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Capitol Federal Financial, Inc. - Quarter Report: 2013 March (Form 10-Q)


 

 

UNITED STATES SECURITIES

 AND EXCHANGE COMMISSION

Washington, D.C.    20549

_________________

Form 10-Q

_________________

(Mark One)

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

or

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-34814

Capitol Federal Financial, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Maryland   

27-2631712

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

700 Kansas Avenue, Topeka, Kansas

66603

(Address of principal executive offices)

(Zip Code)

 

 

 

Registrant’s telephone number, including area code:

(785) 235-1341

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.   Yes  þ    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)   Yes  þ  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller Reporting Company ¨

(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨  No  þ

 

As of April 24,  2013, there were 148,958,246 shares of Capitol Federal Financial, Inc. common stock outstanding.

 

 


 

 


 

 

 

 

 

 

 

PART 1 – FINANCIAL INFORMATION 

Page Number

Item 1.  Financial Statements (Unaudited): 

 

            Consolidated Balance Sheets at March 31, 2013 and September 30, 2012

3

            Consolidated Statements of Income for the three and six months ended

 

                 March 31, 2013 and 2012

4

            Consolidated Statements of Comprehensive Income for the three and six months ended

 

                 March 31, 2013 and 2012

6

            Consolidated Statement of Stockholders’ Equity for the six months ended

 

                 March 31, 2013 

7

            Consolidated Statements of Cash Flows for the six months ended

 

                 March 31, 2013 and 2012

8

            Notes to Consolidated Financial Statements

10

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

30

Financial Condition – Loans 

33

Financial Condition – Asset Quality 

41

Financial Condition – Liabilities 

50

Financial Condition – Stockholders’ Equity 

53

Results of Operations for the six months ended March 31, 2013 and 2012 

55

Results of Operations for the three months ended March 31, 2013 and 2012 

63

Results of Operations for the three months ended March 31, 2013 and 

 

December 31, 2012 

69

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk 

80

Item 4.  Controls and Procedures 

84

 

 

PART II -- OTHER INFORMATION 

 

Item 1.    Legal Proceedings 

84

Item 1A. Risk Factors 

85

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

85

Item 3.    Defaults Upon Senior Securities 

85

Item 4.    Mine Safety Disclosures 

85

Item 5.    Other Information 

85

Item 6.    Exhibits 

85

 

 

Signature Page 

86

 

 

INDEX TO EXHIBITS 

87

 

 

 

 

2

 


 

 

 

 

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

 

 

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

March 31,

 

September 30,

 

2013

 

2012

ASSETS:

 

 

 

 

 

Cash and cash equivalents (includes interest-earning deposits of $30,975 and $127,544)

$

48,574 

 

$

141,705 

Securities:

 

 

 

 

 

Available-for-sale (“AFS”) at estimated fair value (amortized cost of $1,216,857 and $1,367,925)

 

1,245,443 

 

 

1,406,844 

Held-to-maturity (“HTM”) at amortized cost (estimated fair value of $2,014,843 and $1,969,899)

 

1,953,779 

 

 

1,887,947 

Loans receivable, net (of allowance for credit losses (“ACL”) of $10,072 and $11,100)

 

5,715,273 

 

 

5,608,083 

Bank-owned life insurance (“BOLI”)

 

58,756 

 

 

58,012 

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

 

130,680 

 

 

132,971 

Accrued interest receivable

 

24,447 

 

 

26,092 

Premises and equipment, net

 

61,754 

 

 

57,766 

Other real estate owned (“OREO”), net

 

6,682 

 

 

8,047 

Other assets

 

148,330 

 

 

50,837 

TOTAL ASSETS

$

9,393,718 

 

$

9,378,304 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Deposits

$

4,693,573 

 

$

4,550,643 

Advances from FHLB, net

 

2,634,465 

 

 

2,530,322 

Repurchase agreements

 

315,000 

 

 

365,000 

Advance payments by borrowers for taxes and insurance

 

49,959 

 

 

55,642 

Income taxes payable

 

3,199 

 

 

918 

Deferred income tax liabilities, net

 

22,500 

 

 

25,042 

Accounts payable and accrued expenses

 

32,015 

 

 

44,279 

Total liabilities

 

7,750,711 

 

 

7,571,846 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock ($0.01 par value) 100,000,000 shares authorized; no shares issued or outstanding

 

-- 

 

 

-- 

Common stock ($0.01 par value) 1,400,000,000 shares authorized; 149,301,782 and 155,379,739

 

 

 

 

 

shares issued and outstanding as of March 31, 2013 and September 30, 2012, respectively

 

1,493 

 

 

1,554 

Additional paid-in capital

 

1,245,057 

 

 

1,292,122 

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

 

(46,089)

 

 

(47,575)

Retained earnings

 

424,765 

 

 

536,150 

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

 

17,781 

 

 

24,207 

Total stockholders’ equity

 

1,643,007 

 

 

1,806,458 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

9,393,718 

 

$

9,378,304 

 

See accompanying notes to consolidated financial statements.

 

3

 


 

 

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

56,936 

 

$

59,785 

 

$

115,403 

 

$

120,460 

Mortgage-backed securities (“MBS”)

 

14,446 

 

 

18,169 

 

 

29,629 

 

 

36,542 

Investment securities

 

2,457 

 

 

4,115 

 

 

5,322 

 

 

8,752 

Capital stock of FHLB

 

1,105 

 

 

1,111 

 

 

2,233 

 

 

2,202 

Cash and cash equivalents

 

36 

 

 

94 

 

 

69 

 

 

145 

Total interest and dividend income

 

74,980 

 

 

83,274 

 

 

152,656 

 

 

168,101 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

17,909 

 

 

20,443 

 

 

36,537 

 

 

42,782 

Deposits

 

9,344 

 

 

11,835 

 

 

19,193 

 

 

24,622 

Repurchase agreements

 

3,407 

 

 

3,530 

 

 

6,976 

 

 

7,857 

Total interest expense

 

30,660 

 

 

35,808 

 

 

62,706 

 

 

75,261 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

44,320 

 

 

47,466 

 

 

89,950 

 

 

92,840 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR CREDIT LOSSES

 

-- 

 

 

1,500 

 

 

233 

 

 

2,040 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR CREDIT LOSSES

 

44,320 

 

 

45,966 

 

 

89,717 

 

 

90,800 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

Retail fees and charges

 

3,521 

 

 

3,854 

 

 

7,513 

 

 

8,018 

Insurance commissions

 

979 

 

 

774 

 

 

1,550 

 

 

1,343 

Loan fees

 

418 

 

 

560 

 

 

885 

 

 

1,135 

Income from BOLI

 

361 

 

 

387 

 

 

743 

 

 

799 

Other income, net

 

665 

 

 

597 

 

 

1,021 

 

 

1,029 

Total other income

 

5,944 

 

 

6,172 

 

 

11,712 

 

 

12,324 

 

 (Continued)

4

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

12,155 

 

 

10,586 

 

 

24,336 

 

 

21,173 

Occupancy

 

2,391 

 

 

2,091 

 

 

4,709 

 

 

4,170 

Information technology and communications

 

2,232 

 

 

1,834 

 

 

4,430 

 

 

3,664 

Regulatory and outside services

 

1,290 

 

 

1,113 

 

 

3,055 

 

 

2,548 

Deposit and loan transaction costs

 

1,384 

 

 

1,245 

 

 

2,910 

 

 

2,505 

Federal insurance premium

 

1,116 

 

 

1,084 

 

 

2,230 

 

 

2,176 

Advertising and promotional

 

1,004 

 

 

841 

 

 

2,036 

 

 

1,751 

Other expenses, net

 

1,645 

 

 

3,175 

 

 

4,252 

 

 

6,049 

Total other expenses

 

23,217 

 

 

21,969 

 

 

47,958 

 

 

44,036 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX EXPENSE

 

27,047 

 

 

30,169 

 

 

53,471 

 

 

59,088 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

9,332 

 

 

10,854 

 

 

18,193 

 

 

20,984 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

$

17,715 

 

$

19,315 

 

$

35,278 

 

$

38,104 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.12 

 

$

0.12 

 

$

0.24 

 

$

0.24 

Diluted earnings per share

$

0.12 

 

$

0.12 

 

$

0.24 

 

$

0.24 

Dividends declared per share

$

0.08 

 

$

0.08 

 

$

0.85 

 

$

0.25 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

145,381,605 

 

 

161,721,616 

 

 

146,645,899 

 

 

161,822,674 

Diluted weighted average common shares

 

145,381,718 

 

 

161,727,618 

 

 

146,646,006 

 

 

161,829,691 

 

 (Concluded)

 

See accompanying notes to consolidated financial statements.

5

 


 

 

 

 

 

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

March 31,

 

March 31,

 

2013

 

2012

 

2013

 

2012

Net income

$

17,715 

 

$

19,315 

 

$

35,278 

 

$

38,104 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized holding losses on AFS securities, net of deferred

 

 

 

 

 

 

 

 

 

 

 

income taxes of $1,594 and $976 for the three months ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2013 and 2012, respectively, and $3,907 and $1,091 for the six months

 

 

 

 

 

 

 

 

 

 

 

ended March 31, 2013 and 2012, respectively

 

(2,621)

 

 

(1,597)

 

 

(6,426)

 

 

(1,853)

Comprehensive income

$

15,094 

 

$

17,718 

 

$

28,852 

 

$

36,251 

 

 

See accompanying notes to consolidated financial statements.

 

6

 


 

 

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Unearned

 

 

 

 

 

 

 

Total

 

Common

 

Paid-In

 

Compensation

 

Retained

 

 

 

Stockholders’

 

Stock

 

Capital

 

ESOP

 

Earnings

 

AOCI

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 1, 2012

$

1,554 

 

$

1,292,122 

 

$

(47,575)

 

$

536,150 

 

$

24,207 

 

$

1,806,458 

Net income

 

 

 

 

 

 

 

 

 

 

35,278 

 

 

 

 

 

35,278 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,426)

 

 

(6,426)

ESOP activity, net

 

 

 

 

1,790 

 

 

1,486 

 

 

 

 

 

 

 

 

3,276 

Restricted stock activity, net

 

 

 

 

155 

 

 

 

 

 

 

 

 

 

 

 

155 

Stock-based compensation

 

 

 

 

1,586 

 

 

 

 

 

 

 

 

 

 

 

1,586 

Repurchase of common stock

 

(61)

 

 

(50,596)

 

 

 

 

 

(21,338)

 

 

 

 

 

(71,995)

Dividends on common stock to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stockholders ($0.85 per share)

 

 

 

 

 

 

 

 

 

 

(125,325)

 

 

 

 

 

(125,325)

Balance at March 31, 2013

$

1,493 

 

$

1,245,057 

 

$

(46,089)

 

$

424,765 

 

$

17,781 

 

$

1,643,007 

 

 

See accompanying notes to consolidated financial statements.

 

 

7

 


 

 

 

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31,

 

2013

 

2012

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

35,278 

 

$

38,104 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

FHLB stock dividends

 

(2,233)

 

 

(2,202)

Provision for credit losses

 

233 

 

 

2,040 

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

 

(2,769)

 

 

(2,491)

Proceeds from sales of LHFS

 

2,868 

 

 

3,207 

Amortization and accretion of premiums and discounts on securities

 

4,515 

 

 

4,279 

Depreciation and amortization of premises and equipment

 

2,581 

 

 

2,400 

Amortization of deferred amounts related to FHLB advances, net

 

4,143 

 

 

4,010 

Common stock committed to be released for allocation - ESOP

 

3,276 

 

 

3,151 

Stock-based compensation

 

1,586 

 

 

83 

Changes in:

 

 

 

 

 

Prepaid federal insurance premium

 

1,977 

 

 

1,921 

Accrued interest receivable

 

1,645 

 

 

1,892 

Other assets, net

 

(915)

 

 

1,934 

Income taxes payable/receivable

 

3,801 

 

 

2,489 

Accounts payable and accrued expenses

 

(12,242)

 

 

(10,094)

Net cash provided by operating activities

 

43,744 

 

 

50,723 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of AFS securities

 

(379,187)

 

 

(563,330)

Purchase of HTM securities

 

(420,501)

 

 

(516,374)

Proceeds from calls, maturities and principal reductions of AFS securities

 

529,899 

 

 

329,721 

Proceeds from calls, maturities and principal reductions of HTM securities

 

350,510 

 

 

718,835 

Proceeds from the redemption of capital stock of FHLB

 

4,524 

 

 

2,117 

Purchases of capital stock of FHLB

 

-- 

 

 

(3,652)

Net increase in loans receivable

 

(111,672)

 

 

(81,808)

Purchases of premises and equipment

 

(6,233)

 

 

(4,348)

Proceeds from sales of OREO

 

5,858 

 

 

4,583 

Net cash used in investing activities

 

(26,802)

 

 

(114,256)

 

(Continued)

8

 


 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31,

 

 

2013

 

 

2012

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Dividends paid

 

(125,325)

 

 

(40,483)

Deposits, net of withdrawals

 

142,930 

 

 

161,837 

Proceeds from borrowings

 

403,130 

 

 

600,100 

Repayments on borrowings

 

(453,130)

 

 

(600,100)

Deferred FHLB prepayment penalty

 

-- 

 

 

(7,937)

Change in advance payments by borrowers for taxes and insurance

 

(5,683)

 

 

(5,495)

Repurchase of common stock

 

(71,995)

 

 

(21,752)

Net cash (used in) provided by financing activities

 

(110,073)

 

 

86,170 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(93,131)

 

 

22,637 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

Beginning of period

 

141,705 

 

 

121,070 

End of period

$

48,574 

 

$

143,707 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Income tax payments

$

14,391 

 

$

18,560 

Interest payments

$

58,747 

 

$

72,177 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH

 

 

 

 

 

INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

FHLB advances that will settle in a subsequent period

$

100,000 

 

$

-- 

 

(Concluded)

See accompanying notes to consolidated financial statements.

 

9

 


 

Notes to Consolidated Financial Statements (Unaudited)

 

 

1.   Summary of Significant Accounting Policies

Basis of Presentation - The accompanying consolidated financial statements of Capitol Federal® Financial, Inc. (the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012, filed with the Securities and Exchange Commission (“SEC”).  Interim results are not necessarily indicative of results for a full year.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods.  The ACL is a significant estimate that involves a high degree of complexity and requires management to make difficult and subjective judgments and assumptions about highly uncertain matters.  The use of different judgments and assumptions could cause reported results to differ significantly.  In addition, bank regulators periodically review the ACL of Capitol Federal Savings Bank (the “Bank”).  The bank regulators have the authority to require the Bank, as they can require all banks, to increase the ACL or recognize additional charge-offs based upon their judgments, which may differ from management’s judgments.  Any increases in the ACL or recognition of additional charge-offs required by bank regulators could adversely affect the Company’s financial condition and results of operations.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank.  The Bank has a wholly-owned subsidiary, Capitol Funds, Inc.  Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company.  All intercompany accounts and transactions have been eliminated in consolidation. 

Loans Receivable - Loans receivable that management has the intent and ability to hold for the foreseeable future are carried at the amount of unpaid principal, net of ACL, undisbursed loan funds, unamortized premiums and discounts, and deferred loan origination fees and costs.  Net loan origination fees and costs and premiums and discounts are amortized as yield adjustments to interest income using the level-yield method, adjusted for the estimated prepayment speeds of the related loans when applicable.  Interest on loans is credited to income as earned and accrued only if deemed collectible. 

Endorsed loans - Existing loan customers, whose loans have not been sold to third parties, who have not been delinquent on their contractual loan payments during the previous 12 months and who are not currently in bankruptcy, have the opportunity, for a cash fee, to endorse their original loan terms to current loan terms being offered.  The fee assessed for endorsing the mortgage loan is deferred and amortized over the remaining life of the endorsed loan using the level-yield method and is reflected as an adjustment to interest income.  Each endorsement is examined on a loan-by-loan basis and if the new loan terms represent more than a minor change to the loan, then the unamortized balance of the pre-endorsement deferred fees and/or costs associated with the mortgage loan are recognized in interest income at the time of the endorsement.  If the endorsement of terms does not represent more than a minor change to the loan, then the unamortized balance of the pre-endorsement deferred fees and/or costs continue to be deferred.

Troubled debt restructurings (“TDRs”) - For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower.  Generally, the Bank grants a short-term payment concession to borrowers who are experiencing a temporary cash flow problem.  The most frequently used concession is to reduce the monthly payment amount for a period of 6 to 12 months, often by requiring payments of only interest and escrow during this period, resulting in an extension of the maturity date of the loan.  For more severe situations requiring long-term solutions, the Bank also offers interest rate reductions to currently-offered rates and the capitalization of delinquent interest and/or escrow resulting in an extension of the maturity date of the loan.  The Bank does not forgive principal or interest nor does it commit to lend additional funds, except for the capitalization of delinquent interest and/or escrow not to exceed the original loan balance, to these borrowers.

Endorsed loans are classified as TDRs when certain guidelines for soft credit scores and/or estimated loan-to-value (“LTV”) ratios are not met.  These guidelines are intended to identify changes in the borrower’s credit condition since origination, signifying the borrower could be experiencing financial difficulties even though the borrower has not been delinquent on his contractual loan payment in the previous 12 months.

The TDRs discussed above will be reported as such until paid-off, unless the loan has been restructured to an interest rate equal to or greater than the rate the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk, and has performed under the new terms of the restructuring agreement for at least 12 consecutive months. 

10

 


 

During July 2012, the Office of the Comptroller of the Currency (“OCC”) provided guidance to the industry regarding loans that had been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt owed to the lender.  The OCC requires that these loans be reported as TDRs, regardless of their delinquency status.  These loans will be reported as TDRs until the borrower has made 48 consecutive monthly loan payments after the Chapter 7 discharge date. 

Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date.

Nonaccrual loans - The accrual of income on loans is discontinued when interest or principal payments are 90 days in arrears or, for TDR loans, the borrower has not made six consecutive monthly payments per the restructured loan terms or since the discharge date for loans discharged under Chapter 7 bankruptcy proceedings where the borrower did not reaffirm the debt.  Loans on which the accrual of income has been discontinued are designated as nonaccrual and outstanding interest previously credited beyond 90 days delinquent is reversed.  A nonaccrual loan is returned to accrual status once the contractual payments have been made to bring the loan less than 90 days past due or, in the case of a TDR loan, the borrower has made six consecutive payments per the restructured loan terms or the borrower has made six consecutive payments since the discharge date for loans discharged under Chapter 7 bankruptcy proceedings where the borrower did not reaffirm the debt.

Impaired loans - A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.  Interest income on impaired loans is recognized in the period collected unless the ultimate collection of principal is considered doubtful.  The following types of loans are reported as impaired loans: all nonaccrual loans, loans classified as substandard, loans partially charged-off, and all TDRs except those that have been restructured to an interest rate equal to or greater than the rate the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk, and has performed under the new terms of the restructuring agreement for at least 12 consecutive months.

The majority of the Bank’s impaired loans are related to one- to four-family properties.  Impaired loans related to one- to four-family properties are individually evaluated for loss when the loan becomes 180 days delinquent or at any time management has knowledge of the existence of a potential loss to ensure that the carrying value of the loan is not in excess of the fair value of the collateral, less estimated selling costs.

Allowance for Credit Losses - The ACL represents management’s best estimate of the amount of inherent losses in the loan portfolio as of the balance sheet date.  Management’s methodology for assessing the appropriateness of the ACL consists of an analysis (“formula analysis”) model, along with analyzing several other factors.  Management maintains the ACL through provisions for credit losses that are charged to income.

For one- to four-family secured loans, losses are charged-off when the loan is generally 180 days delinquent.  Losses are based on new collateral values obtained through appraisals, less estimated costs to sell.  Anticipated private mortgage insurance (“PMI”) proceeds are taken into consideration when calculating the loss amount.  An updated appraisal is requested, at a minimum, every 12 months thereafter if the loan remains 180 days or more delinquent.  If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan.  Charge-offs for real estate-secured loans may also occur at any time if the Bank has knowledge of the existence of a potential loss.  For all real estate loans that are not secured by one- to four-family property, losses are charged-off when the collection of such amounts is unlikely.  When a non-real estate secured loan is 120 days delinquent, any identified losses are charged-off.    

The Bank’s primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties, resulting in a loan concentration in residential mortgage loans.  The Bank has a concentration of loans secured by residential property located in Kansas and Missouri.  Based on the composition of the Bank’s loan portfolio, the primary risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may adversely affect borrowers’ ability to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions.  Although the multi-family and commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and to control expenses to satisfy their contractual debt payments, and/or the ability to utilize personal and/or business resources to pay their contractual debt payments if the cash flows are not sufficient.  Additionally, if the Bank were to repossess the secured collateral of a multi-family or commercial loan, the pool of potential buyers is limited more than that for a residential property.  Therefore, the Bank could hold the property for an extended period of time and/or potentially be forced to sell at a discounted price, resulting in additional losses.

11

 


 

Each quarter, a formula analysis is prepared which segregates the loan portfolio into categories based on certain risk characteristics.  The categories include the following: one- to four-family loans; multi-family and commercial loans; consumer home equity loans; and other consumer loans.  Home equity loans with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a combined LTV ratio.  Loans individually evaluated for loss are excluded from the formula analysis model.  The one- to four-family loan portfolio and related home equity loans are segregated into additional categories based on the following risk characteristics: originated or bulk purchased; interest payments (fixed-rate, adjustable-rate, and interest-only); LTV ratios; borrower’s credit scores; and geographic location.  The categories were derived by management based on reviewing the historical performance of the one- to four-family loan portfolio and taking into consideration current economic conditions, such as trends in residential real estate values in certain areas of the U.S. and unemployment rates.  The geographic location categories, specifically for bulk purchased loans, pertain primarily to certain states in which the Bank has experienced measurable loan losses.    

Quantitative loss factors are applied to each loan category in the formula analysis model based on the historical loss experience for each respective loan category.  Each quarter, management reviews the historical loss time periods and utilizes the historical loss time periods believed to be the most reflective of the current economic conditions and recent charge-off experience.

Qualitative loss factors are applied to each loan category in the formula analysis model.  The qualitative loss factors that are applied in the formula analysis model for one- to four-family and consumer loan portfolios are: unemployment rate trends; collateral value trends; credit score trends; and delinquent loan trends.  The qualitative loss factors that are applied in the formula analysis model for multi-family and commercial loan portfolio are: unemployment rate trends; credit score trends; delinquent loan trends; and a factor based on management’s judgment due to the higher risk nature of these loans, as compared to one- to four-family loans.  As loans are classified or become delinquent, the qualitative loss factors increase for each respective loan category.  Additionally, TDRs that have not been partially charged-off are included in a category within the formula analysis model with an overall higher qualitative loss factor than corresponding performing loans, for the life of the loan.  The qualitative factors were derived by management based on a review of the historical performance of the respective loan portfolios and consideration of current economic conditions and their likely impact to the loan portfolio.

Management utilizes the formula analysis, along with analyzing several other factors, when evaluating the adequacy of the ACL.  Such factors include the trend and composition of delinquent loans, results of foreclosed property and short sale transactions, charge-off trends, the current status and trends of local and national economies (particularly levels of unemployment), trends and current conditions in the real estate and housing markets, and loan portfolio growth and concentrations.  Since the Bank’s loan portfolio is primarily concentrated in one- to four-family real estate, management monitors residential real estate market value trends in the Bank’s local market areas and geographic sections of the U.S. by reference to various industry and market reports, economic releases and surveys, and management’s general and specific knowledge of the real estate markets in which the Bank lends, in order to determine what impact, if any, such trends may have on the level of ACL.  Reviewing these factors assists management in evaluating the overall credit quality of the loan portfolio and the reasonableness of the ACL on an ongoing basis, and whether changes need to be made to the Bank’s ACL methodology.  Management seeks to apply the ACL methodology in a consistent manner; however, the methodology can be modified in response to changing conditions.    

Assessing the adequacy of the ACL is inherently subjective.  Actual results could differ from estimates as a result of changes in economic or market conditions.  Changes in estimates could result in a material change in the ACL.  In the opinion of management, the ACL, when taken as a whole, is adequate to absorb estimated losses inherent in the loan portfolio.  However, future adjustments may be necessary if loan portfolio performance or economic or market conditions differ substantially from the conditions that existed at the time of the initial determinations.   

Recent Accounting Pronouncements - In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2011-05, Presentation of Comprehensive Income, which revised how entities present comprehensive income in their financial statements.  The ASU requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements.  In a continuous statement of comprehensive income, an entity would be required to present the components of the income statement as presented today, along with the components of other comprehensive income.  In the two-statement approach, an entity would be required to present a statement that is consistent with the income statement format used today, along with a second statement, which would immediately follow the income statement that would include the components of other comprehensive income.  The ASU did not change the items that an entity must report in other comprehensive income.  ASU 2011-05 was effective October 1, 2012 for the Company.  The Company elected the two-statement approach upon adoption on October 1, 2012 and applied the ASU retrospectively for all periods presented in the financial statements.

In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.  The ASU clarifies the scope of the offsetting disclosure requirements in ASU 2011-11, Disclosures about Offsetting Assets and Liabilities.  These standards are effective for fiscal years beginning on or after January 1, 2013, which is October 1, 2013 for the Company.  The Company has not yet completed its evaluation of ASU 2013-01 and ASU 2011-11; however, the standards are disclosure-related and therefore, their adoption is not expected to have an impact on the Company’s financial condition or results of operations.

12

 


 

 

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which is intended to improve the transparency of changes in other comprehensive income and items reclassified out of accumulated other comprehensive income.  The standard requires entities to disaggregate the total change of each component of other comprehensive income and separately present reclassification adjustments and current period other comprehensive income.  Additionally, the standard requires that significant items reclassified out of accumulated other comprehensive income be presented by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements.  ASU 2013-02 is effective for fiscal years beginning after December 15, 2012, which is October 1, 2013 for the Company, and should be applied prospectively.  The adoption of this ASU is disclosure-related and therefore, is not expected to have an impact on the Company’s financial condition or results of operations.

 

In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The ASU provides recognition, measurement, and disclosure guidance for certain obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date.  ASU 2013-04 is effective for fiscal years beginning after December 15, 2013, which is October 1, 2014 for the Company, and should be applied retrospectively.  The Company has not yet completed its evaluation of this standard.

 

 

 

2.   Earnings Per Share

The Company accounts for the shares acquired by its ESOP and the shares awarded pursuant to its restricted stock benefit plans in accordance with Accounting Standard Codification (“ASC”) 260, which requires that unvested restricted stock awards be treated as participating securities in the computation of earnings per share pursuant to the two-class method as they contain nonforfeitable rights to dividends.  The two-class method is an earnings allocation that determines earnings per share for each class of common stock and participating security.  Shares acquired by the ESOP are not considered in the basic average shares outstanding until the shares are committed for allocation or vested to an employee’s individual account.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

March 31,

   

March 31,

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

(Dollars in thousands, except per share data)

Net income

$

17,715 

 

$

19,315 

 

$

35,278 

 

$

38,104 

Income allocated to participating

 

 

 

 

 

 

 

 

 

 

 

securities (unvested restricted stock)

 

(51)

 

 

--

 

 

(111)

 

 

--

Net income available to common stockholders

$

17,664 

 

$

19,315 

 

$

35,167 

 

$

38,104 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding

 

145,242,074 

 

 

161,582,102 

 

 

146,576,142 

 

 

161,752,544 

Average committed ESOP shares outstanding

 

139,531 

 

 

139,514 

 

 

69,757 

 

 

70,130 

Total basic average common shares outstanding

 

145,381,605 

 

 

161,721,616 

 

 

146,645,899 

 

 

161,822,674 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive restricted stock

 

--

 

 

1,982 

 

 

--

 

 

3,169 

Effect of dilutive stock options

 

113 

 

 

4,020 

 

 

107 

 

 

3,848 

 

 

 

 

 

 

 

 

 

 

 

 

Total diluted average common shares outstanding

 

145,381,718 

 

 

161,727,618 

 

 

146,646,006 

 

 

161,829,691 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.12 

 

$

0.12 

 

$

0.24 

 

$

0.24 

Diluted

$

0.12 

 

$

0.12 

 

$

0.24 

 

$

0.24 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive stock options and restricted stock, excluded

 

 

 

 

 

 

 

 

 

 

 

from the diluted average common shares

 

 

 

 

 

 

 

 

 

 

 

outstanding calculation

 

2,463,165 

 

 

881,128 

 

 

2,466,339 

 

 

883,608 

 

 

 

 

13

 


 

3.   Securities

The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS and HTM securities at March 31, 2013 and September 30, 2012.  The majority of the MBS and investment portfolios are composed of securities issued by U.S. government-sponsored enterprises (“GSEs”).    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

Gross

 

Gross

 

Estimated

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

 

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

$

794,920 

 

$

2,741 

 

$

491 

 

$

797,170 

MBS

 

417,796 

 

 

26,344 

 

 

 

 

444,139 

Trust preferred securities

 

2,830 

 

 

--

 

 

74 

 

 

2,756 

Municipal bonds

 

1,311 

 

 

67 

 

 

--

 

 

1,378 

 

 

1,216,857 

 

 

29,152 

 

 

566 

 

 

1,245,443 

HTM:

 

 

 

 

 

 

 

 

 

 

 

MBS

 

1,913,956 

 

 

63,271 

 

 

3,643 

 

 

1,973,584 

Municipal bonds

 

39,823 

 

 

1,438 

 

 

 

 

41,259 

 

 

1,953,779 

 

 

64,709 

 

 

3,645 

 

 

2,014,843 

 

$

3,170,636 

 

$

93,861 

 

$

4,211 

 

$

3,260,286 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

Gross

 

Gross

 

Estimated

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

 

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

$

857,409 

 

$

4,317 

 

$

 

$

861,724 

MBS

 

505,169 

 

 

35,137 

 

 

--

 

 

540,306 

Municipal bonds

 

2,435 

 

 

81 

 

 

--

 

 

2,516 

Trust preferred securities

 

2,912 

 

 

--

 

 

614 

 

 

2,298 

 

 

1,367,925 

 

 

39,535 

 

 

616 

 

 

1,406,844 

HTM:

 

 

 

 

 

 

 

 

 

 

 

MBS

 

1,792,636 

 

 

79,883 

 

 

--

 

 

1,872,519 

GSE debentures

 

49,977 

 

 

247 

 

 

--

 

 

50,224 

Municipal bonds

 

45,334 

 

 

1,822 

 

 

--

 

 

47,156 

 

 

1,887,947 

 

 

81,952 

 

 

--

 

 

1,969,899 

 

$

3,255,872 

 

$

121,487 

 

$

616 

 

$

3,376,743 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 


 

The following tables summarize the estimated fair value and gross unrealized losses of those securities on which an unrealized loss at March 31, 2013 and September 30, 2012 was reported and the continuous unrealized loss position for at least 12 months or less than 12 months as of March 31, 2013 and September 30, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

Less Than

 

Equal to or Greater

 

12 Months

 

Than 12 Months

 

 

 

Estimated

 

Unrealized

 

 

 

Estimated

 

Unrealized

 

Count

 

Fair Value

 

Losses

 

Count

 

Fair Value

 

Losses

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

11 

 

$

263,650 

 

$

491 

 

--

 

$

--

 

$

--

MBS

 

 

37 

 

 

 

--

 

 

--

 

 

--

Trust preferred securities

--

 

 

--

 

 

--

 

 

 

2,756 

 

 

74 

 

12 

 

$

263,687 

 

$

492 

 

 

$

2,756 

 

$

74 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTM:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS

18 

 

$

399,401 

 

$

3,643 

 

--

 

$

--

 

$

--

Municipal bonds

 

 

980 

 

 

 

--

 

 

--

 

 

--

 

20 

 

$

400,381 

 

$

3,645 

 

--

 

$

--

 

$

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,  2012

 

Less Than

 

Equal to or Greater

 

12 Months

 

Than 12 Months

 

 

 

Estimated

 

Unrealized

 

 

 

Estimated

 

Unrealized

 

Count

 

Fair Value

 

Losses

 

Count

 

Fair Value

 

Losses

 

(Dollars in thousands)

AFS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

 

$

42,733 

 

$

 

--

 

$

--

 

$

--

MBS

--

 

 

--

 

 

--

 

--

 

 

--

 

 

--

Trust preferred securities

--

 

 

--

 

 

--

 

 

 

2,298 

 

 

614 

 

 

$

42,733 

 

$

 

 

$

2,298 

 

$

614 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTM:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS

--

 

$

--

 

$

--

 

--

 

$

--

 

$

--

Municipal bonds

--

 

 

--

 

 

--

 

--

 

 

--

 

 

--

 

--

 

$

--

 

$

--

 

--

 

$

--

 

$

--

 

 

On a quarterly basis, management conducts a formal review of securities for the presence of an other-than-temporary impairment.  Management assesses whether an other-than-temporary impairment is present when the fair value of a security is less than its amortized cost basis at the balance sheet date.  For such securities, other-than-temporary impairment is considered to have occurred if the Company intends to sell the security, if it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, or if the present value of expected cash flows is not sufficient to recover the entire amortized cost.    

