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) June 30, September 30, 2021 2020 ASSETS: Cash and cash equivalents (includes interest-earning deposits of $ 74,346 and $ 172,430 ) $ 95,305 $ 185,148 Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $ 2,002,957 and $ 1,529,605 ) 2,015,705 1,560,950 Loans receivable, net (allowance for credit losses ("ACL") of $ 20,724 and $ 31,527 ) 7,033,827 7,202,851 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 73,630 93,862 Premises and equipment, net 99,551 101,875 Income taxes receivable, net 891 — Other assets 330,756 342,532 TOTAL ASSETS $ 9,649,665 $ 9,487,218 LIABILITIES: Deposits $ 6,638,294 $ 6,191,408 Borrowings 1,582,400 1,789,313 Advance payments by borrowers for taxes and insurance 47,330 65,721 Income taxes payable, net — 795 Deferred income tax liabilities, net 7,922 8,180 Other liabilities 136,095 146,942 Total liabilities 8,412,041 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, 138,833,184 and 138,956,296 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively 1,388 1,389 Additional paid-in capital 1,189,466 1,189,853 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 31,801 ) ( 33,040 ) Retained earnings 91,909 143,162 Accumulated other comprehensive (loss) income ("AOCI"), net of tax ( 13,338 ) ( 16,505 ) Total stockholders' equity 1,237,624 1,284,859 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,649,665 $ 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 For the Nine Months Ended June 30, June 30, 2021 2020 2021 2020 INTEREST AND DIVIDEND INCOME: Loans receivable $ 54,779 $ 66,652 $ 172,758 $ 206,179 Mortgage-backed securities ("MBS") 5,360 5,616 16,499 17,584 FHLB stock 944 1,207 2,964 4,747 Investment securities 763 847 2,075 3,736 Cash and cash equivalents 26 59 117 1,126 Total interest and dividend income 61,872 74,381 194,413 233,372 INTEREST EXPENSE: Deposits 11,475 16,533 38,071 52,299 Borrowings 7,826 11,561 26,885 37,421 Total interest expense 19,301 28,094 64,956 89,720 NET INTEREST INCOME 42,571 46,287 129,457 143,652 PROVISION FOR CREDIT LOSSES ( 2,691 ) — ( 7,187 ) 22,300 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 45,262 46,287 136,644 121,352 NON-INTEREST INCOME: 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 Other non-interest income 1,286 1,229 4,160 4,468 Total non-interest income 5,236 4,439 22,783 14,614 NON-INTEREST EXPENSE: Salaries and employee benefits 13,867 13,059 41,402 39,765 Information technology and related expense 4,736 4,285 13,568 12,694 Occupancy, net 3,504 3,556 10,406 10,212 Loss on interest rate swap termination — — 4,752 — Regulatory and outside services 1,469 1,548 4,288 4,188 Advertising and promotional 1,407 1,004 3,729 3,773 Deposit and loan transaction costs 693 697 2,123 2,086 Federal insurance premium 633 287 1,888 287 Office supplies and related expense 402 475 1,289 1,586 Other non-interest expense 891 1,253 3,877 4,237 Total non-interest expense 27,602 26,164 87,322 78,828 INCOME BEFORE INCOME TAX EXPENSE 22,896 24,562 72,105 57,138 INCOME TAX EXPENSE 4,709 5,088 14,576 10,877 NET INCOME $ 18,187 $ 19,474 $ 57,529 $ 46,261 Basic earnings per share ("EPS") $ 0.13 $ 0.14 $ 0.42 $ 0.34 Diluted EPS $ 0.13 $ 0.14 $ 0.42 $ 0.34 Basic weighted average common shares 135,504,869 138,018,052 135,450,951 137,961,231 Diluted weighted average common shares 135,537,152 138,018,052 135,477,566 137,992,978 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 For the Nine Months Ended June 30, June 30, 2021 2020 2021 2020 Net income $ 18,187 $ 19,474 $ 57,529 $ 46,261 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $( 1,841 ), $( 1,775 ), $ 4,506 , and $( 4,962 ) 5,703 5,533 ( 14,091 ) 15,459 Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $ 29 , $ 367 , $( 5,500 ), and $ 5,826 ( 88 ) ( 1,146 ) 17,258 ( 18,151 ) Comprehensive income $ 23,802 $ 23,861 $ 60,696 $ 43,569 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 Nine Months Ended June 30, 2021 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 Net income 20,444 20,444 Other comprehensive loss, net of tax ( 7,582 ) ( 7,582 ) ESOP activity 132 413 545 Stock-based compensation 134 134 Stock options exercised 24 24 Cash dividends to stockholders ($ 0.085 per share) ( 11,518 ) ( 11,518 ) Balance at March 31, 2021 1,388 1,188,926 ( 32,214 ) 139,448 ( 18,953 ) 1,278,595 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 (Continued) 6 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 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 Net income 4,276 4,276 Other comprehensive loss, net of tax ( 12,051 ) ( 12,051 ) ESOP activity 117 413 530 Stock-based compensation 152 152 Stock options exercised 25 25 Cash dividends to stockholders ($ 0.085 per share) ( 11,733 ) ( 11,733 ) Balance at March 31, 2020 1,415 1,211,466 ( 33,866 ) 130,756 ( 21,978 ) 1,287,793 Net income 19,474 19,474 Other comprehensive income, net of tax 4,387 4,387 ESOP activity 61 413 474 Restricted stock activity, net ( 6 ) ( 6 ) Stock-based compensation 132 132 Cash dividends to stockholders ($ 0.085 per share) ( 11,734 ) ( 11,734 ) Balance at June 30, 2020 $ 1,415 $ 1,211,653 $ ( 33,453 ) $ 138,496 $ ( 17,591 ) $ 1,300,520 See accompanying notes to consolidated financial statements. (Concluded) 7 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Nine Months Ended June 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 57,529 $ 46,261 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 2,964 ) ( 4,747 ) Provision for credit losses ( 7,187 ) 22,300 Originations of loans receivable held-for-sale ("LHFS") ( 597 ) — Proceeds from sales of LHFS 610 — Amortization and accretion of premiums and discounts on securities 4,308 999 Depreciation and amortization of premises and equipment 6,938 6,812 Amortization of intangible assets 1,264 1,493 Amortization of deferred amounts related to FHLB advances, net 1,132 315 Common stock committed to be released for allocation - ESOP 1,569 1,586 Stock-based compensation 379 450 Gain on the sale of Visa Class B shares ( 7,386 ) — Changes in: Other assets, net 8,776 5,049 Income taxes payable/receivable, net ( 1,703 ) ( 1,649 ) Deferred income tax liabilities, net ( 511 ) ( 2,507 ) Other liabilities ( 10,780 ) ( 7,225 ) Net cash provided by operating activities 51,377 69,137 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities ( 953,818 ) ( 465,764 ) Proceeds from calls, maturities and principal reductions of AFS securities 476,158 469,995 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 Purchase of premises and equipment ( 8,108 ) ( 9,422 ) Proceeds from sale of other real estate owned ("OREO") 97 993 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) provided by investing activities ( 274,392 ) 2,833 (Continued) 8 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Nine Months Ended June 30, 2021 2020 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 106,372 ) ( 82,130 ) Net change in deposits 446,886 487,817 Proceeds from borrowings 803,800 1,325,600 Repayments on borrowings ( 1,006,800 ) ( 1,572,600 ) Change in advance payments by borrowers for taxes and insurance ( 18,391 ) ( 26,561 ) Payment of FHLB prepayment penalties ( 5,076 ) ( 4,215 ) Repurchase of common stock ( 4,569 ) — Stock options exercised 324 638 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: Beginning of period 239,708 253,700 End of period $ 126,495 $ 454,219 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Operating lease right-of-use assets obtained $ — $ 16,841 Operating lease liabilities obtained $ — $ 16,726 See accompanying notes to consolidated financial statements. (Concluded) 9 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 $ 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. 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 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. 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 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. 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 10 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. Interest accrued on AFS debt securities but not received is also reversed against interest income. 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. 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 ("COVID-19 loan modifications"). 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 as a result of COVID-19 loan modifications 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 COVID-19 loan modifications include all loans modified under the programs, including loans classified as TDRs. Troubled debt restructurings - For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which reduced payment amounts are required, and/or reductions in interest rates. The Bank does not forgive principal or interest, nor does it commit to lend additional funds to these borrowers, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family loans and consumer loans, not to exceed the original loan amount. In the case of commercial loans, the Bank does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve the credit quality. Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date. The number of days delinquent is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment. 11 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. 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. The ACL is an estimate that requires significant judgment including projections of the macroeconomic environment. The macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses. The Bank's ACL is measured on a collective ("pool") basis, with loans aggregated into pools based on similar risk characteristics such as collateral type, historical loss experience, loan-to-value ("LTV") for one- to four-family loans, and payment sources for commercial loans. Loans that do not share similar risk characteristics are evaluated on an individual basis. Charge-offs against the related ACL amounts for any loan type may be recorded at any time if the Bank has knowledge of the existence of a probable loss. One- to four-family loans and consumer home equity loans are deemed to be collateral dependent and individually evaluated for loss when the loan is generally 180 days delinquent, and any identified losses are charged-off at that time. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell. Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan. When a non-real estate secured consumer loan is 120 days delinquent, any identified losses are charged-off. For commercial loans, loans are individually evaluated for loss if management determines they exhibit unique risk characteristics. Specific allocations of ACL are established and/or losses are charged-off prior to a loan becoming 120 days delinquent when it is determined, through the analysis of any available current financial information regarding the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement. In the case of secured loans, the loan is deemed to be collateral dependent when this occurs, and the specific allocation of ACL and/or charge-off amount is based on a comparison of the amounts due from the borrower and calculated current fair value of the collateral after consideration of estimated costs to sell. The primary credit risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased delinquencies, non-performing assets, charge-offs, and provisions for credit losses. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. For loans evaluated for credit losses on a pool basis, average historical loss rates are calculated for each pool using the Company's historical charge-offs, or peer data when the Company's own historical loss rates are not reflective of future loss expectations, and outstanding loan balances during a historical time period. The historical time periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. Generally, the historical time periods are at least one economic cycle. These historical loss rates are compared to historical data related to economic variables including national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the United States gross domestic product during the same time periods over which the historical loss rates were calculated, and a correlation is estimated using regression analysis. Each quarter, the Company's ACL model pairs the results of the regression analysis with an economic forecast of these same macroeconomic variables, which is provided by a third party, in order to project future loss 12 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 Bank's loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual and/or expected changes in economic conditions, real estate values, and/or other economic developments in which the Bank operates. 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 unfunded amount/commitment will occur. The reserve for these off-balance sheet credit exposures is recorded as a liability and is presented in other liabilities 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 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. 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 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. 