4. Loans Receivable and Allowance for Credit Losses

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


	June 30, 2014		September 30, 2013
		(Dollars in thousands)
Real estate loans:
One- to four-family	$	5,890,819	$	5,743,047
Multi-family and commercial		62,038		50,358
Construction		108,652		77,743
Total real estate loans		6,061,509		5,871,148

Consumer loans:
Home equity		130,645		135,028
Other		4,960		5,623
Total consumer loans		135,605		140,651

Total loans receivable		6,197,114		6,011,799

Less:
Undisbursed loan funds		58,067		42,807
ACL		9,082		8,822
Discounts/unearned loan fees		23,812		23,057
Premiums/deferred costs		(26,367)		(21,755)
	$	6,132,520	$	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 and, periodically, purchases whole one- to four-family loans in bulk packages from nationwide and correspondent lenders. The Bank also originates 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 – Full documentation to support an applicant’s credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Loans are underwritten according to the “ability to repay” and “qualified mortgage” standards, as issued by the Consumer Financial Protection Bureau (“CFPB”), with total debt-to-income ratios not exceeding 43% of a borrower’s verified income. 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 by the Bank’s underwriters. 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. 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. 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, loan-to-value (“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 required payments related to the outstanding debt at the time of origination. The Bank generally requires personal guarantees from 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 the home equity line of credit is in the first lien position.

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

Credit Quality Indicators – Based on the Bank’s lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family loans; (2) consumer loans; and (3) multi-family and commercial loans. The one- to four-family and consumer segments are further segmented into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio. The classes are: one- to four-family 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 June 30, 2014 and September 30, 2013, all loans 90 or more days delinquent were on nonaccrual status. At June 30, 2014 and September 30, 2013, the balance of loans on nonaccrual status was $26.3 million and $26.4 million, respectively.


	June 30, 2014
			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	$	15,704	$	8,414	$	24,118	$	5,319,093	$	5,343,211
One- to four-family loans - purchased		6,915		8,388		15,303		569,584		584,887
Multi-family and commercial loans		--		--		--		77,899		77,899
Consumer - home equity		628		345		973		129,672		130,645
Consumer - other		40		24		64		4,896		4,960
	$	23,287	$	17,171	$	40,458	$	6,101,144	$	6,141,602


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

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

The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the dates presented. Special mention and substandard loans are included in the 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.


	June 30, 2014				September 30, 2013
	Special Mention		Substandard		Special Mention		Substandard
	(Dollars in thousands)
One- to four-family - originated	$	21,099	$	28,970	$	29,359	$	27,761
One- to four-family - purchased		2,331		12,706		1,871		14,195
Multi-family and commercial		--		--		1,976		--
Consumer - home equity		171		868		87		819
Consumer - other		--		24		--		13
	$	23,601	$	42,568	$	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 March 2014, 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.


	June 30, 2014			September 30, 2013
	Credit Score	LTV		Credit Score	LTV
One- to four-family - originated	765	65	%	762	65	%
One- to four-family - purchased	749	67		747	67
Consumer - home equity	750	19		746	19
	763	64		760	64

Troubled Debt Restructurings (“TDRs”) – The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.


	For the Three Months Ended					For the Nine Months Ended
	June 30, 2014					June 30, 2014
	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	36	$	5,438	$	5,461	105	$	13,510	$	13,534
One- to four-family loans - purchased	3		642		644	5		840		842
Multi-family and commercial loans	--		--		--	--		--		--
Consumer - home equity	1		20		20	6		100		101
Consumer - other	--		--		--	--		--		--
	40	$	6,100	$	6,125	116	$	14,450	$	14,477


	For the Three Months Ended					For the Nine Months Ended
	June 30, 2013					June 30, 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	37	$	6,248	$	6,284	137	$	25,652	$	25,791
One- to four-family loans - purchased	1		581		581	8		2,119		2,161
Multi-family and commercial loans	--		--		--	2		82		79
Consumer - home equity	4		97		100	11		253		261
Consumer - other	--		--		--	--		--		--
	42	$	6,926	$	6,965	158	$	28,106	$	28,292

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						For the Nine Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
	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	13	$	1,818	12	$	805	29	$	3,299	29	$	2,316
One- to four-family loans - purchased	1		442	2		156	3		780	6		1,270
Multi-family and commercial loans	--		--	--		--	--		--	--		--
Consumer - home equity	1		29	--		--	2		56	2		7
Consumer - other	--		--	1		10	--		--	1		10
	15	$	2,289	15	$	971	34	$	4,135	38	$	3,603

Impaired loans – The following information pertains to impaired loans, by class, as of the dates presented. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.


