Capitol Federal Financial, Inc. 10-K

cffn-20200930 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30 , 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __ to __ 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 South Kansas Avenue, Topeka, Kansas 66603 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: ( 785 ) 235-1341 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.01 per share CFFN The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the average of the closing bid and asked price of such stock on the NASDAQ Stock Market as of March 31, 2020, was $ 1.61 billion. As of November 19, 2020, there were issued and outstanding 138,792,496 shares of the Registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE Part III of Form 10-K - Portions of the proxy statement for the Annual Meeting of Stockholders for the year ended September 30, 2020. Page No. PART I Item 1. Business 2 Item 1A. Risk Factors 32 Item 1B. Unresolved Staff Comments 39 Item 2. Properties 39 Item 3. Legal Proceedings 39 Item 4. Mine Safety Disclosures 39 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 40 Item 6. Selected Financial Data 42 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 78 Item 8. Financial Statements and Supplementary Data 85 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 139 Item 9A. Controls and Procedures 139 Item 9B. Other Information 139 PART III Item 10. Directors, Executive Officers and Corporate Governance 140 Item 11. Executive Compensation 140 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 140 Item 13. Certain Relationships and Related Transactions, and Director Independence 141 Item 14. Principal Accounting Fees and Services 141 PART IV Item 15. Exhibits and Financial Statement Schedules 141 Item 16. Form 10-K Summary 141 INDEX TO EXHIBITS 142 SIGNATURES 144 Private Securities Litigation Reform Act-Safe Harbor Statement Capitol Federal Financial, Inc. (the "Company"), and Capitol Federal Savings Bank ("Capitol Federal Savings" or the "Bank"), may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the Securities and Exchange Commission ("SEC"). These forward-looking statements may be included in this Annual Report on Form 10-K and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements: • our ability to maintain overhead costs at reasonable levels; • our ability to originate and purchase a sufficient volume of one- to four-family loans in order to maintain the balance of that portfolio at a level desired by management; • our ability to invest funds in wholesale or secondary markets at favorable yields compared to the related funding source; • our ability to access cost-effective funding; • the expected synergies and other benefits from our acquisition activities, including our acquisition of Capital City Bancshares, Inc. ("CCB"), might not be realized within the anticipated time frames or at all; • our ability to extend the commercial banking and trust asset management expertise acquired from CCB through our existing branch footprint; • fluctuations in deposit flows; • the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy; • the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations, including areas where we have purchased large amounts of correspondent loans; • changes in real estate values, unemployment levels, and the level and direction of loan delinquencies and charge-offs may require changes in the estimates of the adequacy of the allowance for credit losses ("ACL"), which may adversely affect our business; • potential adverse impacts of the ongoing Coronavirus Disease 2019 ("COVID-19") pandemic and any governmental or societal responses thereto on the economic conditions in the Company's local market areas and other market areas where the Bank has lending relationships, on other aspects of the Company's business operations and on financial markets; • increases in classified and/or non-performing assets, which may require the Bank to increase the ACL, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets; • results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL; • changes in accounting principles, policies, or guidelines; • the effects of, and changes in, monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB"); • the effects of, and changes in, trade and fiscal policies and laws of the United States government; • the effects of, and changes in, foreign and military policies of the United States government; • inflation, interest rate, market, monetary, and currency fluctuations; • the timely development and acceptance of new products and services and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors' products and services; • the willingness of users to substitute competitors' products and services for our products and services; • our success in gaining regulatory approval of our products and services and branching locations, when required; 1 • the impact of interpretations of, and changes in, financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection, trust and insurance and the impact of other governmental initiatives affecting the financial services industry; • implementing business initiatives may be more difficult or expensive than anticipated; • significant litigation; • technological changes; • our ability to maintain the security of our financial, accounting, technology, and other operating systems and facilities, including the ability to withstand cyber-attacks; • acquisitions and dispositions; • changes in consumer spending, borrowing and saving habits; and • our success at managing the risks involved in our business. This list of important factors is not all inclusive. See "Part I, Item 1A. Risk Factors" for a discussion of risks and uncertainties related to our business that could adversely impact our operations and/or financial results. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank. PART I As used in this Form 10-K, unless we specify or the context indicates otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc. a Maryland corporation, and its subsidiaries. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc. Item 1. Business General The Company is a Maryland corporation that was incorporated in 2010 to be the successor corporation upon completion of the second step mutual-to-stock conversion of Capitol Federal Savings Bank MHC in December 2010. The Company's common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol "CFFN." The Bank is a wholly-owned subsidiary of the Company and is a federally chartered and insured savings bank headquartered in Topeka, Kansas. The Bank is examined and regulated by the Office of the Comptroller of the Currency (the "OCC"), its primary regulator, and its deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). The Company, as a savings and loan holding company, is examined and regulated by the FRB. In August 2018, the Company completed the acquisition of CCB and its wholly-owned subsidiary Capital City Bank, a commercial bank with $450 million in assets that was headquartered in Topeka, Kansas. During April 2019, the Bank completed the integration of the operations of Capital City Bank into the Bank's operations. The acquisition of Capital City Bank has allowed us to advance our commercial banking strategy while staying under $10 billion in assets, and allowed us to offer trust and brokerage services. The Bank competes for commercial banking business through a wide variety of commercial deposit and expanded lending products. 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 deposits primarily from the general public and from businesses, and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. We also originate and participate with other lenders in commercial loans, originate consumer loans primarily secured by mortgages on one- to four-family residences, and invest in certain investment securities and mortgage-backed securities ("MBS") using funding from deposits, repurchase agreements, and Federal Home Loan Bank Topeka ("FHLB") borrowings. We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market accounts, interest-bearing and non-interest-bearing checking accounts, and certificates of deposit with terms ranging from 91 days to 120 months. The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, and cash, and the interest paid on deposits and borrowings. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing 2 strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local lending markets, and secondary market prices and competitor pricing for our correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits are either non-maturity deposits or have stated maturities of less than two years. The Company is significantly affected by prevailing economic conditions, including federal monetary and fiscal policies and federal regulation of financial institutions. Deposit balances are influenced by a number of factors, including interest rates paid on competing investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and business activity levels, our loan underwriting guidelines compared to those of our competitors, as well as interest rate pricing competition from other lending institutions. Local economic conditions have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans. The industries in the Bank's local market areas, which are listed below under "Market Area and Competition" and where the properties securing approximately 69% of the Bank's one- to four-family loans are located, are diversified. This is especially true in the Kansas City metropolitan statistical area, which comprises the largest segment of our one- to four-family loan portfolio and deposit base. Management also monitors broad industry and economic indicators and trends in the states and/or metropolitan statistical areas with the highest concentrations of correspondent one- to four-family purchased loans and commercial loans. The Kansas City market area has an average household income of approximately $97 thousand per annum, based on 2020 estimates from Claritas Pop-Facts Premier. The average household income in our combined local market areas is approximately $95 thousand per annum, with 93% of the population at or above the poverty level, based on 2020 estimates from Claritas Pop-Facts Premier. In addition to our local market areas, the properties securing approximately 33% of the Bank's correspondent purchased one- to four-family loans are located in the state of Texas. The average household income in the Texas region where the majority of our correspondent one- to four-family loans are located is approximately $104 thousand per annum, with 90% of the population at or above the poverty level, based on 2020 estimates from Claritas Pop-Facts Premier. As of October 2020, the unemployment rate was 5.3% for Kansas, 4.6% for Missouri, and 6.9% for Texas, compared to the national average of 6.9%, based on information from the Bureau of Labor Statistics. Our executive offices are located at 700 South Kansas Avenue, Topeka, Kansas 66603, and our telephone number at that address is (785) 235-1341. Available Information Our website address is www.capfed.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our website. These reports are available on our website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These reports are also available on the SEC's website at http://www.sec.gov. Market Area and Competition Our corporate office is located in Topeka, Kansas. We currently have a network of 54 branches (45 traditional branches and 9 in-store branches) located in nine counties throughout Kansas and three counties in Missouri. We primarily serve the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia, and Salina, Kansas and a portion of the metropolitan area of greater Kansas City. In addition to our full service banking offices, we provide services through our call center, which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services. The Bank ranked first in deposit market share, at 6.90%, in the state of Kansas as reported in the June 30, 2020 FDIC "Summary of Deposits - Market Share Report." Management considers our well-established banking network together with our reputation for financial strength and customer service to be major factors in our success at attracting and retaining customers in our market areas. 3 The Bank consistently has been one of the top one- to four-family lenders with regard to mortgage loan origination volume in the state of Kansas. Through our strong relationships with real estate agents and marketing efforts, which reflect our reputation, and pricing, we attract mortgage loan business from walk-in customers, customers that apply online, and existing customers. Competition in originating one- to four-family loans primarily comes from other savings institutions, commercial banks, credit unions, and mortgage bankers. Lending Practices and Underwriting Standards General. Originating and purchasing loans secured by one- to four-family residential properties is the Bank's primary lending business, resulting in a loan concentration in residential first mortgage loans secured by properties located in Kansas and Missouri. The Bank also originates and participates in commercial loans, and originates consumer loans and construction loans. One- to Four-Family Residential Real Estate Lending. The Bank originates and services one- to four-family loans that are not guaranteed or insured by the federal government, and purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders. Originated Loans While the Bank originates both fixed- and adjustable-rate loans, our origination volume is dependent upon customer demand for loans in our market areas. Demand is affected by the local housing market, competition, and the interest rate environment. During fiscal years 2020 and 2019, the Bank originated and refinanced $931.3 million and $581.1 million of one- to four-family loans, respectively. Correspondent Purchased Loans The Bank purchases one- to four-family loans, on a loan-by-loan basis, from a select group of correspondent lenders. Loan purchases enable the Bank to attain geographic diversification in the loan portfolio. At September 30, 2020, the Bank had correspondent lending relationships in 28 states and the District of Columbia. During fiscal years 2020 and 2019, the Bank purchased $448.0 million and $166.4 million, respectively, of one- to four-family loans from correspondent lenders. We generally pay a premium of 0.50% to 1.0% of the loan balance to purchase these loans, and we pay 1.0% of the loan balance to purchase the servicing of these loans. The premium paid is amortized against the interest earned over the life of the loan, which reduces the loan yield. If a loan pays off before the scheduled maturity date, the remaining premium is recognized as reduction in interest income. The Bank has an agreement with a third-party mortgage sub-servicer to service loans originated by the Bank's correspondent lenders in certain states. The sub-servicer has experience servicing loans in the market areas in which the Bank purchases loans and services the loans according to the Bank's servicing standards, which is intended to allow the Bank greater control over servicing and reporting and help maintain a standard of loan performance. Bulk Purchased Loans In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages. See "Part I, Item 1A. Risk Factors" for additional information regarding why the Bank no longer purchases bulk loan packages. At September 30, 2020, $158.2 million, or 76% of the Bank's bulk purchased loan portfolio, are loans guaranteed by one seller. Based on the historical performance of these loans and the seller, the Bank believes the seller has the financial ability to repurchase or replace loans if any were to become delinquent. The Bank has not experienced any losses with this group of loans since the loan package was purchased in August 2012. The servicing rights associated with bulk purchased loans were generally retained by the lender/seller for the loans purchased from nationwide lenders. The servicing by nationwide lenders is governed by a servicing agreement, which outlines collection policies and procedures, as well as oversight requirements, such as servicer certifications attesting to and providing proof of compliance with the servicing agreement. Underwriting Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"). Information pertaining to the creditworthiness of the borrower generally consists of a summary of the borrower's credit history, employment stability, sources of income, assets, net worth, and debt ratios. The value of the subject property must be supported by an appraisal 4 report prepared in accordance with our appraisal policy by either a staff appraiser or a fee appraiser, both of which are independent of the loan origination function. The underwriting standards for loans purchased from correspondent and nationwide lenders are generally similar to the Bank's internal underwriting standards. The underwriting of correspondent loans is performed by the Bank's underwriters. Our standard contractual agreement with the lender/seller includes recourse options for any breach of representation or warranty with respect to the loans purchased. The Bank requested the repurchase of one loan from a lender for breach of representation during fiscal year 2020. Adjustable-rate Mortgage ("ARM") Loans ARM loans are offered with a three-year, five-year, or seven-year term to the initial repricing date. After the initial period, the interest rate for each ARM loan adjusts annually for the remainder of the term of the loan. Currently, the repricing index for loan originations and correspondent purchases is tied to the one-year Constant Maturity Treasury ("CMT") index; however, other indices have been used in the past, including LIBOR. See "Part I, Item 1A. Risk Factors - Risks Related to Lending Activities" for information regarding the upcoming discontinuation of LIBOR. Current adjustable-rate one- to four-family loans originated by the Bank generally provide for a specified rate limit or cap on the periodic adjustment to the interest rate, as well as a specified maximum lifetime cap and minimum rate, or floor. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as our cost of funds. Negative amortization of principal is not allowed. For three- and five-year ARM loans, borrowers are qualified based on the principal, interest, tax, and insurance payments at the initial interest rate plus the life of loan cap and the initial interest rate plus the first period cap, respectively. For seven-year ARM loans, borrowers are qualified based on the principal, interest, tax, and insurance payments at the initial rate. After the initial three-, five-, or seven-year period, the interest rate resets annually and the new principal and interest payment is based on the new interest rate, remaining unpaid principal balance, and remaining term of the ARM loan. Our ARM loans are not automatically convertible into fixed-rate loans; however, we do allow borrowers to pay an endorsement fee to convert an ARM loan into a fixed-rate loan. ARM loans can pose greater credit risks than fixed-rate loans, primarily because if interest rates rise, the borrower's payment also rises, increasing the potential for default. This specific type of risk is known as repricing risk. Pricing Our pricing strategy for one- to four-family loan products includes setting interest rates based on secondary market prices and local competitor pricing for our local lending markets, and secondary market prices and national competitor pricing for our correspondent markets. Mortgage Insurance For a one- to four-family loan with a loan-to-value ("LTV") ratio in excess of 80% at the time of origination, private mortgage insurance ("PMI") is required in order to reduce the Bank's loss exposure. The Bank will lend up to 97% of the lesser of the appraised value or purchase price for one- to four-family loans, provided PMI is obtained. Management continuously monitors the claim-paying ability of our PMI counterparties. We believe our PMI counterparties have the ability to meet potential claim obligations we may file in the foreseeable future. Repayment The Bank's one- to four-family loans are primarily fully amortizing fixed-rate or ARM loans. The contractual maturities for fixed-rate loans and ARM loans can be up to 30 years; however, there are certain bulk purchased ARM loans that had original contractual maturities of 40 years. Our one- to four-family loans are generally not assumable and do not contain prepayment penalties. A "due on sale" clause, allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the secured property, is generally included in the security instrument. Construction Lending The Bank originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. The majority of these loans are secured by property located within the Bank's Kansas City market area. At September 30, 2020, we had $34.6 million in one- to four-family construction loans outstanding, representing 0.5% of our total loan portfolio. 5 The application process for a construction loan includes submission of complete plans, specifications, and costs of the project to be constructed. Construction draw requests and the supporting documentation are reviewed and approved by authorized management or experienced construction loan personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose. Interest is not capitalized during the construction period; it is billed and collected monthly based on the amount of funds disbursed. The Bank's owner-occupied construction-to-permanent loan program combines the construction loan and the permanent loan into one loan, allowing the borrower to secure the same interest rate structure throughout the construction period and the permanent loan term. Once the construction period is complete, the payment method is changed from interest-only to an amortized principal and interest payment for the remaining term of the loan. Loan Endorsement Program In an effort to offset the impact of repayments and to retain our customers, existing loan customers, including customers whose loans were purchased from a correspondent lender, have the opportunity, for a fee, to endorse their original loan terms to current loan terms being offered. Customers whose loans have been sold to third parties, have been delinquent on their contractual loan payments during the previous 12 months, have an active charge-off, or are currently in bankruptcy, are not eligible to participate in this program. The Bank does not solicit customers for this program, but considers it a valuable opportunity to retain customers who, based on our initial underwriting criteria, could likely obtain similar financing elsewhere. During fiscal years 2020 and 2019, the Bank endorsed $695.4 million and $121.5 million of one- to four-family loans, respectively. Loan Sales One- to four-family loans may be sold on a bulk basis or on a flow basis as loans are originated. Loans originated by the Bank and purchased from correspondent lenders are generally eligible for sale in the secondary market. Loans are generally sold for portfolio restructuring purposes, to reduce interest rate risk and/or to maintain a certain liquidity position. The Bank generally retains the servicing on these loans. The Bank's Asset and Liability Management Committee ("ALCO") determines the criteria upon which one- to four-family loans are to be classified as held-for-sale or held-for-investment. One- to four-family loans classified as held-for-sale are to be sold in accordance with policies set forth by ALCO. During fiscal years 2020 and 2019, the Bank did not sell any loans. Consumer Lending. The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by savings deposits. The Bank also originates a very limited amount of unsecured loans. Generally, consumer loans are originated in the Bank's market areas. The majority of our consumer loan portfolio is comprised of home equity lines of credit which have adjustable interest rates. For a majority of the home equity lines of credit, the Bank has the first mortgage or the Bank is in the first lien position. At September 30, 2020, our consumer loan portfolio totaled $113.9 million, or approximately 2% of our total loan portfolio. 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. For consumer loans secured by one- to four-family property, an appraisal is required if the loan is over a certain dollar threshold; otherwise, a property inspection along with county tax assessment valuations and other supporting documentation is required. Consumer loans generally have shorter terms-to-maturity or reprice more frequently, usually without periodic caps, which reduces our exposure to credit risk and changes in interest rates, and usually carry higher rates of interest than do one- to four-family loans. Management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities. Commercial Lending . At September 30, 2020, the Bank's commercial loans totaled $829.7 million, or approximately 12% of our total loan portfolio. Of this amount, $372.5 million were participation loans. Total undisbursed loan amounts related to commercial loans were $154.2 million, resulting in a total commercial loan concentration of $983.9 million at September 30, 2020. 6 At September 30, 2020, the Bank's commercial real estate loan portfolio totaled $732.0 million or approximately 88% of our commercial loan portfolio. Our commercial real estate loans include a variety of property types, including hotels, office and retail buildings, senior housing facilities, and multi-family dwellings located in Kansas, Missouri, and 13 other states. Our largest commercial lending relationship was $68.0 million at September 30, 2020, all of which was disbursed, including $64.9 million in commercial real estate loans and $3.1 million in commercial and industrial loans. These loans were current according to their terms at September 30, 2020. At September 30, 2020, the Bank's commercial and industrial loan portfolio totaled $97.6 million, or approximately 12% of our commercial loan portfolio. Included in this amount was $43.9 million of Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans. Excluding PPP loans, the Bank's commercial and industrial loan portfolio consists largely of loans secured by accounts receivable, inventory and equipment. Underwriting The Bank performs more extensive due diligence in underwriting commercial loans than loans secured by one- to four-family residential properties due to the larger loan amounts, the more complex sources of repayment and the riskier nature of such loans. When participating in a commercial loan, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. When underwriting a commercial real estate loan, several factors are considered, such as the income producing potential of the property to support the debt service, cash equity provided by the borrower, the financial strength of the borrower, tenant and/or guarantor(s), managerial expertise of the borrower or tenant, feasibility studies from the borrower or an independent third party, the marketability of the property and our lending experience with the borrower. For non-owner occupied properties, the Bank has a pre-lease requirement, depending on the property type, and overall strength of the credit. For non-construction properties, the historical net operating income, which is the income derived from the operation of the property less all operating expenses, generally must be at least 1.15 times the required payments related to the outstanding debt (debt service coverage ratio) at the time of origination. For construction projects, the minimum debt service coverage ratio of 1.15 applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. As part of the underwriting process, the historical or projected cash flows are stressed under various scenarios to measure the viability of the project under adverse conditions. Generally, our maximum LTV ratios conform to supervisory limits, including 65% for raw land, 75% for land development and 85% for commercial real estate loans. The Bank requires full independent appraisals for commercial real estate properties. The Bank generally requires at least 15% cash equity from the borrower for land acquisition, land development and commercial real estate construction loans. For non-acquisition, development or construction loans, the equity may be from a combination of cash and the appraised value of the secured property. Our commercial and industrial loans are primarily made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. Other sources of repayment include the collateral underlying the loans and guarantees from business owners. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. In general, commercial and industrial loans involve more credit risk than commercial real estate loans. The increased risk in commercial and industrial loans is due to the type of collateral securing these loans as well as the expectation that commercial and industrial loans generally will be serviced principally from the operations of the business, and those operations may not be successful. Significant adverse changes in borrowers' industries and businesses could cause a rapid decline in the values of, and collectability associated with, business assets securing the loans, which could result in inadequate collateral coverage of our commercial and industrial loans. Additionally, commercial and industrial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from clients and loans secured by inventory and equipment are subject to depreciation over time and may be difficult to appraise. As a result of these additional complexities, variables and risks, commercial and industrial loans require more thorough underwriting and servicing than other types of commercial loans. 7 Loan Terms Commercial loans generally have amortization terms of 15 to 30 years and maturities ranging from 90 days to 20 years, which generally requires balloon payments of the remaining principal balance. Commercial loans have either fixed or adjustable interest rates based on prevailing market rates. The interest rate on adjustable-rate loans is based on a variety of indices, but is generally determined through negotiation with the borrower or determined by the lead bank in the case of a loan participation. For a construction loan, generally, the Bank allows interest-only payments during the construction phase of a project and for a stabilization period of 6 to 24 months after occupancy. The Bank requires amortizing payments at the conclusion of the stabilization period. Additionally, the Bank may include covenants in the loan agreement that allow the Bank to take action when deterioration in the financial strength of the project is detected to potentially prevent the credit from becoming impaired. The covenants are specific to each loan agreement, based on factors such as the purpose of funds, the collateral type, and the financial strength of the project, the borrower and the guarantor, among other factors. Monitoring of Risk For the Bank's commercial real estate loan portfolio, borrowers are generally required to provide financial information annually, including borrower financial statements, subject property rental rates and income, maintenance costs, an update of real estate property tax and insurance payments, and personal financial information for the guarantor(s). The annual review process for loans with a principal balance of $1.5 million or more or borrowing relationships with a total exposure of $5 million or more allows the Bank to monitor compliance with loan covenants and review the borrower's performance, including cash flows from operations, debt service coverage, and comparison of performance to projections and year-over-year performance trending. Additionally, the Bank monitors and performs site visits, or in the case of participation loans, obtains updates from the lead bank as needed to determine the condition of the collateral securing the loan. Depending on the financial strength of the project and/or the complexity of the borrower's financials, the Bank may also perform a global analysis of cash flows to account for all other properties owned by the borrower or guarantor. If signs of weakness are identified, the Bank may begin performing more frequent financial and/or collateral reviews or will initiate contact with the borrower, or the lead bank will contact the borrower if the loan is a participation loan, to ensure cash flows from operations are maintained at a satisfactory level to meet the debt requirements. Both macro-level and loan-level stress-test scenarios based on existing and forecasted market conditions are part of the on-going portfolio management process for the commercial real estate portfolio. Commercial real estate construction lending generally involves a greater degree of risk than commercial real estate lending. Repayment of a construction loan is, to a great degree, dependent upon the successful and timely completion of the construction of the subject property. Construction delays, slower than anticipated stabilization or the financial impairment of the builder may negatively affect the borrower's ability to repay the loan. The Bank takes these risks into consideration during the underwriting process including the requirement of personal guarantees. The Bank mitigates the risk of commercial real estate construction lending during the construction period by monitoring inspection reports from an independent third-party, project budget, percentage of completion, on-site inspections and percentage of advanced funds. Commercial and industrial loans are monitored through a review of borrower performance as indicated by borrower financial statements, borrowing base reports, accounts receivable aging reports, and inventory aging reports. These reports are required to be provided by the borrowers monthly, quarterly, or annually depending on the nature of the borrowing relationship. Our commercial loans are generally large dollar loans and involve a greater degree of credit risk than one- to four-family loans. Because payments on these loans are often dependent on the successful operation or management of the properties and/or businesses, repayment of such loans may be subject to adverse conditions in the economy, the borrower's line of business, and/or the real estate market. If the cash flows from the project or business operation are reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may become impaired. The Bank regularly monitors the level of risk in the portfolio, including concentrations in such factors as geographic locations, collateral types, tenant brand name, borrowing relationships, and lending relationships in the case of participation loans, among other factors. 8 Loan Portfolio. The following table presents the composition of our loan portfolio as of the dates indicated. September 30, 2020 2019 2018 2017 2016 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands) One- to four-family: Originated $ 3,937,310 54.5 % $ 3,873,851 52.2 % $ 3,965,692 52.8 % $ 3,959,232 55.1 % $ 4,005,615 57.6 % Correspondent purchased 2,101,082 29.1 2,349,877 31.7 2,505,987 33.4 2,445,311 34.0 2,206,072 31.7 Bulk purchased 208,427 2.9 252,347 3.4 293,607 3.9 351,705 4.9 416,653 6.0 Construction 34,593 0.5 36,758 0.5 33,149 0.4 30,647 0.4 39,430 0.6 Total 6,281,412 87.0 6,512,833 87.8 6,798,435 90.5 6,786,895 94.4 6,667,770 95.9 Commercial: Commercial real estate 626,588 8.7 583,617 7.9 426,243 5.7 183,030 2.6 110,768 1.6 Commercial and industrial 97,614 1.4 61,094 0.8 62,869 0.9 — — — — Construction 105,458 1.4 123,159 1.7 80,498 1.1 86,952 1.2 43,375 0.6 Total 829,660 11.5 767,870 10.4 569,610 7.7 269,982 3.8 154,143 2.2 Consumer loans: Home equity 103,838 1.4 120,587 1.6 129,588 1.7 122,066 1.7 123,345 1.8 Other 10,086 0.1 11,183 0.2 10,012 0.1 3,808 0.1 4,264 0.1 Total 113,924 1.5 131,770 1.8 139,600 1.8 125,874 1.8 127,609 1.9 Total loans receivable 7,224,996 100.0 % 7,412,473 100.0 % 7,507,645 100.0 % 7,182,751 100.0 % 6,949,522 100.0 % Less: ACL 31,527 9,226 8,463 8,398 8,540 Discounts/unearned loan fees 29,190 31,058 33,933 24,962 24,933 Premiums/deferred costs (38,572) (44,558) (49,236) (45,680) (41,975) Total loans receivable, net $ 7,202,851 $ 7,416,747 $ 7,514,485 $ 7,195,071 $ 6,958,024 9 The following table presents the contractual maturity of our loan portfolio, along with associated weighted average yields, at September 30, 2020. Loans which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. One- to Four-Family Commercial Construction (2) Home Equity (3) Other Consumer Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Amounts due: Within one year (1) $ 1,237 4.51 % $ 117,410 4.03 % $ 139,667 4.27 % $ 2,130 5.15 % $ 1,161 3.36 % $ 261,605 4.17 % After one year: Over one to two 2,855 4.23 106,369 3.05 384 3.75 412 5.08 971 5.50 110,991 3.11 Over two to three 10,262 3.85 49,650 4.56 — — 402 5.37 2,220 4.92 62,534 4.46 Over three to five 46,938 3.89 75,892 4.82 — — 1,346 5.43 3,912 3.99 128,088 4.46 Over five to ten 497,411 3.18 267,221 4.57 — — 11,201 5.52 1,383 5.81 777,216 3.70 Over ten to fifteen 1,316,691 3.12 64,802 4.66 — — 42,602 4.41 355 6.06 1,424,450 3.23 After fifteen years 4,371,425 3.57 42,858 4.76 — — 45,745 4.59 84 5.67 4,460,112 3.59 Total due after one year 6,245,582 3.44 606,792 4.36 384 3.75 101,708 4.64 8,925 4.76 6,963,391 3.54 Totals loans $ 6,246,819 3.44 $ 724,202 4.30 $ 140,051 4.27 $ 103,838 4.65 $ 10,086 4.60 7,224,996 3.57 Less: ACL 31,527 Discounts/unearned loan fees 29,190 Premiums/deferred costs (38,572) Total loans receivable, net $ 7,202,851 (1) Includes demand loans, loans having no stated maturity, and overdraft loans. (2) Construction loans are presented based upon the estimated term to complete construction. See "One- to Four-Family Residential Real Estate Lending - Construction Lending" above for more information regarding our construction-to-permanent loan program. (3) For home equity loans, including those that do not have a stated maturity date, the maturity date calculated assumes the borrower always makes the required minimum payment. The majority of home equity loans assume a maximum term of 240 months. 10 The following table presents, as of September 30, 2020, the amount of loans due after September 30, 2021, and whether these loans have fixed or adjustable interest rates. Fixed Adjustable Total (Dollars in thousands) One- to four-family $ 5,416,534 $ 829,048 $ 6,245,582 Commercial 416,303 190,489 606,792 Construction — 384 384 Consumer loans: Home equity 14,682 87,026 101,708 Other 6,504 2,421 8,925 Total $ 5,854,023 $ 1,109,368 $ 6,963,391 Asset Quality The Bank's traditional one- to four-family underwriting guidelines have provided the Bank with generally low delinquencies and low levels of non-performing assets within this loan category compared to national levels. Of particular importance is the complete and full documentation required for each loan the Bank originates, participates in or 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. For one- to four-family loans and consumer loans, when a borrower fails to make a loan payment within 15 days after the due date, a late charge is assessed and a notice is mailed. Collection personnel review all delinquent loan accounts more than 16 days past due. Attempts to contact the borrower occur, with the purpose of establishing repayment arrangements. For residential mortgage loans serviced by the Bank, beginning at approximately the 31 st day of delinquency, and again at approximately the 50 th day of delinquency, information notices are mailed to borrowers to inform them of the availability of payment assistance programs. Once a loan becomes 90 days delinquent, assuming a loss mitigation solution is not actively in process, a demand letter is issued requiring the loan be brought current or foreclosure procedures will be implemented. Generally, when a loan becomes 120 days delinquent, and an acceptable repayment plan or loss mitigation solution has neither been established nor is in the process of being negotiated, the loan is forwarded to legal counsel to initiate foreclosure. We also monitor whether borrowers who have filed for bankruptcy are meeting their obligation to pay the mortgage debt in accordance with the terms of the bankruptcy petition. For purchased one- to four-family loans serviced by a third party, we monitor delinquencies using data received from the servicers. The reports generally provide total principal and interest due and length of delinquency, and are used to prepare monthly management reports and perform delinquent loan trend analysis. The information from the sub-servicer of our correspondent one- to four-family loans is generally received during the first week of the month while the information from the servicers of our one- to-four family bulk loans is received later in the month. Management also utilizes information from the servicers to monitor property valuations and identify the need to charge-off loan balances. For commercial loans originated by the Bank, when a loan becomes past due, the Bank begins collection efforts, initially by notifying the borrower of the past due payment and attempting to determine if there have been changes in the borrower's financial condition that may affect future loan performance. If it is determined that future loan performance may be adversely affected, the Bank initiates discussions with the borrower regarding plans to ensure cash flow from operations is sufficient to satisfy the debt requirements and meet the loan covenants. Generally, once a loan becomes 90 days delinquent, foreclosure or collection procedures are initiated. For participation loans, the lead bank is responsible for all collection efforts and contact with the borrower. However, if the Bank does not receive an expected payment on a participation loan, the Bank contacts the lead bank to determine the cause of the late payment and to initiate discussions with the lead bank of collection efforts, as necessary. See "Lending Practices and Underwriting Standards – Commercial Lending – Monitoring of Risk" for additional information. 