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 13 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. 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 $ 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. 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 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. 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. 14 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 For the Nine Months Ended June 30, June 30, 2021 2020 2021 2020 (Dollars in thousands, except per share amounts) Net income $ 18,187 $ 19,474 $ 57,529 $ 46,261 Income allocated to participating securities ( 12 ) ( 16 ) ( 39 ) ( 38 ) Net income available to common stockholders $ 18,175 $ 19,458 $ 57,490 $ 46,223 Average common shares outstanding 135,421,817 137,935,000 135,409,349 137,919,631 Average committed ESOP shares outstanding 83,052 83,052 41,602 41,600 Total basic average common shares outstanding 135,504,869 138,018,052 135,450,951 137,961,231 Effect of dilutive stock options 32,283 — 26,615 31,747 Total diluted average common shares outstanding 135,537,152 138,018,052 135,477,566 137,992,978 Net EPS: Basic $ 0.13 $ 0.14 $ 0.42 $ 0.34 Diluted $ 0.13 $ 0.14 $ 0.42 $ 0.34 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 93,565 813,645 210,529 405,522 15 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. June 30, 2021 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,502,856 $ 22,210 $ 6,038 $ 1,519,028 GSE debentures 494,968 13 3,466 491,515 Municipal bonds 5,133 29 — 5,162 $ 2,002,957 $ 22,252 $ 9,504 $ 2,015,705 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. June 30, 2021 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 $ 770,670 $ 5,973 $ 9,018 $ 65 GSE debentures 466,503 3,466 — — Municipal bonds — — — — $ 1,237,173 $ 9,439 $ 9,018 $ 65 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 16 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 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. In the case of MBS, borrowers on the underlying loans generally have the right to prepay their loans without penalty. For this reason, MBS are not included in the maturity categories. Amortized Estimated Cost Fair Value (Dollars in thousands) One year or less $ 4,421 $ 4,448 One year through five years 470,680 467,344 Five years through ten years 25,000 24,885 500,101 496,677 MBS 1,502,856 1,519,028 $ 2,002,957 $ 2,015,705 The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented. For the Three Months Ended For the Nine Months Ended June 30, June 30, 2021 2020 2021 2020 (Dollars in thousands) Taxable $ 740 $ 797 $ 1,982 $ 3,556 Non-taxable 23 50 93 180 $ 763 $ 847 $ 2,075 $ 3,736 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. June 30, 2021 September 30, 2020 (Dollars in thousands) Public unit deposits $ 303,275 $ 330,986 Federal Reserve Bank of Kansas City ("FRB of Kansas City") 71,061 259,851 Commercial deposits 68,132 — $ 442,468 $ 590,837 During the current year, the Company sold its Visa Class B shares. 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 nine months ended June 30, 2021 and June 30, 2020 were the result of principal repayments, calls, or maturities. 17 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at the dates presented is summarized as follows: June 30, 2021 September 30, 2020 (Dollars in thousands) One- to four-family: Originated $ 3,977,129 $ 3,937,310 Correspondent purchased 1,953,185 2,101,082 Bulk purchased 179,019 208,427 Construction 30,325 34,593 Total 6,139,658 6,281,412 Commercial: Commercial real estate 680,664 626,588 Commercial and industrial 73,713 97,614 Construction 60,614 105,458 Total 814,991 829,660 Consumer: Home equity 88,587 103,838 Other 8,389 10,086 Total 96,976 113,924 Total loans receivable 7,051,625 7,224,996 Less: ACL 20,724 31,527 Discounts/unearned loan fees 30,593 29,190 Premiums/deferred costs ( 33,519 ) ( 38,572 ) $ 7,033,827 $ 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 18 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, 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. 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 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. 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. 