		June 30, 2014						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	$	14,310	$	14,965	$	--	$	12,950	$	13,543	$	--
	One- to four-family - purchased		13,454		16,317		--		13,882		16,645		--
	Multi-family and commercial		--		--		--		--		--		--
	Consumer - home equity		625		914		--		577		980		--
	Consumer - other		20		27		--		2		7		--
			28,409		32,223		--		27,411		31,175		--
With an allowance recorded
	One- to four-family - originated		24,888		24,975		111		35,520		35,619		209
	One- to four-family - purchased		1,475		1,450		29		2,034		2,015		29
	Multi-family and commercial		--		--		--		73		74		2
	Consumer - home equity		510		510		37		492		492		78
	Consumer - other		4		4		--		11		11		1
			26,877		26,939		177		38,130		38,211		319
Total
	One- to four-family - originated		39,198		39,940		111		48,470		49,162		209
	One- to four-family - purchased		14,929		17,767		29		15,916		18,660		29
	Multi-family and commercial		--		--		--		73		74		2
	Consumer - home equity		1,135		1,424		37		1,069		1,472		78
	Consumer - other		24		31		--		13		18		1
		$	55,286	$	59,162	$	177	$	65,541	$	69,386	$	319

The following information pertains to impaired loans, by class, for the periods presented.


		For the Three Months Ended								For the Nine Months Ended
		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
		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	$	14,012	$	110	$	11,116	$	89	$	13,448	$	307	$	9,298	$	228
	One- to four-family - purchased		13,636		55		14,537		45		13,549		147		14,916		141
	Multi-family and commercial		--		--		--		--		--		--		--		--
	Consumer - home equity		583		8		554		8		578		25		577		31
	Consumer - other		7		--		18		--		5		--		23		--
			28,238		173		26,225		142		27,580		479		24,814		400
With an allowance recorded
	One- to four-family - originated		25,704		261		38,383		377		29,425		875		41,236		1,282
	One- to four-family - purchased		1,839		13		1,904		13		2,354		41		2,087		59
	Multi-family and commercial		--		--		76		1		22		1		54		2
	Consumer - home equity		524		6		541		6		564		17		521		18
	Consumer - other		12		--		15		--		13		--		25		1
			28,079		280		40,919		397		32,378		934		43,923		1,362
Total
	One- to four-family - originated		39,716		371		49,499		466		42,873		1,182		50,534		1,510
	One- to four-family - purchased		15,475		68		16,441		58		15,903		188		17,003		200
	Multi-family and commercial		--		--		76		1		22		1		54		2
	Consumer - home equity		1,107		14		1,095		14		1,142		42		1,098		49
	Consumer - other		19		--		33		--		18		--		48		1
		$	56,317	$	453	$	67,144	$	539	$	59,958	$	1,413	$	68,737	$	1,762

Allowance for credit losses – The following is a summary of ACL activity, by segment, for the periods presented, and the ending balance of ACL based on the Company’s impairment methodology. Of the $1.3 million of net charge-offs during the nine months ended June 30, 2013, $378 thousand was due 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 value loss, even if they were current.



		For the Three Months Ended June 30, 2014
	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	$	6,737	$	1,817	$	8,554	$	143	$	270	$	8,967
Charge-offs		(144)		(149)		(293)		--		(15)		(308)
Recoveries		--		64		64		--		52		116
Provision for credit losses		(394)		749		355		18		(66)		307
Ending balance	$	6,199	$	2,481	$	8,680	$	161	$	241	$	9,082


	For the Nine Months Ended June 30, 2014
	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		(284)		(536)		(820)		--		(34)		(854)
Recoveries		1		64		65		--		67		132
Provision for credit losses		711		467		1,178		(24)		(172)		982
Ending balance	$	6,199	$	2,481	$	8,680	$	161	$	241	$	9,082


	For the Three Months Ended June 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)
Beginning balance	$	6,002	$	3,495	$	9,497	$	208	$	367	$	10,072
Charge-offs		(60)		--		(60)		--		(111)		(171)
Recoveries		13		118		131		--		7		138
Provision for credit losses		(202)		(677)		(879)		(34)		113		(800)
Ending balance	$	5,753	$	2,936	$	8,689	$	174	$	376	$	9,239


	For the Nine Months Ended June 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)
Beginning balance	$	6,074	$	4,453	$	10,527	$	219	$	354	$	11,100
Charge-offs		(563)		(685)		(1,248)		--		(246)		(1,494)
Recoveries		13		160		173		--		27		200
Provision for credit losses		229		(992)		(763)		(45)		241		(567)
Ending balance	$	5,753	$	2,936	$	8,689	$	174	$	376	$	9,239

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.


	June 30, 2014
	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	$	5,328,901	$	571,433	$	5,900,334	$	77,899	$	134,960	$	6,113,193
Recorded investment in loans
individually evaluated for impairment		14,310		13,454		27,764		--		645		28,409
	$	5,343,211	$	584,887	$	5,928,098	$	77,899	$	135,605	$	6,141,602
ACL for loans collectively evaluated
for impairment	$	6,199	$	2,481	$	8,680	$	161	$	241	$	9,082


		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