What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-08-09 compared with 2021-05-10 · 130 added, 112 removed, 926 unchanged (21% of the section changed)

4 unchanged sentences

(Dollars in thousands, except per share amounts)

March 31, September 30,

June 30, September 30,

Cash and cash equivalents (includes interest-earning deposits of $ 74,346 and $ 172,430 )

6 unchanged sentences

Premises and equipment, net 99,551 101,875

Income taxes receivable, net 891 —

Other assets 330,756 342,532

11 unchanged sentences

Common stock, $ .01 par value;

1,400,000,000 shares authorized, 138,809,796 and 138,956,296 shares issued and outstanding as of March 31, 2021 and September 30, 2020, respectively

1,400,000,000 shares authorized, 138,833,184 and 138,956,296 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively

Additional paid-in capital 1,189,466 1,189,853

9 unchanged sentences

(Dollars in thousands, except per share amounts)

For the Three Months Ended For the Six Months Ended

March 31, March 31,

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2021 2020 2021 2020

15 unchanged sentences

NON-INTEREST INCOME:

Gain on sale of Visa Class B shares 7,386 — 7,386 —

Deposit service fees 3,227 2,539 8,988 8,384

Gain on sale of Visa Class B shares — — 7,386 —

Insurance commissions 723 671 2,249 1,762

25 unchanged sentences

(Dollars in thousands)

For the Three Months Ended For the Six Months Ended

March 31, March 31,

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2021 2020 2021 2020

11 unchanged sentences

(Dollars in thousands, except per share amounts)

For the Six Months Ended March 31, 2021

For the Nine Months Ended June 30, 2021

Additional Unearned Total

20 unchanged sentences

Balance at March 31, 2021 1,388 1,188,926 ( 32,214 ) 139,448 ( 18,953 ) 1,278,595

For the Six Months Ended March 31, 2020

Net income 18,187 18,187

Other comprehensive income, net of tax 5,615 5,615

ESOP activity 118 413 531

Restricted stock activity, net ( 5 ) ( 5 )

Stock-based compensation 127 127

Stock options exercised 300 300

Cash dividends to stockholders ($ 0.485 per share)

( 65,726 ) ( 65,726 )

Balance at June 30, 2021 $ 1,388 $ 1,189,466 $ ( 31,801 ) $ 91,909 $ ( 13,338 ) $ 1,237,624

CAPITOL FEDERAL FINANCIAL, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(Dollars in thousands, except per share amounts)

For the Nine Months Ended June 30, 2020

Additional Unearned Total

20 unchanged sentences

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

See accompanying notes to consolidated financial statements.

3 unchanged sentences

(Dollars in thousands)

For the Six Months Ended

For the Nine Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

21 unchanged sentences

Proceeds from the redemption of FHLB stock 24,225 421

Purchase of FHLB stock ( 1,029 ) —

Net change in loans receivable 179,277 6,120

2 unchanged sentences

Proceeds from the sale of Visa Class B shares 7,386 —

Proceeds from sale of assets held-for-sale 977 —

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

Net cash used in investing activities ( 302,435 ) ( 105,811 )

Net cash (used in) provided by investing activities ( 274,392 ) 2,833

CAPITOL FEDERAL FINANCIAL, INC.

2 unchanged sentences

(Dollars in thousands)

For the Six Months Ended

For the Nine Months Ended

CASH FLOWS FROM FINANCING ACTIVITIES:

7 unchanged sentences

Stock options exercised 324 638

Net cash provided by (used in) financing activities 202,125 ( 11,601 )

NET DECREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS ( 68,256 ) ( 79,036 )

Net cash provided by financing activities 109,802 128,549

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS ( 113,213 ) 200,519

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 $ 139.5 million and $ 185.1 million at March 31, 2021 and September 30, 2020, respectively, and restricted cash and cash equivalents of $ 32.0 million and $ 54.6 million at March 31, 2021 and September 30, 2020, 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 $ 95.3 million and $ 185.1 million at June 30, 2021 and September 30, 2020, respectively, and restricted cash and cash equivalents of $ 31.2 million and $ 54.6 million at June 30, 2021 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.

