Capitol Federal Financial, Inc. 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 30, 2021, of the Company and our report dated November 24, 2021, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Kansas City, Missouri November 24, 2021 53 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. and subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended September 30, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 24, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses - Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The allowance for credit losses (ACL) is a valuation amount that is deducted from the amortized cost basis of loans which represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date. In management's ACL model, average historical loss rates on loan pools with similar risk characteristics are compared to historical data and a correlation is estimated using regression analysis. Each quarter, the Company's ACL model pairs the results of the regression analysis with a third party provided economic forecast in order to project future loss rates for a reasonable and supportable time period before reverting back to long-term historical averages for each economic index. The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for prepayments and curtailments. The ACL model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life which are discounted back to the reporting date using each loan's effective yield, to arrive at a present value of future cash flows which is compared to the amortized cost basis of the loan pool to determine 54 the amount of ACL necessary. Management evaluates qualitative factors not included in historical loss rates, macroeconomic forecasts, or other model inputs and/or other ACL processes, considering risks related to loan portfolio attributes and external factors and adjusts the modeled ACL as deemed appropriate based upon the assessment. We identified the allowance for credit losses as a critical audit matter because of the significant estimates and assumptions required by management in determining qualitative factor adjustments. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists, when performing audit procedures to evaluate the reasonableness of management's qualitative factor adjustments. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the ACL model included the following, among others: • We tested the effectiveness of controls over the Company's ACL model including those over the determination of the qualitative adjustments and management's review of the adequacy of the ACL. • With the assistance of our credit specialists, we evaluated the appropriateness of the ACL model, evaluated data elements utilized in the ACL model such as portfolio segmentation into loan pools, forecast and reversion to mean time periods, and economic forecasts, and evaluated reasonableness of the use of qualitative adjustments to the outputs of the modeled ACL. • We evaluated the qualitative adjustments including reasonableness and basis for the adjustments which include market and economic conditions and/or portfolio performance metrics. • We evaluated the appropriateness and relevance of the data elements by comparing to relevant internal and external sources. • We evaluated the magnitude and proportion of the overall allowance, including the directional consistency and magnitude of the qualitative adjustments. • We reviewed independent economic statistics such as common macroeconomic indicators, as well as industry peers, and we used data analytics to identify changes in the loan portfolio to assess the completeness of management's qualitative adjustments. /s/ Deloitte & Touche LLP Kansas City, Missouri November 24, 2021 We have served as the Company's auditor since 1974. 55 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2021 and 2020 (Dollars in thousands, except per share amounts) 2021 2020 ASSETS: Cash and cash equivalents (includes interest-earning deposits of $ 24,289 and $ 172,430 ) $ 42,262 $ 185,148 Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $ 2,008,456 and $ 1,529,605 ) 2,014,608 1,560,950 Loans receivable, net (allowance for credit losses ("ACL") of $ 19,823 and $ 31,527 ) 7,081,142 7,202,851 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 73,421 93,862 Premises and equipment, net 99,127 101,875 Other assets 320,686 342,532 TOTAL ASSETS $ 9,631,246 $ 9,487,218 LIABILITIES: Deposits $ 6,597,396 $ 6,191,408 Borrowings 1,582,850 1,789,313 Advance payments by borrowers for taxes and insurance 72,729 65,721 Income taxes payable, net 918 795 Deferred income tax liabilities, net 5,810 8,180 Other liabilities 129,270 146,942 Total liabilities 8,388,973 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, 138,832,284 and 138,956,296 shares issued and outstanding as of September 30, 2021 and 2020, respectively 1,388 1,389 Additional paid-in capital 1,189,633 1,189,853 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 31,387 ) ( 33,040 ) Retained earnings 98,944 143,162 Accumulated other comprehensive (loss) income ("AOCI"), net of tax ( 16,305 ) ( 16,505 ) Total stockholders' equity 1,242,273 1,284,859 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,631,246 $ 9,487,218 See accompanying notes to consolidated financial statements. 