What changed in this filing

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Item 1. Business

2020-11-25 compared with 2019-11-27 · 292 added, 166 removed, 643 unchanged (42% of the section changed)

The Company is a Maryland corporation that was incorporated in April 2010.

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."

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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 strategies.

On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing

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.

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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, where the properties securing approximately 66% of the Bank's one- to four-family loans are located, are diversified.

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 purchased loans and commercial real estate loans.

As of October 2019, the unemployment rate was 3.1% for Kansas and Missouri, and 3.4% for Texas, compared to the national average of 3.6% , based on information from the Bureau of Labor Statistics.

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 Internet website address is www.capfed.com.

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.

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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 secured by residential properties.

The Bank also originates and participates in commercial loans, and originates consumer loans and construction loans.

One- to Four-Family Residential Real Estate Lending.

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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.

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In the past, the Bank has also purchased one- to four-family loans from correspondent and nationwide lenders in bulk loan packages.

The last bulk loan package purchase by the Bank was in August 2012.

The Bank no longer purchases bulk loan packages.

See "Part I, Item 1A.

Risk Factors" for additional information regarding why the Bank no longer purchases bulk loan packages.

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.

At September 30, 2020, $158.2 million, or 76% of the Bank's bulk purchased loan portfolio, are loans guaranteed by one seller.

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The Bank has not experienced any losses with this group of loans since the loan package was purchased in August 2012.

For the $73.8 million of bulk purchased loans at September 30, 2019 that do not have the above noted guarantee, the Bank has continued to experience a reduction in loan losses.

See "Asset Quality - Allowance for credit losses and Provision for credit losses" below for additional information regarding loan losses for bulk purchased loans.

The servicing rights associated with bulk purchased loans were generally retained by the lender/seller for the loans purchased from nationwide lenders.

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.

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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 did not request any lenders/sellers to repurchase loans for breach of representation during fiscal year 2019 .

The Bank requested the repurchase of one loan from a lender for breach of representation during fiscal year 2020.

Adjustable-rate Mortgage ("ARM") Loans

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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.

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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 cash fee, to endorse their original loan terms to current loan terms being offered.

Customers whose loans have been sold to third parties, or have been delinquent on their contractual loan payments during the previous 12 months, or are currently in bankruptcy, are not eligible to participate in this 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.

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One- to four-family loans classified as held-for-sale are to be sold in accordance with policies set forth by ALCO.

During fiscal year 2019 , the Bank did not sell any loans.

During fiscal year 2018 , the Bank sold $16.6 million of one- to four-family loans, to test loan sale processes for liquidity purposes.

During fiscal years 2020 and 2019, the Bank did not sell any loans.

Consumer Lending.

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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.

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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 $98.9 million at September 30, 2019 , of which $94.1 million was disbursed, including $90.8 million in commercial real estate loans and $3.3 million in commercial and industrial loans.

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.

The Bank's commercial and industrial loan portfolio consists largely of loans secured by accounts receivable, inventory and equipment.

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.

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.

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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 given adverse conditions.

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.

In accordance with regulatory guidelines, the Bank requires full independent appraisals for commercial real estate properties.

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.

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Monitoring of Risk

For the Bank's commercial real estate loan portfolio, borrowers with a loan principal balance of $1.5 million or more are 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 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 performs a site visit, schedules a drive-by site visit or obtains an update from the lead bank to obtain information regarding the maintenance of the property and surrounding area.

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.

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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 is reduced, or if leases are not obtained or renewed, the borrower's ability to repay the loan may become impaired.

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.

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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 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 %

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

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The table does not reflect the effects of possible prepayments or enforcement of due on sale clauses.

One- to Four-Family

Construction (2)

One- to Four-Family Commercial Construction (2)

Home Equity (3)

Other Consumer

Other Consumer Total

Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield

(Dollars in thousands)

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:

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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

Discounts/unearned loan fees 29,190

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See "One- to Four-Family Residential Real Estate Lending - Construction Lending" above for more information regarding our construction-to-permanent loan program.

