Capitol Federal Financial, Inc. 10-K

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 value of securities pledged as collateral for the obligations indicated below as of the dates presented. September 30, 2020 2019 (Dollars in thousands) Public unit deposits $ 330,986 $ 381,143 FRB of Kansas City 259,851 6,636 Repurchase agreements — 108,271 $ 590,837 $ 496,050 During fiscal year 2018, the Company sold trust preferred securities and received proceeds of $ 2.1 million. The Company recognized a gain of $ 9 thousand on the sale. All other dispositions of securities during fiscal years 2020, 2019, and 2018 were the result of principal repayments, calls, or maturities. 106 5. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at September 30, 2020 and 2019 is summarized as follows: 2020 2019 (Dollars in thousands) One- to four-family: Originated $ 3,937,310 $ 3,873,851 Correspondent purchased 2,101,082 2,349,877 Bulk purchased 208,427 252,347 Construction 34,593 36,758 Total 6,281,412 6,512,833 Commercial: Commercial real estate 626,588 583,617 Commercial and industrial 97,614 61,094 Construction 105,458 123,159 Total 829,660 767,870 Consumer: Home equity 103,838 120,587 Other 10,086 11,183 Total 113,924 131,770 Total loans receivable 7,224,996 7,412,473 Less: ACL 31,527 9,226 Discounts/unearned loan fees 29,190 31,058 Premiums/deferred costs ( 38,572 ) ( 44,558 ) $ 7,202,851 $ 7,416,747 Included in the loan portfolio at September 30, 2020 were $ 139.6 million of non-PCI loans and $ 5 thousand of PCI loans associated with the acquisition of CCB during fiscal year 2018. At September 30, 2020, the Company had $ 2.4 million of net purchase discounts related to non-PCI loans and $ 5 thousand related to PCI loans. As of September 30, 2020 and 2019, the Bank serviced loans for others aggregating $ 87.2 million and $ 117.3 million, respectively. Such loans are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees withheld from investors and certain charges collected from borrowers, such as late payment fees. The Bank held borrowers' escrow balances on loans serviced for others of $ 1.7 million and $ 2.2 million as of September 30, 2020 and 2019, respectively. Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary lending business. The Bank also originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri. One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau. Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function. 107 The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters. The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided. Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate or commercial construction loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. For commercial real estate and commercial construction participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. At the time of origination, LTV ratios on commercial real estate loans generally do not exceed 85 % of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 . For commercial construction loans, LTV ratios generally do not exceed 80 % of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 , but it 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. Appraisals on properties securing these loans are performed by independent state certified fee appraisers. The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. With the exception of Paycheck Protection Program loans, 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 due to the type of collateral securing these loans. As a result of these additional complexities, variables and risks, these loans require more thorough underwriting and servicing than other types of loans. Consumer loans - 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 deposits. The Bank also originates a very limited amount of unsecured loans. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first mortgage or the home equity line of credit is in the first lien position. The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount. Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial. These segments are further divided into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio. The classes are: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, consumer - other, commercial - commercial real estate, and commercial - commercial and industrial. One- to four-family construction loans are included in either the originated class or correspondent purchased class, and commercial construction loans are included in the commercial real estate class. The Bank's primary credit quality indicators for the one- to four-family and consumer - home equity loan portfolios are delinquency status, asset classifications, LTV ratios, and borrower credit scores. The Bank's primary credit quality indicators for the commercial and consumer - other loan portfolios are delinquency status and asset classifications. 108 The following tables present the recorded investment, by class, in loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total recorded investment at the dates presented. The recorded investment in loans is defined as the unpaid principal balance of a loan, less charge-offs and inclusive of unearned loan fees and deferred costs. At September 30, 2020 and 2019, all loans 90 or more days delinquent were on nonaccrual status. September 30, 2020 90 or More Days Total Total 30 to 89 Days Delinquent or Delinquent Current Recorded Delinquent in Foreclosure Loans Loans Investment (Dollars in thousands) One- to four-family: Originated $ 3,001 $ 4,347 $ 7,348 $ 3,950,387 $ 3,957,735 Correspondent purchased 3,170 2,433 5,603 2,122,085 2,127,688 Bulk purchased 2,558 2,938 5,496 203,844 209,340 Commercial: Commercial real estate 40 1,206 1,246 728,191 729,437 Commercial and industrial 5 157 162 96,124 96,286 Consumer: Home equity 323 296 619 103,210 103,829 Other 75 8 83 9,980 10,063 $ 9,172 $ 11,385 $ 20,557 $ 7,213,821 $ 7,234,378 September 30, 2019 90 or More Days Total Total 30 to 89 Days Delinquent or Delinquent Current Recorded Delinquent in Foreclosure Loans Loans Investment (Dollars in thousands) One- to four-family: Originated $ 7,187 $ 3,261 $ 10,448 $ 3,885,335 $ 3,895,783 Correspondent purchased 2,762 1,023 3,785 2,377,629 2,381,414 Bulk purchased 3,624 1,484 5,108 248,376 253,484 Commercial: Commercial real estate 762 — 762 702,377 703,139 Commercial and industrial 70 173 243 60,340 60,583 Consumer: Home equity 446 302 748 119,688 120,436 Other 78 21 99 11,035 11,134 $ 14,929 $ 6,264 $ 21,193 $ 7,404,780 $ 7,425,973 The recorded investment in mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of both September 30, 2020 and 2019 was $ 1.5 million, which is included in loans 90 or more days delinquent or in foreclosure in the table above. The carrying value of residential OREO held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure was $ 183 thousand at September 30, 2020 and $ 745 thousand at September 30, 2019. 