56 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands, except per share amounts) 2021 2020 2019 INTEREST AND DIVIDEND INCOME: Loans receivable $ 229,897 $ 270,494 $ 284,229 Mortgage-backed securities ("MBS") 21,399 23,009 25,730 FHLB stock 3,916 5,827 7,823 Investment securities 2,825 4,467 6,366 Cash and cash equivalents 144 1,181 5,806 Total interest and dividend income 258,181 304,978 329,954 INTEREST EXPENSE: Deposits 48,406 67,598 66,201 Borrowings 34,774 48,045 57,363 Total interest expense 83,180 115,643 123,564 NET INTEREST INCOME 175,001 189,335 206,390 PROVISION FOR CREDIT LOSSES ( 8,510 ) 22,300 750 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 183,511 167,035 205,640 NON-INTEREST INCOME: Deposit service fees 12,282 11,285 12,740 Gain on sale of Visa Class B shares 7,386 — — Insurance commissions 3,030 2,487 2,821 Other non-interest income 5,388 5,827 6,397 Total non-interest income 28,086 19,599 21,958 NON-INTEREST EXPENSE: Salaries and employee benefits 56,002 52,996 53,145 Information technology and related expense 17,922 16,974 17,615 Occupancy, net 14,045 13,870 13,032 Regulatory and outside services 5,764 5,762 5,813 Advertising and promotional 5,133 4,889 5,244 Loss on interest rate swap termination 4,752 — — Deposit and loan transaction costs 2,761 2,890 2,478 Federal insurance premium 2,545 914 1,172 Office supplies and related expense 1,715 2,195 2,439 Other non-interest expense 4,930 5,514 6,006 Total non-interest expense 115,569 106,004 106,944 INCOME BEFORE INCOME TAX EXPENSE 96,028 80,630 120,654 INCOME TAX EXPENSE 19,946 16,090 26,411 NET INCOME $ 76,082 $ 64,540 $ 94,243 Basic earnings per share ("EPS") $ 0.56 $ 0.47 $ 0.68 Diluted EPS $ 0.56 $ 0.47 $ 0.68 See accompanying notes to consolidated financial statements. 57 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands) 2021 2020 2019 Net income $ 76,082 $ 64,540 $ 94,243 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $ 6,116 , $( 4,359 ), and $( 3,468 ) ( 19,077 ) 13,578 10,804 Unrealized gains on securities reclassified from held-to-maturity ("HTM") to AFS during the period, net of taxes of $ 0 , $ 0 , and $( 750 ) — — 2,336 Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $( 6,153 ), $ 4,875 , and $ 10,394 19,277 ( 15,184 ) ( 32,379 ) Comprehensive income $ 76,282 $ 62,934 $ 75,004 See accompanying notes to consolidated financial statements. 58 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands, except per share amounts) Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2018 $ 1,412 $ 1,207,644 $ ( 36,343 ) $ 214,569 $ 4,340 $ 1,391,622 Net income, fiscal year 2019 94,243 94,243 Other comprehensive loss, net of tax ( 19,239 ) ( 19,239 ) Cumulative effect of adopting Accounting Standards Update ("ASU") 2014-09 394 394 ESOP activity 549 1,651 2,200 Restricted stock activity, net 1 ( 3 ) ( 2 ) Stock-based compensation 552 552 Stock options exercised 1 1,484 1,485 Cash dividends to stockholders ($ 0.98 per share) ( 134,929 ) ( 134,929 ) Balance at September 30, 2019 1,414 1,210,226 ( 34,692 ) 174,277 ( 14,899 ) 1,336,326 Net income, fiscal year 2020 64,540 64,540 Cumulative effect of adopting ASU 2016-02 88 88 Other comprehensive loss, net of tax ( 1,606 ) ( 1,606 ) ESOP activity 336 1,652 1,988 Restricted stock activity, net ( 19 ) ( 19 ) Stock-based compensation 570 570 Repurchase of common stock ( 26 ) ( 21,897 ) ( 1,881 ) ( 23,804 ) Stock options exercised 1 637 638 Cash dividends to stockholders ($ 0.68 per share) ( 93,862 ) ( 93,862 ) Balance at September 30, 2020 1,389 1,189,853 ( 33,040 ) 143,162 ( 16,505 ) 1,284,859 Cumulative effect of adopting ASU 2016-13 ( 2,288 ) ( 2,288 ) Net income, fiscal year 2021 76,082 76,082 Other comprehensive income, net of tax 200 200 ESOP activity 383 1,653 2,036 Restricted stock activity, net ( 16 ) ( 16 ) Stock-based compensation 496 496 Repurchase of common stock ( 1 ) ( 1,407 ) ( 122 ) ( 1,530 ) Stock options exercised 324 324 Cash dividends to stockholders ($ 0.87 per share) ( 117,890 ) ( 117,890 ) Balance at September 30, 2021 $ 1,388 $ 1,189,633 $ ( 31,387 ) $ 98,944 $ ( 16,305 ) $ 1,242,273 See accompanying notes to consolidated financial statements. 59 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands) 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 76,082 $ 64,540 $ 94,243 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 3,916 ) ( 5,827 ) ( 7,823 ) Provision for credit losses ( 8,510 ) 22,300 750 Originations of loans receivable held-for-sale ("LHFS") ( 1,780 ) — — Proceeds from sales of LHFS 1,825 — — Amortization and accretion of premiums and discounts on securities 6,206 1,661 1,242 Depreciation and amortization of premises and equipment 9,372 9,133 9,143 Amortization of intangible assets 1,578 1,964 2,316 Amortization of deferred amounts related to FHLB advances, net 1,582 539 8 Common stock committed to be released for allocation - ESOP 2,036 1,988 2,200 Stock-based compensation 496 570 552 Provision for deferred income taxes ( 1,668 ) ( 5,588 ) ( 361 ) Gain on the sale of Visa Class B shares ( 7,386 ) — — Changes in: Unrestricted cash collateral (provided to)/received from derivative counterparties, net — — ( 9,970 ) Other assets, net 12,751 9,105 6,220 Income taxes payable/receivable, net 105 774 2,173 Other liabilities ( 14,306 ) ( 8,231 ) ( 19,746 ) Net cash provided by operating activities 74,467 92,928 80,947 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities ( 1,079,351 ) ( 1,007,763 ) ( 386,702 ) Proceeds from calls, maturities and principal reductions of AFS securities 594,294 667,952 359,551 Proceeds from calls, maturities and principal reductions