What changed in this filing

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Item 1. Financial Statements

2021-02-09 compared with 2020-08-07 · 388 added, 397 removed, 566 unchanged (58% of the section changed)

4 unchanged sentences

(Dollars in thousands, except per share amounts)

June 30, September 30,

December 31, September 30,

Cash and cash equivalents (includes interest-earning deposits of $ 139,031 and $ 172,430 )

$ 168,032 $ 185,148

Available-for-sale ("AFS") securities, at estimated fair value 1,220,054 1,204,863

Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $ 1,880,972 and $ 1,529,605 )

1,913,866 1,560,950

Loans receivable, net (allowance for credit losses ("ACL") of $ 26,125 and $ 31,527 )

2 unchanged sentences

Premises and equipment, net 101,238 101,875

Income taxes receivable, net 1,655 2

Other assets 335,041 342,532

3 unchanged sentences

Advance payments by borrowers for taxes and insurance 33,216 65,721

Income taxes payable, net 3,180 795

Deferred income tax liabilities, net 9,318 8,180

5 unchanged sentences

Common stock, $ .01 par value;

1,400,000,000 shares authorized, 141,511,716 and 141,440,030

shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively 1,415 1,414

1,400,000,000 shares authorized, 138,792,496 and 138,956,296 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively

Additional paid-in capital 1,188,636 1,189,853

9 unchanged sentences

(Dollars in thousands, except per share amounts)

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2020 2019 2020 2019

For the Three Months Ended

INTEREST AND DIVIDEND INCOME:

11 unchanged sentences

PROVISION FOR CREDIT LOSSES ( 1,532 ) 225

NET INTEREST INCOME AFTER

PROVISION FOR CREDIT LOSSES 46,287 51,231 121,352 156,129

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 45,345 48,472

NON-INTEREST INCOME:

10 unchanged sentences

Deposit and loan transaction costs 766 711

Office supplies and related expense 475 689 1,586 1,884

Federal insurance premium 621 —

Office supplies and related expense 424 519

Other non-interest expense 1,083 1,698

12 unchanged sentences

(Dollars in thousands)

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2020 2019 2020 2019

For the Three Months Ended

Net income $ 18,898 $ 22,511

Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on AFS securities arising during the period,

net of taxes of $( 1,775 ), $( 1,317 ), $( 4,962 ) and $( 3,432 )

5,533 4,102 15,459 10,690

Changes in unrealized gains (losses) on cash flow hedges,

net of taxes of $ 367 , $ 3,601 , $ 5,826 and $ 8,847

Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $( 409 ) and $ 145

1,140 ( 452 )

Comprehensive (loss) income $ 23,861 $ 15,781 $ 43,569 $ 54,962

Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $( 1,220 ) and $( 1,741 )

Comprehensive income $ 24,032 $ 27,483

See accompanying notes to consolidated financial statements.

3 unchanged sentences

(Dollars in thousands, except per share amounts)

For the Nine Months Ended June 30, 2020

For the Three Months Ended December 31, 2020

Additional Unearned Total

2 unchanged sentences

Balance at September 30, 2020 $ 1,389 $ 1,189,853 $ ( 33,040 ) $ 143,162 $ ( 16,505 ) $ 1,284,859

Cumulative effect of adopting Accounting Standards Update ("ASU") 2016-02 88 88

Net income 18,898 18,898

Other comprehensive income, net of tax 5,134 5,134

Cumulative effect of adopting Accounting Standards Update ("ASU") 2016-13, net of tax ( 2,288 ) ( 2,288 )

ESOP activity 80 413 493

1 unchanged sentence

Stock-based compensation 118 118

Stock options exercised 1 612 613

Repurchase of common stock ( 1 ) ( 1,407 ) ( 122 ) ( 1,530 )

Cash dividends to stockholders ($ 0.215 per share)

1 unchanged sentence

Balance at December 31, 2020 $ 1,388 $ 1,188,636 $ ( 32,627 ) $ 130,522 $ ( 11,371 ) $ 1,276,548

Net income 4,276 4,276

Other comprehensive loss, net of tax ( 12,051 ) ( 12,051 )

ESOP activity 117 413 530

Stock-based compensation 152 152

Stock options exercised 25 25

Cash dividends to stockholders ($ 0.085 per share)

( 11,733 ) ( 11,733 )

Balance at March 31, 2020 1,415 1,211,466 ( 33,866 ) 130,756 ( 21,978 ) 1,287,793

Net income 19,474 19,474

Other comprehensive income, net of tax 4,387 4,387

ESOP activity 61 413 474

Restricted stock activity, net ( 6 ) ( 6 )

Stock-based compensation 132 132

Cash dividends to stockholders ($ 0.085 per share)

( 11,734 ) ( 11,734 )

Balance at June 30, 2020 $ 1,415 $ 1,211,653 $ ( 33,453 ) $ 138,496 $ ( 17,591 ) $ 1,300,520

For the Nine Months Ended June 30, 2019

For the Three Months Ended December 31, 2019

Additional Unearned Total

2 unchanged sentences

Balance at September 30, 2019 $ 1,414 $ 1,210,226 $ ( 34,692 ) $ 174,277 $ ( 14,899 ) $ 1,336,326

Cumulative effect of adopting ASU 2014-09 394 394

Cumulative effect of adopting ASU 2016-02, net of tax 88 88

Net income 22,511 22,511

Other comprehensive loss, net of tax ( 6,217 ) ( 6,217 )

Other comprehensive income, net of tax 4,972 4,972

ESOP activity 169 413 582

Restricted stock activity, net ( 1 ) ( 1 )

Stock-based compensation 166 166

3 unchanged sentences

Balance at December 31, 2019 $ 1,415 $ 1,211,172 $ ( 34,279 ) $ 138,213 $ ( 9,927 ) $ 1,306,594

Net income 24,554 24,554

Other comprehensive loss, net of tax ( 3,539 ) ( 3,539 )

ESOP activity 134 413 547

Stock-based compensation 90 90

Stock options exercised 118 118

Cash dividends to stockholders ($ 0.085 per share)

( 11,700 ) ( 11,700 )

Balance at March 31, 2019 1,413 1,208,665 ( 35,517 ) 186,838 ( 5,416 ) 1,355,983

Net income 22,897 22,897

Other comprehensive loss, net of tax ( 7,116 ) ( 7,116 )

ESOP activity 147 413 560

Stock-based compensation 167 167

Stock options exercised 1 761 762

Cash dividends to stockholders ($ 0.335 per share)

( 46,154 ) ( 46,154 )

Balance at June 30, 2019 $ 1,414 $ 1,209,740 $ ( 35,104 ) $ 163,581 $ ( 12,532 ) $ 1,327,099

See accompanying notes to consolidated financial statements.