109 The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented. September 30, 2020 2019 (Dollars in thousands) One- to four-family: Originated $ 5,037 $ 4,436 Correspondent purchased 2,433 1,023 Bulk purchased 2,938 1,551 Commercial: Commercial real estate 1,663 — Commercial and industrial 157 173 Consumer: Home equity 305 337 Other 8 21 $ 12,541 $ 7,541 In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's portfolio to determine whether any loans require classification. Loan classifications are defined as follows: • Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the non-performing loan categories. • Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected. • Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable. • Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted. The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at the dates presented. Special mention and substandard loans are included in the ACL formula analysis model if the loans are not individually evaluated for loss. Loans classified as doubtful or loss are individually evaluated for loss. At the dates presented, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. September 30, 2020 2019 Special Mention Substandard Special Mention Substandard (Dollars in thousands) One- to four-family: Originated $ 9,249 $ 15,729 $ 12,941 $ 15,628 Correspondent purchased 2,076 4,512 2,349 2,785 Bulk purchased — 5,319 102 5,294 Commercial: Commercial real estate 50,957 3,541 52,891 2,472 Commercial and industrial 1,040 1,368 1,215 3,057 Consumer: Home equity 331 581 280 696 Other — 8 2 24 $ 63,653 $ 31,058 $ 69,780 $ 29,956 110 The following table shows the weighted average credit score and weighted average LTV for one- to four-family loans and consumer home equity loans at the dates presented. Borrower credit scores are intended to provide an indication as to the likelihood that a borrower will repay their debts. Credit scores are updated at least annually, with the last update in September 2020, from a nationally recognized consumer rating agency. The LTV ratios provide an estimate of the extent to which the Bank may incur a loss on any given loan that may go into foreclosure. The consumer - home equity LTV does not take into account the first lien position, if applicable. 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 2019 Credit Score LTV Credit Score LTV One- to four-family - originated 771 62 % 768 62 % One- to four-family - correspondent 765 64 765 65 One- to four-family - bulk purchased 767 60 762 61 Consumer - home equity 756 19 754 19 769 62 766 62 TDRs - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented. These tables do not reflect the recorded investment at the end of the periods indicated. Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances. For the Year Ended September 30, 2020 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 5 $ 241 $ 242 Correspondent purchased 1 192 191 Bulk purchased 1 75 134 Commercial: Commercial real estate 1 837 837 Commercial and industrial 1 1,683 1,709 Consumer: Home equity 2 45 44 Other — — — 11 $ 3,073 $ 3,157 111 For the Year Ended September 30, 2019 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 3 $ 385 $ 386 Correspondent purchased — — — Bulk purchased 2 377 377 Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: Home equity — — — Other — — — 5 $ 762 $ 763 For the Year Ended September 30, 2018 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 5 $ 264 $ 281 Correspondent purchased 2 406 406 Bulk purchased — — — Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: Home equity — — — Other — — — 7 $ 670 $ 687 The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured. For the Years Ended September 30, 2020 September 30, 2019 September 30, 2018 Number of Recorded Number of Recorded Number of Recorded Contracts Investment Contracts Investment Contracts Investment (Dollars in thousands) One- to four-family: Originated 1 $ 38 1 $ 45 22 $ 1,416 Correspondent purchased — — — — 1 124 Bulk purchased 1 134 — — 3 1,040 Commercial: Commercial real estate — — — — — — Commercial and industrial — — — — — — Consumer: Home equity 1 9 — — 4 133 Other — — — — — — 3 $ 181 1 $ 45 30 $ 2,713 112 Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented. September 30, 2020 September 30, 2019 Unpaid Unpaid Recorded Principal Related Recorded Principal Related Investment Balance ACL Investment Balance ACL (Dollars in thousands) With no related allowance recorded One- to four-family: Originated $ 12,385 $ 12,813 $ — $ 14,683 $ 15,241 $ — Correspondent purchased 1,955 2,058 — 1,763 1,868 — Bulk purchased 3,843 4,302 — 4,943 5,661 — Commercial: Commercial real estate 1,052 1,379 — — — — Commercial and industrial 99 244 — 60 184 — Consumer: Home equity 280 360 — 345 462 — Other — 45 — — 29 — 19,614 21,201 — 21,794 23,445 — With an allowance recorded One- to four-family: Originated — — — — — — Correspondent purchased — — — — — — Bulk purchased — — — — — — Commercial: Commercial real estate 660 660 83 — — — Commercial and industrial 1,269 1,268 240 — — — Consumer: Home equity — — — — — — Other — — — — — — 1,929 1,928 323 — — — Total One- to four-family: Originated $ 12,385 $ 12,813 — $ 14,683 $ 15,241 — Correspondent purchased 1,955 2,058 — 1,763 1,868 — Bulk purchased 3,843 4,302 — 4,943 5,661 — Commercial: Commercial real estate 1,712 2,039 83 — — — Commercial and industrial 1,368 1,512 240 60 184 — Consumer: Home equity 280 360 — 345 462 — Other — 45 — — 29 — $ 21,543 $ 23,129 $ 323 $ 21,794 $ 23,445 $ — 113 The following information pertains to impaired loans, by class, for the periods presented. For the Years Ended September 30, 2020 September 30, 2019 September 30, 2018 Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Investment Recognized Investment Recognized Investment Recognized (Dollars in thousands) With no related allowance recorded One- to four-family: Originated $ 13,918 $ 606 $ 16,030 $ 671 $ 23,847 $ 990 Correspondent purchased 1,878 73 2,071 82 3,204 112 Bulk purchased 4,720 179 5,257 180 6,438 191 Commercial: Commercial real estate 725 15 — — — — Commercial and industrial 41 — 5 — — — Consumer: Home equity 318 20 417 28 588 39 Other — — — — — — 21,600 893 23,780 961 34,077 1,332 With an allowance recorded One- to four-family: Originated — — — — — — Correspondent purchased — — — — — — Bulk purchased — — — — — — Commercial: Commercial real estate 51 — — — — — Commercial and industrial 1,413 91 — — — — Consumer: Home equity — — — — — — Other — — — — — — 1,464 91 — — — — Total One- to four-family: Originated 13,918 606 16,030 671 23,847 990 Correspondent purchased 1,878 73 2,071 82 3,204 112 Bulk purchased 4,720 179 5,257 180 6,438 191 Commercial: Commercial real estate 776 15 — — — — Commercial and industrial 1,454 91 5 — — — Consumer: Home equity 318 20 417 28 588 39 Other — — — — — — $ 23,064 $ 984 $ 23,780 $ 961 $ 34,077 $ 1,332 114 Allowance for Credit Losses - The Bank maintains an ACL to absorb inherent losses in the loan portfolio based on quarterly assessments of the loan portfolio. Each quarter a formula analysis model is prepared 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. As noted in Note 1. Summary of Significant Accounting Policies, Allowance for Credit Losses, management increased the historical loss factors and qualitative factors for all loan categories at September 30, 2020 and applied a COVID-19 qualitative factor to the Bank's commercial loan portfolio, due to deterioration of economic conditions as a result of the COVD-19 pandemic. The increase in the factors and the new COVID-19 pandemic qualitative factor resulted in an increase in the ACL during the current fiscal year. 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. The following is a summary of ACL activity, by loan portfolio segment, for the periods presented, and the ending balance of ACL based on the Company's impairment methodology. For the Year Ended September 30, 2020 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226 Charge-offs ( 64 ) — — ( 64 ) ( 349 ) ( 30 ) ( 443 ) Recoveries 41 — 265 306 110 28 444 Provision for credit losses 4,108 1,488 ( 485 ) 5,111 16,868 321 22,300 Ending balance $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527 For the Year Ended September 30, 2019 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,953 $ 1,861 $ 925 $ 5,739 $ 2,556 $ 168 $ 8,463 Charge-offs ( 75 ) — ( 26 ) ( 101 ) ( 124 ) ( 37 ) ( 262 ) Recoveries 22 — 106 128 49 98 275 Provision for credit losses ( 900 ) ( 658 ) ( 318 ) ( 1,876 ) 2,690 ( 64 ) 750 Ending balance $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226 115 For the Year Ended September 30, 2018 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 3,173 $ 1,922 $ 1,000 $ 6,095 $ 2,112 $ 191 $ 8,398 Charge-offs ( 136 ) ( 128 ) — ( 264 ) — ( 38 ) ( 302 ) Recoveries 144 — 196 340 — 27 367 Provision for credit losses ( 228 ) 67 ( 271 ) ( 432 ) 444 ( 12 ) — Ending balance $ 2,953 $ 1,861 $ 925 $ 5,739 $ 2,556 $ 168 $ 8,463 The following is a summary of the loan portfolio and related ACL balances, at the dates presented, by loan portfolio segment disaggregated by the Company's impairment