of HTM securities — — 165,336 Proceeds from the redemption of FHLB stock 25,386 10,421 197,054 Purchase of FHLB stock ( 1,029 ) — ( 187,961 ) Net change in loans receivable 132,800 191,359 95,358 Purchase of premises and equipment ( 9,410 ) ( 14,742 ) ( 11,732 ) Proceeds from sale of other real estate owned ("OREO") 194 993 2,053 Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures — — 302 Proceeds from the sale of Visa Class B shares 7,386 — — Proceeds from sale of assets held-for-sale 2,619 — — Proceeds from bank-owned life insurance ("BOLI") death benefit 443 490 — Net cash (used in) provided by investing activities ( 326,668 ) ( 151,290 ) 233,259 (Continued) 60 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands) 2021 2020 2019 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 117,890 ) ( 93,862 ) ( 134,929 ) Net change in deposits 405,988 609,541 ( 21,487 ) Proceeds from borrowings 1,143,800 1,665,600 5,518,700 Repayments on borrowings ( 1,346,800 ) ( 2,112,600 ) ( 5,563,752 ) Change in advance payments by borrowers for taxes and insurance 7,008 35 422 Payment of FHLB prepayment penalties ( 5,077 ) ( 4,215 ) — Repurchase of common stock ( 4,568 ) ( 20,767 ) — Stock options exercised 324 638 1,485 Net cash provided by financing activities 82,785 44,370 ( 199,561 ) NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS ( 169,416 ) ( 13,992 ) 114,645 CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS: Beginning of year 239,708 253,700 139,055 End of year $ 70,292 $ 239,708 $ 253,700 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax payments $ 13,057 $ 13,045 $ 17,779 Interest payments $ 83,646 $ 118,610 $ 123,508 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Operating lease right-of-use assets obtained $ — $ 16,841 $ — Operating lease liabilities obtained $ — $ 16,726 $ — Transfer of HTM securities, at amortized cost, to AFS securities $ — $ — $ 444,732 See accompanying notes to consolidated financial statements. (Concluded) 61 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - Capitol Federal Financial, Inc. (the "Company") provides a full range of retail banking services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"), a federal savings bank, which has 45 traditional and nine in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the Kansas City metropolitan area. The Bank emphasizes mortgage lending, primarily originating and purchasing one- to four-family loans, and providing personal retail financial services, along with offering commercial banking and lending products. The Bank is subject to competition from other financial institutions and other companies that provide financial services. Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank has two wholly owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and assumptions. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $ 42.3 million and $ 185.1 million at September 30, 2021 and 2020, respectively, and restricted cash and cash equivalents of $ 28.0 million and $ 54.6 million at September 30, 2021 and 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 8. Deposits and Borrowed Funds." Regulations of the Board of Governors of the Federal Reserve System ("FRB") have required federally chartered savings banks to maintain cash reserves against their transaction accounts. Required reserves were required to be maintained in the form of vault cash, an account at a Federal Reserve Bank, or a pass-through account as defined by the FRB. The amount of interest-earning deposits held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City") as of September 30, 2021 and 2020 was $ 24.1 million and $ 172.2 million, respectively. In March 2020, the FRB eliminated reserve requirements for all depository institutions; thus, there was no reserve requirement in place at September 30, 2021 or 2020. Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSEs"), including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association, and municipal bonds. Securities are classified as HTM, AFS, or trading based on management's intention for holding the securities on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at the time of purchase. 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 62 interest income over the life of the securities using the level-yield method. At September 30, 2021 and 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 14. Fair Value of Financial Instruments." Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in non-interest income in the consolidated statements of income. During the fiscal years ended September 30, 2021 and 2020, neither the Company nor the Bank maintained a trading securities portfolio. Allowance for Credit Losses on AFS Debt Securities - Management monitors AFS debt securities for impairment on an ongoing basis and performs a formal review quarterly. If an AFS debt security is in an unrealized loss position at the time of the quarterly review, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost. If either condition is met, the entire loss in fair value is recognized in current earnings. If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors. In making this assessment, management considers the security structure, the cause(s) and severity of the loss, expectations of future performance including recent events specific to the issuer or industry including the issuer's financial condition and current ability to make future payments in a timely manner, and external credit ratings and recent downgrades in such ratings. Management's assessment involves a high degree of subjectivity and judgment that is based on information available at a point in time. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an ACL is recorded, which became effective October 1, 2020 when the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments . 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 September 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 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. 63 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. 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 as of a point in time. 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 64 basis. Charge-offs against the related ACL amounts for any loan type may be recorded at any time if the Bank has knowledge of the existence of a probable loss. One- to four-family loans and consumer home equity loans are deemed to be collateral dependent and individually evaluated for loss when the loan is generally 180 days delinquent, and any identified losses are charged-off at that time. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell. Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan. When a non-real estate secured consumer loan is 120 days delinquent, any identified losses are charged-off. For commercial loans, loans are individually evaluated for loss if management determines they exhibit unique risk characteristics. Specific allocations of ACL are established and/or losses are charged-off prior to a loan becoming 120 days delinquent when it is determined, through the analysis of any available current financial information regarding the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement. In the case of secured loans, the loan is deemed to be collateral dependent when this occurs, and the specific allocation of ACL and/or charge-off amount is based on a comparison of the amounts due from the borrower and calculated current fair value of the collateral after consideration of estimated costs to sell. The primary credit risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased delinquencies, non-performing assets, charge-offs, and provisions for credit losses. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. For loans evaluated for credit losses on a pool basis, average historical loss rates are calculated for each pool using the Company's historical charge-offs, or peer data when the Company's own historical loss rates are not reflective of future loss expectations, and outstanding loan balances during a historical time period. The historical time periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. Generally, the historical time periods are at least one economic cycle. These historical loss rates are compared to historical data related to economic variables including national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the United States gross domestic product during the same time periods over which the historical loss rates were calculated, and a correlation is estimated using regression analysis. Each quarter, the Company's ACL model pairs the results of the regression analysis with an economic forecast of these same macroeconomic variables, which is provided by a third party, in order to project future loss rates. The forecast is applied for a reasonable and supportable time period, as determined by management, before reverting back to long-term historical averages at the macroeconomic variable level using a straight-line method. The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for expected prepayments and curtailments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a TDR will be executed. In the case of revolving lines of credit, since the rate of principal reduction is generally at the discretion of the borrower, remaining contractual lives are calculated by estimating future cash flows expected to be received from the borrower until the outstanding balance has been reduced to zero. Using all of these inputs, the ACL model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life. These cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at a present value of future cash flows. Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of future cash flows compared to the amortized cost basis of the loan pool. 65 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. Federal Home Loan Bank Stock - As a member of FHLB, the Bank is required to acquire and hold shares of FHLB stock. The Bank's holding requirement varies based on the Bank's activities, primarily the Bank's outstanding borrowings, with FHLB. FHLB stock is carried at cost and is considered a restricted asset because it cannot be pledged as collateral or bought or sold on the open market and it also has certain redemption restrictions. Management conducts a quarterly evaluation to determine if any FHLB stock impairment exists. The quarterly impairment evaluation focuses primarily on the capital adequacy and liquidity of FHLB, while also considering the impact that legislative and regulatory developments may have on FHLB. Stock and cash dividends received on FHLB stock are reflected as dividend income in the consolidated statements of income. Premises, Equipment, and Leases - Land is carried at cost. Buildings, leasehold improvements, and furniture, fixtures and equipment are carried at cost less accumulated depreciation