15

 


 

The unrealized losses at March 31, 2013 are primarily a result of increases in market yields from the time of purchase.  In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase.  Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired.  Additionally, the impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount, which could be at maturity.  The unrealized losses at September 30, 2012 are primarily a result of a decrease in the credit rating of a trust preferred security held by the Bank.  Management reviews the underlying cash flows of this security on a quarterly basis.  As of March 31, 2013 and September 30, 2012, the analysis indicated the present value of future expected cash flows are adequate to recover the entire amortized cost.  Management neither intends to sell this security, nor is it more likely than not that the Company will be required to sell the security before the recovery of the remaining amortized cost amount, which could be at maturity.  As a result of the analysis discussed above, management does not believe any other-than-temporary impairments existed at March 31, 2013 or September 30, 2012. 

The amortized cost and estimated fair value of securities by remaining contractual maturity without consideration for call features or pre-refunding dates as of March 31, 2013 are shown below.  Actual maturities of MBS may differ from contractual maturities because borrowers have the right to prepay obligations, generally without penalties.  As of March 31, 2013, the amortized cost of the securities in our portfolio which are callable or have pre-refunding dates within one year totaled $655.0 million.  Maturities of MBS depend on the repayment characteristics and experience of the underlying financial instruments.  Issuers of certain investment securities have the right to call and prepay obligations with or without prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFS

 

 

HTM

 

 

 

 

Estimated

 

 

 

 

Estimated

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Cost

 

Value

 

Cost

 

Value

 

 

(Dollars in thousands)

One year or less

$

191 

 

$

193 

 

$

5,950 

 

$

6,008 

One year through five years

 

673,348 

 

 

676,450 

 

 

27,579 

 

 

28,765 

Five years through ten years

 

256,948 

 

 

266,756 

 

 

481,104 

 

 

493,176 

Ten years and thereafter

 

286,370 

 

 

302,044 

 

 

1,439,146 

 

 

1,486,894 

 

$

1,216,857 

 

$

1,245,443 

 

$

1,953,779 

 

$

2,014,843 

 

 

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

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

 

(Dollars in thousands)

Federal National Mortgage Association (“FNMA”)

$

1,443,503 

 

$

1,324,293 

Federal Home Loan Mortgage Corporation (“FHLMC”)

 

746,607 

 

 

824,197 

Government National Mortgage Association

 

167,848 

 

 

183,778 

Private Issuer

 

137 

 

 

674 

 

$

2,358,095 

 

$

2,332,942 

 

The following table presents the taxable and non-taxable components of interest income on investment securities for the time periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

March 31,

 

March 31,

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

(Dollars in thousands)

Taxable

$

2,147 

 

$

3,688 

 

$

4,685 

 

$

7,885 

Non-taxable

 

310 

 

 

427 

 

 

637 

 

 

867 

 

$

2,457 

 

$

4,115 

 

$

5,322 

 

$

8,752 

 

16

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

September 30, 2012

 

 

 

 

Estimated

 

 

 

 

Estimated

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Cost

 

Value

 

Cost

 

Value

 

 

(Dollars in thousands)

Repurchase agreements

$

350,779 

 

$

372,474 

 

$

400,827 

 

$

427,864 

Public unit deposits

 

212,315 

 

 

222,416 

 

 

219,913 

 

 

232,514 

Federal Reserve Bank

 

41,430 

 

 

43,463 

 

 

49,472 

 

 

52,122 

 

$

604,524 

 

$

638,353 

 

$

670,212 

 

$

712,500 

 

 

 

 

4.   Loans Receivable and Allowance for Credit Losses

Loans receivable, net at March 31, 2013 and September 30, 2012 is summarized as follows:

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

 

(Dollars in thousands)

Real estate loans:

 

 

 

 

 

One- to four-family

$

5,508,452 

 

$

5,392,429 

Multi-family and commercial

 

46,579 

 

 

48,623 

Construction

 

64,572 

 

 

52,254 

Total real estate loans

 

5,619,603 

 

 

5,493,306 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

Home equity

 

137,380 

 

 

149,321 

Other

 

6,072 

 

 

6,529 

Total consumer loans

 

143,452 

 

 

155,850 

 

 

 

 

 

 

Total loans receivable

 

5,763,055 

 

 

5,649,156 

 

 

 

 

 

 

Less:

 

 

 

 

 

Undisbursed loan funds

 

32,619 

 

 

22,874 

ACL

 

10,072 

 

 

11,100 

Discounts/unearned loan fees

 

22,149 

 

 

21,468 

Premiums/deferred costs

 

(17,058)

 

 

(14,369)

 

$

5,715,273 

 

$

5,608,083 

 

Lending Practices and Underwriting Standards  - Originating and purchasing loans secured by one- to four-family residential properties is the Bank’s primary lending business, resulting in a loan concentration in residential first mortgage loans.  The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders located generally throughout the central, northeastern, and southern United States.    As a result of originating loans in our branches, along with the purchasing of loans from correspondent lenders in our local markets, the Bank has a concentration of loans secured by real property located in Kansas and Missouri.  Additionally, the Bank periodically purchases whole one- to four-family loans in bulk packages from nationwide and correspondent lenders.  The Bank also makes consumer loans, construction loans secured by residential or commercial properties, and real estate loans secured by multi-family dwellings.   

17

 


 

One- to four-family loans - One- to four-family loans are underwritten manually or by using an internal loan origination auto-underwriting method.  The method closely resembles the Bank’s manual underwriting standards which are generally in accordance with FHLMC and FNMA manual underwriting guidelines.  The method includes, but is not limited to, an emphasis on credit scoring, qualifying ratios reflecting the applicant’s ability to repay, asset reserves, LTV ratio, property, and occupancy type.  Full documentation to support the applicant’s credit, income, and sufficient funds to cover all applicable fees and reserves at closing are required on all loans.  Loans that do not meet the automated underwriting standards are referred to a staff underwriter for manual underwriting.  Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function.

The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the Bank’s internal underwriting standards.  The underwriting of correspondent loans is generally performed by the Bank’s underwriters.  Before committing to a bulk loan purchase, the Bank’s Chief Lending Officer or Secondary Marketing Manager reviews specific criteria such as loan amount, credit scores, LTV ratios, geographic location, and debt ratios of each loan in the pool.  If the specific criteria do not meet the Bank’s underwriting standards and compensating factors are not sufficient, then a loan will be removed from the population.  Before the bulk loan purchase is funded, an internal Bank underwriter or a third party reviews at least 25% of the loan files to confirm loan terms, credit scores, debt service ratios, property appraisals, and other underwriting related documentation.  For the tables within Note 4, correspondent purchased loans are included with originated loans, and bulk purchased loans are reported as purchased loans. 

The Bank also originates construction-to-permanent loans secured by one- to four-family residential real estate.  The majority of the one- to four-family construction loans are secured by property located within the Bank’s Kansas City market area.  Construction loans are obtained by homeowners who will occupy the property when construction is complete.  Construction loans to builders for speculative purposes are not permitted.  The application process includes submission of complete plans, specifications, and costs of the project to be constructed.  All construction loans are manually underwritten using the Bank’s internal underwriting standards.  Construction draw requests and the supporting documentation are reviewed and approved by management.  The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided.

Multi-family and commercial loans - The Bank’s multi-family and commercial real estate loans are originated by the Bank or are in participation with a lead bank.  These loans are granted based on the income producing potential of the property and the financial strength of the borrower.  At the time of origination, LTV ratios on multi-family and commercial real estate loans cannot exceed 80% of the appraised value of the property securing the loans.  The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt at the time of origination.  The Bank generally requires personal guarantees of the borrowers covering a portion of the debt in addition to the security property as collateral for these loans.  Appraisals on properties securing these loans are performed by independent state certified fee appraisers.

Consumer loans  - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, auto loans, and loans secured by savings deposits.  The Bank also originates a very limited amount of unsecured loans.  The Bank does not originate any consumer loans on an indirect basis, such as contracts purchased from retailers of goods or services which have extended credit to their customers.  The majority of the consumer loan portfolio is comprised of home equity lines of credit. 

The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of 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.

Credit quality indicators Based on the Bank’s lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family loans; (2) consumer loans; and (3) multi-family and commercial loans.  The one- to four-family and consumer segments are further grouped into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio.  The classes are:  one- to four-family loans – originated, one- to four-family loans – purchased, consumer loans – home equity, and consumer loans – other.

The Bank’s primary credit quality indicators for the one- to four-family loan and consumer – home equity loan portfolios are delinquency status, asset classifications, LTV ratios and borrower credit scores.  The Bank’s primary credit quality indicators for the multi-family and commercial loan and consumer – other loan portfolios are delinquency status and asset classifications.

18

 


 

The following table presents the recorded investment of loans, defined as the unpaid principal balance of a loan (net of unadvanced funds related to loans in process and charge-offs) inclusive of unearned loan fees and deferred costs, of the Company’s loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, total current loans, and the total loans receivable balance at March 31, 2013 and September 30, 2012, by class.  Delinquent loans that are included in the formula analysis model are assigned a higher qualitative loss factor than corresponding performing loans.  At March 31, 2013 and September 30, 2012, all loans in the 90 or more days delinquent were on nonaccrual status.  In addition to loans 90 or more days delinquent, the Bank also had $7.5 million and $10.0 million of originated loan TDRs classified as nonaccrual at March 31, 2013 and September 30, 2012, respectively, as well as $711 thousand and $2.4 million of purchased loan TDRs classified as nonaccrual at March 31, 2013 and September 30, 2012, respectively, as required by the OCC Call Report requirements.  Of these amounts, $7.2 million and $11.2 million were current at March 31, 2013 and September 30, 2012, respectively.    At March 31, 2013 and September 30, 2012, the balance of loans on nonaccrual status was $26.3 million and $31.8 million, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

 

90 or More Days

 

Total

 

 

 

 

Total

 

30 to 89 Days

 

Delinquent or

 

Delinquent

 

Current

 

Recorded

 

Delinquent

 

in Foreclosure

 

Loans

 

Loans

 

Investment

 

 

(Dollars in thousands)

One- to four-family loans - originated

$

14,754 

 

$

8,317 

 

$

23,071 

 

$

4,770,458 

 

$

4,793,529 

One- to four-family loans - purchased

 

9,268 

 

 

9,488 

 

 

18,756 

 

 

709,084 

 

 

727,840 

Multi-family and commercial loans

 

--

 

 

--

 

 

--

 

 

60,524 

 

 

60,524 

Consumer - home equity

 

719 

 

 

393 

 

 

1,112 

 

 

136,268 

 

 

137,380 

Consumer - other

 

104 

 

 

26 

 

 

130 

 

 

5,942 

 

 

6,072 

 

$

24,845 

 

$

18,224 

 

$

43,069 

 

$

5,682,276 

 

$

5,725,345 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

 

90 or More Days

 

Total

 

 

 

 

Total

 

30 to 89 Days

 

Delinquent or

 

Delinquent

 

Current

 

Recorded

 

Delinquent

 

in Foreclosure

 

Loans

 

Loans

 

Investment

 

 

(Dollars in thousands)

One- to four-family loans - originated

$

14,902 

 

$

8,602 

 

$

23,504 

 

$

4,590,194 

 

$

4,613,698 

One- to four-family loans - purchased

 

7,788 

 

 

10,530 

 

 

18,318 

 

 

771,755 

 

 

790,073 

Multi-family and commercial loans

 

--

 

 

--

 

 

--

 

 

59,562 

 

 

59,562 

Consumer - home equity

 

521 

 

 

369 

 

 

890 

 

 

148,431 

 

 

149,321 

Consumer - other

 

106 

 

 

27 

 

 

133 

 

 

6,396 

 

 

6,529 

 

$

23,317 

 

$

19,528 

 

$

42,845 

 

$

5,576,338 

 

$

5,619,183 

 

19

 


 

In accordance with the Bank’s asset classification policy, management regularly reviews the problem loans in the Bank’s portfolio to determine whether any loans require classification.  Loan classifications are defined as follows:

·

Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the non-performing loan categories.

·

Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected.

·

Doubtful - Loans classified as doubtful have all the weaknesses inherent as those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable.

·

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted.  

 

Special mention and substandard loans are included in the formula analysis model if the loan is not individually evaluated for loss.  Loans classified as doubtful or loss loans are individually evaluated for loss

The following tables set forth the recorded investment in loans classified as special mention or substandard at March 31, 2013 and September 30, 2012, by class.  At March 31, 2013 and September 30, 2012, there were no loans classified as doubtful or loss that were not fully charged-off. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

Special Mention

 

Substandard

 

Special Mention

 

Substandard

 

(Dollars in thousands)

One- to four-family - originated

$

33,086 

 

$

26,310 

 

$

36,055 

 

$

23,153 

One- to four-family - purchased

 

2,270 

 

 

14,244 

 

 

2,829 

 

 

14,538 

Multi-family and commercial

 

2,583 

 

 

--

 

 

2,578 

 

 

--

Consumer - home equity

 

230 

 

 

1,026 

 

 

413 

 

 

815 

Consumer - other

 

--

 

 

36 

 

 

--

 

 

39 

 

$

38,169 

 

$

41,616 

 

$

41,875 

 

$

38,545 

 

The following table shows the weighted average LTV and credit score information for originated and purchased one- to four-family loans and originated consumer home equity loans at March 31, 2013 and September 30, 2012.  Borrower credit scores are intended to provide an indication as to the likelihood that a borrower will repay their debts.  Credit scores are typically updated in the last month of the quarter and are obtained from a nationally recognized consumer rating agency.  The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent bank appraisal, if available.  In most cases, the most recent appraisal was obtained at the time of origination. 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

Weighted Average

 

Weighted Average

 

Credit Score

 

LTV

 

Credit Score

 

LTV

One- to four-family - originated

763 

 

65 

%

 

763 

 

65 

%

One- to four-family - purchased

749 

 

67 

 

 

749 

 

67 

 

Consumer - home equity

744 

 

19 

 

 

747 

 

19 

 

 

761 

 

64 

%

 

761 

 

64 

%

 

 

20

 


 

 

Troubled Debt Restructurings  - The following table presents the recorded investment prior to restructuring and immediately after restructuring for all loans restructured during the three and six months ended March 31, 2013 and 2012.  These tables do not reflect the recorded investment at the end of the periods indicated.  The increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

March 31, 2013

 

March 31, 2013

 

 

Number

 

Pre-

 

Post-

 

Number

 

Pre-

 

Post-

 

 

of

 

Restructured

 

Restructured

 

of

 

Restructured

 

Restructured

 

 

Contracts

 

Outstanding

 

Outstanding

 

Contracts

 

Outstanding

 

Outstanding

 

 

(Dollars in thousands)

One- to four-family loans - originated

 

45 

 

$

6,826 

 

$

6,857 

 

100 

 

$

19,404 

 

$

19,507 

One- to four-family loans - purchased

 

 

 

983 

 

 

982 

 

 

 

1,538 

 

 

1,580 

Multi-family and commercial loans

 

--

 

 

--

 

 

--

 

 

 

82 

 

 

79 

Consumer - home equity

 

 

 

76 

 

 

81 

 

 

 

156 

 

 

161 

Consumer - other

 

--

 

 

--

 

 

--

 

--

 

 

--

 

 

--

 

 

54 

 

$

7,885 

 

$

7,920 

 

116 

 

$

21,180 

 

$

21,327 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

March 31, 2012

 

March 31, 2012

 

 

Number

 

Pre-

 

Post-

 

Number

 

Pre-

 

Post-

 

 

of

 

Restructured

 

Restructured

 

of

 

Restructured

 

Restructured

 

 

Contracts

 

Outstanding

 

Outstanding

 

Contracts

 

Outstanding

 

Outstanding

 

 

(Dollars in thousands)

One- to four-family loans - originated

 

55 

 

$

9,394 

 

$

9,446 

 

125 

 

$

19,725 

 

$

19,816 

One- to four-family loans - purchased

 

--

 

 

--

 

 

--

 

--

 

 

--

 

 

--

Multi-family and commercial loans

 

--

 

 

--

 

 

--

 

--

 

 

--

 

 

--

Consumer - home equity

 

--

 

 

--

 

 

--

 

 

 

--

 

 

10 

Consumer - other

 

--

 

 

--

 

 

--

 

--

 

 

--

 

 

--

 

 

55 

 

$

9,394 

 

$

9,446 

 

126 

 

$

19,725 

 

$

19,826 

 

The following table provides information on TDRs restructured within the last 12 months that became delinquent during the three and six months ended March 31, 2013 and 2012. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

March 31, 2013

 

March 31, 2012

 

March 31, 2013

 

March 31, 2012

 

Number

 

 

 

 

Number

 

 

 

 

Number

 

 

 

 

Number

 

 

 

 

of

 

Recorded

 

of

 

Recorded

 

of

 

Recorded

 

of

 

Recorded

 

Contracts

 

Investment

 

Contracts

 

Investment

 

Contracts

 

Investment

 

Contracts

 

Investment

 

(Dollars in thousands)

One- to four-family loans - originated

11 

 

$

1,106 

 

 

$

762 

 

17 

 

$

1,511 

 

 

$

838 

One- to four-family loans - purchased

 

 

1,067 

 

--

 

 

--

 

 

 

1,114 

 

 

 

401 

Multi-family and commercial loans

--

 

 

--

 

--

 

 

--

 

--

 

 

--

 

--

 

 

--

Consumer - home equity

 

 

 

--

 

 

--

 

 

 

 

--

 

 

--

Consumer - other

--

 

 

--

 

--

 

 

--

 

--

 

 

--

 

--

 

 

--

 

15 

 

$

2,178 

 

 

$

762 

 

23 

 

$

2,632 

 

 

$

1,239 

 

21

 


 

 

Impaired loans – The following is a summary of information pertaining to impaired loans by class as of March 31, 2013 and September 30, 2012. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

 

 

 

 

Unpaid

 

 

 

 

 

 

 

Unpaid

 

 

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Principal

 

Related

 

 

Investment

 

Balance

 

ACL

 

Investment

 

Balance

 

ACL

 

 

(Dollars in thousands)

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family - originated

$

11,483 

 

$

11,523 

 

$

--

 

$

10,729 

 

$

10,765 

 

$

--

 

One- to four-family - purchased

 

14,753 

 

 

14,625 

 

 

--

 

 

15,340 

 

 

15,216 

 

 

--

 

Multi-family and commercial

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

Consumer - home equity

 

622 

 

 

622 

 

 

--

 

 

882 

 

 

881 

 

 

--

 

Consumer - other

 

33 

 

 

33 

 

 

--

 

 

27 

 

 

27 

 

 

--

 

 

 

26,891 

 

 

26,803 

 

 

--

 

 

26,978 

 

 

26,889 

 

 

--

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family - originated

 

38,368 

 

 

38,503 

 

 

228 

 

 

41,125 

 

 

41,293 

 

 

268 

 

One- to four-family - purchased

 

1,762 

 

 

1,746 

 

 

52 

 

 

2,028 

 

 

2,016 

 

 

54 

 

Multi-family and commercial

 

77 

 

 

79 

 

 

 

 

--

 

 

--

 

 

--

 

Consumer - home equity

 

500 

 

 

500 

 

 

74 

 

 

307 

 

 

307 

 

 

52 

 

Consumer - other

 

10 

 

 

10 

 

 

 

 

12 

 

 

12 

 

 

 

 

 

40,717 

 

 

40,838 

 

 

358 

 

 

43,472 

 

 

43,628 

 

 

375 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family - originated

 

49,851 

 

 

50,026 

 

 

228 

 

 

51,854 

 

 

52,058 

 

 

268 

 

One- to four-family - purchased

 

16,515 

 

 

16,371 

 

 

52 

 

 

17,368 

 

 

17,232 

 

 

54 

 

Multi-family and commercial

 

77 

 

 

79 

 

 

 

 

--

 

 

--

 

 

--

 

Consumer - home equity

 

1,122 

 

 

1,122 

 

 

74 

 

 

1,189 

 

 

1,188 

 

 

52 

 

Consumer - other

 

43 

 

 

43 

 

 

 

 

39 

 

 

39 

 

 

 

 

$

67,608 

 

$

67,641 

 

$

358 

 

$

70,450 

 

$

70,517 

 

$

375 

 

 

22

 


 

 

 

The following is a summary of information pertaining to impaired loans by class for the three and six months ended March 31, 2013 and 2012. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

March 31, 2013

 

March 31, 2012

 

March 31, 2013

 

March 31, 2012

 

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

 

(Dollars in thousands)

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family - originated

$

7,784 

 

$

63 

 

$

49,682 

 

$

481 

 

$

8,572 

 

$

139 

 

$

49,025 

 

$

872 

 

One- to four-family - purchased

 

15,058 

 

 

51 

 

 

11,876 

 

 

49 

 

 

15,108 

 

 

97 

 

 

9,942 

 

 

108 

 

Multi-family and commercial

 

--

 

 

--

 

 

277 

 

 

--

 

 

--

 

 

--

 

 

372 

 

 

--

 

Consumer - home equity

 

474 

 

 

15 

 

 

466 

 

 

 

 

596 

 

 

22 

 

 

467 

 

 

 

Consumer - other

 

29 

 

 

--

 

 

10 

 

 

--

 

 

28 

 

 

--

 

 

 

 

--

 

 

 

23,345 

 

 

129 

 

 

62,311 

 

 

533 

 

 

24,304 

 

 

258 

 

 

59,815 

 

 

985 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family - originated

 

42,937 

 

 

452 

 

 

3,225 

 

 

24 

 

 

42,457 

 

 

905 

 

 

3,249 

 

 

70 

 

One- to four-family - purchased

 

2,136 

 

 

21 

 

 

7,022 

 

 

13 

 

 

2,145 

 

 

46 

 

 

9,228 

 

 

18 

 

Multi-family and commercial

 

78 

 

 

--

 

 

--

 

 

--

 

 

44 

 

 

--

 

 

--

 

 

--

 

Consumer - home equity

 

605 

 

 

 

 

138 

 

 

 

 

507 

 

 

14 

 

 

180 

 

 

 

Consumer - other

 

26 

 

 

--

 

 

--

 

 

--

 

 

28 

 

 

--

 

 

--

 

 

--

 

 

 

45,782 

 

 

482 

 

 

10,385 

 

 

38 

 

 

45,181 

 

 

965 

 

 

12,657 

 

 

91 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family - originated

 

50,721 

 

 

515 

 

 

52,907 

 

 

505 

 

 

51,029 

 

 

1,044 

 

 

52,274 

 

 

942 

 

One- to four-family - purchased

 

17,194 

 

 

72 

 

 

18,898 

 

 

62 

 

 

17,253 

 

 

143 

 

 

19,170 

 

 

126 

 

Multi-family and commercial

 

78 

 

 

--

 

 

277 

 

 

--

 

 

44 

 

 

--

 

 

372 

 

 

--

 

Consumer - home equity

 

1,079 

 

 

24 

 

 

604 

 

 

 

 

1,103 

 

 

36 

 

 

647 

 

 

 

Consumer - other

 

55 

 

 

--

 

 

10 

 

 

--

 

 

56 

 

 

--

 

 

 

 

--

 

 

$

69,127 

 

$

611 

 

$

72,696 

 

$

571 

 

$

69,485 

 

$

1,223 

 

$

72,472 

 

$

1,076 

 

 

23


 

 

Allowance for credit losses - The following is a summary of the activity in the ACL by segment and the ending balance of the ACL based on the Company’s impairment methodology for and at the beginning and end of the periods presented.  Net charge-offs during the six months ended March 31, 2013 were $1.3 million, of which $372 thousand related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that must be, in accordance with OCC regulations, evaluated for collateral value loss, even if the loans are current.  In January 2012, management implemented a loan charge-off policy as OCC Call Report requirements do not permit the use of specific valuation allowances (“SVAs”), which the Bank was previously utilizing for potential loan losses, as permitted by the Bank’s previous regulator.  As a result of the implementation of the charge-off policy change, $3.5 million of SVAs were charged-off during the three months ended March 31, 2012.  These charge-offs did not impact the provision for credit losses, and therefore had no additional income statement impact, as the amounts were expensed in previous periods. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2013

 

 

One- to Four-

 

One- to Four-

 

One- to Four-

 

Multi-family

 

 

 

 

 

 

 

 

Family -

 

Family -

 

Family -

 

and

 

 

 

 

 

 

 

 

Originated

 

Purchased

 

Total

 

Commercial

 

Consumer

 

Total

 

 

(Dollars in thousands)

 

Beginning balance

$

5,639 

 

$

4,290 

 

$

9,929 

 

$

201 

 

$

347 

 

$

10,477 

 

Charge-offs

 

(284)

 

 

(153)

 

 

(437)

 

 

--

 

 

(20)

 

 

(457)

 

Recoveries

 

--

 

 

42 

 

 

42 

 

 

--

 

 

10 

 

 

52 

 

Provision for credit losses

 

647 

 

 

(684)

 

 

(37)

 

 

 

 

30 

 

 

--

 

Ending balance

$

6,002 

 

$

3,495 

 

$

9,497 

 

$

208 

 

$

367 

 

$

10,072 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

 

 

 

 

 

0.01 

%

Ratio of net charge-offs during the period to average non-performing assets during the period

 

 

 

 

 

1.19 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended March 31, 2013

 

 

One- to Four-

 

One- to Four-

 

One- to Four-

 

Multi-family

 

 

 

 

 

 

 

 

Family -

 

Family -

 

Family -

 

and

 

 

 

 

 

 

 

 

Originated

 

Purchased

 

Total

 

Commercial

 

Consumer

 

Total

 

 

(Dollars in thousands)

 

Beginning balance

$

6,074 

 

$

4,453 

 

$

10,527 

 

$

219 

 

$

354 

 

$

11,100 

 

Charge-offs

 

(503)

 

 

(685)

 

 

(1,188)

 

 

--

 

 

(135)

 

 

(1,323)

 

Recoveries

 

--

 

 

42 

 

 

42 

 

 

--

 

 

20 

 

 

62 

 

Provision for credit losses

 

431 

 

 

(315)

 

 

116 

 

 

(11)

 

 

128 

 

 

233 

 

Ending balance

$

6,002 

 

$

3,495 

 

$

9,497 

 

$

208 

 

$

367 

 

$

10,072 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

 

 

0.02 

%

Ratio of net charge-offs during the period to average non-performing assets during the period

 

 

3.46 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2012

 

 

One- to Four-

 

One- to Four-

 

One- to Four-

 

Multi-family

 

 

 

 

 

 

 

 

Family -

 

Family -

 

Family -

 

and

 

 

 

 

 

 

 

 

Originated

 

Purchased

 

Total

 

Commercial

 

Consumer

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

$

4,921 

 

$

10,342 

 

$

15,263 

 

$

83 

 

$

259 

 

$

15,605 

 

Charge-offs

 

(497)

 

 

(3,850)

 

 

(4,347)

 

 

--

 

 

(199)

 

 

(4,546)

 

Recoveries

 

--

 

 

--

 

 

-- 

 

 

--

 

 

--

 

 

-- 

 

Provision for credit losses

 

368 

 

 

1,000 

 

 

1,368 

 

 

(1)

 

 

133 

 

 

1,500 

 

Ending balance

$

4,792 

 

$

7,492 

 

$

12,284 

 

$

82 

 

$

193 

 

$

12,559 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

 

 

0.09 

%

Ratio of net charge-offs during the period to average non-performing assets during the period

 

 

11.11 

%

 

 

24


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended March 31, 2012

 

 

One- to Four-

 

One- to Four-

 

One- to Four-

 

Multi-family

 

 

 

 

 

 

 

 

Family -

 

Family -

 

Family -

 

and

 

 

 

 

 

 

 

 

Originated

 

Purchased

 

Total

 

Commercial

 

Consumer

 

Total

 

 

 

(Dollars in thousands)

 

Beginning balance

$

4,915 

 

$

9,901 

 

$

14,816 

 

$

254 

 

$

395 

 

$

15,465 

 

Charge-offs

 

(587)

 

 

(4,154)

 

 

(4,741)

 

 

--

 

 

(205)

 

 

(4,946)

 

Recoveries

 

--

 

 

--

 

 

-- 

 

 

--

 

 

--

 

 

-- 

 

Provision for credit losses

 

464 

 

 

1,745 

 

 

2,209 

 

 

(172)

 

 

 

 

2,040 

 

Ending balance

$

4,792 

 

$

7,492 

 

$

12,284 

 

$

82 

 

$

193 

 

$

12,559 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs during the period to average loans outstanding during the period

 

 

0.10 

%

Ratio of net charge-offs during the period to average non-performing assets during the period

 

 

12.37 

%

 

The following is a summary of the loan portfolio and related ACL balances at March 31, 2013 and September 30, 2012 by loan portfolio segment disaggregated by the Company’s impairment method.  There was no ACL for loans individually evaluated for impairment at March 31, 2013 or September 30, 2012, as all potential losses were charged-off.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

One- to Four-

 

One- to Four-

 

One- to Four-

 

Multi-family

 

 

 

 

 

 

 

Family -

 

Family -

 

Family -

 

and

 

 

 

 

 

 

 

Originated

 

Purchased

 

Total

 

Commercial

 

Consumer

 

Total

 

(Dollars in thousands)

Recorded investment of loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

collectively evaluated for impairment

$

4,782,046 

 

$

713,087 

 

$

5,495,133 

 

$

60,524 

 

$

142,797 

 

$

5,698,454 

Recorded investment of loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

individually evaluated for impairment

 

11,483 

 

 

14,753 

 

 

26,236 

 

 

--

 

 

655 

 

 

26,891 

 

$

4,793,529 

 

$

727,840 

 

$

5,521,369 

 

$

60,524 

 

$

143,452 

 

$

5,725,345 

ACL for loans collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

$

6,002 

 

$

3,495 

 

$

9,497 

 

$

208 

 

$

367 

 

$

10,072 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

One- to Four-

 

One- to Four-

 

One- to Four-

 

Multi-family

 

 

 

 

 

 

 

Family -

 

Family -

 

Family -

 

and

 

 

 

 

 

 

 

Originated

 

Purchased

 

Total

 

Commercial

 

Consumer

 

Total

 

(Dollars in thousands)

Recorded investment of loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

collectively evaluated for impairment

$

4,602,969 

 

$

774,734 

 

$

5,377,703 

 

$

59,562 

 

$

154,940 

 

$

5,592,205 

Recorded investment of loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

individually evaluated for impairment

 

10,729 

 

 

15,339 

 

 

26,068 

 

 

--

 

 

910 

 

 

26,978 

 

$

4,613,698 

 

$

790,073 

 

$

5,403,771 

 

$

59,562 

 

$

155,850 

 

$

5,619,183 

ACL for loans collectively evaluated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for impairment

$

6,074 

 

$

4,453 

 

$

10,527 

 

$

219 

 

$

354 

 

$

11,100 

 

As noted above, the Bank has a loan concentration in residential first mortgage loans.  Declines in residential real estate values could adversely impact the property used as collateral for the Bank’s loans.  Adverse changes in economic conditions and increasing unemployment rates may have a negative effect on the ability of the Bank’s borrowers to make timely loan payments, which would likely increase delinquencies and have an adverse impact on the Bank’s earnings.  Further increases in delinquencies would decrease interest income on loans receivable and would likely adversely impact the Bank’s loan loss experience, resulting in an increase in the Bank’s ACL and provision for credit losses.  Although management believes the ACL was at a level adequate to absorb inherent

25

 


 

losses in the loan portfolio at March 31, 2013, the level of the ACL remains an estimate that is subject to significant judgment and short-term changes.  Additions to the ACL may be necessary if future economic and other conditions worsen substantially from the current environment.    