method. September 30, 2020 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Recorded investment in loans: Collectively evaluated for impairment $ 3,945,350 $ 2,125,733 $ 205,497 $ 6,276,580 $ 822,643 $ 113,612 $ 7,212,835 Individually evaluated for impairment 12,385 1,955 3,843 18,183 3,080 280 21,543 $ 3,957,735 $ 2,127,688 $ 209,340 $ 6,294,763 $ 825,723 $ 113,892 $ 7,234,378 ACL for loans: Collectively evaluated for impairment $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,477 $ 484 $ 31,204 Individually evaluated for impairment — — — — 323 — 323 $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527 116 September 30, 2019 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Recorded investment in loans: Collectively evaluated for impairment $ 3,881,100 $ 2,379,651 $ 248,541 $ 6,509,292 $ 763,662 $ 131,225 $ 7,404,179 Individually evaluated for impairment 14,683 1,763 4,943 21,389 60 345 21,794 $ 3,895,783 $ 2,381,414 $ 253,484 $ 6,530,681 $ 763,722 $ 131,570 $ 7,425,973 ACL for loans: Collectively evaluated for impairment $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226 Individually evaluated for impairment — — — — — — — $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226 117 6. PREMISES AND EQUIPMENT A summary of the net carrying value of premises and equipment at September 30, 2020 and 2019 was as follows: 2020 2019 (Dollars in thousands) Land $ 16,566 $ 14,313 Building and improvements 116,595 110,262 Furniture, fixtures and equipment 57,504 52,270 190,665 176,845 Less accumulated depreciation 88,790 80,061 $ 101,875 $ 96,784 7. LOW INCOME HOUSING PARTNERSHIPS The Bank's investment in low income housing partnerships, which is included in other assets in the consolidated balance sheets, was $ 89.7 million and $ 82.6 million at September 30, 2020 and 2019, respectively. The Bank's obligations related to unfunded commitments, which are included in accounts payable and accrued expenses in the consolidated balance sheets, were $ 44.5 million and $ 40.0 million at September 30, 2020 and 2019, respectively. The majority of the commitments at September 30, 2020 are projected to be funded through the end of calendar year 2022 . For fiscal year 2020, the net income tax benefit associated with these investments, which consists of proportional amortization expense and affordable housing tax credits and other related tax benefits, was reported in income tax expense in the consolidated statements of income. The amount of proportional amortization expense recognized during fiscal years 2020, 2019 and 2018 was $ 7.9 million, $ 6.8 million and $ 7.0 million, respectively, and the amount of affordable housing tax credits and other related tax benefits was $ 9.8 million, $ 8.6 million and $ 7.5 million, respectively, resulting in a net income tax benefit of $ 1.9 million, $ 1.8 million and $ 500 thousand, respectively. There were no impairment losses during fiscal years 2020, 2019, or 2018 resulting from the forfeiture or ineligibility of tax credits or other circumstances. 118 8. INTANGIBLE ASSETS With the acquisition of CCB in fiscal year 2018, the Company recognized goodwill of $ 8.0 million, which is calculated as the consideration exchanged in excess of the fair value of assets, net of the fair value of liabilities assumed. Certain purchase accounting adjustments were applied during the measurement period in fiscal year 2019, resulting in a $1.3 million increase in goodwill associated with the acquisition of CCB. The Company also recognized $ 10.1 million of other intangible assets in conjunction with the acquisition which is largely composed of core deposit intangibles. These other intangible assets are being amortized over their estimated lives, which management determined to be 8.0 years at the time of acquisition. Changes in the carrying amount of the Company's intangible assets, which are included in other assets on the consolidated balance sheet, are presented in the following table. Core Deposit and Goodwill Other Intangibles (Dollars in thousands) Balance at September 30, 2017 $ — $ — Acquisition of CCB 7,989 10,052 Less: Amortization — ( 234 ) Balance at September 30, 2018 7,989 9,819 Purchase accounting adjustments 1,335 — Less: Amortization — ( 2,316 ) Balance at September 30, 2019 9,324 7,503 Purchase accounting adjustments — — Less: Amortization — ( 1,964 ) Balance at September 30, 2020 $ 9,324 $ 5,539 As of September 30, 2020, there was no impairment recorded on goodwill or other intangible assets. The estimated amortization expense for the next five years related to the core deposit and other intangible assets as of September 30, 2020 is presented in the following table (dollars in thousands): 2021 $ 1,659 2022 1,358 2023 1,056 2024 761 2025 509 119 9. DEPOSITS AND BORROWED FUNDS Deposits - Non-interest-bearing deposits totaled $ 451.4 million and $ 357.3 million as of September 30, 2020 and 2019, respectively. Certificates of deposit with a minimum denomination of $250 thousand were $ 643.0 million and $ 610.0 million as of September 30, 2020 and 2019, respectively. Deposits in excess of $250 thousand may not be fully insured by the Federal Deposit Insurance Corporation. FHLB Borrowings - FHLB borrowings at September 30, 2020 consisted of $ 1.79 billion in FHLB advances, of which $ 1.15 billion were fixed-rate advances and $ 640.0 million were variable-rate advances, and no borrowings against the variable-rate FHLB line of credit. FHLB borrowings at September 30, 2019 consisted of $ 2.04 billion in FHLB advances, of which $ 1.40 billion were fixed-rate advances and $640.0 million were variable-rate advances, and $ 100.0 million against the variable-rate FHLB line of credit. The line of credit is set to expire on November 12, 2021 , at which time it is expected to be renewed by FHLB for a one-year period. FHLB advances at September 30, 2020 and 2019 were comprised of the following: 2020 2019 (Dollars in thousands) FHLB advances $ 1,793,000 $ 2,040,000 Deferred prepayment penalty ( 3,687 ) ( 11 ) $ 1,789,313 $ 2,039,989 Weighted average contractual interest rate on FHLB advances 1.41 % 2.23 % Weighted average effective interest rate on FHLB advances (1) 2.31 2.37 (1) The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the adjustable-rate FHLB advances. During fiscal years 2019 and 2018, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings. 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, with all of the balance being paid down at each quarter end, or earlier if the strategy it is not profitable. The proceeds of the borrowings, net of the required FHLB stock holdings, are deposited at the FRB of Kansas City. The leverage strategy was not utilized during 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. At both September 30, 2020 and 2019, the Bank had entered into interest rate swap agreements with a total notional amount of $ 640.0 million in order to hedge the variable cash flows associated with $ 640.0 million of adjustable-rate FHLB advances. At September 30, 2020 and 2019, the interest rate swap agreements had an average remaining term to maturity of 3.5 years and 4.5 years, respectively. The interest rate swaps were designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. At September 30, 2020 and September 30, 2019, the interest rate swaps were in a loss position with a total fair value of $ 53.1 million and $ 33.1 million, respectively, which was reported in accounts payable and accrued expenses on the consolidated balance sheet. During fiscal years 2020 and 2019, $ 6.3 million and $ 438 thousand, respectively, were reclassified from AOCI as an increase to interest expense. At September 30, 2020, the Company estimated that $ 15.6 million of interest expense associated with the interest rate swaps will be reclassified from AOCI as an increase to interest expense on FHLB borrowings during the next 12 months. The Bank has minimum collateral posting thresholds with its derivative counterparties and posts collateral on a daily basis. The Bank posted cash collateral of $ 54.6 million at September 30, 2020 and $ 33.3 million at September 30, 2019. During the current fiscal year, the Bank prepaid fixed-rate FHLB advances totaling $ 350.0 million with a weighted average contractual interest rate of 2.42 % and a weighted average remaining term of 1.0 years, and replaced these advances with $ 350.0 million of fixed-rate FHLB advances with a weighted average contractual interest rate of 1.43 % and a weighted average term of 4.7 years. The Bank paid penalties totaling $ 4.2 million to FHLB as a result of prepaying the FHLB advances. The prepayment penalties are being recognized in interest expense over the life of the new FHLB advances. 