11 In late March 2020, the Bank suspended the initiation of foreclosure proceedings for one- to four-family loans through the end of calendar year 2020. Additionally, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. Generally, loan modifications under these programs ("COVID-19 loan modifications") for one- to four-family loans and consumer loans consist of a three-month payment forbearance of principal, interest and, in some cases, escrow. COVID-19 loan modifications of commercial loans mainly consist of a six-month interest-only payment period. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Loans Receivable" for additional discussion regarding COVID-19 loan modifications. Delinquent and non-performing loans and other real estate owned ("OREO") The following table presents the Company's 30 to 89 day delinquent loans at the dates indicated. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent during the forbearance time period. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs. Of the loans 30 to 89 days delinquent at September 30, 2020, 2019, and 2018, approximately 70%, 67%, and 74%, respectively, were 59 days or less delinquent. Loans Delinquent for 30 to 89 Days at September 30, 2020 2019 2018 Number Amount Number Amount Number Amount (Dollars in thousands) One- to four-family: Originated 42 $ 3,012 90 $ 7,223 129 $ 10,647 Correspondent purchased 8 3,123 9 2,721 18 3,803 Bulk purchased 12 2,532 16 3,581 15 3,502 Commercial 2 45 8 826 6 322 Consumer 26 398 42 525 38 533 90 $ 9,110 165 $ 14,876 206 $ 18,807 Loans 30 to 89 days delinquent to total loans receivable, net 0.13 % 0.20 % 0.25 % 12 The table below presents the Company's non-performing loans and OREO at the dates indicated. The amounts in the table represent the unpaid principal balance of the loans less related charge-offs. Non-performing loans are loans that are 90 or more days delinquent or in foreclosure and other loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest. Non-performing assets include non-performing loans and OREO. OREO primarily includes assets acquired in settlement of loans. Over the past 12 months, one- to four-family OREO properties acquired in settlement of one- to four-family loans were owned by the Bank, on average, for approximately four months before the properties were sold. September 30, 2020 2019 2018 2017 2016 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 51 $ 4,362 44 $ 3,268 67 $ 5,040 67 $ 5,515 73 $ 8,190 Correspondent purchased 6 2,397 4 1,008 1 449 1 91 3 985 Bulk purchased 12 2,903 6 1,465 11 3,045 13 3,371 28 7,323 Commercial 5 1,360 4 170 — — — — — — Consumer 14 304 25 362 30 569 22 410 31 529 88 11,326 83 6,273 109 9,103 103 9,387 135 17,027 Loans 90 or more days delinquent or in foreclosure as a percentage of total loans 0.16 % 0.08 % 0.12 % 0.13 % 0.24 % Nonaccrual loans less than 90 Days Delinquent: (1) One- to four-family: Originated 9 $ 691 16 $ 1,183 19 $ 1,482 50 $ 4,567 70 $ 8,956 Correspondent purchased — — — — 2 396 8 1,690 9 2,786 Bulk purchased — — 1 65 — — 4 846 1 31 Commercial 3 464 1 7 — — — — — — Consumer 1 9 2 35 2 9 7 113 12 328 13 1,164 20 1,290 23 1,887 69 7,216 92 12,101 Total non-performing loans 101 12,490 103 7,563 132 10,990 172 16,603 227 29,128 Non-performing loans as a percentage of total loans 0.17 % 0.10 % 0.15 % 0.23 % 0.42 % 13 September 30, 2020 2019 2018 2017 2016 Number Amount Number Amount Number Amount Number Amount Number Amount (Dollars in thousands) OREO: One- to four-family: Originated (2) 4 $ 183 8 $ 745 8 $ 843 4 $ 58 12 $ 692 Correspondent purchased — — — — — — — — 1 499 Bulk purchased — — — — 1 454 5 1,279 4 1,265 Commercial — — 1 600 1 600 — — — — Consumer — — — — — — 1 67 — — Other — — — — — — — — 1 1,278 4 183 9 1,345 10 1,897 10 1,404 18 3,734 Total non-performing assets 105 $ 12,673 112 $ 8,908 142 $ 12,887 182 $ 18,007 245 $ 32,862 Non-performing assets as a percentage of total assets 0.13 % 0.10 % 0.14 % 0.20 % 0.35 % (1) Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements and/or internal policies, even if the loans are current. The decrease in the balance of these loans at September 30, 2017 compared to September 30, 2016 was due to fewer loans being classified as troubled debt restructurings ("TDRs") as a result of management refining its methodology for assessing whether a loan modification qualifies as a TDR. (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. The amount of interest income on nonaccrual loans and TDRs as of September 30, 2020 included in interest income was $1.0 million for the year ended September 30, 2020. The amount of additional interest income that would have been recorded on nonaccrual loans and TDRs as of September 30, 2020, if they had performed in accordance with their original terms, was $123 thousand for the year ended September 30, 2020. The following table presents the states where the properties securing five percent or more of the total amount of our one- to four-family loans are located and the corresponding balance of loans 30 to 89 days delinquent, 90 or more days delinquent or in foreclosure, and weighted average LTV ratios for loans 90 or more days delinquent or in foreclosure at September 30, 2020. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available. At September 30, 2020, potential losses, after taking into consideration anticipated PMI proceeds and estimated selling costs, have been charged-off. Loans 30 to 89 Loans 90 or More Days Delinquent One- to Four-Family Days Delinquent or in Foreclosure State Amount % of Total Amount % of Total Amount % of Total LTV (Dollars in thousands) Kansas $ 3,541,606 56.7 % $ 2,547 29.4 % $ 4,457 46.1 % 67 % Missouri 1,089,197 17.4 1,683 19.4 210 2.2 40 Texas 698,017 11.2 1,553 17.9 437 4.5 44 Other states 917,999 14.7 2,884 33.3 4,558 47.2 60 $ 6,246,819 100.0 % $ 8,667 100.0 % $ 9,662 100.0 % 62 14 Classified Assets. In accordance with the Bank's asset classification policy, management regularly reviews the problem assets in the Bank's portfolio to determine whether any assets require classification. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5. Loans Receivable and Allowance for Credit Losses" for asset classification definitions. The following table sets forth the recorded investment in assets, classified as either special mention or substandard, as of September 30, 2020. At September 30, 2020, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. Special Mention Substandard Number Amount Number Amount (Dollars in thousands) One- to four-family: Originated 82 $ 9,249 196 $ 15,729 Correspondent purchased 6 2,076 17 4,512 Bulk purchased — — 25 5,319 Commercial: Commercial real estate 5 50,957 9 3,541 Commercial and industrial 7 1,040 3 1,368 Consumer 14 331 35 589 Total loans 114 63,653 285 31,058 OREO: One- to four-family: Originated — — 4 183 Total OREO — — 4 183 Total classified assets 114 $ 63,653 289 $ 31,241 Troubled Debt Restructurings . For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower, resulting in a TDR. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which reduced payment amounts are required, reductions in interest rates, and/or loans that have been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt. The Bank does not forgive principal or interest, nor does it commit to lend additional funds, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family and consumer loans, not to exceed the original loan balance, to these borrowers. For commercial loans, the Bank does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve credit quality. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies and Note 5. Loans Receivable and Allowance for Credit Losses" for additional information related to TDRs. As previously noted, in late March 2020, the Bank announced COVID-19 loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. The Company has followed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and interagency guidance from the federal banking agencies when determining if a borrower's modification is subject to TDR classification. 15 The following table presents the Company's TDRs, based on accrual status, at the dates indicated. September 30, 2020 2019 2018 2017 2016 (Dollars in thousands) Accruing TDRs $ 13,205 $ 14,892 $ 20,216 $ 27,383 $ 23,177 Nonaccrual TDRs (1) 3,394 2,958 4,652 11,742 18,725 Total TDRs $ 16,599 $ 17,850 $ 24,868 $ 39,125 $ 41,902 (1) Nonaccrual TDRs are included in the non-performing loan table above and are classified as substandard. Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the original contractual terms of the loan agreement. Interest income on impaired loans is recognized in the period collected unless the ultimate collection of principal is considered doubtful. The unpaid principal balance of loans reported as impaired at September 30, 2020, 2019, and 2018 was $23.1 million, $23.4 million, and $29.9 million, respectively. Included in the impaired loan balance at September 30, 2020 were $22.9 million of loans classified as either special mention or substandard. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies and Note 5. Loans Receivable and Allowance for Credit Losses" for additional information related to impaired loans. Allowance for credit losses and provision for credit losses . Management maintains an ACL to absorb inherent losses in the loan portfolio based on quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses which are either charged to or credited to income. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Credit Losses" and "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for a full discussion of our ACL methodology. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 5. Loans Receivable and Allowance for Credit Losses" for additional information on the ACL. Each quarter a formula analysis model is prepared which segregates the loan portfolio into categories based on certain risk characteristics. Historical loss and qualitative factors are applied to each loan category in the formula analysis model. The factors are reviewed by management quarterly to assess whether they adequately cover probable and estimable losses inherent in the loan portfolio. During the current fiscal year, management increased the historical loss and qualitative factors applied in the formula analysis model for all loan categories and added a COVID-19 qualitative factor to the Bank's commercial loan portfolio. The increase in the factors and addition of the new qualitative factor was in response to the deterioration of economic conditions due to the COVID-19 pandemic. When determining the appropriate historical loss and qualitative factors to apply in the formula analysis model, management considered such items as: national and state unemployment and unemployment benefit claim information, amount and timing of governmental financial assistance, the Bank's COVID-19 loan modification programs, consumer spending information, industries most impacted by the COVID-19 pandemic, and a loan analysis completed by the commercial lending team. As of September 30, 2020, unemployment benefit claims continued to be at high levels, but not as high as the late March 2020/early April 2020 timeframe. Individuals that were unemployed benefited from the Federal Pandemic Unemployment Compensation Program ("FPUC") which the CARES Act created. FPUC provided an additional $600 per week to individuals collecting regular unemployment compensation. The FPUC expired in late July 2020. There were other unemployment compensation benefits created under the CARES Act which benefited individuals that exhausted their regular unemployment insurance benefits and that are generally not eligible for regular unemployment compensation, like self-employed individuals. In early August 2020, President Trump signed an executive memorandum authorizing the Federal Emergency Management Agency to provide $300 per week in extra unemployment benefits for six weeks, which started on August 1, 2020. The majority of the financial assistance provided by the federal government, which may be masking the Bank's actual credit exposure, tapered off significantly by September 30, 2020. In late March 2020, the Bank began offering 16 a COVID-19 loan modification program for one- to four-family and consumer loans. While the intention of the COVID-19 loan modification program was to keep customers current on their payments and therefore in their homes during the worst of the economic downturn, the program could also be masking the Bank's actual credit exposure on these loans. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition" for additional information regarding COVID-19 loan modifications. Many of the stay-at-home orders issued in March and April 2020 were lifted by September 30, 2020, resulting in some people returning to work, but not at the same level as prior to March 2020. Several companies are still requiring their employees to work from home and limit business travel and several colleges and schools are electing remote and/or hybrid learning. The residents of senior housing facilities continue to be generally disproportionately impacted by the COVID-19 pandemic. Consumer spending has continued to gradually rebound, but generally not in the travel, lodging, and entertainment industries. The Bank's commercial lending team analyzed the Bank's largest commercial lending relationships through September 30, 2020. Approximately 91% of all commercial loans, excluding PPP loans, were evaluated. The commercial lending team primarily focused on the lending relationships considered most at risk of short-term operational cash flow issues and/or collateral concerns, which had an aggregate unpaid principal balance of $201.2 million at September 30, 2020, and was primarily in the following categories: senior housing facilities, hotels, retail buildings, office buildings and single use buildings. These loan categories were among the categories with the highest usage of the Bank's COVID-19 loan modification program. We believe the Bank's COVID-19 loan modification program has been very beneficial to the majority of the Bank's commercial borrowers that took advantage of the program; however, as is the case with one- to four-family loans, the modifications may be masking the Bank's actual credit exposure. The commercial lending team also considered the largest credits in the industries most impacted by the COVID-19 pandemic: senior housing, hotel, retail building, office building and single use buildings. The weighted average LTV ratios based on the aggregate unpaid principal balances of senior housing, hotel, retail building, office building, and single use building loans were 69%, 58%, 67%, 75%, and 69%, respectively, at September 30, 2020. In most cases, the most recent appraisal was obtained at the time of origination. There was no significant deterioration in credit quality indicators, such as loan delinquencies, asset classification and credit scores, during the current fiscal year; however, as noted above, the financial assistance provided by the federal government and our COVID-19 loan modifications may be masking our actual credit exposure which could result in worsening credit quality indicators in the coming months. Loans 30 to 89 days delinquent were 0.13% of total loans at September 30, 2020 and 0.20% of total loans at September 30, 2019. Loans 90 days or more delinquent or in foreclosure were 0.16% of total loans at September 30, 2020 and 0.08% of total loans at September 30, 2019. Loans classified as special mention were $63.7 million at September 30, 2020 compared to $69.8 million at September 30, 2019. Loans classified as substandard were $31.1 million at September 30, 2020 compared to $30.1 million at September 30, 2019. The weighted average credit score for our one- to four-family loan portfolio was 768 at September 30, 2020 compared to 767 at September 30, 2019. We completed a credit score update from a nationally recognized consumer rating agency during September of 2020 and 2019. The majority of the provision for credit losses recorded in the current fiscal year was to increase the ACL to account for the increase in the factors and the addition of the new qualitative factor in the formula analysis model as a result of management's assessment of the inherent losses in the loan portfolio due to the deterioration of economic conditions. Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate. If economic conditions worsen or do not improve in the near term, and if future government programs, if any, do not provide adequate relief to borrowers, it is possible the Bank's ACL will need to increase in future periods. Management seeks to apply the ACL methodology in a consistent manner; however, the methodology may be modified in response to changing conditions, such as was the case during the current fiscal year. Although management believes the ACL was at a level adequate to absorb inherent losses in the loan portfolio at September 30, 2020, the level of the ACL remains an estimate that is subject to significant judgment and short-term changes. Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments became effective for the Company on October 1, 2020. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information. 17 The following table presents ACL activity and related ratios at the dates and for the periods indicated. Year Ended September 30, 2020 2019 2018 2017 2016 (Dollars in thousands) Balance at beginning of period $ 9,226 $ 8,463 $ 8,398 $ 8,540 $ 9,443 Charge-offs: One- to four-family: Originated (64) (75) (136) (72) (200) Correspondent — — (128) — — Bulk purchased — (26) — (216) (342) Total (64) (101) (264) (288) (542) Commercial: Commercial real estate (325) — — — — Commercial and industrial (24) (124) — — — Total (349) (124) — — — Consumer: Home equity (10) (28) (32) (51) (83) Other (20) (9) (6) (9) (5) Total (30) (37) (38) (60) (88) Total charge-offs (443) (262) (302) (348) (630) Recoveries: One- to four-family: Originated 41 22 144 4 77 Bulk purchased 265 106 196 165 374 Total 306 128 340 169 451 Commercial: Commercial real estate 110 22 — — — Commercial and industrial — 2 — — — Construction — 25 — — — Total 110 49 — — — Consumer: Home equity 23 80 22 26 25 Other 5 18 5 11 1 Total 28 98 27 37 26 Total recoveries 444 275 367 206 477 Net recoveries (charge-offs) 1 13 65 (142) (153) Provision for credit losses 22,300 750 — — (750) Balance at end of period $ 31,527 $ 9,226 $ 8,463 $ 8,398 $ 8,540 Ratio of net charge-offs during the period to average loans outstanding during the period — % — % — % — % — % Ratio of net (recoveries) charge-offs during the period to average non-performing assets (0.01) (0.12) (0.42) 0.56 0.48 ACL to non-performing loans at end of period 252.42 121.99 77.01 50.58 29.32 ACL to loans receivable, net at end of period 0.44 0.12 0.11 0.12 0.12 ACL to net charge-offs N/M (1) N/M (1) N/M (1) 58.9x 55.8x (1) This ratio is not presented for the time period noted due to loan recoveries exceeding loan charge-offs during the period. 18 The distribution of our ACL at the dates indicated is summarized below. September 30, 2020 2019 2018 2017 2016 % of % of % of % of % of Amount Loans to Amount Loans to Amount Loans to Amount Loans to Amount Loans to of ACL Total Loans of ACL Total Loans of ACL Total Loans of ACL Total Loans of ACL Total Loans (Dollars in thousands) One- to four-family: Originated $ 6,044 54.5 % $ 1,982 52.2 % $ 2,933 52.8 % $ 3,149 55.1 % $ 3,892 57.6 % Correspondent purchased 2,691 29.1 1,203 31.7 1,861 33.4 1,922 34.0 2,102 31.7 Bulk purchased 467 2.9 687 3.4 925 3.9 1,000 4.9 1,065 6.0 Construction 41 0.5 18 0.5 20 0.4 24 0.4 36 0.6 Total 9,243 87.0 3,890 87.8 5,739 90.5 6,095 94.4 7,095 95.9 Commercial: Commercial real estate 16,869 8.6 3,448 7.9 1,801 5.7 1,242 2.6 774 1.6 Commercial and industrial 1,451 1.4 472 0.8 21 0.8 — — — — Construction 3,480 1.5 1,251 1.7 734 1.1 870 1.2 434 0.6 Total 21,800 11.5 5,171 10.4 2,556 7.6 2,112 3.8 1,208 2.2 Consumer loans: Home equity 370 1.4 97 1.6 129 1.8 159 1.7 187 1.8 Other consumer 114 0.1 68 0.2 39 0.1 32 0.1 50 0.1 Total consumer loans 484 1.5 165 1.8 168 1.9 191 1.8 237 1.9 $ 31,527 100.0 % $ 9,226 100.0 % $ 8,463 100.0 % $ 8,398 100.0 % $ 8,540 100.0 % The majority of the loans acquired in the CCB acquisition were not deemed purchased credit impaired ("PCI") as of the acquisition date ("non-PCI loans"). The net purchase discounts associated with non-PCI loans were compared to the amount of hypothetical ACL estimated for these loans at September 30, 2020, 2019, and 2018. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Allowance for Credit Losses" for additional information regarding management's estimation of the hypothetical ACL for non-PCI loans. As a result of this analysis, management determined the net purchase discounts were not sufficient, so ACL was recorded on those loans at September 30, 2020. At September 30, 2019 and 2018, the net purchase discounts were sufficient and no ACL was required on those loans. 19 The ratio of ACL to loans receivable, by loan type, at the dates indicated is summarized below. As discussed above, the ACL increased during the current fiscal year resulting in an overall increase in the ACL to loans receivable ratio at September 30, 2020 compared to the other dates presented in the table below. The bulk purchased loan ACL to loans receivable ratio decreased at September 30, 2020 compared to September 30, 2019 due to the portion of the loan portfolio guaranteed by a third party representing more of the overall portfolio balance. Included in the commercial and industrial loan category at September 30, 2020 are PPP loans. PPP loans are 100% guaranteed by the SBA so the Bank did not record ACL on those loans at September 30, 2020. At September 30, 2020 2019 2018 2017 2016 One- to four-family: Originated 0.15 % 0.05 % 0.07 % 0.08 % 0.10 % Correspondent purchased 0.13 0.05 0.07 0.08 0.10 Bulk purchased 0.22 0.27 0.32 0.28 0.26 Construction 0.12 0.05 0.06 0.08 0.09 Total 0.15 0.06 0.08 0.09 0.11 Commercial: Commercial real estate 2.69 0.59 0.42 0.68 0.70 Commercial and industrial 1.49 0.77 0.03 — — Construction 3.30 1.02 0.91 1.00 1.00 Total 2.63 0.67 0.45 0.78 0.78 Consumer 0.42 0.13 0.12 0.15 0.19 Total 0.44 0.12 0.11 0.12 0.12 Investment Activities Federally chartered savings institutions have the authority to invest in various types of liquid assets, including U.S. Treasury obligations; securities of various federal agencies; government-sponsored enterprises ("GSEs"), including callable agency securities; municipal bonds; certain certificates of deposit of insured banks and savings institutions; certain bankers' acceptances; repurchase agreements; and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in investment grade commercial paper, corporate debt securities, and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. As a member of FHLB, the Bank is required to maintain a specified investment in FHLB stock. See "Regulation and Supervision – Federal Home Loan Bank System" and "Office of the Comptroller of the Currency" for a discussion of additional restrictions on our investment activities. ALCO considers various factors when making investment decisions, including the liquidity, credit, interest rate risk, and tax consequences of the proposed investment options. The composition of the investment portfolio will be affected by various market conditions, including the slope of the yield curve, the level of interest rates, the impact on the Bank's interest rate risk, the trend of net deposit flows, repayments of borrowings, loan originations and purchases, and commercial construction loan funding. The general objectives of the Bank's investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low, and to maximize earnings while satisfactorily managing liquidity risk, interest rate risk, reinvestment risk, and credit risk. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Cash flow projections are reviewed regularly and updated to ensure that adequate liquidity is maintained. We have the ability to classify securities as either trading, available-for-sale ("AFS"), or held-to-maturity ("HTM") at the date of purchase. Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value with unrealized gains and losses reported in the consolidated statements of income. AFS securities are reported at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) ("AOCI") within stockholders' equity, net of deferred income taxes. HTM securities are reported at cost, adjusted for amortization of premium and accretion of discount. Effective September 30, 2019, the 20 Company adopted ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities and certain components of ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that are applicable to ASU 2017-12. As part of the adoption, the Company reclassified its entire portfolio of HTM securities, totaling $444.7 million at amortized cost, to AFS securities. On a quarterly basis, management reviews securities for the presence of an other-than-temporary impairment. The process involves monitoring market events and other items that could impact issuers. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information. Management does not believe any other-than-temporary impairments existed at September 30, 2020. Investment Securities . Our investment securities portfolio consists primarily of debentures issued by GSEs (primarily Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal Home Loan Banks) and non-taxable municipal bonds. At September 30, 2020, our investment securities portfolio totaled $380.1 million. The portfolio consisted entirely of securities classified as AFS. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Securities" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investment Securities" for additional information. Mortgage-Backed Securities . At September 30, 2020, our MBS portfolio totaled $1.18 billion. The portfolio consisted entirely of securities classified as AFS and were primarily issued by GSEs. The principal and interest payments of MBS issued by GSEs are collateralized by the underlying mortgage assets with principal and interest payments guaranteed by the GSEs. The underlying mortgage assets are conforming mortgages that comply with FNMA and FHLMC underwriting guidelines, as applicable, and are therefore not considered subprime. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. Securities" and "Management's Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Mortgage-Backed Securities" for additional information. MBS generally yield less than the loans that underlie such securities because of the servicing fee retained by the servicer and the cost of payment guarantees or credit enhancements retained by the GSEs that reduce credit risk. However, MBS are generally more liquid than individual mortgage loans and may be used to collateralize certain borrowings and public unit deposits of the Bank. When securities are purchased for a price other than par value, the difference between the price paid and par is accreted to or amortized against the interest earned over the life of the security, depending on whether a discount or premium to par was paid. Movements in interest rates affect prepayment rates which, in turn, affect the average lives of MBS and the speed at which the discount or premium is accreted to or amortized against earnings. At September 30, 2020, the MBS portfolio included $70.5 million of collateralized mortgage obligations ("CMOs"). CMOs are special types of MBS in which the stream of principal and interest payments on the underlying mortgages or MBS are used to create investment classes with different maturities and, in some cases, different amortization schedules, as well as a residual interest, with each such class possessing different risk characteristics. We do not purchase residual interest bonds. While MBS issued by FNMA and FHLMC carry a reduced credit risk compared to whole mortgage loans, these securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of the underlying mortgage loans and consequently affect both the prepayment speed and value of the securities. As noted above, the Bank, on some transactions, pays a premium over par value on MBS purchased. Large premiums could cause significant negative yield adjustments due to accelerated prepayments on the underlying mortgages. The balance of net premiums on our portfolio of MBS at September 30, 2020 was $11.9 million. 21 The following table sets forth the composition of our investment and MBS portfolios as of the dates indicated. At September 30, 2020, our investment securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our stockholders' equity, excluding those issued by GSEs. September 30, 2020 2019 2018 Carrying % of Fair Carrying % of Fair Carrying % of Fair Value Total Value Value Total Value Value Total Value (Dollars in thousands) AFS: MBS $ 1,180,803 75.7 % $ 1,180,803 $ 936,487 77.7 % $ 936,487 $ 445,090 62.3 % $ 445,090 GSE debentures 370,340 23.7 370,340 249,954 20.8 249,954 265,398 37.1 265,398 Municipal bonds 9,807 0.6 9,807 18,422 1.5 18,422 4,126 0.6 4,126 1,560,950 100.0 % 1,560,950 1,204,863 100.0 % 1,204,863 714,614 100.0 % 714,614 HTM: MBS — — % — — — % — 591,900 96.7 % 580,825 Municipal bonds — — — — — — 20,418 3.3 20,246 — — % — — — % — 612,318 100.0 % 601,071 $ 1,560,950 $ 1,560,950 $ 1,204,863 $ 1,204,863 $ 1,326,932 $ 1,315,685 The composition and maturities of the investment and MBS portfolio at September 30, 2020 are indicated in the following table by remaining contractual maturity, without consideration of call features or pre-refunding dates, along with associated weighted average yields. Yields on tax-exempt investments are not calculated on a fully taxable equivalent basis . 1 year or less More than 1 to 5 years More than 5 to 10 years Over 10 years Total Securities Carrying Carrying Carrying Carrying Carrying Value Yield Value Yield Value Yield Value Yield Value Yield (Dollars in thousands) MBS $ 3,664 2.63 % $ 58,924 1.90 % $ 272,681 2.34 % $ 845,534 1.82 % $ 1,180,803 1.94 % GSE debentures — — 370,340 0.62 — — — — 370,340 0.62 Municipal bonds 4,009 1.47 5,798 1.85 — — — — 9,807 1.69 $ 7,673 2.02 $ 435,062 0.81 $ 272,681 2.34 $ 845,534 1.82 $ 1,560,950 1.62 22 Sources of Funds General . Our primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. Deposits . We offer a variety of retail deposit accounts and commercial deposit accounts and services. Our deposit account offerings have a wide range of interest rates and terms. Our deposits consist of savings accounts, money market deposit accounts, interest-bearing and non-interest-bearing checking accounts, and certificates of deposit. We rely primarily upon competitive pricing policies, marketing, and customer service to attract and retain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts we offer has allowed us to utilize strategic pricing to obtain funds and to respond with flexibility to changes in consumer demand. We seek to manage the pricing of our deposits in keeping with our asset and liability management, liquidity, and profitability objectives. Based on our experience, we believe that our deposits are stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them has been, and will continue to be, significantly affected by market conditions. The Board of Directors has authorized the utilization of brokers to obtain deposits as a source of funds. Depending on market conditions, the Bank may use brokered deposits to fund asset growth and gather deposits that may help to manage interest rate risk. No brokered deposits were acquired during fiscal year 2020 and there were no brokered deposits outstanding at September 30, 2020 or 2019. The Board of Directors also has authorized the utilization of public unit certificates of deposit as a source of funds. In order to qualify to obtain such deposits, the Bank must have a branch in each county in which it collects public unit certificates of deposit and, by law, must pledge securities as collateral for all such balances in excess of the FDIC insurance limits. At September 30, 2020 and 2019, the balance of public unit certificates of deposit was $254.8 million and $294.9 million, respectively. As of September 30, 2020, the Bank's policy allows for combined brokered and public unit certificates of deposit up to 15% of total deposits. At September 30, 2020, that amount was approximately 4% of total deposits. Borrowings . We utilize borrowings when we need additional capacity to fund loan demand or when they help us meet our asset and liability management objectives. Historically, our term borrowings have consisted primarily of FHLB advances. FHLB advances may be made pursuant to several different credit programs, each of which has its own interest rate, maturity, repayment, and embedded options, if any. At September 30, 2020, $1.15 billion of our FHLB advances were fixed-rate advances with no embedded options and $640.0 million of our FHLB advances were variable-rate, also with no embedded options. The variable-rate advances are tied to interest rate swaps, effectively converting the adjustable-rate borrowings into fixed-rate liabilities. At times, the Bank supplements FHLB borrowings with repurchase agreements, wherein the Bank enters into agreements with Board-approved counterparties to sell securities under agreements to repurchase them. These agreements are recorded as financing transactions as the Bank maintains effective control over the transferred securities. Repurchase agreements are made at mutually agreed upon terms between counterparties and the Bank. The use of repurchase agreements allows for the diversification of funding sources and the use of securities that were not being leveraged as collateral. The Bank also regularly uses its FHLB line of credit as a source of funding. The Bank's internal policy limits total borrowings to 55% of total assets. At September 30, 2020, we had $1.79 billion of FHLB advances, at par, outstanding and did not have a balance outstanding on the Bank's FHLB line of credit, for a total of 19% of Bank Call Report total assets as of September 30, 2020. Total FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40% of Bank Call Report total assets without the pre-approval of FHLB senior management. The Bank's borrowing limit ranged from 50% to 55% of Bank Call Report total assets during fiscal year 2020, as approved by the president of FHLB. At September 30, 2020, the approved limit was 50%. At September 30, 2020, the Bank did not have any repurchase agreements outstanding. The Bank may enter into repurchase agreements as management deems appropriate, not to exceed 15% of total assets and subject to the internal policy limit on total borrowings of 55%. The securities underlying the agreements continue to be reported in the Bank's securities portfolio. 23 The following table sets forth certain information relating to the category of borrowings for which the average short-term balance outstanding during the period was at least 30% of stockholders' equity at the end of each period shown. The maximum balance, average balance, and weighted average contractual interest rate during the fiscal years shown reflect borrowings that were scheduled to mature within one year at any month-end during those years. 2020 2019 2018 (Dollars in thousands) Short-term FHLB borrowings: Balance at end of period $ 843,000 $ 1,090,000 $ 975,000 Maximum balance outstanding at any month-end during the period 1,240,000 1,090,000 2,975,000 Average balance 1,024,866 1,208,456 2,189,483 Weighted average contractual interest rate during the period 1.62 % 2.34 % 1.65 % Weighted average contractual interest rate at end of period 0.76 2.15 2.00 Subsidiary Activities At September 30, 2020, the Company had one wholly-owned subsidiary, the Bank. The Bank provides a full range of retail banking services through 54 banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the metropolitan area of greater Kansas City. At September 30, 2020, the Bank had two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. At September 30, 2020, Capitol Funds, Inc. had one wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company ("CFMRC"), which historically served as a reinsurance company for certain PMI companies the Bank uses in its normal course of operations. CFMRC stopped writing new business for the Bank in January 2010. Capital City Investments, Inc. is a real estate and investment holding company. Each wholly-owned subsidiary is reported with the Company on a consolidated basis. 24 Regulation and Supervision Set forth below is a description of certain laws and regulations that are applicable to Capitol Federal Financial, Inc. and the Bank. This description is intended as a brief summary of selected features of such laws and regulations and is qualified in its entirety by references to the laws and regulations applicable to the Company and the Bank. General. The Bank, as a federally chartered savings bank, is subject to regulation and oversight by the OCC extending to all aspects of its operations. This regulation of the Bank is intended for the protection of depositors and other customers and not for the purpose of protecting the Company's stockholders. The Bank is required to maintain minimum levels of regulatory capital and is subject to some limitations on capital distributions to the Company. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Limitations on Dividends and Other Capital Distributions" for additional information regarding capital distributions and regulatory requirements. The Bank also is subject to regulation and examination by the FDIC, which insures the deposits of the Bank to the maximum extent permitted by law. The Company is a unitary savings and loan holding company within the meaning of the Home Owners' Loan Act ("HOLA"). As such, the Company is registered with the FRB and subject to the FRB regulations, examinations, supervision, and reporting requirements. In addition, the FRB has enforcement authority over the Company. Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the Bank. The OCC and FRB enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed. Except under certain circumstances, public disclosure of final enforcement actions by the OCC or the FRB is required by law. Office of the Comptroller of the Currency. The investment and lending authority of the Bank is prescribed by federal laws and regulations and the Bank is prohibited from engaging in any activities not permitted by such laws and regulations. As a federally chartered savings bank, the Bank is required to meet a Qualified Thrift Lender ("QTL") test in order to avoid certain restrictions on its operations. This test requires the Bank to have at least 65% of its portfolio assets, as defined by statute, in qualified thrift investments at month-end for 9 out of every 12 months on a rolling basis. Under an alternative test, the Bank's business must consist primarily of acquiring the savings of the public and investing in loans, while maintaining 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986. Under either test, the Bank is required to maintain a significant portion of its assets in residential housing related loans and investments. An institution that fails to qualify as a QTL based upon one of these tests is immediately subject to certain restrictions on its operations, including a prohibition against capital distributions, except with the prior approval of both the OCC and the FRB, as necessary to meet the obligations of a company controlling the institution. If the Bank fails the QTL test and does not regain QTL status within one year, or fails the test for a second time, the Company must immediately register as, and become subject to, the restrictions applicable to a bank holding company. The activities authorized for a bank holding company are more limited than are the activities authorized for a savings and loan holding company. Three years after failing the test, an institution must divest all investments and cease all activities not permissible for both a national bank and a savings association. Failure to meet the QTL test is a statutory violation subject to enforcement action. As of September 30, 2020, the Bank met the QTL test. The Bank is subject to a 35% of total assets limit on non-real estate consumer loans, commercial paper and corporate debt securities, and a 20% limit on commercial non-mortgage loans. At September 30, 2020, the Bank was in compliance with these limits. The Bank's relationship with its depositors and borrowers is regulated to a great extent by federal laws and regulations, especially in such matters as the ownership of savings accounts and the form and content of mortgage requirements. In addition, the branching authority of the Bank is regulated by the OCC. The Bank is generally authorized to branch nationwide. 