5.    Fair Value of Financial Instruments

Fair Value Measurements - ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  ASC 820 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures.  ASC 820 was issued to increase consistency and comparability in reporting fair values.

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures.  The Company did not have any liabilities that were measured at fair value at March 31, 2013 or September 30, 2012.  The Company’s AFS securities are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as OREO and loans individually evaluated for impairment.  These non-recurring fair value adjustments involve the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

In accordance with ASC 820, the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

·

Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

·

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

·

Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market.  These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques.  The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.


The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.  As required by ASC 820, the Company maximizes  the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. 

The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

AFS Securities - The Company’s AFS securities portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders’ equity.  The majority of the securities within the AFS portfolio are issued by U.S. GSEs.  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)

26

 


 

The following table provides the level of valuation assumption used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis, which consists of AFS securities, at March 31, 2013 and September 30, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

 

Quoted Prices 

 

Significant 

 

Significant

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Carrying

 

for Identical Assets

 

Inputs

 

Inputs

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3) (1) 

 

(Dollars in thousands)

AFS Securities:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

$

797,170 

 

$

-- 

 

$

797,170 

 

$

-- 

MBS

 

444,139 

 

 

-- 

 

 

444,139 

 

 

-- 

Trust preferred securities

 

2,756 

 

 

-- 

 

 

-- 

 

 

2,756 

Municipal bonds

 

1,378 

 

 

-- 

 

 

1,378 

 

 

-- 

  

$

1,245,443 

 

$

-- 

 

$

1,242,687 

 

$

2,756 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

 

Quoted Prices 

 

Significant 

 

Significant

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Carrying

 

for Identical Assets

 

Inputs

 

Inputs

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3) (2) 

 

(Dollars in thousands)

AFS Securities:

 

 

 

 

 

 

 

 

 

 

 

GSE debentures

$

861,724 

 

$

-- 

 

$

861,724 

 

$

-- 

MBS

 

540,306 

 

 

-- 

 

 

540,306 

 

 

-- 

Municipal bonds

 

2,516 

 

 

-- 

 

 

2,516 

 

 

-- 

Trust preferred securities

 

2,298 

 

 

-- 

 

 

-- 

 

 

2,298 

  

$

1,406,844 

 

$

-- 

 

$

1,404,546 

 

$

2,298 

 

(1)

The Company’s Level 3 AFS securities had no activity from September 30, 2012 to March 31, 2013, except for principal repayments of $117 thousand and reductions in net unrealized losses recognized in other comprehensive income.  Reductions in net unrealized losses included in other comprehensive income for the six months ended March 31, 2013 were $336 thousand.

(2)

The Company’s Level 3 AFS securities had no activity from September 30, 2011 to September 30, 2012, except for principal repayments of $996 thousand and reductions in net unrealized losses recognized in other comprehensive income.  Reductions of net unrealized losses included in other comprehensive income for the year ended September 30, 2012 were $78 thousand.

 

The following is a description of valuation methodologies used for significant assets measured at fair value on a non-recurring basis. 

Loans Receivable - The balance of loans individually evaluated for impairment at March 31, 2013 and September 30, 2012 was $26.8 million and $26.9 million, respectively.  Substantially all of these loans were secured by residential real estate and were individually evaluated to ensure that the carrying value of the loan was not in excess of the fair value of the collateral, less estimated selling costs.  Fair values were estimated through current appraisals or listing prices.  Fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.  Based on this evaluation, the Bank charged-off any loss amounts at March 31, 2013 and September 30, 2012; therefore there was no ACL related to these loans.

OREO - OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower-of-cost or fair value.  Fair value is estimated through current appraisals or listing prices.  As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions and, as such, are classified as Level 3.  The fair value of OREO at March 31, 2013 and September 30, 2012 was $6.7 million and $8.0 million, respectively.

27

 


 

The following table provides the level of valuation assumption used to determine the carrying value of the Company’s assets measured at fair value on a non-recurring basis at March 31, 2013 and September 30, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

 

 

 

Quoted Prices 

 

Significant 

 

Significant

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Carrying

 

for Identical Assets

 

Inputs

 

Inputs

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Dollars in thousands)

Loans individually evaluated for impairment

$

26,803 

 

$

-- 

 

$

-- 

 

$

26,803 

OREO

 

6,682 

 

 

-- 

 

 

-- 

 

 

6,682 

  

$

33,485 

 

$

-- 

 

$

-- 

 

$

33,485 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

 

 

 

Quoted Prices 

 

Significant 

 

Significant

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Carrying

 

for Identical Assets

 

Inputs

 

Inputs

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Dollars in thousands)

Loans individually evaluated for impairment

$

26,890 

 

$

-- 

 

$

-- 

 

$

26,890 

OREO

 

8,047 

 

 

-- 

 

 

-- 

 

 

8,047 

  

$

34,937 

 

$

-- 

 

$

-- 

 

$

34,937 

 

 

Fair Value Disclosures - The Company determined estimated fair value amounts using available market information and from a variety of valuation methodologies.  However, considerable judgment is required to interpret market data to develop the estimates of fair value.  Accordingly, the estimates presented are not necessarily indicative of the amount the Company could realize in a current market exchange.  The use of different market assumptions and estimation methodologies may have a material impact on the estimated fair value amounts.  The fair value estimates presented herein were based on pertinent information available to management as of March 31, 2013 and September 30, 2012.

The carrying amounts and estimated fair values of the Company’s financial instruments as of March 31, 2013 and September 30, 2012 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

 

 

Estimated

 

 

 

Estimated

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Amount

 

Value

 

Amount

 

Value

 

(Dollars in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

48,574 

 

$

48,574 

 

$

141,705 

 

$

141,705 

HTM securities

 

1,953,779 

 

 

2,014,843 

 

 

1,887,947 

 

 

1,969,899 

Loans receivable

 

5,715,273 

 

 

6,065,659 

 

 

5,608,083 

 

 

5,978,872 

BOLI

 

58,756 

 

 

58,756 

 

 

58,012 

 

 

58,012 

Capital stock of FHLB

 

130,680 

 

 

130,680 

 

 

132,971 

 

 

132,971 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,693,573 

 

 

4,737,225 

 

 

4,550,643 

 

 

4,607,732 

Advances from FHLB

 

2,634,465 

 

 

2,772,436 

 

 

2,530,322 

 

 

2,701,142 

Repurchase agreements

 

315,000 

 

 

332,836 

 

 

365,000 

 

 

388,761 

 

28

 


 

The following methods and assumptions were used to estimate the fair value of the financial instruments:

Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents are considered to approximate their fair value due to the nature of the financial asset. (Level 1)

HTM Securities - Estimated fair values of securities are based on one of three methods: 1) quoted market prices where available, 2) quoted market prices for similar instruments if quoted market prices are not available, 3) unobservable data that represents the Bank’s assumptions about items that market participants would consider in determining fair value where no market data is available.  HTM securities are carried at amortized cost. (Level 2

Loans Receivable - The fair value of one- to four-family mortgages and home equity loans are generally estimated using the present value of expected future cash flows, assuming future prepayments and using discount factors determined by prices obtained from securitization markets, less a discount for the cost of servicing and lack of liquidity. The estimated fair value of the Bank’s multi-family and consumer loans are based on the expected future cash flows assuming future prepayments and discount factors based on current offering rates. (Level 3)

BOLI - The carrying value of BOLI is considered to approximate its fair value due to the nature of the financial asset. (Level 1)

Capital Stock of FHLB - The carrying value and estimated fair value of FHLB stock equals cost, which is based on redemption at par value. (Level 1)

Deposits - The estimated fair value of demand deposits, savings and money market accounts is the amount payable on demand at the reporting date.  The estimated fair value of these deposits at March 31, 2013 and September 30, 2012 was $2.13 billion and $1.98 billion, respectively. (Level 1)  The fair value of certificates of deposit is estimated by discounting future cash flows using current LIBOR rates.  The estimated fair value of certificates of deposit at March 31, 2013 and September 30, 2012 was $2.61 billion and $2.63 billion, respectively. (Level 2)

Advances from FHLB and Repurchase Agreements - The fair value of fixed-maturity borrowed funds is estimated by discounting estimated future cash flows using currently offered rates. (Level 2)

 

 

6.   Subsequent Events

In preparing these financial statements, management has evaluated events occurring subsequent to March 31, 2013, for potential recognition and disclosure.  There have been no material events or transactions which would require adjustments to the consolidated financial statements at March 31, 2013.

 

 

29

 


 

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

The Company and its wholly-owned subsidiary 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 SEC.  These forward-looking statements may be included in this Quarterly Report on Form 10-Q 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, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control.  The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:    

·

our ability to continue to maintain overhead costs at reasonable levels;

·

our ability to continue to originate a significant volume of one- to four-family mortgage loans in our market areas or to purchase loans through correspondents;

·

our ability to invest funds in wholesale or secondary markets at favorable yields as compared to the related funding source;

·

our ability to access cost-effective funding;

·

the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy;

·

fluctuations in deposit flows, loan demand, and/or real estate values, as well as unemployment levels, which may adversely affect our business;

·

the credit risks of lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the ACL;

·

results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL;

·

the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

·

the effects of, and changes in, trade, fiscal policies and laws, and monetary and interest rate policies of the Board of Governors of the Federal Reserve System (“FRB”);

·

the effects of, and changes in, foreign and military policies of the United States government;

·

inflation, interest rate, market and monetary fluctuations;

·

the timely development and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;

·

the willingness of users to substitute competitors’ products and services for our products and services;

·

our success in gaining regulatory approval of our products and services and branching locations, when required;

·

the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection and insurance and the impact of other governmental initiatives affecting the financial services industry;

·

implementing business initiatives may be more difficult or expensive than anticipated;

·

technological changes;

·

acquisitions and dispositions;

·

changes in consumer spending and saving habits; and

·

our success at managing the risks involved in our business.

 

This list of important factors is not all inclusive.  We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.

As used in this Form 10-Q, 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.  

The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity and capital resources of the Company.  It should be read in conjunction with the consolidated financial statements and notes presented in this report.  The discussion includes comments relating to the Bank, since the Bank is wholly-owned by the Company and comprises the majority of its assets and is the principal source of income for the Company.  This discussion and analysis should be read in conjunction with management’s discussion and analysis included in the Company’s 2012 Annual Report on Form 10-K filed with the SEC.    

30

 


 

Executive Summary

The following summary should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations in its entirety.

We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve.  We attract retail deposits from the general public and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences.  To a lesser extent, we also originate consumer loans, loans secured by first mortgages on non-owner-occupied one- to four-family residences, multi-family and commercial real estate loans, and construction loans.  While our primary business is the origination of one- to four-family mortgage loans funded through retail deposits, we also purchase whole one- to four-family mortgage loans from correspondent and nationwide lenders, and invest in certain investment securities and MBS using funding from retail deposits, advances from FHLB, and repurchase agreements.  The Company is significantly affected by prevailing economic conditions including federal monetary and fiscal policies and federal regulation of financial institutions.  Retail deposit balances are influenced by a number of factors including interest rates paid on competing personal investment products, the level of personal income, and the personal rate of savings within our market areas.  Lending activities are influenced by the demand for housing and other loans, our loan underwriting guidelines compared to those of our competitors, as well as interest rate pricing competition from other lending institutions.  The primary sources of funds for lending activities include deposits, loan repayments, investment income, borrowings, and funds provided from operations.

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, MBS, investment securities, and cash, and the interest paid on deposits and borrowings.  On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies.  The Bank generally prices its first mortgage loan products based on secondary market and competitor pricing.  Generally, deposit pricing is based upon a survey of competitors in the Bank’s market areas, and the need to attract funding and retain maturing deposits.  The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our deposits have maturity or repricing dates of less than two years

The Federal Open Market Committee of the Federal Reserve (the “FOMC”) noted in their March 2013 statement and minutes that economic activity has returned to moderate growth following a pause late last year.  Although the unemployment rate remains elevated, labor market conditions have shown signs of improvement in recent months.  The FOMC stated that household spending and business fixed investment have advanced, and that the housing sector continues to strengthen.  Rising home prices are strengthening household balance sheets by increasing wealth and progressively affording homeowners the ability to refinance their mortgages at lower rates.  The FOMC views this dynamic as potentially leading to a virtuous cycle that could help support household spending and financial market conditions over time.  For the most part, inflation has been running somewhat below the FOMC’s longer-run objective and longer-term inflationary expectations have remained stable.  The FOMC decided to continue its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and will continue to purchase additional longer-term Treasury securities at a pace of $45 billion per month and agency MBS at a pace of $40 billion per month.  The FOMC expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.  The FOMC believes that these actions, taken together, will maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.  The FOMC remarked that it will continue to maintain the overnight lending rate at zero to 0.25% as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the FOMC’s 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.

 

Economic conditions in the Bank’s local market areas have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans.  As of March 2013, the unemployment rate was 5.6% for Kansas and 6.7% for Missouri, compared to the national average of 7.6% based on information from the Bureau of Economic Analysis.  The unemployment rate remains relatively low in our market areas, compared to the national average, due to diversified industries within our market areas, primarily in the Kansas City metropolitan statistical area, but it is higher than the historical average.  Our Kansas City market area, which comprises the largest segment of our loan portfolio and deposit base, has an average household income of approximately $79 thousand per annum, based on 2012 estimates from the American Community Survey, which is a statistical survey by the U.S. Census Bureau.  The average household income in our combined market areas is approximately $68 thousand per annum, with 92% of the population at or above the poverty level, also based on the 2012 estimates from the American Community Survey.  The Federal Housing Finance Agency (“FHFA”) price index for Kansas and Missouri has not experienced significant fluctuations during the past 10 years, unlike other market areas of the United States, which indicates relative stability historically in property values in our local market areas.    

31

 


 

Total assets increased $15.4 million, from $9.38 billion at September 30, 2012 to $9.39 billion at March 31, 2013, due primarily to a $107.2 million increase in the loan portfolio and a $97.5 million increase in other assets, partially offset by a $95.6 million decrease in the securities portfolio and a $93.1 million decrease in cash and cash equivalents.  The increase in other assets was due primarily to a $100.0 million FHLB advance commitment, which settled in early April 2013.

The overall performance of our loan portfolio continued to improve during the current fiscal year.    Loans 90 or more days delinquent or in foreclosure decreased $1.3 million, or 6.7%, from $19.5 million at September 30, 2012 to $18.2 million at March 31, 2013.  Net charge-offs during the current six month period were $1.3 million, of which $372 thousand related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that had to be, in accordance with OCC regulations, evaluated for collateral value loss, even if the loan was current

 

Total liabilities increased $178.9 million, from $7.57 billion at September 30, 2012, to $7.75 billion at March 31, 2013 due largely to a $142.9 million increase in deposits and a $100.0 million FHLB advance commitment, partially offset by the repayment of $50.0 million of repurchase agreements that matured during the current quarter.  Stockholders’ equity decreased $163.5 million, from $1.81 billion at September 30, 2012 to $1.64 billion at March 31, 2013.  The decrease was due primarily to the payment of $125.3 million of dividends and the repurchase of $72.0 million of stock, partially offset by net income of $35.3 million.

 

Net income for the quarter ended March 31, 2013 was $17.7 million, compared to $19.3 million for the quarter ended March 31, 2012The $1.6 million, or 8.3%, decrease in net income was due primarily to a decrease in net interest income and an increase in other expenses, partially offset by decreases in provision for credit losses and income tax expense.  The net interest margin decreased nine basis points, from 2.06% for the prior year quarter to 1.97% for the current quarter, primarily as a result of continued downward pressure on loan and security yields.  

 

Net income for the six months ended March 31, 2013 was $35.3 million, compared to net income of $38.1 million for the six months ended March 31, 2012.  The $2.8 million, or 7.4%, decrease in net income was due primarily to an increase in other expenses and a decrease in net interest income, partially offset by a decrease in income tax expense and provision for credit losses.  The net interest margin decreased three basis points, from 2.02% for the prior year six month period to 1.99% for the current year six month period.  The decrease in the net interest margin was primarily a result of a decrease in loan and security yields, which more than offset the benefit received from a decrease in the cost of funds between the two periods.  

The Bank currently expects to open one new branch in calendar year 2013.  The branch will be located in our Kansas City market area.  Management continues to consider expansion opportunities in all of our market areas.    

 

Available Information

Financial and other Company information, including press releases, 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 investor relations website, http://ir.capfed.com.  SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC’s website at www.sec.gov.

 

 

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.  For a full discussion of our critical accounting policies, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

32

 


 

 

 

Financial Condition

The following table presents selected balance sheet information for the dates presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

2013

 

2012

 

2012

 

2012

 

2012

 

 

(Dollars in thousands)

 

Total assets

$

9,393,718 

 

 

$

9,238,786 

 

 

$

9,378,304 

 

 

$

9,420,614 

 

 

$

9,573,144 

 

Cash and cash equivalents

 

48,574 

 

 

 

105,157 

 

 

 

141,705 

 

 

 

172,948 

 

 

 

143,707 

 

AFS securities

 

1,245,443 

 

 

 

1,259,392 

 

 

 

1,406,844 

 

 

 

1,632,297 

 

 

 

1,715,445 

 

HTM securities

 

1,953,779 

 

 

 

1,902,228 

 

 

 

1,887,947 

 

 

 

2,073,951 

 

 

 

2,165,036 

 

Loans receivable, net

 

5,715,273 

 

 

 

5,640,077 

 

 

 

5,608,083 

 

 

 

5,209,990 

 

 

 

5,224,178 

 

Capital stock of FHLB

 

130,680 

 

 

 

130,784 

 

 

 

132,971 

 

 

 

131,437 

 

 

 

130,614 

 

Deposits

 

4,693,573 

 

 

 

4,582,163 

 

 

 

4,550,643 

 

 

 

4,592,437 

 

 

 

4,657,010 

 

Advances from FHLB

 

2,634,465 

 

 

 

2,532,493 

 

 

 

2,530,322 

 

 

 

2,527,903 

 

 

 

2,525,535 

 

Repurchase agreements

 

315,000 

 

 

 

365,000 

 

 

 

365,000 

 

 

 

365,000 

 

 

 

365,000 

 

Stockholders’ equity

 

1,643,007 

 

 

 

1,669,951 

 

 

 

1,806,458 

 

 

 

1,832,858 

 

 

 

1,912,472 

 

Equity to total assets at end of period

 

17.5 

%

 

 

18.1 

%

 

 

19.3 

%

 

 

19.5 

%

 

 

20.0 

%

 

 

Assets.    Total assets increased $15.4 million, from $9.38 billion at September 30, 2012 to $9.39 billion at March 31, 2013, due primarily to a $107.2 million increase in the loan portfolio and a $97.5 million increase in other assets, partially offset by a $95.6 million decrease in the securities portfolio and a $93.1 million decrease in cash and cash equivalents.  The net increase in the loan portfolio was due primarily to one- to four-family loan originations and correspondent purchases outpacing principal repayments during the current six month period.  The increase in other assets was due primarily to a $100.0 million FHLB advance commitment, which settled in early April 2013.  Of the $95.6 million decrease in the securities portfolio, $60.0 million related to securities at the holding company level, the proceeds from which were used to pay dividend to stockholders and repurchase stock.  The remaining cash flows from the securities portfolio which were not reinvested along with cash were used, in part, to fund loan activity and repay $50 million of repurchase agreements that matured during the current quarter. 

 

Loans Receivable.    The loans receivable portfolio increased $107.2 million, or at an annualized rate of 3.8%, to $5.72 billion at March 31, 2013, from $5.61 billion at September 30, 2012.  During the six months ended March 31, 2013, the Bank originated $224.1 million of one- to four-family loans, refinanced $194.2 million of Bank customer one- to four-family loans, and purchased $244.9 million of one- to four-family loans from correspondent lenders.  As of March 31, 2013, the Bank had 26 active correspondent lending relationships in 21 states.  

 

As a portfolio lender focused on delivering outstanding customer service while acquiring quality assets, our borrowers ability to repay has always been paramount in our business model.  Although we continue to evaluate the recently issued “qualified mortgage” rules by the Consumer Financial Protection Bureau, we currently anticipate that the impact to our overall book of business will generally be minimal. 

33

 


 

The following table presents characteristics of our loan portfolio as of March 31, 2013 and September 30, 2012.  The weighted average rate of the loan portfolio decreased 21 basis points from 4.15% at September 30, 2012 to 3.94% at March 31, 2013.  The decrease in the weighted average portfolio rate was due primarily to the endorsement and refinancing of loans at current market rates, as well as to the origination and purchase of loans between periods with rates less than the average rate of the existing portfolio.    Within the one- to four-family loan portfolio at March 31, 2013, 69% of the loans had a balance at origination of less than $417 thousand.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

 

 

Average

 

 

 

Average

 

Amount

 

Rate

 

Amount

 

Rate

 

 

(Dollars in thousands)

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

5,508,452 

 

3.89 

%

 

$

5,392,429 

 

4.10 

%

Multi-family and commercial

 

46,579 

 

5.62 

 

 

 

48,623 

 

5.64 

 

Construction

 

64,572 

 

3.87 

 

 

 

52,254 

 

4.08 

 

Total real estate loans

 

5,619,603 

 

3.90 

 

 

 

5,493,306 

 

4.11 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

137,380 

 

5.36 

 

 

 

149,321 

 

5.42 

 

Other

 

6,072 

 

4.50 

 

 

 

6,529 

 

4.77 

 

Total consumer loans

 

143,452 

 

5.32 

 

 

 

155,850 

 

5.39 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable

 

5,763,055 

 

3.94 

%

 

 

5,649,156 

 

4.15 

%

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

Undisbursed loan funds

 

32,619 

 

 

 

 

 

22,874 

 

 

 

ACL

 

10,072 

 

 

 

 

 

11,100 

 

 

 

Discounts/unearned loan fees

 

22,149 

 

 

 

 

 

21,468 

 

 

 

Premiums/deferred costs

 

(17,058)

 

 

 

 

 

(14,369)

 

 

 

Total loans receivable, net

$

5,715,273 

 

 

 

 

$

5,608,083 

 

 

 

 

 

Included in the loan portfolio at March 31, 2013 were $123.5 million, or 2.2% of the total loan portfolio, of adjustable-rate mortgage (“ARM”) loans that were originated as interest-only.  Of these interest-only loans, $103.4 million were purchased in bulk loan packages from nationwide lenders, primarily during fiscal year 2005.  Interest-only ARM loans do not typically require principal payments during their initial term, and have initial interest-only terms of either five or 10 years.  The $103.4 million of purchased interest-only ARM loans held at March 31, 2013, had a weighted average credit score of 725 and a weighted average LTV ratio of 71% as of March 31, 2013.  At March 31, 2013, $63.2 million, or 51%, of the interest-only loans were still in their interest-only payment term and $4.2 million, or 16% of non-performing loans, were interest-only ARMs. 

34

 


 

The following table presents the balance, percentage of total one- to four-family loans, weighted average credit score, LTV ratio, and average balance per loan for our one- to four-family loans as of the dates presented.  Credit scores are updated in the last month of the quarter and are obtained from a nationally recognized consumer rating agency.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent bank appraisal, if available.  In most cases, the most recent appraisal was obtained at the time of origination. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

September 30, 2012

 

 

 

% of

 

Credit

 

 

 

Average

 

 

 

% of

 

Credit

 

 

 

Average

 

Balance

 

Total

 

Score

 

LTV

 

Balance

 

Balance

 

Total

 

Score

 

LTV

 

Balance

 

(Dollars in thousands)

Originated

$

4,020,666 

 

73.0 

%

 

763 

 

65 

%

 

$

125 

 

$

4,032,581 

 

74.8 

%

 

763 

 

65 

%

 

$

124 

Correspondent purchased

 

764,862 

 

13.9 

 

 

763 

 

66 

 

 

 

341 

 

 

575,502 

 

10.7 

 

 

761 

 

65 

 

 

 

326 

Bulk purchased

 

722,924 

 

13.1 

 

 

749 

 

67 

 

 

 

316 

 

 

784,346 

 

14.5 

 

 

749 

 

67 

 

 

 

316 

 

$

5,508,452 

 

100.0 

%

 

761 

 

65 

%

 

$

150 

 

$

5,392,429 

 

100.0 

%

 

761 

 

65 

%

 

$

147 

 

The following table presents the rates and weighted average lives (“WAL”) in years, which reflects prepayment assumptions, of our loan portfolio as of the dates indicated.  The terms listed under fixed-rate one- to four-family loans represent original terms-to-maturity.  The terms listed under adjustable-rate one- to four-family loans represent initial terms-to-repricing.  Yields include the amortization of fees, costs, and premiums and discounts, all of which are considered adjustments to the yield.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

December 31, 2012

 

March 31, 2012

 

 

Amount

 

Rate

 

WAL

 

Amount

 

Rate

 

WAL

 

Amount

 

Rate

 

WAL

 

 

(Dollars in thousands)

 

Fixed-rate one- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<= 15 years

$

1,125,356 

 

3.70 

%

 

3.5 

 

$

1,087,787 

 

3.84 

%

 

2.9 

 

$

1,055,293 

 

4.23 

%

 

3.1 

 

> 15 years

 

3,237,793 

 

4.29 

 

 

5.4 

 

 

3,176,924 

 

4.40 

 

 

4.2 

 

 

3,110,361 

 

4.73 

 

 

5.1 

 

All other fixed-rate loans

 

118,288 

 

5.37 

 

 

3.3 

 

 

115,526 

 

5.53 

 

 

3.0 

 

 

113,713 

 

6.24 

 

 

1.7 

(1)

Total fixed-rate loans

 

4,481,437 

 

4.17 

 

 

4.8 

 

 

4,380,237 

 

4.29 

 

 

3.8 

 

 

4,279,367 

 

4.65 

 

 

4.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustable-rate one- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<= 36 months

 

443,269 

 

2.68 

 

 

3.7 

 

 

452,328 

 

2.70 

 

 

3.7 

 

 

126,124 

 

3.49 

 

 

3.3 

 

> 36 months

 

702,034 

 

3.15 

 

 

3.2 

 

 

712,517 

 

3.21 

 

 

2.8 

 

 

718,298 

 

3.39 

 

 

3.4 

 

All other adjustable-rate loans

 

136,315 

 

4.69 

 

 

0.3 

 

 

142,811 

 

4.69 

 

 

0.3 

 

 

151,507 

 

4.65 

 

 

1.7 

(1)

Total adjustable-rate loans

 

1,281,618 

 

3.15 

 

 

3.0 

 

 

1,307,656 

 

3.20 

 

 

2.8 

 

 

995,929 

 

3.59 

 

 

3.2 

 

Total loans receivable

$

5,763,055 

 

3.94 

%

 

4.4 

 

$

5,687,893 

 

4.04 

%

 

3.6 

 

$

5,275,296 

 

4.45 

%

 

4.3 

 

 

(1)

The 1.7 years presented at March 31, 2012 is for all other fixed-rate and adjustable-rate loans combined as the individual WAL for each category was not available.