120 FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, when necessary. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40 % of a borrowing institution's regulatory total assets without the pre-approval of FHLB senior management. In July 2020, the president of FHLB approved an increase, through July 2021, in the Bank's borrowing limit to 50 % of Bank Call Report total assets. At September 30, 2020, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was 19 %. At times, the Bank's FHLB borrowings to the Bank's Call Report total assets may be in excess of 40% due to the leverage strategy. Repurchase Agreements - At September 30, 2020, the Company had no repurchase agreements outstanding. At September 30, 2019, the Company had repurchase agreements outstanding in the amount of $ 100.0 million, with a weighted average contractual rate of 2.53 %. The repurchase agreements were included in other borrowings on the consolidated balance sheet. All of the Company's repurchase agreements at September 30, 2019 were fixed-rate. See Note 4 for information regarding the amount of securities pledged as collateral in conjunction with repurchase agreements. Securities are delivered to the party with whom each transaction is executed and the party agrees to resell the same securities to the Bank at the maturity of the agreement. The Bank retains the right to substitute similar or like securities throughout the terms of the agreements. The repurchase agreements and collateral are subject to valuation at current market levels and the Bank may ask for the return of excess collateral or be required to post additional collateral due to changes in the market values of these items. The Bank may also be required to post additional collateral as a result of principal payments received on the securities pledged. Maturity of Borrowed Funds and Certificates of Deposit - The following table presents the scheduled maturity of FHLB advances, at par, and certificates of deposit as of September 30, 2020: FHLB Certificates Advances of Deposit Amount Amount (Dollars in thousands) 2021 $ 843,000 $ 1,505,501 2022 200,000 773,278 2023 300,000 426,520 2024 100,000 239,650 2025 250,000 75,391 Thereafter 100,000 904 $ 1,793,000 $ 3,021,244 Junior Subordinated Debentures and Trust-Preferred Securities - In conjunction with the CCB acquisition, the Company assumed $ 10.1 million of junior subordinated debentures relating to mandatorily redeemable capital trust preferred securities that were previously issued by CCB-sponsored trusts to third-party investors. The proceeds from the sale of the trust preferred securities to investors were invested by the trusts in the related junior subordinated debentures issued by CCB. The junior subordinated debentures were redeemed by the Company during fiscal year 2019, which resulted in the concurrent redemption by the trusts of the related trust preferred securities. 121 10. INCOME TAXES Income tax expense for the years ended September 30, 2020, 2019, and 2018 consisted of the following: 2020 2019 2018 (Dollars in thousands) Current: Federal $ 17,610 $ 22,030 $ 26,007 State 4,068 4,742 3,512 21,678 26,772 29,519 Deferred: Federal ( 4,857 ) ( 456 ) ( 5,956 ) State ( 731 ) 95 1,416 ( 5,588 ) ( 361 ) ( 4,540 ) $ 16,090 $ 26,411 $ 24,979 The Tax Cuts and Jobs Act, enacted in December 2017, made significant changes to the U.S. corporate income tax laws, such as a permanent reduction in the federal corporate income tax rate from 35 % to 21 % effective January 1, 2018. The Company had a blended statutory federal income tax rate of 24.5 % for the year ended September 30, 2018, which was based on the applicable income tax rates prior to and subsequent to January 1, 2018 and the number of days in the fiscal year. The Company revalued its deferred tax assets and liabilities as of the enactment date to account for the future impact of a lower federal income tax rate. The revaluation of the Company's deferred tax assets and liabilities resulted in a $ 7.5 million reduction in income tax expense during the December 31, 2017 quarter and a corresponding reduction in the Company's net deferred tax liability, as reflected in the table below. The Company's effective tax rates were 20.0 %, 21.9 %, and 20.2 % for the years ended September 30, 2020, 2019, and 2018, respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense resulted from the following: 2020 2019 2018 Amount % Amount % Amount % (Dollars in thousands) Federal income tax expense computed at statutory Federal rate $ 16,932 21.0 % $ 25,337 21.0 % $ 30,392 24.5 % Increases (decreases) in taxes resulting from: State taxes, net of Federal tax effect 2,626 3.3 4,024 3.3 3,986 3.2 Deferred tax liability remeasurement, net — — — — ( 7,498 ) ( 6.0 ) Low income housing tax credits, net ( 1,897 ) ( 2.4 ) ( 1,745 ) ( 1.4 ) ( 500 ) ( 0.4 ) ESOP related expenses, net ( 525 ) ( 0.6 ) ( 757 ) ( 0.6 ) ( 790 ) ( 0.6 ) Acquired BOLI policies ( 636 ) ( 0.8 ) — — — — Other ( 410 ) ( 0.5 ) ( 448 ) ( 0.4 ) ( 611 ) ( 0.5 ) $ 16,090 20.0 % $ 26,411 21.9 % $ 24,979 20.2 % 122 The components of the net deferred income tax liabilities as of September 30, 2020 and 2019 were as follows: 2020 2019 (Dollars in thousands) Deferred income tax assets: Unrealized loss on interest rate swaps $ 12,916 $ 8,041 ACL 6,553 1,938 Lease liabilities 3,590 — Salaries, deferred compensation and employee benefits 1,622 1,579 ESOP compensation 1,360 1,288 Low income housing partnerships 655 792 Net purchase discounts related to acquired loans 577 991 Other 2,717 2,918 Gross deferred income tax assets 29,990 17,547 Valuation allowance ( 1,808 ) ( 1,823 ) Gross deferred income tax asset, net of valuation allowance 28,182 15,724 Deferred income tax liabilities: FHLB stock dividends 15,699 16,009 Unrealized gain on AFS securities 7,617 3,258 Premises and equipment 4,625 3,546 Lease right-of-use assets 3,588 — Deposit intangible 1,475 1,978 ACL 2,388 3,018 Other 970 2,197 Gross deferred income tax liabilities 36,362 30,006 Net deferred tax liabilities $ 8,180 $ 14,282 The State of Kansas allows for a bad debt deduction on savings and loan institutions' privilege tax returns of up to 5% of Kansas taxable income. Due to the low level of net loan charge-offs experienced by the Bank historically, at times, the Bank's bad debt deduction on the Kansas privilege tax return has been in excess of actual net charge-offs, resulting in a state deferred tax liability, which is presented separately from the federal deferred tax asset related to ACL. The Company assesses the available positive and negative evidence surrounding the recoverability of its deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances. At both September 30, 2020 and 2019, the Company had a valuation allowance of $ 1.8 million related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return. The companies included in the consolidated Kansas corporate income tax return are the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., as the Bank files a Kansas privilege tax return. Based on the nature of the operations of the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., management believes there will not be sufficient taxable income to fully utilize the deferred tax assets noted above; therefore, a valuation allowance has been recorded for the related amounts at September 30, 2020 and 2019. ASC 740 Income Taxes prescribes a process by which a tax position taken, or expected to be taken, on an income tax return is determined based upon the technical merits of the position, along with whether the tax position meets a more-likely-than-not-recognition threshold, to determine the amount, if any, of unrecognized tax benefits to recognize in the financial statements. Estimated penalties and interest related to unrecognized tax benefits are included in income tax expense in the consolidated 123 statements of income. For the years ended September 30, 2020, 2019, and 2018 the Company had no unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction and the state of Kansas, as well as other states where it has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest income derived from sources within a given state. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for fiscal years before 2017 . 11. EMPLOYEE STOCK OWNERSHIP PLAN The ESOP trust acquired 3,024,574 shares ( 6,846,728 shares post-corporate reorganization) of common stock in the Company's initial public offering and 4,726,000 shares of common stock in the Company's corporate reorganization in December of 2010. Both acquisitions of common stock were made with proceeds from loans from the Company, secured by shares of the Company's stock purchased in each offering. The Bank has agreed to make cash contributions to the ESOP trust on an annual basis sufficient to enable the ESOP trust to make the required annual loan payments to the Company on September 30 of each year. The loan for the shares acquired in the initial public offering matured on September 30, 2013 . The loan for the shares acquired in the corporate reorganization matures on September 30, 2040 . As annual loan payments are made on each September 30th, shares are released from collateral and allocated to qualified employees based on the proportion of their qualifying compensation to total qualifying compensation. On September 30, 2020, 165,198 shares were released from collateral. On September 30, 2021, 165,198 shares will be released from collateral. As ESOP shares are committed to be released from collateral, the Company records compensation expense. Dividends on unallocated ESOP shares are applied to the debt service payments of the loan secured by the unallocated shares. Dividends on unallocated ESOP shares in excess of the debt service payment are recorded as compensation expense and distributed to participants or participants' ESOP accounts. Compensation expense related to the ESOP was $ 2.0 million for the year ended September 30, 2020, $ 3.1 million for the year ended September 30, 2019, and $ 2.9 million for the year ended September 30, 2018. Of these amounts, $ 336 thousand, $ 549 thousand, and $ 541 thousand related to the difference between the market price of the Company's stock when the shares were acquired by the ESOP trust and the average market price of the Company's stock during the years ended September 30, 2020, 2019, and 2018, respectively. The amount included in compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments was zero for the year ended September 30, 2020, and $ 906 thousand and $ 688 thousand for the years ended September 30, 2019 and 2018, respectively. Shares may be withdrawn from the ESOP trust due to diversification (a participant may begin to diversify at least 25 % of their ESOP shares at age 50 ), retirement, termination, or death of the participant. The following is a summary of shares held in the ESOP trust as of September 30, 2020 and 2019: 2020 2019 (Dollars in thousands) Allocated ESOP shares 4,200,964 4,207,520 Unreleased ESOP shares 3,303,960 3,469,158 Total ESOP shares 7,504,924 7,676,678 Fair value of unreleased ESOP shares $ 30,628 $ 47,805 124 12. STOCK-BASED COMPENSATION The Company has a Stock Option Plan, a Restricted Stock Plan, and an Equity Incentive Plan, all of which are considered share-based plans. The Stock Option Plan and Restricted Stock Plan expired in April 2015. No additional grants can be made from these two plans; however, awards granted under these two plans remain outstanding until they are individually vested, forfeited or expire. The objectives of the Equity Incentive Plan are to provide additional compensation to certain officers, directors and key employees by facilitating their acquisition of an equity interest in the Company and enable the Company to retain personnel of experience and ability in key positions of responsibility. Stock Option Plans – There are currently 287,935 stock options outstanding as a result of grants awarded from the Stock Option Plan. The Equity Incentive Plan had 5,907,500 stock options originally eligible to be granted and, as of September 30, 2020, the Company had 4,199,316 stock options still available for future grants under this plan. This plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested, forfeited, or expire. The Company may issue incentive and nonqualified stock options under the Equity Incentive Plan. The Company may also award stock appreciation rights, although no stock appreciation rights have been awarded to date. The incentive stock options expire no later than 10 years from the date of grant, and the nonqualified stock options expire no later than 15 years from the date of grant. The vesting period of the stock options under the Equity Incentive Plan generally has ranged from 3 years to 5 years. The stock option exercise price cannot be less than the market value at the date of the grant as defined by each plan. The fair value of stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model. At September 30, 2020, the Company had 813,645 stock options outstanding with a weighted average exercise price of $ 12.86 per option and a weighted average contractual life of 3.2 years, and 812,645 options exercisable with a weighted average exercise price of $ 12.86 per option and a weighted average contractual life of 3.2 years. The exercise price may be paid in cash, shares of common stock, or a combination of both. New shares are issued by the Company upon the exercise of stock options. Compensation expense attributable to stock option awards during the years ended September 30, 2020, 2019, and 2018 totaled $ 12 thousand, $ 49 thousand, and $ 71 thousand, respectively. The fair value of stock options vested during the years ended September 30, 2020, 2019, and 2018 was $ 24 thousand, $ 64 thousand, and $ 77 thousand, respectively. Restricted Stock Plans – The Equity Incentive Plan had 2,363,000 shares originally eligible to be granted as restricted stock and, as of September 30, 2020, the Company had 1,625,519 shares available for future grants of restricted stock under this plan. This plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested or forfeited. The vesting period of the restricted stock awards under the Equity Incentive Plan has generally ranged from 3 years to 5 years. At September 30, 2020, the Company had 104,850 unvested shares of restricted stock with a weighted average grant date fair value of $ 13.65 per share. Compensation expense is calculated based on the fair market value of the common stock at the date of the grant, as defined by the plan, and is recognized over the vesting time period. Compensation expense attributable to restricted stock awards during the years ended September 30, 2020, 2019, and 2018 totaled $ 540 thousand, $ 501 thousand, and $ 301 thousand, respectively. The fair value of restricted stock that vested during the years ended September 30, 2020, 2019, and 2018 totaled $ 535 thousand, $ 294 thousand, and $ 294 thousand, respectively. As of September 30, 2020, there was $ 1.1 million of unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.7 years. 