19 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 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. June 30, 2021 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 $ 774,522 $ 737,008 $ 352,275 $ 270,074 $ 298,371 $ 1,535,915 $ — $ 3,968,165 Special Mention 417 347 451 347 447 8,253 — 10,262 Substandard — 986 863 52 192 11,322 — 13,415 Correspondent purchased Pass 452,366 353,955 95,110 150,762 182,693 729,492 — 1,964,378 Special Mention 722 — 357 — — 3,554 — 4,633 Substandard — — 169 — — 6,076 — 6,245 Bulk purchased Pass — — — — — 175,150 — 175,150 Special Mention — — — — — — — — Substandard — — — — — 4,610 — 4,610 1,228,027 1,092,296 449,225 421,235 481,703 2,474,372 — 6,146,858 Commercial: Commercial real estate Pass 207,489 151,517 96,558 93,332 42,091 38,941 5,074 635,002 Special Mention 50,000 — — — — 50,008 — 100,008 Substandard 1,246 660 226 681 11 35 — 2,859 Commercial and industrial Pass 34,504 12,164 8,035 3,174 1,425 690 11,587 71,579 Special Mention — — — — — — — — Substandard — — — 86 48 — 1,064 1,198 293,239 164,341 104,819 97,273 43,575 89,674 17,725 810,646 Consumer: Home equity Pass 2,042 2,820 1,732 1,655 653 2,716 76,158 87,776 Special Mention — — 38 12 — — 186 236 Substandard — — — — — 15 641 656 Other Pass 2,963 1,962 1,382 1,055 516 183 303 8,364 Special Mention — — 1 — — — — 1 Substandard — 4 6 1 3 — — 14 5,005 4,786 3,159 2,723 1,172 2,914 77,288 97,047 Total $ 1,526,271 $ 1,261,423 $ 557,203 $ 521,231 $ 526,450 $ 2,566,960 $ 95,013 $ 7,054,551 20 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 21 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. June 30, 2021 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 $ 774,815 $ 738,341 $ 353,473 $ 270,107 $ 298,585 $ 1,547,709 $ — $ 3,983,030 30-89 124 — — 314 233 4,461 — 5,132 90+/FC — — 116 52 192 3,320 — 3,680 Correspondent purchased Current 452,366 353,955 95,467 150,762 181,762 732,948 — 1,967,260 30-89 722 — — — 931 2,050 — 3,703 90+/FC — — 169 — — 4,124 — 4,293 Bulk purchased Current — — — — — 176,164 — 176,164 30-89 — — — — — 971 — 971 90+/FC — — — — — 2,625 — 2,625 1,228,027 1,092,296 449,225 421,235 481,703 2,474,372 — 6,146,858 Commercial: Commercial real estate Current 258,735 151,517 96,558 93,750 42,102 88,949 5,074 736,685 30-89 — — — — — 35 — 35 90+/FC — 660 226 263 — — — 1,149 Commercial and industrial Current 34,504 12,164 8,035 3,174 1,425 690 12,651 72,643 30-89 — — — — — — — — 90+/FC — — — 86 48 — — 134 293,239 164,341 104,819 97,273 43,575 89,674 17,725 810,646 Consumer: Home equity Current 2,042 2,760 1,770 1,667 653 2,692 76,336 87,920 30-89 — 60 — — — 34 222 316 90+/FC — — — — — 5 427 432 Other Current 2,960 1,962 1,384 1,055 509 155 303 8,328 30-89 3 — — — 7 28 — 38 90+/FC — 4 5 1 3 — — 13 5,005 4,786 3,159 2,723 1,172 2,914 77,288 97,047 Total $ 1,526,271 $ 1,261,423 $ 557,203 $ 521,231 $ 526,450 $ 2,566,960 $ 95,013 $ 7,054,551 22 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 30 to 89 Days Delinquent or Delinquent Current Amortized Delinquent in Foreclosure Loans Loans Cost (Dollars in thousands) One- to four-family: Originated $ 5,132 $ 3,680 $ 8,812 $ 3,983,030 $ 3,991,842 Correspondent purchased 3,703 4,293 7,996 1,967,260 1,975,256 Bulk purchased 971 2,625 3,596 176,164 179,760 Commercial: Commercial real estate 35 1,149 1,184 736,685 737,869 Commercial and industrial — 134 134 72,643 72,777 Consumer: Home equity 316 432 748 87,920 88,668 Other 38 13 51 8,328 8,379 $ 10,195 $ 12,326 $ 22,521 $ 7,032,030 $ 7,054,551 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 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. 23 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 (Dollars in thousands) One- to four-family: Originated $ 5,070 $ 2,510 $ 5,037 Correspondent purchased 4,293 307 2,433 Bulk purchased 2,757 1,451 2,938 Commercial: Commercial real estate 1,544 520 1,663 Commercial and industrial 134 86 157 Consumer: Home equity 432 84 305 Other 13 — 8 $ 14,243 $ 4,958 $ 12,541 24 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 For the Nine Months Ended June 30, 2021 June 30, 2021 Number Pre- Post- Number Pre- Post- of Restructured Restructured of Restructured Restructured Contracts Outstanding Outstanding Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated — $ — $ — 6 $ 1,518 $ 1,407 Correspondent purchased — — — — — — Bulk purchased — — — — — — Commercial: Commercial real estate — — — — — — Commercial and industrial — — — — — — Consumer: Home equity — — — — — — Other — — — — — — — $ — $ — 6 $ 1,518 $ 1,407 For the Three Months Ended For the Nine Months Ended June 30, 2020 June 30, 2020 Number Pre- Post- Number Pre- Post- of Restructured Restructured of Restructured Restructured Contracts Outstanding Outstanding Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated — $ — $ — 5 $ 241 $ 242 Correspondent purchased — — — 1 192 191 Bulk purchased — — — 1 75 134 Commercial: Commercial real estate — — — 1 837 837 Commercial and industrial — — — — — — Consumer: Home equity — — — 2 45 44 Other — — — — — — — $ — $ — 10 $ 1,390 $ 1,448 25 The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured. For the Three Months Ended For the Nine Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Number of Amortized Number of Recorded Number of Amortized Number of Recorded Contracts Cost Contracts Investment 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 — — — — — — 1 9 Other — — — — — — — — — $ — — $ — — $ — 3 $ 181 26 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 For the Nine Months Ended September 30, 2020 June 30, 2020 June 30, 2020 Unpaid Average Interest Average Interest Recorded Principal Related Recorded Income Recorded Income Investment Balance ACL Investment Recognized Investment Recognized With no related allowance recorded One- to four-family: Originated $ 12,385 $ 12,813 $ — $ 13,865 $ 150 $ 14,273 $ 472 Correspondent purchased 1,955 2,058 — 1,949 19 1,855 56 Bulk purchased 3,843 4,302 — 4,814 46 4,910 148 Commercial: Commercial real estate 1,052 1,379 — 817 5 494 9 Commercial and industrial 99 244 — 26 — 24 — Consumer: Home equity 280 360 — 319 4 329 15 Other — 45 — 1 — — — 19,614 21,201 — 21,791 224 21,885 700 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 1,875 24 1,440 78 Consumer: Home equity — — — — — — — Other — — — — — — — 1,929 1,928 323 1,875 24 1,440 78 Total One- to four-family: Originated 12,385 12,813 — 13,865 150 14,273 472 Correspondent purchased 1,955 2,058 — 1,949 19 1,855 56 Bulk purchased 3,843 4,302 — 4,814 46 4,910 148 Commercial: Commercial real estate 1,712 2,039 83 817 5 494 9 Commercial and industrial 1,368 1,512 240 1,901 24 1,464 78 Consumer: Home equity 280 360 — 319 4 329 15 Other — 45 — 1 — — — $ 21,543 $ 23,129 $ 323 $ 23,666 $ 248 $ 23,325 $ 778 27 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 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 Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 1,536 $ 1,705 $ 747 $ 3,988 $ 19,157 $ 252 $ 23,397 Charge-offs ( 18 ) — — ( 18 ) — ( 1 ) ( 19 ) Recoveries 49 — — 49 18 4 71 Provision for credit losses ( 32 ) 34 ( 73 ) ( 71 ) ( 2,642 ) ( 12 ) ( 2,725 ) Ending balance $ 1,535 $ 1,739 $ 674 $ 3,948 $ 16,533 $ 243 $ 20,724 For the Nine Months Ended June 30, 2021 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 ( 142 ) — ( 21 ) ( 163 ) ( 515 ) ( 11 ) ( 689 ) Recoveries 140 — — 140 38 29 207 Provision for credit losses ( 96 ) ( 585 ) ( 208 ) ( 889 ) ( 4,597 ) ( 74 ) ( 5,560 ) Ending balance $ 1,535 $ 1,739 $ 674 $ 3,948 $ 16,533 $ 243 $ 20,724 For the Three Months Ended June 30, 2020 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 6,467 $ 3,355 $ 557 $ 10,379 $ 20,328 $ 489 $ 31,196 Charge-offs — — — — — ( 5 ) ( 5 ) Recoveries — — — — 17 7 24 Provision for credit losses ( 121 ) ( 166 ) ( 51 ) ( 338 ) 359 ( 21 ) — Ending balance $ 6,346 $ 3,189 $ 506 $ 10,041 $ 20,704 $ 470 $ 31,215 28 For the Nine Months Ended June 30, 2020 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226 Charge-offs ( 64 ) — — ( 64 ) ( 349 ) ( 15 ) ( 428 ) Recoveries 3 — — 3 98 16 117 Provision for credit losses 4,407 1,986 ( 181 ) 6,212 15,784 304 22,300 Ending balance $ 6,346 $ 3,189 $ 506 $ 10,041 $ 20,704 $ 470 $ 31,215 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 29 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 June 30, 2021. The key assumptions utilized in estimating the Company's ACL at June 30, 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 June 30, 2021. 