3 unchanged sentences

(Dollars in thousands)

For the Nine Months Ended

For the Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

3 unchanged sentences

Provision for credit losses ( 1,532 ) 225

Originations of loans receivable held-for-sale ("LHFS") ( 364 ) —

Proceeds from sales of LHFS 366 —

Amortization and accretion of premiums and discounts on securities 1,017 228

4 unchanged sentences

Stock-based compensation 118 166

Unrestricted cash collateral (provided to)/received from derivative counterparties, net — ( 9,970 )

Other assets, net 1,942 1,237

6 unchanged sentences

Proceeds from calls, maturities and principal reductions of AFS securities 152,396 123,810

Proceeds from calls, maturities and principal reductions of held-to-maturity ("HTM") securities — 126,684

Proceeds from the redemption of FHLB stock 10,238 421

Purchase of FHLB stock — ( 97,270 )

Net change in loans receivable 203,698 ( 12,844 )

2 unchanged sentences

Proceeds from bank-owned life insurance ("BOLI") death benefit 443 490

Net cash provided by investing activities 2,833 90,439

Net cash used in investing activities ( 140,010 ) ( 40,779 )

CAPITOL FEDERAL FINANCIAL, INC.

2 unchanged sentences

(Dollars in thousands)

For the Nine Months Ended

For the Three Months Ended

CASH FLOWS FROM FINANCING ACTIVITIES:

5 unchanged sentences

Payment of FHLB prepayment penalties ( 2,292 ) —

Repurchase of common stock ( 4,568 ) —

Stock options exercised — 613

Net cash provided by (used in) financing activities 97,941 ( 142,468 )

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS 200,519 ( 68,934 )

NET DECREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS ( 22,866 ) ( 156,437 )

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:

20 unchanged sentences

Interim results are not necessarily indicative of results for a full year.

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 $ 396.2 million and $ 220.4 million at June 30, 2020 and September 30, 2019, respectively, and restricted cash and cash equivalents of $ 58.0 million and $ 33.3 million at June 30, 2020 and September 30, 2019, respectively, which was included in other assets on the consolidated balance sheet.

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 $ 168.0 million and $ 185.1 million at December 31, 2020 and September 30, 2020, respectively, and restricted cash and cash equivalents of $ 48.8 million and $ 54.6 million at December 31, 2020 and September 30, 2020, 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.

1 unchanged sentence

Borrowed Funds.

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.

There was no FHLB advance activity reported on a net basis in the consolidated statements of cash flows during the nine months ended June 30, 2020 and 2019.

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 amount 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 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.

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 9.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses:

Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSEs"), including Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association ("GNMA"), and municipal bonds.

Securities are classified as held-to maturity ("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.

Accrued interest receivable for all securities is reported in other assets on the consolidated balance sheet.

When the Company adopted ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments, the practical expedient to exclude accrued interest from all required disclosures of amortized cost was elected.

Additionally, an election was made to not measure ACL for accrued interest receivables.

Interest accrued but not received is reversed against interest income.

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 December 31, 2020 and September 30, 2020, the portfolio did not contain any securities classified as HTM.

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 non-credit 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 6.

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.

Neither the Company nor the Bank maintained a trading securities portfolio during the three months ended December 31, 2020 or during fiscal year 2020.

Allowance for Credit Losses on AFS Debt Securities - Management monitors AFS debt securities for impairment on an ongoing basis and performs a formal review quarterly.

If an AFS debt security is in an unrealized loss position at the time of the quarterly review, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost.

If either condition is met, the entire loss in fair value is recognized in current earnings.

If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors.

In making this assessment, management considers the security structure, the cause(s) and severity of the loss, expectations of future performance including 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, and external credit ratings and recent downgrades in such ratings.

Management's assessment involves a high degree of subjectivity and judgment that is based on information available at a point in time.

If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security.

If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an ACL is recorded, which became effective October 1, 2020 when the Company adopted 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.

Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.

The ACL is limited by the amount that the fair value is less than the amortized cost basis.

Any impairment not recorded through the provision for credit losses is recognized in other comprehensive income.

Prior to the adoption of ASU 2016-13, management assessed all known facts and circumstances to determine whether an other-than-temporary loss should be recognized for impaired securities.

If an other-than-temporary impairment had occurred, the difference between the amortized cost and fair value was recognized as a loss in earnings and the security was written down to fair value.

Changes in the ACL on AFS debt securities are recorded as an increase or decrease in the provision for credit losses on the consolidated statements of income.

Losses are charged against the ACL on securities when management believes the collectability of an AFS security is in doubt or when either of the conditions regarding intent or requirement to sell is met.

As of October 1, 2020 and December 31, 2020, the Company did not identify any credit losses related to the Company's AFS debt securities so there was no ACL on AFS debt securities as of those dates.

Loans Receivable - Loans receivable that management has the intention and ability to hold for the foreseeable future are carried at amortized cost, excluding accrued interest.

Amortized cost is the amount of unpaid principal, net of 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.

Loans are presented on the consolidated balance sheet net of the ACL on loans.

Interest on loans is accrued based on the principal amount outstanding.

When the Company adopted ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments, the practical expedient to exclude all accrued interest receivable from all required disclosures of amortized cost was elected.

Additionally, an election was made to not measure ACL for accrued interest receivables.

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, without being required to complete the standard application and underwriting process.

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 modifications - 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.

Loans reported as being modified under the Bank's COVID-19 loan modification program includes all loans modified under the programs, including loans classified as TDRs.

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 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.

Allowance for Credit Losses on Loans Receivable - The ACL is a valuation amount that is deducted from the amortized cost basis of loans.

It represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date and is determined using relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts, along with the application of qualitative factors when necessary.

ACL is recorded upon origination or purchase of a loan and is updated at subsequent reporting dates.

Changes in the ACL are recorded through increases or decreases to the provision for credit losses in the consolidated statements of income.

The ACL is an estimate that requires significant judgment including projections of the macroeconomic environment.

The macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses.

The Bank's ACL is measured on a collective ("pool") basis, with loans aggregated into pools based on similar risk characteristics such as collateral type, historical loss experience, loan-to-value ("LTV") for one- to four-family loans, and payment sources for commercial loans.

Loans that do not share similar risk characteristics are evaluated on an individual basis.

