Capitol Federal Financial, Inc. 10-Q

Item 1. Financial Statements CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) December 31, September 30, 2020 2020 ASSETS: 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 (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 ) 7,004,094 7,202,851 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 84,693 93,862 Premises and equipment, net 101,238 101,875 Other assets 335,041 342,532 TOTAL ASSETS $ 9,606,964 $ 9,487,218 LIABILITIES: Deposits $ 6,410,842 $ 6,191,408 Borrowings 1,734,275 1,789,313 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 Accounts payable and accrued expenses 139,585 146,942 Total liabilities 8,330,416 8,202,359 STOCKHOLDERS' EQUITY: Preferred stock, $ .01 par value; 100,000,000 shares authorized, no shares issued or outstanding — — Common stock, $ .01 par value; 1,400,000,000 shares authorized, 138,792,496 and 138,956,296 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively 1,388 1,389 Additional paid-in capital 1,188,636 1,189,853 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 32,627 ) ( 33,040 ) Retained earnings 130,522 143,162 Accumulated other comprehensive (loss) income ("AOCI"), net of tax ( 11,371 ) ( 16,505 ) Total stockholders' equity 1,276,548 1,284,859 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,606,964 $ 9,487,218 See accompanying notes to consolidated financial statements. 3 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) For the Three Months Ended December 31, 2020 2019 INTEREST AND DIVIDEND INCOME: Loans receivable $ 60,694 $ 69,914 Mortgage-backed securities ("MBS") 5,710 6,102 FHLB stock 1,069 1,826 Investment securities 683 1,507 Cash and cash equivalents 51 687 Total interest and dividend income 68,207 80,036 INTEREST EXPENSE: Deposits 14,067 17,962 Borrowings 10,327 13,377 Total interest expense 24,394 31,339 NET INTEREST INCOME 43,813 48,697 PROVISION FOR CREDIT LOSSES ( 1,532 ) 225 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 45,345 48,472 NON-INTEREST INCOME: Deposit service fees 2,947 3,062 Insurance commissions 638 691 Other non-interest income 1,485 1,751 Total non-interest income 5,070 5,504 NON-INTEREST EXPENSE: Salaries and employee benefits 14,138 13,471 Information technology and related expense 4,233 4,141 Occupancy, net 3,379 3,207 Regulatory and outside services 1,585 1,343 Advertising and promotional 838 1,410 Deposit and loan transaction costs 766 711 Federal insurance premium 621 — Office supplies and related expense 424 519 Other non-interest expense 1,083 1,698 Total non-interest expense 27,067 26,500 INCOME BEFORE INCOME TAX EXPENSE 23,348 27,476 INCOME TAX EXPENSE 4,450 4,965 NET INCOME $ 18,898 $ 22,511 Basic earnings per share ("EPS") $ 0.14 $ 0.16 Diluted EPS $ 0.14 $ 0.16 Basic weighted average common shares 135,397,691 137,898,010 Diluted weighted average common shares 135,398,884 137,976,122 See accompanying notes to consolidated financial statements. 4 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) For the Three Months Ended December 31, 2020 2019 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 $( 409 ) and $ 145 1,140 ( 452 ) Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $( 1,220 ) and $( 1,741 ) 3,994 5,424 Comprehensive income $ 24,032 $ 27,483 See accompanying notes to consolidated financial statements. 5 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except per share amounts) For the Three Months Ended December 31, 2020 Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2020 $ 1,389 $ 1,189,853 $ ( 33,040 ) $ 143,162 $ ( 16,505 ) $ 1,284,859 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 Restricted stock activity, net ( 8 ) ( 8 ) Stock-based compensation 118 118 Repurchase of common stock ( 1 ) ( 1,407 ) ( 122 ) ( 1,530 ) Cash dividends to stockholders ($ 0.215 per share) ( 29,128 ) ( 29,128 ) Balance at December 31, 2020 $ 1,388 $ 1,188,636 $ ( 32,627 ) $ 130,522 $ ( 11,371 ) $ 1,276,548 For the Three Months Ended December 31, 2019 Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2019 $ 1,414 $ 1,210,226 $ ( 34,692 ) $ 174,277 $ ( 14,899 ) $ 1,336,326 Cumulative effect of adopting ASU 2016-02, net of tax 88 88 Net income 22,511 22,511 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 Stock options exercised 1 612 613 Cash dividends to stockholders ($ 0.425 per share) ( 58,663 ) ( 58,663 ) Balance at December 31, 2019 $ 1,415 $ 1,211,172 $ ( 34,279 ) $ 138,213 $ ( 9,927 ) $ 1,306,594 See accompanying notes to consolidated financial statements. 6 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Three Months Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 18,898 $ 22,511 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 1,069 ) ( 1,826 ) 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 Depreciation and amortization of premises and equipment 2,304 2,286 Amortization of intangible assets 422 500 Amortization of deferred amounts related to FHLB advances, net 254 2 Common stock committed to be released for allocation - ESOP 493 582 Stock-based compensation 118 166 Changes in: Other assets, net 1,942 1,237 Income taxes payable/receivable, net 2,372 3,808 Deferred income tax liabilities, net 248 ( 597 ) Accounts payable and accrued expenses ( 6,266 ) ( 2,312 ) Net cash provided by operating activities 19,203 26,810 