35

 


 

The following tables present the annualized prepayment speeds of our one- to four-family loan portfolio for the quarter ended March 31, 2013, by interest rate tier.  The balances represent unpaid principal balances, excluding charge-offs, and including LIP, construction loans and non-performing loans.  The terms presented in the tables below represent the original terms for our fixed-rate one-to four-family loans, and current terms to repricing for our adjustable-rate one- to four-family loans.  Loan endorsements and refinances are considered prepayments and therefore are included in the prepayment speeds below.  During the quarter ended March 31, 2013, $3.4 million of adjustable-rate one- to four-family loans were endorsed to fixed-rate loans.  The annualized prepayment speeds are presented with and without endorsements.  Additionally, annualized prepayment speeds for our originated, correspondent purchased and bulk purchased portfolios for the quarter ended March 31, 2013, is also presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original Term

 

 

15 years or less

 

More than 15 years

 

 

 

 

Prepayment Speed (annualized)

 

 

 

Prepayment Speed (annualized)

Rate

 

Principal

 

Including

 

Excluding

 

Principal

 

Including

 

Excluding

Range

 

Balance

 

Endorsements

 

Endorsements

 

Balance

 

Endorsements

 

Endorsements

 

 

 

(Dollars in thousands)

 

<= 3.50%

 

$

623,255 

 

8.4 

%

 

5.6 

%

 

$

684,145 

 

6.8 

%

 

5.3 

%

3.51 - 3.99%

 

 

190,141 

 

26.6 

 

 

17.2 

 

 

 

660,459 

 

10.0 

 

 

5.8 

 

4.00 - 4.50%

 

 

100,346 

 

51.0 

 

 

32.2 

 

 

 

993,693 

 

27.0 

 

 

13.1 

 

4.51 - 4.99%

 

 

84,643 

 

40.7 

 

 

30.4 

 

 

 

185,929 

 

39.7 

 

 

18.8 

 

5.00 - 5.50%

 

 

91,139 

 

31.8 

 

 

27.5 

 

 

 

457,041 

 

47.5 

 

 

21.9 

 

5.51 - 5.99%

 

 

21,095 

 

20.4 

 

 

17.1 

 

 

 

133,670 

 

39.7 

 

 

20.8 

 

>= 6.00%

 

 

14,743 

 

21.0 

 

 

19.5 

 

 

 

165,550 

 

27.2 

 

 

18.1 

 

 

 

$

1,125,362 

 

21.3 

%

 

14.9 

%

 

$

3,280,487 

 

24.8 

%

 

12.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

 

$

937,653 

 

19.2 

%

 

13.2 

%

 

$

2,792,002 

 

25.8 

%

 

13.5 

%

Correspondent purchased

 

 

161,724 

 

26.7 

 

 

16.3 

 

 

 

443,730 

 

16.4 

 

 

4.7 

 

Bulk purchased

 

 

25,985 

 

63.1 

 

 

63.1 

 

 

 

44,755 

 

33.2 

 

 

33.2 

 

 

 

$

1,125,362 

 

21.3 

%

 

14.9 

%

 

$

3,280,487 

 

24.8 

%

 

12.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Term to Repricing

 

 

36 months or less

 

More than 36 months

 

 

 

 

 

Prepayment Speed (annualized)

 

 

 

 

Prepayment Speed (annualized)

Rate

 

Principal

 

Including

 

Excluding

 

Principal

 

Including

 

Excluding

Range

 

Balance

 

Endorsements

 

Endorsements

 

Balance

 

Endorsements

 

Endorsements

 

 

 

(Dollars in thousands)

 

<= 2.50%

 

$

372,822 

 

5.3 

%

 

5.3 

%

 

$

52,272 

 

3.5 

%

 

3.5 

%

2.51 - 2.99%

 

 

251,142 

 

15.1 

 

 

15.1 

 

 

 

124,420 

 

7.2 

 

 

6.7 

 

3.00 - 3.50%

 

 

90,040 

 

33.1 

 

 

26.1 

 

 

 

86,126 

 

28.6 

 

 

23.7 

 

3.51 - 4.49%

 

 

38,679 

 

25.2 

 

 

15.1 

 

 

 

26,568 

 

50.5 

 

 

49.0 

 

4.50 - 5.49%

 

 

79,969 

 

24.3 

 

 

17.0 

 

 

 

3,391 

 

153.8 

 

 

96.0 

 

>= 5.50%

 

 

27,616 

 

21.4 

 

 

16.0 

 

 

 

344 

 

1.2 

 

 

1.2 

 

 

 

$

860,268 

 

14.5 

%

 

12.4 

%

 

$

293,121 

 

20.2 

%

 

17.4 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

 

$

164,853 

 

26.4 

%

 

16.4 

%

 

$

173,082 

 

12.3 

%

 

9.4 

%

Correspondent purchased

 

 

51,576 

 

19.4 

 

 

14.2 

 

 

 

108,233 

 

21.8 

 

 

18.9 

 

Bulk purchased

 

 

643,839 

 

11.3 

 

 

11.3 

 

 

 

11,806 

 

107.3 

 

 

107.3 

 

 

 

$

860,268 

 

14.5 

%

 

12.4 

%

 

$

293,121 

 

20.2 

%

 

17.4 

%

 

36

 


 

The following table summarizes the activity in the loan portfolio for the periods shown, excluding changes in loans in process, deferred fees, and ACL.  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 table 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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31, 2013

 

December 31, 2012

 

September 30, 2012

 

June 30, 2012

 

Amount

 

Rate

 

Amount

 

Rate

 

Amount

 

Rate

 

Amount

 

Rate

 

(Dollars in thousands)

Beginning balance

$

5,687,893 

 

4.04 

%

 

$

5,649,156 

 

4.15 

%

 

$

5,256,803 

 

4.37 

%

 

$

5,275,296 

 

4.45 

%

Originated and refinanced:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

179,828 

 

3.26 

 

 

 

209,873 

 

3.26 

 

 

 

220,934 

 

3.51 

 

 

 

151,724 

 

3.78 

 

Adjustable

 

22,676 

 

3.94 

 

 

 

39,964 

 

3.58 

 

 

 

50,533 

 

3.50 

 

 

 

42,802 

 

3.74 

 

Purchased and participations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

119,334 

 

3.22 

 

 

 

88,763 

 

3.45 

 

 

 

90,939 

 

3.62 

 

 

 

34,567 

 

3.94 

 

Adjustable

 

19,145 

 

2.64 

 

 

 

21,434 

 

2.70 

 

 

 

360,463 

 

2.49 

 

 

 

12,722 

 

3.00 

 

Repayments

 

(262,865)

 

 

 

 

 

(318,332)

 

 

 

 

 

(327,972)

 

 

 

 

 

(256,221)

 

 

 

Principal charge-offs, net

 

(405)

 

 

 

 

 

(856)

 

 

 

 

 

(677)

 

 

 

 

 

(782)

 

 

 

Other(1)

 

(2,551)

 

 

 

 

 

(2,109)

 

 

 

 

 

(1,867)

 

 

 

 

 

(3,305)

 

 

 

Ending balance

$

5,763,055 

 

3.94 

%

 

$

5,687,893 

 

4.04 

%

 

$

5,649,156 

 

4.15 

%

 

$

5,256,803 

 

4.37 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31, 2013

 

March 31, 2012

 

Amount

 

Rate

 

Amount


Rate

 

 

(Dollars in thousands)

Beginning balance

$

5,649,156 

 

4.15 

%

 

$

5,195,876 

 

4.69 

%

Originated and refinanced:

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

389,701 

 

3.26 

 

 

 

319,493 

 

3.78 

 

Adjustable

 

62,640 

 

3.71 

 

 

 

98,460 

 

3.58 

 

Purchased and participations:

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

208,097 

 

3.32 

 

 

 

75,965 

 

4.14 

 

Adjustable

 

40,579 

 

2.67 

 

 

 

69,632 

 

3.62 

 

Repayments

 

(581,197)

 

 

 

 

 

(476,131)

 

 

 

Principal charge-offs, net

 

(1,261)

 

 

 

 

 

(4,553)

 

 

 

Other(1)

 

(4,660)

 

 

 

 

 

(3,446)

 

 

 

Ending balance

$

5,763,055 

 

3.94 

%

 

$

5,275,296 

 

4.45 

%

 

(1)

 “Other” consists of transfers to OREO, endorsement fees advanced and changes in commitments.

37

 


 

The following tables present loan origination, refinance and purchase activities for the periods indicated, excluding endorsement activity.  Loan originations, purchases and refinances are reported together.  During the three and six months ended March 31, 2013, the Bank endorsed $122.1 million and $375.4 million, respectively, of one-to four-family loans, reducing the average rate on those loans by 118 basis points and 111 basis points, respectively.  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.  Of the $186.4 million of one- to four-family loan originations and refinances for the current quarter,  82% had loan values of $417 thousand or less.  Of the $138.5 million of one- to four-family loans purchased during the current quarter, 32% had loan values of $417 thousand or less. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31, 2013

 

March 31, 2012

 

Amount

 

Rate

 

% of Total

 

Amount

 

Rate

 

% of Total

Fixed-Rate:

 

(Dollars in thousands)

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<= 15 years

$

105,724 

 

2.75 

%

 

31.0 

%

 

$

58,990 

 

3.41 

%

 

25.9 

%

> 15 years

 

192,169 

 

3.49 

 

 

56.4 

 

 

 

110,785 

 

4.11 

 

 

48.6 

 

Multi-family and commercial real estate

 

497 

 

5.75 

 

 

0.1 

 

 

 

--

 

--

 

 

-- 

 

Home equity

 

542 

 

6.16 

 

 

0.1 

 

 

 

400 

 

7.44 

 

 

0.2 

 

Other

 

230 

 

9.17 

 

 

0.1 

 

 

 

285 

 

8.33 

 

 

0.1 

 

Total fixed-rate

 

299,162 

 

3.24 

 

 

87.7 

 

 

 

170,460 

 

3.88 

 

 

74.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustable-Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<= 36 months

 

669 

 

2.20 

 

 

0.2 

 

 

 

2,355 

 

2.54 

 

 

1.0 

 

> 36 months

 

26,316 

 

2.65 

 

 

7.7 

 

 

 

38,347 

 

2.98 

 

 

16.8 

 

Home equity

 

14,509 

 

4.67 

 

 

4.3 

 

 

 

16,127 

 

4.89 

 

 

7.1 

 

Other

 

327 

 

3.36 

 

 

0.1 

 

 

 

736 

 

3.39 

 

 

0.3 

 

Total adjustable-rate

 

41,821 

 

3.35 

 

 

12.3 

 

 

 

57,565 

 

3.50 

 

 

25.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total originated, refinanced and purchased

$

340,983 

 

3.25 

%

 

100.0 

%

 

$

228,025 

 

3.79 

%

 

100.0 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased and participation loans included above:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Correspondent - one- to four-family

$

119,334 

 

3.22 

%

 

 

 

 

$

31,165 

 

4.29 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustable-Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Correspondent - one- to four-family

 

19,145 

 

2.64 

 

 

 

 

 

 

16,426 

 

3.07 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total purchased/participation loans

$

138,479 

 

3.14 

%

 

 

 

 

$

47,591 

 

3.87 

%

 

 

 

 

38

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31, 2013

 

March 31, 2012

 

Amount

 

Rate

 

% of Total

 

Amount

 

Rate

 

% of Total

Fixed-Rate:

 

(Dollars in thousands)

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<= 15 years

$

218,063 

 

2.80 

%

 

31.1 

%

 

$

172,106 

 

3.43 

%

 

30.6 

%

> 15 years

 

373,910 

 

3.52 

 

 

53.3 

 

 

 

221,616 

 

4.15 

 

 

39.3 

 

Multi-family and commercial real estate

 

4,347 

 

5.09 

 

 

0.6 

 

 

 

--

 

--

 

 

-- 

 

Home equity

 

998 

 

6.07 

 

 

0.1 

 

 

 

1,007 

 

7.18 

 

 

0.2 

 

Other

 

480 

 

8.56 

 

 

0.1 

 

 

 

729 

 

7.44 

 

 

0.1 

 

Total fixed-rate

 

597,798 

 

3.28 

 

 

85.2 

 

 

 

395,458 

 

3.85 

 

 

70.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustable-Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<= 36 months

 

2,738 

 

2.24 

 

 

0.4 

 

 

 

5,114 

 

2.55 

 

 

0.9 

 

> 36 months

 

68,455 

 

2.68 

 

 

9.8 

 

 

 

113,964 

 

3.11 

 

 

20.2 

 

Multi-family and commercial real estate

 

--

 

--

 

 

-- 

 

 

 

13,975 

 

5.00 

 

 

2.5 

 

Home equity

 

31,275 

 

4.76 

 

 

4.5 

 

 

 

33,463 

 

4.86 

 

 

5.9 

 

Other

 

751 

 

3.09 

 

 

0.1 

 

 

 

1,576 

 

3.33 

 

 

0.3 

 

Total adjustable-rate

 

103,219 

 

3.30 

 

 

14.8 

 

 

 

168,092 

 

3.60 

 

 

29.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total originated, refinanced and purchased

$

701,017 

 

3.28 

%

 

100.0 

%

 

$

563,550 

 

3.77 

%

 

100.0 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased and participation loans included above:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Correspondent - one- to four-family

$

204,247 

 

3.28 

%

 

 

 

 

$

75,440 

 

4.14 

%

 

 

 

Bulk - one- to four-family

 

--

 

--

 

 

 

 

 

 

392 

 

3.25 

 

 

 

 

Participations - commercial real estate

 

3,850 

 

5.00 

 

 

 

 

 

 

--

 

--

 

 

 

 

Participations - other

 

--

 

--

 

 

 

 

 

 

133 

 

2.57 

 

 

 

 

Total fixed-rate purchased/participations

 

208,097 

 

3.32 

 

 

 

 

 

 

75,965 

 

4.14 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustable-Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Correspondent - one- to four-family

 

40,579 

 

2.67 

 

 

 

 

 

 

35,789 

 

3.12 

 

 

 

 

Bulk - one- to four-family

 

--

 

--

 

 

 

 

 

 

19,868 

 

3.55 

 

 

 

 

Participations - commercial real estate

 

--

 

--

 

 

 

 

 

 

13,975 

 

5.00 

 

 

 

 

Total adjustable-rate purchased/participations

 

40,579 

 

2.67 

 

 

 

 

 

 

69,632 

 

3.62 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total purchased/participation loans

$

248,676 

 

3.21 

%

 

 

 

 

$

145,597 

 

3.89 

%

 

 

 

 

The Bank generally prices its first mortgage loan products based on secondary market and competitor pricing.  During the six months ended March 31, 2013, the average rate offered on the Bank’s 30-year fixed-rate one- to four-family loans, with no points paid by the borrower, was approximately 170 basis points above the average 10-year Treasury rate, while the average rate offered on the Bank’s 15-year fixed-rate one- to four-family loans was approximately 100 basis points above the average 10-year Treasury rate.    

39

 


 

The following tables present originated, refinanced, and purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, and the corresponding LTV and credit score at the time of origination for the three and six months ended March 31, 2013 and 2012.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31, 2013

 

March 31, 2012

 

 

 

 

 

Credit

 

 

 

 

 

Credit

 

Amount

 

LTV

 

Score

 

Amount

 

LTV

 

Score

 

(Dollars in thousands)

Originated

$

101,576 

 

75 

%

 

759 

 

$

89,822 

 

75 

%

 

761 

Refinanced by Bank customers

 

84,823 

 

67 

 

 

762 

 

 

73,064 

 

68 

 

 

774 

Correspondent purchased

 

138,479 

 

70 

 

 

766 

 

 

47,591 

 

68 

 

 

764 

 

$

324,878 

 

71 

%

 

763 

 

$

210,477 

 

71 

%

 

766 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31, 2013

 

March 31, 2012

 

 

 

 

 

Credit

 

 

 

 

 

Credit

 

Amount

 

LTV

 

Score

 

Amount

 

LTV

 

Score

 

(Dollars in thousands)

Originated

$

224,092 

 

75 

%

 

764 

 

$

215,014 

 

74 

%

 

763 

Refinanced by Bank customers

 

194,248 

 

67 

 

 

767 

 

 

166,297 

 

67 

 

 

774 

Correspondent purchased

 

244,826 

 

69 

 

 

767 

 

 

111,229 

 

67 

 

 

768 

Bulk purchased

 

-- 

 

-- 

 

 

-- 

 

 

20,260 

 

60 

 

 

763 

 

$

663,166 

 

71 

%

 

766 

 

$

512,800 

 

70 

%

 

768 

 

 

The following table presents one- to four-family loan originations, which includes correspondent purchases, for the top 12 states based on year-to-date volume, excluding endorsement activity, for the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

March 31, 2013

 

March 31, 2013

State

 

Amount

 

% of Total

 

Rate

 

Amount

 

% of Total

 

Rate

 

 

(Dollars in thousands)

Kansas

 

$

174,665 

 

53.8 

%

 

3.21 

%

 

$

394,511 

 

59.5 

%

 

3.20 

%

Missouri

 

 

86,744 

 

26.7 

 

 

3.15 

 

 

 

163,097 

 

24.6 

 

 

3.15 

 

Texas

 

 

27,248 

 

8.4 

 

 

3.15 

 

 

 

44,057 

 

6.6 

 

 

3.26 

 

Oklahoma

 

 

11,965 

 

3.7 

 

 

3.20 

 

 

 

18,585 

 

2.8 

 

 

3.24 

 

Tennessee

 

 

10,216 

 

3.2 

 

 

3.15 

 

 

 

15,765 

 

2.4 

 

 

3.23 

 

Alabama

 

 

3,633 

 

1.1 

 

 

2.55 

 

 

 

10,487 

 

1.6 

 

 

3.00 

 

North Carolina

 

 

2,716 

 

0.8 

 

 

3.14 

 

 

 

3,734 

 

0.6 

 

 

3.26 

 

Nebraska

 

 

756 

 

0.2 

 

 

2.88 

 

 

 

2,981 

 

0.4 

 

 

3.54 

 

Colorado

 

 

1,105 

 

0.3 

 

 

2.89 

 

 

 

2,386 

 

0.4 

 

 

3.12 

 

Arkansas

 

 

1,761 

 

0.6 

 

 

3.53 

 

 

 

2,338 

 

0.3 

 

 

3.62 

 

Maine

 

 

1,111 

 

0.3 

 

 

3.02 

 

 

 

1,776 

 

0.3 

 

 

3.04 

 

Minnesota

 

 

1,332 

 

0.4 

 

 

3.03 

 

 

 

1,332 

 

0.2 

 

 

3.03 

 

Other states

 

 

1,626 

 

0.5 

 

 

3.24 

 

 

 

2,117 

 

0.3 

 

 

3.26 

 

 

 

$

324,878 

 

100.0 

%

 

3.18 

%

 

$

663,166 

 

100.0 

%

 

3.19 

%

 

 

 

 

 

 

40

 


 

Asset Quality – Loans and OREO

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 and purchases.  This allows the Bank to make an informed credit decision based upon a thorough assessment of the borrower’s ability to repay the loan compared to underwriting methodologies that do not require full documentation.  See additional discussion regarding underwriting standards in “Lending Practices and Underwriting Standards” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.  In the following asset quality discussion, unless otherwise noted, correspondent purchased loans are included with originated loans and bulk purchased loans are reported as purchased loans.  Management believes that it is unlikely the balances of loans 30 to 89 days delinquent, non-performing loans, and OREO will decrease significantly from their current levels, and will likely stay within a range seen during the past year, though no assurance can be given in this regard.

Delinquent and non-performing loans and OREO

The following tables present the Company’s 30 to 89 day delinquent loans, non-performing loans, and OREO at the dates indicated.  Non-performing loans are loans that are 90 or more days delinquent or in foreclosure or nonaccrual loans less than 90 days delinquent, which are loans that are required to be reported as nonaccrual pursuant to OCC Call Report requirements, even if the loans are current.    In accordance with OCC Call Report requirements, TDRs that were either nonaccrual at the time of restructuring or did not receive a credit evaluation prior to the restructuring and have not made six consecutive monthly payments per the restructured loan terms must be reported as nonaccrual loans.  Similarly, loans that have been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt owed to the lender must be reported as nonaccrual loans,  even if the loans are current, until the borrower has made six consecutive monthly payments subsequent to their discharge date.  The balance of loans that are current or 30 to 89 days delinquent but are required by the OCC to be reported as nonaccrual was $8.2 million at March 31, 2013.  At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest.  OREO primarily includes assets acquired in settlement of loans.  Over the past 12 months, OREO properties were owned by the Bank, on average, for approximately five months before the properties were sold.  Non-performing assets include non-performing loans and OREO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Delinquent for 30 to 89 Days at:

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

 

2013

 

2012

 

2012

 

2012

 

2012

 

 

Number

 

Amount

 

Number

 

Amount

 

Number

 

Amount

 

Number

 

Amount

 

Number

 

Amount

 

Loans 30 to 89 Days Delinquent:

(Dollars in thousands)

 

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

124 

 

$

13,718 

 

156 

 

$

15,182 

 

142 

 

$

14,178 

 

131 

 

$

13,060 

 

118 

 

$

12,725 

 

Correspondent purchased

 

 

1,054 

 

 

 

243 

 

 

 

770 

 

 

 

1,598 

 

 

 

709 

 

Bulk purchased

42 

 

 

9,190 

 

35 

 

 

6,622 

 

39 

 

 

7,695 

 

37 

 

 

8,463 

 

38 

 

 

7,343 

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

40 

 

 

719 

 

42 

 

 

966 

 

28 

 

 

521 

 

31 

 

 

526 

 

33 

 

 

616 

 

Other

14 

 

 

104 

 

10 

 

 

188 

 

16 

 

 

106 

 

13 

 

 

128 

 

20 

 

 

342 

 

 

225 

 

$

24,785 

 

245 

 

$

23,201 

 

228 

 

$

23,270 

 

219 

 

$

23,775 

 

213 

 

$

21,735 

 

30 to 89 days delinquent loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to total loans receivable, net

 

 

 

0.43 

%

 

 

 

0.41 

%

 

 

 

0.41 

%

 

 

 

0.46 

%

 

 

 

0.42 

%

 

41

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Performing Loans and OREO at:

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

 

2013

 

2012

 

2012

 

2012

 

2012

 

 

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

85 

 

$

7,687 

 

83 

 

$

7,395 

 

86 

 

$

7,885 

 

92 

 

$

8,998 

 

99 

 

$

10,545 

 

Correspondent purchased

 

 

642 

 

 

 

815 

 

 

 

722 

 

 

 

328 

 

 

 

1,897 

 

Bulk purchased

40 

 

 

9,408 

 

43 

 

 

10,378 

 

43 

 

 

10,447 

 

47 

 

 

11,792 

 

49 

 

 

12,485 

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

22 

 

 

393 

 

21 

 

 

357 

 

19 

 

 

369 

 

21 

 

 

505 

 

14 

 

 

327 

 

Other

 

 

26 

 

14 

 

 

76 

 

 

 

27 

 

 

 

20 

 

 

 

10 

 

 

156 

 

 

18,156 

 

167 

 

 

19,021 

 

157 

 

 

19,450 

 

167 

 

 

21,643 

 

170 

 

 

25,264 

 

Nonaccrual loans less than 90 Days Delinquent:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

61 

 

 

6,893 

 

66 

 

 

7,246 

 

77 

 

 

8,815 

 

26 

 

 

3,744 

 

29 

 

 

4,313 

 

Correspondent purchased

 

 

433 

 

 

 

657 

 

 

 

686 

 

 

 

457 

 

 

 

458 

 

Bulk purchased

 

 

711 

 

 

 

1,450 

 

10 

 

 

2,405 

 

--

 

 

--

 

 

 

324 

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

150 

 

17 

 

 

342 

 

22 

 

 

456 

 

--

 

 

--

 

 

 

10 

 

Other

--

 

 

--

 

 

 

11 

 

 

 

12 

 

--

 

 

--

 

--

 

 

--

 

 

73 

 

 

8,187 

 

94 

 

 

9,706 

 

114 

 

 

12,374 

 

28 

 

 

4,201 

 

33 

 

 

5,105 

 

Total non-performing loans

229 

 

 

26,343 

 

261 

 

 

28,727 

 

271 

 

 

31,824 

 

195 

 

 

25,844 

 

203 

 

 

30,369 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans as a percentage of total loans

 

 

 

0.46 

%

 

 

 

0.51 

%

 

 

 

0.57 

%

 

 

 

0.50 

%

 

 

 

0.58 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OREO:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated(2)

51 

 

 

4,219 

 

51 

 

 

3,639 

 

59 

 

 

5,374 

 

69 

 

 

6,452 

 

71 

 

 

6,996 

 

Correspondent purchased

 

 

173 

 

--

 

 

--

 

 

 

92 

 

 

 

1,045 

 

 

 

429 

 

Bulk purchased

 

 

830 

 

 

 

1,188 

 

 

 

1,172 

 

 

 

1,007 

 

11 

 

 

2,851 

 

Consumer Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

60 

 

 

 

32 

 

 

 

 

 

 

 

 

 

21 

 

Other(3)

 

 

1,400 

 

 

 

1,400 

 

 

 

1,400 

 

 

 

1,400 

 

 

 

1,502 

 

 

63 

 

 

6,682 

 

61 

 

 

6,259 

 

68 

 

 

8,047 

 

81 

 

 

9,913 

 

90 

 

 

11,799 

 

Total non-performing assets

292 

 

$

33,025 

 

322 

 

$

34,986 

 

339 

 

$

39,871 

 

276 

 

$

35,757 

 

293 

 

$

42,168 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing assets as a percentage of total assets

 

 

 

0.35 

%

 

 

 

0.38 

%

 

 

 

0.43 

%

 

 

 

0.38 

%

 

 

 

0.44 

%

 

(1)

Represents loans required to be reported as nonaccrual by the OCC regardless of delinquency status.  At March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012, and March 31, 2012, this amount was comprised of $975 thousand, $1.8  million, $1.2 million,  $604 thousand and $635 thousand, respectively, of loans that were 30 to 89 days delinquent, and $7.2 million, $7.9 million, $11.2 million, $3.6 million, and $4.5 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)

Other OREO represents a single property the Bank purchased for a potential branch site but now intends to sell.

 

42

 


 

Of the $9.4 million of purchased one- to four-family loans 90 or more days delinquent or in foreclosure as of March 31, 2013,  $8.8 million, or 94%, were originated in calendar year 2004 or 2005.  Of the $8.3 million of originated and correspondent one- to four-family loans 90 or more days delinquent or in foreclosure as of March 31, 2013,  $6.9 million, or 83%, were originated in calendar year 2007 or earlier.

The following table presents the top 12 states where the properties securing our one- to four-family loans are located and their corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios at March 31, 2013.  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 March 31, 2013, losses expected to be realized, after taking into consideration anticipated PMI proceeds and the costs to sell the property, have been charged-off.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 30 to 89

 

Loans 90 or More Days Delinquent or

 

 

One- to Four-Family

 

Days Delinquent

 

in Foreclosure

State

 

Balance

 

% of Total

 

Balance

 

% of Total

 

Balance

 

% of Total

 

Average LTV

 

 

(Dollars in thousands)

Kansas

 

$

3,715,178 

 

67.5 

%

 

$

10,884 

 

45.4 

%

 

$

7,414 

 

41.8 

%

 

78 

%

Missouri

 

 

899,748 

 

16.3 

 

 

 

4,844 

 

20.2 

 

 

 

915 

 

5.2 

 

 

85 

 

California

 

 

339,135 

 

6.2 

 

 

 

--

 

-- 

 

 

 

--

 

-- 

 

 

n/a

 

Texas

 

 

83,685 

 

1.5 

 

 

 

1,887 

 

7.9 

 

 

 

--

 

-- 

 

 

n/a

 

Oklahoma

 

 

44,680 

 

0.8 

 

 

 

29 

 

0.1 

 

 

 

380 

 

2.1 

 

 

51 

 

Illinois

 

 

39,775 

 

0.7 

 

 

 

419 

 

1.7 

 

 

 

1,316 

 

7.5 

 

 

73 

 

Nebraska

 

 

38,688 

 

0.7 

 

 

 

957 

 

4.0 

 

 

 

44 

 

0.2 

 

 

65 

 

Alabama

 

 

32,450 

 

0.6 

 

 

 

--

 

-- 

 

 

 

--

 

-- 

 

 

n/a

 

Tennessee

 

 

30,125 

 

0.5 

 

 

 

--

 

-- 

 

 

 

--

 

-- 

 

 

n/a

 

Florida

 

 

24,559 

 

0.5 

 

 

 

504 

 

2.1 

 

 

 

2,171 

 

12.2 

 

 

75 

 

Minnesota

 

 

23,514 

 

0.4 

 

 

 

355 

 

1.5 

 

 

 

97 

 

0.5 

 

 

92 

 

New York

 

 

22,329 

 

0.4 

 

 

 

450 

 

1.9 

 

 

 

939 

 

5.3 

 

 

87 

 

Other states

 

 

214,586 

 

3.9 

 

 

 

3,633 

 

15.2 

 

 

 

4,461 

 

25.2 

 

 

72 

 

 

 

$

5,508,452 

 

100.0 

%

 

$

23,962 

 

100.0 

%

 

$

17,737 

 

100.0 

%

 

76 

%

 

Troubled Debt Restructurings
For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower.  Generally, the Bank grants a short-term payment concession to borrowers who are experiencing a temporary cash flow problem.  The most frequently used concession is to reduce the monthly payment amount for a period of six to 12 months, often by only requiring payments of interest and escrow during this period.  These restructurings result in an extension of the maturity date of the loan.  For more severe situations requiring long-term solutions, the Bank also offers interest rate reductions to currently-offered rates and more lengthy extensions of the maturity date.  Each such concession is considered a TDR.  The Bank does not forgive principal or interest nor does it commit to lend additional funds, except for the capitalization of delinquent interest and/or escrow balances, not to exceed the original loan balance, to debtors whose terms have been modified in TDRs. 