Charge-offs against the related ACL amounts for any loan type may be recorded at any time if the Bank has knowledge of the existence of a probable loss.

One- to four-family loans and consumer home equity loans are deemed to be collateral dependent and individually evaluated for loss when the loan is generally 180 days delinquent, and any identified losses are charged-off at that time.

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.

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, loans are individually evaluated for loss if management determines they exhibit unique risk characteristics.

Specific allocations of ACL are established and/or 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 regarding the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement.

In the case of secured loans, the loan is deemed to be collateral dependent when this occurs, and the specific allocation of ACL and/or charge-off amount is based on a comparison of the amounts due from the borrower and calculated current fair value of the collateral after consideration of estimated costs to sell.

The primary credit 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, charge-offs, and provisions for credit losses.

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.

For loans evaluated for credit losses on a pool basis, average historical loss rates are calculated for each pool using the Company's historical charge-offs, or peer data when the Company's own historical loss rates are not reflective of future loss expectations, and outstanding loan balances during a historical time period.

The historical time periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life.

Generally, the historical time periods are at least one economic cycle.

These historical loss rates are compared to historical data related to economic variables including national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the

United States gross domestic product during the same time periods over which the historical loss rates were calculated, and a correlation is estimated using regression analysis.

Each quarter, the Company's ACL model pairs the results of the regression analysis with an economic forecast of these same macroeconomic variables, which is provided by a third party, in order to project future loss rates.

The forecast is applied for a reasonable and supportable time period, as determined by management, before reverting back to long-term historical averages at the macroeconomic variable level using a straight-line method.

The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for expected prepayments and curtailments.

The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a TDR will be executed.

In the case of revolving lines of credit, since the rate of principal reduction is generally at the discretion of the borrower, remaining contractual lives are calculated by estimating future cash flows expected to be received from the borrower until the outstanding balance has been reduced to zero.

Using all of these inputs, the ACL model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life.

These cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at a present value of future cash flows.

Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of future cash flows compared to the amortized cost basis of the loan pool.

Additionally, qualitative factors are considered for items not included in historical loss rates, macroeconomic forecasts, or other model inputs and/or other ACL processes, as deemed appropriate by management's current assessment of risks related to loan portfolio attributes and external factors.

Such qualitative factor considerations include changes in the loan portfolio composition and credit concentrations, changes in lending policies and procedures and underwriting standards, changes in balances and/or trends in asset quality and/or loan credit performance, model imprecision, and/or external factors such as significant unique events or conditions.

Management assesses the potential impact of such items and adjusts the modeled ACL as deemed appropriate based upon the assessment.

Reserve for Off-Balance Sheet Credit Exposures - The Company's off-balance sheet credit exposures are comprised of unfunded portions of existing loans, such as lines of credit and construction loans, and commitments to originate or purchase loans that are not unconditionally cancellable by the Company.

Expected credit losses on these amounts are calculated using the same methodology that is applied in the ACL model;

however, the estimate of credit risk for off-balance sheet credit exposures also takes into consideration the likelihood that funding of the commitment will occur.

The reserve for these off-balance sheet credit exposures is recorded as a liability and is presented in accounts payable and accrued expenses on the consolidated balance sheet.

Changes to the reserve on off-balance sheet credit exposures are recorded through increases or decreases to the provision for credit losses on the consolidated statements of income.

Recent Accounting Pronouncements - In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments .

The ASU, as amended, replaces the incurred loss methodology in GAAP, which required credit losses to be recognized when it is probable that a loss has been incurred, with an expected credit loss methodology, which is commonly known as the current expected credit loss ("CECL") methodology.

The CECL 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 off-balance sheet credit exposures, over their remaining contractual lives.

Under the CECL methodology, expected credit losses are 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.

Credit losses related to AFS debt securities will be recorded through the ACL rather than as a direct write-down.

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.

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.

The Company has been working with a software provider on the 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.

Management is in the process of reviewing and selecting several assumptions including a reasonable and supportable forecast time period, a reversion methodology, prepayment and curtailment speeds, among others.

Management is also in the process of preparing supporting documentation and developing internal controls, policies, and procedures.

During the remainder of fiscal year 2020, the Company is planning more processing runs, as well as analyzing model sensitivity to various assumptions.

At June 30, 2020, the Company ran the model using various assumptions and forecast scenarios.

Preliminary results indicate that our ACL and reserves on unfunded commitments would be between $ 20 million and our current level of approximately $ 32 million.

The ACL calculated under the new methodology could be lower than that under the existing incurred loss methodology due to having the ability to forecast improvement in economic conditions over a loan's contractual life rather than only being able to consider current conditions as is allowed under the incurred loss methodology.

The preliminary results will likely change at adoption due to factors including, but not limited to, changes in current economic conditions, forecasted economic conditions, the Company's credit quality trends, and further refinement of model assumptions.

The ASU, as amended, became effective for the Company on October 1, 2020.

The Company adopted the ASU, as amended, on October 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Financial results for reporting periods beginning after October 1, 2020 are reported in accordance with the new ASU, as amended, while prior period amounts continue to be reported in accordance with previous GAAP.

Upon adoption, the Company recorded a cumulative-effect adjustment for the change in the ACL and reserve for off-balance sheet credit exposures of $ 2.3 million, net of tax of $ 739 thousand, which was recognized as a decrease in retained

The following table presents the impact of the cumulative-effect adjustment for the change in the ACL and reserve for off-balance sheet credit exposures.

September 30,

October 1, 2020

Cumulative-Effect Adjustment

(Dollars in thousands)

One- to four-family:

$ 6,085 $ ( 4,452 ) $ 1,633

Correspondent purchased

2,691 ( 367 ) 2,324

Bulk purchased

Commercial real estate

20,349 699 21,048

Commercial and industrial

1,451 ( 892 ) 559

370 ( 289 ) 81

31,527 ( 4,761 ) 26,766

Reserve for off-balance sheet credit exposures

— 7,788 7,788

ACL and reserve for off-balance sheet credit exposures

$ 31,527 $ 3,027 $ 34,554

The Company elected the practical expedient to exclude accrued interest receivable from the amortized cost of financing receivables and AFS debt securities.

Accrued interest totaled $ 20.0 million and $ 3.1 million at December 31, 2020 for loans receivable and AFS securities, respectively, and was included in other assets on the consolidated balance sheet.

Additionally, an election was made not to measure ACL for accrued interest receivables.

All interest accrued on loans but not received is reversed against interest income once it becomes more than 90 days past due.