11 unchanged sentences

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 March 31, 2021 and September 30, 2020, the portfolio did not contain any securities classified as HTM.

At June 30, 2021 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.

5 unchanged sentences

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 six months ended March 31, 2021 or during fiscal year 2020.

Neither the Company nor the Bank maintained a trading securities portfolio during the nine months ended June 30, 2021 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.

16 unchanged sentences

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

As of October 1, 2020 and March 31, 2021, 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.

As of October 1, 2020 and June 30, 2021, 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.

28 unchanged sentences

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.

The 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.

43 unchanged sentences

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.

Additionally, the ASU amended the credit loss measurements for AFS debt securities.

Credit losses related to AFS debt securities are now 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.

1 unchanged sentence

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

Financial results for reporting periods beginning on or 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.

retained 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.

19 unchanged sentences

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 $ 19.8 million and $ 3.1 million at March 31, 2021 for loans receivable and AFS securities, respectively, and was included in other assets on the consolidated balance sheet.

Accrued interest totaled $ 19.1 million and $ 3.1 million at June 30, 2021 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.

14 unchanged sentences

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.

According to the provisions of the ASU, entities that have not adopted ASU 2017-12 prior to the issuance of ASU 2019-04 must 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.

7 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 Six Months Ended

March 31, March 31,

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2021 2020 2021 2020

14 unchanged sentences

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

March 31, 2021

June 30, 2021

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.

March 31, 2021

June 30, 2021

Less Than 12 Months Equal to or Greater Than 12 Months

15 unchanged sentences

$ 282,030 $ 371 $ 118 $ 1

The unrealized losses at March 31, 2021 were a result of an increase in market yields from the time the securities were purchased.

The unrealized losses at June 30, 2021 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 March 31, 2021 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 March 31, 2021, by contractual maturity, are shown below.

Management did not record ACL on securities in an unrealized loss position at June 30, 2021 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 June 30, 2021, by contractual maturity, are shown below.

Actual principal repayments may differ from contractual maturities due to prepayment or early call privileges by the issuer.

6 unchanged sentences

One year through five years 470,680 467,344

Five years through ten years 25,000 24,885

500,101 496,677

2 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 Six Months Ended

March 31, March 31,

For the Three Months Ended For the Nine Months Ended

June 30, June 30,

2021 2020 2021 2020

4 unchanged sentences

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

March 31, 2021 September 30, 2020

June 30, 2021 September 30, 2020

(Dollars in thousands)

1 unchanged sentence

Federal Reserve Bank of Kansas City ("FRB of Kansas City") 71,061 259,851

Retail deposits 66,135 —

Commercial deposits 68,132 —

$ 442,468 $ 590,837

1 unchanged sentence

The proceeds and realized gain related to the sale of the Visa Class B shares were each $ 7.4 million.

All other dispositions of securities during the six months ended March 31, 2021 and March 31, 2020 were the result of principal repayments, calls, or maturities.

All other dispositions of securities during the nine months ended June 30, 2021 and June 30, 2020 were the result of principal repayments, calls, or maturities.

LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

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

March 31, 2021 September 30, 2020

June 30, 2021 September 30, 2020

(Dollars in thousands)

36 unchanged sentences

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.

With the exception of Paycheck Protection Program ("PPP") loans, which are unsecured, 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.

1 unchanged sentence

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 Bank also originates a very limited amount of unsecured consumer 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.

19 unchanged sentences

• 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 March 31, 2021, the amortized cost of loans by class of financing receivable, year of origination or most recent credit decision, and loan classification.

The following table sets forth, as of June 30, 2021, the amortized cost of loans by class of financing receivable, year of origination or most recent credit decision, 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 March 31, 2021, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

In the table below, certain loans are presented in the "Current Fiscal Year" column and are reported as special mention or substandard.