Additionally, endorsed loans are classified as TDRs when certain guidelines for soft credit scores and/or estimated LTV ratios are not met.  These guidelines are intended to identify changes in the borrower’s credit condition since origination, signifying the borrower could be experiencing financial difficulties even though the borrower has not been delinquent on his contractual loan payment in the previous 12 months. 

A TDR is reported as such until it pays off, unless it has been restructured to an interest rate equal to or greater than the rate the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk, and has performed under the new terms of the restructuring agreement for at least 12 consecutive months.  During July 2012, the OCC provided guidance to the industry regarding loans that had been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt owed to the lender.  The OCC requires that these loans be reported as TDRs, regardless of their delinquency status.  These loans will be reported as TDRs until the borrower has made 48 consecutive monthly loan payments after the Chapter 7 discharge date.

At March 31, 2013 and September 30, 2012, the Bank had TDRs with a recorded investment of $51.1 million and $52.0 million, respectively.  Of the $51.1 million of TDRs at March 31, 2013, $40.0 million were originated loans, $3.0 million were correspondent purchased loans, and $8.1 million were bulk purchased loans.  Additionally, of the $51.1 million of TDRs at March 31, 2013,  $4.1 million were 30 to 89 days delinquent and $4.1 million were 90 or more days delinquent or in foreclosure.    For additional information regarding our TDRs, see “Note 4 – Loans Receivable and Allowance for Credit Losses.”  

43

 


 

The following table presents TDR activity, at recorded investment, during the six months ended March 31, 2013.  Excluded from the restructuring activity in the table below is $4.0 million of loans that were restructured in the current year, as well as in a prior fiscal year, and are therefore already presented in the beginning balance.  Of the $4.0 million of loans, $2.8 million related to borrowers that endorsed multiple times in order to obtain a lower market interest rate. 

 

 

 

 

 

 

 

 

 

 

 

Concession

 

 

 

 

 

Granted

 

Loan

 

 

 

by the

 

Endorsement

 

 

 

Bank

   

Program

   

Total

 

(Dollars in thousands)

Beginning balance

$

31,687 

 

$

20,347 

 

$

52,034 

Restructurings

 

8,023 

 

 

7,018 

 

 

15,041 

Chapter 7 bankruptcy(1)

 

2,252 

 

 

--

 

 

2,252 

TDRs no longer reported as such(2)

 

(4,683)

 

 

(10,083)

 

 

(14,766)

Principal repayments/payoffs

 

(2,333)

 

 

(471)

 

 

(2,804)

Charge-offs

 

(657)

 

 

--

 

 

(657)

Ending balance

$

34,289 

 

$

16,811 

 

$

51,100 

 

(1)

These loans have been discharged under Chapter 7 bankruptcy proceedings and the borrower has not reaffirmed the debt owed to the Bank.

(2)

These loans have met certain criteria and are no longer required to be reported as TDRs.

 

 

The following table presents the recorded investment of TDRs as of March 31, 2013 by asset classification. 

 

 

 

 

 

 

 

 

 

 

 

Concession

 

 

 

 

 

Granted

 

Loan

 

 

 

by the

 

Endorsement

 

 

 

Bank

 

Program

 

Total

 

(Dollars in thousands)

Not classified(1)

$

2,008 

 

$

--

 

$

2,008 

Special mention

 

5,491 

 

 

16,247 

 

 

21,738 

Substandard

 

26,790 

 

 

564 

 

 

27,354 

 

$

34,289 

 

$

16,811 

 

$

51,100 

 

(1)

These loans have been discharged under Chapter 7 bankruptcy proceedings but the borrower has made 12 consecutive monthly payments subsequent to their discharge date and therefore the loans are no longer classified per the Bank’s asset classification policies.  

 

Impaired Loans

A loan is reported as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.  The following types of loans are reported as impaired loans: all nonaccrual loans, loans classified as substandard, loans partially charged-off, and all TDRs except those that have been restructured to an interest rate equal to or greater than the rate the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk, and have performed under the new terms of the restructuring agreement for at least 12 consecutive months.  The balance of loans reported as impaired at March 31, 2013 and September 30, 2012 was $67.6 million and $70.5 million, respectively.

 

 

44

 


 

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.  Our ACL methodology considers a number of factors including: the trend and composition of our delinquent and non-performing loans, results of foreclosed property and short sale transactions,  charge-off trends, the status and trends of the local and national economies, the trends and current conditions of the residential real estate markets, and loan portfolio growth and concentrations.  See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and “Note 1 – Summary of Significant Accounting Policies” for a full discussion of our ACL methodology.  For additional information regarding our ACL activity during fiscal year 2013, see “Note 4 – Loans Receivable and Allowance for Credit Losses.”

The ACL is maintained through provisions for credit losses which are charged to income.  The provision for credit losses is based upon the results of management’s quarterly assessment of the ACLDuring the six months ended March 31, 2013, the Company recorded a provision for credit losses of $233 thousand in order to maintain the ACL at a level considered appropriate by management.  For additional information regarding the provision for credit losses for the six months ended March 31, 2013, see “Comparison of Operating Results for the Six Months Ended March 31, 2013 and 2012.”  At March 31, 2013,  the balance of ACL was $10.1 million, or 0.18% of the total loan portfolio and 38.2% of total non-performing loans.  This compares to an ACL of $11.1 million, or 0.20% of the total loan portfolio and 34.9% of total non-performing loans as of September 30, 2012.

The following table presents the Company’s allocation of the ACL to each respective loan category at March 31, 2013 and September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At

 

At

 

March 31, 2013

  

September 30, 2012

 

 

 

% of ACL

 

 

 

% of

 

 

 

% of ACL

 

 

 

% of

 

Amount of

 

to Total

 

Total

 

Loans to

 

Amount of

 

to Total

 

Total

 

Loans to

 

ACL

 

ACL

 

Loans

 

Total Loans

 

ACL

 

ACL

 

Loans

 

Total Loans

 

(Dollars in thousands)

One- to four-family:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated

$

5,987 

 

59.5 

 

$

4,785,528 

 

83.1 

 

$

6,057 

 

54.5 

 

$

4,608,083 

 

81.6 

Purchased

 

3,495 

 

34.7 

 

 

 

722,924 

 

12.5 

 

 

 

4,453 

 

40.1 

 

 

 

784,346 

 

13.9 

 

Multi-family and commercial

 

182 

 

1.8 

 

 

 

46,579 

 

0.8 

 

 

 

196 

 

1.8 

 

 

 

48,623 

 

0.9 

 

Construction

 

41 

 

0.4 

 

 

 

64,572 

 

1.1 

 

 

 

40 

 

0.4 

 

 

 

52,254 

 

0.9 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

323 

 

3.2 

 

 

 

137,380 

 

2.4 

 

 

 

301 

 

2.7 

 

 

 

149,321 

 

2.6 

 

Other consumer

 

44 

 

0.4 

 

 

 

6,072 

 

0.1 

 

 

 

53 

 

0.5 

 

 

 

6,529 

 

0.1 

 

 

$

10,072 

 

100.0 

%

 

$

5,763,055 

 

100.0 

%

 

$

11,100 

 

100.0 

%

 

$

5,649,156 

 

100.0 

%

 

 

45

 


 

 

 

Securities.    The following table presents the distribution of our MBS and investment securities portfolios, at amortized cost, at the dates indicated.  The total securities portfolio increased $41.8 million, or 1.3%, from December 31, 2012 to March 31, 2013 due primarily to purchases of fixed-rate MBS.  Included in the $907.4 million of fixed-rate GSE debentures at September 30, 2012 was $60.0 million of securities at the holding company.  The holding company securities matured during the December 31, 2012 quarter.  Overall, fixed-rate securities comprised 78% of these portfolios at March 31, 2013.  The WAL is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied.  The increase in the WAL between September 30, 2012 and March 31, 2013 was due primarily to the call and maturity of investment securities with shorter WALs along with purchase of investment securities with WALs greater than the existing portfolio WAL, partially offset by an increase in actual MBS prepayments.   The decrease in the yield between September 30, 2012 and March 31, 2013 was due primarily to the purchase of securities with yields less than the average yield on the existing portfolio.  Yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

  

December 31, 2012

 

September 30, 2012

 

Balance

 

Yield

 

WAL

 

Balance

 

Yield

 

WAL

 

Balance

 

Yield

 

WAL

 

(Dollars in thousands)

Fixed-rate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS

$

1,650,657 

 

2.41 

%

 

3.1 

 

$

1,559,219 

 

2.60 

%

 

3.0 

 

$

1,505,480 

 

2.85 

%

 

3.1 

GSE debentures

 

794,920 

 

1.05 

 

 

2.3 

 

 

787,666 

 

1.10 

 

 

1.6 

 

 

907,386 

 

1.14 

 

 

0.8 

Municipal bonds

 

41,134 

 

2.90 

 

 

1.8 

 

 

44,379 

 

2.89 

 

 

1.9 

 

 

47,769 

 

2.94 

 

 

2.0 

Total fixed-rate securities

 

2,486,711 

 

1.98 

 

 

2.8 

 

 

2,391,264 

 

2.11 

 

 

2.5 

 

 

2,460,635 

 

2.22 

 

 

2.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustable-rate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MBS

 

681,095 

 

2.55 

 

 

4.9 

 

 

734,655 

 

2.63 

 

 

5.1 

 

 

792,325 

 

2.65 

 

 

5.8 

Trust preferred securities

 

2,830 

 

1.54 

 

 

24.2 

 

 

2,900 

 

1.56 

 

 

24.5 

 

 

2,912 

 

1.65 

 

 

24.7 

Total adjustable-rate securities

 

683,925 

 

2.55 

 

 

5.0 

 

 

737,555 

 

2.62 

 

 

5.2 

 

 

795,237 

 

2.64 

 

 

5.9 

Total securities portfolio

$

3,170,636 

 

2.11 

%

 

3.3 

 

$

3,128,819 

 

2.23 

%

 

3.1 

 

$

3,255,872 

 

2.33 

%

 

3.1 

 

 

 

46

 


 

Mortgage-Backed Securities.  The balance of MBS, which primarily consists of securities of U.S. GSEs, increased $25.2 million from $2.33 billion at September 30, 2012 to $2.36 billion at March 31, 2013The following tables provide a summary of the activity in our portfolio of MBS for the periods presented.  The yields and WALs for purchases are presented as recorded at the time of purchase.  The yields for the beginning balances are as of the last day of the period previous to the period presented and the yield 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 yield of the MBS portfolio decreased from September 30, 2012 to March 31, 2013 primarily as a result of purchases of securities at market rates which resulted in average yields lower than that of the existing portfoliosThe beginning and ending WAL is the estimated remaining maturity (in years) after three-month historical prepayment speeds have been applied.  The decrease in the WAL at March 31, 2013 compared to September 30, 2012 was due primarily to an increase in actual prepayments. The net balance of premiums/(discounts) on our portfolio of MBS was $23.5 million at March 31, 2013.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31,  2013

 

December 31, 2012

 

September 30, 2012

 

June 30, 2012

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

WAL

 

(Dollars in thousands)

Beginning balance - carrying value

$

2,324,187 

 

2.61 

%

 

3.7 

 

$

2,332,942 

 

2.78 

%

 

4.0 

 

$

2,510,659 

 

2.86 

%

 

4.6 

 

$

2,626,544 

 

2.91 

%

 

5.1 

Maturities and repayments

 

(187,308)

 

 

 

 

 

 

 

(194,769)

 

 

 

 

 

 

 

(175,776)

 

 

 

 

 

 

 

(152,162)

 

 

 

 

 

Net amortization of premiums/(discounts)

 

(2,124)

 

 

 

 

 

 

 

(2,124)

 

 

 

 

 

 

 

(1,875)

 

 

 

 

 

 

 

(1,625)

 

 

 

 

 

Purchases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

227,310 

 

1.24 

 

 

4.0 

 

 

192,962 

 

1.23 

 

 

3.9 

 

 

--

 

--

 

 

-- 

 

 

41,510 

 

1.91 

 

 

4.4 

Change in valuation on AFS securities

 

(3,970)

 

 

 

 

 

 

 

(4,824)

 

 

 

 

 

 

 

(66)

 

 

 

 

 

 

 

(3,608)

 

 

 

 

 

Ending balance - carrying value

$

2,358,095 

 

2.45 

%

 

3.6 

 

$

2,324,187 

 

2.61 

%

 

3.7 

 

$

2,332,942 

 

2.78 

%

 

4.0 

 

$

2,510,659 

 

2.86 

%

 

4.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31,  2013

 

March 31,  2012

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

 

WAL

 

 

(Dollars in thousands)

Beginning balance - carrying value

$

2,332,942 

 

2.78 

%

 

4.0 

 

$

2,412,076 

 

3.26 

%

 

5.3 

Maturities and repayments

 

(382,077)

 

 

 

 

 

 

 

(295,259)

 

 

 

 

 

Net amortization of premiums/(discounts)

 

(4,248)

 

 

 

 

 

 

 

(3,057)

 

 

 

 

 

Purchases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

420,272 

 

1.24 

 

 

3.9 

 

 

439,979 

 

1.93 

 

 

4.4 

Adjustable

 

--

 

--

 

 

--

 

 

75,754 

 

1.84 

 

 

5.7 

Change in valuation on AFS securities

 

(8,794)

 

 

 

 

 

 

 

(2,949)

 

 

 

 

 

Ending balance - carrying value

$

2,358,095 

 

2.45 

%

 

3.6 

 

$

2,626,544 

 

2.91 

%

 

5.1 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

 


 

The following table presents our fixed-rate MBS portfolio, at amortized cost, based on the underlying weighted average loan rate, the annualized prepayment speeds for the quarter ended March 31, 2013, and the net premium/discount by interest rate tier.  Our fixed-rate MBS portfolio is somewhat less sensitive than our fixed-rate one- to four-family loan portfolio to repricing risk due to external refinancing barriers such as unemployment, income changes, and decreases in property values, which are generally more pronounced outside of our local market areas.  However, we are unable to control the interest rates and/or governmental programs that could impact the loans in our fixed-rate MBS portfolio, and are therefore more likely to experience reinvestment risk due to principal prepayments.  Additionally, prepayments impact the amortization/accretion of premiums/discounts on our MBS portfolio.  As prepayments increase, the related premiums/discounts are amortized/accreted at a faster rate.  The amortization of premiums decreases interest income while the accretion of discounts increases interest income.  As noted in the table below, the fixed-rate MBS portfolio had a net premium of $20.8 million as of March 31, 2013.  Given that the weighted average coupon on the underlying loans in this portfolio are above current market rates, the Bank could experience an increase in the premium amortization should prepayment speeds increase significantly, potentially reducing future interest income.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original Term

 

 

 

 

 

 

 

15 years or less

 

More than 15 years

 

 

 

 

 

 

 

 

 

Prepayment

 

 

 

Prepayment

 

 

 

Net

 

 

Amortized

 

Speed

 

Amortized

 

Speed

 

 

 

Premium/

Rate Range

 

Cost

 

(annualized)

 

Cost

 

(annualized)

 

Total

 

(Discount)

 

 

(Dollars in thousands)

< =3.50%

 

$

694,315 

 

9.4 

%

 

$

--

 

--

%

 

$

694,315 

 

$

15,013 

3.51 - 3.99%

 

 

484,172 

 

24.3 

 

 

 

32,396 

 

30.2 

 

 

 

516,568 

 

 

3,697 

4.00 - 4.50%

 

 

110,755 

 

29.3 

 

 

 

33,518 

 

27.2 

 

 

 

144,273 

 

 

2,330 

4.51 - 4.99%

 

 

130,324 

 

23.7 

 

 

 

3,565 

 

29.6 

 

 

 

133,889 

 

 

(319)

5.00 - 5.50%

 

 

64,184 

 

24.2 

 

 

 

1,439 

 

23.2 

 

 

 

65,623 

 

 

(15)

5.51 - 5.99%

 

 

42,802 

 

23.7 

 

 

 

24,786 

 

37.0 

 

 

 

67,588 

 

 

>=6.00%

 

 

7,676 

 

31.6 

 

 

 

20,725 

 

21.8 

 

 

 

28,401 

 

 

113 

 

 

$

1,534,228 

 

17.9 

%

 

$

116,429 

 

29.2 

%

 

$

1,650,657 

 

$

20,826 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average rate

 

 

3.66 

%

 

 

 

 

4.90 

%

 

 

 

 

3.75 

%

 

 

Average remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

contractual term (years)

 

10.8 

 

 

 

 

 

17.2 

 

 

 

 

 

11.3 

 

 

 

 

 

48

 


 

Investment SecuritiesInvestment securities, which consist of U.S. GSE debentures (primarily issued by FNMA, FHLMC, or FHLB) and municipal investments, decreased $120.7 million, from $961.8 million at September 30, 2012 to $841.1 million at March 31, 2013.  The decrease in the portfolio was due primarily to called and matured securities not being replaced in their entirety, including the remaining $60.0 million of securities at the holding company.  The cash flows from calls and maturities that were not reinvested in the portfolio, were largely used to fund loan activity, pay dividends to stockholders,  repurchase stock, and repay maturing repurchase agreements. The following tables provide a summary of the activity of investment securities for the periods presented.  The yields for the beginning balances are as of the last day of the period previous to the period presented and the yields for the ending balances are as of the last day of the period presented.  The decrease in the yield at March 31, 2013 compared to September 30, 2012 was due primarily to the purchase of investment securities during the period, which had yields lower than the overall portfolio yield.  The beginning and ending WALs represent the estimated remaining maturity (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.  The increase in the WAL at March 31, 2013 compared to September 30, 2012 was due to the purchase of investment securities during the period with WALs greater than the existing portfolio WAL, as well as to the call and maturity of securities with shorter WALs.  Of the $379.4 million of fixed-rate investment securities purchased during the six months ended March 31, 2013, $379.2 million are callable.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31,  2013

 

December 31, 2012

 

September 30, 2012

 

June 30, 2012

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

WAL

 

(Dollars in thousands)

Beginning balance - carrying value

$

837,433 

 

1.20 

%

 

1.7 

 

$

961,849 

 

1.23 

%

 

1.0 

 

$

1,195,589 

 

1.23 

%

 

0.9 

 

$

1,253,937 

 

1.22 

%

 

1.5 

Maturities and calls

 

(171,009)

 

 

 

 

 

 

 

(327,323)

 

 

 

 

 

 

 

(309,012)

 

 

 

 

 

 

 

(112,150)

 

 

 

 

 

Net amortization of premiums/(discounts)

 

(97)

 

 

 

 

 

 

 

(170)

 

 

 

 

 

 

 

(331)

 

 

 

 

 

 

 

(553)

 

 

 

 

 

Purchases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

175,045 

 

0.91 

 

 

2.5 

 

 

204,371 

 

1.01 

 

 

1.4 

 

 

75,190 

 

0.80 

 

 

2.2 

 

 

52,141 

 

0.98 

 

 

3.0 

Change in valuation of AFS securities

 

(245)

 

 

 

 

 

 

 

(1,294)

 

 

 

 

 

 

 

413 

 

 

 

 

 

 

 

2,214 

 

 

 

 

 

Ending balance - carrying value

$

841,127 

 

1.14 

%

 

2.3 

 

$

837,433 

 

1.20 

%

 

1.7 

 

$

961,849 

 

1.23 

%

 

1.0 

 

$

1,195,589 

 

1.23 

%

 

0.9 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31,  2013

 

March 31,  2012

 

Amount

 

Yield

 

WAL

 

Amount

 

Yield

 

 

WAL

 

(Dollars in thousands)

Beginning balance - carrying value

$

961,849 

 

1.23 

%

 

1.0 

 

$

1,444,480 

 

1.17 

%

 

1.0 

Maturities and calls

 

(498,332)

 

 

 

 

 

 

 

(753,297)

 

 

 

 

 

Net amortization of premiums/(discounts)

 

(267)

 

 

 

 

 

 

 

(1,221)

 

 

 

 

 

Purchases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

379,416 

 

0.96 

 

 

1.9 

 

 

563,970 

 

1.14 

 

 

2.8 

Change in valuation of AFS securities

 

(1,539)

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - carrying value

$

841,127 

 

1.14 

%

 

2.3 

 

$

1,253,937 

 

1.22 

%

 

1.5 

 

 

49

 


 

Liabilities.    Total liabilities increased $178.9 million, from $7.57 billion at September 30, 2012, to $7.75 billion at March 31, 2013 due primarily to a $142.9 million increase in deposits and a $100.0 million FHLB advance commitment, partially offset by the repayment of $50.0 million of repurchase agreements that matured during the current quarter.  The increase in the deposit portfolio was due primarily to an $81.8 million increase in the checking portfolio, a $45.4 million increase in the money market portfolio, and a $20.3 million increase in the savings portfolio, partially offset by a $4.6 million decrease in the certificate of deposit portfolio.  The decrease in the certificate of deposit portfolio was due primarily to a decrease in floating rate certificates of deposit, partially offset by an increase in public unit deposits.  Additionally, fixed-rate retail certificates of deposit decreased slightly and there was a shift in this portfolio from certificates of deposit with a term of 30 months or less to those with a term of 36 months or more, primarily to 36 and 60 month terms.  The $100.0 million FHLB advance commitment settled in early April 2013.  The FHLB advance has a six year term and a fixed contractual rate of 1.29%.  Proceeds from the FHLB advance will largely be used to replace the $50.0 million of repurchase agreements that matured and also fund upcoming maturities of repurchase agreements.    

 

Deposits – Deposits increased $142.9 million between September 30, 2012 and March 31, 2013, due to growth in the checking, money market, and savings portfolios.  If interest rates were to rise, it is possible that our customers may move the funds in those accounts to higher-yielding deposit products within the Bank or withdraw their funds to invest in higher-yielding investments outside of the Bank.    The following table presents the amount, average rate and percentage of total deposits for checking, savings, money market and certificates (including public units and brokered deposits) at the dates presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

  

December 31, 2012

  

September 30, 2012

  

 

 

 

Average

 

% of

 

 

 

Average

 

% of

 

 

 

Average

 

% of

 

 

Amount

 

Rate

 

Total

 

Amount

 

Rate

 

Total

 

Amount

 

Rate

 

Total

 

 

(Dollars in thousands)

Checking

$

688,354 

 

0.04 

%

 

14.7 

%

 

$

656,239 

 

0.04 

%

 

14.3 

%

 

$

606,504 

 

0.04 

%

 

13.3 

%

 

Savings

 

281,219 

 

0.10 

 

 

6.0 

 

 

 

265,195 

 

0.11 

 

 

5.8 

 

 

 

260,933 

 

0.11 

 

 

5.8 

 

 

Money market

 

1,156,404 

 

0.19 

 

 

24.6 

 

 

 

1,142,990 

 

0.22 

 

 

25.0 

 

 

 

1,110,962 

 

0.25 

 

 

24.4 

 

 

Retail certificates of deposit

 

2,287,360 

 

1.40 

 

 

48.7 

 

 

 

2,246,908 

 

1.46 

 

 

49.0 

 

 

 

2,295,941 

 

1.49 

 

 

50.4 

 

 

Public units/brokered deposits

 

280,236 

 

0.96 

 

 

6.0 

 

 

 

270,831 

 

1.00 

 

 

5.9 

 

 

 

276,303 

 

0.98 

 

 

6.1 

 

 

 

$

4,693,573 

 

0.80 

%

 

100.0 

%

 

$

4,582,163 

 

0.84 

%

 

100.0 

%

 

$

4,550,643 

 

0.89 

%

 

100.0 

%

 

 

 

At March 31, 2013,  $83.7 million of certificates were brokered deposits, unchanged from September 30, 2012.  The $83.7 million of brokered deposits at March 31, 2013 had a weighted average rate of 2.58% and a remaining term to maturity of  1.4 years.  The Bank monitors the cost of brokered deposits and considers them as a potential source of funding, provided that investment opportunities are balanced with the funding cost.  As of March 31, 2013,  $196.5 million of certificates were public unit deposits, compared to $192.6 million of public unit deposits at September 30, 2012.  The $196.5 million of public unit deposits at March 31, 2013 had a weighted average rate of 0.27% and an average remaining term to maturity of nine months.  Management will continue to monitor the wholesale deposit market for attractive opportunities relative to the use of proceeds for investments.

 

 

50

 


 

The following tables set forth scheduled maturity information for our certificate of deposit portfolio (including public units and brokered deposits) at March 31, 2013.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Due

 

 

 

 

 

 

More than

 

More than

 

 

 

  

 

 

 

1 year

 

1 year to

 

2 years to

 

More than

 

Total

 

Rate range

 

or less

 

2 years

 

3 years

 

3 years

 

Amount

 

Rate

 

 

 

(Dollars in thousands)

 

 

 

0.00 – 0.99%

 

$

795,232 

 

$

239,836 

 

$

32,775 

 

$

458 

 

$

1,068,301 

 

0.52 

%

1.00 – 1.99%

 

 

111,485 

 

 

230,091 

 

 

154,906 

 

 

313,318 

 

 

809,800 

 

1.42 

 

2.00 – 2.99%

 

 

202,443 

 

 

209,531 

 

 

195,183 

 

 

18,185 

 

 

625,342 

 

2.51 

 

3.00 – 3.99%

 

 

41,397 

 

 

13,784 

 

 

7,248 

 

 

520 

 

 

62,949 

 

3.16 

 

4.00 – 4.99%

 

 

663 

 

 

251 

 

 

290 

 

 

--

 

 

1,204 

 

4.50 

 

 

 

$

1,151,220 

 

$

693,493 

 

$

390,402 

 

$

332,481 

 

$

2,567,596 

 

1.35 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent of total

 

 

44.8 

%

 

27.0 

%

 

15.2 

%

 

13.0 

%

 

 

 

 

 

Weighted average rate

 

 

1.02 

 

 

1.47 

 

 

1.94 

 

 

1.59 

 

 

 

 

 

 

Weighted average maturity (in years)

0.4 

 

 

1.5 

 

 

2.4 

 

 

3.7 

 

 

1.4 

 

 

 

Weighted average maturity for the retail certificate of deposit portfolio (in years)

 

 

 

1.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity

 

 

 

Over

 

Over

 

 

 

 

 

3 months

 

3 to 6

 

6 to 12

 

Over

 

 

 

or less

 

months

 

months

 

12 months

 

Total

 

(Dollars in thousands)

Retail certificates of deposit less than $100,000

$

205,238 

 

$

228,157 

 

$

299,894 

 

$

864,040 

 

$

1,597,329 

Retail certificates of deposit of $100,000 or more

 

67,923 

 

 

94,161 

 

 

105,581 

 

 

422,366 

 

 

690,031 

Public units/brokered deposits less than $100,000

 

20,058 

 

 

--

 

 

--

 

 

63,652 

 

 

83,710 

Public units of $100,000 or more

 

84,504 

 

 

24,021 

 

 

21,683 

 

 

66,318 

 

 

196,526 

Total certificates of deposit

$

377,723 

 

$

346,339 

 

$

427,158 

 

$

1,416,376 

 

$

2,567,596 

 

 

 

51

 


 

Borrowings  – The following tables present FHLB advances, at par, and repurchase agreement activity for the periods shown.  Line of credit activity is excluded from the following table due to the short-term nature of the borrowings. 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.  The effective rate includes the net impact of the amortization of deferred prepayment penalties resulting from the prepayment of certain FHLB advances and deferred gains related to interest rate swaps previously terminated.  Rates on new borrowings are fixed-rate.    The new $100.0 million FHLB advance in the current quarter represents an outstanding FHLB advance commitment at March 31, 2013 that settled in early April 2013.  The new advance has a term of 72 months at a rate of 1.29%.  This replaces $50.0 million of repurchase agreements that matured late during the current quarter which had a weighted average rate of 3.48%.  In early April 2013, $25.0 million of repurchase agreements matured with a rate of 3.33%.  In May 2013, $225.0 million of advances are scheduled to mature with a weighted average rate of 3.86%. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31, 2013

 

December 31, 2012

 

September 30, 2012

 

June 30, 2012

 

 

 

Effective

 

 

 

 

 

Effective

 

 

 

 

 

Effective

 

 

 

 

 

Effective

 

 

 

Amount

 

Rate

 

WAM

 

Amount

 

Rate

 

WAM

 

Amount

 

Rate

 

WAM

 

Amount

 

Rate

 

WAM

 

(Dollars in thousands)

Beginning balance

$

2,915,000 

 

2.99 

%

 

2.6 

 

$

2,915,000 

 

3.13 

%

 

2.7 

 

$

2,915,000 

 

3.25 

%

 

2.8 

 

$

2,915,000 

 

3.24 

%

 

3.1 

Maturities and prepayments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

--

 

--

 

 

 

 

 

(100,000)

 

4.85 

 

 

 

 

 

(100,000)

 

4.27 

 

 

 

 

 

--

 

--

 

 

 

Repurchase agreements

 

(50,000)

 

3.48 

 

 

 

 

 

--

 

--

 

 

 

 

 

--

 

--

 

 

--

 

 

--

 

--

 

 

 

New borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

100,000 

 

1.29 

 

 

6.0 

 

 

100,000 

 

0.78 

 

 

4.0 

 

 

100,000 

 

0.83 

 

 

4.0 

 

 

--

 

--

 

 

 

Ending balance

$

2,965,000 

 

2.92 

%

 

2.5 

 

$

2,915,000 

 

2.99 

%

 

2.6 

 

$

2,915,000 

 

3.13 

%

 

2.7 

 

$

2,915,000 

 

3.25 

%

 

2.8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

March 31, 2013

 

March 31, 2012

 

 

 

 

Effective

 

 

 

 

 

Effective

 

 

 

Amount

 

Rate

 

WAM

 

Amount

 

Rate

 

WAM

 

 

(Dollars in thousands)

Beginning principal balance

$

2,915,000 

 

3.13 

%

 

2.7 

 

$

2,915,000 

 

3.76 

%

 

3.0 

Maturities and prepayments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

(100,000)

 

4.85 

 

 

 

 

 

(450,000)

 

3.38 

 

 

 

Repurchase agreements

 

(50,000)

 

3.48 

 

 

 

 

 

(150,000)

 

4.41 

 

 

 

New borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

200,000 

 

1.04 

 

 

5.0 

 

 

600,000 

 

1.14 

 

 

3.2 

Ending principal balance

$

2,965,000 

 

2.92 

%

 

2.5 

 

$

2,915,000 

 

3.24 

%

 

3.1 

 

 

52

 


 

The following table presents the maturity of FHLB advances, at par, and repurchase agreements as of March 31, 2013, including the $100.0 million FHLB advance commitment at March 31, 2013Management will continue to monitor the Bank’s investment opportunities and balance those opportunities with the cost of FHLB advances and other funding sources.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

Weighted

 

 

FHLB

 

Repurchase

 

Average

 

Average

Maturity by

 

Advances

 

Agreements

 

Contractual

 

Effective

Fiscal year

 

Amount

 

Amount

 

Rate

 

Rate(1)

 

 

(Dollars in thousands)

 

 

 

 

 

 

2013

 

$

225,000 

 

$

95,000 

 

3.90 

%

 

3.90 

%

2014

 

 

450,000 

 

 

100,000 

 

3.33 

 

 

3.95 

 

2015

 

 

600,000 

 

 

20,000 

 

1.73 

 

 

1.95 

 

2016

 

 

575,000 

 

 

--

 

2.29 

 

 

2.91 

 

2017

 

 

500,000 

 

 

--

 

2.69 

 

 

2.72 

 

2018

 

 

200,000 

 

 

100,000 

 

2.90 

 

 

2.90 

 

2019

 

 

100,000 

 

 

--

 

1.29 

 

 

1.29 

 

 

 

$

2,650,000 

 

$

315,000 

 

2.64 

%

 

2.92 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The effective rate includes the net impact of the amortization of deferred prepayment penalties resulting from the prepayment of certain FHLB advances and deferred gains related to terminated interest rate swaps.