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 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 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 June 30, 2021 For the Nine Months Ended June 30, 2021 (Dollars in thousands) Beginning balance $ 6,127 Beginning balance $ — Provision for credit losses 34 Adoption of CECL 7,788 Ending balance $ 6,161 Balance at October 1, 2020 7,788 Provision for credit losses ( 1,627 ) Ending balance $ 6,161 30 5. BORROWED FUNDS 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 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 $ 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. The interest rate swaps were designated as cash flow hedges and involved 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. Since it was management's intention to prepay the related FHLB advances, it is no longer probable that the original forecasted transactions subject to the cash flow hedges will occur. Therefore, the termination of the interest rate swaps resulted in the reclassification of unrealized losses, net of tax, totaling $ 3.6 million ($ 4.8 million pretax) from AOCI into earnings. During the current fiscal year, the Bank prepaid fixed-rate FHLB advances totaling $ 400.0 million with a weighted average contractual interest rate of 1.29 % and a weighted average remaining term of 0.9 years, and replaced these advances with fixed-rate FHLB advances totaling $ 400.0 million with a weighted average contractual interest rate of 0.80 % and a weighted average term of 5.0 years. The Bank paid penalties of $ 5.1 million to FHLB as a result of prepaying these FHLB advances. The weighted average effective interest rate of the new advances is 1.03 %. The majority of the prepayment penalties are being recognized in interest expense over the life of the new FHLB advances. 31 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 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: • 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 other liabilities 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 obtained from the counterparty during the nine months ended June 30, 2021 or during fiscal year 2020. (Level 2) 32 The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at June 30, 2021 or September 30, 2020. June 30, 2021 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 $ 1,519,028 $ — $ 1,519,028 $ — GSE debentures 491,515 — 491,515 — Municipal bonds 5,162 — 5,162 — $ 2,015,705 $ — $ 2,015,705 $ — Liabilities: Interest rate swaps $ 30,391 $ — $ 30,391 $ — 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 collateral dependent 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 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. 33 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 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. 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 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. 34 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: June 30, 2021 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 95,305 $ 95,305 $ 95,305 $ — $ — AFS securities 2,015,705 2,015,705 — 2,015,705 — Loans receivable 7,033,827 7,455,382 — — 7,455,382 FHLB stock 73,630 73,630 73,630 — — Liabilities: Deposits 6,638,294 6,698,075 3,756,725 2,941,350 — Borrowings 1,582,400 1,616,452 — 1,616,452 — Interest rate swaps 30,391 30,391 — 30,391 — 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 — 35 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 June 30, 2021 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 3,934 $ ( 22,887 ) $ ( 18,953 ) Other comprehensive income (loss), before reclassifications 5,703 ( 2,212 ) 3,491 Amount reclassified from AOCI, net of taxes of $( 686 ) — 2,124 2,124 Other comprehensive income (loss) 5,703 ( 88 ) 5,615 Ending balance $ 9,637 $ ( 22,975 ) $ ( 13,338 ) For the Nine Months Ended June 30, 2021 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 ( 14,091 ) 5,743 ( 8,348 ) Amount reclassified from AOCI, net of taxes of $( 3,717 ) — 11,515 11,515 Other comprehensive income (loss) ( 14,091 ) 17,258 3,167 Ending balance $ 9,637 $ ( 22,975 ) $ ( 13,338 ) For the Three Months Ended June 30, 2020 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 20,076 $ ( 42,054 ) $ ( 21,978 ) Other comprehensive income (loss), before reclassifications 5,533 ( 2,856 ) 2,677 Amount reclassified from AOCI, 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 Nine Months Ended June 30, 2020 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 10,150 $ ( 25,049 ) $ ( 14,899 ) Other comprehensive income (loss), before reclassifications 15,459 ( 21,553 ) ( 6,094 ) Amount reclassified from AOCI, net of taxes of $( 1,092 ) — 3,402 3,402 Other comprehensive income (loss) 15,459 ( 18,151 ) ( 2,692 ) Ending balance $ 25,609 $ ( 43,200 ) $ ( 17,591 ) 36