and leasehold amortization. Buildings, furniture, fixtures and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases. The costs for major improvements and renovations are capitalized, while maintenance, repairs and minor improvements are charged to operating expenses as incurred. Gains and losses on dispositions are recorded as non-interest income or non-interest expense as incurred. The Company leases real estate property for branches, ATMs, and certain equipment. All of the leases in which the Company is the lessee are classified as operating leases. The Company determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease. Operating lease right-of-use assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The right-of-use assets associated with operating leases are recorded in other assets in the Company's consolidated balance sheets. The lease liabilities associated with operating leases are included in other liabilities on the consolidated balance sheets. The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset. The lease liability is decreased as periodic lease payments are made. The Company performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable. The calculated amounts of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company cannot practically determine the interest rate implicit in the lease so the Company's incremental borrowing rate is used as the discount rate for the lease. The Company uses FHLB advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception 66 based upon the term of the lease. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Company's consolidated statements of income. For facility-related leases, the Company elected, by lease class, to not separate lease and non-lease components. Lease expense is recognized on a straight-line basis over the lease term. Variable lease expense primarily represents payments such as common area maintenance, real estate taxes, and utilities and are recognized as expense in the period when those payments are incurred. Short-term lease expense relates to leases with an initial term of 12 months or less. The Company has elected to not record a right-of-use asset or lease liability for short-term leases. Low Income Housing Partnerships - As part of the Bank's community reinvestment initiatives, the Bank invests in affordable housing limited partnerships ("low income housing partnerships") that make equity investments in affordable housing properties. The Bank is a limited partner in each partnership in which it invests. A separate, unrelated third party is the general partner. The Bank receives affordable housing tax credits and other tax benefits for these investments. Other Assets - Included in other assets on the consolidated balance sheet are the Company's intangible assets, which consist of goodwill, deposit intangibles and other intangibles. Goodwill is assessed for impairment on an annual basis, or more frequently in certain circumstances. The test for impairment is performed by comparing the fair value of the reporting unit with its carrying amount. If the fair value is determined to be less than the carrying amount, an impairment is recorded. The Company's intangible assets primarily relate to core deposits. These intangible assets are amortized based upon the expected economic benefit over an estimated life determined at the time of acquisition and are tested for impairment whenever events or circumstances change. Interest Rate Swaps - The Company uses interest rate swaps as part of its interest rate risk management strategy to hedge the variable cash outflows associated with certain borrowings. Interest rate swaps are carried at fair value in the Company's consolidated financial statements. For interest rate swaps that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of such agreements are recorded in AOCI and are subsequently reclassified into interest expense in the period that interest on the borrowings affects earnings. The ineffective portion of the change in fair value of the interest rate swap is recognized directly in earnings. Effectiveness is assessed using regression analysis. At the inception of a hedge, the Company documents certain items, including the relationship between the hedging instrument and the hedged item, the risk management objective and the nature of the risk being hedged, a description of how effectiveness will be measured and an evaluation of hedged transaction effectiveness. Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income tax expense (benefit) represents the change in deferred income tax assets and liabilities excluding the tax effects of the change in net unrealized gain (loss) on AFS securities and interest rate swaps. Income tax related penalties and interest, if any, are included in income tax expense in the consolidated statements of income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that management considers it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is recorded. All positive and negative evidence is reviewed in determining how much of a valuation allowance is recognized on a quarterly basis. Accounting Standards Codification ("ASC") Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position taken, or expected to be taken, in a tax return. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense in the consolidated statements of income. Accrued interest and penalties related to unrecognized tax benefits are included within the related tax liabilities line in the consolidated balance sheet. 