4. Loans Receivable and Allowance for Credit Losses

Loans receivable, net at the dates presented is summarized as follows:


	December 31, 2013		September 30, 2013
		(Dollars in thousands)
Real estate loans:
One- to four-family	$	5,811,216	$	5,743,047
Multi-family and commercial		41,745		50,358
Construction		101,638		77,743
Total real estate loans		5,954,599		5,871,148

Consumer loans:
Home equity		135,023		135,028
Other		5,467		5,623
Total consumer loans		140,490		140,651

Total loans receivable		6,095,089		6,011,799

Less:
Undisbursed loan funds		61,480		42,807
ACL		8,919		8,822
Discounts/unearned loan fees		23,540		23,057
Premiums/deferred costs		(23,439)		(21,755)
	$	6,024,589	$	5,958,868

Lending Practices and Underwriting Standards - Originating and purchasing loans secured by one- to four-family residential properties is the Bank’s primary lending business, resulting in a loan concentration in residential first mortgage loans. The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders in 24 states. Additionally, the Bank periodically purchases whole one- to four-family loans in bulk packages from nationwide and correspondent lenders. The Bank also makes consumer loans, commercial and multi-family real estate loans, and construction loans secured by residential, multi-family or commercial real estate. As a result of our one- to four-family lending activities, the Bank has a concentration of loans secured by real property located in Kansas and Missouri.

One- to four-family loans - One- to four-family loans are underwritten generally in accordance with FHLMC and FNMA underwriting guidelines. Full documentation to support the applicant’s credit, income, and sufficient funds to cover all applicable fees and reserves at closing are required on all loans. Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function and approved by our Board of Directors.

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

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

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

Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, auto loans, and loans secured by savings deposits. The Bank also originates a very limited amount of unsecured loans. The Bank does not originate any consumer loans on an indirect basis, such as contracts purchased from retailers of goods or services which have extended credit to their customers. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first mortgage or there is no first mortgage.

The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount.

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

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

The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, total current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan (net of unadvanced funds related to loans in process), less charge-offs and inclusive of unearned loan fees and deferred costs. At December 31, 2013 and September 30, 2013, all loans 90 or more days delinquent were on nonaccrual status. In addition to loans 90 or more days delinquent, the Bank also had $6.1 million and $6.7 million of originated loan TDRs classified as nonaccrual at December 31, 2013 and September 30, 2013, respectively, as well as $392 thousand and $280 thousand of purchased loan TDRs classified as nonaccrual at December 31, 2013 and September 30, 2013, respectively, as required by the OCC. Of the loans required to be reported as nonaccrual pursuant to OCC reporting requirements, $5.4 million and $5.9 million were current at December 31, 2013 and September 30, 2013, respectively. At December 31, 2013 and September 30, 2013, the balance of loans on nonaccrual status was $27.7 million and $26.4 million, respectively.


	December 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	$	19,183	$	10,541	$	29,724	$	5,191,936	$	5,221,660
One- to four-family loans - purchased		7,959		10,215		18,174		605,955		624,129
Multi-family and commercial loans		--		--		--		47,229		47,229
Consumer - home equity		721		477		1,198		133,825		135,023
Consumer - other		100		11		111		5,356		5,467
	$	27,963	$	21,244	$	49,207	$	5,984,301	$	6,033,508


	September 30, 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	$	18,889	$	9,379	$	28,268	$	5,092,581	$	5,120,849
One- to four-family loans - purchased		7,842		9,695		17,537		631,050		648,587
Multi-family and commercial loans		--		--		--		57,603		57,603
Consumer - home equity		848		485		1,333		133,695		135,028
Consumer - other		35		5		40		5,583		5,623
	$	27,614	$	19,564	$	47,178	$	5,920,512	$	5,967,690

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

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

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

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

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

The following table sets forth the recorded investment in loans classified as special mention or substandard at the dates presented, by class. Special mention and substandard loans are included in the formula analysis model if the loan is not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.


	December 31, 2013				September 30, 2013
	Special Mention		Substandard		Special Mention		Substandard
	(Dollars in thousands)
One- to four-family - originated	$	24,631	$	28,634	$	29,359	$	27,761
One- to four-family - purchased		1,665		14,635		1,871		14,195
Multi-family and commercial		1,865		--		1,976		--
Consumer - home equity		81		953		87		819
Consumer - other		--		18		--		13
	$	28,242	$	44,240	$	33,293	$	42,788

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


	December 31, 2013			September 30, 2013
	Weighted Average			Weighted Average
	Credit Score	LTV		Credit Score	LTV
One- to four-family - originated	762	65	%	762	65	%
One- to four-family - purchased	748	67		747	67
Consumer - home equity	747	19		746	19
	760	64		760	64

TDRs - The following tables present the recorded investment prior to restructuring and immediately after restructuring for all loans restructured during the periods presented. 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
	December 31, 2013
	Number	Pre-		Post-
	of	Restructured		Restructured
	Contracts	Outstanding		Outstanding
	(Dollars in thousands)
One- to four-family loans - originated	38	$	3,825	$	3,853
One- to four-family loans - purchased	2		198		198
Multi-family and commercial loans	--		--		--
Consumer - home equity	4		65		66
Consumer - other	--		--		--
	44	$	4,088	$	4,117


	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

The following table provides information on TDRs restructured within the last 12 months that became delinquent during the periods presented.