Interest accrued on AFS debt securities but not received is also reversed against interest income.

The enhanced disclosures required by the ASU, as amended, are included in the relevant significant accounting policies above and in "Note 4.

Loans Receivable and Allowance for Credit Losses."

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement:

2 unchanged sentences

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.

This ASU, which was adopted on October 1, 2020, did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures.

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.

The Company is currently evaluating the effect of the ASU on the Company's consolidated financial condition, results of operations and disclosures.

The ASU was adopted by the Company on October 1, 2020.

The Company includes hosting arrangements that are service contracts in its evaluation of projects for capitalization.

The adoption of this ASU did not have a material impact on the Company's consolidated financial condition, results of operations, or 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.

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 Company is currently evaluating the effect of the non-hedging amendments contained in this ASU on the Company's consolidated financial condition, results of operations and disclosures.

Since the Company previously adopted ASU 2017-12, the related provisions included in ASU 2019-04 were adopted at the same time.

The Company adopted the non-hedging amendments contained in ASU 2019-04, including amendments related to ASU 2016-13, on October 1, 2020.

The adoption of this ASU did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures.

For additional information regarding the impact of adopting ASU 2016-13, see ASU 2016-13, Financial Instruments - Credit Losses:

Measurement of Credit Losses on Financial Instruments above.

EARNINGS PER SHARE

2 unchanged sentences

The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2020 2019 2020 2019

For the Three Months Ended

(Dollars in thousands, except per share amounts)

12 unchanged sentences

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 United States government-sponsored enterprises ("GSEs").

June 30, 2020

The majority of the MBS and investment securities portfolios are composed of securities issued by GSEs.

December 31, 2020

Gross Gross Estimated

16 unchanged sentences

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.

June 30, 2020

December 31, 2020

Less Than 12 Months Equal to or Greater Than 12 Months

1 unchanged sentence

Fair Value Losses Fair Value Losses

(Dollars in thousands)

MBS $ 40,462 $ 93 $ 110 $ 1

6 unchanged sentences

Fair Value Losses Fair Value Losses

(Dollars in thousands)

MBS $ 207,071 $ 330 $ 118 $ 1

2 unchanged sentences

$ 282,030 $ 371 $ 118 $ 1

The unrealized losses at June 30, 2020 and September 30, 2019 were a result of an increase in market yields from the time the securities were purchased.

The unrealized losses at December 31, 2020 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 June 30, 2020 or September 30, 2019.

The amortized cost and estimated fair value of AFS debt securities as of June 30, 2020, by contractual maturity, are shown below.

Management did not record ACL on securities in an unrealized loss position at December 31, 2020 because scheduled coupon payments have been made, management anticipates that the entire principal balance will be collected as scheduled, and neither does the Company intend 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.

The amortized cost and estimated fair value of AFS debt securities as of December 31, 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.

10 unchanged sentences

The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented.

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2020 2019 2020 2019

For the Three Months Ended

(Dollars in thousands)

3 unchanged sentences

The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented.

June 30, 2020 September 30, 2019

December 31, 2020 September 30, 2020

(Dollars in thousands)

1 unchanged sentence

Federal Reserve Bank of Kansas City ("FRB of Kansas City") 207,401 259,851

Repurchase agreements 106,625 108,271

Retail deposits 47,362 —

$ 559,531 $ 590,837

1 unchanged sentence

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

June 30, 2020 September 30, 2019

December 31, 2020 September 30, 2020

(Dollars in thousands)

31 unchanged sentences

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, loan-to-value ("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 .

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.

1 unchanged sentence

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.

Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets.

With the exception of Paycheck Protection Program ("PPP") 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.

9 unchanged sentences

and (3) commercial.

These segments are further divided into classes for purposes of providing disaggregated information about the credit quality of the loan portfolio.

See discussion regarding the credit risks for these loan segments in Note 1.

Summary of Significant Accounting Policies - Allowance for Credit Losses.

These segments are further divided into classes for purposes of providing disaggregated credit quality information about the loan portfolio.

The classes are:

1 unchanged sentence

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.

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 June 30, 2020 and September 30, 2019, all loans 90 or more days delinquent were on nonaccrual status.

June 30, 2020

90 or More Days Total Total

30 to 89 Days Delinquent or Delinquent Current Recorded

Delinquent in Foreclosure Loans Loans Investment

As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to loan classification and delinquency status.

Loan Classification - 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, as of December 31, 2020, the amortized cost of loans by class of financing receivable, year of origination and loan classification.

All revolving lines of credit are presented separately, regardless of origination year.

Loans classified as doubtful or loss are individually evaluated for loss.

At December 31, 2020, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

December 31, 2020

Current Fiscal Fiscal Fiscal Fiscal Revolving

Fiscal Year Year Year Year Prior Line of

Year 2020 2019 2018 2017 Years Credit Total

(Dollars in thousands)

One- to four-family:

Originated $ 5,058 $ 4,012 $ 9,070 $ 3,969,051 $ 3,978,121

Pass $ 274,145 $ 805,755 $ 404,651 $ 315,587 $ 354,212 $ 1,784,798 $ — $ 3,939,148

Special Mention 124 443 244 241 639 7,572 — 9,263

Substandard — 285 903 52 259 14,364 — 15,863

Correspondent purchased

Pass 58,120 408,309 112,323 200,255 246,482 963,862 — 1,989,351

Special Mention — — — — — 3,149 — 3,149

Substandard — — — — — 5,498 — 5,498

Bulk purchased

Pass — — — — — 194,336 — 194,336

Special Mention — — — — — 96 — 96

Substandard — — — — — 6,124 — 6,124

332,389 1,214,792 518,121 516,135 601,592 2,979,799 — 6,162,828

Commercial real estate

Pass 68,729 155,596 129,381 122,344 51,233 53,767 5,895 586,945

Special Mention — — — — — 101,276 — 101,276

Substandard 1,296 674 229 695 391 — — 3,285

Commercial and industrial

Home equity 393 249 642 106,448 107,090

Other 38 30 68 9,934 10,002

Pass 4,856 34,835 9,295 4,342 3,886 1,031 8,487 66,732

Special Mention — — 223 — 402 — — 625

Substandard — 2 — 94 54 — 1,336 1,486

74,881 191,107 139,128 127,475 55,966 156,074 15,718 760,349

Pass 467 3,653 2,540 2,051 908 3,505 83,639 96,763

Special Mention — — — 13 — 9 236 258

Substandard — — — — — 24 687 711

Pass 1,166 3,309 2,182 1,392 691 277 278 9,295

Special Mention — — — — — — — —

Substandard — 4 — 5 4 2 — 15

1,633 6,966 4,722 3,461 1,603 3,817 84,840 107,042

Total $ 408,903 $ 1,412,865 $ 661,971 $ 647,071 $ 659,161 $ 3,139,690 $ 100,558 $ 7,030,219

The following table sets forth the recorded investment in loans classified as special mention or substandard, by class, at September 30, 2020 (prior to the adoption of CECL).