67 Employee Stock Ownership Plan - The funds borrowed by the ESOP from the Company to purchase the Company's common stock are being repaid from dividends paid on unallocated ESOP shares and, if necessary, contributions by the Bank. The ESOP shares pledged as collateral are reported as a reduction of stockholders' equity at cost. As ESOP shares are committed to be released from collateral each quarter, the Company records compensation expense based on the average market price of the Company's stock during the quarter. Additionally, the ESOP shares become outstanding for EPS computations once they are committed to be released. Stock-based Compensation - The Company has share-based plans under which stock options and restricted stock awards have been granted. Compensation expense is recognized over the service period of the share-based payment award. The Company utilizes a fair-value-based measurement method in accounting for the share-based payment transactions. The Company applies the modified prospective method in which compensation cost is recognized over the service period for all awards granted. Trust Asset Management - Assets (other than cash deposits with the Bank) held in fiduciary or agency capacities for customers are not included in the accompanying consolidated balance sheets, since such items are not assets of the Company or its subsidiaries. Revenue Recognition - Non-interest income within the scope of ASC Topic 606 is recognized by the Company when performance obligations, under the terms of the contract, are satisfied. This income is measured as the amount of consideration expected to be received in exchange for the providing of services. The majority of the Company's applicable non-interest income continues to be recognized at the time when services are provided to its customers. See "Note 16. Revenue Recognition" for additional information. Segment Information - As a community-oriented financial institution, substantially all of the Bank's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company's only operating segment for financial reporting purposes. Earnings Per Share - Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during any period are weighted for the portion of the period that they were outstanding. In computing both basic and diluted EPS, the weighted average number of common shares outstanding includes the ESOP shares previously allocated to participants and shares committed to be released for allocation to participants and shares of restricted stock which have vested. ESOP shares that have not been committed to be released are excluded from the computation of basic and diluted EPS. Unvested restricted stock awards contain nonforfeitable rights to dividends and are treated as participating securities in the computation of EPS pursuant to the two-class method. 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. 68 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 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 $ 18.7 million and $ 2.9 million at September 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. 69 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. 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 Year Ended September 30, 2021 2020 2019 (Dollars in thousands, except per share amounts) Net income $ 76,082 $ 64,540 $ 94,243 Income allocated to participating securities ( 50 ) ( 52 ) ( 55 ) Net income available to common stockholders $ 76,032 $ 64,488 $ 94,188 Average common shares outstanding 135,418,774 137,834,304 137,614,465 Average committed ESOP shares outstanding 62,458 62,400 62,458 Total basic average common shares outstanding 135,481,232 137,896,704 137,676,923 Effect of dilutive stock options 14,363 4,484 58,478 Total diluted average common shares outstanding 135,495,595 137,901,188 137,735,401 Net EPS: Basic $ 0.56 $ 0.47 $ 0.68 Diluted $ 0.56 $ 0.47 $ 0.68 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 206,284 437,731 470,938 70 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. September 30, 2021 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,484,211 $ 18,690 $ 8,908 $ 1,493,993 GSE debentures 519,971 — 3,645 516,326 Municipal bonds 4,274 15 — 4,289 $ 2,008,456 $ 18,705 $ 12,553 $ 2,014,608 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. September 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 $ 881,975 $ 8,843 $ 10,612 $ 65 GSE debentures 516,325 3,645 — — Municipal bonds — — — — $ 1,398,300 $ 12,488 $ 10,612 $ 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 71 The unrealized losses at September 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 September 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 September 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 $ 4,064 $ 4,079 One year through five years 495,181 491,685 Five years through ten years 25,000 24,851 524,245 520,615 MBS 1,484,211 1,493,993 $ 2,008,456 $ 2,014,608 The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented. For the Year Ended September 30, 2021 2020 2019 (Dollars in thousands) Taxable $ 2,710 $ 4,242 $ 6,020 Non-taxable 115 225 346 $ 2,825 $ 4,467 $ 6,366 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. September 30, 2021 2020 (Dollars in thousands) Public unit deposits $ 264,885 $ 330,986 FRB of Kansas City 64,707 259,851 Commercial deposits 66,256 — $ 395,848 $ 590,837 During fiscal year 2021, 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 fiscal years 2021, 2020, and 2019 were the result of principal repayments, calls, or maturities. 