125 13. COMMITMENTS AND CONTINGENCIES The following table summarizes the Bank's loan commitments as of September 30, 2020 and 2019: 2020 2019 (Dollars in thousands) Originate fixed-rate $ 96,126 $ 55,249 Originate adjustable-rate 21,801 32,206 Purchase/participate fixed-rate 65,600 94,400 Purchase/participate adjustable-rate 65,080 49,141 $ 248,607 $ 230,996 Commitments to originate loans are commitments to lend to a customer. Commitments to purchase/participate in loans represent commitments to purchase loans from correspondent lenders on a loan-by-loan basis or participate in commercial loans with a lead bank. The Bank evaluates each borrower's creditworthiness on a case-by-case basis. Commitments generally have expiration dates or other termination clauses and one- to four-family loan commitments may require the payment of a rate lock fee. Some of the commitments are expected to expire without being fully drawn upon; therefore, the amount of total commitments disclosed in the table above does not necessarily represent future cash requirements. As of September 30, 2020 and 2019, there were no significant loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans. As of September 30, 2020 and 2019, the Bank had approved but unadvanced lines of credit of $ 283.2 million and $ 265.2 million, respectively. The Company also has standby letters of credit, which are conditional commitments to guarantee the performance of a customer to a third party. Most guarantees have one-year terms. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2020 and 2019, the Company had $ 1.4 million and $ 1.2 million, respectively, in outstanding standby letters of credit, and no amounts had been recorded as liabilities for the Company's potential obligations under these agreements at either date. In the normal course of business, the Company and the Bank are named defendants in various lawsuits and counterclaims. 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. 14. REGULATORY CAPITAL REQUIREMENTS The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Under regulatory capital adequacy guidelines, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Additionally, the Bank must meet specific capital guidelines to be considered well capitalized per the regulatory framework for prompt corrective action. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. The Bank and the Company must maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. In September 2019, the regulatory agencies, including the Office of the Comptroller of the Currency 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. 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 reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR 126 requirement will increase to 8.5% for the calendar year before returning to 9% in calendar year 2022. Management has elected to use the CBLR framework for the Bank and Company. Before electing to use the CBLR framework, the Company and Bank were required to maintain a capital conservation buffer above certain minimum risk-based capital ratios for capital adequacy purposes in order to avoid certain restrictions on capital distributions and other payments including dividends, share repurchases, and certain compensation. The capital conservation buffer was 2.5 % at September 30, 2019, and the Bank and Company exceeded the capital conservation buffer requirement at that time. Management believes, as of September 30, 2020, that the Bank and Company meet all capital adequacy requirements to which they are subject and there were no conditions or events subsequent to September 30, 2020 that would change the Bank's or Company's category. To Be Well Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Bank As of September 30, 2020 CBLR $ 1,168,808 12.4 % $ 754,884 8.0 % N/A N/A As of September 30, 2019 Tier 1 leverage 1,169,037 12.1 387,427 4.0 484,284 5.0 Common Equity Tier 1 ("CET1") capital 1,169,037 24.1 218,042 4.5 314,949 6.5 Tier 1 capital 1,169,037 24.1 290,722 6.0 387,630 8.0 Total capital 1,178,263 24.3 387,630 8.0 484,537 10.0 Company As of September 30, 2020 CBLR 1,287,854 13.7 754,767 8.0 N/A N/A As of September 30, 2019 Tier 1 leverage 1,336,377 13.8 387,346 4.0 N/A N/A CET1 capital 1,336,377 27.6 218,070 4.5 N/A N/A Tier 1 capital 1,336,377 27.6 290,759 6.0 N/A N/A Total capital 1,345,603 27.8 387,679 8.0 N/A N/A Generally, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to the earnings of the previous two calendar years and current year-to-date earnings. It is generally required that the Bank remain well capitalized before and after the proposed distribution. The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. So long as the Bank continues to remain well capitalized after each capital distribution and operates in a safe and sound manner, it is management's belief that the regulators will continue to allow the Bank to distribute its net income to the Company, although no assurance can be given in this regard. In conjunction with the Company's corporate reorganization in December 2010, a "liquidation account" was established for the benefit of certain depositors of the Bank in an amount equal to Capitol Federal Savings Bank MHC's ownership interest in the retained earnings of Capitol Federal Financial as of June 30, 2010. As of September 30, 2020, the balance of this liquidation account was $ 115.4 million. Under applicable federal banking regulations, neither the Company nor the Bank is permitted to pay dividends on its capital stock to its stockholders if stockholders' equity would be reduced below the amount of the liquidation account at that time. 127 15. FAIR VALUE OF FINANCIAL INSTRUMENTS 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 ASC 820 and ASC 825. The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments. The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are: • Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. • Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument. The Company bases its fair values on the price that would be received from the sale of a financial instrument in an orderly transaction between market participants at the measurement date under current market conditions. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring basis. AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third-party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third-party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third-party pricing service when determining the fair value of its securities during the years ended September 30, 2020 and 2019. The Company's major security types, based on the nature and risks of the securities, are: • GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for similar securities. (Level 2) • MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on prepayment projections of the underlying mortgages and are discounted using current market yields for benchmark securities. (Level 2) • Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for securities with similar credit profiles. (Level 2) Interest Rate Swaps - The Company's interest rate swaps are designated as cash flow hedges and are reported at fair value in other assets on the consolidated balance sheet if in a gain position, and in accounts payable and accrued expenses if in a loss position, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 9. Deposits and Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted 128 cash flow analysis with independent observable market-based inputs from a third party. No adjustments were made to the estimated fair values during the years ended September 30, 2020 and 2019. (Level 2) The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2020 or 2019. September 30, 2020 Quoted Prices Significant Significant in Active Markets Other Observable Unobservable Carrying for Identical Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) (Dollars in thousands) Assets: AFS Securities: MBS $ 1,180,803 $ — $ 1,180,803 $ — GSE debentures 370,340 — 370,340 — Municipal bonds 9,807 — 9,807 — $ 1,560,950 $ — $ 1,560,950 $ — Liabilities: Interest rate swaps $ 53,149 $ — $ 53,149 $ — September 30, 2019 Quoted Prices Significant Significant in Active Markets Other Observable Unobservable Carrying for Identical Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) (Dollars