 

Maturities – The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of borrowings and certificates of deposit, split between retail and public unit/brokered deposit amounts, for the next four quarters as of March 31, 2013. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

Public Unit/

 

Weighted

 

 

 

 

Weighted

 

 

 

 

 

Average

 

Retail

 

Average

 

Brokered

 

Average

 

 

 

 

Average

Maturity by

 

Borrowings

 

Repricing

 

Certificate

 

Repricing

 

Deposit

 

Repricing

 

 

 

 

Repricing

Quarter End

 

Amount

 

Rate

 

Amount

 

Rate

 

Amount

 

Rate

 

Total

 

Rate

 

 

(Dollars in thousands)

June 30, 2013

 

$

250,000 

 

3.81 

%

 

$

273,161 

 

1.14 

%

 

$

104,562 

 

0.52 

%

 

$

627,723 

 

2.10 

%

September 30, 2013

 

 

70,000 

 

4.23 

 

 

 

322,318 

 

1.19 

 

 

 

24,021 

 

0.18 

 

 

 

416,339 

 

1.64 

 

December 31, 2013

 

 

150,000 

 

3.16 

 

 

 

203,882 

 

0.92 

 

 

 

10,173 

 

0.75 

 

 

 

364,055 

 

1.84 

 

March 31, 2014

 

 

200,000 

 

5.01 

 

 

 

201,593 

 

1.12 

 

 

 

11,510 

 

0.25 

 

 

 

413,103 

 

2.98 

 

 

 

$

670,000 

 

4.06 

%

 

$

1,000,954 

 

1.11 

%

 

$

150,266 

 

0.46 

%

 

$

1,821,220 

 

2.14 

%

 

 

 

 

Stockholders’ EquityStockholders’ equity decreased $163.5 million, from $1.81 billion at September 30, 2012 to $1.64 billion at March 31, 2013.  The decrease was due primarily to the payment of $125.3 million of dividends and the repurchase of $72.0 million of stock, partially offset by net income of $35.3 million.

The $125.3 million of dividends paid during the current six month period consisted of a $0.52 per share, or $76.5 million, True Blue® dividend, an $0.18 per share, or $26.6 million, special year-end dividend related to fiscal year 2012 earnings, per the Company’s dividend policy, and two regular quarterly dividends of $0.075 per share totaling $0.15 per share, or $22.2 million.  On April 17, 2013, the Company declared a regular quarterly cash dividend of $0.075 per share, or approximately $10.8 million, payable on May 17, 2013 to stockholders of record as of the close of business on May 3, 2013.  Dividend payments depend upon a number of factors including the Company’s financial condition and results of operations, the Bank’s regulatory capital requirements, regulatory limitations on the Bank’s ability to make capital distributions to the Company, and the amount of cash at the holding company.    

In December 2011, the Company announced that its Board of Directors approved the repurchase of up to $193.0 million of the Company’s common stock.  The Company began repurchasing common stock during the second quarter of fiscal year 2012 and completed the plan during the current quarter, having repurchased 16,360,654 shares at an average price of $11.80 per share.  In November 2012, the Company announced its Board of Directors approved a new $175.0 million stock repurchase program to commence upon the completion of the aforementioned $193.0 million repurchase plan.  As of March 31, 2013, 2,359,430 shares had been repurchased under the new plan at an average price of $11.86 per share, or $28.0 million.  Subsequent to March 31, 2013 and through April 12, 2013, the Company repurchased 343,536 shares at an average price of $11.91 per share.  The new plan, under which $142.9 million remained available as of April 12, 2013, has no expiration date.

53

 


 

The following table presents quarterly dividends paid in calendar years 2013, 2012, and 2011.  For the quarter ending June 30, 2013, the table below does not present the actual dividend payout, but rather management’s estimate of the dividend payout as of April 24, 2013, based on the number of shares outstanding on that date and the dividend declared on April 17, 2013 of $0.075 per share.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calendar Year

 

 

 

2013

 

 

2012

 

 

2011

 

 

 

(Dollars in thousands)

Quarter ended March 31

 

 

 

 

 

 

 

 

 

Total dividends paid

$

11,023 

 

$

12,145 

 

$

12,105 

Quarter ended June 30

 

 

 

 

 

 

 

 

 

Total dividends paid

 

10,796 

 

 

11,883 

 

 

12,105 

Quarter ended September 30

 

 

 

 

 

 

 

 

 

Total dividends paid

 

--

 

 

11,402 

 

 

12,106 

Quarter ended December 31

 

 

 

 

 

 

 

 

 

Total dividends paid

 

--

 

 

11,223 

 

 

12,145 

True Blue dividend 2012/Welcome dividend 2011

 

 

 

 

 

 

 

 

 

Total dividends paid

 

--

 

 

76,494 

 

 

96,838 

Special year-end dividend

 

 

 

 

 

 

 

 

 

Total dividends paid

 

--

 

 

26,585 

 

 

16,193 

 

Calendar year-to-date dividends paid

$

21,819 

 

$

149,732 

 

$

161,492 

 

 

 

 

 

 

 

 

 

 

 

 

54

 


 

Operating Results

The following table presents selected income statement and other information for the quarters indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

 

2013

 

2012

 

2012

 

2012

 

2012

 

 

(Dollars in thousands, except per share data)

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

56,936 

 

$

58,467 

 

$

58,218 

 

$

57,547 

 

$

59,785 

 

MBS

 

14,446 

 

 

15,183 

 

 

16,470 

 

 

18,144 

 

 

18,169 

 

Investment securities

 

2,457 

 

 

2,865 

 

 

3,409 

 

 

3,783 

 

 

4,115 

 

Other interest and dividend income

 

1,141 

 

 

1,161 

 

 

1,208 

 

 

1,171 

 

 

1,205 

 

Total interest and dividend income

 

74,980 

 

 

77,676 

 

 

79,305 

 

 

80,645 

 

 

83,274 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

 

17,909 

 

 

18,628 

 

 

19,403 

 

 

19,859 

 

 

20,443 

 

Deposits

 

9,344 

 

 

9,849 

 

 

10,480 

 

 

11,068 

 

 

11,835 

 

Repurchase agreements

 

3,407 

 

 

3,569 

 

 

3,569 

 

 

3,530 

 

 

3,530 

 

Total interest expense

 

30,660 

 

 

32,046 

 

 

33,452 

 

 

34,457 

 

 

35,808 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

44,320 

 

 

45,630 

 

 

45,853 

 

 

46,188 

 

 

47,466 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

--

 

 

233 

 

 

--

 

 

--

 

 

1,500 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(after provision for credit losses)

 

44,320 

 

 

45,397 

 

 

45,853 

 

 

46,188 

 

 

45,966 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

5,944 

 

 

5,768 

 

 

5,829 

 

 

6,080 

 

 

6,172 

 

Other expenses

 

23,217 

 

 

24,741 

 

 

24,134 

 

 

22,905 

 

 

21,969 

 

Income tax expense

 

9,332 

 

 

8,861 

 

 

9,812 

 

 

10,690 

 

 

10,854 

 

Net income

$

17,715 

 

$

17,563 

 

$

17,736 

 

$

18,673 

 

$

19,315 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

46.19 

%

 

48.14 

%

 

46.70 

%

 

43.82 

%

 

40.96 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share 

$

0.12 

 

$

0.12 

 

$

0.11 

 

$

0.12 

 

$

0.12 

 

Diluted earnings per share

 

0.12 

 

 

0.12 

 

 

0.11 

 

 

0.12 

 

 

0.12 

 

 

 

55

 


 

Comparison of Operating Results for the Six Months Ended March 31, 2013 and 2012

For the six month period ended March 31, 2013, the Company recognized net income of $35.3 million, compared to net income of $38.1 million for the six month period ended March 31, 2012.  The $2.8 million, or 7.4%, decrease in net income was due primarily to an increase in other expenses and a decrease in net interest income, partially offset by a decrease in income tax expense and provision for credit losses.    

Interest and Dividend Income
The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

115,403 

 

$

120,460 

 

$

(5,057)

 

(4.2)

%

MBS

 

29,629 

 

 

36,542 

 

 

(6,913)

 

(18.9)

 

Investment securities

 

5,322 

 

 

8,752 

 

 

(3,430)

 

(39.2)

 

Capital stock of FHLB

 

2,233 

 

 

2,202 

 

 

31 

 

1.4 

 

Cash and cash equivalents

 

69 

 

 

145 

 

 

(76)

 

(52.4)

 

Total interest and dividend income

$

152,656 

 

$

168,101 

 

$

(15,445)

 

(9.2)

%

 

The decrease in interest income on loans receivable was due to a decrease in the weighted average yield of the portfolio, partially offset by a $439.9 million increase in the average balance of the portfolio, which was largely due to a bulk loan purchase during the quarter ended September 30, 2012.    The average yield on the loans receivable portfolio decreased 54 basis points, from 4.62% for the prior year six month period to 4.08% for the current six month period.  The decrease in the weighted average yield was due to the continued downward repricing of the existing portfolio due to endorsements and refinances, as well as to the origination and purchase of loans at rates less than the weighted average rate of the existing portfolio.  

The decrease in interest income on MBS was due primarily to a 48 basis point decrease in the weighted average yield of the portfolio, from 3.03% during the prior year six month period to 2.55% for the current six month period, and partially to a $91.4 million decrease in the average balance between the two periodsThe decrease in the average yield was due primarily to purchases of MBS between periods with yields less than the average yield on the existing portfolioThe funds for these purchases were provided primarily from repayments and prepayments of higher-yielding MBS.  The cash flows from MBS that were not reinvested in the portfolio were used largely to fund loan activity.

The decrease in interest income on investment securities was due primarily to a $448.6 million decrease in the average balance of the portfolio, of which $257.1 million related to securities at the holding company, and partially to a 10 basis point decrease in the weighted average yield to 1.22% for the current six month period.  The cash flows from calls and maturities of investment securities that were not reinvested in the portfolio were used to repurchase stock, pay dividends to stockholders, and fund loan activity.

56

 


 

Interest Expense
The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

$

36,537 

 

$

42,782 

 

$

(6,245)

 

(14.6)

%

Deposits

 

19,193 

 

 

24,622 

 

 

(5,429)

 

(22.0)

 

Repurchase agreements

 

6,976 

 

 

7,857 

 

 

(881)

 

(11.2)

 

Total interest expense

$

62,706 

 

$

75,261 

 

$

(12,555)

 

(16.7)

%

 

The decrease in interest expense on FHLB advances was due to a decrease in the weighted average rate paid on the portfolio, partially offset by a $44.3 million increase in the average balance between the two periods.  The weighted average rate paid on FHLB advances decreased 54 basis points, from 3.44% for the prior year six month period to 2.90% for the current six month period.  The decrease in the average rate paid was due to the renewal of advances between periods to lower rates, as well as to the prepayment of an advance during the second quarter of fiscal year 2012. 

 

The decrease in interest expense on deposits was due primarily to a 25 basis point reduction in the weighted average rate paid on the portfolio to 0.84% for the current six month period, and partially to a change in the portfolio mix. The decrease in the weighted average rate paid on the deposit portfolio was primarily due a decrease in the weighted average rate paid on the certificate of deposit and money market portfolios as the portfolios continued to reprice to lower market rates.  The weighted average rate paid on the certificate of deposit portfolio decreased 32 basis points, from 1.71% for the prior year six month period to 1.39% for the current six month period.  The weighted average rate paid on the money market portfolio decreased 12 basis points, from 0.34% for the prior year six month period to 0.22% for the current six month periodThe average balance of deposits increased $62.2 million between the two periods; however the growth was in lower rate deposit products, primarily checking and money market, while the average balance of the certificates of deposit decreased between the two periods. 

The decrease in interest expense on repurchase agreements was due primarily to a $39.5 million decrease in the average balance between periods as a result of maturing agreements not being renewed; rather, the agreements were replaced with FHLB advances.    

Net Interest Margin
The net interest margin, which is calculated as the difference between interest income and interest expense divided by average interest-earning assets, decreased three basis points, from 2.02% for the prior year six month period to 1.99% for the current six month period.  The decrease in the net interest margin was primarily a result of a decrease in loan and security yields, which more than offset the benefit received from a decrease in the cost of funds between the two periods. 

 

The weighted average yield on total interest-earning assets decreased 27 basis points from the prior year six month period to 3.38% for the current six month period and the average balance of interest-earning assets decreased $154.6 million from the prior year six month period to $9.04 billion for the current six month period.  The decrease in the weighted average balance between the two periods was primarily in lower yielding assets;  specifically the investment securities portfolio, where the proceeds from securities called or matured not reinvested in the portfolio were used largely to repurchase stock, pay dividends to stockholders, and fund loan activity.  The average balance of the loan portfolio increased between the two periods; however, not enough to overcome the impact of the 54 basis point reduction in the loan portfolio yield. 

 

The weighted average rate paid on total interest-bearing liabilities decreased 35 basis points from the prior year six month period to 1.68% for the current six month period and the average balance of interest-bearing liabilities increased $67.0 million from the prior year six month period to $7.45 billion for the current six month period.  The increase in the average balance of interest-bearing liabilities was largely in lower rate deposit products while the average balance of certificates of deposit decreased between the two periods. 

 

57

 


 

Provision for Credit Losses
The provision for credit losses for the current six month period was $233 thousand, compared to $2.0 million for the prior year six month period.  The decrease in the provision for credit losses between periods was a result of the improvement in the performance of our loan portfolio, as evidenced by the decline in net charge-offs and loans 90 or more days delinquent or in foreclosure. Net charge-offs during the current six month period were $1.3 million, of which $372 thousand related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that must be, in accordance with OCC regulations, evaluated for collateral value loss, even if the loans are current.  Net charge-offs during the prior year six month period were $4.9 million, of which $3.5 million was related the implementation of a loan charge-off policy during January 2012.  OCC Call Report requirements do not permit the use of specific valuation allowances, which the Bank was previously utilizing for potential loan losses, as permitted by the Bank’s previous regulator.  Loans 90 or more days delinquent or in foreclosure decreased $7.1 million, or 28.1%, from $25.3 million at March 31, 2012 to $18.2 million at March 31, 2013.

Other Income

The following table presents the components of other income for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

Retail fees and charges

$

7,513 

 

$

8,018 

 

$

(505)

 

(6.3)

%

Insurance commissions

 

1,550 

 

 

1,343 

 

 

207 

 

15.4 

 

Loan fees

 

885 

 

 

1,135 

 

 

(250)

 

(22.0)

 

BOLI

 

743 

 

 

799 

 

 

(56)

 

(7.0)

 

Other income, net

 

1,021 

 

 

1,029 

 

 

(8)

 

(0.8)

 

Total other income

$

11,712 

 

$

12,324 

 

$

(612)

 

(5.0)

%

 

The decrease in retail fees and charges was due primarily to a decrease in service charges and debit card income.  The decrease in loan fees was due primarily to a decrease in servicing fees received from sold loans as a result of a decrease in the balance of our sold loan portfolio.  The increase in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers as a result of favorable claims experience during the prior year. 

Other Expense
The following table presents the components of other expense for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

$

24,336 

 

$

21,173 

 

$

3,163 

 

14.9 

%

Occupancy

 

4,709 

 

 

4,170 

 

 

539 

 

12.9 

 

Information technology and communications

 

4,430 

 

 

3,664 

 

 

766 

 

20.9 

 

Regulatory and outside services

 

3,055 

 

 

2,548 

 

 

507 

 

19.9 

 

Deposit and loan transaction costs

 

2,910 

 

 

2,505 

 

 

405 

 

16.2 

 

Federal insurance premium

 

2,230 

 

 

2,176 

 

 

54 

 

2.5 

 

Advertising and promotional

 

2,036 

 

 

1,751 

 

 

285 

 

16.3 

 

Other expenses, net

 

4,252 

 

 

6,049 

 

 

(1,797)

 

(29.7)

 

Total other expenses

$

47,958 

 

$

44,036 

 

$

3,922 

 

8.9 

%

 

58

 


 

The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated ESOP shares related to the $0.52 True Blue® dividend paid in December 2012, along with stock option and restricted stock grants in May 2012 and September 2012.  The increase in occupancy expense was due largely to an increase in depreciation expense and real estate taxes associated with the remodel of our home office.  The increase in information technology and communications expense was primarily related to maintenance and licensing expenses.  The increase in regulatory and outside services was due largely to professional services, along with the timing of fees paid for external audit and tax preparation services.  The increase in deposit and loan transaction costs was primarily related to loan activity.  The decrease in other expenses, net, was due primarily to a decrease in OREO operations expense, a decrease in office supplies and related expenses, and a recovery of valuation allowance expense on the mortgage-servicing rights asset compared to an impairment expense in the prior year.

We currently anticipate the following increases in other expenses during the full fiscal year 2013, as compared to the full fiscal year 2012:  (1) a $4.8 million increase in salaries and employee benefits due primarily to an estimated $2.7 million in compensation expense on unallocated ESOP shares as a result of the True Blue® and special year-end dividends paid and $1.4 million resulting from a full year’s impact of equity plan awards made in May 2012 and September 2012; (2) a $2.6 million increase in information technology and communications expense and occupancy expense as a result of an increase in licensing and maintenance expenses related to upgrades to our information technology infrastructure and an increase in depreciation expense associated with the remodel of our home office; and (3) a $1.1 million increase in advertising expense, which is due primarily to media campaigns that were delayed until fiscal year 2013.    We currently anticipate that the preceding increases in other expenses will be partially offset by an estimated $1.0 million decrease in other expenses, net, due primarily to decreases in OREO operations expense.

 

The final ESOP loan payment associated with the shares acquired in our initial public offering in March 1999 will be made on September 30, 2013.  As a result, salaries and employee benefits expense is currently anticipated to decrease approximately $4.5 million in fiscal year 2014, as compared to fiscal year 2013.  Additionally, we do not currently anticipate additional compensation expense on unallocated ESOP shares in fiscal year 2014, which would result in an additional decrease in salaries and employee benefit expense of $3.0 million, when compared to fiscal year 2013.

 

Income Tax Expense
Income tax expense was $18.2 million for the current six month period compared to $21.0 million for the prior year six month period.  The decrease in expense between periods was due primarily to a decrease in pretax income.  The effective tax rate for the current six month period was 34.0% compared to 35.5% for the prior year six month periodManagement anticipates the effective tax rate for fiscal year 2013 will be approximately 34%, based on fiscal year 2013 estimates as of March 31, 2013.  This rate is lower than the prior year rate of 35.8% due primarily to higher deductible expenses associated with the ESOP, and higher tax credits related to our low income housing partnerships.  Additionally, pre-tax income is anticipated to be lower than the prior year, due primarily to the items outlined above in other expenses, which results in all items impacting the income tax rate to have a larger impact on the overall effective tax rate than in fiscal year 2012. 

 

59

 


 

Average Balance Sheet 

The following table presents the average balances of our assets, liabilities and stockholders’ equity and the related annualized yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated and the weighted average yield/rate on our interest-earning assets and interest-bearing liabilities at March 31, 2013.  Average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown.  Average outstanding balances are derived from average daily balances.  The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates.  Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At

 

For the Six Months Ended

 

March 31, 2013

 

March 31, 2013

 

March 31, 2012

 

 

 

Average

 

Interest 

 

 

 

Average

 

Interest 

 

 

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Rate

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

Assets:

 

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable(1)

 3.95%

 

$

5,653,923 

 

$

115,403 

 

4.08 

%

 

$

5,214,027 

 

$

120,460 

 

4.62 

%

MBS(2)

2.45

 

 

2,324,497 

 

 

29,629 

 

2.55 

 

 

 

2,415,850 

 

 

36,542 

 

3.03 

 

Investment securities(2)(3)

1.14

 

 

875,321 

 

 

5,322 

 

1.22 

 

 

 

1,323,899 

 

 

8,752 

 

1.32 

 

Capital stock of FHLB

3.47

 

 

131,662 

 

 

2,233 

 

3.40 

 

 

 

127,995 

 

 

2,202 

 

3.44 

 

Cash and cash equivalents

0.21

 

 

59,506 

 

 

69 

 

0.23 

 

 

 

117,751 

 

 

145 

 

0.25 

 

Total interest-earning assets(1)(2)

3.29

 

 

9,044,909 

 

 

152,656 

 

3.38 

 

 

 

9,199,522 

 

 

168,101 

 

3.65 

 

Other noninterest-earning assets

 

 

 

237,402 

 

 

 

 

 

 

 

 

234,260 

 

 

 

 

 

 

Total assets

 

 

$

9,282,311 

 

 

 

 

 

 

 

$

9,433,782 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 0.04%

 

$

617,686 

 

$

119 

 

0.04 

%

 

$

548,356 

 

$

216 

 

0.08 

%

Savings

0.10

 

 

267,401 

 

 

133 

 

0.10 

 

 

 

254,786 

 

 

236 

 

0.18 

 

Money market

0.19

 

 

1,131,513 

 

 

1,266 

 

0.22 

 

 

 

1,085,811 

 

 

1,852 

 

0.34 

 

Certificates

1.35

 

 

2,543,552 

 

 

17,675 

 

1.39 

 

 

 

2,608,987 

 

 

22,318 

 

1.71 

 

Total deposits

0.80

 

 

4,560,152 

 

 

19,193 

 

0.84 

 

 

 

4,497,940 

 

 

24,622 

 

1.09 

 

FHLB advances(4)

2.81

 

 

2,531,094 

 

 

36,537 

 

2.90 

 

 

 

2,486,771 

 

 

42,782 

 

3.44 

 

Repurchase agreements

3.88

 

 

360,192 

 

 

6,976 

 

3.83 

 

 

 

399,699 

 

 

7,857 

 

3.87 

 

Total borrowings

2.92

 

 

2,891,286 

 

 

43,513 

 

3.01 

 

 

 

2,886,470 

 

 

50,639 

 

3.50 

 

Total interest-bearing liabilities

1.62

 

 

7,451,438 

 

 

62,706 

 

1.68 

 

 

 

7,384,410 

 

 

75,261 

 

2.03 

 

Other noninterest-bearing liabilities

 

 

 

112,121 

 

 

 

 

 

 

 

 

111,361 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

1,718,752 

 

 

 

 

 

 

 

 

1,938,011 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

 

$

9,282,311 

 

 

 

 

 

 

 

$

9,433,782 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Continued)

60

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At

 

For the Six Months Ended

 

March 31, 2013

 

March 31, 2013

 

March 31, 2012

 

 

 

Average

 

Interest 

 

 

 

 

Average

 

Interest 

 

 

 

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Rate

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income(5)

 

 

 

 

 

$

89,950 

 

 

 

 

 

 

 

$

92,840 

 

 

 

Net interest rate spread(6)

1.67%

 

 

 

 

 

 

 

1.70 

%

 

 

 

 

 

 

 

1.62 

%

Net interest-earning assets

 

 

$

1,593,471 

 

 

 

 

 

 

 

$

1,815,112 

 

 

 

 

 

 

Net interest margin(7)

 

 

 

 

 

 

 

 

1.99 

 

 

 

 

 

 

 

 

2.02 

 

Ratio of interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to interest-bearing liabilities

 

 

 

 

 

 

 

 

1.21 

 

 

 

 

 

 

 

 

1.25 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected performance ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

 

 

 

 

 

 

 

0.76 

%

 

 

 

 

 

 

 

0.81 

%

Return on average equity (annualized)

 

 

 

 

 

 

 

 

4.11 

 

 

 

 

 

 

 

 

3.93 

 

Average equity to average assets

 

 

 

 

 

 

 

 

18.52 

 

 

 

 

 

 

 

 

20.54 

 

Operating expense ratio

 

 

 

 

 

 

 

 

1.03 

 

 

 

 

 

 

 

 

0.93 

 

Efficiency ratio

 

 

 

 

 

 

 

 

47.17 

 

 

 

 

 

 

 

 

41.87 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Concluded)

 

(1)

Calculated net of unearned loan fees and deferred costs, and undisbursed loan funds.  Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.  Balances include LHFS.

(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 $44.0 million and $57.4 million for the six months ended March 31, 2013 and 2012, respectively.

(4)

The balance and rate of FHLB advances are stated net of deferred gains and deferred prepayment penalties.

(5)

Net interest income represents the difference between interest income earned on interest-earning assets, such as mortgage loans, investment securities, and MBS, and interest paid on interest-bearing liabilities, such as deposits, FHLB advances, and other borrowings.  Net interest income depends on the balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.

(6)

Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. 

(7)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

61

 


 

Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the six months ended March 31, 2013 to the six months ended March 31, 2012.  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 Six Months Ended

 

March 31, 2013 vs. March 31, 2012

 

Increase (Decrease) Due to

 

Volume

 

Rate

 

Total

 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

Loans receivable

$

9,504 

 

$

(14,561)

 

$

(5,057)

MBS

 

(1,340)

 

 

(5,573)

 

 

(6,913)

Investment securities

 

(2,773)

 

 

(657)

 

 

(3,430)

Capital stock of FHLB

 

53 

 

 

(22)

 

 

31 

Cash and cash equivalents

 

(69)

 

 

(7)

 

 

(76)

Total interest-earning assets

 

5,375 

 

 

(20,820)

 

 

(15,445)

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

Checking

 

24 

 

 

(121)

 

 

(97)

Savings

 

11 

 

 

(114)

 

 

(103)

Money market

 

73 

 

 

(659)

 

 

(586)

Certificates of deposit

 

(559)

 

 

(4,084)

 

 

(4,643)

FHLB advances

 

560 

 

 

(6,805)

 

 

(6,245)

Repurchase agreements

 

(805)

 

 

(76)

 

 

(881)

Total interest-bearing liabilities

 

(696)

 

 

(11,859)

 

 

(12,555)

 

 

 

 

 

 

 

 

 

Net change in net interest income

$

6,071 

 

$

(8,961)

 

$

(2,890)

 

 

 

62

 


 

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

For the quarter ended March 31, 2013, the Company recognized net income of $17.7 million, compared to net income of $19.3 million for the quarter ended March 31, 2012.  The $1.6 million, or 8.3%, decrease in net income was due primarily to a decrease in net interest income and an increase in other expenses, partially offset by decreases in provision for credit losses and income tax expense.    

Interest and Dividend Income
The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

56,936 

 

$

59,785 

 

$

(2,849)

 

(4.8)

%

MBS

 

14,446 

 

 

18,169 

 

 

(3,723)

 

(20.5)

 

Investment securities

 

2,457 

 

 

4,115 

 

 

(1,658)

 

(40.3)

 

Capital stock of FHLB

 

1,105 

 

 

1,111 

 

 

(6)

 

(0.5)

 

Cash and cash equivalents

 

36 

 

 

94 

 

 

(58)

 

(61.7)

 

Total interest and dividend income

$

74,980 

 

$

83,274 

 

$

(8,294)

 

(10.0)

%

 

The decrease in interest income on loans receivable was due to a 56 basis point decrease in the weighted average yield of the portfolio, from 4.57% for the prior year quarter to 4.01% for the current quarter, partially offset by a $447.4 million increase in the average balance of the portfolio between the two periods, which was primarily a result of a bulk loan purchase during the quarter ended September 30, 2012.  The decrease in the weighted average yield was due to the continued downward repricing of the existing portfolio due to endorsements and refinances, as well as to the origination and purchase of loans at rates less than the weighted average rate of the existing portfolio.

The decrease in interest income on MBS was due primarily to a 47 basis point decrease in the weighted average yield of the portfolio, from 2.97% during the prior year quarter to 2.50% for the current quarter, and partially to a $138.6 million decrease in the average balance between the two periods.  The decrease in the average yield was due primarily to purchases of MBS between periods with yields less than the average yield on the existing portfolio.  The cash flows from maturities of MBS that were not reinvested in the portfolio were used largely to fund loan activity.    

The decrease in interest income on investment securities was due primarily to a $439.7 million decrease in the average balance of the portfolio, of which $215.5 million related to securities at the holding company.  The cash flows from calls and maturities of investment securities that were not reinvested in the portfolio were used to fund loan activity, repurchase stock, and pay dividends to stockholders 

Interest Expense
The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent. 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

$

17,909 

 

$

20,443 

 

$

(2,534)

 

(12.4)

%

Deposits

 

9,344 

 

 

11,835 

 

 

(2,491)

 

(21.0)

 

Repurchase agreements

 

3,407 

 

 

3,530 

 

 

(123)

 

(3.5)

 

Total interest expense

$

30,660 

 

$

35,808 

 

$

(5,148)

 

(14.4)

%

 

The decrease in interest expense on FHLB advances was due to a 38 basis point decrease in the weighted average rate of the portfolio, from 3.25% for the prior year quarter to 2.87% for the current quarter.  The decrease in the average rate paid was due to the renewal of advances at lower rates and to the prepayment of higher rate advances

63

 


 

The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate of the portfolio, most notably on the certificate of deposit portfolio, which decreased 27 basis points, from 1.64% for the prior year quarter to 1.37% for the current quarter, as the portfolio repriced to lower market rates.  The weighted average rate paid on total deposits decreased 23 basis points, from 1.05% for the prior year quarter to 0.82% for the current quarter.   