At that date, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

September 30, 2020

90 or More Days Total Total

30 to 89 Days Delinquent or Delinquent Current Recorded

Delinquent in Foreclosure Loans Loans Investment

Special Mention Substandard

(Dollars in thousands)

6 unchanged sentences

Home equity 331 581

Other 78 21 99 11,035 11,134

$ 63,653 $ 31,058

The recorded investment in mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of June 30, 2020 and September 30, 2019 was $ 2.6 million and $ 1.5 million, respectively, 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 June 30, 2020 and $ 745 thousand at September 30, 2019.

The following table presents the recorded investment, by class, in loans classified as nonaccrual at the dates presented.

June 30, 2020 September 30, 2019

Delinquency Status - The following table sets forth, as of December 31, 2020, the amortized cost of current loans, loans 30 to 89 days delinquent, and loans 90 or more days delinquent or in foreclosure ("90+/FC"), by class of financing receivable and year of origination.

All revolving lines of credit are presented separately, regardless of origination year.

December 31, 2020

Current Fiscal Fiscal Fiscal Fiscal Revolving

Fiscal Year Year Year Year Prior Line of

Year 2020 2019 2018 2017 Years Credit Total

(Dollars in thousands)

One- to four-family:

Originated $ 4,955 $ 4,436

Correspondent purchased 2,971 1,023

Bulk purchased 1,305 1,551

Commercial real estate 546 —

Commercial and industrial 165 173

Home equity 282 337

Current $ 274,269 $ 806,483 $ 405,610 $ 315,538 $ 354,482 $ 1,797,714 $ — $ 3,954,096

30-89 — — — 290 369 5,164 — 5,823

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:

• 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.

• 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.

June 30, 2020 September 30, 2019

Special Mention Substandard Special Mention Substandard

(Dollars in thousands)

One- to four-family:

Originated $ 10,611 $ 16,401 $ 12,941 $ 15,628

90+/FC — — 188 52 259 3,856 — 4,355

Correspondent purchased

Current 58,120 408,309 112,153 199,766 246,078 965,396 — 1,989,822

30-89 — — 170 489 404 3,694 — 4,757

90+/FC — — — — — 3,419 — 3,419

Bulk purchased

Current — — — — — 195,018 — 195,018

30-89 — — — — — 1,768 — 1,768

90+/FC — — — — — 3,770 — 3,770

332,389 1,214,792 518,121 516,135 601,592 2,979,799 — 6,162,828

Commercial real estate

Current 70,025 155,490 129,381 122,444 51,624 155,005 5,895 689,864

30-89 — 106 229 595 — 38 — 968

90+/FC — 674 — — — — — 674

Commercial and industrial

Home equity 318 534 280 696

Other — 30 2 24

Current 4,856 34,835 9,448 4,341 4,288 1,031 9,823 68,622

30-89 — — 70 1 — — — 71

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 June 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.

June 30, 2020 September 30, 2019

Credit Score LTV Credit Score LTV

One- to four-family - originated 770 62 % 768 62 %

One- to four-family - correspondent 765 64 765 65

One- to four-family - bulk purchased 768 60 762 61

Consumer - home equity 755 19 754 19

90+/FC — 2 — 94 54 — — 150

74,881 191,107 139,128 127,475 55,966 156,074 15,718 760,349

Troubled Debt Restructurings ("TDRs") - The following tables present the recorded investment prior to restructuring and immediately after restructuring in all loans restructured during the periods presented.

These tables do not reflect the recorded investment at the end of the periods indicated.

Any increase in the recorded investment at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.

For the Three Months Ended For the Nine Months Ended

June 30, 2020 June 30, 2020

Number Pre- Post- Number Pre- Post-

of Restructured Restructured of Restructured Restructured

Contracts Outstanding Outstanding Contracts Outstanding Outstanding

Current 467 3,653 2,540 2,064 908 3,484 83,678 96,794

30-89 — — — — — 41 439 480

90+/FC — — — — — 13 445 458

Current 1,165 3,292 2,170 1,388 691 277 278 9,261

30-89 1 17 12 4 — — — 34

90+/FC — 4 — 5 4 2 — 15

1,633 6,966 4,722 3,461 1,603 3,817 84,840 107,042

Total $ 408,903 $ 1,412,865 $ 661,971 $ 647,071 $ 659,161 $ 3,139,690 $ 100,558 $ 7,030,219

Delinquent and Nonaccrual Loans - The following tables present the amortized cost at December 31, 2020 and, prior to the adoption of CECL, the recorded investment, which is identical to amortized cost, at September 30, 2020, by class, of loans 30 to 89 days delinquent, loans 90 or more days delinquent or in foreclosure, total delinquent loans, current loans, and total.

At December 31, 2020 and September 30, 2020, all loans 90 or more days delinquent were on nonaccrual status.

December 31, 2020

90 or More Days Total Total

30 to 89 Days Delinquent or Delinquent Current Amortized

Delinquent in Foreclosure Loans Loans Cost

(Dollars in thousands)

8 unchanged sentences

$ 13,901 $ 12,841 $ 26,742 $ 7,003,477 $ 7,030,219

For the Three Months Ended For the Nine Months Ended

June 30, 2019 June 30, 2019

Number Pre- Post- Number Pre- Post-

of Restructured Restructured of Restructured Restructured

Contracts Outstanding Outstanding Contracts Outstanding Outstanding

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)

8 unchanged sentences

$ 9,172 $ 11,385 $ 20,557 $ 7,213,821 $ 7,234,378

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

For the Three Months Ended For the Nine Months Ended

June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019

Number of Recorded Number of Recorded Number of Recorded Number of Recorded

Contracts Investment Contracts Investment Contracts Investment Contracts Investment

The amortized cost of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of December 31, 2020 and September 30, 2020 was $ 912 thousand and $ 1.5 million, respectively, 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 $ 129 thousand at December 31, 2020 and $ 183 thousand at September 30, 2020.

The following table presents the amortized cost at December 31, 2020 and, prior to the adoption of CECL, the recorded investment at September 30, 2020, by class, of loans classified as nonaccrual.

