4. Loans Receivable and Allowance for Credit Losses

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


	December 31, 2012		September 30, 2012
		(Dollars in thousands)
Real estate loans:
One- to four-family	$	5,429,556	$	5,392,429
Multi-family and commercial		46,815		48,623
Construction		60,975		52,254
Total real estate loans		5,537,346		5,493,306

Consumer loans:
Home equity		144,121		149,321
Other		6,426		6,529
Total consumer loans		150,547		155,850

Total loans receivable		5,687,893		5,649,156

Less:
Undisbursed loan funds		30,843		22,874
ACL		10,477		11,100
Discounts/unearned loan fees		21,864		21,468
Premiums/deferred costs		(15,368)		(14,369)
	$	5,640,077	$	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, eastern, and southern United States. As a result of originating loans in our branches, along with the correspondent lenders in our local markets, the Bank has a concentration of loans secured by real property located in Kansas and Missouri. Additionally, the Bank 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.

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 loans are included with originated loans, and bulk loan purchases 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.

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 December 31, 2012 and September 30, 2012, by class. In the formula analysis model, delinquent loans not individually evaluated for impairment are assigned a higher loss factor than corresponding performing loans. At December 31, 2012 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 $8.3 million and $10.0 million of originated loan TDRs classified as nonaccrual at December 31, 2012 and September 30, 2012, respectively, as well as $1.4 million and $2.4 million of purchased loan TDRs classified as nonaccrual at December 31, 2012 and September 30, 2012, respectively, as required by the OCC Call Report requirements. Of these amounts, $7.9 million and $11.2 million were current at December 31, 2012 and September 30, 2012, respectively. At December 31, 2012 and September 30, 2012, loans with unpaid principal amounts totaling $28.7 million and $31.8 million, respectively, were on nonaccrual status.


	December 31, 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	$	15,384	$	8,196	$	23,580	$	4,655,885	$	4,679,465
One- to four-family loans - purchased		6,687		10,475		17,162		742,663		759,825
Multi-family and commercial loans		--		--		--		60,717		60,717
Consumer - home equity		966		357		1,323		142,798		144,121
Consumer - other		188		76		264		6,162		6,426
	$	23,225	$	19,104	$	42,329	$	5,608,225	$	5,650,554


	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

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

Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the 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 impairment. Loans classified as doubtful or loss are individually evaluated for impairment.

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


	December 31, 2012				September 30, 2012
	Special Mention		Substandard		Special Mention		Substandard
	(Dollars in thousands)
One- to four-family - originated	$	32,986	$	25,866	$	36,055	$	23,153
One- to four-family - purchased		1,993		15,440		2,829		14,538
Multi-family and commercial		2,612		--		2,578		--
Consumer - home equity		126		935		413		815
Consumer - other		--		87		--		39
	$	37,717	$	42,328	$	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 December 31, 2012 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 or broker price opinions (“BPO”), if available. In most cases, the most recent appraisal was obtained at the time of origination.


	December 31, 2012			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	748	67		749	67
Consumer - home equity	746	19		747	19
	761	64	%	761	64	%

Troubled Debt Restructurings - The following table presents the recorded investment prior to restructuring and immediately after restructuring for all loans restructured during the three months ended December 31, 2012 and 2011. This table does 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 amounts due.


	For the Three Months Ended
	December 31, 2012
	Number	Pre-		Post-
	of	Restructured		Restructured
	Contracts	Outstanding		Outstanding
	(Dollars in thousands)
One- to four-family loans - originated	55	$	12,578	$	12,650
One- to four-family loans - purchased	2		555		598
Multi-family and commercial loans	2		82		79
Consumer - home equity	3		80		80
Consumer - other	--		--		--
	62	$	13,295	$	13,407


	For the Three Months Ended
	December 31, 2011
	Number	Pre-		Post-
	of	Restructured		Restructured
	Contracts	Outstanding		Outstanding
	(Dollars in thousands)
One- to four-family loans - originated	70	$	10,331	$	10,370
One- to four-family loans - purchased	--		--		--
Multi-family and commercial loans	--		--		--
Consumer - home equity	1		--		10
Consumer - other	--		--		--
	71	$	10,331	$	10,380

The following table provides information on TDRs restructured within the 12 month period prior to the end of the periods presented that became delinquent during the three months ended December 31, 2012 and 2011.