in thousands) Assets: AFS Securities: MBS $ 936,487 $ — $ 936,487 $ — GSE debentures 249,954 — 249,954 — Municipal bonds 18,422 — 18,422 — $ 1,204,863 $ — $ 1,204,863 $ — Liabilities: Interest rate swaps $ 33,090 $ — $ 33,090 $ — 129 The following is a description of valuation methodologies used for significant financial instruments measured at fair value on a non-recurring basis. Loans Receivable – The fair value of impaired loans individually evaluated for impairment on a non-recurring basis during fiscal years 2020 and 2019 that were still held in the portfolio as of September 30, 2020 and 2019 was $ 5.7 million and $ 6.8 million, respectively. The one- to four-family loans included in this amount were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10 %. Fair values were estimated through current appraisals. Management does not adjust or apply a discount to the appraised value of one- to four-family loans, except for the estimated sales cost noted above, and the primary unobservable input for these loans was the appraisal. For commercial loans, if the most recent appraisal or book value of the collateral does not reflect current market conditions due to the passage of time and/or other factors, management will make adjustments to the existing appraised or book value based on knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable inputs for impaired commercial loans individually evaluated for impairment during the year ended September 30, 2020 were downward adjustments to the book value of the collateral for lack of marketability. The adjustments ranged from 4 % to 50 %, with a weighted average of 18 %. There were no impaired commercial loans individually evaluated during the year ended September 30, 2019. Fair values of impaired loans individually evaluated for impairment cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3. OREO – OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower of cost or fair value. The fair value for OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10 %. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO measured on a non-recurring basis during fiscal years 2020 and 2019 that was still held in the portfolio as of September 30, 2020 and 2019 was $ 183 thousand and $ 678 thousand, respectively. The carrying value of the properties equaled the fair value of the properties at September 30, 2020 and 2019. Fair Value Disclosures – The Company estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates. 130 The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows: 2020 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 185,148 $ 185,148 $ 185,148 $ — $ — AFS securities 1,560,950 1,560,950 — 1,560,950 — Loans receivable 7,202,851 7,663,000 — — 7,663,000 FHLB stock 93,862 93,862 93,862 — — Liabilities: Deposits 6,191,408 6,259,080 3,170,164 3,088,916 — Borrowings 1,789,313 1,840,605 — 1,840,605 — Interest rate swaps 53,149 53,149 — 53,149 — 2019 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 220,370 $ 220,370 $ 220,370 $ — $ — AFS securities 1,204,863 1,204,863 — 1,204,863 — Loans receivable 7,416,747 7,654,586 — — 7,654,586 FHLB stock 98,456 98,456 98,456 — — Liabilities: Deposits 5,581,867 5,614,895 2,594,242 3,020,653 — Borrowings 2,239,989 2,253,353 100,001 2,153,352 — Interest rate swaps 33,090 33,090 — 33,090 — 131 16. ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables present the changes in the components of AOCI, net of tax, for the years presented. For the Year Ended September 30, 2020 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 10,150 $ ( 25,049 ) $ ( 14,899 ) Other comprehensive income (loss), before reclassifications 13,578 ( 21,458 ) ( 7,880 ) Amount reclassified from AOCI, net of taxes of $( 2,014 ) — 6,274 6,274 Other comprehensive income (loss) 13,578 ( 15,184 ) ( 1,606 ) Ending balance $ 23,728 $ ( 40,233 ) $ ( 16,505 ) For the Year Ended September 30, 2019 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 2,990 ) $ 7,330 $ 4,340 Transfer of HTM securities to AFS securities 2,336 — 2,336 Other comprehensive income (loss), before reclassifications 10,804 ( 32,817 ) ( 22,013 ) Amount reclassified from AOCI, net of taxes of $( 141 ) — 438 438 Other comprehensive income (loss) 13,140 ( 32,379 ) ( 19,239 ) Ending balance $ 10,150 $ ( 25,049 ) $ ( 14,899 ) For the Year Ended September 30, 2018 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 3,290 $ ( 372 ) $ 2,918 Other comprehensive income (loss), before reclassifications ( 6,741 ) 6,981 240 Amount reclassified from AOCI, net of taxes of $( 197 ) — 515 515 Other comprehensive income (loss) ( 6,741 ) 7,496 755 Reclassification of certain income tax effects related to adoption of ASU 2018-02 461 206 667 Ending balance $ ( 2,990 ) $ 7,330 $ 4,340 132 17. REVENUE RECOGNITION On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers , and all subsequent ASUs that modified the principles for recognizing revenue. The Company's primary sources of revenue consist of net interest income on financial assets and liabilities, which are not within the scope of the amended ASU. In addition, certain non-interest income revenue streams, such as loan servicing fees, derivatives, and BOLI, are not in-scope of the amended ASU. Based on an assessment of non-interest income revenue streams and a review of the related contracts with customers, the Company concluded the amended ASU did not significantly change the Company's revenue recognition methods. The Company elected to implement the amended ASU using the modified retrospective application with a cumulative adjustment, which increased opening retained earnings at October 1, 2018 by $ 394 thousand related to contracts that were not complete upon adoption. The amount was related to the change in the recognition of revenue related to certain insurance commissions. Details of the Company's primary types of non-interest income revenue streams by financial statement line item reported in the consolidated statements of income that are within the scope of ASC Topic 606 are below. During fiscal years 2020 and 2019, revenue from contracts with customers totaled $ 14.8 million and $ 16.6 million, respectively. Deposit Service Fees Interchange Transaction Fees - Interchange transaction fee income primarily consists of interchange fees earned on a transactional basis through card payment networks. The performance obligation for these types of transactions is satisfied as services are rendered for each transaction and revenue is recognized daily concurrently with the transaction processing services provided to the cardholder. In order to participate in the card payment networks, the Company must pay various transaction related costs established by the networks ("interchange network charges"), including membership fees and a per unit charge for each transaction. The Company is acting as an agent for its debit card customers when they are utilizing the card payment networks; therefore, upon adoption of the amended ASU, interchange transaction fee income is reported net of interchange network charges. Previously, interchange network charges were reported in deposit and loan expense. Interchange network charges totaled $ 3.2 million and $ 3.4 million for fiscal years 2020 and 2019, respectively. Service Charges on Deposit Accounts - Service charges on deposit accounts consist of account maintenance and transaction-based fees such as overdrafts, insufficient funds, wire transfers and the use of out-of-network ATMs. The Company's performance obligation is satisfied over a period of time, generally a month, for account maintenance and at the time of service for transaction-based fees. Revenue is recognized after the performance obligation is satisfied. Payments are typically collected from the customer's deposit account at the time the transaction is processed and/or at the end of the customer's statement cycle (typically monthly). Insurance Commissions Commissions are received on insurance product sales. The Company acts in the capacity of an agent between the Company's customer and the insurance carrier. The Company's performance obligation is satisfied when the terms of the policy have been agreed upon and the insurance policy becomes effective. Additionally, the Company earns performance-based incentives ("contingent insurance commissions") based on certain criteria established by the insurance carriers. Upon adoption of the amended ASU, contingent insurance commissions are accrued based upon management's expectations. Previously, contingent insurance commissions were recognized when the funds were received. Other Non-Interest Income Trust Asset Management Income - The Company provides trust asset management services to customers. The Company primarily earns fees for these services over time as the monthly services are provided and the Company assesses revenue at each month end. Fees are charged based on a tiered scale of the market value of the individual trust asset accounts at the end of the month. 