Additionally, the amortized cost of nonaccrual loans that had no related ACL is presented as of December 31, 2020, all of which were individually evaluated for loss and any identified losses have been charged off.

December 31, 2020 September 30, 2020

Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans

(Dollars in thousands)

6 unchanged sentences

Home equity 467 9 305

Other — — — — — — — —

$ 14,220 $ 4,307 $ 12,541

In late March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the Coronavirus Disease 2019 ("COVID-19") pandemic.

The COVID-19 loan modification programs are consistent with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act or interagency guidance from the federal banking agencies on such programs, and the Company has followed such guidance when determining if a borrower's modification is subject to TDR classification.

If it is determined that the modification is not short-term, not related to financial hardship resulting from COVID-19, or the customer does not meet the criteria under the 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.

Impaired loans - The following information pertains to impaired loans, by class, as of the dates presented.

June 30, 2020 September 30, 2019

Unpaid Unpaid

Recorded Principal Related Recorded Principal Related

Investment Balance ACL Investment Balance ACL

Troubled Debt Restructurings - The following tables present the amortized cost for the current period and, prior to the adoption of CECL, the recorded investment for the prior period, prior to restructuring and immediately after restructuring in all loans restructured during the periods presented.

These tables do not reflect the amortized cost at the end of the periods indicated.

Any increase in the amortized cost at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances.

For the Three Months Ended

December 31, 2020

Number Pre- Post-

of Restructured Restructured

Contracts Outstanding Outstanding

(Dollars in thousands)

With no related allowance recorded

One- to four-family:

5 unchanged sentences

Home equity — — —

Other — 35 — — 29 —

4 $ 647 $ 645

With an allowance recorded

For the Three Months Ended

December 31, 2019

Number Pre- Post-

of Restructured Restructured

Contracts Outstanding Outstanding

(Dollars in thousands)

One- to four-family:

5 unchanged sentences

Home equity — — —

Other — — — — — —

3 $ 178 $ 236

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

For the Three Months Ended

December 31, 2020 December 31, 2019

Number of Amortized Number of Recorded

Contracts Cost Contracts Investment

(Dollars in thousands)

One- to four-family:

7 unchanged sentences

— $ — 2 $ 172

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

For the Three Months Ended For the Nine Months Ended

June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019

Average Interest Average Interest Average Interest Average Interest

Recorded Income Recorded Income Recorded Income Recorded Income

Investment Recognized Investment Recognized Investment Recognized Investment Recognized

Impaired Loans - The following information pertains to impaired loans, by class, as of the date and for the period presented (prior to the adoption of CECL).

Prior to the adoption of CECL, a loan was considered impaired when, based on current information and events, it was probable that the Bank would be unable to collect all amounts due, including principal and interest, according to the original contractual terms of the loan agreement.

For the Three Months Ended

September 30, 2020 December 31, 2019

Unpaid Average Interest

Recorded Principal Related Recorded Income

Investment Balance ACL Investment Recognized

(Dollars in thousands)

28 unchanged sentences

$ 21,543 $ 23,129 $ 323 $ 22,337 $ 249

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.

Due to the deterioration of economic conditions as a result of the COVID-19 pandemic, management increased some of the historical loss factors and qualitative factors in the formula analysis model to account for the increase in the estimated inherent losses in the loan portfolio at March 31, 2020.

The significant deterioration of economic conditions at March 31, 2020 due to the COVID-19 pandemic carried into the June 30, 2020 quarter.

The increase in the historical loss factors and qualitative factors due to the deterioration of economic conditions accounts for the majority of the 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 Three Months Ended June 30, 2020

One- to Four-Family

Correspondent Bulk

Originated Purchased Purchased Total Commercial Consumer Total

(Dollars in thousands)

Beginning balance $ 6,467 $ 3,355 $ 557 $ 10,379 $ 20,328 $ 489 $ 31,196

Charge-offs — — — — — ( 5 ) ( 5 )

Recoveries — — — — 17 7 24

Provision for credit losses ( 121 ) ( 166 ) ( 51 ) ( 338 ) 359 ( 21 ) —

Ending balance $ 6,346 $ 3,189 $ 506 $ 10,041 $ 20,704 $ 470 $ 31,215

For the Nine Months Ended June 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 ) ( 15 ) ( 428 )

Recoveries 3 — — 3 98 16 117

Provision for credit losses 4,407 1,986 ( 181 ) 6,212 15,784 304 22,300

Ending balance $ 6,346 $ 3,189 $ 506 $ 10,041 $ 20,704 $ 470 $ 31,215

For the Three Months Ended June 30, 2019

Allowance for Credit Losses - The following is a summary of ACL activity, by loan portfolio segment, for the periods presented.

Activity during the three months ended December 31, 2019 occurred prior to the adoption of CECL.

For the Three Months Ended December 31, 2020

One- to Four-Family

3 unchanged sentences

Beginning balance $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527

Adoption of CECL ( 4,452 ) ( 367 ) 436 ( 4,383 ) ( 193 ) ( 185 ) ( 4,761 )

Balance at October 1, 2020 1,633 2,324 903 4,860 21,607 299 26,766

Charge-offs ( 14 ) — — ( 14 ) ( 515 ) ( 3 ) ( 532 )

2 unchanged sentences

Ending balance $ 1,538 $ 1,758 $ 852 $ 4,148 $ 21,707 $ 270 $ 26,125

For the Nine Months Ended June 30, 2019

For the Three Months Ended December 31, 2019

One- to Four-Family

7 unchanged sentences

Ending balance $ 2,047 $ 1,200 $ 612 $ 3,859 $ 5,418 $ 158 $ 9,435

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.

June 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 $ 3,964,815 $ 2,295,684 $ 214,064 $ 6,474,563 $ 804,213 $ 116,803 $ 7,395,579

Individually evaluated for impairment 13,306 1,951 4,573 19,830 3,607 289 23,726

$ 3,978,121 $ 2,297,635 $ 218,637 $ 6,494,393 $ 807,820 $ 117,092 $ 7,419,305

ACL for loans:

Collectively evaluated for impairment $ 6,346 $ 3,189 $ 506 $ 10,041 $ 20,464 $ 470 $ 30,975

Individually evaluated for impairment — — — — 240 — 240

$ 6,346 $ 3,189 $ 506 $ 10,041 $ 20,704 $ 470 $ 31,215

The following is a summary of the loan portfolio and related ACL balances by loan portfolio segment disaggregated by the Company's impairment method as of September 30, 2020 (prior to the adoption of CECL).