For home equity loans, the maturity date calculated assumes the borrower always makes the required minimum payment.

(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.

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

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Of particular importance is the complete and full documentation required for each loan the Bank originates, participates in or purchases.

Generally, one- to four-family owner occupied loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the CFPB.

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 10 to 15 days after the due date, a late charge is assessed and a notice is mailed.

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 by personal letter and, if no response is received, by telephone, with the purpose of establishing repayment arrangements for the borrower to bring the loan current.

Repayment arrangements must be approved by a designated bank employee.

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.

Borrowers are encouraged to contact the Bank to initiate the process of reviewing such opportunities.

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.

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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 loans serviced by a third party, we monitor delinquencies using reports received from the servicers.

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 loans is generally received during the first week of the month while the information from the servicers of our bulk loans is received later in the month.

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 borrower fails to make a loan payment within 10 days after the due date, a late notice is mailed.

If the loan becomes 30 days or more past due, the Bank begins collection efforts including sending legal notices for payment collection and contacting the borrower by telephone.

The primary purpose of such contact is to notify the borrower of the past due payment in case the loan payment was misplaced or lost and to identify any changes in the borrower's income flow that may affect future loan performance.

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.

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See "Lending Practices and Underwriting Standards – Commercial Lending – Monitoring of Risk" for additional information.

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.

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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

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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, even if the loans are current.

At all dates presented, there were no loans 90 or more days delinquent that were still accruing interest.

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September 30,

2020 2019 2018 2017 2016

Number Amount Number Amount Number Amount Number Amount Number Amount

(Dollars in thousands)

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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

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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

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September 30,

2020 2019 2018 2017 2016

Number Amount Number Amount Number Amount Number Amount Number Amount

(Dollars in thousands)

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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 %

Includes loans required to be reported as nonaccrual pursuant to accounting and/or regulatory reporting requirements, even if the loans are current.

(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, 2019 included in interest income was $988 thousand for the year ended September 30, 2019 .

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.

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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

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

Classified Assets.

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The following table sets forth the recorded investment in assets, classified as either special mention or substandard, as of September 30, 2020.

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 information regarding asset classification definitions.

During the June 30, 2019 quarter, management classified a $50.0 million commercial real estate participation loan as special mention.

The loan has been in the portfolio for approximately 3.5 years, with approximately 1.5 years remaining, and relates to a recently opened large hotel and convention center in a high growth area in the central-southern United States.

Management identified credit weaknesses associated with this loan, including a debt service coverage ratio below policy, the development surrounding the hotel and convention center has been slower than initially anticipated, and construction delays have occurred.

The Bank has personal guarantees from members of a financially strong borrowing group, and the loan was current according to its terms as of September 30, 2019 .

Management continues to closely monitor the hotel and convention center and surrounding activities.

At September 30, 2020, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

Special Mention

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

Consumer Loans:

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

One- to four-family:

Originated — — 4 183

Total OREO — — 4 183

Total classified assets 114 $ 63,653 289 $ 31,241

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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.

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)

1 unchanged sentence

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.

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The ACL is maintained through provisions for credit losses which are either charged to or credited to income.

Our ACL methodology considers a number of factors including the trend and composition of delinquent loans, trends in foreclosed property transactions and charge-off activity, the current status and trends of local and national employment levels, trends and current conditions in the real estate and housing markets, loan portfolio growth and concentrations, industry and peer charge-off activity and ACL ratios, and the Bank's ACL ratios.

For our commercial loan portfolio, we also consider qualitative factors such as geographic locations, collateral types, tenant brand name, borrowing relationships, and lender relationships in the case of participation loans, among other factors.

See "Part II, Item 7.

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Loans Receivable and Allowance for Credit Losses" for additional information on the ACL.

Each quarter we prepare a formula analysis model which segregates the loan portfolio into categories based on certain risk characteristics.

Historical loss factors and qualitative factors are applied to each loan category in the formula analysis model.

The factors are reviewed by management quarterly to assess whether the factors adequately cover probable and estimable losses inherent in the loan portfolio.