25 The Bank is subject to a statutory lending limit on aggregate loans to one person or a group of persons combined because of certain common interests. The general limit is equal to 15% of our unimpaired capital and surplus, plus an additional 10% for loans fully secured by readily marketable collateral. At September 30, 2020, the Bank's lending limit under this restriction was $180.1 million. The Bank has no loans or loan relationships in excess of its lending limit. Total loan commitments and loans outstanding to the Bank's largest borrowing relationship totaled $68.0 million at September 30, 2020, all of which was current according to its terms. The Bank is subject to periodic examinations by the OCC. During these examinations, the examiners may require the Bank to increase its ACL, change the classification of loans, and/or recognize additional charge-offs based on their judgments, which can impact our capital and earnings. As a federally chartered savings bank, the Bank is subject to a semi-annual assessment, based upon its total assets, to fund the operations of the OCC. The OCC has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure, and compensation and other employee benefits. Any institution regulated by the OCC that fails to comply with these standards must submit a compliance plan. Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in the Bank up to applicable limits. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") permanently increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250 thousand per separately insured deposit ownership right or category. The FDIC assesses deposit insurance premiums on all FDIC-insured institutions quarterly based on annualized rates. Under these rules, assessment rates for an institution with total assets of less than $10 billion are determined by weighted average CAMELS composite ratings and certain financial ratios, and range from 1.5 to 30.0 basis points, subject to certain adjustments. For the fiscal year ended September 30, 2020, the Bank paid $914 thousand in FDIC premiums. Assessment rates are applied to an institution's assessment base, which is its average consolidated total assets minus its average tangible equity during the assessment period. The FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on the operating expenses and results of operations of the Company. Management cannot predict what assessment rates will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment. Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition, or violation that may lead to termination of our deposit insurance. The Dodd-Frank Act required large institutions to bear the burden of raising the reserve ratio from 1.15% to 1.35%. To implement this mandate, large and highly complex institutions paid an annual surcharge of 4.5 basis points on their assessment base through December 28, 2018 as a result of the DIF ratio reaching 1.36%. Since established small institutions contributed to the DIF while the reserve ratio was between 1.15% and 1.35%, the FDIC has provided assessment credits to the established small institutions for the portion of their assessments that contributed to the increase. The Bank received $2.8 million in credits to apply to FDIC assessments. Pursuant to regulatory guidance, once the reserve ratio exceeds 1.38%, credits are allocated to banks with less than $10 billion in assets. These credits were utilized to offset the Bank's premium assessments until they were exhausted. The Bank utilized $1.6 million and $1.2 million of the credit during fiscal year 2020 and 2019, respectively. FDIC-insured institutions were required to pay additional quarterly assessments known as "FICO assessments" in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. The rate for these assessments was adjusted quarterly and was applied to the same base used for the deposit insurance assessment. These assessments were discontinued during fiscal year 2019 when the bonds matured. As such, the Bank did not pay any FICO assessments during fiscal year 2020. 26 Transactions with Affiliates. Transactions between the Bank and its affiliates are required to be on terms as favorable to the institution as transactions with non-affiliates, and certain of these transactions are restricted to a percentage of the Bank's capital, and, in the case of loans, require eligible collateral in specified amounts. In addition, the Bank may not lend to any affiliate engaged in activities not permissible for a bank holding company or purchase or invest in the securities of affiliates. Regulatory Capital Requirements. The Bank and Company are required to maintain specified levels of regulatory capital under regulations of the OCC and FRB, respectively. In September 2019, the regulatory agencies, including the OCC and FRB, adopted a final rule, effective January 1, 2020, creating a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria related to off-balance sheet exposures and trading assets and liabilities. The CBLR provides for a simple measure of capital adequacy for qualifying institutions. Management has elected to use the CBLR framework for the Bank and Company. The CBLR is calculated as Tier 1 Capital to average consolidated assets as reported on an institution's regulatory reports. Tier 1 Capital, for the Company and the Bank, generally consists of common stock plus related surplus and retained earnings, adjusted for goodwill and other intangible assets and AOCI-related amounts. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the well-capitalized ratio requirements. In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduce the CBLR requirement to 8% through the end of 2020. Beginning in 2021, the CBLR requirement will increase to 8.5% for the calendar year before returning to 9% in 2022. A qualifying institution utilizing the CBLR framework that fails to maintain a leverage ratio greater than the required percentage is allowed a two-quarter grace period in which to increase its leverage ratio back above the required percentage. During the grace period, a qualifying institution will still be considered well capitalized so long as it maintains a leverage ratio of no more than one percent less than the required percentage. If an institution either fails to meet all the qualifying criteria within the grace period, or fails to maintain a leverage ratio of no more than one percent less than the required percentage, it becomes ineligible to use the CBLR framework and must instead comply with generally applicable capital rules, sometimes referred to as Basel III rules. For the quarter ended September 30, 2020, the Bank reported in its Call Report quarterly average assets of $9.45 billion and a CBLR of 12.4%, and the Company reported to the FRB quarterly average assets of $9.45 billion and a CBLR of 13.7%. At September 30, 2020, the Bank was considered well capitalized under OCC regulations. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 14. Regulatory Capital Requirements" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources" for additional regulatory capital information. The OCC has the ability to establish individual minimum capital requirements for a particular institution which vary from the capital levels that would otherwise be required under the applicable capital regulations based on such factors as concentrations of credit risk, levels of interest rate risk, the risks of non-traditional activities, and other circumstances. The OCC has not imposed any such requirement on the Bank. The OCC is authorized and, under certain circumstances, required to take certain actions against federal savings banks that are considered not to be adequately capitalized because they fail to meet the minimum requirements associated with their elected capital framework. Any such institution must submit a capital restoration plan for OCC approval and may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and may not make capital distributions. The OCC may impose further restrictions. The plan must include a guaranty by the institution's holding company limited to the lesser of 5% of the institution's assets when it became undercapitalized, or the amount necessary to restore the institution to adequately capitalized status. Community Reinvestment and Consumer Protection Laws. In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act"), and the Community Reinvestment Act ("CRA"). In addition, federal banking regulators, pursuant to the Gramm-Leach-Bliley Act, have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer 27 information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties. With respect to federal consumer protection laws, regulations are generally promulgated by the CFPB, but the OCC examines the Bank for compliance with such laws. The CRA requires the appropriate federal banking agency, in connection with its examination of an FDIC-insured institution, to assess its record in meeting the credit needs of the communities served by the institution, including low and moderate income neighborhoods. The federal banking regulators take into account the institution's record of performance under the CRA when considering applications for mergers, acquisitions, and branches. Under the CRA, institutions are assigned a rating of outstanding, satisfactory, needs to improve, or substantial non-compliance. The Bank received a satisfactory rating in its most recently completed CRA evaluation. In May 2020, the OCC released a final rule amending its regulations under the CRA. The final rule clarifies and expands the activities that qualify for CRA credit, updates where activities count for such credits and seeks to provide more consistent and objective measures for evaluating performance. The final rule became effective on October 1, 2020 but compliance with the amended requirements is not mandatory for the Bank until January 1, 2023. Bank Secrecy Act /Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws, including the USA PATRIOT Act of 2001 and regulations thereunder. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity and source of deposits and wealth of its customers. Violations of these laws and regulations can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions. Federal Securities Law. The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934. The Company stock held by persons who are affiliates of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. For this purpose, affiliates are generally considered to be executive officers, directors and principal stockholders. If the Company meets specified current public information requirements, each affiliate of the Company generally may sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At September 30, 2020, the Bank was in compliance with the reserve requirements in place at that time and is still in compliance with the reserve requirements through the date of this filing. The Bank is authorized to borrow from the Federal Reserve Bank "discount window." An eligible institution need not exhaust other sources of funds before going to the discount window, nor are there restrictions on the purposes for which the institution can use primary credit. At September 30, 2020, the Bank had no outstanding borrowings from the discount window. Federal Home Loan Bank System. The Bank is a member of one of 11 regional Federal Home Loan Banks, each of which serves as a reserve, or central bank, for its members within its assigned region and is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans, called advances, to members and provides access to a line of credit in accordance with policies and procedures established by the Board of Directors of FHLB, which are subject to the oversight of the Federal Housing Finance Agency. 28 As a member, the Bank is required to purchase and maintain capital stock in FHLB. The minimum required FHLB stock amount is generally 4.5% of the Bank's FHLB advances and outstanding balance against the FHLB line of credit, and 2% of the outstanding principal of loans sold into the Mortgage Partnership Finance program. At September 30, 2020, the Bank had a balance of $93.9 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has received dividends on its FHLB stock, although no assurance can be given that these dividends will continue. On a quarterly basis, management conducts a financial review of FHLB to determine whether an other-than-temporary impairment of the FHLB stock is present. At September 30, 2020, management concluded there was no such impairment. Federal Savings and Loan Holding Company Regulation. The HOLA prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings association, or holding company thereof, without prior written approval from the FRB; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by savings and loan holding companies to acquire savings associations, the FRB must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, competitive factors, and other factors. The FRB has long set forth in its regulations its "source of strength" policy, which requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. The Dodd-Frank Act extended to savings and loan holding companies and codified the FRB's "source of strength" doctrine, which had applied to bank holding companies before the FRB regulated savings and loan holding companies in addition to bank holding companies. Economic Growth, Regulatory Relief and Consumer Protection Act and Other Regulations. In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Regulatory Relief Act"), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for community banks such as the Bank, and their holding companies. The Regulatory Relief Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single CBLR, as described above, under "Regulatory Capital Requirements." In addition, the Regulatory Relief Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans. Regulations have been adopted which allow a federal savings association with total consolidated assets of $20 billion or less as of December 31, 2017 to operate as a covered savings association, having generally the same rights, privileges, duties, restrictions, limitations and conditions as a national bank. Amendments to the Volcker Rule exclude from the definition of "banking entity" certain firms that have total consolidated assets equal to $10 billion or less and total trading assets and liabilities equal to five percent or less of total consolidated assets. Effective November 24, 2019, the minimum asset threshold for federal savings associations covered by the company-run stress testing requirement was raised from $10 billion to $250 billion in total consolidated assets. 29 Taxation Federal Taxation. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations. The Company files a consolidated federal income tax return. The Company is no longer subject to federal income tax examination for fiscal years prior to 2017. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on September 30 for filing its federal income tax return. Changes to the corporate federal income tax rate would result in changes to the Company's effective income tax rate and would require the Company to remeasure its deferred tax assets and liabilities based on the tax rate in the years in which those temporary differences are expected to be recovered or settled. State Taxation. The earnings/losses of Capitol Federal Financial, Inc., Capitol Funds, Inc. and Capital City Investments, Inc. are combined for purposes of filing a consolidated Kansas corporate tax return. The Kansas corporate tax rate is 4.0%, plus a surcharge of 3.0% on earnings greater than $50 thousand. The Bank files a Kansas privilege tax return. For Kansas privilege tax purposes, the minimum tax rate is 4.5% of earnings, which is calculated based on federal taxable income, subject to certain adjustments. The Bank has not received notification from the state of any potential tax liability for any years still subject to audit. Additionally, the Bank files state tax returns in various other states where it has significant purchased loans and/or foreclosure activities. In these states, the Bank has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest derived from sources within the state. Employees and Human Capital Resources At September 30, 2020, we had a total of 793 employees, including 125 part-time employees. The full-time equivalent of our total employees at September 30, 2020 was 757. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. We believe our ability to attract and retain employees is a key to our success. Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas. In addition, we are committed to developing our staff through continuing education when applicable and specialty education within banking, using universities that offer Banking Management programs. Leadership development is supported through our Leadership Forum series, on a biannual basis, for mid-level leaders within the organization. We have also used outside consultants for business simulations in the past for training purposes, and this is expected to continue. Information about our Executive Officers John B. Dicus . Age 59 years. Mr. Dicus is Chairman of the Board of Directors, Chief Executive Officer, and President of the Bank and the Company. He has served as Chairman since January 2009 and Chief Executive Officer since January 2003. He has served as President of the Bank since 1996 and of the Company since its predecessor's inception in March 1999. Prior to accepting the responsibilities of Chief Executive Officer, he served as Chief Operating Officer of the Bank and the Company. Prior to that, he served as the Executive Vice President of Corporate Services for the Bank for four years. He has been with the Bank in various other positions since 1985. Kent G. Townsend. Age 59 years. Mr. Townsend serves as Executive Vice President and Chief Financial Officer of the Bank, its subsidiary, and the Company. Mr. Townsend also serves as Treasurer for the Company, Capitol Funds, Inc. and CFMRC. Mr. Townsend was promoted to Executive Vice President, Chief Financial Officer and Treasurer on September 1, 2005. Prior to that, he served as Senior Vice President, a position he held since April 1999, and Controller of the Company, a position he held since March 1999. He has served in similar positions with the Bank since September 1995. He served as the Financial Planning and Analysis Officer with the Bank for three years and has held other financial-related positions since joining the Bank in 1984. Rick C. Jackson. Age 55 years. Mr. Jackson serves as Executive Vice President, Chief Lending Officer and Community Development Director of the Bank and the Company. He also serves as the Chief Executive Officer of Capitol Funds, Inc., a subsidiary of the Bank, and President of CFMRC. He has been with the Bank since 1993 and has held the position of Community Development Director since that time. He has held the position of Chief Lending Officer since February 2010. 30 Natalie G. Haag . Age 61 years. Ms. Haag serves as Executive Vice President and General Counsel of the Bank and the Company. Prior to joining the Bank and the Company in August 2012, Ms. Haag was 2nd Vice President, Director of Governmental Affairs and Assistant General Counsel for Security Benefit Corporation and Security Benefit Life Insurance Company in Topeka, Kansas. Security Benefit provides retirement products and services, including annuities and mutual funds. Ms. Haag was employed by Security Benefit since 2003. The Security Benefit companies are not parents, subsidiaries or affiliates of the Bank or the Company. Anthony S. Barry. Age 56 years. Mr. Barry serves as Executive Vice President, Chief Corporate Services Officer of the Bank and the Company. Prior to joining the Bank and the Company in October 2018, Mr. Barry was engaged in the private practice of law for 29 years in real estate and general litigation, with an emphasis in construction law. Mr. Barry also served as a board member of a bank holding company in Arizona from 1998 to 2008. Daniel L. Lehman. Age 55 years. Mr. Lehman serves as Executive Vice President, Chief Retail Operations Officer of the Bank and Company. Prior to accepting those responsibilities in October 2016, he served as First Vice President and Accounting Director, a position held since May 2003 and Controller, a position held since 2005. Robert D. Kobbeman. Age 65 years. Mr. Kobbeman joined the Bank and the Company at the time of the acquisition of CCB and serves as Executive Vice President, Chief Commercial Banking Officer. Prior to joining the Bank and the Company, Mr. Kobbeman was the President and Chief Executive Officer and a director of Capital City Bank since 2002. From 1998 to 2002, Mr. Kobbeman served as Executive Vice President, Chief Lending Officer of Capital City Bank. 31 Item 1A. Risk Factors There are risks inherent in the Bank's and Company's business. The following is a summary of material risks and uncertainties relating to the operations of the Bank and the Company. Adverse experiences with these could have a material impact on the Company's financial condition and results of operations. Some of these risks and uncertainties are interrelated, and the occurrence of one or more of them may exacerbate the effect of others. These material risks and uncertainties are not necessarily presented in order of significance. In addition to the risks set forth below and the other risks described in this Annual Report, there may be risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results. Risks Related to Macroeconomic Conditions The impact of the COVID-19 pandemic on our customers, employees and business operations has had, and will likely continue to have, a significant adverse effect on our business, results of operations and financial condition. The COVID-19 pandemic created a global public-health crisis that resulted in challenging economic conditions for households and businesses. The economic impact of the COVID-19 pandemic impacted a broad range of industries. Many areas of consumer spending have rebounded since the initial onset of the COVID-19 pandemic, but generally not related to travel and entertainment. There is increasing concern about the longer lasting impact on local business, as well as travel and entertainment, resulting from the COVID-19 pandemic. There is also concern about resurgences of COVID-19 as we move into the winter months. The Federal Reserve returned to a zero-interest rate policy in March 2020 and the U.S. government enacted several fiscal stimulus measures to counteract the economic disruption caused by the COVID-19 pandemic and provide economic assistance to businesses and households. The dramatic lowering of market interest rates in a short period of time had an adverse effect on the Company's asset yields. The majority of the fiscal assistance provided by the federal government to businesses and households significantly tapered off by September 30, 2020, which could adversely impact the ability of borrowers to repay their loans. The Company's financial performance is dependent upon the ability of borrowers to repay their loans. The COVID-19 pandemic resulted in changes to our business operations during the current year and could continue to result in changes to operations in future periods. Depending on the severity and length of the COVID-19 pandemic, which is impossible to predict, we could experience significant disruptions in our business operations if key personnel or a significant number of employees were to become unavailable due to the effects of, and restrictions resulting from, the COVID-19 pandemic, as well as decreased demand for our products and services. There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the COVID-19 pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. Asset quality may deteriorate and the amount of our ACL may not be sufficient for future loan losses we may experience. This could require us to increase our reserves and recognize more expense in future periods. The changes in market rates of interest and the impact that has on our ability to price our products may reduce our net interest income in the future or negatively impact the demand for our products. There is some risk that operational costs could continue to increase as we maintain existing facilities in accordance with health guidelines as well as potentially have staff work remotely. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. 32 Changes in interest rates could have an adverse impact on our results of operations and financial condition. Our results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, cash at the Federal Reserve Bank and dividends received on FHLB stock, and the interest paid on deposits and borrowings. Changes in interest rates could have an adverse impact on our results of operations and financial condition because the majority of our interest-earning assets are long-term, fixed-rate loans, while the majority of our interest-bearing liabilities are shorter term, and therefore subject to a greater degree of interest rate fluctuations. This type of risk is known as interest rate risk and is affected by prevailing economic and competitive conditions, including monetary policies of the FRB and fiscal policies of the United States federal government. The impact of changes in interest rates is generally observed on the income statement. The magnitude of the impact will be determined by the difference between the amount of interest-earning assets and interest-bearing liabilities, both of which either reprice or mature within a given period of time. This difference provides an indication of the extent to which our net interest rate spread will be impacted by changes in interest rates. In addition, changes in interest rates will impact the expected level of repricing of the Bank's mortgage-related assets and callable debt securities. Generally, as interest rates decline, the amount of interest-earning assets expected to reprice will increase as borrowers have an economic incentive to reduce the cost of their mortgage or debt, which would negatively impact the Bank's interest income. Conversely, as interest rates rise, the amount of interest-earning assets expected to reprice will decline as the economic incentive to refinance the mortgage or debt is diminished. As this occurs, the amount of interest-earning assets repricing could diminish to the point where interest-bearing liabilities reprice to a higher interest rate at a faster pace than interest-earning assets, thus negatively impacting the Bank's net interest income. Changes in interest rates can also have an adverse effect on our financial condition as AFS securities are reported at estimated fair value. We increase or decrease our stockholders' equity, specifically AOCI (loss), by the amount of change in the estimated fair value of our AFS securities, net of deferred taxes. Increases in interest rates generally decrease the fair value of AFS securities. Decreases in the fair value of AFS securities would, therefore, adversely impact stockholders' equity. Changes in interest rates, as they relate to customers, can also have an adverse impact on our financial condition and results of operations. In times of rising interest rates, default risk may increase among borrowers with adjustable-rate loans as the rates on their loans adjust upward and their payments increase. Fluctuations in interest rates also affect customer demand for deposit products. Local competition could affect our ability to attract deposits, or could result in us paying more than competitors for deposits. In addition to general changes in interest rates, changes that affect the shape of the yield curve could negatively impact the Bank. The Bank's interest-bearing liabilities are generally priced based on short-term interest rates while the majority of the Bank's interest-earning assets are priced based on long-term interest rates. Income for the Bank is primarily driven by the spread between these rates. As a result, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. When the yield curve is flat, meaning long-term interest rates and short-term interest rates are essentially the same, or when the yield curve is inverted, meaning long-term interest rates are lower than short-term interest rates, the yield between interest-earning assets and interest-bearing liabilities that reprice is compressed or diminished and would likely negatively impact the Bank's net interest income. See "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information about the Bank's interest rate risk management. An economic downturn, especially one affecting our geographic market areas and certain regions of the country where we have correspondent loans secured by one- to four-family properties, could adversely impact our business and financial results. Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans secured by residential properties; therefore, we are particularly exposed to downturns in regional housing markets and, to a lesser extent, the U.S. housing market, along with changes in the levels of unemployment or underemployment. We monitor the current status and trends of local and national employment levels and trends and current conditions in the real estate and housing markets in our local market areas and certain areas where we have correspondent loans secured by one- to four-family properties. Adverse conditions in our local economies and in certain areas where we have correspondent loans secured by one- to four-family properties, such as inflation, unemployment, recession, natural disasters or pandemics, or other factors beyond our control, could impact the ability of our borrowers to repay their loans. Any one or a combination of these events may have an adverse impact on borrowers' ability to repay their loans, which could result in increased delinquencies, non- 33 performing assets, loan losses, and future loan loss provisions. Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Risks Related to Lending Activities The increase in commercial loans in our loan portfolio exposes us to increased lending and credit risks, which could adversely impact our financial condition and results of operations. A growing portion of our loan portfolio consists of commercial loans. These loan types tend to be larger than and in different geographic regions from most of our existing loan portfolio and are generally considered to have different and greater risks than one- to four-family residential real estate loans and may involve multiple loans to groups of related borrowers. A growing commercial loan portfolio also subjects us to greater regulatory scrutiny. Furthermore, these loan types can expose us to a greater risk of delinquencies, non-performing assets, loan losses, and future loan loss provisions than one- to four-family residential real estate loans because repayment of such loans often depends on the successful operation of a business or of the underlying property. Repayment of such loans may be affected by factors outside the borrower's control, such as adverse conditions in the real estate market, the economy, environmental factors, natural disasters or pandemics, and/or changes in government regulation. Also, there are risks inherent in commercial real estate construction lending as the value of the project is uncertain prior to the completion of construction and subsequent lease-up. A sudden downturn in the economy or other unforeseen events could result in stalled projects or collateral shortfalls, thus exposing us to increased credit risk. Commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. The borrowers' cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral consists of accounts receivable, inventory and equipment. Significant adverse changes in a borrower's industries and businesses could cause rapid declines in values of, and collectability associated with, those business assets, which could result in inadequate collateral coverage for our commercial and industrial loans and expose us to future losses. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Inventory and equipment may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower's ability to repay the loan may be impaired. An increase in valuation allowances and charge-offs related to our commercial and industrial loan portfolio could have an adverse effect on our business, financial condition, results of operations and future prospects. If our ACL is not sufficient to cover actual loan losses, it could adversely impact our financial results. We make several assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the ACL that is adequate to absorb inherent losses in the loan portfolio, management analyzes and considers several elements, such as current economic conditions, loan modification programs and activity, performance of our loan portfolio, loan growth and concentrations, and industry and peer charge-off and ACL information. If actual results differ significantly from our assumptions, our ACL may not be sufficient to cover inherent losses in our loan portfolio, resulting in additions to our ACL and an increase in the provision for credit losses. Bank regulators also periodically review our loan portfolio, the ACL, and our assumptions underlying the determinations we have made regarding the ACL, and as a result may require us to increase our ACL and/or recognize additional loan charge-offs, both resulting in an increase in the provision for credit losses. We may be required to provide remedial consideration to borrowers whose loans we purchase from correspondent and nationwide lenders if it is discovered that the originating company did not properly comply with lending regulations during the origination process. We purchase whole one- to four-family loans from correspondent and nationwide lenders. While loans purchased on a loan-by-loan basis from correspondent lenders are underwritten by the Bank's underwriters and loans purchased in bulk packages from correspondent and nationwide lenders are evaluated on a certain set of criteria before being purchased, we are still subject to some risks associated with the loan origination process itself. By law, loan originators are required to comply with lending regulations at all times during the origination process. Even though the Bank can contractually pursue the originating company, certain compliance-related risks associated with the origination process itself may shift from the originating company to the Bank once the Bank purchases the loan. Should it be discovered, at any point, that an instance of 34 noncompliance occurred by the originating company during the origination process, the Bank may still be held responsible and required to remedy the issue for the loans it purchased from the originator. Remedial actions can include refunding interest paid by the borrower and adjusting the contractual interest rate on the loan to the current market rate if advantageous to the borrower. The Bank no longer purchases loans in bulk from nationwide lenders due primarily to these risks. The expected discontinuation of LIBOR, and the identification and use of alternative replacement reference rates, may adversely affect our results of operations and subject the Company to litigation risk. LIBOR is used extensively in the United States as a reference rate for various financial contracts, including adjustable-rate loans, asset-backed securities, and interest rate swaps. In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The announcement means the continuation of LIBOR cannot be guaranteed after 2021. In the United States, the Alternative Reference Rate Committee ("ARRC"), a group of diverse private-market participants assembled by the Federal Reserve Board and the Federal Reserve Bank of New York, was tasked with identifying alternative reference interest rates to replace LIBOR. The Secured Overnight Finance Rate ("SOFR") has emerged as the ARRC's preferred alternative rate for LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities in the repurchase agreement market. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from LIBOR is anticipated to be gradual over the coming years. The Company has formed a LIBOR steering committee composed of individuals from lending, compliance/risk, treasury and legal. The LIBOR steering committee has been charged with overseeing the coordination of the Company's enterprise-wide LIBOR transition program and evaluating and mitigating the risks associated with the transition from LIBOR. The LIBOR transition program includes a comprehensive review by management of the financial products, agreements, contracts and business processes that may use LIBOR as a reference rate. As financial products, agreements, contracts and business processes that use LIBOR are identified, the LIBOR steering committee works with management to develop a strategy to transition away from LIBOR. During the strategy development process, management and the LIBOR steering committee considers the financial, customer/counterparty, regulatory and legal impacts of all proposed strategies. As of September 30, 2020, the Company has identified $500.7 million of adjustable-rate one- to four-family loans for which the repricing index was tied to LIBOR and the loan maturity date is after December 31, 2021. Our one- to four-family loan agreements generally allow the Bank to choose a new alternative reference rate based upon comparable information if the current index is no longer available. During the June 30, 2019 quarter, the Bank discontinued the use of LIBOR for the origination of adjustable-rate one- to four-family loans and no longer purchases correspondent one- to four-family loans that use LIBOR. The Bank began using the one-year CMT index for newly originated and correspondent purchased one- to four-family adjustable-rate loans. At September 30, 2020, none of the Bank's consumer or commercial loans use a repricing index tied to LIBOR. The Bank has interest rate swaps maturing after December 31, 2021 with a notional amount of $465.0 million at September 30, 2020 that are tied to LIBOR. The Bank's swap agreements are governed by the International Swap Dealers Association ("ISDA"). ISDA is in the process of developing fallback language for swap agreements and is expected to establish a protocol to allow counterparties to modify legacy trades to include the new fallback language. The market transition away from LIBOR to an alternative reference rate is complex. If LIBOR rates are no longer available, and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements with borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers over the appropriateness or comparability to LIBOR of the replacement reference rates. The replacement reference rates could also result in a reduction in our interest income. We may also receive inquiries and other actions from regulators in respect to the Company's preparation and readiness for the replacement of LIBOR with alternative reference rates. 