September 30, 2020

11 unchanged sentences

$ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527

The key assumptions in the Company's ACL model include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions.

Management also considered certain qualitative factors when evaluating the adequacy of the ACL at December 31, 2020.

The key assumptions utilized in estimating the Company's ACL at December 31, 2020 are discussed below.

• Economic Forecast - Management considered several economic forecasts provided by a third party and selected the economic forecast believed to be the most appropriate considering the facts and circumstances at December 31, 2020.

The forecasted economic indices applied to the model at December 31, 2020 were the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the U.S.

gross domestic product.

The economic index most impactful to all loan pools within the model at December 31, 2020 was the national unemployment rate.

The forecast national unemployment rate in the economic scenario selected by management at December 31, 2020 had the national unemployment rate peaking at 8.0 % at June 30, 2021 and then a gradual decline to 7.5 % at December 31, 2021 which was the end of our four quarter forecast time period.

• Forecast and reversion to mean time period - The forecasted time period for all of the economic indices was four quarters at December 31, 2020.

The reversion to mean time period was eight quarters for the national unemployment rate and four quarters for all other economic indices at December 31, 2020.

• Prepayment and curtailment assumptions - The assumptions used at December 31, 2020 were generally based on actual prepayment and curtailment speeds for each respective loan pool in the model.

• Qualitative factors - The qualitative considerations by management at December 31, 2020 included the COVID-19 loan modification programs considering the payment performance of the loans that had exited their deferral periods, the increase in special mention commercial loans during the current quarter and the special mention commercial loans still in their COVID-19 loan modification time period, and the economic uncertainties related to the political party changes in U.S.

government offices, the effectiveness of the latest federal stimulus package, potential additional economic stimulus from the federal government, and the impact the increasing COVID-19 cases and limited vaccine distribution may have on the economy.

Management determined a qualitative amount was not necessary at December 31, 2020 for the loans in the COVID-19 loan modification program due to the significant decrease in the dollar amount of the loans in the program and the fact that the majority of the loans that have exited the program are current on their payments.

See discussion below regarding the qualitative amount at December 31, 2020 for special mention commercial loans and the economic uncertainty.

At December 31, 2020, the ACL was composed of $ 15.1 million calculated by the model, $ 6.6 million related to the economic uncertainty qualitative factor, and $ 4.4 million related to the special mention qualitative factor, resulting in a total ACL of $ 26.1 million.

The decrease in ACL during the current quarter was due to net charge-offs of $ 464 thousand and a negative provision for credit losses of $ 177 thousand.

The negative provision for credit losses was due primarily to a reduction in the correspondent one-to four-family loan portfolio during the current quarter, partially offset by an increase in the commercial loan ACL due to the related qualitative factor.

The commercial loan portfolio balance decreased during the current quarter, but due to the related qualitative factors, any reduction in the ACL due to a reduction in the loan balance was offset.

The economic forecast selected at December 31, 2020 improved from October 1, 2020 when CECL was adopted by the Company, but the improvement in the forecast was largely offset by the qualitative factors discussed above.

Reserve for Off-Balance Sheet Credit Exposures - The following is a summary of the changes in reserve for off-balance sheet credit exposures during the three months ended December 31, 2020 (dollars in thousands).

Beginning balance $ —

Adoption of CECL 7,788

Balance at October 1, 2020 7,788

Provision for credit losses ( 1,355 )

Ending balance $ 6,433

At December 31, 2020, the Company also applied a qualitative factor for economic uncertainty related to the calculation of the reserve for off-balance sheet credit exposures, but the impact of this qualitative factor was smaller compared to the economic uncertainty factor applied in the calculation of ACL, in consideration of the fact the commitments are being underwritten during a challenging economic environment and are still meeting/exceeding the Bank's conservative underwriting requirements.

The $ 1.4 million reduction in the reserve compared to October 1, 2020, which was recognized as a negative provision for credit losses, was due to an improvement in the economic forecast during the current quarter, partially offset by an increase in the balance of off-balance sheet credit exposures.

BORROWED FUNDS

FHLB Borrowings and Interest Rate Swaps - At June 30, 2020 and September 30, 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 June 30, 2020 and September 30, 2019, the interest rate swap agreements had an average remaining term to maturity of 3.8 years and 4.5 years, respectively.

FHLB Borrowings and Interest Rate Swaps - At December 31, 2020 and September 30, 2020, 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 December 31, 2020 and September 30, 2020, the interest rate swap agreements had an average remaining term to maturity of 3.2 years and 3.5 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 June 30, 2020 and September 30, 2019, the interest rate swaps were in a loss position with a total fair value of $ 57.1 million and $ 33.1 million, respectively, which was reported in accounts payable and accrued expenses on the consolidated balance sheet.

During the three and nine months ended June 30, 2020, $ 1.7 million and $ 3.4 million, respectively, was reclassified from AOCI as an increase to interest expense.

During the three and nine months ended June 30, 2019, $ 55 thousand and $ 106 thousand, respectively, was reclassified from AOCI as an increase to interest expense.

At June 30, 2020, the Company estimated that $ 15.4 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.

At December 31, 2020 and September 30, 2020, the interest rate swaps were in a loss position with a total fair value of $ 47.9 million and $ 53.1 million, respectively, which was reported in accounts payable and accrued expenses on the consolidated balance sheet.

During the three months ended December 31, 2020, $ 3.0 million was reclassified from AOCI as an increase to interest expense.

During the three months ended December 31, 2019, $ 709 thousand was reclassified from AOCI as an increase to interest expense.

At December 31, 2020, the Company estimated that $ 15.0 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 $ 58.0 million at June 30, 2020 and $ 33.3 million at September 30, 2019.

During the current nine month period, 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.

The Bank posted cash collateral of $ 48.8 million at December 31, 2020 and $ 54.6 million at September 30, 2020.

During the current quarter, the Bank prepaid a fixed-rate FHLB advance totaling $ 100.0 million with a contractual interest rate of 2.21 % and a remaining term of 1.2 years, and replaced this advance with a $ 100.0 million fixed-rate FHLB advance with a contractual interest rate of 0.62 % and a term of 5.0 years.

The Bank paid a penalty of $ 2.3 million to FHLB as a result of prepaying the FHLB advance.

The effective interest rate of the new advance is 1.09 %.

The prepayment penalty is being recognized in interest expense over the life of the new FHLB advance

FAIR VALUE OF FINANCIAL INSTRUMENTS

19 unchanged sentences

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 nine months ended June 30, 2020 or during fiscal year 2019.