	For the Three Months Ended
	December 31, 2013			December 31, 2012
	Number			Number
	of	Recorded		of	Recorded
	Contracts	Investment		Contracts	Investment
	(Dollars in thousands)
One- to four-family loans - originated	11	$	816	6	$	405
One- to four-family loans - purchased	2		338	1		47
Multi-family and commercial loans	--		--	--		--
Consumer - home equity	--		--	1		2
Consumer - other	--		--	--		--
	13	$	1,154	8	$	454

Impaired loans – The following is a summary of information pertaining to impaired loans by class as of the dates presented.


		December 31, 2013						September 30, 2013
				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	$	14,730	$	15,304	$	--	$	12,950	$	13,543	$	--
	One- to four-family - purchased		13,857		16,916		--		13,882		16,645		--
	Multi-family and commercial		--		--		--		--		--		--
	Consumer - home equity		677		1,063		--		577		980		--
	Consumer - other		5		9		--		2		7		--
			29,269		33,292		--		27,411		31,175		--
With an allowance recorded
	One- to four-family - originated		27,738		27,851		165		35,520		35,619		209
	One- to four-family - purchased		2,572		2,541		54		2,034		2,015		29
	Multi-family and commercial		--		--		--		73		74		2
	Consumer - home equity		551		551		75		492		492		78
	Consumer - other		14		14		2		11		11		1
			30,875		30,957		296		38,130		38,211		319
Total
	One- to four-family - originated		42,468		43,155		165		48,470		49,162		209
	One- to four-family - purchased		16,429		19,457		54		15,916		18,660		29
	Multi-family and commercial		--		--		--		73		74		2
	Consumer - home equity		1,228		1,614		75		1,069		1,472		78
	Consumer - other		19		23		2		13		18		1
		$	60,144	$	64,249	$	296	$	65,541	$	69,386	$	319

The following is a summary of information pertaining to impaired loans by class for the periods presented.


		For the Three Months Ended
		December 31, 2013				December 31, 2012
		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	$	12,872	$	97	$	8,935	$	46
	One- to four-family - purchased		13,636		45		15,267		46
	Multi-family and commercial		--		--		--		--
	Consumer - home equity		569		8		695		6
	Consumer - other		3		--		36		--
			27,080		150		24,933		98
With an allowance recorded
	One- to four-family - originated		33,212		319		42,421		433
	One- to four-family - purchased		2,858		16		2,191		17
	Multi-family and commercial		54		1		40		1
	Consumer - home equity		613		5		423		5
	Consumer - other		15		--		27		--
			36,752		341		45,102		456
Total
	One- to four-family - originated		46,084		416		51,356		479
	One- to four-family - purchased		16,494		61		17,458		63
	Multi-family and commercial		54		1		40		1
	Consumer - home equity		1,182		13		1,118		11
	Consumer - other		18		--		63		--
		$	63,832	$	491	$	70,035	$	554

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. Of the $856 thousand of net charge-offs during the three months ended December 31, 2012, $369 thousand related to loans that were primarily discharged in a prior fiscal year under Chapter 7 bankruptcy, that had to be, pursuant to OCC reporting requirements, evaluated for collateral loss, even if they were current.



		For the Three Months Ended December 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	$	5,771	$	2,486	$	8,257	$	185	$	380	$	8,822
Charge-offs		(88)		(327)		(415)		--		(10)		(425)
Recoveries		1		--		1		--		6		7
Provision for credit losses		155		354		509		(3)		9		515
Ending balance	$	5,839	$	2,513	$	8,352	$	182	$	385	$	8,919


	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

The following is a summary of the loan portfolio and related ACL balances, at the dates presented, by loan portfolio segment disaggregated by the Company’s impairment method. There was no ACL for loans individually evaluated for impairment at either date, as all potential losses were charged-off.


	December 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 in loans
collectively evaluated for impairment	$	5,206,930	$	610,272	$	5,817,202	$	47,229	$	139,808	$	6,004,239
Recorded investment in loans
individually evaluated for impairment		14,730		13,857		28,587		--		682		29,269
	$	5,221,660	$	624,129	$	5,845,789	$	47,229	$	140,490	$	6,033,508
ACL for loans collectively evaluated
for impairment	$	5,839	$	2,513	$	8,352	$	182	$	385	$	8,919


		September 30, 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 in loans
collectively evaluated for impairment	$	5,107,899	$	634,705	$	5,742,604	$	57,603	$	140,072	$	5,940,279
Recorded investment in loans
individually evaluated for impairment		12,950		13,882		26,832		--		579		27,411
	$	5,120,849	$	648,587	$	5,769,436	$	57,603	$	140,651	$	5,967,690
ACL for loans collectively evaluated
for impairment	$	5,771	$	2,486	$	8,257	$	185	$	380	$	8,822

As previously discussed, the Bank has a loan concentration in residential first mortgage loans. Declines in residential real estate values could adversely impact the property used as collateral for the Bank’s loans. Adverse changes in economic conditions and increasing unemployment rates may have a negative effect on the ability of the Bank’s borrowers to make timely loan payments, which would likely increase delinquencies and have an adverse impact on the Bank’s earnings. Further increases in delinquencies would decrease interest income on loans receivable and would likely adversely impact the Bank’s loan loss experience, resulting in an increase in the Bank’s ACL and provision for credit losses. Although management believes the ACL was at a level adequate to absorb inherent losses in the loan portfolio at December 31, 2013, the level of the ACL remains an estimate that is subject to significant judgment.