35 Risks Related to Cybersecurity, Third Parties, and Technology The occurrence of any information system failure or interruption, breach of security or cyber-attack, at the Company, at its third-party service providers or counterparties may have an adverse effect on our business, reputation, financial condition or results of operations. Information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits and our loans. In the normal course of our business, we collect, process, retain and transmit (by email and other electronic means) sensitive and confidential information regarding our customers, employees and others. We also outsource certain aspects of our data processing, data processing operations, remote network monitoring, engineering and managed security services to third-party service providers. In addition to confidential information regarding our customers, employees and others, we, and in some cases a third party, compile, process, transmit and store proprietary, non-public information concerning our business, operations, plans and strategies. Information security risks for financial institutions continue to increase in part because of evolving technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. Cyber criminals use a variety of tactics, such as ransomware, denial of service, and theft of sensitive business and customer information to extort payment or other concessions from victims. In some cases, these attacks have caused significant impacts on other businesses' access to data and ability to provide services. We are not able to anticipate or implement effective preventive measures against all incidents of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We use a variety of physical, procedural and technological safeguards to prevent or limit the impact of system failures, interruptions and security breaches and to protect confidential information from mishandling, misuse or loss, including detection and response mechanisms designed to contain and mitigate security incidents. However, there can be no assurance that such events will not occur or that they will be promptly detected and adequately addressed if they do, and early detection of security breaches may be thwarted by sophisticated attacks and malware designed to avoid detection. If there is a failure in or breach of our information systems, or those of a third-party service provider, the confidential and other information processed and stored in, and transmitted through, such information systems could be jeopardized, or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers, employees, or others. Our business and operations depend on the secure processing, storage and transmission of confidential and other information in our information systems and those of our third-party service providers. Although we devote significant resources and management focus to ensuring the integrity of our information systems through information security measures, risk management practices, relationships with threat intelligence providers and business continuity planning, our facilities, computer systems, software and networks, and those of our third-party service providers, may be vulnerable to external or internal security breaches, acts of vandalism, unauthorized access, misuse, computer viruses or other malicious code and cyber-attacks that could have a security impact. In addition, breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our confidential or other information or the confidential or other information of our customers, employees or others. While we regularly conduct security and risk assessments on our systems and those of our third-party service providers, there can be no assurance that their information security protocols are sufficient to withstand a cyber-attack or other security breach. Across our industry, the cost of minimizing these risks and investigating incidents has continued to increase with the frequency and sophistication of these threats. To date, the Company has no knowledge of a material information security breach affecting its systems. The occurrence of any of the foregoing could subject us to litigation or regulatory scrutiny, cause us significant reputational damage or erode confidence in the security of our information systems, products and services, cause us to lose customers or have greater difficulty in attracting new customers, have an adverse effect on the value of our common stock or subject us to financial losses that may not be covered by insurance, any of which could have a material adverse effect on our business, financial condition or results of operations. As information security risks and cyber threats continue to evolve, we may be required to expend significant additional resources to further enhance or modify our information security measures and/or to investigate and remediate any information security vulnerabilities or other exposures arising from operational and security risks. Furthermore, there continues to be heightened legislative and regulatory focus on privacy, data protection and information security. New or revised laws and regulations may significantly impact our current and planned privacy, data protection and 36 information security-related practices, the collection, use, sharing, retention and safeguarding of consumer and employee information, and current or planned business activities. Compliance with current or future privacy, data protection and information security laws could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition or results of operations. Our customers are also targets of cyber-attacks and identity theft. There continues to be instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses. The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations. Third party vendors subject the Company to potential business, reputation and financial risks. Third party vendors are sources of operational and information security risk to the Company, including risks associated with operations errors, information system interruptions or breaches, and unauthorized disclosures of sensitive or confidential customer information. The Company requires third party vendors to maintain certain levels of information security; however, vendors may remain vulnerable to breaches, unauthorized access, misuse, computer viruses, and/or other malicious attacks that could ultimately compromise sensitive information. We have developed procedures and processes for selecting and monitoring third party vendors, but ultimately we are dependent on these third party vendors to secure their information. If these vendors encounter any of these types of issues, or if we have difficulty communicating with them, we could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our business, financial condition and results of operations. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which could have a material adverse effect on our business and, in turn, our financial condition and results of operations. Additionally, replacing certain third party vendors could also entail significant delay and expense. We are heavily reliant on technology, and a failure to effectively implement technology initiatives or anticipate future technology needs or demands could adversely affect our business or performance. Like most financial institutions, the Bank significantly depends on technology to deliver its products and other services and to otherwise conduct business. To remain technologically competitive and operationally efficient, the Bank invests in system upgrades, new technological solutions, and other technology initiatives. Many of these solutions and initiatives have a significant duration, are tied to critical information systems, and require substantial resources. Although the Bank takes steps to mitigate the risks and uncertainties associated with these solutions and initiatives, there is no guarantee that they will be implemented on time, within budget, or without negative operational or customer impact. The Bank also may not succeed in anticipating its future technology needs, the technology demands of its customers, or the competitive landscape for technology. If the Bank were to falter in any of these areas, it could have an adverse effect on our business, financial condition or results of operations. Risks Related to Competition Strong competition may limit growth and profitability. While we are one of the largest mortgage loan originators in the state of Kansas, we compete in the same market areas as local, regional, and national banks, credit unions, mortgage brokerage firms, investment banking firms, investment brokerage firms, and savings institutions. We also compete with online investment and mortgage brokerages and online banks that are not confined to any specific market area. Many of these competitors operate on a national or regional level, are a conglomerate of various financial services providers housed under one corporation, or otherwise have substantially greater financial or technological resources than the Bank. We compete primarily on the basis of the interest rates offered to depositors, the terms of loans offered to borrowers, and the benefits afforded to customers as a local institution and portfolio lender. Our pricing strategy for loan and deposit products includes setting interest rates based on secondary market prices 37 and local competitor pricing for our local markets, and secondary market prices and national competitor pricing for our correspondent lending markets. Should we face competitive pressure to increase deposit rates or decrease loan rates, our net interest income could be adversely affected. Additionally, our competitors may offer products and services that we do not or cannot provide, as certain deposit and loan products fall outside of our accepted level of risk. Our profitability depends upon our ability to compete in our local market areas. Risks Related to Regulation We operate in a highly regulated environment which limits the manner and scope of our business activities and we may be adversely affected by new and/or changes in laws and regulations or interpretation of existing laws and regulations. We are subject to extensive regulation, supervision, and examination by the OCC, FRB, and the FDIC. These regulatory authorities exercise broad discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank's operations, reclassify assets, determine the adequacy of a bank's ACL, and determine the level of deposit insurance premiums assessed. The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws, including a wide range of consumer protection laws that apply to all banks and savings institutions, like the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB also has examination and enforcement authority over all banks with regulatory assets exceeding $10 billion at four consecutive quarter-ends. The Bank has not exceeded $10 billion in regulatory assets at four consecutive quarter-ends, but it may at some point in the future. Smaller banks, like the Bank, will continue to be examined for compliance with the consumer laws and regulations of the CFPB by their primary bank regulators (the OCC, in the case of the Bank). The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, interpretation or application, could have a material adverse impact on our operations. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued formal enforcement orders requiring capital ratios in excess of regulatory requirements and/or assessing monetary penalties. Bank regulatory agencies, such as the OCC and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of investors. The CFPB enforces consumer protection laws and regulations for the benefit of the consumer and not the protection or benefit of investors. In addition, new laws and regulations may continue to increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and securities, the products we offer, the fees we can charge and our ongoing operations, costs, and profitability. The Company is also directly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits. These regulations, along with the currently existing tax, accounting, securities, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern financial reporting. The Company's failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputation damage, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Part I, Item 1. Business - Regulation and Supervision" for more information about the regulations to which the Company is subject. 38 Other Risks The Company's ability to pay dividends is subject to the ability of the Bank to make capital distributions to the Company. The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level in the event earnings are not sufficient to pay dividends. Under certain circumstances, capital distributions from the Bank to the Company may be subject to regulatory approvals. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Limitations on Dividends and Other Capital Distributions" for additional information. Our risk- management and compliance programs and functions may not be effective in mitigating risk and loss. We maintain an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that we face. These risks include: interest-rate, credit, liquidity, operations, reputation, compliance and litigation. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. If conditions or circumstances arise that expose flaws or gaps in our risk management or compliance programs, or if our controls do not function as designed, the performance and value of our business could be adversely affected. The Company may not attract and retain skilled employees. The Company's success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense, and the Company spends considerable time and resources attracting and hiring qualified people for its operations. The unexpected loss of the services of one or more of the Company's key personnel could have a material adverse impact on the Company's business because of their skills, knowledge of the Company's market, and years of industry experience, as well as the difficulty of promptly finding qualified replacement personnel. Item 1B. Unresolved Staff Comments None. Item 2. Properties At September 30, 2020, we had 45 traditional branch offices and 9 in-store branch offices. The Bank owns the office building and related land in which its home office and executive offices are located, and 34 of its other branch offices. The remaining 19 branches are either leased or partially owned. For additional information regarding our lease obligations, see "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Leases." Management believes that our current facilities are adequate to meet our present and immediately foreseeable needs. However, we will continue to monitor customer growth and expand our branching network, if necessary, to serve our customers' needs. Item 3. Legal Proceedings The Company and the Bank are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In our opinion, after consultation with legal counsel, we believe it unlikely that such pending legal actions will have a material adverse effect on our financial condition, results of operations or liquidity. Item 4. Mine Safety Disclosures Not applicable. 39 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stock Listing Capitol Federal Financial, Inc. common stock is traded on the Global Select tier of the NASDAQ Stock Market under the symbol "CFFN". At November 19, 2020, there were approximately 8,539 Capitol Federal Financial, Inc. stockholders of record. Share Repurchases On October 28, 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. During the current fiscal year, the Company repurchased $23.8 million, or 2,558,100 shares, of common stock. As of September 30, 2020, there was still $46.2 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock. Subsequent to September 30, 2020 through November 24, 2020, the Company repurchased an additional $1.5 million, or 164,400 shares, of common stock. This plan has no expiration date; however, the Federal Reserve Bank's approval for the Company to repurchase shares extends through August 2021. Since the Company completed its second-step conversion in December 2010, $393.4 million worth of shares of common stock have been repurchased. The following table summarizes our share repurchase activity during the three months ended September 30, 2020 and additional information regarding our share repurchase program. Total Number of Approximate Dollar Total Shares Purchased as Value of Shares Number of Average Part of Publicly that May Yet Be Shares Price Paid Announced Plans Purchased Under the Purchased per Share or Programs Plans or Programs July 1, 2020 through July 31, 2020 — $ — — $ 70,000,000 August 1, 2020 through August 31, 2020 — — — 70,000,000 September 1, 2020 through September 30, 2020 2,558,100 9.31 2,558,100 46,196,180 Total 2,558,100 9.31 2,558,100 46,196,180 Stockholders and General Inquiries Copies of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 are available to stockholders at no charge in the Investor Relations section of our website, www.capfed.com. 40 Stockholder Return Performance Presentation The information presented below assumes $100 invested on September 30, 2015 in the Company's common stock and in each of the indices, and assumes the reinvestment of all dividends. Historical stock price performance is not necessarily indicative of future stock price performance. Period Ending Index 9/30/2015 9/30/2016 9/30/2017 9/30/2018 9/30/2019 9/30/2020 Capitol Federal Financial, Inc. 100.00 123.80 137.11 127.06 148.12 104.91 NASDAQ Composite Index 100.00 116.42 144.00 180.24 181.19 255.40 SNL U.S. Bank & Thrift Index 100.00 103.39 145.42 156.32 154.40 113.66 Source: S&P Global Market Intelligence Restrictions on the Payments of Dividends The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. The dividend policy of the Company is subject to the discretion of the Board of Directors and will depend upon a number of factors, including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Limitations on Dividends and Other Capital Distributions" for additional information regarding the Company's ability to pay dividends. 41 Item 6. Selected Financial Data The summary information presented below under "Selected Balance Sheet Data" and "Selected Operations Data" for, and as of the end of, each of the years ended September 30 is derived from our audited consolidated financial statements. The following information is only a summary and should be read in conjunction with our consolidated financial statements. At September 30, 2020 2019 2018 2017 2016 (Dollars in thousands) Selected Balance Sheet Data: Total assets $ 9,487,218 $ 9,340,018 $ 9,449,547 $ 9,192,916 $ 9,267,247 Loans receivable, net 7,202,851 7,416,747 7,514,485 7,195,071 6,958,024 Securities: AFS 1,560,950 1,204,863 714,614 415,831 527,301 HTM — — 612,318 827,738 1,100,874 FHLB stock 93,862 98,456 99,726 100,954 109,970 Deposits 6,191,408 5,581,867 5,603,354 5,309,868 5,164,018 Borrowings 1,789,313 2,239,989 2,285,033 2,373,808 2,572,389 Stockholders' equity 1,284,859 1,336,326 1,391,622 1,368,313 1,392,964 For the Year Ended September 30, 2020 2019 2018 2017 2016 (Dollars and counts in thousands, except per share amounts) Selected Operations Data: Total interest and dividend income $ 304,978 $ 329,954 $ 321,892 $ 313,186 $ 301,113 Total interest expense 115,643 123,564 123,119 117,804 108,931 Net interest and dividend income 189,335 206,390 198,773 195,382 192,182 Provision for credit losses 22,300 750 — — (750) Net interest and dividend income after provision for credit losses 167,035 205,640 198,773 195,382 192,932 Deposit service fees 11,285 12,740 15,636 15,053 14,835 Other non-interest income 8,314 9,218 6,399 7,143 8,477 Total non-interest income 19,599 21,958 22,035 22,196 23,312 Salaries and employee benefits 52,996 53,145 46,563 43,437 42,378 Other non-interest expense 53,008 53,799 50,339 46,221 51,927 Total non-interest expense 106,004 106,944 96,902 89,658 94,305 Income before income tax expense 80,630 120,654 123,906 127,920 121,939 Income tax expense 16,090 26,411 24,979 43,783 38,445 Net income $ 64,540 $ 94,243 $ 98,927 $ 84,137 $ 83,494 Basic earnings per share $ 0.47 $ 0.68 $ 0.73 $ 0.63 $ 0.63 Average basic shares outstanding 137,897 137,677 134,698 134,082 133,045 Diluted earnings per share $ 0.47 $ 0.68 $ 0.73 $ 0.63 $ 0.63 Average diluted shares outstanding 137,901 137,735 134,759 134,244 133,176 42 2020 2019 2018 2017 2016 Performance Ratios: Return on average assets (1) 0.69 % 0.99 % 0.94 % 0.75 % 0.74 % Return on average equity (1) 4.92 6.94 7.25 6.09 5.95 Dividends paid per share $ 0.68 $ 0.98 $ 0.88 $ 0.88 $ 0.84 Dividend payout ratio 145.43 % 143.17 % 119.60 % 140.20 % 133.86 % Operating expense ratio 1.13 1.12 0.92 0.80 0.84 Efficiency ratio (1) 50.74 46.83 43.89 41.21 43.76 Ratio of average interest-earning assets to average interest-bearing liabilities 1.13x 1.14x 1.13x 1.12x 1.13x Net interest margin (1) 2.12 % 2.26 % 1.95 % 1.79 % 1.75 % Interest rate spread information: Average during period (1) 1.94 2.07 1.80 1.66 1.63 End of period 1.92 2.04 2.18 2.04 1.92 Asset Quality Ratios: Non-performing assets to total assets 0.13 0.10 0.14 0.20 0.35 Non-performing loans to total loans 0.17 0.10 0.15 0.23 0.42 ACL to non-performing loans 252.42 121.99 77.01 50.58 29.32 ACL to loans receivable, net 0.44 0.12 0.11 0.12 0.12 Capital Ratios: Equity to total assets at end of period 13.5 14.3 14.7 14.9 15.0 Average equity to average assets 14.0 14.3 13.0 12.4 12.4 Company CBLR/Tier 1 leverage ratio (2) 13.7 13.8 14.9 12.3 12.3 Bank CBLR/Tier 1 leverage ratio (2) 12.4 12.1 13.0 10.8 10.9 Other Data: Number of traditional offices 45 44 48 37 37 Number of in-store offices 9 10 10 10 10 (1) The table below provides a reconciliation between certain performance ratios presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") and those same performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of its unique nature. The leverage strategy reduces some of our performance ratios, even though it increases our net income, due to the small amount of earnings associated with the transaction in comparison to the size of the transaction. The leverage strategy was not in place during the current fiscal year due to the negative interest rate spreads between the related FHLB borrowings and cash held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City"), making the transaction unprofitable. For the Year Ended September 30, 2019 2018 Actual Leverage Non- Actual Leverage Non- (GAAP) Strategy GAAP (GAAP) Strategy GAAP Return on average assets 0.99 % (0.02) % 1.01 % 0.94 % (0.13) % 1.07 % Return on average equity 6.94 — 6.94 7.25 0.13 7.12 Efficiency ratio 46.83 — 46.83 43.89 (0.30) 44.19 Net interest margin 2.26 (0.04) 2.30 1.95 (0.29) 2.24 Average interest rate spread 2.07 (0.03) 2.10 1.80 (0.26) 2.06 For the Year Ended September 30, 2017 2016 Actual Leverage Non- Actual Leverage Non- (GAAP) Strategy GAAP (GAAP) Strategy GAAP Return on average assets 0.75 % (0.14) % 0.89 % 0.74 % (0.14) % 0.88 % Return on average equity 6.09 0.21 5.88 5.95 0.17 5.78 Efficiency ratio 41.21 (0.63) 41.84 43.76 (0.42) 44.18 Net interest margin 1.79 (0.36) 2.15 1.75 (0.35) 2.10 Average interest rate spread 1.66 (0.32) 1.98 1.63 (0.30) 1.93 (2) The Tier 1 leverage ratio was replaced with the CBLR when the Bank and Company elected to use the CBLR framework beginning in fiscal year 2020. See "Part I, Item 1. Business - Regulation and Supervision - Regulatory Capital Requirements" for additional information regarding the CBLR. 43 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity, and capital resources of the Company. The Bank comprises almost all of the consolidated assets and liabilities of the Company and the Company is dependent primarily upon the performance of the Bank for the results of its operations. Because of this relationship, references to management actions, strategies and results of actions apply to both the Bank and the Company. Executive Summary The following summary should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section in its entirety. The Company provides a full range of banking services through the Bank, which is a wholly-owned subsidiary of the Company headquartered in Topeka, Kansas. The Bank has 45 traditional and nine in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the Kansas City metropolitan area. We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, securities, and cash, and the interest paid on deposits and borrowings. Company's Actions and Impact on Operations as a Result of the COVID-19 Pandemic Management's actions related to the COVID-19 pandemic and the impact of the pandemic on certain aspects of the Company's business during fiscal year 2020 are summarized below. Bank operations - In mid-March 2020, preventative health measures were put in place including elimination of business-related travel, implementing mandatory work from home for all employees able to do so, social distancing precautions for all employees in Bank offices, and preventative cleaning at offices and branches. Lobby services were limited to appointment only while drive-through, mobile, and online banking became the Bank's primary channels of serving customers. Retail loan closings were conducted with customers coming to our drive-through facilities and commercial loans were closed in person only when necessary. All employees continued to be paid their regular salary and receive full benefits. In mid-May 2020, lobbies reopened with limitations on the number of customers in a branch at one time. We also implemented operational measures to promote social distancing when customers visit branches and installed sneeze guards. There are several other precautions being taken at our locations such as extra cleaning in high traffic/touch areas and providing locations with additional cleaning supplies, hand sanitizer and masks. In early June 2020, back-office employees started to return to the office in phases. Due to the increase in COVID-19 cases in late June into July 2020, management rolled back the changes to the lobbies that occurred mid-May and adjusted the return to office phases, where necessary, for back-office employees and lobby services were again by appointment only. In mid-September 2020, lobbies were reopened once again. Management continues to monitor COVID-19 cases and will adjust operational plans as necessary. Loan modification programs - In late March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. Generally, loan modifications under these programs ("COVID-19 loan modifications") for one- to four-family loans and consumer loans consist of a three-month payment forbearance of principal, interest and, in some cases, escrow. COVID-19 loan modifications of commercial loans mainly consist of a six-month interest-only payment period. See "Financial Condition - Loans Receivable" below for additional discussion regarding COVID-19 loan modifications. As of September 30, 2020, the Bank had 193 one- to four-family loans totaling $39.8 million and 27 consumer loans totaling $795 thousand that were still in their deferral period. The deferral period concluded by September 30, 2020 for $199.7 million of one- to four-family loans and $1.6 million of consumer loans. As of September 30, 2020, the Bank had 204 commercial loans with a combined gross loan amount of $367.4 million, which includes undisbursed amounts, that were still in their deferral period. The deferral period concluded by September 30, 2020 for $43.5 million, or 11%, of the commercial loans subject to COVID-19 loan modifications. All of these loans were current 44 as of September 30, 2020. The deferral period for the majority of the remaining commercial loans concluded by November 16, 2020. Small Business Administration Paycheck Protection Program loans - As of September 30, 2020, the Bank had originated and funded 791 PPP loans totaling $43.9 million, with a median loan amount of $19 thousand, and received origination fees totaling $1.9 million associated with these loans. These loans are fully guaranteed by the SBA. The program ended August 8, 2020. Through November 16, 2020, $12.2 million of the Bank's PPP loans have been forgiven by the SBA. On October 8, 2020 the SBA released a streamlined loan forgiveness application for PPP loans in amounts of $50 thousand or less. Of the PPP loans originated by the Bank, 611 loans totaling $9.6 million, or 22% of the Bank's aggregate PPP loan balance, were in amounts less than $50 thousand and will be eligible for the streamlined forgiveness process. Capital, liquidity, and dividends - Management performed stress test scenarios during April 2020. Based on the Company's existing capital levels, deposit inflows, loan underwriting policies, loan concentration, and geographical diversification, no liquidity or capital concerns were identified as a result of the stress tests. Management continues to anticipate being able to manage the economic risks and uncertainties associated with the COVID-19 pandemic and the Bank remaining well capitalized with sufficient liquidity to serve our customers. Deposit balances have increased due primarily to the economic stimulus payments, a reduction in consumer spending, and PPP loan proceeds being deposited at the Bank. As a result, management is currently faced with the challenge of excess liquidity. Due to the nature of deposit cash flows, management does not know how long the excess liquidity will continue. As such, management has elected, for the time being, to reduce the Bank's level of borrowings and increase the balance of securities using the excess liquidity from the deposit portfolio. With earnings of $0.47 per share for fiscal year 2020, and a cash balance at the holding company level of $82.5 million, the Company has the resources to continue to pay its regular quarterly dividend of $0.085 per share for the foreseeable future. Given the state of economic uncertainty and how that may play out with the credit risk exposure in the Bank's loan portfolio, the Company elected to defer the annual True Blue dividend in June 2020 and did not ask at that time for a regulatory non-objection to move capital from the Bank to the Company to pay that dividend. It is management's intention to ask for a regulatory non-objection at some point in the future to pay this dividend when economic conditions are more certain. It is currently the Company's intention to pay out 100% of its fiscal year 2021 earnings. Management's Evolving Response to COVID-19 - There is continued concern about a resurgence of COVID-19 as we enter the winter months. In October and November 2020, COVID-19 cases, hospitalizations, and deaths nationally and in our local market areas increased compared to the summer months, including to new record levels in some areas. The Kansas Governor recently issued an executive order establishing a statewide face-covering protocol as part of her administration's strategy to keep schools and businesses open and to protect the economy. We continue to be confronted with a significant and unfamiliar degree of uncertainty as to how a resurgence will impact our customers, employees, and operations and how actions taken by governmental authorities and other third parties in response to a resurgence will impact our customers, employees, and operations. We will continue to monitor COVID-19 cases and will adjust operational plans as necessary. We will also continue to assist our customers as necessary during these uncertain times. See "Part I, Item 1A. Risk Factors - Risks Related to Macroeconomic Conditions" for additional discussion regarding the impact the COVID-19 pandemic may have on our business, results of operations and financial condition. Impact on Market Interest Rates as a Result of COVID-19 Pandemic and Company's Response The Federal Reserve, in response to economic risks resulting from the COVID-19 pandemic, returned to a zero-interest rate policy in March 2020. This was after most broader market rates decreased significantly in response to evolving news about the COVID-19 pandemic. The dramatic lowering of interest rates in a short period of time impacted the operations and performance of the Bank. Deteriorating economic conditions included more than 20 million people becoming unemployed in the United States in one month's time, with more than 58 million in total filing for unemployment benefits, along with immediate reductions in consumer spending on almost all categories of purchases except groceries and staples, and closure or significantly reduced operations of restaurants, bars, airlines, hotels, and entertainment and hospitality venues, among others, and had a devastating impact on the economy. Since that time, many areas of consumer spending have rebounded, generally locally and not related to travel and entertainment. As previously described, we adjusted our operations in response to the 45 COVID-19 pandemic and have worked with both our retail and commercial customers to help them manage their debt during this period of economic uncertainty as our regulators or the CARES Act have allowed. There is increasing concern about the longer lasting impact on local business as well as travel and entertainment resulting from the COVID-19 pandemic. This could cause a longer recovery time for all sectors of the economy and could make it challenging for sectors that have had better recoveries to maintain that recovery in the long run. We have been responding and expect to continue to respond to local market conditions regarding the loan and deposit rates we offer. We responded to lower market rates for lending by lowering rates offered on our one- to four-family loan products over the course of the year. Given current market interest rates, rates offered on new loans and the recent volume of one- to four-family refinances and endorsements allowing borrowers to take advantage of the lower current market interest rates, the yield on the total loan portfolio is likely to continue to decrease. Additionally, with significant cash inflows realized due to investment securities being called and prepayments on MBS increasing, the yields on reinvested funds into new securities are lower than portfolio yields. Since the onset of the pandemic the Bank lowered its offered rates on all retail deposit products except checking and savings accounts. Changes in the rates paid on money market accounts have an immediate impact on the cost of our deposits, while the impact of reducing rates offered on our certificate of deposit products lower the cost of deposits only as certificates of deposit reprice lower when they mature. As the Bank further monitors rates offered and the cost of borrowings, we anticipate that the average cost of our interest-bearing liabilities will continue to decrease. Considering the drastic changes in market rates and the ongoing economic uncertainty, even with the changes the Bank has made to its cost of funding, with the lower rates on new mortgage loans, refinances, endorsements and new securities also at lower rates, our net interest margin could continue to decrease, with further downside risk as a result of high levels of prepayments and premium amortization on correspondent one- to four-family loans and MBS. Summary of Results of Operation and Financial Condition The Company recognized net income of $64.5 million, or $0.47 per share, for the year ended September 30, 2020 compared to net income of $94.2 million, or $0.68 per share, for the year ended September 30, 2019. The decrease in net income was due primarily to a $21.6 million increase in provision for credit losses and a decrease in net interest income, partially offset by a decrease in income tax expense. Net interest income decreased $17.1 million, or 8.3%, from the prior year to $189.3 million for the current year. The leverage strategy was suspended at certain times during the prior year and during all of the current year due to the negative interest rate spreads between the related FHLB borrowings and cash held at the FRB of Kansas City, making the transaction unprofitable. Excluding the effects of the leverage strategy, net interest income decreased $16.9 million, or 8.2% compared to the prior year. The decrease in net interest income excluding the effects of the leverage strategy was due to a $20.9 million decrease in interest and dividend income, partially offset by a $4.0 million decrease in interest expense. Interest and dividend income decreased across all interest-earning asset types, with the most significant being a $13.7 million decrease in interest income on loans receivable, primarily related to correspondent loans. Interest income on correspondent loans decreased due primarily to a reduction in the portfolio balance and rate related to payoffs exceeding purchases, new loans purchased at lower market interest rates, and downward repricing of existing loans, along with an increase in premium amortization due to payoffs and endorsements. Interest expense on borrowings, excluding the effects of the leverage strategy, decreased $5.4 million due to replacing FHLB advances at lower market rates and a reduction in the rate and usage of the Bank's FHLB line of credit. This was partially offset by a $1.4 million increase in interest expense on deposits due to an increase in the cost of the retail/business certificate of deposit portfolio. The net interest margin decreased 14 basis points, from 2.26% for the prior year to 2.12% for the current year. When the leverage strategy is in place, it increases our net interest income but reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. Excluding the effects of the leverage strategy, the net interest margin would have decreased 18 basis points, from 2.30% for the prior year to 2.12% for the current year. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to a decrease in the loan portfolio yield, specifically the yield on the correspondent one- to four-family loan portfolio. 46 Total assets at September 30, 2020 were $9.49 billion, an increase of $147.2 million, or 1.6% from September 30, 2019. The increase was due mainly to an increase in securities, partially offset by a decrease in loans receivable. Securities were purchased with cash flows from payments on the loan portfolio and growth in the deposit portfolio. Total loans decreased $213.9 million from September 30, 2019 to September 30, 2020. The decrease was primarily in the one- to four-family correspondent loans and one- to four-family bulk purchased loans, partially offset by an increase in one- to four-family originated loans and commercial loans. During the current year, the Bank originated and refinanced $1.00 billion of one- to four-family and consumer loans with a weighted average rate of 3.27% and purchased $448.0 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.29%. The Bank also originated $165.5 million of commercial loans with a weighted average rate of 3.52% and entered into commercial real estate loan participations of $93.6 million at a weighted average rate of 4.16%. The commercial loan portfolio totaled $829.7 million at September 30, 2020 and was composed of 75% commercial real estate, 12% commercial and industrial, and 13% commercial construction. Total commercial real estate and commercial construction potential exposure, including undisbursed amounts and outstanding commitments totaling $205.5 million, was $937.5 million at September 30, 2020. Total commercial and industrial potential exposure, including undisbursed amounts and outstanding commitments of $21.7 million, was $119.3 million at September 30, 2020. Total deposits at September 30, 2020 were $6.19 billion, an increase of $609.5 million, or 10.9%, from September 30, 2019. Non-maturity deposits increased $575.9 million, including a $242.8 million increase in checking accounts, a $220.8 million increase in money market accounts, and a $112.3 million increase in savings accounts. Retail/business certificates of deposit increased $73.7 million during the current year, mainly in the business-related certificates of deposit category. These increases were partially offset by a $40.1 million decrease in public unit certificates of deposit. Total borrowings at September 30, 2020 were $1.79 billion, a decrease of $450.7 million, or 20.1%, from September 30, 2019. The decrease was due to not renewing a portion of the FHLB advances and repurchase agreements that matured during the current year and repaying the FHLB line of credit balance. Cash flows from the deposit portfolio were used to pay off maturing borrowings and the FHLB line of credit. Stockholders' equity was $1.28 billion at September 30, 2020 compared to $1.34 billion at September 30, 2019. The $51.5 million decrease was due primarily to the payment of cash dividends totaling $93.9 million and the repurchase of common stock totaling $23.8 million, partially offset by net income of $64.5 million during the current year. During the current fiscal year, the Company repurchased 2,558,100 shares of common stock. In the long run, management considers the Bank's equity to total assets ratio of at least 10% an appropriate level of capital. At September 30, 2020, this ratio was 12.3%. The cash dividends paid during the current year totaled $0.68 per share and consisted of a $0.34 per share cash true-up dividend related to fiscal year 2019 earnings, paid in December 2019, per the Company's dividend policy, and four regular quarterly cash dividends of $0.085 per share, totaling $0.34 per share. 