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 three months ended December 31, 2020 or during fiscal year 2020.

The Company's major security types, based on the nature and risks of the securities, are:

9 unchanged sentences

On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted cash flow analysis with independent observable market-based inputs from a third party.

No adjustments were made to the estimated fair values during the nine months ended June 30, 2020 or during fiscal year 2019.

No adjustments were made to the estimated fair values during the three months ended December 31, 2020 or during fiscal year 2020.

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 June 30, 2020 or September 30, 2019.

June 30, 2020

The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2020 or September 30, 2020.

December 31, 2020

Quoted Prices Significant Significant

21 unchanged sentences

Interest rate swaps $ 53,149 $ — $ 53,149 $ —

The Company's significant Level 3 measurements that are measured on a non-recurring basis pertain to the Company's loans receivable and OREO.

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 the nine months ended June 30, 2020 and 2019 that were still held in the portfolio as of June 30, 2020 and 2019 was $ 6.0 million and $ 4.6 million, respectively.

The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that, if changed, could result in higher or lower fair value measurements of these assets as of the reporting date .

Loans Receivable - With the adoption of CECL, collateral dependent assets are assets evaluated as part of the ACL on an individual basis.

Those assets for which there is an associated ACL are considered financial assets measured at fair value on a non-recurring basis.

Prior to the adoption of CECL, loans identified as impaired were considered financial assets measured at fair value on a non-recurring basis.

The valuation method for collateral dependent assets and impaired loans is identical.

The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during the three months ended December 31, 2020 and 2019 that were still held in the portfolio as of December 31, 2020 and 2019 was $ 5.9 million and $ 3.9 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 %.

3 unchanged sentences

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 nine months ended June 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 17 %.

There were no impaired commercial loans individually evaluated during the nine months ended June 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.

The primary significant unobservable inputs for commercial loans individually evaluated during the three months ended December 31, 2020 and December 31, 2019 were downward adjustments to the book value of the collateral for lack of marketability.

During the three months ended December 31, 2020, the adjustments ranged from 10 % to 50 %, with a weighted average of 26 %.

During the three months ended December 31, 2019, the adjustments ranged from 10 % to 50 %, with a weighted average of 18 %.

The basis utilized in calculating the weighted averages for these adjustments was the original unadjusted value of each collateral item.

Fair values of collateral dependent loans/loans individually evaluated for loss 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.

3 unchanged sentences

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 the nine months ended June 30, 2020 and 2019 that was still held in the portfolio as of June 30, 2020 and 2019 was $ 183 thousand and $ 333 thousand, respectively.

The carrying value of the properties equaled the fair value of the properties at June 30, 2020 and 2019.

The fair value of OREO measured on a non-recurring basis during the three months ended December 31, 2020 and 2019 that was still held in the portfolio as of December 31, 2020 and 2019 was $ 30 thousand and $ 193 thousand, respectively.

The carrying value of the properties equaled the fair value of the properties at December 31, 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.

2 unchanged sentences

The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows:

June 30, 2020

December 31, 2020

Carrying Estimated Fair Value

21 unchanged sentences

The following tables present the changes in the components of AOCI, net of tax, for the periods indicated.

For the Three Months Ended June 30, 2020

Unrealized Unrealized

Gains (Losses) Gains (Losses)

on AFS on Cash Flow Total

Securities Hedges AOCI

(Dollars in thousands)

Beginning balance $ 20,076 $ ( 42,054 ) $ ( 21,978 )

Other comprehensive income (loss), before reclassifications 5,533 ( 2,856 ) 2,677

Amount reclassified from AOCI — 1,710 1,710

Other comprehensive income (loss) 5,533 ( 1,146 ) 4,387

Ending balance $ 25,609 $ ( 43,200 ) $ ( 17,591 )

For the Nine Months Ended June 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 15,459 ( 21,553 ) ( 6,094 )

Amount reclassified from AOCI — 3,402 3,402

Other comprehensive income (loss) 15,459 ( 18,151 ) ( 2,692 )

Ending balance $ 25,609 $ ( 43,200 ) $ ( 17,591 )

For the Three Months Ended June 30, 2019

For the Three Months Ended December 31, 2020

Unrealized Unrealized

5 unchanged sentences

Other comprehensive income (loss), before reclassifications 1,140 1,024 2,164

Amount reclassified from AOCI — 55 55

Amount reclassified from AOCI, net of taxes of $( 959 )

— 2,970 2,970

Other comprehensive income (loss) 1,140 3,994 5,134

Ending balance $ 24,868 $ ( 36,239 ) $ ( 11,371 )

For the Nine Months Ended June 30, 2019

For the Three Months Ended December 31, 2019

Unrealized Unrealized

5 unchanged sentences

Other comprehensive income (loss), before reclassifications ( 452 ) 4,715 4,263

Amount reclassified from AOCI — 106 106

Amount reclassified from AOCI, net of taxes of $( 228 )

Other comprehensive income (loss) ( 452 ) 5,424 4,972

Ending balance $ 9,698 $ ( 19,625 ) $ ( 9,927 )

REVENUE RECOGNITION

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 the nine months ended June 30, 2020 and 2019, revenue from contracts with customers totaled $ 10.9 million and $ 12.4 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, interchange transaction fee income is reported net of interchange network charges.

Interchange network charges totaled $ 2.4 million and $ 2.5 million for the nine months ended June 30, 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.

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.

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 of June 30, 2020, a right-of-use asset of $ 15.5 million was included in other assets and a lease liability of $ 15.5 million was included in accounts payable and accrued expenses on the consolidated balance sheets.

As of June 30, 2020, for the Company's operating leases, the weighted average remaining lease term was 22.0 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 the periods presented.

For the Three Months Ended For the Nine Months Ended

June 30, 2020 June 30, 2020

(Dollars in thousands)

Operating lease expense $ 373 $ 1,138

Variable lease expense 50 158

Short-term lease expense 1 17

Cash paid for amounts included in the measurement of lease liabilities 345 1,028

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 June 30, 2020:

Remainder of fiscal year 2020 $ 231

Fiscal year 2021 1,363

Fiscal year 2022 1,329

Fiscal year 2023 1,236

Fiscal year 2024 1,027

Fiscal year 2025 858

Thereafter 16,135

Total future minimum lease payments 22,179

Amounts representing interest ( 6,668 )

Present value of net future minimum lease payments $ 15,511

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:

Thereafter 1,115

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

What changed 10-Q

Item 1. Financial Statements