	For the Three Months Ended
	December 31, 2012			December 31, 2011
	Number			Number
	of	Recorded		of	Recorded
	Contracts	Investment		Contracts	Investment
	(Dollars in thousands)
One- to four-family loans - originated	6	$	405	1	$	76
One- to four-family loans - purchased	1		47	1		401
Multi-family and commercial loans	--		--	--		--
Consumer - home equity	1		2	--		--
Consumer - other	--		--	--		--
	8	$	454	2	$	477

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


		December 31, 2012						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	$	7,141	$	7,161	$	--	$	10,729	$	10,765	$	--
	One- to four-family - purchased		15,195		15,069		--		15,340		15,216		--
	Multi-family and commercial		--		--		--		--		--		--
	Consumer - home equity		508		506		--		882		881		--
	Consumer - other		45		45		--		27		27		--
			22,889		22,781		--		26,978		26,889		--
With an allowance recorded
	One- to four-family - originated		43,718		43,886		291		41,125		41,293		268
	One- to four-family - purchased		2,354		2,323		99		2,028		2,016		54
	Multi-family and commercial		79		81		3		--		--		--
	Consumer - home equity		538		538		42		307		307		52
	Consumer - other		42		42		1		12		12		1
			46,731		46,870		436		43,472		43,628		375
Total
	One- to four-family - originated		50,859		51,047		291		51,854		52,058		268
	One- to four-family - purchased		17,549		17,392		99		17,368		17,232		54
	Multi-family and commercial		79		81		3		--		--		--
	Consumer - home equity		1,046		1,044		42		1,189		1,188		52
	Consumer - other		87		87		1		39		39		1
		$	69,620	$	69,651	$	436	$	70,450	$	70,517	$	375

The following is a summary of information pertaining to impaired loans by class for the three months ended December 31, 2012 and 2011.



		For the Three Months Ended				For the Three Months Ended
		December 31, 2012				December 31, 2011
		Average		Interest		Average		Interest
		Recorded		Income		Recorded		Income
		Investment		Recognized		Investment		Recognized
		(Dollars in thousands)
With no related allowance recorded
	One- to four-family - originated	$	8,935	$	46	$	48,051	$	385
	One- to four-family - purchased		15,267		46		6,812		25
	Multi-family and commercial		--		--		558		9
	Consumer - home equity		695		6		526		5
	Consumer - other		36		--		7		--
			24,933		98		55,954		424
With an allowance recorded
	One- to four-family - originated		42,421		433		3,001		25
	One- to four-family - purchased		2,191		17		13,097		30
	Multi-family and commercial		40		1		--		--
	Consumer - home equity		423		5		187		1
	Consumer - other		27		--		--		--
			45,102		456		16,285		56
Total
	One- to four-family - originated		51,356		479		51,052		410
	One- to four-family - purchased		17,458		63		19,909		55
	Multi-family and commercial		40		1		558		9
	Consumer - home equity		1,118		11		713		6
	Consumer - other		63		--		7		--
		$	70,035	$	554	$	72,239	$	480

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 current quarter were $856 thousand, of which $369 thousand related to loans that were previously discharged under Chapter 7 bankruptcy that must be, in accordance with OCC regulations, evaluated for collateral value loss, even if they are current.


		For the Three Months Ended December 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	$		6,074	$	4,453	$	10,527	$	219	$	354	$	11,100
Charge-offs			(219)		(532)		(751)		--		(115)		(866)
Recoveries			--		--		--		--		10		10
Provision for credit losses			(216)		369		153		(18)		98		233
Ending balance	$		5,639	$	4,290	$	9,929	$	201	$	347	$	10,477


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													2.29	%


	For the Three Months Ended December 31, 2011
	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		(90)		(304)		(394)		--		(6)		(400)
Recoveries		--		--		--		--		--		--
Provision for credit losses		96		745		841		(171)		(130)		540
Ending balance	$	4,921	$	10,342	$	15,263	$	83	$	259	$	15,605

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												1.03	%

The following is a summary of the loan portfolio and related ACL balances at December 31, 2012 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 December 31, 2012 or September 30, 2012, as all potential losses were charged-off.


	December 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)
Recorded investment of loans
collectively evaluated for impairment	$	4,672,011	$	744,630	$	5,416,641	$	60,717	$	149,976	$	5,627,334
Recorded investment of loans
individually evaluated for impairment		7,454		15,195		22,649		--		571		23,220
	$	4,679,465	$	759,825	$	5,439,290	$	60,717	$	150,547	$	5,650,554
ACL for loans collectively evaluated
for impairment	$	5,639	$	4,290	$	9,929	$	201	$	347	$	10,477


		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 the economic conditions and increasing unemployment rates may have a negative effect on the ability of the Bank’s borrowers to make timely loan payments, which would likely increase delinquencies and have an adverse impact on the Bank’s earnings. Further increases in delinquencies would decrease interest income on loans receivable and would likely adversely impact the Bank’s loan loss experience, resulting in an increase in the Bank’s ACL and provision for credit losses. Although management believes the ACL was at a level adequate to absorb inherent losses in the loan portfolio at December 31, 2012, 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.