133 18. LEASES The Company leases real estate property for branches, ATMs, and certain equipment. These leases have remaining terms that range from one year to 47 years, some of which include the exercising of renewal options that the Company considers to be reasonably certain. As September 30, 2020, a right-of-use asset of $ 14.7 million was included in other assets and a lease liability of $ 14.7 million was included in accounts payable and accrued expenses on the consolidated balance sheets. As of September 30, 2020, for the Company's operating leases, the weighted average remaining lease term was 23.5 years and the weighted average discount rate was 2.59 %. The following table presents lease expenses and supplemental cash flow information related to the Company's leases for fiscal year 2020 (dollars in thousands). Operating lease expense $ 1,511 Variable lease expense 201 Short-term lease expense 17 Cash paid for amounts included in the measurement of lease liabilities 1,357 The following table presents future minimum payments, rounded to the nearest thousand, for operating leases with initial or remaining terms in excess of one year as of September 30, 2020 (dollars in thousands): Fiscal year 2021 1,192 Fiscal year 2022 1,302 Fiscal year 2023 1,210 Fiscal year 2024 1,003 Fiscal year 2025 827 Thereafter 15,308 Total future minimum lease payments 20,842 Amounts representing interest ( 6,129 ) Present value of net future minimum lease payments $ 14,713 The Company elected the modified retrospective approach for its adoption of ASU 2016-02, and the optional transition method under which the Company used the effective date as the date of initial application of the amendments. These elections require the inclusion of ASC Topic 840 disclosures for periods that continue to be presented in accordance with ASC Topic 840. As of September 30, 2019, future minimum rental commitments, rounded to the nearest thousand, required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year were as follows (dollars in thousands): 2020 $ 1,298 2021 1,187 2022 1,069 2023 930 2024 637 Thereafter 1,115 $ 6,236 134 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents summarized quarterly data for each of the years indicated for the Company. First Second Third Fourth Quarter Quarter Quarter Quarter Total (Dollars and counts in thousands, except per share amounts) 2020 Total interest and dividend income $ 80,036 $ 78,955 $ 74,381 $ 71,606 $ 304,978 Net interest and dividend income 48,697 48,668 46,287 45,683 189,335 Provision for credit losses 225 22,075 — — 22,300 Net income 22,511 4,276 19,474 18,279 64,540 Basic EPS 0.16 0.03 0.14 0.13 0.47 Diluted EPS 0.16 0.03 0.14 0.13 0.47 Dividends declared per share 0.425 0.085 0.085 0.085 0.68 Average number of basic shares outstanding 137,898 137,968 138,018 137,705 137,897 Average number of diluted shares outstanding 137,976 138,000 138,018 137,705 137,901 2019 Total interest and dividend income $ 82,421 $ 82,037 $ 82,211 $ 83,285 $ 329,954 Net interest and dividend income 52,301 52,597 51,681 49,811 206,390 Provision for credit losses — — 450 300 750 Net income 24,383 24,554 22,897 22,409 94,243 Basic EPS 0.18 0.18 0.17 0.16 0.68 Diluted EPS 0.18 0.18 0.17 0.16 0.68 Dividends declared per share 0.475 0.085 0.335 0.085 0.98 Average number of basic shares outstanding 137,551 137,635 137,720 137,801 137,677 Average number of diluted shares outstanding 137,592 137,691 137,788 137,867 137,735 135 20. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY) The Company serves as the holding company for the Bank (see "Note 1. Summary of Significant Accounting Policies"). The Company's (parent company only) balance sheets at the dates presented, and the related statements of income and cash flows for each of the years presented are as follows: BALANCE SHEETS SEPTEMBER 30, 2020 and 2019 (Dollars in thousands, except per share amounts) 2020 2019 ASSETS: Cash and cash equivalents $ 82,466 $ 126,320 Investment in the Bank 1,165,813 1,168,986 Note receivable - ESOP 38,614 39,971 Other assets 707 711 Income taxes receivable, net 492 429 TOTAL ASSETS $ 1,288,092 $ 1,336,417 LIABILITIES: Accounts payable and accrued expenses 3,142 91 Deferred income tax liabilities, net 91 — Total liabilities 3,233 91 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 - ESOP ( 33,040 ) ( 34,692 ) Retained earnings 143,162 174,277 AOCI, net of tax ( 16,505 ) ( 14,899 ) Total stockholders' equity 1,284,859 1,336,326 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,288,092 $ 1,336,417 136 STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2020, 2019, and 2018 (Dollars in thousands) 2020 2019 2018 INTEREST AND DIVIDEND INCOME: Dividend income from the Bank $ 68,329 $ 129,409 $ 134,540 Interest income from other investments 2,036 2,428 1,951 Total interest and dividend income 70,365 131,837 136,491 INTEREST EXPENSE — 403 62 NET INTEREST INCOME 70,365 131,434 136,429 NON-INTEREST INCOME — 14 — NON-INTEREST EXPENSE: Salaries and employee benefits 988 829 1,031 Regulatory and outside services 292 286 1,129 Other non-interest expense 622 652 581 Total non-interest expense 1,902 1,767 2,741 INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 68,463 129,681 133,688 INCOME TAX EXPENSE (BENEFIT) 28 57 ( 179 ) INCOME BEFORE EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 68,435 129,624 133,867 EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY ( 3,895 ) ( 35,381 ) ( 34,940 ) NET INCOME $ 64,540 $ 94,243 $ 98,927 137 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: Equity in excess of distribution over earnings of subsidiary 3,895 35,381 34,940 Depreciation of equipment 45 37 30 Loss on disposal of premises and equipment — 8 — Provision for deferred income taxes 91 — ( 35 ) Changes in: Other assets ( 60 ) 54 ( 53 ) Income taxes receivable/payable ( 63 ) 57 ( 145 ) Accounts payable and accrued expenses 13 ( 86 ) ( 257 ) Net cash provided by operating activities 68,461 129,694 133,407 CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on note receivable from ESOP 1,357 1,314 1,272 Cash acquired from acquisition — — 18 Purchase of equipment — ( 423 ) — Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures — 302 — Net cash provided by investing activities 1,357 1,193 1,290 CASH FLOWS FROM FINANCING ACTIVITIES: Net payment from subsidiary related to restricted stock awards 319 1,245 253 Cash dividends paid ( 93,862 ) ( 134,929 ) ( 118,312 ) Repurchase of common stock ( 20,767 ) — — Repayment of other borrowings — ( 10,052 ) — Stock options exercised 638 1,485 261 Net cash used in financing activities ( 113,672 ) ( 142,251 ) ( 117,798 ) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 43,854 ) ( 11,364 ) 16,899 CASH AND CASH EQUIVALENTS: Beginning of year 126,320 137,684 120,785 End of year $ 82,466 $ 126,320 $ 137,684 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for acquisition $ — $ — $ 39,113 Capital contribution to subsidiary in conjunction with acquisition of CCB $ — $ — $ 48,798 138 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.