At June 30, 2021, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

In the table below, certain commercial loans are presented in the "Current Fiscal Year" column and are reported as special mention or substandard.

These loans were generally first originated in prior years but were renewed or modified in the current year.

March 31, 2021

June 30, 2021

Current Fiscal Fiscal Fiscal Fiscal Revolving

45 unchanged sentences

$ 63,653 $ 31,058

Delinquency Status - The following table sets forth, as of March 31, 2021, 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 or most recent credit decision.

Delinquency Status - The following table sets forth, as of June 30, 2021, 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 or most recent credit decision.

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

March 31, 2021

June 30, 2021

Current Fiscal Fiscal Fiscal Fiscal Revolving

32 unchanged sentences

Total $ 1,526,271 $ 1,261,423 $ 557,203 $ 521,231 $ 526,450 $ 2,566,960 $ 95,013 $ 7,054,551

Delinquent and Nonaccrual Loans - The following tables present the amortized cost at March 31, 2021 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 March 31, 2021 and September 30, 2020, all loans 90 or more days delinquent were on nonaccrual status.

March 31, 2021

Delinquent and Nonaccrual Loans - The following tables present the amortized cost at June 30, 2021 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 June 30, 2021 and September 30, 2020, all loans 90 or more days delinquent were on nonaccrual status.

June 30, 2021

90 or More Days Total Total

25 unchanged sentences

$ 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 March 31, 2021 and September 30, 2020 was $ 910 thousand and $ 1.5 million, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the tables 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 $ 105 thousand at March 31, 2021 and $ 183 thousand at September 30, 2020.

The following table presents the amortized cost at March 31, 2021 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 March 31, 2021, all of which were individually evaluated for loss and any identified losses have been charged off.

March 31, 2021 September 30, 2020

The amortized cost of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of June 30, 2021 and September 30, 2020 was $ 946 thousand and $ 1.5 million, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the tables 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 $ 177 thousand at June 30, 2021 and $ 183 thousand at September 30, 2020.

The following table presents the amortized cost at June 30, 2021 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 June 30, 2021, all of which were individually evaluated for loss and any identified losses have been charged off.

June 30, 2021 September 30, 2020

Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans

11 unchanged sentences

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 For the Six Months Ended

March 31, 2021 March 31, 2021

For the Three Months Ended For the Nine Months Ended

June 30, 2021 June 30, 2021

Number Pre- Post- Number Pre- Post-

11 unchanged sentences

— $ — $ — 6 $ 1,518 $ 1,407

For the Three Months Ended For the Six Months Ended

March 31, 2020 March 31, 2020

For the Three Months Ended For the Nine Months Ended

June 30, 2020 June 30, 2020

Number Pre- Post- Number Pre- Post-

12 unchanged sentences

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 Six Months Ended

March 31, 2021 March 31, 2020 March 31, 2021 March 31, 2020

For the Three Months Ended For the Nine Months Ended

June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Number of Amortized Number of Recorded Number of Amortized Number of Recorded

12 unchanged sentences

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 For the Six Months Ended

September 30, 2020 March 31, 2020 March 31, 2020

For the Three Months Ended For the Nine Months Ended

September 30, 2020 June 30, 2020 June 30, 2020

Unpaid Average Interest Average Interest

31 unchanged sentences

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

Activity during the three and six months ended March 31, 2020 occurred prior to the adoption of CECL.

For the Three Months Ended March 31, 2021

Activity during the three and nine months ended June 30, 2020 occurred prior to the adoption of CECL.