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities ( 504,780 ) ( 149,359 ) Proceeds from calls, maturities and principal reductions of AFS securities 152,396 123,810 Proceeds from the redemption of FHLB stock 10,238 421 Net change in loans receivable 203,698 ( 12,844 ) Purchase of premises and equipment ( 2,058 ) ( 3,882 ) Proceeds from sale of other real estate owned ("OREO") 53 585 Proceeds from bank-owned life insurance ("BOLI") death benefit 443 490 Net cash used in investing activities ( 140,010 ) ( 40,779 ) (Continued) 7 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Three Months Ended December 31, 2020 2019 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 29,128 ) ( 58,663 ) Net change in deposits 219,434 3,984 Proceeds from borrowings 305,000 362,400 Repayments on borrowings ( 358,000 ) ( 412,400 ) Change in advance payments by borrowers for taxes and insurance ( 32,505 ) ( 38,402 ) 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 DECREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS ( 22,866 ) ( 156,437 ) CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS: Beginning of period 239,708 253,700 End of period $ 216,842 $ 97,263 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Operating lease right-of-use assets obtained $ — $ 15,658 Operating lease liabilities obtained $ — $ 15,543 See accompanying notes to consolidated financial statements. (Concluded) 8 Notes to Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal Financial, Inc.® (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the Securities and Exchange Commission ("SEC"). 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 $ 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. See additional discussion regarding the interest rate swaps in Note 5. Borrowed Funds. 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 9 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 . 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. 10 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 11 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. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. 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 12 earnings. 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, 2020 October 1, 2020 Balance Cumulative-Effect Adjustment Balance (Dollars in thousands) ACL One- to four-family: Originated $ 6,085 $ ( 4,452 ) $ 1,633 Correspondent purchased 2,691 ( 367 ) 2,324 Bulk purchased 467 436 903 Commercial: Commercial real estate 20,349 699 21,048 Commercial and industrial 1,451 ( 892 ) 559 Consumer: Home equity 370 ( 289 ) 81 Other 114 104 218 Total ACL 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: Disclosure Framework - Changes to the Disclosures Requirements for Fair Value Measurement . This ASU eliminates, modifies and adds certain disclosure requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. 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 licenses). 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. 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. 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. 13 2. EARNINGS PER SHARE Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. For the Three Months Ended December 31, 2020 2019 (Dollars in thousands, except per share amounts) Net income $ 18,898 $ 22,511 Income allocated to participating securities ( 13 ) ( 19 ) Net income available to common stockholders $ 18,885 $ 22,492 Average common shares outstanding 135,397,242 137,897,561 Average committed ESOP shares outstanding 449 449 Total basic average common shares outstanding 135,397,691 137,898,010 Effect of dilutive stock options 1,193 78,112 Total diluted average common shares outstanding 135,398,884 137,976,122 Net EPS: Basic $ 0.14 $ 0.16 Diluted $ 0.14 $ 0.16 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 431,212 435,750 14 3. SECURITIES The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by GSEs. December 31, 2020 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,427,216 $ 32,178 $ 94 $ 1,459,300 GSE debentures 444,964 747 — 445,711 Municipal bonds 8,792 63 — 8,855 $ 1,880,972 $ 32,988 $ 94 $ 1,913,866 September 30, 2020 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,149,922 $ 31,212 $ 331 $ 1,180,803 GSE debentures 369,967 414 41 370,340 Municipal bonds 9,716 91 — 9,807 $ 1,529,605 $ 31,717 $ 372 $ 1,560,950 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. December 31, 2020 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses (Dollars in thousands) MBS $ 40,462 $ 93 $ 110 $ 1 GSE debentures — — — — Municipal bonds — — — — $ 40,462 $ 93 $ 110 $ 1 September 30, 2020 Less Than 12 Months Equal to or Greater Than 12 Months Estimated Unrealized Estimated Unrealized Fair Value Losses Fair Value Losses (Dollars in thousands) MBS $ 207,071 $ 330 $ 118 $ 1 GSE debentures 74,959 41 — — Municipal bonds — — — — $ 282,030 $ 371 $ 118 $ 1 15 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 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. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without prepayment penalty. For this reason, MBS are not included in the maturity categories. Amortized Estimated Cost Fair Value (Dollars in thousands) One year or less $ 4,915 $ 4,937 One year through five years 448,841 449,629 453,756 454,566 MBS 1,427,216 1,459,300 $ 1,880,972 $ 1,913,866 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 December 31, 2020 2019 (Dollars in thousands) Taxable $ 645 $ 1,437 Non-taxable 38 70 $ 683 $ 1,507 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. December 31, 2020 September 30, 2020 (Dollars in thousands) Public unit deposits $ 304,768 $ 330,986 Federal Reserve Bank of Kansas City ("FRB of Kansas City") 207,401 259,851 Retail deposits 47,362 — $ 559,531 $ 590,837 16 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at the dates presented is summarized as follows: December 31, 2020 September 30, 2020 (Dollars in thousands) One- to four-family: Originated $ 3,946,073 $ 3,937,310 Correspondent purchased 1,974,086 2,101,082 Bulk purchased 199,673 208,427 Construction 32,871 34,593 Total 6,152,703 6,281,412 Commercial: Commercial real estate 609,936 626,588 Commercial and industrial 69,378 97,614 Construction 84,564 105,458 Total 763,878 829,660 Consumer: Home equity 97,717 103,838 Other 9,328 10,086 Total 107,045 113,924 Total loans receivable 7,023,626 7,224,996 Less: ACL 26,125 31,527 Discounts/unearned loan fees 28,825 29,190 Premiums/deferred costs ( 35,418 ) ( 38,572 ) $ 7,004,094 $ 7,202,851 Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary lending business. The Bank also originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri. One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau ("CFPB"). Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function. The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters. The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided. Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate or commercial construction loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. For commercial real estate and commercial construction participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. At the time of origination, LTV ratios on commercial 17 real estate loans generally do not exceed 85 % of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 . For commercial construction loans, LTV ratios generally do not exceed 80 % of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 , but it applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. Appraisals on properties securing these loans are performed by independent state certified fee appraisers. The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. With the exception of Paycheck Protection Program ("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. As a result of these additional complexities, variables and risks, these loans require more thorough underwriting and servicing than other types of loans. Consumer loans - The Bank offers a variety of secured consumer loans, including home equity loans and lines of credit, home improvement loans, vehicle loans, and loans secured by deposits. The Bank also originates a very limited amount of unsecured loans. The majority of the consumer loan portfolio is comprised of home equity lines of credit for which the Bank also has the first mortgage or the home equity line of credit is in the first lien position. The underwriting standards for consumer loans include a determination of an applicant's payment history on other debts and an assessment of an applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of an applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security in relation to the proposed loan amount. Credit Quality Indicators - Based on the Bank's lending emphasis and underwriting standards, management has segmented the loan portfolio into three segments: (1) one- to four-family; (2) consumer; and (3) commercial. 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: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, consumer - other, commercial - commercial real estate, and commercial - commercial and industrial. One- to four-family construction loans are included in either the originated class or correspondent purchased class, and commercial construction loans are included in the commercial real estate class. 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. 18 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 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: 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 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 Consumer: Home equity 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 Other 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 19 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 Special Mention Substandard (Dollars in thousands) One- to four-family: Originated $ 9,249 $ 15,729 Correspondent purchased 2,076 4,512 Bulk purchased — 5,319 Commercial: Commercial real estate 50,957 3,541 Commercial and industrial 1,040 1,368 Consumer: Home equity 331 581 Other — 8 $ 63,653 $ 31,058 20 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 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 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: 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 Current 4,856 34,835 9,448 4,341 4,288 1,031 9,823 68,622 30-89 — — 70 1 — — — 71 90+/FC — 2 — 94 54 — — 150 74,881 191,107 139,128 127,475 55,966 156,074 15,718 760,349 Consumer: Home equity 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 Other 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 