Net Interest Margin
The net interest margin decreased nine basis points, from 2.06% for the prior year quarter to 1.97% for the current quarter, primarily as a result of continued downward pressure on loan and security yieldsDecreases in the cost of funds tempered the decrease in the net interest margin, but were not enough to fully offset the impact of decreasing asset yields.    

The weighted average yield on total interest-earning assets decreased 28 basis points from the prior year quarter to 3.33% for the current quarter and the average balance of interest-earning assets decreased $220.0 million between the two periods.  The decrease in the weighted average balance between the two periods was primarily in lower yielding assets; specifically the investment securities and MBS portfoliosRepayments, calls and maturities not reinvested in the securities portfolio were used largely to fund loan activity, repurchase stock and pay dividends to stockholders.  The average balance of the loan portfolio increased between the two periods; however, not enough to overcome the impact of the 56 basis point reduction in the loan portfolio yield.

The weighted average rate paid on total interest-bearing liabilities decreased 28 basis points from the prior year quarter to 1.66% for the current quarter and the average balance of interest-bearing liabilities increased $55.5 million between the two periods. The increase in the average balance of interest-bearing liabilities was in lower rate deposit products while the average balance of certificates of deposit decreased between the two periods.

Provision for Credit Losses
The Bank did not record a provision for credit losses during the current quarter, compared to $1.5 million for the prior year quarter.  The decrease in the provision for credit losses between periods was a result of the improvement in the performance of our loan portfolio, as evidenced by the decline in net charge-offs and loans 90 or more days delinquent or in foreclosure.  Net charge-offs during the current quarter were $405 thousand compared to $4.5 million during the prior year quarterOf the $4.5 million of net charge-offs during the prior year quarter, $3.5 million was related to the implementation of a loan charge-off policy during January 2012.  OCC Call Report requirements do not permit the use of SVAs, which the Bank was previously utilizing for potential loan losses, as permitted by the Bank’s previous regulator.  Loans 90 or more days delinquent or in foreclosure decreased $7.1 million, or 28.1%, from $25.3 million at March 31, 2012 to $18.2 million at March 31, 2013.

Other Income
The following table presents the components of other income for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

Retail fees and charges

$

3,521 

 

$

3,854 

 

$

(333)

 

(8.6)

%

Insurance commissions

 

979 

 

 

774 

 

 

205 

 

26.5 

 

Loan fees

 

418 

 

 

560 

 

 

(142)

 

(25.4)

 

BOLI

 

361 

 

 

387 

 

 

(26)

 

(6.7)

 

Other income, net

 

665 

 

 

597 

 

 

68 

 

11.4 

 

Total other income

$

5,944 

 

$

6,172 

 

$

(228)

 

(3.7)

%

 

The decrease in retail fees and charges was due primarily to a decrease in debit card income and service charges.  The increase in insurance commissions was due largely to an increase in annual commissions received in the current quarter from certain insurance providers as a result of favorable claims experience during the prior year.

 

64

 


 

Other Expense
The following table presents the components of other expense for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

$

12,155 

 

$

10,586 

 

$

1,569 

 

14.8 

%

Occupancy

 

2,391 

 

 

2,091 

 

 

300 

 

14.3 

 

Information technology and communications

 

2,232 

 

 

1,834 

 

 

398 

 

21.7 

 

Regulatory and outside services

 

1,290 

 

 

1,113 

 

 

177 

 

15.9 

 

Deposit and loan transaction costs

 

1,384 

 

 

1,245 

 

 

139 

 

11.2 

 

Federal insurance premium

 

1,116 

 

 

1,084 

 

 

32 

 

3.0 

 

Advertising and promotional

 

1,004 

 

 

841 

 

 

163 

 

19.4 

 

Other expenses, net

 

1,645 

 

 

3,175 

 

 

(1,530)

 

(48.2)

 

Total other expenses

$

23,217 

 

$

21,969 

 

$

1,248 

 

5.7 

%

 

The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated ESOP shares related to the $0.52 True Blue® dividend paid in December 2012 and compensation expense associated with stock options and restricted stock grants in fiscal year 2012.    The increase in occupancy expense was due largely to an increase in depreciation expense associated with the remodel of our home office.  The increase in information technology and communications expense was primarily related to maintenance and licensing expenses.  The decrease in other expenses, net, was due primarily to a decrease in OREO operations expense, a recovery of valuation allowance expense on the mortgage-servicing rights asset compared to an impairment expense in the prior year quarter, and a decrease in office supplies and related expenses.

Income Tax Expense
Income tax expense was $9.3 million for the current quarter compared to $10.9 million for the prior year quarter.  The decrease in expense between periods was due primarily to a decrease in pretax income.  The effective tax rate for the current quarter was 34.5% compared to 36.0% for the prior year quarter. 

 

 

65

 


 

Average Balance Sheet 

As mentioned above, average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown.  Average outstanding balances are derived from average daily balances.  The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31, 2013

 

March 31, 2012

 

Average

 

Interest 

 

 

 

Average

 

Interest 

 

 

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

Assets:

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable(1)

$

5,683,867 

 

$

56,936 

 

4.01 

%

 

$

5,236,465 

 

$

59,785 

 

4.57 

%

MBS(2)

 

2,311,938 

 

 

14,446 

 

2.50 

 

 

 

2,450,532 

 

 

18,169 

 

2.97 

 

Investment securities(2)(3)

 

818,147 

 

 

2,457 

 

1.20 

 

 

 

1,257,852 

 

 

4,115 

 

1.31 

 

Capital stock of FHLB

 

130,716 

 

 

1,105 

 

3.43 

 

 

 

129,515 

 

 

1,111 

 

3.45 

 

Cash and cash equivalents

 

62,420 

 

 

36 

 

0.23 

 

 

 

152,735 

 

 

94 

 

0.25 

 

Total interest-earning assets(1)(2)

 

9,007,088 

 

 

74,980 

 

3.33 

 

 

 

9,227,099 

 

 

83,274 

 

3.61 

 

Other noninterest-earning assets

 

238,232 

 

 

 

 

 

 

 

 

238,195 

 

 

 

 

 

 

Total assets

$

9,245,320 

 

 

 

 

 

 

 

$

9,465,294 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

$

637,161 

 

$

61 

 

0.04 

%

 

$

561,799 

 

$

109 

 

0.08 

%

Savings

 

272,418 

 

 

62 

 

0.09 

 

 

 

256,970 

 

 

86 

 

0.13 

 

Money market

 

1,146,185 

 

 

609 

 

0.22 

 

 

 

1,096,620 

 

 

907 

 

0.33 

 

Certificates

 

2,541,835 

 

 

8,612 

 

1.37 

 

 

 

2,624,122 

 

 

10,733 

 

1.64 

 

Total deposits

 

4,597,599 

 

 

9,344 

 

0.82 

 

 

 

4,539,511 

 

 

11,835 

 

1.05 

 

FHLB advances(4)

 

2,533,961 

 

 

17,909 

 

2.87 

 

 

 

2,526,848 

 

 

20,443 

 

3.25 

 

Repurchase agreements

 

355,278 

 

 

3,407 

 

3.84 

 

 

 

365,000 

 

 

3,530 

 

3.83 

 

Total borrowings

 

2,889,239 

 

 

21,316 

 

2.99 

 

 

 

2,891,848 

 

 

23,973 

 

3.32 

 

Total interest-bearing liabilities

 

7,486,838 

 

 

30,660 

 

1.66 

 

 

 

7,431,359 

 

 

35,808 

 

1.94 

 

Other noninterest-bearing liabilities

 

99,798 

 

 

 

 

 

 

 

 

98,696 

 

 

 

 

 

 

Stockholders’ equity

 

1,658,684 

 

 

 

 

 

 

 

 

1,935,239 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

$

9,245,320 

 

 

 

 

 

 

 

$

9,465,294 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Continued)

 

 

66

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31, 2013

 

March 31, 2012

 

Average

 

Interest 

 

 

 

Average

 

Interest 

 

 

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income(5)

 

 

 

$

44,320 

 

 

 

 

 

 

 

$

47,466 

 

 

 

Net interest rate spread(6)

 

 

 

 

 

 

1.67 

%

 

 

 

 

 

 

 

1.67 

%

Net interest-earning assets

$

1,520,250 

 

 

 

 

 

 

 

$

1,795,740 

 

 

 

 

 

 

Net interest margin(7)

 

 

 

 

 

 

1.97 

 

 

 

 

 

 

 

 

2.06 

 

Ratio of interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to interest-bearing liabilities

 

 

 

 

 

 

1.20 

 

 

 

 

 

 

 

 

1.24 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected performance ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

 

 

 

 

 

0.77 

%

 

 

 

 

 

 

 

0.82 

%

Return on average equity (annualized)

 

 

 

 

 

 

4.27 

 

 

 

 

 

 

 

 

3.99 

 

Average equity to average assets

 

 

 

 

 

 

17.94 

 

 

 

 

 

 

 

 

20.45 

 

Operating expense ratio (annualized)

 

 

 

 

 

 

1.00 

 

 

 

 

 

 

 

 

0.93 

 

Efficiency ratio

 

 

 

 

 

 

46.19 

 

 

 

 

 

 

 

 

40.96 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Concluded)

 

 

(1)

Calculated net of unearned loan fees and deferred costs, and undisbursed loan funds.  Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.  Balances include LHFS.

(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 $42.9 million and $56.1 million for the three month periods ended March 31, 2013 and 2012, respectively.

(4)

The balance and rate of FHLB advances are stated net of deferred gains and deferred prepayment penalties.

(5)

Net interest income represents the difference between interest income earned on interest-earning assets, such as mortgage loans, investment securities, and MBS, and interest paid on interest-bearing liabilities, such as deposits, FHLB advances, and other borrowings.  Net interest income depends on the balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.

(6)

Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. 

(7)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

 

67

 


 

Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2013 to the three months ended March 31, 2012.  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 Three Months Ended March 31,

 

2013 vs. 2012

 

Increase (Decrease) Due to

 

Volume

 

Rate

 

Total

 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

Loans receivable

$

4,764 

 

$

(7,613)

 

$

(2,849)

MBS

 

(985)

 

 

(2,738)

 

 

(3,723)

Investment securities

 

(1,343)

 

 

(315)

 

 

(1,658)

Capital stock of FHLB

 

 

 

(7)

 

 

(6)

Cash equivalents

 

(53)

 

 

(5)

 

 

(58)

Total interest-earning assets

 

2,384 

 

 

(10,678)

 

 

(8,294)

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

Checking

 

13 

 

 

(62)

 

 

(49)

Savings

 

 

 

(29)

 

 

(24)

Money market

 

38 

 

 

(336)

 

 

(298)

Certificates of deposit

 

(343)

 

 

(1,777)

 

 

(2,120)

FHLB advances

 

--

 

 

(2,534)

 

 

(2,534)

Repurchase agreements

 

(128)

 

 

 

 

(123)

Total interest-bearing liabilities

 

(415)

 

 

(4,733)

 

 

(5,148)

 

 

 

 

 

 

 

 

 

Net change in net interest income

$

2,799 

 

$

(5,945)

 

$

(3,146)

 

 

 

 

 

 

68

 


 

 

 

Comparison of Operating Results for the Quarters Ended March 31, 2013 and December 31, 2012

Net income increased $152 thousand, or 0.9%, from $17.6 million for the quarter ended December 31, 2012 to $17.7 million for the quarter ended March 31, 2013.

Interest and Dividend Income
The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

December 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

56,936 

 

$

58,467 

 

$

(1,531)

 

(2.6)

%

MBS

 

14,446 

 

 

15,183 

 

 

(737)

 

(4.9)

 

Investment securities

 

2,457 

 

 

2,865 

 

 

(408)

 

(14.2)

 

Capital stock of FHLB

 

1,105 

 

 

1,128 

 

 

(23)

 

(2.0)

 

Cash and cash equivalents

 

36 

 

 

33 

 

 

 

9.1 

 

Total interest and dividend income

$

74,980 

 

$

77,676 

 

$

(2,696)

 

(3.5)

%

 

The decrease in interest income on loans receivable was due to a 15 basis point decrease in the average yield of the portfolio to 4.01% for the current quarter, partially offset by a $59.2 million increase in the average balance of the portfolio.  The decrease in the weighted average yield was due to the continued downward repricing of the existing portfolio due to endorsements and refinances, as well as to the origination and purchase of loans at rates less than the weighted average rate of the existing portfolio.  Also contributing to the decrease in the weighted average yield was a decrease in deferred fee amortization due primarily to a decrease in loan endorsement and refinance activity between periods.

The decrease in interest income on MBS was due primarily to a 10 basis point decrease in the average yield of the portfolio, from 2.60% for the prior quarter to 2.50% for the current quarter, and partially due to a $24.8 million decrease in the average balance of the portfolio.  The decrease in the average yield of the portfolio was due primarily to purchases of MBS during the quarter with yields less than the average yield on the existing portfolio, and the decrease in the average balance was due primarily to the timing of when purchases were made.

The decrease in interest income on investment securities was due primarily to a $113.1 million decrease in the average balance of the portfolio as a result of cash flows from calls and maturities not being replaced in their entirety.

Interest Expense
The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

December 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

$

17,909 

 

$

18,628 

 

$

(719)

 

(3.9)

%

Deposits

 

9,344 

 

 

9,849 

 

 

(505)

 

(5.1)

 

Repurchase agreements

 

3,407 

 

 

3,569 

 

 

(162)

 

(4.5)

 

Total interest expense

$

30,660 

 

$

32,046 

 

$

(1,386)

 

(4.3)

%

 

The decrease in interest expense on FHLB advances and deposits was due primarily to a decrease in the weighted average rate paid on the portfolios, as well as to fewer days during the current quarter compared to the prior quarter.  The weighted average rate paid on FHLB advances decreased five basis points, from 2.92% for the prior quarter to 2.87% for the current quarter.  The decrease in the weighted average rate paid on FHLB advances was due primarily to the current quarter including the full impact of the renewal of a

69

 


 

$100.0 million advance during the prior quarter, which had an effective rate of 4.85%, to a new advance with a term of four years and a fixed contractual rate of 0.78%

The decrease in the weighted average rate paid on the deposit portfolio was due primarily to a decrease in the weighted average rate paid on the certificate of deposit portfolio.  The weighted average rate paid on the certificate of deposit portfolio decreased four basis points, from 1.41% for the prior quarter to 1.37% for the current quarter.

Net Interest Margin
The net interest margin decreased four basis points, from 2.01% for the prior quarter, to 1.97% for the current quarter primarily as a result of continued downward pressure on loan and security yields.  Decreases in the cost of funds tempered the decrease in the net interest margin, but were not enough to fully offset the impact of decreasing asset yields. 

The weighted average yield on total interest-earning assets decreased nine basis points from the prior quarter to 3.33% for the current quarter and the average balance of interest-earning assets decreased $73.3 million between the two periods.  The decrease in the weighted average balance between the two periods was primarily in lower yielding assets; specifically the investment securities portfolio.  The average balance of the loan portfolio increased between the two periods; however, not enough to overcome the impact of the 15 basis point reduction in the loan portfolio yield between the two periods. 

The weighted average rate paid on total interest-bearing liabilities decreased five basis points from the prior quarter to 1.66% for the current quarter and the average balance of interest-bearing liabilities increased $70.0 million between the two periods. The increase in the average balance of interest-bearing liabilities was in lower rate deposit products while the average balance of certificates of deposit decreased between the two periods. 

Provision for Credit Losses
The Bank did not record a provision for credit losses during the current quarter, compared to $233 thousand recorded during the prior quarter.  The overall performance of our loan portfolio continued to improve during the current quarter as evidenced by the decline in net charge-offs and loans 90 or more days delinquent or in foreclosure.  Net charge-offs during the current quarter were $405 thousand compared to $856 thousand in the prior quarter.  Included in the current quarter and prior quarter were net charge-off amounts of $3 thousand and $369 thousand, respectively, related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that must be, in accordance with OCC regulations, evaluated for collateral value loss, even if the loans are current.  Loans 90 or more days delinquent or in foreclosure decreased $865 thousand, or 4.5%, from $19.0 million at December 31, 2012 to $18.2 million at March 31, 2013.     

Other Income 

The following table presents the components of other income for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

December 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

Retail fees and charges

$

3,521 

 

$

3,992 

 

$

(471)

 

(11.8)

%

Insurance commissions

 

979 

 

 

571 

 

 

408 

 

71.5 

 

Loan fees

 

418 

 

 

467 

 

 

(49)

 

(10.5)

 

BOLI

 

361 

 

 

382 

 

 

(21)

 

(5.5)

 

Other income, net

 

665 

 

 

356 

 

 

309 

 

86.8 

 

Total other income

$

5,944 

 

$

5,768 

 

$

176 

 

3.1 

%

 

The decrease in retail fees and charges was due primarily to a decrease in debit card income, due in part to seasonality, and service charges.  The increase in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers as a result of favorable claims experience during the prior year. 

 

70

 


 

Other Expense
The following table presents the components of other expense for the time periods presented, along with the change in dollars and percent.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

December 31,

 

Change Expressed in:

 

2013

 

2012

 

Dollars

 

Percent

 

(Dollars in thousands)

 

 

 

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

$

12,155 

 

$

12,181 

 

$

(26)

 

(0.2)

%

Occupancy

 

2,391 

 

 

2,318 

 

 

73 

 

3.1 

 

Information technology and communications

 

2,232 

 

 

2,198 

 

 

34 

 

1.5 

 

Regulatory and outside services

 

1,290 

 

 

1,765 

 

 

(475)

 

(26.9)

 

Deposit and loan transaction costs

 

1,384 

 

 

1,526 

 

 

(142)

 

(9.3)

 

Federal insurance premium

 

1,116 

 

 

1,114 

 

 

 

0.2 

 

Advertising and promotional

 

1,004 

 

 

1,032 

 

 

(28)

 

(2.7)

 

Other expenses, net

 

1,645 

 

 

2,607 

 

 

(962)

 

(36.9)

 

Total other expenses

$

23,217 

 

$

24,741 

 

$

(1,524)

 

(6.2)

%

 

The decrease in regulatory and outside services expense was due primarily to the timing of fees paid for external audit and tax services. The decrease in other expenses, net was due primarily to a $638 thousand decrease in OREO operations expense, from $670 thousand for the prior quarter, to $32 thousand for the current quarter, along with a decrease in expenses related to our low-income housing partnerships. 

 

Income Tax Expense
Income tax expense was $9.3 million for the current quarter compared to $8.9 million for the prior quarter.  The effective income tax rate for the current quarter was 34.5% compared to 33.5% for the prior quarter.  The difference in the effective income tax rate between quarters was due primarily to items impacting the prior quarter, largely the difference between estimated income tax expense and actual income tax expense per the Company’s tax returns filed during the prior quarter.  

71

 


 

Average Balance Sheet    

As mentioned above, average yields are derived by dividing annualized income by the average balance of the related assets and average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown.  Average outstanding balances are derived from average daily balances.  The yields and rates include amortization of fees, costs, premiums and discounts which are considered adjustments to yields/rates. Yields on tax-exempt securities were not calculated on a fully taxable equivalent basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31, 2013

 

December 31, 2012

 

Average

 

Interest 

 

 

 

Average

 

Interest 

 

 

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

Assets:

 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable(1)

$

5,683,867 

 

$

56,936 

 

4.01 

%

 

$

5,624,629 

 

$

58,467 

 

4.16 

%

MBS(2)

 

2,311,938 

 

 

14,446 

 

2.50 

 

 

 

2,336,783 

 

 

15,183 

 

2.60 

 

Investment securities(2)(3)

 

818,147 

 

 

2,457 

 

1.20 

 

 

 

931,252 

 

 

2,865 

 

1.23 

 

Capital stock of FHLB

 

130,716 

 

 

1,105 

 

3.43 

 

 

 

132,587 

 

 

1,128 

 

3.38 

 

Cash and cash equivalents

 

62,420 

 

 

36 

 

0.23 

 

 

 

55,178 

 

 

33 

 

0.24 

 

Total interest-earning assets(1)(2)

 

9,007,088 

 

 

74,980 

 

3.33 

 

 

 

9,080,429 

 

 

77,676 

 

3.42 

 

Other noninterest-earning assets

 

238,232 

 

 

 

 

 

 

 

 

238,069 

 

 

 

 

 

 

Total assets

$

9,245,320 

 

 

 

 

 

 

 

$

9,318,498 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

$

637,161 

 

$

61 

 

0.04 

%

 

$

598,634 

 

$

58 

 

0.04 

%

Savings

 

272,418 

 

 

62 

 

0.09 

 

 

 

262,492 

 

 

71 

 

0.11 

 

Money market

 

1,146,185 

 

 

609 

 

0.22 

 

 

 

1,117,159 

 

 

657 

 

0.23 

 

Certificates

 

2,541,835 

 

 

8,612 

 

1.37 

 

 

 

2,545,232 

 

 

9,063 

 

1.41 

 

Total deposits

 

4,597,599 

 

 

9,344 

 

0.82 

 

 

 

4,523,517 

 

 

9,849 

 

0.86 

 

FHLB advances(4)

 

2,533,961 

 

 

17,909 

 

2.87 

 

 

 

2,528,290 

 

 

18,628 

 

2.92 

 

Repurchase agreements

 

355,278 

 

 

3,407 

 

3.84 

 

 

 

365,000 

 

 

3,569 

 

3.83 

 

Total borrowings

 

2,889,239 

 

 

21,316 

 

2.99 

 

 

 

2,893,290 

 

 

22,197 

 

3.04 

 

Total interest-bearing liabilities

 

7,486,838 

 

 

30,660 

 

1.66 

 

 

 

7,416,807 

 

 

32,046 

 

1.71 

 

Other noninterest-bearing liabilities

 

99,798 

 

 

 

 

 

 

 

 

124,176 

 

 

 

 

 

 

Stockholders’ equity

 

1,658,684 

 

 

 

 

 

 

 

 

1,777,515 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

$

9,245,320 

 

 

 

 

 

 

 

$

9,318,498 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Continued)

 

72

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

March 31, 2013

 

December 31, 2012

 

Average

 

Interest 

 

 

 

Average

 

Interest 

 

 

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income(5)

 

 

 

$

44,320 

 

 

 

 

 

 

 

$

45,630 

 

 

 

Net interest rate spread(6)

 

 

 

 

 

 

1.67 

%

 

 

 

 

 

 

 

1.71 

%

Net interest-earning assets

$

1,520,250 

 

 

 

 

 

 

 

$

1,663,622 

 

 

 

 

 

 

Net interest margin(7)

 

 

 

 

 

 

1.97 

 

 

 

 

 

 

 

 

2.01 

 

Ratio of interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to interest-bearing liabilities

 

 

 

 

 

 

1.20 

 

 

 

 

 

 

 

 

1.22 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected performance ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

 

 

 

 

 

0.77 

%

 

 

 

 

 

 

 

0.75 

%

Return on average equity (annualized)

 

 

 

 

 

 

4.27 

 

 

 

 

 

 

 

 

3.95 

 

Average equity to average assets

 

 

 

 

 

 

17.94 

 

 

 

 

 

 

 

 

19.08 

 

Operating expense ratio (annualized)

 

 

 

 

 

 

1.00 

 

 

 

 

 

 

 

 

1.06 

 

Efficiency ratio

 

 

 

 

 

 

46.19 

 

 

 

 

 

 

 

 

48.14 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Concluded)

 

(1)

Calculated net of unearned loan fees and deferred costs, and undisbursed loan funds.  Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent.  Balances include LHFS.

(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 $42.9 million and $45.0 million for the three month periods ended March 31, 2013 and December 31, 2012, respectively.

(4)

The balance and rate of FHLB advances are stated net of deferred gains and deferred prepayment penalties.

(5)

Net interest income represents the difference between interest income earned on interest-earning assets, such as mortgage loans, investment securities, and MBS, and interest paid on interest-bearing liabilities, such as deposits, FHLB advances, and other borrowings.  Net interest income depends on the balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them.

(6)

Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. 

(7)

Net interest margin represents net interest income as a percentage of average interest-earning assets. 

73

 


 

Rate/Volume Analysis

The table below presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities, comparing the three months ended March 31, 2013 to the three months ended December 31, 2012.  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 quarter’s average rate and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous quarter.  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 Three Months Ended

 

March 31, 2013 vs. December 31, 2012

 

Increase (Decrease) Due to

 

Volume

 

Rate

 

Total

 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

Loans receivable

$

576 

 

$

(2,107)

 

$

(1,531)

MBS

 

(160)

 

 

(577)

 

 

(737)

Investment securities

 

(341)

 

 

(67)

 

 

(408)

Capital stock of FHLB

 

(27)

 

 

 

 

(23)

Cash and cash equivalents

 

 

 

(1)

 

 

Total interest-earning assets

 

52 

 

 

(2,748)

 

 

(2,696)

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

Checking

 

 

 

(1)

 

 

Savings

 

 

 

(12)

 

 

(10)

Money market

 

13 

 

 

(60)

 

 

(47)

Certificates of deposit

 

(21)

 

 

(429)

 

 

(450)

FHLB advances

 

(2)

 

 

(717)

 

 

(719)

Repurchase agreements

 

(164)

 

 

 

 

(162)

Total interest-bearing liabilities

 

(169)

 

 

(1,217)

 

 

(1,386)

 

 

 

 

 

 

 

 

 

Net change in net interest income

$

221 

 

$

(1,531)

 

$

(1,310)

 

 

74

 


 

Liquidity and Capital Resources

Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to pay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments.  Liquidity management is both a daily and long-term function of our business management.  The Company’s most available liquid assets are represented by cash and cash equivalents, AFS MBS and investment securities, and short-term investment securities.  The Bank’s primary sources of funds are deposits, FHLB advances, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations.  The Bank’s borrowings primarily have been used to invest in U.S. GSE debentures and MBS in an effort to manage the Bank’s interest rate risk with the intent to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions.  In addition, the Bank’s focus on managing risk has provided additional liquidity capacity by remaining below FHLB borrowing limits and by maintaining the balance of MBS and investment securities available as collateral for borrowings.

We generally intend to maintain cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days.  Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management.  The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify periods of, and to quantify, liquidity risk.  In the event short-term liquidity needs exceed available cash, the Bank has access to lines of credit at the FHLB and the Federal Reserve Bank.  The FHLB line of credit, when combined with FHLB advances, may generally not exceed 40% of total assets.  The outstanding amount of FHLB advances was $2.65 billion at March 31, 2013, of which $575.0 million is scheduled to mature in the next 12 months.    Maturing advances will likely be replaced with borrowings with terms between 36 and 60 months.  At March 31, 2013, the Bank’s ratio of the par value of the FHLB advances to total assets, as reported to the OCC, was 28%.    The advances are secured by a blanket pledge of our loan portfolio, as collateral, supported by quarterly reporting to the FHLB.  Our excess capacity at the FHLB as of March 31, 2013 was $1.32 billion.    It is possible that increases in our borrowings or decreases in our loan portfolio or changes in FHLB lending guidelines could require the Bank to pledge securities as collateral on the FHLB advances.  The Federal Reserve Bank line of credit is based upon the fair values of the securities pledged as collateral and certain other characteristics of those securities, and is used only when other sources of short-term liquidity are unavailable.  At March 31, 2013, the Bank had $1.87 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs.  This collateral amount is comprised of AFS and HTM securities with individual fair values greater than $10.0 million, which is then reduced by a collateralization ratio of 10% to account for potential market value fluctuations.  Borrowings on the lines of credit are outstanding until replaced by cash flows from long-term sources of liquidity, and are generally outstanding no longer than 30 days.   

If management observes a trend in the amount and frequency of lines of credit utilization, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide permanent fixed-rate funding.  The maturity of these borrowings is generally structured in such a way as to stagger maturities in order to reduce the risk of a highly negative cash flow position at maturity.  Additionally, the Bank could utilize the repayment and maturity of outstanding loans, MBS and other investments for liquidity needs rather than reinvesting such funds into the related portfolios.   

While scheduled payments from the amortization of loans and MBS and payments on short-term investments are relatively predictable sources of funds, deposit flows, prepayments on loans and MBS, and calls of investment securities are greatly influenced by general interest rates, economic conditions and competition, and are less predictable sources of funds.  To the extent possible, the Bank manages the cash flows of its loan and deposit portfolios by the rates it offers customers

At March 31, 2013, cash and cash equivalents totaled $48.6 million, a decrease of $93.1 million from September 30, 2012Cash and cash equivalents were used, in part, to fund loan activity and repay $50 million of repurchase agreements that matured during the current quarter.

During the six month period ended March 31, 2013, loan originations and purchases, net of principal repayments and related loan activity, resulted in a cash outflow of $111.7 million, compared to a cash outflow of $81.8 million during the same period in the prior fiscal year.  See additional discussion regarding loan activity in “Financial Condition – Loans Receivable.”

During the six month period ended March 31, 2013, proceeds from called or matured investment securities were $498.3 million and principal payments on MBS were $382.1 millionOf the $498.3 million of called and matured investment securities, $60.0  million were securities at the holding company level.  During the six month period ended March 31, 2013, the Company purchased $379.4 million of investment securities and $420.3 million of MBS.    Cash flows from the securities portfolio which were not reinvested were used, in part, to fund loan activity, pay dividends to stockholders, repurchase stock, and repay $50 million of repurchase agreements that matured during the current quarter. 

 

 

75

 


 

The following table presents the contractual maturity of our loan, MBS, and investment securities portfolios at March 31, 2013.  Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due.  The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)

 

MBS

 

Investment Securities

 

Total

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

 

 

Average

 

Amount

 

  Rate  

 

Amount

 

  Rate  

 

Amount

 

  Rate  

 

Amount

 

  Rate  

 

(Dollars in thousands)

Amounts due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

$

36,241 

 

4.44 

%

 

$

--

 

-- 

%

 

$

6,143 

 

2.85 

%

 

$

42,384 

 

4.21 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Over one to two

 

38,726 

 

3.78 

 

 

 

--

 

-- 

 

 

 

7,126 

 

3.17 

 

 

 

45,852 

 

3.69 

 

Over two to three

 

12,325 

 

5.02 

 

 

 

--

 

-- 

 

 

 

120,980 

 

0.97 

 

 

 

133,305 

 

1.34 

 

Over three to five

 

63,775 

 

5.07 

 

 

 

6,936 

 

5.24 

 

 

 

568,987 

 

1.19 

 

 

 

639,698 

 

1.62 

 

Over five to ten

 

313,193 

 

4.48 

 

 

 

616,929 

 

3.30 

 

 

 

130,931 

 

1.18 

 

 

 

1,061,053 

 

3.39 

 

Over 10 to 15

 

1,493,464 

 

3.64 

 

 

 

987,501 

 

2.63 

 

 

 

1,697 

 

5.30 

 

 

 

2,482,662 

 

3.24 

 

After 15 years

 

3,805,331 

 

3.99 

 

 

 

746,729 

 

2.86 

 

 

 

5,263 

 

3.08 

 

 

 

4,557,323 

 

3.80 

 

Total due after one year

 

5,726,814 

 

3.94 

 

 

 

2,358,095 

 

2.88 

 

 

 

834,984 

 

1.19 

 

 

 

8,919,893 

 

3.40 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,763,055 

 

3.94 

%

 

$

2,358,095 

 

2.88 

%

 

$

841,127 

 

1.21 

%

 

$

8,962,277 

 

3.41 

%

 

(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 term to complete construction.  The maturity date for home equity loans assumes the customer always makes the required minimum payment. 