To the extent the commercial loan portfolio continues to grow and the inherent loss factors remain relatively constant and/or the asset quality declines, the related ACL amounts will likely increase.

The Bank recorded a $750 thousand provision for credit losses during the current fiscal year compared to no provision for credit losses in the prior fiscal year.

The provision for credit losses in the current fiscal year was due primarily to commercial loan activities during the current fiscal year, specifically the classification of a large commercial participation loan as special mention, commercial loan growth and funding, certain commercial loans that renewed since being obtained in the CCB acquisition and are now in the Bank's ACL model, and commercial loan charge-offs.

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

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.

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)

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One- to four-family:

Originated (64) (75) (136) (72) (200)

Correspondent — — (128) — —

Bulk purchased — (26) — (216) (342)

Total (64) (101) (264) (288) (542)

Commercial real estate (325) — — — —

Commercial and industrial (24) (124) — — —

Total (349) (124) — — —

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)

One- to four-family:

Originated 41 22 144 4 77

Bulk purchased 265 106 196 165 374

Total 306 128 340 169 451

Commercial real estate 110 22 — — —

Commercial and industrial — 2 — — —

Construction — 25 — — —

Total 110 49 — — —

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

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ACL to loans receivable, net at end of period 0.44 0.12 0.11 0.12 0.12

ACL to net charge-offs

ACL to net charge-offs N/M (1)

(1) This ratio is not presented for the time period noted due to loan recoveries exceeding loan charge-offs during the period.

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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 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

The majority of the CCB loans acquired 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, 2019 and September 30, 2018.

$ 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 sufficient and no ACL was required on those loans at September 30, 2019 or September 30, 2018.

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.

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 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

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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, the volume of loan sales, repayments of borrowings, and loan originations and purchases.

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.

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HTM securities are reported at cost, adjusted for amortization of premium and accretion of discount.

Effective September 30, 2019, the Company adopted Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging:

Effective September 30, 2019, the

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.

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Mortgage-Backed Securities .

At September 30, 2019 , our MBS portfolio totaled $936.5 million .

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.

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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.

In general, MBS issued or guaranteed by FNMA and FHLMC are weighted at no more than 20% for risk-based capital purposes compared to the 50% risk-weighting assigned to most non-securitized one- to four-family loans.

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.

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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)

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

Trust Preferred Securities

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

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

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

Sources of Funds

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The variable-rate advances are tied to interest rate swaps, effectively converting the adjustable-rate borrowings into fixed-rate liabilities.

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.

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.

3 unchanged sentences

The Bank's internal policy limits total borrowings to 55% of total assets.

During fiscal year 2019 , the Bank continued, at times, to utilize a leverage strategy (the "leverage strategy") to increase earnings.

The leverage strategy during the current fiscal year involved 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 were repaid prior to each quarter end, or earlier if the strategy was suspended.

The proceeds of the borrowings, net of the required FHLB stock holdings, were deposited at the Federal Reserve Bank of Kansas City ("FRB of Kansas City").

Management suspended the strategy during the majority of fiscal year 2019 due to the large negative interest rate spread making the strategy unprofitable.

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.

At September 30, 2019 , we had $2.04 billion of FHLB advances, at par, outstanding and $100.0 million outstanding on the Bank's FHLB line of credit.

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.

In July 2019 , the president of the FHLB renewed the approval of the increase in the Bank's borrowing limit to 55% of Bank Call Report total assets through July 2020 .

This approval was also in place throughout fiscal year 2019 .

When the full leverage strategy is in place, FHLB borrowings may be in excess of 40% of the Bank's Call Report total assets, and may continue to be in excess of 40% as long as the Bank continues its leverage strategy and FHLB senior management continues to approve the Bank's borrowing limit being in excess of 40% of Call Report total assets.

At September 30, 2019 , repurchase agreements totaled $100.0 million, or approximately 1% of total assets.

The Bank may enter into additional 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 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.

At September 30, 2019 , we had securities with a fair value of $108.3 million pledged as collateral on repurchase agreements.