21 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) One- to four-family: Originated $ 5,823 $ 4,355 $ 10,178 $ 3,954,096 $ 3,964,274 Correspondent purchased 4,757 3,419 8,176 1,989,822 1,997,998 Bulk purchased 1,768 3,770 5,538 195,018 200,556 Commercial: Commercial real estate 968 674 1,642 689,864 691,506 Commercial and industrial 71 150 221 68,622 68,843 Consumer: Home equity 480 458 938 96,794 97,732 Other 34 15 49 9,261 9,310 $ 13,901 $ 12,841 $ 26,742 $ 7,003,477 $ 7,030,219 September 30, 2020 90 or More Days Total Total 30 to 89 Days Delinquent or Delinquent Current Recorded Delinquent in Foreclosure Loans Loans Investment (Dollars in thousands) One- to four-family: Originated $ 3,001 $ 4,347 $ 7,348 $ 3,950,387 $ 3,957,735 Correspondent purchased 3,170 2,433 5,603 2,122,085 2,127,688 Bulk purchased 2,558 2,938 5,496 203,844 209,340 Commercial: Commercial real estate 40 1,206 1,246 728,191 729,437 Commercial and industrial 5 157 162 96,124 96,286 Consumer: Home equity 323 296 619 103,210 103,829 Other 75 8 83 9,980 10,063 $ 9,172 $ 11,385 $ 20,557 $ 7,213,821 $ 7,234,378 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. 22 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) One- to four-family: Originated $ 5,323 $ 2,361 $ 5,037 Correspondent purchased 3,418 308 2,433 Bulk purchased 3,771 1,463 2,938 Commercial: Commercial real estate 1,076 72 1,663 Commercial and industrial 150 94 157 Consumer: Home equity 467 9 305 Other 15 — 8 $ 14,220 $ 4,307 $ 12,541 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) One- to four-family: Originated 4 $ 647 $ 645 Correspondent purchased — — — Bulk purchased — — — Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: Home equity — — — Other — — — 4 $ 647 $ 645 23 For the Three Months Ended December 31, 2019 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 2 $ 103 $ 102 Correspondent purchased — — — Bulk purchased 1 75 134 Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: 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: Originated — $ — 1 $ 38 Correspondent purchased — — — — Bulk purchased — — 1 134 Commercial: Commercial real estate — — — — Commercial and industrial — — — — Consumer: Home equity — — — — Other — — — — — $ — 2 $ 172 24 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) With no related allowance recorded One- to four-family: Originated $ 12,385 $ 12,813 $ — $ 14,621 $ 161 Correspondent purchased 1,955 2,058 — 1,760 18 Bulk purchased 3,843 4,302 — 4,978 52 Commercial: Commercial real estate 1,052 1,379 — — — Commercial and industrial 99 244 — 33 — Consumer: Home equity 280 360 — 337 6 Other — 45 — — — 19,614 21,201 — 21,729 237 With an allowance recorded One- to four-family: Originated — — — — — Correspondent purchased — — — — — Bulk purchased — — — — — Commercial: Commercial real estate 660 660 83 — — Commercial and industrial 1,269 1,268 240 608 12 Consumer: Home equity — — — — — Other — — — — — 1,929 1,928 323 608 12 Total One- to four-family: Originated 12,385 12,813 — 14,621 161 Correspondent purchased 1,955 2,058 — 1,760 18 Bulk purchased 3,843 4,302 — 4,978 52 Commercial: Commercial real estate 1,712 2,039 83 — — Commercial and industrial 1,368 1,512 240 641 12 Consumer: Home equity 280 360 — 337 6 Other — 45 — — — $ 21,543 $ 23,129 $ 323 $ 22,337 $ 249 25 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 Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) 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 ) Recoveries 34 — — 34 12 22 68 Provision for credit losses ( 115 ) ( 566 ) ( 51 ) ( 732 ) 603 ( 48 ) ( 177 ) Ending balance $ 1,538 $ 1,758 $ 852 $ 4,148 $ 21,707 $ 270 $ 26,125 For the Three Months Ended December 31, 2019 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 ( 18 ) — — ( 18 ) ( 24 ) ( 6 ) ( 48 ) Recoveries — — — — 27 5 32 Provision for credit losses 65 ( 3 ) ( 75 ) ( 13 ) 244 ( 6 ) 225 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 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 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Recorded investment in loans: Collectively evaluated for impairment $ 3,945,350 $ 2,125,733 $ 205,497 $ 6,276,580 $ 822,643 $ 113,612 $ 7,212,835 Individually evaluated for impairment 12,385 1,955 3,843 18,183 3,080 280 21,543 $ 3,957,735 $ 2,127,688 $ 209,340 $ 6,294,763 $ 825,723 $ 113,892 $ 7,234,378 ACL for loans: Collectively evaluated for impairment $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,477 $ 484 $ 31,204 Individually evaluated for impairment — — — — 323 — 323 $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527 26 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. 27 5. BORROWED FUNDS 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 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 $ 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 28 6. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value Measurements - The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825. The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments. The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are: • Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. • Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument. The Company bases its fair values on the price that would be received from the sale of a financial instrument in an orderly transaction between market participants at the measurement date under current market conditions. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring basis. AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third party pricing service when determining the fair value of its securities during the 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: • GSE Debentures - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for similar securities. (Level 2) • MBS - Estimated fair values are based on a discounted cash flow method. Cash flows are determined based on prepayment projections of the underlying mortgages and are discounted using current market yields for benchmark securities. (Level 2) • Municipal Bonds - Estimated fair values are based on a discounted cash flow method. Cash flows are determined by taking any embedded options into consideration and are discounted using current market yields for securities with similar credit profiles. (Level 2) Interest Rate Swaps - The Company's interest rate swaps are designated as cash flow hedges and are reported at fair value in other assets on the consolidated balance sheet if in a gain position, and in accounts payable and accrued expenses if in a loss position, with any unrealized gains and losses, net of taxes, reported as AOCI in stockholders' equity. See "Note 5. Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted cash flow analysis with independent observable market-based inputs from a third party. No adjustments were made to the estimated fair values during the three months ended December 31, 2020 or during fiscal year 2020. (Level 2) 29 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 December 31, 2020 or September 30, 2020. December 31, 2020 Quoted Prices Significant Significant in Active Markets Other Observable Unobservable Carrying for Identical Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) (Dollars in thousands) Assets: AFS Securities: MBS $ 1,459,300 $ — $ 1,459,300 $ — GSE debentures 445,711 — 445,711 — Municipal bonds 8,855 — 8,855 — $ 1,913,866 $ — $ 1,913,866 $ — Liabilities: Interest rate swaps $ 47,935 $ — $ 47,935 $ — September 30, 2020 Quoted Prices Significant Significant in Active Markets Other Observable Unobservable Carrying for Identical Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) (Dollars in thousands) Assets: AFS Securities: MBS $ 1,180,803 $ — $ 1,180,803 $ — GSE debentures 370,340 — 370,340 — Municipal bonds 9,807 — 9,807 — $ 1,560,950 $ — $ 1,560,950 $ — Liabilities: Interest rate swaps $ 53,149 $ — $ 53,149 $ — 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. 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. 30 The one- to four-family loans included in this amount were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10 %. Fair values were estimated through current appraisals. Management does not adjust or apply a discount to the appraised value of one- to four-family loans, except for the estimated sales cost noted above, and the primary unobservable input for these loans was the appraisal. For commercial loans, if the most recent appraisal or book value of the collateral does not reflect current market conditions due to the passage of time and/or other factors, management will make adjustments to the existing appraised or book value based on knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable inputs for 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. The fair value for OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10 %. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO measured on a non-recurring basis during 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. 31 Fair Value Disclosures - The Company estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates. The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows: December 31, 2020 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 168,032 $ 168,032 $ 168,032 $ — $ — AFS securities 1,913,866 1,913,866 — 1,913,866 — Loans receivable 7,004,094 7,532,104 — — 7,532,104 FHLB stock 84,693 84,693 84,693 — — Liabilities: Deposits 6,410,842 6,475,389 3,392,685 3,082,704 — Borrowings 1,734,275 1,783,034 — 1,783,034 — Interest rate swaps 47,935 47,935 — 47,935 — September 30, 2020 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 185,148 $ 185,148 $ 185,148 $ — $ — AFS securities 1,560,950 1,560,950 — 1,560,950 — Loans receivable 7,202,851 7,663,000 — — 7,663,000 FHLB stock 93,862 93,862 93,862 — — Liabilities: Deposits 6,191,408 6,259,080 3,170,164 3,088,916 — Borrowings 1,789,313 1,840,605 — 1,840,605 — Interest rate swaps 53,149 53,149 — 53,149 — 32 7. ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables present the changes in the components of AOCI, net of tax, for the periods indicated. For the Three Months Ended December 31, 2020 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 23,728 $ ( 40,233 ) $ ( 16,505 ) Other comprehensive income (loss), before reclassifications 1,140 1,024 2,164 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 Three Months Ended December 31, 2019 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 ( 452 ) 4,715 4,263 Amount reclassified from AOCI, net of taxes of $( 228 ) — 709 709 Other comprehensive income (loss) ( 452 ) 5,424 4,972 Ending balance $ 9,698 $ ( 19,625 ) $ ( 9,927 ) 33