 

The Bank has access to and utilizes other sources for liquidity purposes, such as secondary market repurchase agreements, brokered deposits, and public unit deposits.  At March 31, 2013, the Bank had repurchase agreements of $315.0 million, or approximately 3% of total assets, $95.0 million of which were scheduled to mature in the next 12 months.  The Bank may enter into additional repurchase agreements as management deems appropriate, not to exceed 15% of total assets.  The Bank has pledged securities with an estimated fair value of $372.5 million as collateral for repurchase agreements at March 31, 2013.  The securities pledged for the repurchase agreements will be delivered back to the Bank when the repurchase agreements mature.

The Bank’s internal policy limits total borrowings to 55% of total assets.  At March 31, 2013, the Bank had total borrowings, at par, of $2.97 billion, or approximately 32% of total assets.

As of March 31, 2013, the Bank’s policy allows for combined brokered and public unit deposits up to 15% of total deposits.  At March 31, 2013, the Bank had brokered and public unit deposits totaling $280.2 million, or approximately 6% of total deposits.  Management continuously monitors the wholesale deposit market for opportunities to obtain brokered and public unit deposits at attractive rates.  The Bank has pledged securities with an estimated fair value of $222.4 million as collateral for public unit deposits.  The securities pledged as collateral for public unit deposits are held under joint custody receipt by the FHLB and generally will be released upon deposit maturity. 

 

76

 


 

At March 31, 2013,  $1.15 billion of the Bank’s $2.57 billion of certificates of deposit were scheduled to mature within one year. Included in the $1.15 billion were $150.3 million of public unit and brokered deposits Based on our deposit retention experience and our current pricing strategy, we anticipate the majority of the maturing retail certificates of deposit will renew or transfer to other deposit products at the prevailing rate, although no assurance can be given in this regard. 

Limitations on Dividends and Other Capital Distributions   

Although savings and loan holding companies are not currently subject to regulatory capital requirements or specific restrictions on the payment of dividends or other capital distributions, the OCC does prescribe such restrictions on subsidiary savings associations. The OCC regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.

Generally, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings.  It is generally required that the Bank remain well capitalized before and after the proposed distribution.  However, an institution deemed to be in need of more than normal supervision by the OCC may have its capital distribution authority restricted.  A savings institution, such as the Bank, that is a subsidiary of a savings and loan holding company and that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution.  The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns.  Savings institutions that desire to make a larger capital distribution, or are under special restrictions, or are not, or would not be, well capitalized following a proposed capital distribution, however, must obtain regulatory approval prior to making such distribution.

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company.  So long as the Bank continues to remain “well capitalized” after each capital distribution and operates in a safe and sound manner, it is management’s belief that the OCC and FRB will continue to allow the Bank to distribute its net income to the Company, although no assurance can be given in this regard.  

In connection with the corporate reorganization, a “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to Capitol Federal Savings Bank MHC’s ownership interest in the retained earnings of Capitol Federal Financial as of June 30, 2010.  Under applicable federal banking regulations, neither the Company nor the Bank is permitted to pay dividends on its capital stock to its stockholders if stockholders’ equity would be reduced below the amount of the liquidation account at that time.

The Company paid cash dividends of $125.3 million during the six month period ended March 31, 2013The $125.3 million of dividends paid during the current six month period consisted of a $0.52 per share, or $76.5 million, True Blue® dividend, an $0.18 per share, or $26.6 million, special year-end dividend related to fiscal year 2012 earnings, per the Company’s dividend policy, and two regular quarterly dividends of $0.075 per share each totaling $0.15 per share, or $22.2 millionOn April 17, 2013, the Company declared a regular quarterly cash dividend of $0.075 per share, or approximately $10.8 million, payable on May 17, 2013 to stockholders of record as of the close of business on May 3, 2013.  Dividend payments depend upon a number of factors including the Company’s financial condition and results of operations, the Bank’s regulatory capital requirements, regulatory limitations on the Bank’s ability to make capital distributions to the Company, and the amount of cash at the holding companyAt March 31, 2013, Capitol Federal Financial, Inc., at the holding company level, had $206.3 million on deposit at the Bank.    

In December 2011, the Company announced that its Board of Directors approved the repurchase of up to $193.0 million of the Company’s common stock.  The Company began repurchasing common stock during the second quarter of fiscal year 2012 and completed the plan during the current quarter having repurchased 16,360,654 shares at an average price of $11.80 per share.  In November 2012, the Company announced its Board of Directors approved a new $175.0 million stock repurchase program to commence upon the completion of the aforementioned $193.0 million repurchase plan.  As of March 31, 2013, 2,359,430 shares had been repurchased under the new plan at an average price of $11.86 per share, or $28.0 million.  The new plan has no expiration date.  Subsequent to March 31, 2013 and through April 12, 2013, the Company repurchased 343,536 shares at an average price of $11.91 per share. 

77

 


 

Off Balance Sheet Arrangements, Commitments and Contractual Obligations

The Company, in the normal course of business, makes commitments to buy or sell assets or to incur or fund liabilities.  Commitments may include, but are not limited to:

·

the origination, purchase, or sale of loans;

·

the purchase or sale of investment securities and MBS;

·

extensions of credit on home equity loans, construction loans, and commercial loans;

·

terms and conditions of operating leases; and

·

funding withdrawals of deposit accounts at maturity.

 

The following table summarizes our contractual obligations and other material commitments as of March 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity Range

 

 

 

Less than

 

1 to 3

 

3 to 5

 

More than

 

Total

 

1 year

 

years

 

years

 

5 years

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

$

11,953 

 

 

$

1,212 

 

 

$

2,083 

 

 

$

1,834 

 

 

$

6,824 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

$

2,567,596 

 

 

$

1,151,220 

 

 

$

1,083,895 

 

 

$

330,649 

 

 

$

1,832 

 

Weighted average rate

 

1.35 

%

 

 

1.02 

%

 

 

1.63 

%

 

 

1.58 

%

 

 

2.60 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB advances

$

2,650,000 

 

 

$

575,000 

 

 

$

1,075,000 

 

 

$

800,000 

 

 

$

200,000 

 

Weighted average rate

 

2.49 

%

 

 

3.51 

%

 

 

2.02 

%

 

 

2.49 

%

 

 

2.06 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

$

315,000 

 

 

$

95,000 

 

 

$

120,000 

 

 

$

100,000 

 

 

$

--

 

Weighted average rate

 

3.88 

%

 

 

3.99 

%

 

 

4.24 

%

 

 

3.35 

%

 

 

--

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to originate/refinance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and purchase/participate in loans

$

247,235 

 

 

$

247,235 

 

 

$

--

 

 

$

--

 

 

$

--

 

Weighted average rate

 

3.38 

%

 

 

3.38 

%

 

 

--

%

 

 

--

%

 

 

--

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to fund unused home

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equity lines of credit and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

unadvanced commercial loans

$

266,328 

 

 

$

266,328 

 

 

$

--

 

 

$

--

 

 

$

--

 

Weighted average rate

 

4.54 

%

 

 

4.54 

%

 

 

--

%

 

 

--

%

 

 

--

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unadvanced portion of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

construction loans

$

32,619 

 

 

$

32,619 

 

 

$

--

 

 

$

--

 

 

$

--

 

Weighted average rate

 

3.60 

%

 

 

3.60 

%

 

 

--

%

 

 

--

%

 

 

--

%

 

A percentage of commitments to originate mortgage loans are expected to expire unfunded, so the amounts reflected in the table above are not necessarily indicative of future liquidity requirements.  Additionally, the Bank is not obligated to honor commitments to fund unused home equity lines of credit if a customer is delinquent or otherwise in violation of the loan agreement

We anticipate we will continue to have sufficient funds, through repayments and maturities of loans and securities, deposits and borrowings, to meet our current commitments.  We had no material off-balance sheet arrangements as of March 31, 2013.

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 quarter ended March 31, 2013 or future periods.

78

 


 

Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well-capitalized” status for the Bank in accordance with regulatory standards.  As of March 31, 2013, the Bank exceeded all regulatory capital requirements.  The Company currently does not have any regulatory capital requirements.  The following table presents the Bank’s regulatory capital ratios at March 31, 2013 based upon regulatory guidelines. 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

Requirement For

 

 

Bank

 

“Well-Capitalized”

 

 

Ratios

 

Status

Tier 1 leverage ratio

 

14.5%

 

5.0%

Tier 1 risk-based capital

 

35.9%

 

6.0%

Total risk-based capital

 

36.1%

 

10.0%

 

 

A reconciliation of the Bank’s equity under GAAP to regulatory capital amounts as of March 31, 2013 is as follows (dollars in thousands): 

 

 

 

 

 

Total Bank equity as reported under GAAP

$

1,378,352 

Unrealized gains on AFS securities

 

(17,781)

Total Tier 1 capital

 

1,360,571 

ACL

 

10,072 

Total risk-based capital

$

1,370,643 

 

 

79

 


 

 

Item 3.   Quantitative and Qualitative Disclosure about Market Risk 

For a complete discussion of the Bank’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Bank’s portfolios, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management and Market Risk” in the Company’s Annual Report to Stockholders for the year ended September 30, 2012, attached as Exhibit 13 to the Company’s Annual Report on Form 10-K for the year ended September 30, 2012.  The analyses presented in the tables below reflect the level of market risk at the Bank and does not include the assets of the Company, at the holding company level, other than cash that was deposited at the Bank as of the dates reported, which is reflected in the Bank’s tables below.  The 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.  Risk associated with changes in interest rates on the earnings of the Bank and the market value of its financial assets and liabilities is known as interest rate risk.  Interest rate risk is our most significant market risk and our ability to adapt to changes in interest rates is known as interest rate risk management.

The general objective of our interest rate risk management program is to determine and manage an appropriate level of interest rate risk while maximizing net interest income in a manner consistent with our policy to reduce, to the extent practicable, the exposure of net interest income to changes in market interest rates.  The Asset and Liability Committee regularly reviews the interest rate risk exposure of the Bank by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity (“MVPE”) at various dates.  The MVPE is defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments.  The present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest rate environments providing potential changes in the MVPE under those alternative interest rate environments.  Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and with management strategies considered.  The MVPE and net interest income analyses are also conducted to estimate our sensitivity to rates for future time horizons based upon market conditions as of the date of the analysis.  In addition to the interest rate environments presented below, management also reviews the impact of non-parallel rate shock scenarios on a quarterly basis.  These scenarios consist of flattening and steepening the yield curve by changing short-term and long-term interest rates independent of each other, and simulating cash flows and valuations as a result of these hypothetical changes in interest rates.  This analysis helps management quantify the Bank’s exposure to changes in the shape of the yield curve.   

For each period presented in the following table, the estimated percentage change in the Bank’s net interest income based on the indicated instantaneous, parallel and permanent change in interest rates is presented.  The percentage change in each interest rate environment represents the difference between estimated net interest income in the 0 basis point interest rate environment (“base case”, assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates).  Estimations of net interest income used in preparing the table below are based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented.  The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments.  It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period.  These do not reflect the earnings expectations of management.

 

 

 

 

 

 

 

 

 

 

 

 

Change

 

Percentage Change in Net Interest Income    

(in Basis Points)

 

At

in Interest Rates(1) 

 

March 31, 2013

 

December 31, 2012

 

September 30, 2012

-100 bp

 

N/A

 

 

N/A

 

 

N/A

 

  000 bp

 

--

 

 

--

 

 

--

 

+100 bp  

 

(0.22)

%

 

2.61 

%

 

5.00 

%

+200 bp  

 

(2.61)

%

 

1.25 

%

 

3.79 

%

+300 bp  

 

(5.95)

%

 

(1.20)

%

 

1.54 

%

 

(1)

Assumes an instantaneous, permanent and parallel change in interest rates at all maturities.

 

The projected percentage change in net interest income was more adversely impacted by higher interest rates at March 31, 2013 than at both December 31, 2012 and September 30, 2012.  This was largely driven by a decrease in mortgage-related assets projected to reprice in the next 12 months at March 31, 2013, as compared to December 31, 2012 and September 30, 2012.  The decrease in

80

 


 

mortgage-related assets projected to reprice was due primarily to market interest rates, particularly mortgage interest rates, being higher at March 31, 2013 than at December 31, 2012 and September 30, 2012.  Since mortgage interest rates were higher, borrowers had less economic incentive to refinance or endorse their mortgage at March 31, 2013, as compared to the previous two quarters.  In addition, as the Bank received cash flows from these assets throughout the current quarter and as assets were refinanced, endorsed or purchased, the cash flows from these assets were generally priced at current market rates, which were generally less than the average rates of our existing portfolios.  As a result, cash flow projections on these assets lengthen, generally beyond the one year horizon.

 

As a result of the low level of interest rates at December 31, 2012 and September 30, 2012, compared to March 31, 2013, assets that were projected to reprice over the one year time horizon were greater than the liabilities expected to reprice.  As interest rates rise, these assets reprice to the higher interest rates faster than do liabilities, thus increasing net interest income projections compared to the base case.  However, the more interest rates rise, the less economic incentive and ability borrowers and agency debt issuers have to modify their cost of debt; thus, cash flows available to reprice are significantly reduced.  Consequently, the benefit of rising interest rates to net interest income diminishes as interest rates rise due to a reduction in projected asset cash flows.  At March 31, 2013, in all interest rate environments, cash flows related to assets diminished to such levels that the benefit of reinvesting those cash flows at higher interest rates was more than offset by the cash flows from liabilities repricing to a higher interest rate.  See the Gap analysis discussion below for additional information.

 

In addition to a lower level of assets repricing, there are more liabilities expected to reprice in the 12-month horizon at March 31, 2013, compared to the previous two quarters presented.  Higher levels of liabilities repricing negatively impacts the Bank in a rising interest rate environment compared to the base case interest rate environment due to the higher interest expense on costing liabilities.

 

The following table sets forth the estimated percentage change in the MVPE for each period presented based on the indicated instantaneous, parallel and permanent change in interest rates.  The percentage change in each interest rate environment represents the difference between the MVPE in the base case and the MVPE in each alternative interest rate environment.  The estimations of the MVPE used in preparing the table below are based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities do not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates are used in each alternative interest rate environment.  The estimated MVPE results from the valuation of cash flows from financial assets and liabilities over the anticipated lives of each for each interest rate environment.  The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay or reprice, as shown by the change in the MVPE for alternative interest rates.

 

 

 

 

 

 

 

 

 

 

 

Change

 

Percentage Change in MVPE 

(in Basis Points)

 

At

in Interest Rates(1) 

 

March 31, 2013

 

December 31, 2012

 

September 30, 2012

-100 bp

 

N/A

 

 

N/A

 

 

N/A

 

  000 bp

 

--

 

 

--

 

 

--

 

+100 bp  

 

(5.03)

%

 

0.27 

%

 

3.09 

%

+200 bp  

 

(15.17)

%

 

(8.55)

%

 

(3.72)

%

+300 bp  

 

(26.69)

%

 

(19.25)

%

 

(13.79)

%

 

(1)

Assumes an instantaneous, permanent and parallel change in interest rates at all maturities.

 

Changes in the estimated market values of our financial assets and liabilities drive changes in estimates of MVPE.  The market value of an asset or liability reflects the present value of all the projected cash flows over its remaining life, discounted at current market interest rates.  As interest rates rise, generally the market value for both financial assets and liabilities decrease.  The opposite is generally true as interest rates fall.  The MVPE represents the theoretical market value of capital that is calculated by netting the market value of assets and liabilities.  If the market values of financial assets increase at a faster pace than the market values of financial liabilities, or if the market values of financial liabilities decrease at a faster pace than the market values of financial assets, the MVPE will increase.  The magnitude of the changes in the Bank’s MVPE represents the Bank’s interest rate risk.  The market value of shorter term-to-maturity financial instruments is less sensitive to changes in interest rates than are longer term-to-maturity financial instruments.  Because of this, 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 increasing the sensitivity of these assets in higher rate environments.   

81

 


 

At March 31, 2013, the percentage change in the Bank’s MVPE was more adversely impacted by higher interest rates than at both December 31, 2012 and September 30, 2012.  This was primarily due to higher interest rates, particularly higher mortgage interest rates, than in the previous two quarters presented.  As interest rates rise, projected prepayments decrease as the economic incentive for borrowers to refinance or endorse the mortgage to a lower interest rate would diminish.  Prepayments in the higher interest rate environments will likely only be realized through changes in borrowers’ lives such as divorce, death, job-related relocations, or other life changing events, resulting in an increase in the average life of these assets.  Call projections for the Bank’s callable agency debentures would also decrease significantly as interest rates rise to these levels, which would result in the cash flows for these assets to move toward their contractual maturities.  The longer expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increases their sensitivity to changes in interest rates.  As a result, the market value of the Bank’s financial assets decreased more than the decrease in the market value of its financial liabilities, resulting in a decrease in the MVPE in all interest rate environments at March 31, 2013.

At December 31, 2012 and September 30, 2012, the average life of the Bank’s mortgage-related assets were shorter than the average life of the Bank’s long-term borrowings and core deposits due to the low level of interest rates, as compared to March 31, 2013.  Because the level of interest rates at both December 31, 2012 and September 30, 2012 were at or near historical lows, prepayment projections for mortgage-related assets and call projections for callable agency debentures were high, thereby significantly reducing the average life of these assets.  As interest rates rise, the market values of the Bank’s financial liabilities decrease at a faster pace than that of its assets.  As a result, the Bank’s MVPE increased in the +100 basis point interest rate environment at both December 31, 2012 and September 30, 2012.

As interest rates move higher in the +200 and +300 basis point interest rate environments, prepayment projections for mortgage-related assets, in general, are projected to decrease significantly.  As a result, the Bank’s sensitivity to rising interest rates increases to such a point that the expected decrease in the market value of the Bank’s financial assets more than offsets the decrease in the market value of its financial liabilities, resulting in a decrease in the MVPE in these interest rate environments.

The following gap table summarizes the anticipated maturities or repricing periods of the Bank’s interest-earning assets and interest-bearing liabilities as of March 31, 2013 based on the information and assumptions set forth in the notes below.  Cash flow projections for mortgage-related assets are calculated based on current interest rates.  Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot be determined with a high degree of accuracy.  Although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates.  Assumptions may not reflect how actual yields and costs respond to market changes.  The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.  In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table below.  For additional information regarding the impact of changes in interest rates, see the preceding Percentage Change in Net Interest Income and Percentage Change in MVPE discussions and tables.

 

 

82

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within

 

 

Three to

 

 

More Than

 

 

More Than 

 

 

 

 

 

 

 

 

Three

 

 

Twelve

 

 

One Year to

 

 

Three Years

 

 

Over 

 

 

 

 

 

Months

 

 

Months

 

 

Three Years

 

 

to Five Years

 

 

Five Years

 

 

Total

Interest-earning assets:

 

(Dollars in thousands)

Loans receivable:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

$

278,654 

 

$

723,105 

 

$

1,216,109 

 

$

628,159 

 

$

1,593,613 

 

$

4,439,640 

Adjustable-rate

 

122,833 

 

 

652,176 

 

 

270,123 

 

 

87,016 

 

 

24,969 

 

 

1,157,117 

Other loans

 

111,292 

 

 

12,211 

 

 

11,943 

 

 

3,869 

 

 

3,736 

 

 

143,051 

Investment securities(2)

 

29,582 

 

 

278,341 

 

 

92,668 

 

 

308,835 

 

 

129,458 

 

 

838,884 

MBS(3)

 

328,459 

 

 

602,056 

 

 

621,945 

 

 

333,877 

 

 

445,415 

 

 

2,331,752 

Other interest-earning assets

 

23,563 

 

 

--

 

 

--

 

 

--

 

 

--

 

 

23,563 

Total interest-earning assets

 

894,383 

 

 

2,267,889 

 

 

2,212,788 

 

 

1,361,756 

 

 

2,197,191 

 

 

8,934,007 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking(4)

 

110,751 

 

 

48,553 

 

 

107,902 

 

 

87,522 

 

 

333,626 

 

 

688,354 

Savings(4)

 

77,639 

 

 

13,566 

 

 

31,281 

 

 

24,262 

 

 

134,471 

 

 

281,219 

Money market(4)

 

59,878 

 

 

284,619 

 

 

309,455 

 

 

170,555 

 

 

538,187 

 

 

1,362,694 

Certificates

 

390,411 

 

 

764,665 

 

 

1,080,957 

 

 

329,746 

 

 

1,817 

 

 

2,567,596 

Borrowings(5)

 

250,000 

 

 

422,827 

 

 

1,195,000 

 

 

900,000 

 

 

247,259 

 

 

3,015,086 

Total interest-bearing liabilities

 

888,679 

 

 

1,534,230 

 

 

2,724,595 

 

 

1,512,085 

 

 

1,255,360 

 

 

7,914,949 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess (deficiency) of interest-earning assets over

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest-bearing liabilities

$

5,704 

 

$

733,659 

 

$

(511,807)

 

$

(150,329)

 

$

941,831 

 

$

1,019,058 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative excess of interest-earning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

assets over interest-bearing liabilities

$

5,704 

 

$

739,363 

 

$

227,556 

 

$

77,227 

 

$

1,019,058 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative excess of interest-earning

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

assets over interest-bearing liabilities as a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

percent of total Bank assets at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

0.06 

%

 

7.87 

%

 

2.42 

%

 

0.82 

%

 

10.85 

%

 

 

December 31, 2012

 

5.20 

 

 

17.55 

 

 

12.99 

 

 

6.90 

 

 

11.65 

 

 

 

September 30, 2012

 

6.18 

 

 

22.82 

 

 

20.61 

 

 

13.59 

 

 

11.93 

 

 

 

 

 

83

 


 

 

 

 

 

(1)

ARM loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due.  Fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions.  Balances are net of deferred fees and exclude loans 90 or more days delinquent or in foreclosure, which totaled $18.2 million at March 31, 2013.

(2)

Based on contractual maturities, term to call dates or pre-refunding dates as of March 31, 2013, at amortized cost.

(3)

Reflects projected prepayments of MBS, at amortized cost. 

(4)

Although the Bank’s checking, savings and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities.  The decay rates (the assumed rates at which the balances of existing accounts would decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts.  If all of the Bank’s checking, savings and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $997.9 million, for a cumulative one-year gap of (10.6)% of total assets.

(5)

Borrowings exclude $15.7 million of deferred prepayment penalty costs and $193 thousand of deferred gains on terminated interest rate swap agreements.

 

The decrease in the one-year gap from 17.55% at December 31, 2012 to 7.87% at March 31, 2013, was due primarily to a decrease in the amount of assets expected to reprice over the next 12 months, as compared to the prior quarter, as a result of an increase in interest rates between the two periods.  The increase in mortgage interest rates decreased prepayment expectations and thus decreased the amount of assets expected to reprice over the next 12 months, as compared to the prior quarter.  The higher interest rates also reduced the amount of expected calls in the Bank’s investment securities portfolio as agency debt issuers have less economic incentive to exercise embedded call options due to the higher interest rate environment.  In addition, the Bank had $150.0 million more of liabilities scheduled to reprice over the upcoming year at March 31, 2013 than in the prior quarter, which also contributed in the decrease in the positive gap between periods. 

If interest rates were to increase 200 basis points, the Bank’s one-year gap would become negative, which indicates that more liabilities would be expected to reprice than assets in this interest rate environment.  The +200 basis point gap in this scenario would be $(167.1) million, or (1.8%) of total assets.  The significant decrease in the one-year gap amount in the + 200 basis point scenario compared to the base case at March 31, 2013 compared to December 31, 2012 was due largely to a significant decrease in the amount of assets expected to reprice if rates were to increase 200 basis points.

 

 

Item 4.  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 March 31, 2013.  Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of March 31, 2013, 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.

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) identified in connection with the evaluation required by Rule 13a-15(d) of the Act that occurred during the Company’s quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II -   OTHER INFORMATION

Item 1.  Legal Proceedings

We are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.    We believe that these routine legal proceedings, in the aggregate, are immaterial to our financial condition and results of operations.

84

 


 

Item 1A.  Risk Factors

There have been no material changes to our risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.  For a summary of risk factors relevant to our operations, see Part I, Item 1A in our 2012 Annual Report on Form 10-K. 

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

See  “Liquidity and Capital Resources - Capital”  in  “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”  regarding the OCC restrictions on dividends from the Bank to the Company.

The following table summarizes our share repurchase activity during the three months ended March 31, 2013 and additional information regarding our share repurchase program.  In December 2011, the Company announced that its Board of Directors approved the repurchase of up to $193.0 million of the Company’s common stock.  The Company began repurchasing common stock during the second quarter of fiscal year 2012 and completed the plan during the current quarter.  In November 2012, the Company announced its Board of Directors approved a new $175.0 million stock repurchase program to commence upon the completion of the aforementioned $193.0 million repurchase plan.  The new plan has no expiration date. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximate

 

 

Total

 

 

 

 

Total Number of

 

Dollar Value of

 

 

Number of

 

Average

 

Shares Purchased

 

Shares that May

 

 

Shares

 

Price Paid

 

as Part of Publicly

 

Yet Be Purchased

Period

 

Purchased

 

per Share

 

Announced Plans

 

Under the Plans

January 1, 2013 through

 

 

 

 

 

 

 

 

 

 

January 31, 2013

 

112,500 

 

$

11.79 

 

112,500 

 

$

179,037,688 

February 1, 2013 through

 

 

 

 

 

 

 

 

 

 

February 28, 2013

 

2,641,354 

 

 

11.85 

 

2,641,354 

 

 

147,739,176 

March 1, 2013 through

 

 

 

 

 

 

 

 

 

 

March 31, 2013

 

59,846 

 

 

11.93 

 

59,846 

 

 

147,025,228 

Total

 

2,813,700 

 

 

11.85 

 

2,813,700 

 

 

147,025,228 

 

 

 

 

 

 

 

 

 

 

 

 

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

See Index to Exhibits.

85

 


 

SIGNATURES

Pursuant to the requirement 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:  May 3, 2013

By: /s/ John B. Dicus

 

John B. Dicus, Chairman, President and Chief Executive Officer

 

 

Date:  May 3, 2013

By: /s/ Kent G. Townsend

 

Kent G. Townsend, Executive Vice President,  

 

Chief Financial Officer and Treasurer

 

86

 


 

INDEX TO EXHIBITS

 

 

 

 

Exhibit

 

 

Number

 

Document 

2.0

   

Amended Plan of Conversion and Reorganization filed on October 27, 2010 as Exhibit 2 to Capitol Federal Financial, Inc.’s Post Effective Amendment No. 2 Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by reference

3(i)

 

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

3(ii)

 

Bylaws of Capitol Federal Financial, Inc. as filed on May 6, 2010, as Exhibit 3(ii) to Capitol Federal Financial Inc.’s Registration Statement on Form S-1 (File No. 333-166578) and incorporated herein by reference

10.1(i)

 

Capitol Federal Financial’s Thrift Plan filed on November 29, 2007 as Exhibit 10.1(i) to the Annual Report on Form 10-K for Capitol Federal Financial and incorporated herein by reference

10.1(ii)

 

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

10.1(iii)

 

Form of Change of Control Agreement with each of John B. Dicus, Kent G. Townsend, R. Joe Aleshire, Larry Brubaker, 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

10.1(iv)

 

Form of Change of Control Agreement with each 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

10.2

 

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

10.3

 

Capitol Federal Financial’s 2000 Recognition and Retention Plan filed on April 13, 2000 as Appendix B to Capitol Federal Financial’s Revised Proxy Statement (File No. 000-25391) and incorporated herein by reference

10.4

 

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

10.5

 

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

10.6

 

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

10.7

 

Form of Restricted Stock Agreement under the Recognition and Retention Plan filed on February 4, 2005 as Exhibit 10.7 to the December 31, 2004 Form 10-Q for Capitol Federal Financial and incorporated herein by reference

10.8

 

Description of Named Executive Officer Salary and Bonus Arrangements filed on November 29, 2012 as Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K and incorporated herein by reference

10.9

 

Description of Director Fee Arrangements filed on February 9, 2011 as Exhibit 10.9 to the December 31, 2010 Form 10-Q and incorporated herein by reference

10.10

 

Short-term Performance Plan filed on August 4, 2011 as Exhibit 10.10 to the June 30, 2011 Form 10-Q and incorporated herein by reference

10.11

 

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

10.12

 

Form of Incentive Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.12 to the March 31, 2012 Form 10-Q and incorporated herein by reference

10.13

 

Form of Non-Qualified Stock Option Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.13 to the March 31, 2012 Form 10-Q and incorporated herein by reference

10.14

 

Form of Stock Appreciation Right Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.14 to the March 31, 2012 Form 10-Q and incorporated herein by reference

10.15

 

Form of Restricted Stock Agreement under the Equity Incentive Plan filed on February 6, 2012 as Exhibit 10.15 to the March 31, 2012 Form 10-Q and incorporated herein by reference

11

 

Statement re: computation of earnings per share*

31.1

 

Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by John B. Dicus, Chairman, President and Chief Executive Officer

31.2

 

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

32

 

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

 

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101

 

The following information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the SEC on May 3, 2013, has been formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets at March 31, 2013 and September 30, 2012, (ii) Consolidated Statements of Income for the three and six months ended March 31, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2013 and 2012, (iv) Consolidated Statement of Stockholders’ Equity for the six months ended March 31, 2013, (v) Consolidated Statements of Cash Flows for the six months ended March 31, 2013 and 2012, and (vi) Notes to the Unaudited Consolidated Financial Statements**

 

*No statement is provided because the computation of per share earnings can be clearly determined from the Financial Statements included in this report.

**Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. 

88