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)

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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.

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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.

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.

Under either test, the Bank is required to maintain a significant portion of its assets in residential housing related loans and investments.

23 unchanged sentences

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.

Under the FDIC's system for assessing insurance premiums, insured institutions that have not reported assets of $10 billion or more at the end of the quarter for at least four consecutive quarters on their Call Reports are assessed based on CAMELS component ratings and certain financial ratios.

For these institutions, total base assessment rates currently range from 1.5 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 3 to 30 basis points for those with a CAMELS composite score of 3, and 11 to 30 basis points for those with CAMELS composite scores of 4 or 5, all subject to adjustments.

For the fiscal year ended September 30, 2019 , the Bank paid $1.1 million in FDIC premiums.

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.

An institution that has reported total assets at the end of the quarter of $10 billion or more for at least four consecutive quarters is assessed under a complex scorecard method employing many factors, including weighted average CAMELS ratings;

a performance score;

leverage ratio;

ability to withstand asset-related stress;

certain measures of concentration, core earnings, core deposits, credit quality, and liquidity;

and a loss severity score and loss severity measure.

Total base assessment rates for these institutions currently range from 1.5 to 40 basis points, subject to certain adjustments.

For all institutions, the base assessment rates are expected to decrease when the reserve ratio increases to specified thresholds of 2% and 2.5%.

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.

6 unchanged sentences

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 future FDIC assessments.

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 will continue to offset the Bank's premium assessments as long as the reserve ratio remains above 1.38% and the Bank still has a remaining credit balance.

During fiscal year 2019, the Bank utilized $1.2 million of the credit.

As of September 30, 2019, the Bank had a remaining credit of $1.6 million.

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.

1 unchanged sentence

These assessments were discontinued during fiscal year 2019 when the bonds matured.

For the fiscal year ended September 30, 2019 , the Bank paid $55 thousand in FICO assessments.

As such, the Bank did not pay any FICO assessments during fiscal year 2020.

Transactions with Affiliates.

3 unchanged sentences

The Bank and Company are required to maintain specified levels of regulatory capital under regulations of the OCC and FRB, respectively.

The current regulatory capital rules, sometimes referred to as the Basel III rules, became effective for the Company and Bank in January 2016, with some rules being transitioned into full effectiveness over two-to-four years and some adjustments being made to selected features of the rules since January 2016.

Under the Basel III rules, the minimum capital ratios are as follows:

4.5% common equity Tier 1 ("CET1") to risk-weighted assets.

6.0% Tier 1 capital to risk-weighted assets.

8.0% total capital to risk-weighted assets.

4.0% Tier 1 capital to average consolidated assets as reported on Call Reports, minus certain items deducted from Tier 1 capital (known as the "leverage ratio").

CET1 capital and 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.

Tier 2 capital for the Company and the Bank includes the balance of ACL;

however, the amount of includable ACL in Tier 2 capital may be limited if the amount exceeds 1.25% of risk-weighted assets.

At September 30, 2019 , the Bank had $9.2 million of ACL, which was less than the 1.25% risk-weighted assets limit;

therefore, the entire amount of ACL was includable in Tier 2 and total risk-based capital.

Total capital for the Company and the Bank consists of Tier 1 capital plus the amount of includable ACL (Tier 2 capital).

The Basel III rules require the Company and the Bank to maintain a capital conservation buffer above certain minimum capital ratios in order to avoid certain restrictions on capital distributions and other payments including dividends, share repurchases, and certain compensation.

The Bank and Company must maintain a balance of capital that exceeds by more than 2.5% each of the minimum risk-based capital ratios in order to satisfy the requirement, so that the required ratios will bear:

(1) a CET1 capital ratio of more than 7.0%, (2) a Tier 1 capital ratio of more than 8.5%, and (3) a total capital (Tier 1 plus Tier 2) ratio of more than 10.5%.

At September 30, 2019 and 2018, the Bank and Company held capital in excess of the capital conservation buffer requirement.