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 affect reported results materially. These critical accounting policies and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application. Allowance for Credit Losses. The Company maintains an ACL to absorb inherent losses in the loan portfolio based upon ongoing quarterly assessments of the loan portfolio. The ACL is maintained through provisions for credit losses which are either charged or credited to income. The methodology for determining the ACL is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in economic conditions that could result in changes to the amount of the recorded ACL. Additionally, bank regulators review the ACL and could have a differing view from management regarding the ACL balance, which could result in an increase in the ACL and/or the recognition of additional charge-offs. Although management believes that the Bank has established and maintained the ACL at appropriate levels, additions may be necessary if economic and other conditions worsen substantially from the current operating environment, and/or if bank regulators have a differing view from management regarding the ACL balance. 47 Our lending emphasis on the origination and purchase of one- to four-family loans and, to a lesser extent, consumer loans secured by one- to four-family residential properties, has resulted in a loan concentration in one- to four-family residential mortgage loans. We believe the primary risks inherent in our one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Adverse changes in any one or a combination of these events may negatively affect borrowers' ability to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions. Although the 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 business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or potentially be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Each quarter, we prepare a formula analysis model which segregates our loan portfolio into categories based on certain risk characteristics such as loan type (one- to four-family, commercial, etc.), interest payments (fixed-rate and adjustable-rate), loan source (originated, correspondent purchased, or bulk purchased), LTV ratios, borrower's credit score and payment status (i.e. current or number of days delinquent). Consumer loans, such as second mortgages and home equity lines of credit, with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a combined LTV ratio. Historical loss factors are applied to each loan category in the formula analysis model. Additionally, qualitative factors that management believes impact the collectability of the loan portfolio as of the evaluation date are applied to each loan category. Qualitative loss factors increase as loans are classified or become delinquent. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information related to the historical and qualitative loss factors utilized in the formula analysis model. The historical loss and qualitative factors applied in the formula analysis model are reviewed quarterly by management to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. Our ACL methodology permits modifications to the formula analysis model in the event that, in management's judgment, significant factors which affect the collectability of the portfolio or any category of the loan portfolio, as of the evaluation date, have changed from the current formula analysis model. Management's evaluation of the qualitative factors with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with a specific problem loan or portfolio segment. During the current fiscal year, management increased the historical loss and qualitative factors applied in the formula analysis model for all loan categories and added a COVID-19 qualitative loss factor to the Bank's commercial loan portfolio. The increase in the factors and the addition of the new qualitative factor was in response to the deterioration of economic conditions due to the COVID-19 pandemic. Management considered several items when determining the appropriate historical loss and qualitative factors to apply in the formula analysis model. Such considerations included: national and state unemployment and unemployment benefit claim information, amount and timing of governmental financial assistance, the Bank's COVID-19 loan modification program, consumer spending information, industries most impacted by the COVID-19 pandemic and a loan analysis completed by the commercial lending team. Management also evaluated the Bank's historical and peer ACL to loan ratios and charge-off ratios taking into consideration the economic conditions during those time periods. After applying the higher and new factors in the formula analysis model, management then considered the calculated ACL to loans ratio compared to historical and peer ratios to determine the appropriate amount of ACL at September 30, 2020, considering the economic conditions at that point in time. Non-PCI loans that have not become impaired subsequent to the acquisition date are included in the formula analysis model. For these loans, the Company estimates a hypothetical amount of ACL. The Company applies the same historical and qualitative loss factors as the Bank's formula analysis model to establish the hypothetical amount of ACL. This amount is compared with the remaining net purchase discount for the non-PCI loans to test for credit quality deterioration and the 48 possible need for an additional loan loss provision. To the extent the remaining net purchase discount of the pool is greater than the hypothetical ACL, no additional ACL is necessary. If the remaining net purchase discount of the pool is less than the hypothetical ACL, the difference results in an increase to the ACL recorded through a provision for credit losses. Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate. If economic conditions worsen or do not improve in the near term, and if future government programs, if any, do not provide adequate relief to borrowers, it is possible the Bank's ACL will need to increase in future periods. In addition, the adequacy of the Company's ACL is reviewed during bank regulatory examinations. We consider any comments from our regulators when assessing the appropriateness of our ACL. Management seeks to apply the ACL methodology in a consistent manner; however, the methodology may be modified in response to changing conditions. ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments became effective for the Company on October 1, 2020. See "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 1. Summary of Significant Accounting Policies" for additional information. Fair Value Measurements. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825. The Company groups its financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable. The Company bases its fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company's AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities are recorded, net of tax, as AOCI in stockholders' equity. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its AFS securities. Various modeling techniques are used to determine pricing for the Company's securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. All AFS securities are classified as Level 2. The Company's interest rate swaps are measured at fair value on a recurring basis. The estimated fair value of the interest rate swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. Changes in the fair value of the interest rate swaps are recorded, net of tax, as AOCI in stockholders' equity. The Company did not have any other financial instruments that were measured at fair value on a recurring basis at September 30, 2020. Recent Accounting Pronouncements For a discussion of Recent Accounting Pronouncements, see "Part II, Item 8. Financial Statements and Supplementary Data – Notes to Financial Statements – Note 1. Summary of Significant Accounting Policies." 49 Management Strategy We are a community-oriented financial institution dedicated to serving the needs of customers in our market areas. Our commitment is to provide qualified borrowers the broadest possible access to home ownership through our mortgage lending programs and to offer a complete set of personal and commercial banking products and services to our customers. We strive to enhance stockholder value while maintaining a strong capital position. To achieve these goals, we focus on the following strategies: • Lending. We are one of the leading originators of one- to four-family loans in the state of Kansas. We originate these loans primarily for our own portfolio, and we service the loans we originate. We also purchase one- to four-family loans from correspondent lenders. In addition, we offer several commercial lending options to our customers and participate in commercial loans with other lenders. We offer both fixed- and adjustable-rate products with various terms to maturity and pricing options. We maintain strong relationships with local real estate agents to attract mortgage loan business. We rely on our marketing efforts and customer service reputation to attract mortgage business from walk-in customers, customers that apply online, and existing customers. • Deposit Services. We offer a wide array of retail and business deposit products and services. These products include checking, savings, money market, certificates of deposit, and retirement accounts. Our deposit services are provided through a branch network of 54 locations, including traditional branches and retail in-store locations, our call center which operates on extended hours, mobile banking, telephone banking, and online banking and bill payment services. • Cost Control. We generally are very effective at controlling our costs of operations. By using technology, we are able to centralize our loan servicing and deposit support functions for efficient processing. We serve a broad range of customers through relatively few branch locations. Our average deposit base per traditional branch at September 30, 2020 was approximately $123.6 million. This large average deposit base per branch helps to control costs. Our one- to four-family lending strategy and our effective management of credit risk allows us to service a large portfolio of loans at efficient levels because it costs less to service a portfolio of performing loans. We recognize it is more expensive to offer a full suite of commercial products and services, but we will continue our efforts to control those costs. • Asset Quality. We utilize underwriting standards for our lending products, including the loans we purchase and participate in, that are designed to limit our exposure to credit risk. We require complete documentation for both originated and purchased loans, and make credit decisions based on our assessment of the borrower's ability to repay the loan in accordance with its terms. Additionally, we monitor the asset quality of existing loans and strive to work proactively with customers who face challenging financial conditions. • Capital Position. Our policy has always been to protect the safety and soundness of the Bank through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been a capital ratio in excess of the well-capitalized standards set by the OCC. We believe that maintaining a strong capital position safeguards the long-term interests of the Bank, the Company, and our stockholders. • Stockholder Value. We strive to provide stockholder value while maintaining a strong capital position. One way that we continue to provide returns to stockholders is through our dividend payments. Total dividends declared and paid during fiscal year 2020 were $93.9 million. The Company's cash dividend payout policy is reviewed quarterly by management and the Board of Directors, and the ability to pay dividends under the policy depends upon a number of factors, including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company level. For fiscal year 2021, it is the intention of the Board of Directors to continue the payout of 100% of the Company's earnings to its stockholders through regular quarterly dividends and a true-up dividend. Stockholder value is also provided through common stock repurchases. During fiscal year 2020, the Company repurchased $23.8 million, or 2,558,100 shares, of common stock. • Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies. 50 Financial Condition Assets. Total assets at September 30, 2020 were $9.49 billion, an increase of $147.2 million, or 1.6% from September 30, 2019. The increase was due mainly to an increase in securities, partially offset by a decrease in loans receivable. Securities were purchased with cash flows from the loan portfolio and growth in the deposit portfolio. Loans Receivable. The following table presents the balance and weighted average rate of our loan portfolio as of the dates indicated. Approximately 67% of the one- to four-family loan portfolio balance at September 30, 2020 was comprised of loans that had a balance of $510 thousand or less at the time of origination. The weighted average interest rate on our loan portfolio decreased 26 basis points, to 3.55% at September 30, 2020. The decrease was due primarily to the downward repricing of the one- to four-family originated and correspondent purchased portfolios as a result of endorsements, payoffs of loans with higher rates, and originations and purchases at lower market rates during the year. September 30, 2020 September 30, 2019 Amount Rate Amount Rate (Dollars in thousands) One- to four-family: Originated $ 3,937,310 3.50 % $ 3,873,851 3.74 % Correspondent purchased 2,101,082 3.49 2,349,877 3.64 Bulk purchased 208,427 2.41 252,347 2.94 Construction 34,593 3.30 36,758 4.00 Total 6,281,412 3.46 6,512,833 3.68 Commercial: Commercial real estate 626,588 4.29 583,617 4.48 Commercial and industrial 97,614 2.79 61,094 5.14 Construction 105,458 4.04 123,159 4.81 Total 829,660 4.08 767,870 4.58 Consumer loans: Home equity 103,838 4.66 120,587 6.15 Other 10,086 4.40 11,183 4.57 Total 113,924 4.64 131,770 6.02 Total loans receivable 7,224,996 3.55 7,412,473 3.81 Less: ACL 31,527 9,226 Discounts/unearned loan fees 29,190 31,058 Premiums/deferred costs (38,572) (44,558) Total loans receivable, net $ 7,202,851 $ 7,416,747 51 Loan Activity - The following tables summarize activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid off as a result of refinances are included in repayments. Loan endorsements are not included in the activity in the following 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. During fiscal year 2020, the Bank endorsed $695.4 million of one- to four-family loans, reducing the average rate on those loans by 83 basis points. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal. During the initial days of the COVID-19 pandemic, correspondent one- to four-family loan application acceptance was suspended by the Bank but existing correspondent applications and commitments continued to progress through the approval and funding process. One- to four-family correspondent new loan application acceptance resumed in mid-June 2020. For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Amount Rate Amount Rate Amount Rate Amount Rate (Dollars in thousands) Beginning balance $ 7,407,442 3.64 % $ 7,493,280 3.74 % $ 7,424,834 3.77 % $ 7,412,473 3.81 % Originated and refinanced: Fixed 265,424 2.98 277,904 2.83 172,891 3.44 233,693 3.52 Adjustable 44,625 3.68 60,626 3.75 55,946 4.11 55,126 4.30 Purchased and participations: Fixed 61,435 3.07 131,739 3.28 125,612 3.46 123,118 3.77 Adjustable 4,396 2.76 62,510 3.76 18,985 2.96 13,801 3.06 Change in undisbursed loan funds 13,898 (32,202) 24,049 (9,743) Repayments (572,536) (586,434) (328,644) (403,361) Principal recoveries/(charge-offs), net 312 19 (314) (16) Other — — (79) (257) Ending balance $ 7,224,996 3.55 $ 7,407,442 3.64 $ 7,493,280 3.74 $ 7,424,834 3.77 For the Year Ended September 30, 2020 2019 Amount Rate Amount Rate (Dollars in thousands) Beginning balance $ 7,412,473 3.81 % $ 7,507,645 3.74 % Originated and refinanced: Fixed 949,912 3.15 505,334 4.10 Adjustable 216,323 3.97 319,608 4.77 Purchased and participations: Fixed 441,904 3.44 186,135 4.64 Adjustable 99,692 3.47 76,305 4.40 Change in undisbursed loan funds (3,998) 52,220 Repayments (1,890,975) (1,233,157) Principal recoveries, net 1 13 Other (336) (1,630) Ending balance $ 7,224,996 3.55 $ 7,412,473 3.81 52 The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total. Commercial loan renewals are not included in the activity in the following table except to the extent new funds are disbursed at the time of renewal. Loan originations, purchases, and refinances are reported together. During fiscal year 2019, the Bank discontinued the use of LIBOR for adjustable-rate one- to four-family loan originations and no longer purchases correspondent one- to four-family loans that use LIBOR, since LIBOR is expected to be discontinued by the end of calendar year 2021. Adjustable-rate one- to four-family loan originations and purchases are now tied to the one-year CMT index, which, to date, does not appear to have had any impact on our ability and opportunities to originate and purchase adjustable-rate one- to four-family loans. For the Year Ended September 30, 2020 September 30, 2019 Amount Rate % of Total Amount Rate % of Total (Dollars in thousands) Fixed-rate: One- to four-family: (1) <= 15 years $ 384,937 2.79 % 22.5 % $ 106,966 3.56 % 9.8 % > 15 years 804,898 3.41 47.1 420,243 4.14 38.6 One- to four-family construction 44,754 3.28 2.6 51,663 4.13 4.8 Commercial: Commercial real estate 44,005 4.17 2.7 27,886 6.21 2.6 Commercial and industrial 65,174 1.92 3.8 15,291 5.24 1.4 Commercial construction 39,346 4.71 2.3 59,108 4.85 5.4 Home equity 4,493 5.83 0.3 5,411 6.20 0.5 Other 4,209 5.67 0.2 4,901 5.29 0.5 Total fixed-rate 1,391,816 3.24 81.5 691,469 4.24 63.6 Adjustable-rate: One- to four-family: (2) <= 36 months 5,800 2.80 0.3 9,786 3.57 0.9 > 36 months 125,865 2.95 7.4 139,511 3.70 12.8 One- to four-family construction 12,984 2.97 0.8 19,364 3.86 1.8 Commercial: Commercial real estate 50,697 4.56 3.0 100,142 4.84 9.2 Commercial and industrial 6,360 4.72 0.4 27,496 5.63 2.5 Commercial construction 53,563 4.06 3.1 30,251 5.39 2.8 Home equity 58,709 4.95 3.4 66,893 6.33 6.2 Other 2,037 3.86 0.1 2,470 3.51 0.2 Total adjustable-rate 316,015 3.81 18.5 395,913 4.70 36.4 Total originated, refinanced and purchased $ 1,707,831 3.35 100.0 % $ 1,087,382 4.41 100.0 % Purchased and participation loans included above: Fixed-rate: Correspondent - one- to four-family $ 395,778 3.34 $ 118,758 4.31 Participations - commercial 46,126 4.29 67,377 5.24 Total fixed-rate purchased/participations 441,904 3.44 186,135 4.64 Adjustable-rate: Correspondent - one- to four-family 52,192 2.94 47,655 3.83 Participations - commercial 47,500 4.04 28,650 5.35 Total adjustable-rate purchased/participations 99,692 3.47 76,305 4.40 Total purchased/participation loans $ 541,596 3.44 $ 262,440 4.57 (1) The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years. (2) 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. 53 One- to Four-Family Loans - The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average credit score, weighted average LTV ratio, and average balance per loan as of the dates presented. Credit scores are updated at least annually, with the latest update in September 2020, 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. September 30, 2020 % of Credit Average Amount Total Score LTV Balance (Dollars in thousands) Originated $ 3,937,310 63.0 % 771 62 % $ 145 Correspondent purchased 2,101,082 33.6 765 64 379 Bulk purchased 208,427 3.4 767 60 300 $ 6,246,819 100.0 % 768 63 187 September 30, 2019 % of Credit Average Amount Total Score LTV Balance (Dollars in thousands) Originated $ 3,873,851 59.8 % 768 62 % $ 140 Correspondent purchased 2,349,877 36.3 765 65 371 Bulk purchased 252,347 3.9 762 61 304 $ 6,476,075 100.0 % 767 63 186 The following table presents originated, refinanced, and correspondent purchased activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated. Included in the "Refinanced by Bank customers" line item are correspondent loans that were refinanced with the Bank. Of the loans originated during the current year, $300.4 million were refinanced from other lenders. Of the loans originated and refinanced during the current year, 76% had loan values of $510 thousand or less. Of the correspondent loans purchased during the current year, 20% had loan values of $510 thousand or less. For the Year Ended September 30, 2020 September 30, 2019 Credit Credit Amount LTV Score Amount LTV Score (Dollars in thousands) Originated $ 662,678 74 % 767 $ 494,739 78 % 760 Refinanced by Bank customers 268,590 67 765 86,381 68 752 Correspondent purchased 447,970 71 768 166,413 73 762 $ 1,379,238 72 767 $ 747,533 76 760 54 The following table presents the amount, percent of total, and weighted average rate, by state, of one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the year ended September 30, 2020. State Amount % of Total Rate (Dollars in thousands) Kansas $ 804,919 58.4 % 3.15 % Missouri 234,730 17.0 3.20 Texas 177,752 12.9 3.23 Other states 161,837 11.7 3.32 $ 1,379,238 100.0 % 3.19 Through September 30, 2020, the Bank had processed COVID-19 loan modifications for 942 one- to four-family loans totaling $239.5 million, of which $39.8 million, or 17%, were still in the deferral period as of September 30, 2020. Of the COVID-19 loan modifications that had completed the deferral period by September 30, 2020 and were not delinquent prior to requesting assistance, $1.4 million were 30 to 89 days delinquent and none were 90 or more days delinquent as of September 30, 2020. The modifications still in the deferral period as of September 30, 2020 are summarized in the table below, along with the weighted average credit score and weighted average LTV as of September 30, 2020. Credit scores were updated in September 2020 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. Credit Count Amount Score LTV (Dollars in thousands) Originated 159 $ 26,859 715 67 % Correspondent purchased 34 12,984 749 67 193 $ 39,843 727 67 The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of September 30, 2020, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of our future cash needs. Fixed-Rate 15 years More than Adjustable- Total or less 15 years Rate Amount Rate (Dollars in thousands) Originate/refinance $ 35,869 $ 56,110 $ 11,300 $ 103,279 2.87 % Correspondent 15,687 49,912 5,080 70,679 2.89 $ 51,556 $ 106,022 $ 16,380 $ 173,958 2.88 Rate 2.49 % 3.08 % 2.79 % Commercial Loans - During fiscal year 2020, the Bank originated $165.5 million of commercial loans, of which $43.9 million were PPP loans, entered into commercial real estate loan participations totaling $93.6 million, and processed commercial loan disbursements, excluding lines of credit, of approximately $228.7 million at a weighted average rate of 3.78%. 55 The following table presents the Bank's commercial real estate and commercial construction loans and loan commitments by type of primary collateral, as of September 30, 2020. Included in the gross loan amounts in the table, which does not include outstanding commitments, are fixed-rate loans totaling $534.6 million at a weighted average rate of 4.15% and adjustable-rate loans totaling $331.1 million at a weighted average rate of 4.38%. The weighted average rate of fixed-rate loans is lower than that of adjustable-rate loans due primarily to the majority of the fixed-rate loans in the portfolio at September 30, 2020 having shorter terms to maturity. Because the commitments to pay out undisbursed funds are not cancellable by the Bank, unless the loan is in default, we anticipate fully funding the related projects. Unpaid Undisbursed Gross Loan Outstanding % of Count Principal Amount Amount Commitments Total Total (Dollars in thousands) Senior housing 25 $ 225,062 $ 32,638 $ 257,700 $ — $ 257,700 27.5 % Hotel 9 129,488 49,686 179,174 — 179,174 19.1 Retail building 133 126,439 11,960 138,399 1,771 140,170 14.9 Office building 98 56,131 4,745 60,876 60,875 121,751 13.0 Multi-family 40 63,115 18,801 81,916 2,800 84,716 9.0 One- to four-family property 391 57,754 7,251 65,005 215 65,220 7.0 Single use building 21 43,596 5,163 48,759 1,500 50,259 5.4 Other 91 30,461 3,459 33,920 4,598 38,518 4.1 808 $ 732,046 $ 133,703 $ 865,749 $ 71,759 $ 937,508 100.0 % Weighted average rate 4.25 % 4.19 % 4.24 % 4.05 % 4.23 % The following table summarizes the Bank's commercial real estate and commercial construction loans and loan commitments by state as of September 30, 2020. Unpaid Undisbursed Gross Loan Outstanding % of Count Principal Amount Amount Commitments Total Total (Dollars in thousands) Kansas 627 $ 285,184 $ 15,744 $ 300,928 $ 8,254 $ 309,182 33.0 % Missouri 149 227,101 56,545 283,646 2,005 285,651 30.5 Texas 9 117,675 53,107 170,782 60,000 230,782 24.6 Nebraska 6 33,820 16 33,836 — 33,836 3.6 Kentucky 1 25,450 109 25,559 — 25,559 2.7 California 3 5,843 4,300 10,143 1,500 11,643 1.2 Other 13 36,973 3,882 40,855 — 40,855 4.4 808 $ 732,046 $ 133,703 $ 865,749 $ 71,759 $ 937,508 100.0 % The following table presents the Bank's commercial and industrial loans and loan commitments by business purpose, as of September 30, 2020. Including in the working capital loan category are $43.9 million of PPP loans. Unpaid Undisbursed Gross Loan Outstanding % of Count Principal Amount Amount Commitments Total Total (Dollars in thousands) Working capital 942 $ 56,348 $ 17,237 $ 73,585 $ 331 $ 73,916 62.0 % Equipment 119 14,184 303 14,487 850 15,337 12.9 Purchase/lease autos 178 11,275 97 11,372 — 11,372 9.5 Business investment 70 11,029 80 11,109 — 11,109 9.3 Other 22 4,778 2,785 7,563 — 7,563 6.3 1,331 $ 97,614 $ 20,502 $ 118,116 $ 1,181 $ 119,297 100.0 % 56 The following table presents the Bank's commercial loan portfolio and outstanding loan commitments, categorized by gross loan amount (unpaid principal plus undisbursed amounts) or outstanding loan commitment amount, as of September 30, 2020. Count Amount (Dollars in thousands) Greater than $30 million $ 4 $ 181,677 >$15 to $30 million 13 314,054 >$10 to $15 million 3 34,761 >$5 to $10 million 13 81,202 $1 to $5 million 103 217,178 Less than $1 million 2,003 227,933 $ 2,139 $ 1,056,805 The Bank's commercial lending team is working proactively with our commercial customers as the COVID-19 pandemic continues to present challenging operating conditions. Through September 30, 2020, we have modified $410.9 million of commercial loans under our COVID-19 loan modification program. Of this amount, $43.5 million had completed the deferral period by September 30, 2020, all of which were current, and $367.4 million, or 89%, were still in the deferral period as of September 30, 2020. We have also processed 791 PPP loans for $43.9 million, for which we received approximately $1.9 million in fees. Approximately 60% of PPP loans processed were in the following industries: construction, professional/scientific/technical, health care/social assistance, and retail trade. Through November 16, 2020, $12.2 million of the Bank's PPP loans have been forgiven by the SBA. The following table presents the gross loan amount, including undisbursed balances, of the Bank's commercial real estate loans by type of primary collateral, and commercial and industrial loans by business purpose, that have been modified per the Bank's COVID-19 loan modification program, and had not completed the deferral period as of September 30, 2020. The information is presented by type of modification and as a percentage of total modifications, as well as by a percentage of the total gross loan amount and undisbursed balances of the related property type or business purpose category. Of the loans presented in the table below, $258.8 million, or 70%, completed their deferral period by November 16, 2020, and an additional $57.4 million was paid off in October 2020. Modification Type % of Interest Payment % of Property Type/ Only Deferral Total Total Business Purpose (Dollars in thousands) Commercial real estate Senior housing $ 115,082 $ 57,258 $ 172,340 46.9 % 66.9 % Hotel 76,208 10,049 86,257 23.5 48.1 Retail building 27,197 5,815 33,012 9.0 23.9 Multi-family 30,304 1,625 31,929 8.7 65.5 One- to four-family property 14,618 4,375 18,993 5.2 31.2 Office building 7,643 336 7,979 2.2 12.3 Single use building 7,390 — 7,390 2.0 9.0 Other 2,318 — 2,318 0.6 6.8 280,760 79,458 360,218 98.1 41.6 Commercial and industrial Working capital 4,136 — 4,136 1.1 32.7 Equipment 848 — 848 0.2 1.2 Business investment 719 — 719 0.2 5.5 Purchase/lease autos 651 — 651 0.2 5.7 Other 786 — 786 0.2 32.6 7,140 — 7,140 1.9 6.0 Total $ 287,900 $ 79,458 $ 367,358 100.0 % 37.3 57 Of the commercial loans modified under the COVID-19 loan modification program, through November 16, 2020, we have received or are expecting to receive requests for additional assistance on loans with a combined gross loan amount, including undisbursed balances, of $87.4 million. This amount includes $14.6 million of loans that had exited the initial deferral period by September 30, 2020, and $72.8 million that are included in the table above, of which $69.0 million were in their second deferral as of September 30, 2020. The Bank is evaluating requests for additional assistance as they are received. Securities. Securities increased $338.2 million from $1.19 billion at September 30, 2019 to $1.53 billion at September 30, 2020. The weighted average yield on the securities portfolio decreased 92 basis points, from 2.54% at September 30, 2019 to 1.62% at September 30, 2020, due primarily to purchases at lower market yields during the current year. The following table presents the distribution of our securities portfolio, at amortized cost, at the dates indicated. Overall, fixed-rate securities comprised 87% of our securities portfolio at September 30, 2020. The weighted average life ("WAL") is the estimated remaining maturity (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. September 30, 2020 September 30, 2019 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Fixed-rate securities: MBS $ 945,432 1.82 % 3.7 $ 625,840 2.46 % 2.9 GSE debentures 369,967 0.62 1.7 249,828 2.15 0.7 Municipal bonds 9,716 1.69 0.7 18,371 1.63 1.0 Total fixed-rate securities 1,325,115 1.49 3.1 894,039 2.35 2.3 Adjustable-rate securities: MBS 204,490 2.49 2.9 297,416 3.10 4.7 Total securities portfolio $ 1,529,605 1.62 3.1 $ 1,191,455 2.54 2.9 The following table presents the carrying value of MBS in our portfolio by issuer at the dates presented. At September 30, 2020 2019 (Dollars in thousands) FNMA $ 809,232 $ 656,799 FHLMC 327,167 208,745 Government National Mortgage Association 44,404 70,943 $ 1,180,803 $ 936,487 58 Mortgage-Backed Securities - The balance of MBS, which primarily consists of securities of U.S. GSEs, increased $244.3 million to $1.18 billion at September 30, 2020 from $936.5 million at September 30, 2019. The following tables summarize the activity in our portfolio of MBS for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented. The beginning and ending WAL are the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied. For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 982,587 2.35 % 3.3 $ 973,318 2.50 % 3.6 $ 937,317 2.61 % 3.3 $ 936,487 2.67 % 3.5 Maturities and repayments (95,842) (75,293) (65,767) (72,635) Net amortization of (premiums)/discounts (608) (363) (279) (248) Purchases: Fixed 297,024 1.06 5.9 77,455 1.29 5.0 88,863 1.80 4.5 74,359 2.05 3.8 Adjustable — — — — — — — — — — — — Change in valuation on AFS securities (2,358) 7,470 13,184 (646) Ending balance - carrying value $ 1,180,803 1.94 3.5 $ 982,587 2.35 3.3 $ 973,318 2.50 3.6 $ 937,317 2.61 3.3 For the Year Ended September 30, 2020 2019 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 936,487 2.67 % 3.5 $ 1,036,990 2.57 % 3.4 Maturities and repayments (309,537) (275,116) Net amortization of (premiums)/discounts (1,498) (1,304) Purchases: Fixed 537,701 1.35 5.2 77,755 2.53 4.1 Adjustable — — — 84,138 2.74 4.4 Valuation transferred from HTM to AFS — 3,039 Change in valuation on AFS securities 17,650 10,985 Ending balance - carrying value $ 1,180,803 1.94 3.5 $ 936,487 2.67 3.5 59 Investment Securities - Investment securities, which consist of U.S. GSE debentures (primarily issued by FNMA, FHLMC, or Federal Home Loan Banks) and municipal investments, increased $111.8 million to $380.1 million at September 30, 2020 from $268.4 million at September 30, 2019. Municipal investments totaled $9.7 million at September 30, 2020. The following tables summarize the activity of investment securities for the periods presented. The weighted average yields and WALs for purchases are presented as recorded at the time of purchase. The weighted average yields for the beginning balances are as of the last day of the period previous to the period presented and the weighted average yields for the ending balances are as of the last day of the period presented. The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented. For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Amount Yield WAL Amount Yield WAL Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 237,467 1.23 % 0.8 $ 262,719 1.87 % 0.3 $ 292,270 2.00 % 0.8 $ 268,376 2.11 % 0.8 Maturities, calls and sales (102,115) (125,000) (80,125) (51,175) Net amortization of (premiums)/discounts (54) (80) (49) 20 Purchases: Fixed 244,975 0.51 3.2 99,990 0.58 1.2 50,097 1.42 0.4 75,000 1.90 1.7 Change in valuation on AFS securities (126) (162) 526 49 Ending balance - carrying value $ 380,147 0.65 1.7 $ 237,467 1.23 0.8 $ 262,719 1.87 0.3 $ 292,270 2.00 0.8 For the Year Ended September 30, 2020 2019 Amount Yield WAL Amount Yield WAL (Dollars in thousands) Beginning balance - carrying value $ 268,376 2.11 % 0.8 $ 289,942 2.05 % 2.2 Maturities, calls and sales (358,415) (249,771) Net amortization of (premiums)/discounts (163) 62 Purchases: Fixed 470,062 0.84 2.3 224,809 2.44 0.9 Valuation transferred from HTM to AFS — 47 Change in valuation on AFS securities 287 3,287 Ending balance - carrying value $ 380,147 0.65 1.7 $ 268,376 2.11 0.8 60 Liabilities. Total liabilities at September 30, 2020 were $8.20 billion, an increase of $198.7 million, or 2.5% from September 30, 2019. The increase was due to an increase in deposits, partially offset by a decrease in borrowings. Deposits. Total deposits were $6.19 billion at September 30, 2020, an increase of $609.5 million, or 10.9%, from September 30, 2019. The increase in retail and business deposit balances was due primarily to economic stimulus payments, a reduction in consumer spending, and PPP loan proceeds being deposited at the Bank. Also, the Bank secured a new business deposit relationship during the current year which brought in $163.6 million of new deposit balances. Because some of these deposits related to the new business deposit relationship are COVID-19 related payments, we do not expect the full balance of the deposits received during fiscal year 2020 to be retained through fiscal year 2021. As previously noted, since the onset of the COVID-19 pandemic, the Bank has lowered rates paid on money market accounts and certificate of deposit products. Despite this, money market accounts increased $220.8 million and certificate of deposit accounts increased $73.8 million during the current fiscal year. The increase in the certificate of deposit accounts was primarily related to business accounts. As retail certificates of deposit matured during the current year, not all were renewed. Rather, customers moved some of those funds to more liquid investment options, such as the Bank's money market accounts. During fiscal year 2020, the Bank's weighted average retention rate of maturing retail certificates of deposit was approximately 80%, compared to approximately 85% during fiscal year 2019. The following table presents the amount, weighted average rate and percent of total for the components of our deposit portfolio at the dates presented. At September 30, 2020 2019 % of % of Amount Rate Total Amount Rate Total (Dollars in thousands) Non-interest-bearing checking $ 451,394 — % 7.3 % $ 357,284 — % 6.4 % Interest-bearing checking 865,782 0.10 14.0 717,121 0.09 12.8 Savings 433,808 0.06 7.0 321,494 0.05 5.8 Money market 1,419,180 0.37 22.9 1,198,343 0.70 21.5 Retail/business certificates of deposit 2,766,461 1.83 44.7 2,692,770 2.08 48.2 Public unit certificates of deposit 254,783 0.74 4.1 294,855 2.29 5.3 $ 6,191,408 0.95 100.0 % $ 5,581,867 1.29 100.0 % The following tables set forth scheduled maturity information for our certificates of deposit, including public unit certificates of deposit, along with associated weighted average rates, at September 30, 2020. 61 Amount Due More than More than 1 year 1 year to 2 years to 3 More than Total Rate range or less 2 years years 3 years Amount Rate (Dollars in thousands) 0.00 – 0.99% $ 449,875 $ 55,037 $ 8,103 $ 1,374 $ 514,389 0.55 % 1.00 – 1.99% 713,300 355,888 104,335 186,939 1,360,462 1.65 2.00 – 2.99% 342,326 362,353 313,831 127,632 1,146,142 2.38 3.00 – 3.99% — — 251 — 251 3.00 $ 1,505,501 $ 773,278 $ 426,520 $ 315,945 $ 3,021,244 1.74 Percent of total 49.8 % 25.6 % 14.1 % 10.5 % Weighted average rate 1.46 1.99 2.16 1.88 Weighted average maturity (in years) 0.5 1.5 2.4 3.7 1.4 Weighted average maturity for the retail/business certificate of deposit portfolio (in years) 1.5 Amount Due Over Over 3 months 3 to 6 6 to 12 Over or less months months 12 months Total (Dollars in thousands) Retail/business certificates of deposit less than $100,000 $ 177,414 $ 167,073 $ 337,599 $ 840,713 $ 1,522,799 Retail/business certificates of deposit of $100,000 or more 134,441 140,790 310,654 657,777 1,243,662 Public unit certificates of deposit of $100,000 or more 100,761 39,310 97,459 17,253 254,783 $ 412,616 $ 347,173 $ 745,712 $ 1,515,743 $ 3,021,244 Borrowings. Total borrowings at September 30, 2020 were $1.79 billion, a decrease of $450.7 million, or 20.1%, from September 30, 2019. As a result of excess liquidity due primarily to the inflow of deposits, management elected to reduce the Bank's level of borrowing during the current fiscal year. Not all maturing FHLB advances and repurchase agreement were renewed and the FHLB line of credit balance was paid off during the year. 62 The following tables present borrowing activity for the periods shown. The borrowings presented in the table have original contractual terms of one year or longer or are tied to interest rate swaps with original contractual terms of one year or longer. Excluded from this table is a $3.0 million FHLB advance that had an original contractual term of less than one year. FHLB advances are presented at par. The effective rate is shown as a weighted average and includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The weighted average maturity ("WAM") is the remaining weighted average contractual term in years. The beginning and ending WAMs represent the remaining maturity at each date presented. For new borrowings, the WAMs presented are as of the date of issue. For the Three Months Ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 Effective Effective Effective Effective Amount Rate WAM Amount Rate WAM Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning balance $ 1,990,000 2.29 % 2.9 $ 2,090,000 2.25 % 3.0 $ 2,090,000 2.37 % 2.6 $ 2,140,000 2.38 % 2.6 Maturities and prepayments: FHLB advances (440,000) 2.49 (200,000) 2.35 (415,000) 2.45 (350,000) 2.40 Repurchase agreements (100,000) 2.53 — — — — — — New FHLB borrowings: Fixed-rate — — — — — — 350,000 1.70 4.7 100,000 1.96 5.0 Interest rate swaps (1) 340,000 2.73 3.5 100,000 3.20 8.0 65,000 2.61 4.0 200,000 2.57 2.5 Ending balance $ 1,790,000 2.31 3.0 $ 1,990,000 2.29 2.9 $ 2,090,000 2.25 3.0 $ 2,090,000 2.37 2.6 For the Year Ended September 30, 2020 2019 Effective Effective Amount Rate WAM Amount Rate WAM (Dollars in thousands) Beginning balance $ 2,140,000 2.38 % 2.6 $ 2,185,052 2.17 % 2.9 Maturities and prepayments: FHLB advances (1,405,000) 2.44 (875,000) 2.10 Repurchase agreements (100,000) 2.53 — — CCB acquisition - junior subordinated debentures assumed (redeemed) — — — (10,052) 8.76 12.3 New FHLB borrowings: Fixed-rate 450,000 1.76 4.8 200,000 2.77 4.5 Interest rate swaps (1) 705,000 2.74 3.9 640,000 2.67 5.0 Ending balance $ 1,790,000 2.31 3.0 $ 2,140,000 2.38 2.6 (1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps to hedge the variability in cash flows associated with the advances. The effective rate and WAM presented include the effect of the interest rate swaps. 