For the Three Months Ended June 30, 2021

One- to Four-Family

7 unchanged sentences

Ending balance $ 1,535 $ 1,739 $ 674 $ 3,948 $ 16,533 $ 243 $ 20,724

For the Six Months Ended March 31, 2021

For the Nine Months Ended June 30, 2021

One- to Four-Family

9 unchanged sentences

Ending balance $ 1,535 $ 1,739 $ 674 $ 3,948 $ 16,533 $ 243 $ 20,724

For the Three Months Ended March 31, 2020

For the Three Months Ended June 30, 2020

One- to Four-Family

7 unchanged sentences

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

For the Six Months Ended March 31, 2020

For the Nine Months Ended June 30, 2020

One- to Four-Family

22 unchanged sentences

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 March 31, 2021.

The key assumptions utilized in estimating the Company's ACL at March 31, 2021 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 March 31, 2021.

The forecasted economic indices applied to the model at March 31, 2021 were the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the U.S.

Management also considered certain qualitative factors when evaluating the adequacy of the ACL at June 30, 2021.

The key assumptions utilized in estimating the Company's ACL at June 30, 2021 are discussed below.

The forecasted economic indices applied to the model at June 30, 2021 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 March 31, 2021 was the national unemployment rate.

The forecast national unemployment rate in the economic scenario selected by management at March 31, 2021 had the national unemployment rate peaking at 6.4 % at September 30, 2021 and then a gradual decline to 5.3 % at March 31, 2022 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 March 31, 2021.

The reversion to mean time period was eight quarters for the national unemployment rate and four quarters for all other economic indices at March 31, 2021.

• Prepayment and curtailment assumptions - The assumptions used at March 31, 2021 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 March 31, 2021 included the COVID-19 loan modification programs considering the payment performance of the loans that had exited their deferral periods, the balance and trending of large-dollar special mention commercial loans, and the economic uncertainties related to (1) the job market, specifically the unemployment rate, labor participation rate and the effectiveness of the latest federal stimulus package to the unemployed and the economic stimulus payments to qualifying households, (2) the unevenness of the recovery in certain industries, and (3) the impact to the housing market as a result of the foreclosure moratorium and how the housing market may react when the foreclosure moratorium is eventually lifted.

Management determined a qualitative amount was not necessary at March 31, 2021 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 March 31, 2021 for special mention commercial loans and the economic uncertainty.

The economic index most impactful to all loan pools within the model at June 30, 2021 was the national unemployment rate.

The forecast national unemployment rate in the economic scenario selected by management at June 30, 2021 had the national unemployment rate gradually declining to 3.7 % at June 30, 2022 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 June 30, 2021.

The reversion to mean time period was also four quarters for all of the economic indices at June 30, 2021.

• Prepayment and curtailment assumptions - The assumptions used at June 30, 2021 were generally based on actual prepayment and curtailment speeds for each respective loan pool in the model.

• Qualitative factors - The qualitative factors applied by management at June 30, 2021 included the balance and trending of large-dollar special mention commercial loans, and the economic uncertainties related to (1) the job market, specifically, the unemployment rate, labor participation rate and the effectiveness of the latest federal stimulus package to the unemployed and the economic stimulus payments to qualifying individuals, (2) the impact to the housing market as a result of the foreclosure moratorium and how the housing market may react when the foreclosure moratorium is eventually lifted, and (3) the unevenness of the recovery in certain industries.

The decrease in ACL during the current quarter was primarily a result of a negative provision for credit losses of $ 2.7 million.

The negative provision for credit losses was due primarily to a reduction in commercial loan ACL as a result of improvements in the economic forecast used in the model, partially offset by an increase in qualitative factors, primarily the economic uncertainty qualitative factor, along with a change in the mix of the loan portfolio during the current quarter.

The balance of the one- to four-family loan portfolio decreased during the quarter, partially offset by an increase in commercial loans.

The reduction in ACL related to the decrease in the balance of the one- to four-family loan portfolio during the current quarter was more than offset by the increase in ACL related to an increase in the balance of the commercial loan portfolio.

The negative provision for credit losses was due primarily to a reduction in the commercial loan ACL related to a decrease in the commercial loan economic uncertainty qualitative factor as a result of improved economic conditions compared to the prior quarter.