The capital rules assign a risk weight to every asset and to certain off-balance sheet items, such as binding loan commitments, which are multiplied by credit conversion factors to convert them into asset equivalents.

The risk weights for the Bank's and Company's assets and off-balance sheet items generally range from 0% to 150%.

At September 30, 2019 , the Bank and the Company each had total risk-weighted assets of $4.85 billion .

For the quarter ended September 30, 2019 , the Bank reported in its Call Report quarterly average assets of $9.69 billion and the Company reported to the FRB quarterly average assets of $9.70 billion .

A depository institution is considered to be well capitalized if it has (i) a total risk-based capital ratio of 10.0% or more, (ii) a CET1 risk-based capital ratio of 6.5% or more, (iii) a Tier 1 risk-based capital ratio of 8.0% or more, and (iv) a leverage ratio of 5.0% or more, and is not subject to any of certain specified requirements to meet and maintain a specific capital level for any capital measure.

An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally.

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.

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Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources" for additional regulatory capital information.

The CBLR provides for a simple measure of capital adequacy for qualifying institutions.

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.

Management is still reviewing the CBLR framework, but expects the Bank and Company will elect to use the CBLR framework.

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 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 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 ratios under the Basel III rules.

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.

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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.

Federal regulations state that any institution that fails to comply with its capital plan or has a CET1 risk-based capital ratio of less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a total risk-based capital ratio of less than 6.0%, or a leverage ratio of less than 3.0% is considered significantly undercapitalized and must be made subject to one or more additional specified actions and restrictions that may cover all aspects of its operations and may include a forced merger or acquisition of the institution.

An institution with tangible equity to total assets of less than 2.0% is critically undercapitalized and becomes subject to further mandatory restrictions on its operations.

The OCC generally is authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The imposition by the OCC of any of these measures on the Bank may have a substantial adverse effect on its operations and profitability.

In general, the FDIC must be appointed receiver for a critically undercapitalized institution whose capital is not restored within the time provided.

When the FDIC as receiver liquidates an institution, the claims of depositors and the FDIC as their successor (for deposits covered by FDIC insurance) have priority over other unsecured claims against the institution.

Community Reinvestment and Consumer Protection Laws.

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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 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 parties.

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

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 bank, including low and moderate income neighborhoods.

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.

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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.

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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 will be able to sell in the public market, without registration, a limited number of shares in any three-month period.

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.

At September 30, 2019 , the Bank was in compliance with these reserve requirements.

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 borrower can use primary credit.

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.

At September 30, 2020, the Bank had no outstanding borrowings from the discount window.

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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 review of FHLB to determine whether an other-than-temporary impairment of the FHLB stock is present.

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 purpose and powers of the Company are to pursue any or all of the lawful objectives of a savings and loan holding company and to exercise any of the powers accorded to a savings and loan holding company.

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;

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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.

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.

2018 Regulatory Reform.

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.

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Many of these changes could result in meaningful regulatory changes for community banks such as the Bank, and their holding companies.

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.

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.

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The Company is no longer subject to federal income tax examination for fiscal years prior to 2017.

Method of Accounting

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.

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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.

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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

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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 inception in March 1999.

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.

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Jackson serves as Executive Vice President, Chief Lending Officer and Community Development Director of the Bank and the Company.

He also serves as the President of Capitol Funds, Inc., a subsidiary of the Bank, and President of CFMRC.

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.

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Barry serves as Executive Vice President, Chief Corporate Services Officer of the Bank and the Company.

Barry has served in the banking industry as a board member of a bank holding company in Arizona from 1998 to 2008.

Prior to joining the Bank and the Company in October 2018, Mr.

Barry was in the private practice of law for 29 years practicing in real estate and general litigation with an emphasis in construction law.

Barry was engaged in the private practice of law for 29 years in real estate and general litigation, with an emphasis in construction law.

Barry also served as a board member of a bank holding company in Arizona from 1998 to 2008.

Age 55 years.

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Age 65 years.

Kobbeman joined the Bank and the Company at the time of the acquisition of CCB and serves as Executive Vice President, Chief Commercial Lending Officer.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business