63 Maturities - The following table presents the maturity of term borrowings (which includes FHLB advances, at par, and repurchase agreements), along with associated weighted average contractual and effective rates as of September 30, 2020. The weighted average effective rate for term borrowings decreased seven basis points during fiscal year 2020, to 2.31% at September 30, 2020. The decrease in the effective rate was due primarily to FHLB advances being replaced at lower market interest rates. Term Borrowings Amount Maturity by Interest rate Total Effective Fiscal Year Fixed-rate swaps (1) Amount Rate (2) (Dollars in thousands) 2021 203,000 640,000 843,000 2.56 % 2022 200,000 — 200,000 2.23 2023 300,000 — 300,000 1.81 2024 100,000 — 100,000 3.39 2025 250,000 — 250,000 1.94 2026 100,000 — 100,000 1.60 $ 1,153,000 $ 640,000 $ 1,793,000 2.31 (1) Represents adjustable-rate FHLB advances for which the Bank has entered into interest rate swaps with a notional amount of $640.0 million to hedge the variability in cash flows associated with the advances. These advances are presented based on their contractual maturity dates and will be renewed periodically until the maturity or termination of the interest rate swaps. The expected WAL of the interest rate swaps was 3.5 years at September 30, 2020. (2) The effective rate includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail/business and public unit amounts, and term borrowings for the next four quarters as of September 30, 2020. Retail/ Business Public Unit Term Maturity by Certificate Repricing Certificate Repricing Borrowings Repricing Repricing Quarter End Amount Rate Amount Rate Amount (1) Rate Total Rate (Dollars in thousands) December 31, 2020 $ 311,855 1.76 % $ 100,761 0.43 % $ 53,000 1.98 % $ 465,616 1.50 % March 31, 2021 307,863 1.78 39,310 1.19 150,000 1.97 497,173 1.79 June 30, 2021 342,662 1.51 49,185 0.48 — — 391,847 1.38 September 30, 2021 305,591 1.40 48,274 0.95 75,000 2.99 428,865 1.63 $ 1,267,971 1.61 $ 237,530 0.67 $ 278,000 2.24 $ 1,783,501 1.59 (1) The maturity date for FHLB advances tied to interest rate swaps is based on the maturity date of the related interest rate swap. 64 Stockholders' Equity. Stockholders' equity was $1.28 billion at September 30, 2020 compared to $1.34 billion at September 30, 2019. The $51.5 million decrease was due primarily to the payment of cash dividends totaling $93.9 million and the repurchase of common stock totaling $23.8 million, partially offset by net income of $64.5 million during the current year. The cash dividends paid during the current year totaled $0.68 per share and consisted of a $0.34 per share cash true-up dividend related to fiscal year 2019 earnings, paid in December 2019, per the Company's dividend policy, and four regular quarterly cash dividends of $0.085 per share, totaling $0.34 per share. In the long run, management considers the Bank's equity to total assets ratio of at least 10% an appropriate level of capital. At September 30, 2020, this ratio was 12.3%. On October 20, 2020, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.5 million, payable on November 20, 2020 to stockholders of record as of the close of business on November 6, 2020. On October 28, 2020, the Company announced a fiscal year 2020 cash true-up dividend of $0.13 per share, or approximately $17.6 million, related to fiscal year 2020 earnings. The $0.13 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2020 and total regular quarterly cash dividends paid during fiscal year 2020, divided by the number of shares outstanding as of October 16, 2020. The cash true-up dividend is payable on December 4, 2020 to stockholders of record as of the close of business on November 20, 2020, and is the result of the Board of Directors' commitment to distribute to stockholders 100% of the annual earnings of the Company for fiscal year 2020. During the current fiscal year, the Company repurchased $23.8 million, or 2,558,100 shares, of common stock. Subsequent to September 30, 2020, through November 24, 2020, the Company repurchased an additional $1.5 million, or 164,400 shares, of common stock. As of November 24, 2020, there was still $44.7 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. This plan has no expiration date; however, the Federal Reserve Bank's approval for the Company to repurchase shares extends through August 2021. At September 30, 2020, Capitol Federal Financial, Inc., at the holding company level, had $82.5 million on deposit at the Bank. For fiscal year 2021, it is currently the intention of the Board of Directors to continue the payout of 100% of the Company's earnings to the Company's stockholders. The payout is expected to be in the form of regular quarterly cash dividends of $0.085 per share, totaling $0.34 for the year, and a cash true-up dividend equal to fiscal year 2021 earnings in excess of the amount paid as regular quarterly cash dividends during fiscal year 2021. It is anticipated that the fiscal year 2021 cash true-up dividend will be paid in December 2021. Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company. The Company works to find multiple ways to provide stockholder value. This has primarily been through the payment of cash dividends and stock buybacks. The Company has maintained a policy of paying out 100% of its earnings to stockholders in the form of quarterly cash dividends and an annual cash true-up dividend in December of each year. In order to provide additional stockholder value, the Company has paid a True Blue Capitol cash dividend of $0.25 per share in June of each of the past six years. The Company has paid the True Blue Capitol dividend primarily due to excess capital levels at the Company and Bank. The Company considers various business strategies and their impact on capital and asset measures on both a current and future basis, as well as regulatory capital levels and requirements, in determining the amount, if any, and timing of the True Blue dividend. Given the state of economic uncertainty and how that may play out with the credit risk exposure in the Bank's loan portfolio, the Company elected to defer the annual True Blue dividend in June 2020 and did not ask for a regulatory non-objection at that time to move capital from the Bank to the Company to pay that dividend. It is management's intention to ask for a regulatory non-objection at some point in the future and to pay this dividend when economic conditions are more certain. It remains the Company's intention to pay out 100% of its earnings. 65 The following table presents regular quarterly cash dividends and special cash dividends paid in calendar years 2020, 2019, and 2018. The amounts represent cash dividends paid during each period. The 2020 true-up dividend amount presented represents the dividend payable on December 6, 2020 to stockholders of record as of November 22, 2020. Calendar Year 2020 2019 2018 Amount Per Share Amount Per Share Amount Per Share (Dollars in thousands, except per share amounts) Regular quarterly dividends paid Quarter ended March 31 $ 11,733 $ 0.085 $ 11,700 $ 0.085 $ 11,427 $ 0.085 Quarter ended June 30 11,733 0.085 11,708 0.085 11,429 0.085 Quarter ended September 30 11,733 0.085 11,713 0.085 11,430 0.085 Quarter ended December 31 11,517 0.085 11,731 0.085 11,696 0.085 True-up dividends paid 17,614 0.130 46,932 0.340 53,666 0.390 True Blue dividends paid — — 34,446 0.250 33,614 0.250 Calendar year-to-date dividends paid $ 64,330 $ 0.470 $ 128,230 $ 0.930 $ 133,262 $ 0.980 Weighted Average Yields and Rates. The following table presents the weighted average yields on interest-earning assets, the weighted average rates paid on interest-bearing liabilities, and the resultant interest rate spreads at the dates indicated. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. The weighted average rate on FHLB borrowings includes the impact of interest rate swaps. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. At September 30, 2020 2019 2018 Yield on: Loans receivable 3.57 % 3.81 % 3.74 % MBS 1.94 2.67 2.57 Investment securities 0.65 2.11 2.05 FHLB stock 4.64 7.47 7.22 Cash and cash equivalents 0.09 1.80 2.19 Combined yield on interest-earning assets 3.18 3.64 3.57 Rate paid on: Checking 0.07 0.06 0.05 Savings 0.06 0.05 0.07 Money market 0.37 0.70 0.47 Retail/business certificates 1.83 2.08 1.79 Wholesale certificates 0.74 2.29 1.89 Total deposits 0.95 1.29 1.06 Total borrowings 2.31 2.37 2.18 Combined rate paid on interest-bearing liabilities 1.26 1.60 1.39 Net interest rate spread 1.92 2.04 2.18 66 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 fiscal years 2020 to 2019. For the comparison of fiscal years 2019 to 2018, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in the average balance multiplied by the previous year's average rate, and (2) changes in rate, which are changes in the average rate multiplied by the average balance from the previous year. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. For the Year Ended September 30, 2020 vs. 2019 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) Interest-earning assets: Loans receivable $ (2,074) $ (11,661) $ (13,735) MBS (612) (2,109) (2,721) Investment securities (236) (1,663) (1,899) FHLB stock (406) (1,590) (1,996) Cash and cash equivalents (1,322) (3,303) (4,625) Total interest-earning assets (4,650) (20,326) (24,976) Interest-bearing liabilities: Checking 65 82 147 Savings 29 66 95 Money market (14) (2,200) (2,214) Certificates of deposit 2,048 1,321 3,369 Borrowings (8,876) (442) (9,318) Total interest-bearing liabilities (6,748) (1,173) (7,921) Net change in net interest income $ 2,098 $ (19,153) $ (17,055) 67 Average Balance Sheets . The following table presents the average balances of our assets, liabilities, and stockholders' equity, and the related weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated. For fiscal year 2018 information, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Weighted average yields are derived by dividing annual income by the average balance of the related assets, and weighted average rates are derived by dividing annual expense by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis. For the Year Ended September 30, 2020 2019 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Amount Paid Rate Amount Paid Rate Assets: (Dollars in thousands) Interest-earning assets: One- to four-family loans $ 6,529,265 $ 226,703 3.47 % $ 6,681,441 $ 240,919 3.61 % Commercial loans 785,127 37,320 4.68 701,771 34,810 4.90 Consumer loans 123,334 6,471 5.25 135,683 8,500 6.26 Total loans receivable (1) 7,437,726 270,494 3.63 7,518,895 284,229 3.77 MBS (2) 954,197 23,009 2.41 977,925 25,730 2.63 Investment securities (2)(3) 270,683 4,467 1.65 281,490 6,366 2.26 FHLB stock 100,251 5,827 5.81 106,057 7,823 7.38 Cash and cash equivalents (4) 179,142 1,181 0.65 251,015 5,806 2.28 Total interest-earning assets (1)(2) 8,941,999 304,978 3.40 9,135,382 329,954 3.61 Other non-interest-earning assets 461,614 385,803 Total assets $ 9,403,613 $ 9,521,185 Liabilities and stockholders' equity: Interest-bearing liabilities: Checking $ 1,180,110 762 0.06 $ 1,073,825 615 0.06 Savings 388,662 292 0.08 342,617 197 0.06 Money market 1,252,992 6,647 0.53 1,255,001 8,861 0.71 Retail/business certificates 2,716,945 55,238 2.03 2,531,923 48,496 1.92 Wholesale certificates 282,947 4,659 1.65 369,282 8,032 2.18 Total deposits 5,821,656 67,598 1.16 5,572,648 66,201 1.19 Borrowings (5) 2,065,966 48,045 2.31 2,441,002 57,363 2.34 Total interest-bearing liabilities 7,887,622 115,643 1.46 8,013,650 123,564 1.54 Other non-interest-bearing liabilities 203,990 149,156 Stockholders' equity 1,312,001 1,358,379 Total liabilities and stockholders' equity $ 9,403,613 $ 9,521,185 Net interest income (6) $ 189,335 $ 206,390 Net interest rate spread (7)(8) 1.94 2.07 Net interest-earning assets $ 1,054,377 $ 1,121,732 Net interest margin (8)(9) 2.12 2.26 Ratio of interest-earning assets to interest-bearing liabilities 1.13x 1.14x 68 (1) Balances are adjusted for unearned loan fees and deferred costs. Loans that are 90 or more days delinquent are included in the loans receivable average balance with a yield of zero percent. (2) AFS securities are adjusted for unamortized purchase premiums or discounts. (3) The average balance of investment securities includes an average balance of nontaxable securities of $13.8 million, and $21.6 million, for the years ended September 30, 2020 and 2019, respectively. (4) There were no cash and cash equivalents related to the leverage strategy during the year ended September 30, 2020. The average balance of cash and cash equivalents includes an average balance of cash related to the leverage strategy of $150.7 million for the year ended September 30, 2019. (5) There were no borrowings related to the leverage strategy during the year ended September 30, 2020. Included in this line item, for the year ended September 30, 2019, are borrowings related to the leverage strategy with an average outstanding balance of $157.8 million and interest paid of $3.9 million, at a weighted average rate of 2.46%, and borrowings not related to the leverage strategy with an average outstanding balance of $2.28 billion and interest paid of $53.4 million, at a weighted average rate of 2.33%. The FHLB advance amounts and rates included in this line item include the effect of interest rate swaps and are net of deferred prepayment penalties. (6) Net interest income represents the difference between interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the average balance of interest-earning assets and interest-bearing liabilities, and the interest rates earned or paid on them. (7) Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (8) The table below provides a reconciliation between certain performance ratios presented in accordance with GAAP and the performance ratios excluding the effects of the leverage strategy, which are not presented in accordance with GAAP. Management believes it is important for comparability purposes to provide the performance ratios without the leverage strategy because of the unique nature of the leverage strategy. The leverage strategy reduces some of our performance ratios due to the small amount of earnings associated with the transaction in comparison to the size of the transaction, while increasing our net income. The leverage strategy was not in place during fiscal year 2020. The pre-tax yield on the leverage strategy was 0.03% for the year ended September 30, 2019. For the Year Ended September 30, 2019 Actual Leverage Adjusted (GAAP) Strategy (Non-GAAP) Net interest margin 2.26 % (0.04) % 2.30 % Net interest rate spread 2.07 (0.03) 2.10 (9) Net interest margin represents net interest income as a percentage of average interest-earning assets. 69 Comparison of Operating Results for the Years Ended September 30, 2020 and 2019 The Company recognized net income of $64.5 million, or $0.47 per share, for the year ended September 30, 2020 compared to net income of $94.2 million, or $0.68 per share, for the year ended September 30, 2019. The decrease in net income was due primarily to a $21.6 million increase in provision for credit losses and a $17.1 million decrease in net interest income, partially offset by a decrease in income tax expense. Net interest income decreased $17.1 million, or 8.3%, from the prior year to $189.3 million for the current year. The net interest margin decreased 14 basis points, from 2.26% for the prior year to 2.12% for the current year. The leverage strategy was suspended at certain times during the prior year and during all of the current year due to the negative interest rate spreads between the related FHLB borrowings and cash held at the FRB of Kansas City, making the transaction unprofitable. When the leverage strategy is in place, it increases our net interest income but reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. Excluding the effects of the leverage strategy, the net interest margin would have decreased 18 basis points, from 2.30% for the prior year to 2.12% for the current year. The decrease in the net interest margin, excluding the effects of the leverage strategy, was due mainly to a decrease in the loan portfolio yield, specifically the yield on the correspondent one- to four-family loan portfolio. The leverage strategy involves borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings are repaid at quarter end, or earlier if the strategy is suspended. The proceeds from the borrowings, net of the required FHLB stock holdings, are deposited at the FRB of Kansas City. Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $14 thousand during the prior year. The leverage strategy was not in place during the current year. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable. Interest and Dividend Income The weighted average yield on total interest-earning assets decreased 21 basis points, from 3.61% for the prior year to 3.40% for the current year, and the average balance of interest-earning assets decreased $193.4 million. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have decreased 22 basis points, from 3.62% for the prior year to 3.40% for the current year, and the average balance of interest-earning assets would have decreased $35.6 million. The decrease in the weighted average yield between periods was due primarily to a decrease in the loan portfolio yield. The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) INTEREST AND DIVIDEND INCOME: Loans receivable $ 270,494 $ 284,229 $ (13,735) (4.8) % MBS 23,009 25,730 (2,721) (10.6) FHLB stock 5,827 7,823 (1,996) (25.5) Investment securities 4,467 6,366 (1,899) (29.8) Cash and cash equivalents 1,181 5,806 (4,625) (79.7) Total interest and dividend income $ 304,978 $ 329,954 $ (24,976) (7.6) The decrease in interest income on loans receivable was due mainly to a decrease in yield on correspondent loans, including a $5.8 million increase in the amortization of premiums related to increases in payoff and endorsement activity. This was partially offset by a shift in the mix of the loan portfolio, as the average balance of lower-yielding one- to four-family loans decreased $152.2 million, or 2.3%, partially offset by a $64.9 million, or 9.2%, increase in the average balance of higher-yielding commercial loans, excluding PPP loans. The weighted average yield on the loans receivable portfolio decreased 14 basis points, from 3.77% for the prior year to 3.63% for the current year. 70 The decrease in interest income on the MBS portfolio was due primarily to a 22 basis point decrease in the weighted average yield to 2.41% in the current year as a result of new purchases at lower market yields and the repricing of existing adjustable-rate MBS to lower market yields. The decrease in dividend income on FHLB stock was due mainly to a decrease in the dividend rate paid by FHLB, as well as to the leverage strategy not being in place during the current year. The decrease in interest income on investment securities was due mainly to a 61 basis point decrease in the weighted average yield to 1.65% in the current year as a result of calls and maturities either being replaced at lower market rates or not being replaced. The decrease in interest income on cash and cash equivalents was due primarily to the leverage strategy being in place for a portion of the prior year and not being in place during the current year, along with a decrease in the yield earned on cash held at the FRB of Kansas City. Interest Expense The weighted average rate paid on total interest-bearing liabilities decreased eight basis points, from 1.54% for the prior year to 1.46% for the current year, and the average balance of interest-bearing liabilities decreased $126.0 million. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased six basis points, from 1.52% for the prior year to 1.46% for the current year, while the average balance of interest-bearing liabilities would have increased $31.8 million. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) INTEREST EXPENSE: Deposits $ 67,598 $ 66,201 $ 1,397 2.1 % Borrowings 48,045 57,363 (9,318) (16.2) Total interest expense $ 115,643 $ 123,564 $ (7,921) (6.4) The increase in interest expense on deposits was due to an increase in the cost of the retail/business certificate of deposit portfolio, partially offset by decreases in the cost of wholesale certificates of deposit and money market accounts. The weighted average rate of the retail/business certificate of deposit portfolio increased 11 basis points, to 2.03% for the current year, and the average balance increased $185.0 million, or approximately 7%. In the third quarter of fiscal year 2019, the Bank increased offered rates on short-term and certain intermediate-term certificates of deposit in an effort to encourage customers to move funds to those terms. During the fourth quarter of fiscal year 2019, the Bank held the unTraditional campaign with above-market rates, resulting in growth in the short-term and certain intermediate-term certificates of deposit. Since the onset of the COVID-19 pandemic, the retail/business certificate of deposit portfolio has been gradually repricing down as certificates renew to lower offered rates. The borrowings line item in the table above includes interest expense associated and not associated with the leverage strategy. Interest expense on borrowings not related to the leverage strategy decreased $5.4 million from the prior year due primarily to a decrease in the average balance of such borrowings, as certain maturing FHLB advances and repurchase agreements were not replaced and the Bank paid down its FHLB line of credit with funds generated from the increase in deposits. Interest expense on FHLB borrowings associated with the leverage strategy decreased $3.9 million from the prior year due to the leverage strategy being in place for a portion of the prior year and not being in place at all during the current year. Provision for Credit Losses The Bank recorded a provision for credit losses during the current year of $22.3 million, compared to $750 thousand during the prior year. The $22.3 million provision for credit losses in the current year was primarily related to the deterioration of economic conditions as a result of COVID-19. See "Part I, Item 1. Business – Asset Quality – Allowance for credit losses and Provision for credit losses" for additional discussion regarding management's evaluation of the adequacy of the Bank's ACL at September 30, 2020. 71 Non-Interest Income The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) NON-INTEREST INCOME: Deposit service fees $ 11,285 $ 12,740 $ (1,455) (11.4) % Insurance commissions 2,487 2,821 (334) (11.8) Other non-interest income 5,827 6,397 (570) (8.9) Total non-interest income $ 19,599 $ 21,958 $ (2,359) (10.7) The decrease in deposit service fees was due mainly to a decrease in service charge income, primarily resulting from a decrease in consumer activity related to the COVID-19 pandemic, along with the discontinuation of point-of-sale service charges, which the Bank ceased charging in April 2019. The decrease in insurance commissions was due primarily to a decrease in the amount of annual contingent insurance commissions. The decrease in other non-interest income was due mainly to a decrease in loan-related fees, primarily prepayment fees and late charges, compared to the prior year. Non-Interest Expense The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) NON-INTEREST EXPENSE: Salaries and employee benefits $ 52,996 $ 53,145 $ (149) (0.3) % Information technology and related expense 16,974 17,615 (641) (3.6) Occupancy, net 13,870 13,032 838 6.4 Regulatory and outside services 5,762 5,813 (51) (0.9) Advertising and promotional 4,889 5,244 (355) (6.8) Deposit and loan transaction costs 2,890 2,478 412 16.6 Office supplies and related expense 2,195 2,439 (244) (10.0) Federal insurance premium 914 1,172 (258) (22.0) Other non-interest expense 5,514 6,006 (492) (8.2) Total non-interest expense $ 106,004 $ 106,944 $ (940) (0.9) The decrease in information technology and related expense was due mainly to the prior year including costs related to the integration of the operations of CCB. The increase in occupancy, net was due primarily to an increase in facility-related costs resulting from the impact of the COVID-19 pandemic, along with an increase in depreciation expense. The decrease in advertising and promotional expenses was due mainly to adjustments in advertising schedules, postponements of campaigns, and cancellations of certain sponsorships as a result of the COVID-19 pandemic. The increase in deposit and loan transaction costs was due mainly to the timing of loan origination-related costs. The decrease in the federal insurance premium was due mainly to the Bank utilizing an assessment credit from the FDIC during the majority of the current year. The decrease in other non-interest expense was due primarily to a decrease in amortization of deposit intangibles, as well as a decrease in debit card fraud losses. 72 The Company's efficiency ratio was 50.74% for the current year compared to 46.83% for the prior year. The change in the efficiency ratio was due to lower net interest income in the current year compared to the prior year. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A higher value indicates that the financial institution is generating revenue with a proportionally higher level of expense, relative to the net interest margin. Income Tax Expense The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent. For the Year Ended September 30, Change Expressed in: 2020 2019 Dollars Percent (Dollars in thousands) Income before income tax expense $ 80,630 $ 120,654 $ (40,024) (33.2) % Income tax expense 16,090 26,411 (10,321) (39.1) Net income $ 64,540 $ 94,243 $ (29,703) (31.5) Effective Tax Rate 20.0 % 21.9 % The decrease in income tax expense was due primarily to lower pretax income in the current year. The lower effective tax rate in the current year compared to the prior year was due mainly to the Company's permanent differences, such as low income housing partnership tax credits, which generally reduce our tax expense, having a proportionately larger impact given the lower pretax income in the current year period. Additionally, an income tax benefit was recognized during the current year as a result of favorable federal tax guidance issued during the current year related to certain bank-owned life insurance policies added in the CCB acquisition. Management anticipates the effective income tax rate for fiscal year 2021 will be approximately 21% to 22%. Comparison of Operating Results for the Years Ended September 30, 2019 and 2018 For this discussion, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Operating Results for the Years Ended September 30, 2019 and 2018" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Liquidity and Capital Resources Liquidity refers to our ability to generate sufficient cash to fund ongoing operations, to repay maturing certificates of deposit and other deposit withdrawals, to repay maturing borrowings, and to fund loan commitments. Liquidity management is both a daily and long-term function of our business management. The Company's most available liquid assets are represented by cash and cash equivalents, AFS securities, and short-term investment securities. The Bank's primary sources of funds are deposits, FHLB borrowings, repurchase agreements, repayments and maturities of outstanding loans and MBS and other short-term investments, and funds provided by operations. The Bank's long-term borrowings primarily have been used to manage the Bank's interest rate risk with the intention to improve the earnings of the Bank while maintaining capital ratios in excess of regulatory standards for well-capitalized financial institutions. In addition, the Bank's focus on managing risk has provided additional liquidity capacity by maintaining a balance of MBS and investment securities available as collateral for borrowings. We generally intend to manage cash reserves sufficient to meet short-term liquidity needs, which are routinely forecasted for 10, 30, and 365 days. Additionally, on a monthly basis, we perform a liquidity stress test in accordance with the Interagency Policy Statement on Funding and Liquidity Risk Management. The liquidity stress test incorporates both short-term and long-term liquidity scenarios in order to identify and to quantify liquidity risk. Management also monitors key liquidity statistics related to items such as wholesale funding gaps, borrowings capacity, and available unpledged collateral, as well as various liquidity ratios. See the "Executive Summary" above for information regarding the impact of the COVID-19 pandemic on our liquidity. 73 In the event short-term liquidity needs exceed available cash, the Bank has access to a line of credit at FHLB and the FRB of Kansas City's discount window. See "Part I, Item 1. Business - Sources of Funds" for information regarding limits on the Bank's FHLB borrowings. The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral and certain other characteristics of those securities. Management tests the Bank's access to the FRB of Kansas City's discount window annually with a nominal, overnight borrowing. If management observes a trend in the amount and frequency of line of credit utilization and/or short-term borrowings that is not in conjunction with a planned strategy, such as the leverage strategy, the Bank will likely utilize long-term wholesale borrowing sources such as FHLB advances and/or repurchase agreements to provide long-term, fixed-rate funding. The maturities of these long-term borrowings are generally staggered in order to mitigate the risk of a highly negative cash flow position at maturity. The Bank's internal policy limits total borrowings to 55% of total assets. At September 30, 2020, the Bank had total borrowings, at par, of $1.79 billion, or approximately 19% of total assets, all of which were FHLB advances. The amount of FHLB borrowings outstanding at September 30, 2020 was $1.79 billion, of which $843.0 million were advances scheduled to mature in the next 12 months, including $640.0 million of one-year floating-rate FHLB advances tied to interest rate swaps. All FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB. At September 30, 2020, the ratio of the par value of the Bank's FHLB borrowings to Call Report total assets was 19%. At September 30, 2020, the Bank had no repurchase agreements. The Bank may enter into repurchase agreements as management deems appropriate, not to exceed 15% of total assets, and subject to the total borrowings internal policy limit of 55% as discussed above. The Bank could utilize the repayment and maturity of outstanding loans, MBS, and other investments for liquidity needs rather than reinvesting such funds into the related portfolios. At September 30, 2020, the Bank had $1.22 billion of securities that were eligible but unused as collateral for borrowing or other liquidity needs. The Bank has access to other sources of funds for liquidity purposes, such as brokered and public unit certificates of deposit. As of September 30, 2020, the Bank's policy allowed for combined brokered and public unit certificates of deposit up to 15% of total deposits. At September 30, 2020, the Bank did not have any brokered certificates of deposit and public unit certificates of deposit were approximately 4% of total deposits. The Bank had pledged securities with an estimated fair value of $331.0 million as collateral for public unit certificates of deposit at September 30, 2020. The securities pledged as collateral for public unit certificates of deposit are held under joint custody with FHLB and generally will be released upon deposit maturity. At September 30, 2020, $1.51 billion of the Bank's certificate of deposit portfolio was scheduled to mature within the next 12 months, including $237.5 million of public unit certificates of deposit. 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 of the Bank at prevailing rates, although no assurance can be given in this regard. We also anticipate the majority of the maturing public unit certificates of deposit will be replaced with similar wholesale funding products, depending on availability and pricing. 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. 74 The following table presents the contractual maturities of our loan, MBS, and investment securities portfolios at September 30, 2020, along with associated weighted average yields. Loans and securities which have adjustable interest rates are shown as maturing in the period during which the contract is due. The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses. As of September 30, 2020, the amortized cost of investment securities in our portfolio which are callable or have pre-refunding dates within one year was $228.0 million. Loans (1) MBS Investment Securities Total Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Amounts due: Within one year $ 261,605 4.17 % $ 3,664 2.63 % $ 4,009 1.47 % $ 269,278 4.11 % After one year: Over one to two years 110,991 3.11 1,715 3.08 5,583 1.84 118,289 3.05 Over two to three years 62,534 4.46 32,457 1.61 75,269 0.41 170,260 2.13 Over three to five years 128,088 4.46 24,752 2.19 295,286 0.68 448,126 1.84 Over five to ten years 777,216 3.70 272,681 2.34 — — 1,049,897 3.35 Over ten to fifteen years 1,424,450 3.23 570,142 1.70 — — 1,994,592 2.79 After fifteen years 4,460,112 3.59 275,392 2.06 — — 4,735,504 3.50 Total due after one year 6,963,391 3.54 1,177,139 1.94 376,138 0.64 8,516,668 3.19 $ 7,224,996 3.57 $ 1,180,803 1.94 $ 380,147 0.65 $ 8,785,946 3.22 (1) The maturity date for home equity loans, including those that do not have a stated maturity date, assumes the customer always makes the required minimum payment. All other loans that do not have a stated maturity date and overdraft loans are included in the amounts due within one year. Construction loans are presented based on the estimated term to complete construction. 75 Limitations on Dividends and Other Capital Distributions OCC regulations impose restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Under FRB and OCC safe harbor regulations, savings institutions generally may make capital distributions during any calendar year equal to earnings of the previous two calendar years and current year-to-date earnings. A savings institution that is a subsidiary of a savings and loan holding company, such as the Company, that proposes to make a capital distribution must submit written notice to the OCC and FRB 30 days prior to such distribution. The OCC and FRB may object to the distribution during that 30-day period based on safety and soundness or other concerns. Savings institutions that desire to make a larger capital distribution, are under special restrictions, or are not, or would not be, sufficiently capitalized following a proposed capital distribution must obtain regulatory non-objection prior to making such a distribution. The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company. So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a CBLR greater than the required percentage), 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 earnings to the Company, although no assurance can be given in this regard. Capital Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action ("PCA"). Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain a the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies' PCA framework. As of September 30, 2020, the Bank's CBLR was 12.4% and the Company's CBLR was 13.7%, which exceeded the minimum requirements. See "Part I, Item 1. Business – Regulation and Supervision – Regulatory Capital Requirements" for additional information related to regulatory capital. The following table presents a reconciliation of equity under GAAP to regulatory capital amounts, as of September 30, 2020, for the Bank and the Company (dollars in thousands): Bank Company Total equity as reported under GAAP $ 1,165,813 $ 1,284,859 AOCI 16,505 16,505 Goodwill and other intangibles, net of associated deferred taxes (13,510) (13,510) Total tier 1 capital $ 1,168,808 $ 1,287,854 Contingencies In the normal course of business, the Company and the Bank are named defendants in various lawsuits and counter claims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the year ended September 30, 2020, or future periods. 76 Off-Balance Sheet Arrangements, Commitments and Contractual Obligations The following table summarizes our contractual obligations, along with associated weighted average contractual rates, as of September 30, 2020. Maturity Range Less than 1 to 3 3 to 5 More than Total 1 year years years 5 years (Dollars in thousands) Operating leases $ 20,842 $ 1,192 $ 2,512 $ 1,830 $ 15,308 Certificates of deposit $ 3,021,244 $ 1,505,501 $ 1,199,798 $ 315,041 $ 904 Rate 1.74 % 1.46 % 2.05 % 1.88 % 1.53 % Borrowings $ 1,793,000 $ 843,000 $ 500,000 $ 350,000 $ 100,000 Rate 1.41 % 0.76 % 1.91 % 2.27 % 1.28 % The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments consist primarily of commitments to originate, purchase, or participate in loans or fund lines of credit, along with standby letters of credit. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with these off-balance-sheet commitments are essentially the same as those involved with extending loans to customers and these commitments are subject to normal credit policies. The contractual amounts of these off-balance sheet financial instruments as of September 30, 2020 were as follows (dollars in thousands): Commitments to originate and purchase/participate in loans $ 248,607 Commitments to fund unused lines of credit 283,199 Standby letters of credit 1,372 Total $ 533,178 It is expected that some of the commitments will expire unfunded; therefore, the amounts reflected in the table above are not necessarily indicative of future liquidity requirements. Additionally, the Bank is not obligated to honor commitments to fund unused lines of credit if a customer is delinquent or otherwise in violation of the loan agreement. The Company has investments in several low income housing partnerships. These partnerships supply funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully attract a specified percentage of residents falling in that lower income range, federal income tax credits are made available to the partners. The tax credits are normally recognized over ten years, and they play an important part in the anticipated yield from these investments. In order to continue receiving the tax credits each year over the life of the partnership, the low-income residency targets must be maintained. Under the terms of the partnership agreements, the Company has a commitment to fund a specified amount that will be due in installments over the life of the agreements. The majority of the commitments at September 30, 2020 are projected to be funded through the end of calendar year 2022. At September 30, 2020, the investments totaled $89.7 million and are included in other assets in the consolidated balance sheet. Unfunded commitments, which are recorded as liabilities, totaled $44.5 million at September 30, 2020. 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. 77 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Asset and Liability Management and Market Risk The rates of interest the Bank earns on its assets and pays on its liabilities are generally established contractually for a period of time. Fluctuations in interest rates have a significant impact not only upon our net income, but also upon the cash flows and market values of our assets and liabilities. Our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities. 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. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. The Bank's pricing strategy for first mortgage loan products includes setting interest rates based on secondary market prices and competitor pricing for our local and correspondent lending markets. Pricing for commercial loans is generally based on competitor pricing and the credit risk of the borrower with consideration given to the overall relationship of the borrower. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our retail deposits have stated maturities or repricing dates of less than two years. The general objective of our interest rate risk management program is to determine and manage an appropriate level of interest rate risk while maximizing net interest income in a manner consistent with our policy to manage, to the extent practicable, the exposure of net interest income to changes in market interest rates. The Board of Directors and ALCO regularly review the Bank's interest rate risk exposure by forecasting the impact of hypothetical, alternative interest rate environments on net interest income and the market value of portfolio equity ("MVPE") at various dates. The MVPE is defined as the net of the present value of cash flows from existing assets, liabilities, and off-balance sheet instruments. The present values are determined based upon market conditions as of the date of the analysis, as well as in alternative interest rate environments, providing potential changes in the MVPE under those alternative interest rate environments. Net interest income is projected in the same alternative interest rate environments with both a static balance sheet and management strategies considered. The MVPE and net interest income 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 determining valuations as a result of these hypothetical changes in interest rates to identify rate environments that pose the greatest risk to the Bank. This analysis helps management quantify the Bank's exposure to changes in the shape of the yield curve. The ability to maximize net interest income is dependent largely upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates. The asset and liability repricing gap is a measure of the difference between the amount of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-earning assets exceeds the amount of interest-bearing liabilities maturing or repricing during the same period. A gap is considered negative when the amount of interest-bearing liabilities exceeds the amount of interest-earning assets maturing or repricing during the same period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods adversely affects net interest income, while a positive gap within shorter repricing periods positively affects net interest income. During a period of falling interest rates, the opposite would generally be true. The shape of the yield curve also has an impact on our net interest income and, therefore, the Bank's net interest margin. Historically, the Bank has benefited from a steeper yield curve as the Bank's mortgage loans are generally priced off of long-term rates while deposits are priced off of short-term rates. A steeper yield curve (one with a greater difference between short-term rates and long-term rates) allows the Bank to receive a higher rate of interest on its new mortgage-related assets relative to the rate paid for the funding of those assets, which generally results in a higher net interest margin. As the yield curve flattens or becomes inverted, the spread between rates received on assets and paid on liabilities becomes compressed, which generally leads to a decrease in net interest margin. 78 General assumptions used by management to evaluate the sensitivity of our financial performance to changes in interest rates presented in the tables below are utilized in, and set forth under, the gap table and related notes. Although management finds these assumptions reasonable, the interest rate sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on our net interest income and MVPE indicated in the below tables could vary substantially if different assumptions were used or actual experience differs from these assumptions. To illustrate this point, the projected cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities within the next 12 months as a percent of total assets ("one-year gap") is also provided for an up 200 basis point scenario, as of September 30, 2020. Qualitative Disclosure about Market Risk At September 30, 2020, the Bank's gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice within one year was $435.0 million, or 4.58% of total assets, compared to $487.4 million, or 5.22% of total assets, at September 30, 2019. The decrease in the one-year gap amount was due to a shift in the cash flow projections on the Bank's non-maturity deposits compared to the prior year, related to the implementation of a new interest rate risk model. This change shortened the life of these liabilities and thus increased the amount of projected cash flows in the 12-month horizon compared to the previous model. This change was largely offset by lower interest rates as of September 30, 2020 compared to September 30, 2019, which increased the cash flow projections related to the Bank's mortgage-related assets. As interest rates fall, borrowers have more economic incentive to refinance their mortgages and agency debt issuers have more economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates, resulting in higher projected cash flows on these assets. The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on one- to four-family loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder. The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted significantly by changes in interest rates, because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty. If interest rates were to increase 200 basis points, as of September 30, 2020, the Bank's one-year gap is projected to be $(611.0) million, or (6.44)% of total assets. The decrease in the gap compared to when there is no change in rates is due to lower anticipated cash flows in the higher rate environment. This compares to a one-year gap of $(361.8) million, or (3.87)% of total assets, if interest rates were to have increased 200 basis points as of September 30, 2019. During the current fiscal year, loan repayments totaled $1.89 billion and cash flows from the securities portfolio totaled $668.0 million. The majority of these cash flows were reinvested into new loans and securities at current market interest rates. Total cash flows from term liabilities that matured and/or repriced into current market interest rates during the current fiscal year were $2.97 billion, including $1.16 billion in term borrowings, of which $640.0 million was tied to interest rate swaps. These offsetting cash flows allow the Bank to manage its interest rate risk and gap position more precisely than if the Bank did not have offsetting cash flows due to its mix of assets or maturity structure of liabilities. The Bank primarily uses long-term fixed-rate borrowings with no embedded options to lengthen the average life of the Bank's liabilities. The fixed-rate characteristics of these borrowings lock-in the cost until maturity and thus decrease the amount of liabilities repricing as interest rates move higher compared to funding with lower-cost short-term borrowings. These borrowings are laddered in order to prevent large amounts of liabilities repricing in any one period. The WAL of the Bank's term borrowings as of September 30, 2020 was 1.9 years. However, including the impact of interest rate swaps related to $640.0 million of adjustable-rate FHLB advances, the WAL of the Bank's term borrowings as of September 30, 2020 was 3.0 years. The interest rate swaps effectively convert the adjustable-rate borrowings into long-term, fixed-rate liabilities. In addition to these wholesale strategies, the Bank has benefited from an increase in non-maturity deposits. Rates paid on non-maturity deposits are not expected to increase as market interest rates rise. Specifically, checking accounts and savings accounts have had minimal interest rate fluctuations throughout historical interest rate cycles, though no assurance can be given that this will be the case in future interest rate cycles. The balances and rates of these accounts have historically tended to remain very stable over time, giving them the characteristic of long-term liabilities. The Bank uses historical data pertaining to these accounts to estimate their future balances. Additionally, as we expand the commercial banking business, we expect to have the ability to obtain lower-costing commercial deposits, which could be used to reduce the cost of funds by replacing FHLB borrowings and wholesale deposits. 79 With the significant decrease in interest rates during the current year, the Bank has decreased the rates on certificates of deposit and money market accounts on pace with competitors in its market areas. The Bank will continue to adjust rates as market conditions allow. Gap Table. The following gap table summarizes the anticipated maturities or repricing periods of the Bank's interest-earning assets and interest-bearing liabilities based on the information and assumptions set forth in the notes below. Cash flow projections for mortgage-related assets are calculated based in part on prepayment assumptions at current and projected interest rates. Prepayment projections are subjective in nature, involve uncertainties and assumptions and, therefore, cannot be determined with a high degree of accuracy. Although certain assets and liabilities may have similar maturities or periods to repricing, they may react differently to changes in market interest rates. Assumptions may not reflect how actual yields and costs respond to market interest rate changes. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table below. A positive gap indicates more cash flows from assets are expected to reprice than cash flows from liabilities and would indicate, in a rising rate environment, that earnings should increase. A negative gap indicates more cash flows from liabilities are expected to reprice than cash flows from assets and would indicate, in a rising rate environment, that earnings should decrease. For additional information regarding the impact of changes in interest rates, see the following Change in Net Interest Income and Change in MVPE discussions and tables. More Than More Than Within One Year to Three Years Over One Year Three Years to Five Years Five Years Total Interest-earning assets: (Dollars in thousands) Loans receivable (1) $ 2,180,950 $ 2,209,189 $ 1,087,823 $ 1,745,032 $ 7,222,994 Securities (2) 618,869 513,172 178,157 219,407 1,529,605 Other interest-earning assets 172,286 — — — 172,286 Total interest-earning assets 2,972,105 2,722,361 1,265,980 1,964,439 8,924,885 Interest-bearing liabilities: Non-maturity deposits (3) 752,147 379,065 410,930 1,710,488 3,252,630 Certificates of deposit 1,505,599 1,199,700 315,477 468 3,021,244 Borrowings (4) 279,401 702,940 618,134 231,139 1,831,614 Total interest-bearing liabilities 2,537,147 2,281,705 1,344,541 1,942,095 8,105,488 Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 434,958 $ 440,656 $ (78,561) $ 22,344 $ 819,397 Cumulative excess of interest-earning assets over interest-bearing liabilities $ 434,958 $ 875,614 $ 797,053 $ 819,397 80 More Than More Than Within One Year to Three Years Over One Year Three Years to Five Years Five Years Total Cumulative excess of interest-earning assets over interest-bearing liabilities as a percent of total Bank assets at: September 30, 2020 4.58 % 9.23 % 8.40 % 8.64 % September 30, 2019 5.21 Cumulative one-year gap - interest rates +200 bps at: September 30, 2020 (6.44) September 30, 2019 (3.88) (1) Adjustable-rate loans are included in the period in which the rate is next scheduled to adjust or in the period in which repayments are expected to occur, or prepayments are expected to be received, prior to their next rate adjustment, rather than in the period in which the loans are due. Fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization and prepayment assumptions. Balances are net of undisbursed amounts and deferred fees and exclude loans 90 or more days delinquent or in foreclosure. (2) MBS reflect projected prepayments at amortized cost. Investment securities are presented based on contractual maturities, term to call dates or pre-refunding dates as of September 30, 2020, at amortized cost. (3) Although the Bank's checking, savings, and money market accounts are subject to immediate withdrawal, management considers a substantial amount of these accounts to be core deposits having significantly longer effective maturities. The decay rates (the assumed rates at which the balances of existing accounts decline) used on these accounts is based on assumptions developed from our actual experiences with these accounts. If all of the Bank's checking, savings, and money market accounts had been assumed to be subject to repricing within one year, interest-bearing liabilities which were estimated to mature or reprice within one year would have exceeded interest-earning assets with comparable characteristics by $2.07 billion, for a cumulative one-year gap of (21.8)% of total assets. (4) Borrowings exclude deferred prepayment penalty costs. Included in this line item are $640.0 million of FHLB adjustable-rate advances with interest rate swaps. The repricing for these liabilities is projected to occur at the maturity date of each interest rate swap. Change in Net Interest Income. The Bank's net interest income projections are a reflection of the response to interest rates of the assets and liabilities that are expected to mature or reprice over the next year. Repricing occurs as a result of cash flows that are received or paid on assets or due on liabilities which would be replaced at then current market interest rates or on adjustable-rate products that reset during the next year. The Bank's borrowings and certificate of deposit portfolios have stated maturities and the cash flows related to the Bank's liabilities do not generally fluctuate as a result of changes in interest rates. Cash flows from mortgage-related assets and callable agency debentures can vary significantly as a result of changes in interest rates. As interest rates decrease, borrowers have an economic incentive to lower their cost of debt by refinancing or endorsing their mortgage to a lower interest rate. Similarly, agency debt issuers are more likely to exercise embedded call options for agency securities and issue new securities at a lower interest rate. 81 For each date presented in the following table, the estimated change in the Bank's net interest income is based on the indicated instantaneous, parallel and permanent change in interest rates. The change in each interest rate environment represents the difference between estimated net interest income in the 0 basis point interest rate environment ("base case," assumes the forward market and product interest rates implied by the yield curve are realized) and the estimated net interest income in each alternative interest rate environment (assumes market and product interest rates have a parallel shift in rates across all maturities by the indicated change in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior changes as market rates change. For the current year, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable. Estimations of net interest income used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change materially and that any repricing of assets or liabilities occurs at anticipated product and market rates for the alternative rate environments as of the dates presented. The estimation of net interest income does not include any projected gains or losses related to the sale of loans or securities, or income derived from non-interest income sources, but does include the use of different prepayment assumptions in the alternative interest rate environments. It is important to consider that estimated changes in net interest income are for a cumulative four-quarter period. These do not reflect the earnings expectations of management. Change Net Interest Income At September 30, (in Basis Points) 2020 2019 in Interest Rates (1) Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%) (Dollars in thousands) 000 bp $ 183,596 $ — — % $ 193,329 $ — — % +100 bp 188,084 4,488 2.44 194,093 764 0.40 +200 bp 188,417 4,821 2.63 192,111 (1,218) (0.63) +300 bp 186,441 2,845 1.55 188,752 (4,577) (2.37) (1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities. The net interest income projection was lower in the base case scenario at September 30, 2020 compared to September 30, 2019 due to lower interest rates at September 30, 2020 compared to September 30, 2019. Because the Bank's gap was positive during the current year, assets have repriced downward at a faster pace than liabilities, resulting in a lower base case net interest income projection at September 30, 2020. The net interest income projections increase from the base case in all rising interest rate scenarios at September 30, 2020. The net interest income projection was more adversely impacted in the rising interest rate scenarios at September 30, 2019 compared to September 30, 2020, due primarily to higher interest rates at September 30, 2019. The positive impact of rising interest rates is diminished as interest rates increase. Higher interest rates decreased the projected cash flows from the Bank's mortgage-related assets, thus decreasing the positive impact of rising interest rates compared to the base case. Change in MVPE. Changes in the estimated market values of our financial assets and liabilities drive changes in estimates of MVPE. The market value of an asset or liability reflects the present value of all the projected cash flows over its remaining life, discounted at market interest rates. As interest rates rise, generally the market value for both financial assets and liabilities decrease. The opposite is generally true as interest rates fall. The MVPE represents the theoretical market value of capital that is calculated by netting the market value of assets, liabilities, and off-balance sheet instruments. If the market values of financial assets increase at a faster pace than the market values of financial liabilities, or if the market values of financial liabilities decrease at a faster pace than the market values of financial assets, the MVPE will increase. The market value of shorter term-to-maturity financial instruments is less sensitive to changes in interest rates than are longer term-to-maturity financial instruments. Because of this, the market values of our certificates of deposit (which generally have relatively shorter average lives) tend to display less sensitivity to changes in interest rates than do our mortgage-related assets (which generally have relatively longer average lives). The average life expected on our mortgage-related assets varies under different interest rate environments because borrowers have the ability to prepay their mortgage loans. Therefore, as interest rates decrease, the WAL of mortgage-related assets decrease as well. As interest rates increase, the WAL would be expected to increase, as well as increasing the sensitivity of these assets in higher rate environments. 82 The following table sets forth the estimated change in the MVPE for each date presented based on the indicated instantaneous, parallel, and permanent change in interest rates. The change in each interest rate environment represents the difference between the MVPE in the base case (assumes the forward market interest rates implied by the yield curve are realized) and the MVPE in each alternative interest rate environment (assumes market interest rates have a parallel shift in rates). Projected cash flows for each scenario are based upon varying prepayment assumptions to model likely customer behavior as market rates change. For the current year, multiple yields along the yield curve were less than one percent, so the -100 basis points scenario was not applicable. The estimations of the MVPE used in preparing the table below were based upon the assumptions that the total composition of interest-earning assets and interest-bearing liabilities does not change, that any repricing of assets or liabilities occurs at current product or market rates for the alternative rate environments as of the dates presented, and that different prepayment rates were used in each alternative interest rate environment. The estimated MVPE results from the valuation of cash flows from financial assets and liabilities over the anticipated lives of each for each interest rate environment. The table below presents the effects of the changes in interest rates on our assets and liabilities as they mature, repay, or reprice, as shown by the change in the MVPE for alternative interest rates. Change Market Value of Portfolio Equity At September 30, (in Basis Points) 2020 2019 in Interest Rates (1) Amount ($) Change ($) Change (%) Amount ($) Change ($) Change (%) (Dollars in thousands) 000 bp $ 1,301,409 $ — — % $ 1,283,429 $ — — % +100 bp 1,290,877 (10,532) (0.81) 1,286,446 3,017 0.24 +200 bp 1,157,368 (144,041) (11.07) 1,162,151 (121,278) (9.45) +300 bp 967,997 (333,412) (25.62) 992,060 (291,369) (22.70) (1) Assumes an instantaneous, parallel, and permanent change in interest rates at all maturities. The percentage change in the Bank's MVPE at September 30, 2020 was negative in all scenarios. At September 30, 2019 the percentage change in the Bank's MVPE was negative in the +200 and +300 basis point scenarios. This change was due primarily to a change in the Bank's interest rate risk model, of which the most significant impact was on the valuation of the Bank's non-maturity deposit portfolio. The model changes resulted in a shorter duration for these liabilities than was modeled at September 30, 2019, which reduced their sensitivity to changes in interest rates. The Bank's MVPE decreases as interest rates rise, as the market value for assets decreases at a faster pace than these liabilities. The negative impact to the MVPE in the rising interest rate scenarios is due to slower prepayment projections on the Bank's mortgage-related assets and investments. As interest rates increase, borrowers have less economic incentive to refinance their mortgages and agency debt issuers have less economic incentive or opportunity to exercise their call options in order to issue new debt at lower interest rates, resulting in lower projected cash flows on these assets. As interest rates increase in the rising rate scenarios, repayments on mortgage-related assets are more likely to decrease and only be realized through significant changes in borrowers' lives such as divorce, death, job-related relocations, or other events as there is less economic incentive for borrowers to prepay their debt, resulting in an increase in the average life of mortgage-related assets. Similarly, call projections for the Bank's callable agency debentures decrease as interest rates rise, which results in cash flows related to these assets moving closer to the contractual maturity dates. The higher expected average lives of these assets, relative to the assumptions in the base case interest rate environment, increases the sensitivity of their market value to changes in interest rates. 83 The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of September 30, 2020. Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts, which are considered adjustments to the yield. The interest rate presented for term borrowings is the effective rate, which includes the impact of interest rate swaps and the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid. The WAL presented for term borrowings includes the effect of interest rate swaps. The maturity and repricing terms presented for one- to four-family loans represent the contractual terms of the loan. Amount Yield/Rate WAL % of Category % of Total (Dollars in thousands) Investment securities $ 380,147 0.65 % 1.0 24.3 % 4.2 % MBS - fixed 970,369 1.82 3.3 62.2 10.7 MBS - adjustable 210,434 2.49 3.1 13.5 2.3 Total securities 1,560,950 1.62 2.7 100.0 % 17.2 Loans receivable: Fixed-rate one- to four-family: <= 15 years 1,130,538 2.98 3.1 15.6 % 12.5 > 15 years 4,287,229 3.67 4.2 59.3 47.3 Fixed-rate commercial 556,195 4.14 3.5 7.7 6.1 All other fixed-rate loans 47,855 4.53 4.9 0.7 0.5 Total fixed-rate loans 6,021,817 3.59 3.9 83.3 66.4 Adjustable-rate one- to four-family: <= 36 months 189,591 2.25 4.8 2.6 2.1 > 36 months 639,461 3.09 3.2 8.9 7.1 Adjustable-rate commercial 273,465 4.75 6.6 3.8 3.0 All other adjustable-rate loans 100,662 4.23 2.5 1.4 1.1 Total adjustable-rate loans 1,203,179 3.43 4.2 16.7 13.3 Total loans receivable 7,224,996 3.57 4.0 100.0 % 79.7 FHLB stock 93,862 4.64 1.9 1.0 Cash and cash equivalents 185,148 0.09 — 2.1 Total interest-earning assets $ 9,064,956 3.18 3.6 100.0 % Non-maturity deposits $ 3,170,164 0.20 6.1 51.2 % 39.7 % Retail/business certificates of deposit 2,766,461 1.83 1.5 44.7 34.6 Public unit certificates of deposit 254,783 0.74 0.5 4.1 3.2 Total deposits 6,191,408 0.95 3.8 100.0 % 77.5 Term borrowings 1,793,000 2.31 3.0 22.5 Total interest-bearing liabilities $ 7,984,408 1.26 3.6 100.0 % 84 Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 30, 2020, of the Company and our report dated November 25, 2020, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Kansas City, Missouri November 25, 2020 85 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended September 30, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 25, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses - Refer to Notes 1 and 5 to the financial statements Critical Audit Matter Description Management's methodology for assessing the appropriateness of the allowance for credit losses (ACL) consists of a formula analysis model, along with analyzing and considering several other relevant internal and external factors. In the formula analysis model, historical loss factors, as adjusted, are applied to each loan category and qualitative factors are applied to reflect risks inherent in each loan category that are not captured by the historical loss factors. Management reviews the factors quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio. Management also analyzes and considers several other relevant internal and external factors, including the national and state unemployment rates, national and state unemployment benefit claim levels, the amount of and timing of financial assistance provided by the government and the Bank's COVID-19 loan modification program, residential real estate value trends, credit score trends, delinquent loan trends, consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, commercial lending's review of the Bank's largest commercial loan relationships, historical peer ACL to loan 86 ratios and industry and peer charge-off percentages, among other considerations. Based on management's review of these data elements, they evaluate the reasonableness of the ACL on an ongoing basis and whether any changes need to be made to the Bank's ACL methodology, including the consideration of the economic conditions. During the current fiscal year, management increased the historical loss and qualitative factors applied in the formula analysis model for all loan categories and added a COVID-19 qualitative loss factor to the Bank's commercial loan portfolio. Considering the estimation and judgment required by management in determining adjustments for qualitative factors, our audit of the ACL and the related disclosures required a high degree of auditor judgment with regard to the qualitative adjustments specifically to the commercial loan portfolio. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the ACL formula analysis model included the following, among others: • We tested the effectiveness of controls over the Company's ACL formula analysis model inclusive of the controls over loan charge-off activity and including additional considerations with respect to current economic conditions and management's review of the adequacy of the ACL. • We tested the classification and appropriate segregation of loan categories based on certain risk characteristics in order to evaluate the application of the relevant economic and qualitative assumptions. • We evaluated the appropriateness and relevance of the data elements by comparing to relevant internal and external sources. • We tested the mathematical accuracy of (i) the historical charge-off activity, (ii) the quantitative measures of the qualitative loss factors, and (iii) the formula analysis model calculations. • We assessed the reasonableness of, and evaluated support for, key qualitative adjustments based on market and economic conditions and/or portfolio performance metrics. • We assessed the reasonableness of, and evaluated support for, the COVID-19 qualitative factor applied to the commercial portfolio including (i) industries significantly impacted by the COVID-19 pandemic, (ii) commercial lending's review of commercial loan relationships, and (iii) COVID-19 loan modifications. • We evaluated analytics, trends, and peer analysis of the overall ACL formula analysis model to assess for reasonableness. /s/ Deloitte & Touche LLP Kansas City, Missouri November 25, 2020 We have served as the Company's auditor since 1974. 87 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2020 and 2019 (Dollars in thousands, except per share amounts) 2020 2019 ASSETS: Cash and cash equivalents (includes interest-earning deposits of $ 172,430 and $ 198,809 ) $ 185,148 $ 220,370 Available-for-sale ("AFS") securities, at estimated fair value 1,560,950 1,204,863 Loans receivable, net (allowance for credit losses ("ACL") of $ 31,527 and $ 9,226 ) 7,202,851 7,416,747 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 93,862 98,456 Premises and equipment, net 101,875 96,784 Income taxes receivable, net — 2 Other assets 342,532 302,796 TOTAL ASSETS $ 9,487,218 $ 9,340,018 LIABILITIES: Deposits $ 6,191,408 $ 5,581,867 Borrowings 1,789,313 2,239,989 Advance payments by borrowers for taxes and insurance 65,721 65,686 Income taxes payable, net 795 — Deferred income tax liabilities, net 8,180 14,282 Accounts payable and accrued expenses 146,942 101,868 Total liabilities 8,202,359 8,003,692 STOCKHOLDERS' EQUITY: Preferred stock, $ .01 par value; 100,000,000 shares authorized, no shares issued or outstanding — — Common stock, $ .01 par value; 1,400,000,000 shares authorized, 138,956,296 and 141,440,030 shares issued and outstanding as of September 30, 2020 and 2019, respectively 1,389 1,414 Additional paid-in capital 1,189,853 1,210,226 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 33,040 ) ( 34,692 ) Retained earnings 143,162 174,277 Accumulated other comprehensive (loss) income ("AOCI"), net of tax ( 16,505 ) ( 14,899 ) Total stockholders' equity 1,284,859 1,336,326 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,487,218 $ 9,340,018 See accompanying notes to consolidated financial statements. 88 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2020, 2019, and 2018 (Dollars in thousands, except per share amounts) 2020 2019 2018 INTEREST AND DIVIDEND INCOME: Loans receivable $ 270,494 $ 284,229 $ 260,198 Mortgage-backed securities ("MBS") 23,009 25,730 22,619 FHLB stock 5,827 7,823 10,962 Investment securities 4,467 6,366 4,670 Cash and cash equivalents 1,181 5,806 23,443 Total interest and dividend income 304,978 329,954 321,892 INTEREST EXPENSE: Deposits 67,598 66,201 52,625 Borrowings 48,045 57,363 70,494 Total interest expense 115,643 123,564 123,119 NET INTEREST INCOME 189,335 206,390 198,773 PROVISION FOR CREDIT LOSSES 22,300 750 — NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 167,035 205,640 198,773 NON-INTEREST INCOME: Deposit service fees 11,285 12,740 15,636 Insurance commissions 2,487 2,821 2,469 Other non-interest income 5,827 6,397 3,930 Total non-interest income 19,599 21,958 22,035 NON-INTEREST EXPENSE: Salaries and employee benefits 52,996 53,145 46,563 Information technology and related expense 16,974 17,615 13,999 Occupancy, net 13,870 13,032 11,455 Regulatory and outside services 5,762 5,813 5,709 Advertising and promotional 4,889 5,244 5,034 Deposit and loan transaction costs 2,890 2,478 5,621 Office supplies and related expense 2,195 2,439 1,888 Federal insurance premium 914 1,172 3,277 Other non-interest expense 5,514 6,006 3,356 Total non-interest expense 106,004 106,944 96,902 INCOME BEFORE INCOME TAX EXPENSE 80,630 120,654 123,906 INCOME TAX EXPENSE 16,090 26,411 24,979 NET INCOME $ 64,540 $ 94,243 $ 98,927 Basic earnings per share ("EPS") $ 0.47 $ 0.68 $ 0.73 Diluted EPS $ 0.47 $ 0.68 $ 0.73 See accompanying notes to consolidated financial statements. 89 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED SEPTEMBER 30, 2020, 2019, and 2018 (Dollars in thousands) 2020 2019 2018 Net income $ 64,540 $ 94,243 $ 98,927 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $( 4,359 ), $( 3,468 ), and $ 2,499 13,578 10,804 ( 6,741 ) Unrealized gains on securities reclassified from held-to-maturity ("HTM") to AFS during the period, net of taxes of $ 0 , $( 750 ), and $ 0 — 2,336 — Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $ 4,875 , $ 10,394 , and $( 2,785 ) ( 15,184 ) ( 32,379 ) 7,496 Comprehensive income $ 62,934 $ 75,004 $ 99,682 See accompanying notes to consolidated financial statements. 90 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2020, 2019, and 2018 (Dollars in thousands, except per share amounts) Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2017 $ 1,382 $ 1,167,368 $ ( 37,995 ) $ 234,640 $ 2,918 $ 1,368,313 Net income, fiscal year 2018 98,927 98,927 Other comprehensive income, net of tax 755 755 Reclassification of certain tax effects related to adopting Accounting Standards Update ("ASU") 2018-02 ( 667 ) 667 — Cumulative effect of adopting ASU 2016-09 19 ( 19 ) — Capital City Bancshares, Inc. ("CCB") acquisition 30 39,083 39,113 ESOP activity 541 1,652 2,193 Stock-based compensation 372 372 Stock options exercised 261 261 Cash dividends to stockholders ($ 0.88 per share) ( 118,312 ) ( 118,312 ) Balance at September 30, 2018 1,412 1,207,644 ( 36,343 ) 214,569 4,340 1,391,622 Net income, fiscal year 2019 94,243 94,243 Other comprehensive loss, net of tax ( 19,239 ) ( 19,239 ) Cumulative effect of adopting ASU 2014-09 394 394 ESOP activity 549 1,651 2,200 Restricted stock activity, net 1 ( 3 ) ( 2 ) Stock-based compensation 552 552 Stock options exercised 1 1,484 1,485 Cash dividends to stockholders ($ 0.98 per share) ( 134,929 ) ( 134,929 ) Balance at September 30, 2019 1,414 1,210,226 ( 34,692 ) 174,277 ( 14,899 ) 1,336,326 Net income, fiscal year 2020 64,540 64,540 Other comprehensive loss, net of tax ( 1,606 ) ( 1,606 ) Cumulative effect of adopting ASU 2016-02 88 88 ESOP activity 336 1,652 1,988 Restricted stock activity, net ( 19 ) ( 19 ) Stock-based compensation 570 570 Repurchase of common stock ( 26 ) ( 21,897 ) ( 1,881 ) ( 23,804 ) Stock options exercised 1 637 638 Cash dividends to stockholders ($ 0.68 per share) ( 93,862 ) ( 93,862 ) Balance at September 30, 2020 $ 1,389 $ 1,189,853 $ ( 33,040 ) $ 143,162 $ ( 16,505 ) $ 1,284,859 See accompanying notes to consolidated financial statements. 91 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2020, 2019, and 2018 (Dollars in thousands) 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 64,540 $ 94,243 $ 98,927 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 5,827 ) ( 7,823 ) ( 10,962 ) Provision for credit losses 22,300 750 — Originations of loans receivable held-for-sale ("LHFS") — — ( 777 ) Proceeds from sales of LHFS — — 16,423 Amortization and accretion of premiums and discounts on securities 1,661 1,242 3,150 Depreciation and amortization of premises and equipment 9,133 9,143 8,458 Amortization of intangible assets 1,964 2,316 234 Amortization of deferred amounts related to FHLB advances, net 539 8 1,173 Common stock committed to be released for allocation - ESOP 1,988 2,200 2,193 Stock-based compensation 570 552 372 Provision for deferred income taxes ( 5,588 ) ( 361 ) ( 4,540 ) Changes in: Unrestricted cash collateral (provided to)/received from derivative counterparties, net — ( 9,970 ) 10,701 Other assets, net 9,105 6,220 1,712 Income taxes payable/receivable, net 774 2,173 ( 2,262 ) Accounts payable and accrued expenses ( 8,231 ) ( 19,746 ) ( 639 ) Net cash provided by operating activities 92,928 80,947 124,163 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities ( 1,007,763 ) ( 386,702 ) ( 411,459 ) Proceeds from calls, maturities and principal reductions of AFS securities 667,952 359,551 192,966 Proceeds from calls, maturities and principal reductions of HTM securities — 165,336 212,267 Proceeds from sale of AFS securities — — 2,078 Proceeds from the redemption of FHLB stock 10,421 197,054 291,506 Purchase of FHLB stock — ( 187,961 ) ( 277,552 ) Net change in loans receivable 191,359 95,358 ( 37,537 ) Purchase of premises and equipment ( 14,742 ) ( 11,732 ) ( 11,761 ) Proceeds from sale of other real estate owned ("OREO") 993 2,053 2,240 Cash acquired from acquisition — — 15,685 Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures — 302 — Proceeds from bank-owned life insurance ("BOLI") death benefit 490 — — Net cash (used in) provided by investing activities ( 151,290 ) 233,259 ( 21,567 ) (Continued) 92 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2020, 2019, and 2018 (Dollars in thousands) 2020 2019 2018 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 93,862 ) ( 134,929 ) ( 118,312 ) Net change in deposits 609,541 ( 21,487 ) ( 58,988 ) Proceeds from borrowings 1,665,600 5,518,700 17,275,100 Repayments on borrowings ( 2,112,600 ) ( 5,563,752 ) ( 17,414,200 ) Change in advance payments by borrowers for taxes and insurance 35 422 939 Payment of FHLB prepayment penalties ( 4,215 ) — — Repurchase of common stock ( 20,767 ) — — Stock options exercised 638 1,485 261 Net cash provided by (used in) financing activities 44,370 ( 199,561 ) ( 315,200 ) NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS ( 13,992 ) 114,645 ( 212,604 ) CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS: Beginning of year 253,700 139,055 351,659 End of year $ 239,708 $ 253,700 $ 139,055 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax payments $ 13,045 $ 17,779 $ 24,785 Interest payments $ 118,610 $ 123,508 $ 119,699 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to LHFS $ — $ — $ 15,814 Operating lease right-of-use assets obtained $ 16,841 $ — $ — Operating lease liabilities obtained $ 16,726 $ — $ — Acquisition: Common stock issued $ — $ — $ 39,113 Fair value of assets acquired, excluding acquired cash and intangibles $ — $ — $ 418,062 Fair value of liabilities assumed $ — $ — $ 412,675 Transfer of HTM securities, at amortized cost, to AFS securities $ — $ 444,732 $ — See accompanying notes to consolidated financial statements. (Concluded) 93 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2020, 2019, and 2018 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - Capitol Federal Financial, Inc. (the "Company") provides a full range of retail banking services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"), a federal savings bank, which has 45 traditional and 9 in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the Kansas City metropolitan area. The Bank emphasizes mortgage lending, primarily originating and purchasing one- to four-family loans, and providing personal retail financial services, along with offering commercial banking and lending products. The Bank is subject to competition from other financial institutions and other companies that provide financial services. Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank has two wholly owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and assumptions. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $ 185.1 million and $ 220.4 million at September 30, 2020 and 2019, respectively, and restricted cash and cash equivalents of $ 54.6 million and $ 33.3 million at September 30, 2020 and 2019, respectively, which was included in other assets on the consolidated balance sheet. The restricted cash and cash equivalents relate to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps. See additional discussion regarding the interest rate swaps in Note 9. Deposits and Borrowed Funds. Regulations of the Board of Governors of the Federal Reserve System ("FRB") require federally chartered savings banks to maintain cash reserves against their transaction accounts. Required reserves must be maintained in the form of vault cash, an account at a Federal Reserve Bank, or a pass-through account as defined by the FRB. The amount of interest-earning deposits held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City") as of September 30, 2020 and 2019 was $ 172.2 million and $ 198.6 million, respectively. The Bank is in compliance with the FRB requirements. For the years ended September 30, 2020 and 2019, the average daily balance of required reserves at the FRB of Kansas City was $ 6.6 million and $ 21.5 million, respectively. Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into certain FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows. Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSE"), including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association, and municipal bonds. Securities are classified as HTM, AFS, or trading based on management's intention for holding the securities on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at the time of purchase. Securities that management has the intention and ability to hold to maturity are classified as HTM and reported at amortized cost. Such securities are adjusted for the amortization of premiums and discounts which are recognized as adjustments to interest income over the life of the securities using the level-yield method. At September 30, 2020 and 2019, the portfolio did not contain any securities classified as HTM. 94 Securities that management may sell if necessary for liquidity or asset management purposes are classified as AFS and reported at fair value, with unrealized gains and losses reported as a component of AOCI within stockholders' equity, net of deferred income taxes. The amortization of premiums and discounts are recognized as adjustments to interest income over the life of the securities using the level-yield method. Gains or losses on the disposition of AFS securities are recognized using the specific identification method. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. See additional discussion of fair value of AFS securities in "Note 15. Fair Value of Financial Instruments." Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in non-interest income in the consolidated statements of income. During the fiscal years ended September 30, 2020 and 2019, neither the Company nor the Bank maintained a trading securities portfolio. Management monitors securities in the investment portfolio for impairment on an ongoing basis and performs a formal review quarterly. The process involves monitoring market events and other items that could impact issuers. The evaluation includes, but is not limited to, such factors as: the nature of the investment, the length of time the security has had a fair value less than the amortized cost basis, the cause(s) and severity of the loss, expectation of an anticipated recovery period, recent events specific to the issuer or industry including the issuer's financial condition and current ability to make future payments in a timely manner, external credit ratings and recent downgrades in such ratings, management's intention to sell and whether it is more likely than not management would be required to sell prior to recovery for debt securities. Management determines whether other-than-temporary losses should be recognized for impaired securities by assessing all known facts and circumstances surrounding the securities. If management intends to sell an impaired security or if it is more likely than not that management will be required to sell an impaired security before recovery of its amortized cost basis, an other-than-temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in earnings and the security will be written down to fair value. Loans Receivable - Loans receivable that management has the intention and ability to hold for the foreseeable future are carried at the amount of unpaid principal, net of ACL, undisbursed loan funds, unamortized premiums and discounts, and deferred loan origination fees and costs. Net loan origination fees and costs, and premiums and discounts are amortized as yield adjustments to interest income using the level-yield method. Interest on loans is credited to income as earned and accrued only if deemed collectible. Loan endorsements - Certain existing one- to four- family loan customers, including customers whose loans were purchased from a correspondent lender, have the opportunity, for a fee, to endorse their original loan terms to current loan terms being offered by the Bank. The fee received for each endorsement is deferred and amortized as an adjustment to interest income over the life of the loan. If the change in loan terms resulting from the endorsement is deemed to be more than minor, the loan is treated as a new loan and all existing unamortized deferred loan origination fees and costs are recognized at the time of endorsement. If the change in loan terms is deemed to be minor, the fee received for the endorsement is added to the net remaining unamortized deferred fee or deferred cost balance. Coronavirus Disease 2019 ("COVID-19") loan modification programs - In March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. Generally, loan modifications under these programs ("COVID-19 loan modifications") for one- to four-family loans and consumer loans consist of a three-month payment forbearance of principal, interest, and in some cases, escrow. COVID-19 loan modifications of commercial loans mainly consist of up to a six-month interest-only payment period, but an option for a three- to six-month forbearance of principal and interest was also available to our borrowers. The Company has followed the loan modification criteria within the Coronavirus Aid, Relief, and Economic Security ("CARES") Act or Interagency guidance when determining if a borrower's modification is subject to troubled debt restructuring ("TDR") classification. If it is determined that the modification does not meet the criteria under the CARES Act or Interagency guidance to be excluded from TDR classification, the Company evaluates the loan modifications under its existing TDR framework. Loans subject to forbearance under the COVID-19 loan modification program are not reported as past due or placed on nonaccrual status during the forbearance time period, and interest income continues to be recognized over the contractual life of the loans. Troubled debt restructurings - For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which 95 reduced payment amounts are required, and/or reductions in interest rates. The Bank does not forgive principal or interest, nor does it commit to lend additional funds to these borrowers, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family loans and consumer loans, not to exceed the original loan amount. In the case of commercial loans, the Bank does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve the credit quality. Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date. The number of days delinquent is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment. Nonaccrual loans - The accrual of income on loans is generally discontinued when interest or principal payments are 90 days in arrears. We also report certain TDR loans as nonaccrual loans that are required to be reported as such pursuant to regulatory reporting requirements. Loans on which the accrual of income has been discontinued are designated as nonaccrual and outstanding interest previously credited beyond 90 days delinquent is reversed, except in the case of commercial loans in which all delinquent accrued interest is reversed. A nonaccrual one- to four-family or consumer loan is returned to accrual status once the contractual payments have been made to bring the loan less than 90 days past due or, in the case of a TDR loan, the borrower has made the required consecutive loan payments. A nonaccrual commercial loan is returned to accrual status once the loan has been current for a minimum of six months, all fees and interest are paid current, the loan has a sufficient debt service coverage ratio, and the loan is well secured and within policy. Impaired loans - A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due, including principal and interest, according to the original contractual terms of the loan agreement. Interest income on impaired loans is recognized in the period collected unless the ultimate collection of principal is considered doubtful, in which case interest income is no longer recognized. Acquired loans - Acquired loans are initially recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, interest rates, projected prepayments, projected default rates, loss given default and recovery rates, with no carryover of any existing ACL. Acquired loans with evidence of credit quality deterioration at acquisition are reviewed to determine if it is probable that the Company will not be able to collect all contractual amounts due, including both principal and interest. When both conditions exist, such loans are categorized and accounted for as purchased credit impaired ("PCI") loans. When these conditions do not exist, the loans are categorized as non-PCI loans. For PCI loans with cash flows that the Company has determined can be reasonably estimated, which is the majority of the PCI loans, interest income is recognized on a level-yield basis over the life of the loan based upon the excess of expected cash flows over the original investment in the loan. Allowance for Credit Losses - The ACL represents management's best estimate of the amount of inherent losses in the loan portfolio as of the balance sheet date. It involves a high degree of complexity and requires management to make difficult and subjective judgments and assumptions about highly uncertain matters. Management's methodology for assessing the appropriateness of the ACL consists of a formula analysis model, along with analyzing and considering several other relevant internal and external factors. The use of different judgments and assumptions could cause reported results to differ significantly. Management maintains the ACL through provisions for credit losses that are either charged or credited to income. One- to four-family loans, including home equity loans, are individually evaluated for loss when the loan is generally 180 days delinquent and any losses are charged-off. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell. Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. An updated appraisal is requested, at a minimum, every 12 months thereafter if the loan is 180 days or more delinquent or in foreclosure. If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan. When a non-real estate secured consumer loan is 120 days delinquent, any identified losses are charged-off. For commercial loans, generally losses are charged-off prior to a loan becoming 120 days delinquent when it is determined, through the analysis of any available current financial information with regards to the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement, or, in the case of secured loans, it is determined, through the analysis of current information with regards to the Bank's collateral position, that the amounts due from the borrower are in excess of the calculated current fair value of the collateral after 96 consideration of estimated costs to sell. Charge-offs for any loan type may also occur at any time if the Bank has knowledge of the existence of a probable loss. The primary risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased delinquencies, non-performing assets, loan losses, and future loan loss provisions. Although the 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 business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. As of each quarter end, a formula analysis is prepared which segregates the loan portfolio into categories based on certain risk characteristics. The categories include the following: one- to four-family loans; commercial loans; consumer home equity loans; and other consumer loans. Home equity loans with the same underlying collateral as a one- to four-family loan are combined with the one- to four-family loan in the formula analysis model to calculate a combined loan-to-value ("LTV") ratio. The one- to four-family loan portfolio and related home equity loans are segregated into additional categories based on the following risk characteristics: loan source (originated, correspondent purchased, or bulk purchased), interest payments (fixed-rate and adjustable-rate), LTV ratios, borrower's credit scores, and 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 commercial loan portfolio is segregated into additional categories based on the type of loan (real estate loan, construction loan or commercial and industrial). Impaired loans are not included in the formula analysis as they are individually evaluated for loss. Historical loss factors are applied to each loan category in the formula analysis model. As of each quarter end, management reviews historical losses over a look-back time period and utilizes the historical loss time periods believed to be the most appropriate considering the then-current economic conditions. The historical loss time period is then adjusted for a loss emergence time period, which represents the estimated time period from the date of a loss event to the date we recognize a charge-off/loss. Qualitative factors are utilized in the formula analysis model to reflect risks inherent in each loan category that are not captured by the historical loss factors. The qualitative factors for one- to four-family and consumer loan portfolios take into consideration such items as: unemployment rate trends, residential real estate value trends, credit score trends, and delinquent loan trends. The qualitative factors for the commercial loan portfolio take into consideration the composition of the portfolio along with industry and peer charge-off information and certain ACL ratios. As loans are classified or become delinquent, the qualitative loss factors increase for each respective loan category. The qualitative factors were derived by management based on a review of the historical performance of the respective loan portfolios and industry and peer information for those loan portfolios with no or limited historical loss experience, along with consideration of current economic conditions and the likely impact such conditions might have on the performance of the loan portfolio. Management increased the historical loss and qualitative factors for the one- to four-family and consumer loan portfolios during the current fiscal year to account for a higher level of estimated inherent losses in the loan portfolio as a result of the deterioration of economic conditions due to the COVID-19 pandemic. When determining the appropriate historical loss and qualitative factors for the one- to four-family and consumer loan portfolios, management took into consideration such factors as the national and state unemployment rates and related trends, national and state unemployment benefit claim levels and related trends, the amount of and timing of financial assistance provided by the government, and the Bank's COVID-19 loan modification program. Unemployed individuals benefited from additional unemployment benefits afforded under the CARES Act; however, the majority of the financial assistance provided by the federal government, which may be masking the Bank's actual credit exposure, tapered off significantly by September 30, 2020. In late March 2020, the Bank began offering a COVID-19 loan modification program for one- to four-family and consumer loans. While the intention of the COVID-19 loan modification program was to keep customers current on their payments and therefore in their homes during 97 the worst of the economic downturn, the program could be masking the Bank's actual credit exposure on these loans. After considering the factors noted above, management evaluated the Bank's historical ACL to loans ratios compared to historical unemployment rates and housing price index trends and the Bank's historical charge-off percentages. After reviewing historical information and considering the economic conditions at September 30, 2020, management selected the worst historical time periods and used those historical loss and qualitative factors in the ACL formula analysis model at September 30, 2020. Management then compared the ACL (calculated by the formula analysis model) to loans ratio to the Bank's historical ACL to loan ratios to determine the appropriate amount of ACL at September 30, 2020 considering the economic conditions at that point in time. Management also increased the qualitative factors and applied a COVID-19 qualitative factor to the Bank's commercial loan portfolio at September 30, 2020. To determine the appropriate qualitative factors for the Bank's commercial loan portfolio at September 30, 2020, management considered the factors noted above, along with such factors as consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, the commercial lending team's review of the Bank's largest commercial loan relationships, and the Bank's COVID-19 loan modification program. The Bank's commercial lending team's loan analysis through September 30, 2020 primarily focused on the lending relationships considered most at risk of short-term operational cash flow issues and/or collateral concerns. Those considered most at risk were among the categories with the highest usage of the Bank's COVID-19 loan modification program. We believe the Bank's COVID-19 loan modification program has been very beneficial to the majority of the Bank's borrowers that took advantage of the program; however, as is the case with one- to four-family loans, the modifications may be masking the Bank's actual credit exposure. The commercial lending team also considered the largest credits and LTVs for loans in the industries most impacted by the COVID-19 pandemic. After considering the factors noted above and the very limited historical loan loss experience for the Bank's commercial loan portfolio, management reviewed historical peer ACL to loan ratios and peer charge-off percentages and the economic conditions during those time periods. After reviewing peer historical information and considering the economic conditions at September 30, 2020, management increased the commercial loan qualitative factors and applied a COVID-19 qualitative factor. Management then compared the ACL (calculated by the formula analysis model) to loans ratio to peer historical ACL to loan ratios to determine the appropriate amount of ACL at September 30, 2020 considering the economic conditions at that point in time. For non-PCI loans, the Company estimates a hypothetical amount of ACL using the same historical loss and qualitative factors as the Bank's formula analysis model to establish the hypothetical amount of ACL. This amount is compared with the remaining net purchase discount for the non-PCI loans to test for credit quality deterioration and the possible need for an additional loan loss provision. To the extent the remaining net purchase discount of the pool is greater than the hypothetical ACL, no additional ACL is necessary. If the remaining net purchase discount of the pool is less than the hypothetical ACL, the difference results in an increase to the ACL recorded through a provision for credit losses. Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate. If economic conditions worsen or do not improve in the near term, and if future government programs, if any, do not provide adequate relief to borrowers, it is possible the Bank's ACL will need to increase in future periods. Management seeks to apply the ACL methodology in a consistent manner; however, the methodology may be modified in response to changing conditions, such as was the case during the current fiscal year. Although management believes the ACL was at a level adequate to absorb inherent losses in the loan portfolio at September 30, 2020, the level of the ACL remains an estimate that is subject to significant judgment and short-term changes. Federal Home Loan Bank Stock - As a member of FHLB, the Bank is required to acquire and hold shares of FHLB stock. The Bank's holding requirement varies based on the Bank's activities, primarily the Bank's outstanding borrowings, with FHLB. FHLB stock is carried at cost and is considered a restricted asset because it cannot be pledged as collateral or bought or sold on the open market and it also has certain redemption restrictions. Management conducts a quarterly evaluation to determine if any FHLB stock impairment exists. The quarterly impairment evaluation focuses primarily on the capital adequacy and liquidity of FHLB, while also considering the impact that legislative and regulatory developments may have on FHLB. Stock and cash dividends received on FHLB stock are reflected as dividend income in the consolidated statements of income. Premises and Equipment - Land is carried at cost. Buildings, leasehold improvements, and furniture, fixtures and equipment are carried at cost less accumulated depreciation and leasehold amortization. Buildings, furniture, fixtures and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the 98 shorter of their estimated useful lives or the term of the respective leases. The costs for major improvements and renovations are capitalized, while maintenance, repairs and minor improvements are charged to operating expenses as incurred. Gains and losses on dispositions are recorded as non-interest income or non-interest expense as incurred. Revenue Recognition - Non-interest income within the scope of Accounting Standards Codification ("ASC") Topic 606 is recognized by the Company when performance obligations, under the terms of the contract, are satisfied. This income is measured as the amount of consideration expected to be received in exchange for the providing of services. The majority of the Company's applicable non-interest income continues to be recognized at the time when services are provided to its customers. See Note 17. Revenue Recognition for additional information. Leases - The Company leases real estate property for branches, ATMs, and certain equipment. All of the leases in which the Company is the lessee are classified as operating leases. The Company determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease. Operating lease right-of-use assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The right-of-use assets associated with operating leases are recorded in other assets in the Company's consolidated balance sheets. The lease liabilities associated with operating leases are included in accounts payable and accrued expenses on the consolidated balance sheets. The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset. The lease liability is decreased as periodic lease payments are made. The Company performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable. The calculated amounts of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company cannot practically determine the interest rate implicit in the lease so the Company's incremental borrowing rate is used as the discount rate for the lease. The Company uses FHLB advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception based upon the term of the lease. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of October 1, 2019 was applied. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Company's consolidated statements of income. For facility-related leases, the Company elected, by lease class, to not separate lease and non-lease components. Lease expense is recognized on a straight-line basis over the lease term. Variable lease expense primarily represents payments such as common area maintenance, real estate taxes, and utilities and are recognized as expense in the period when those payments are incurred. Short-term lease expense relates to leases with an initial term of 12 months or less. The Company has elected to not record a right-of-use asset or lease liability for short-term leases. Other Assets - Included in other assets on the consolidated balance sheet are the Company's intangible assets, recognized as a result of the acquisition of CCB, which consist of goodwill, deposit intangibles and other intangibles. Goodwill is assessed for impairment on an annual basis, or more frequently in certain circumstances. The test for impairment is performed by comparing the fair value of the reporting unit with its carrying amount. If the fair value is determined to be less than the carrying amount, an impairment is recorded. The Company's intangible assets primarily relate to core deposits. These intangible assets are amortized based upon the expected economic benefit over an estimated life of approximately 8 years and are tested for impairment whenever events or circumstances change. Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income tax expense 99 (benefit) represents the change in deferred income tax assets and liabilities excluding the tax effects of the change in net unrealized gain (loss) on AFS securities and interest rate swaps and changes in the market value of restricted stock awards between the grant date and vesting date. Income tax related penalties and interest, if any, are included in income tax expense in the consolidated statements of income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that management considers it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is recorded. All positive and negative evidence is reviewed in determining how much of a valuation allowance is recognized on a quarterly basis. Certain accounting literature prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position taken, or expected to be taken, in a tax return. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense in the consolidated statements of income. Accrued interest and penalties related to unrecognized tax benefits are included within the related tax liabilities line in the consolidated balance sheet. Employee Stock Ownership Plan - The funds borrowed by the ESOP from the Company to purchase the Company's common stock are being repaid from dividends paid on unallocated ESOP shares and, if necessary, contributions by the Bank. The ESOP shares pledged as collateral are reported as a reduction of stockholders' equity at cost. As ESOP shares are committed to be released from collateral each quarter, the Company records compensation expense based on the average market price of the Company's stock during the quarter. Additionally, the ESOP shares become outstanding for EPS computations once they are committed to be released. Stock-based Compensation - The Company has share-based plans under which stock options and restricted stock awards have been granted. Compensation expense is recognized over the service period of the share-based payment award. The Company utilizes a fair-value-based measurement method in accounting for the share-based payment transactions. The Company applies the modified prospective method in which compensation cost is recognized over the service period for all awards granted. Borrowed Funds - The Bank has entered into repurchase agreements, which are sales of securities under agreements to repurchase, with approved counterparties. These agreements are recorded as financing transactions, and thereby reported as liabilities on the consolidated balance sheet, with the related expense reported as interest expense on the consolidated statements of income, as the Bank maintains effective control over the transferred securities and the securities continue to be carried in the Bank's securities portfolio. The Bank has obtained borrowings from FHLB in the form of advances and a line of credit. Total FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, as necessary. Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window." The Company uses interest rate swaps as part of its interest rate risk management strategy to hedge the variable cash outflows associated with certain borrowings. Interest rate swaps are carried at fair value in the Company's consolidated financial statements. For interest rate swaps that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of such agreements are recorded in AOCI and are subsequently reclassified into interest expense in the period that interest on the borrowings affects earnings. The ineffective portion of the change in fair value of the interest rate swap is recognized directly in earnings. Effectiveness is assessed using regression analysis. At the inception of a hedge, the Company documents certain items, including the relationship between the hedging instrument and the hedged item, the risk management objective and the nature of the risk being hedged, a description of how effectiveness will be measured and an evaluation of hedged transaction effectiveness. Segment Information - As a community-oriented financial institution, substantially all of the Bank's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company's only operating segment for financial reporting purposes. 100 Low Income Housing Partnerships - As part of the Bank's community reinvestment initiatives, the Bank invests in affordable housing limited partnerships ("low income housing partnerships") that make equity investments in affordable housing properties. The Bank is a limited partner in each partnership in which it invests. A separate, unrelated third party is the general partner. The Bank receives affordable housing tax credits and other tax benefits for these investments. Earnings Per Share - Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during any period are weighted for the portion of the period that they were outstanding. In computing both basic and diluted EPS, the weighted average number of common shares outstanding includes the ESOP shares previously allocated to participants and shares committed to be released for allocation to participants and shares of restricted stock which have vested. ESOP shares that have not been committed to be released are excluded from the computation of basic and diluted EPS. Unvested restricted stock awards contain nonforfeitable rights to dividends and are treated as participating securities in the computation of EPS pursuant to the two-class method. Trust Asset Management - Assets (other than cash deposits with the Bank) held in fiduciary or agency capacities for customers are not included in the accompanying consolidated balance sheets, since such items are not assets of the Company or its subsidiaries. Recent Accounting Pronouncements - In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases . The ASU, as amended, revises lease accounting guidance by requiring that lessees recognize the assets and liabilities arising from leases on the balance sheet. Additionally, the ASU requires entities to disclose both quantitative and qualitative information regarding their leasing activities. The accounting applied by a lessor is largely unchanged from that applied under the previous guidance. In July 2018, the FASB issued ASU 2018-11, Leases , which provides entities with relief from the costs of implementation by allowing the option to not restate comparative periods as part of the transition. The ASU, as amended, became effective for the Company on October 1, 2019. Upon adoption, the Company elected the modified retrospective approach and the optional transition method under which the Company used the effective date as the date of initial application of the amendments. The optional practical expedients the Company elected include: (1) not reassessing whether any expired or existing contracts are or contain leases, (2) not reassessing the classification of any expired or existing contracts, (3) not reassessing initial direct costs for existing leases, and (4) using hindsight for leases existing at adoption date. For leases with an initial term of 12 months or less, the Company elected the short-term lease option, which entails not recognizing right-of-use assets and lease liabilities for these leases. Additionally, the Company elected, for facility-related leases, the practical expedient that allows an entity to elect, by lease class, the ability to not separate lease and non-lease components. Upon adoption, the Company recognized a right-of-use asset of $ 15.7 million and a lease liability of $ 15.5 million, related to the Company's non-cancellable operating lease commitments based on the present value of the expected remaining lease payments as of October 1, 2019. The cumulative-effect adjustment to retained earnings at the time of adoption totaled $ 88 thousand. These ASUs did not have a material impact on the Company's results of operations and cash flows at the time of adoption. The disclosures required by the ASU are included in Note 18. Leases. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments . The ASU, as amended, replaces the incurred loss impairment methodology in current GAAP, which requires credit losses to be recognized when it is probable that a loss has been incurred, with a new impairment methodology. The new impairment methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets not measured at fair value, such as loans and loan commitments, over their contractual lives. Under the new impairment methodology, expected credit losses will be measured at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL rather than as a direct write-down as per current GAAP. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. The ASU will become effective for the Company on October 1, 2020. The Company intends to apply a modified retrospective approach when adopting the ASU. Upon adoption, a cumulative-effect adjustment for the change in the allowance for credit losses and reserves on unfunded commitments will be recognized in retained earnings, net of tax. The Company worked with a software provider on the 101 application and implementation of the new accounting guidance. The Company has determined its loan segmentation and the methodologies that will be utilized for each loan segment, and has also developed several assumptions including a reasonable and supportable forecast time period, a reversion methodology, and prepayment and curtailment speeds, among others. Management is in the process of finalizing supporting documentation and internal controls, policies, and procedures. Based on analysis performed by the Company with consideration given to the loan portfolio at September 30, 2020 and current expectation of future economic conditions, our ACL and reserves on unfunded commitments upon adoption will be $ 26.8 million and $ 7.8 million, respectively, which would result in a cumulative effect adjustment to retained earnings, net of tax, of $ 2.3 million. However, management continues to evaluate the impact of adoption. The preliminary results may change as the model is finalized and the remaining implementation steps are completed. The enhanced disclosures required by this ASU will be presented beginning with the Company's December 31, 2020 Quarterly Report on Form 10-Q. Under this new accounting standard, the Company's ACL may fluctuate more significantly from period to period than it has historically as a result of changes in forecasted economic conditions and changes in the composition of the Company's loan portfolio. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosures Requirements for Fair Value Measurement . This ASU eliminates, modifies and adds certain disclosure requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. Entities are allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. Since this ASU only requires disclosure changes, it is not expected to have a significant impact on the Company's consolidated financial condition and results of operations. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). The effective date of this ASU for the Company is October 1, 2020, with early adoption permitted. This ASU is not expected to have a significant impact on the Company's consolidated financial condition, results of operations and disclosures. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU makes clarifications and corrections to the application of the guidance contained in each of the amended topics. According to the provisions of the ASU, entities that have not adopted ASU 2017-12 prior to the issuance of ASU 2019-04 shall adopt the provisions of both ASUs at the same time. The effective date of the non-hedging amendments contained in ASU 2019-04 for the Company is October 1, 2020. The non-hedging amendments contained in this ASU are not expected to have a significant impact on the Company's consolidated financial condition, results of operations and disclosures. 2. ACQUISITION On August 31, 2018, the Company completed the acquisition of CCB and its wholly-owned subsidiary, Capital City Bank. Capital City Bank was headquartered in Topeka, Kansas and owned and leased banking locations in Topeka, Lawrence, and Overland Park, Kansas. The acquisition was not considered material to the Company's financial statements; therefore, pro-forma financial data and related disclosures are not included. The Company acquired loans and deposits with fair values of $ 299.7 million and $ 352.5 million, respectively, at the date of acquisition. Included in the loans acquired from CCB at August 31, 2018 were PCI loans with contractually required cash flows totaling $ 2.6 million. Of that amount, the Company expected to collect $ 1.9 million, which was also the fair value at the date of acquisition. Under the terms of the acquisition agreement, the Company issued 3.0 million shares of common stock for all outstanding shares of CCB capital stock, for a total merger consideration of $ 39.1 million, based on the Company's closing stock price of $ 13.21 on August 31, 2018. See "Note 8. Intangible Assets" for additional information regarding the acquisition of CCB. 102 There were no merger-related expenses incurred during fiscal year 2020. During fiscal years 2019 and 2018, the Company incurred $ 30 thousand and $ 872 thousand, respectively, of pre-tax merger-related expenses attributable to the CCB acquisition. The merger-related expenses were reflected on the Company's consolidated statement of income and were reported primarily in regulatory and outside services. 3. EARNINGS PER SHARE Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. For the Year Ended September 30, 2020 2019 2018 (Dollars in thousands, except per share amounts) Net income $ 64,540 $ 94,243 $ 98,927 Income allocated to participating securities ( 52 ) ( 55 ) ( 40 ) Net income available to common stockholders $ 64,488 $ 94,188 $ 98,887 Average common shares outstanding 137,834,304 137,614,465 134,635,886 Average committed ESOP shares outstanding 62,400 62,458 62,458 Total basic average common shares outstanding 137,896,704 137,676,923 134,698,344 Effect of dilutive stock options 4,484 58,478 60,647 Total diluted average common shares outstanding 137,901,188 137,735,401 134,758,991 Net EPS: Basic $ 0.47 $ 0.68 $ 0.73 Diluted $ 0.47 $ 0.68 $ 0.73 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 437,731 470,938 541,418 103 4. SECURITIES The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by GSEs. September 30, 2020 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,149,922 $ 31,212 $ 331 $ 1,180,803 GSE debentures 369,967 414 41 370,340 Municipal bonds 9,716 91 — 9,807 $ 1,529,605 $ 31,717 $ 372 $ 1,560,950 September 30, 2019 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 923,256 $ 15,571 $ 2,340 $ 936,487 GSE debentures 249,828 304 178 249,954 Municipal bonds 18,371 52 1 18,422 $ 1,191,455 $ 15,927 $ 2,519 $ 1,204,863 104 The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented. September 30, 2020 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses (Dollars in thousands) MBS $ 207,071 $ 330 $ 118 $ 1 GSE debentures 74,959 41 — — Municipal bonds — — — — $ 282,030 $ 371 $ 118 $ 1 September 30, 2019 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses (Dollars in thousands) MBS $ 111,368 $ 126 $ 199,442 $ 2,214 GSE debentures — — 74,812 178 Municipal bonds 1,755 1 — — $ 113,123 $ 127 $ 274,254 $ 2,392 The unrealized losses at September 30, 2020 and 2019 were a result of an increase in market yields from the time the securities were purchased. In general, as market yields rise, the fair value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in market yields as temporary. Therefore, these securities have not been classified as other-than-temporarily impaired. The impairment is also considered temporary because scheduled coupon payments have been made, it is anticipated that the entire principal balance will be collected as scheduled, and management neither intends to sell the securities, nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount, which could be at maturity. As a result of the analysis, management has concluded that no other-than-temporary impairments existed at September 30, 2020 or 2019. See "Note 1. Summary of Significant Accounting Policies - Securities" for additional information regarding our impairment review and classification process for securities. 105 The amortized cost and estimated fair value of AFS debt securities as of September 30, 2020, by contractual maturity, are shown below. Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories. Amortized Estimated Cost Fair Value (Dollars in thousands) One year or less $ 3,987 $ 4,009 One year through five years 375,696 376,138 379,683 380,147 MBS 1,149,922 1,180,803 $ 1,529,605 $ 1,560,950 The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented. For the Year Ended September 30, 2020 2019 2018 (Dollars in thousands) Taxable $ 4,242 $ 6,020 $ 4,275 Non-taxable 225 346 395 $ 4,467 $ 6,366 $ 4,670 The following table summarizes the carrying v