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 periods indicated.

For the Three Months Ended March 31, 2021 For the Six Months Ended March 31, 2021

For the Three Months Ended June 30, 2021 For the Nine Months Ended June 30, 2021

(Dollars in thousands)

4 unchanged sentences

Ending balance $ 6,161

At March 31, 2021, the Company also applied a qualitative factor for economic uncertainty related to the calculation of the reserve for off-balance sheet credit exposures;

however, the impact of this qualitative factor was smaller compared to the economic uncertainty factor applied in the calculation of ACL due to consideration of the fact that the majority of off-balance sheet credit exposures are related to credits that have been underwritten during a challenging economic environment and are still meeting/exceeding the Bank's conservative underwriting requirements.

The $ 306 thousand reduction in the reserve during the current quarter, which was recognized as a negative provision for credit losses, was due to an improvement in the economic forecast, along with a change in the mix of off-balance sheet credit exposures.

The balance of off-balance sheet credit exposures increased during the current quarter due to an increase in one- to four-family off-balance sheet credit exposures, partially offset by a decrease in commercial off-balance sheet credit exposures.

Even though the aggregate amount of off-balance sheet credit exposures increased during the current quarter, the related reserve decreased because one- to four-family off-balance sheet credit exposures have a significantly lower reserve rate than commercial off-balance sheet credit exposures due to differences in credit risk.

BORROWED FUNDS

FHLB Borrowings and Interest Rate Swaps - At March 31, 2021 and September 30, 2020, the Bank had entered into interest rate swap agreements with a total notional amount of $ 440.0 million and $ 640.0 million, respectively, in order to hedge the variable cash flows associated with $ 440.0 million and $ 640.0 million, respectively, of adjustable-rate FHLB advances.

At March 31, 2021 and September 30, 2020, the interest rate swap agreements had an average remaining term to maturity of 3.9 years and 3.5 years, respectively.

FHLB Borrowings and Interest Rate Swaps - At June 30, 2021 and September 30, 2020, the Bank had entered into interest rate swap agreements with a total notional amount of $ 440.0 million and $ 640.0 million, respectively, in order to hedge the variable cash flows associated with $ 440.0 million and $ 640.0 million, respectively, of adjustable-rate FHLB advances.

At June 30, 2021 and September 30, 2020, the interest rate swap agreements had an average remaining term to maturity of 3.6 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 March 31, 2021 and September 30, 2020, the interest rate swaps were in a loss position with a total fair value of $ 30.3 million and $ 53.1 million, respectively, which was reported in other liabilities on the consolidated balance sheet.

During the three and six months ended March 31, 2021, $ 6.4 million and $ 9.4 million, respectively, was reclassified from AOCI.

Of this amount, for the three months ended March 31, 2021, $ 2.8 million was recognized as an increase to interest expense and $ 3.6 million, net of tax, was reclassified as a result of the termination of the related interest rate swaps, as discussed below, and reported in the loss on interest rate swap termination line item within the consolidated statements of operations.

During the three and six months ended March 31, 2020, $ 983 thousand and $ 1.7 million, respectively, was reclassified from AOCI as an increase to interest expense.

At March 31, 2021, the Company estimated that $ 10.0 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.

At June 30, 2021 and September 30, 2020, the interest rate swaps were in a loss position with a total fair value of $ 30.4 million and $ 53.1 million, respectively, which was reported in other liabilities on the consolidated balance sheet.

During the three and nine months ended June 30, 2021, $ 2.1 million and $ 11.5 million, respectively, was reclassified from AOCI.

Of this amount, for the nine months ended June 30, 2021, $ 7.9 million was recognized as an increase to interest expense and $ 3.6 million, net of tax, was reclassified as a result of the termination of the related interest rate swaps, as discussed below, and reported in the loss on interest rate swap termination line item within the consolidated statements of operations.

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.

At June 30, 2021, the Company estimated that $ 9.6 million of interest expense associated with the interest rate swaps will be reclassified from AOCI as an increase to interest expense on FHLB borrowings during the next 12 months.

The Bank has minimum collateral posting thresholds with its derivative counterparties and posts collateral on a daily basis.

The Bank posted cash collateral of $ 32.0 million at March 31, 2021 and $ 54.6 million at September 30, 2020.

The Bank posted cash collateral of $ 31.2 million at June 30, 2021 and $ 54.6 million at September 30, 2020.

During the current fiscal year, the Bank terminated interest rate swaps with a notional amount of $ 200.0 million which were tied to FHLB advances totaling $ 200.0 million.

5 unchanged sentences

The weighted average effective interest rate of the new advances is 1.03 %.

The prepayment penalties are being recognized in interest expense over the life of the new FHLB advances.

The majority of the prepayment penalties are being recognized in interest expense over the life of the new FHLB advances.

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 six months ended March 31, 2021 or during fiscal year 2020.

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, 2021 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 obtained from the counterparty during the six months ended March 31, 2021 or during fiscal year 2020.

No adjustments were made to the estimated fair values obtained from the counterparty during the nine months ended June 30, 2021 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 March 31, 2021 or September 30, 2020.

March 31, 2021

The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at June 30, 2021 or September 30, 2020.

June 30, 2021

Quoted Prices Significant Significant

28 unchanged sentences

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 six months ended March 31, 2021 and 2020 that were still held in the portfolio as of March 31, 2021 and 2020 was $ 7.4 million and $ 4.9 million, respectively.

The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during the nine months ended June 30, 2021 and 2020 that were still held in the portfolio as of June 30, 2021 and 2020 was $ 7.4 million and $ 6.0 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 commercial loans individually evaluated during the six months ended March 31, 2021 and March 31, 2020 were downward adjustments to the book value of the collateral for lack of marketability.

During the six months ended March 31, 2021, the adjustments ranged from 7 % to 50 %, with a weighted average of 23 %.

During the six months ended March 31, 2020, the adjustments ranged from 10 % to 50 %, with a weighted average of 20 %.

The primary significant unobservable inputs for commercial loans individually evaluated during the nine months ended June 30, 2021 and June 30, 2020 were downward adjustments to the book value of the collateral for lack of marketability.

During the nine months ended June 30, 2021, the adjustments ranged from 7 % to 50 %, with a weighted average of 22 %.

During the nine months ended June 30, 2020, the adjustments ranged from 4 % to 50 %, with a weighted average of 17 %.

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

5 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 six months ended March 31, 2021 and 2020 that was still held in the portfolio as of March 31, 2021 and 2020 was $ 105 thousand and $ 183 thousand, respectively.

The carrying value of the properties equaled the fair value of the properties at March 31, 2021 and 2020.

The fair value of OREO measured on a non-recurring basis during the nine months ended June 30, 2021 and 2020 that was still held in the portfolio as of June 30, 2021 and 2020 was $ 177 thousand and $ 183 thousand, respectively.

The carrying value of the properties equaled the fair value of the properties at June 30, 2021 and 2020.

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:

March 31, 2021

June 30, 2021

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 March 31, 2021

For the Three Months Ended June 30, 2021

Unrealized Unrealized

9 unchanged sentences

Ending balance $ 9,637 $ ( 22,975 ) $ ( 13,338 )

For the Six Months Ended March 31, 2021

For the Nine Months Ended June 30, 2021

Unrealized Unrealized

9 unchanged sentences

Ending balance $ 9,637 $ ( 22,975 ) $ ( 13,338 )

For the Three Months Ended March 31, 2020

For the Three Months Ended June 30, 2020

Unrealized Unrealized

6 unchanged sentences

Amount reclassified from AOCI, net of taxes of $( 549 )

— 1,710 1,710

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

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

For the Six Months Ended March 31, 2020

For the Nine Months Ended June 30, 2020

Unrealized Unrealized

10 unchanged sentences

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