72 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at September 30, 2021 and 2020 is summarized as follows: 2021 2020 (Dollars in thousands) One- to four-family: Originated $ 3,956,064 $ 3,937,310 Correspondent purchased 2,003,477 2,101,082 Bulk purchased 173,662 208,427 Construction 39,142 34,593 Total 6,172,345 6,281,412 Commercial: Commercial real estate 676,908 626,588 Commercial and industrial 66,497 97,614 Construction 85,963 105,458 Total 829,368 829,660 Consumer: Home equity 86,274 103,838 Other 8,086 10,086 Total 94,360 113,924 Total loans receivable 7,096,073 7,224,996 Less: ACL 19,823 31,527 Discounts/unearned loan fees 29,556 29,190 Premiums/deferred costs ( 34,448 ) ( 38,572 ) $ 7,081,142 $ 7,202,851 As of September 30, 2021 and 2020, the Bank serviced loans for others aggregating $ 63.4 million and $ 87.2 million, respectively. Such loans are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees withheld from investors and certain charges collected from borrowers, such as late payment fees. The Bank held borrowers' escrow balances on loans serviced for others of $ 1.4 million and $ 1.7 million as of September 30, 2021 and 2020, respectively. Lending Practices and Underwriting Standards - Originating and purchasing one- to four-family loans is the Bank's primary lending business. The Bank also originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri. One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. Generally, loans are underwritten according to the "ability to repay" and "qualified mortgage" standards, as issued by the Consumer Financial Protection Bureau. Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function. 73 The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters. The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided. Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or are in participation with a lead bank. When underwriting a commercial real estate or commercial construction loan, several factors are considered, such as the income producing potential of the property, cash equity provided by the borrower, the financial strength of the borrower, managerial expertise of the borrower or tenant, feasibility studies, lending experience with the borrower and the marketability of the property. For commercial real estate and commercial construction participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. At the time of origination, LTV ratios on commercial real estate loans generally do not exceed 85 % of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 . For commercial construction loans, LTV ratios generally do not exceed 80 % of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 , but it applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. Appraisals on properties securing these loans are performed by independent state certified fee appraisers. The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. With the exception of Paycheck Protection Program loans, which are unsecured but are generally guaranteed by the U.S. Small Business Administration, 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 on Loans Receivable." 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 the originated 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. 74 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 nonaccrual 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. 75 The following table sets forth, as of September 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 September 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. September 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 $ 958,080 $ 705,561 $ 326,156 $ 250,846 $ 281,104 $ 1,434,455 $ — $ 3,956,202 Special Mention 402 443 501 678 237 7,805 — 10,066 Substandard — 966 867 51 192 11,192 — 13,268 Correspondent purchased Pass 630,977 334,042 88,057 136,572 162,938 664,530 — 2,017,116 Special Mention 760 — 356 — — 3,160 — 4,276 Substandard — — 169 504 — 4,527 — 5,200 Bulk purchased Pass — — — — — 169,519 — 169,519 Special Mention — — — — — — — — Substandard — — — — — 4,848 — 4,848 1,590,219 1,041,012 416,106 388,651 444,471 2,300,036 — 6,180,495 Commercial: Commercial real estate Pass 272,329 149,244 94,972 61,214 38,962 35,591 5,231 657,543 Special Mention 50,352 — — — — 49,369 — 99,721 Substandard 810 627 225 669 — 34 — 2,365 Commercial and industrial Pass 32,651 10,168 6,988 2,213 1,155 595 11,709 65,479 Special Mention — — — — — — — — Substandard — — — 86 48 — 765 899 356,142 160,039 102,185 64,182 40,165 85,589 17,705 826,007 Consumer: Home equity Pass 3,295 2,218 1,428 1,563 536 2,473 74,036 85,549 Special Mention — — 37 12 — — 82 131 Substandard — 60 — — — 9 636 705 Other Pass 3,491 1,631 1,086 944 465 105 339 8,061 Special Mention — — 4 — — — — 4 Substandard — 3 6 1 3 — — 13 6,786 3,912 2,561 2,520 1,004 2,587 75,093 94,463 Total $ 1,953,147 $ 1,204,963 $ 520,852 $ 455,353 $ 485,640 $ 2,388,212 $ 92,798 $ 7,100,965 76 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. 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 77 Delinquency Status - The following table sets forth, as of September 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. September 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 $ 958,482 $ 706,970 $ 327,408 $ 251,524 $ 281,341 $ 1,445,992 $ — $ 3,971,717 30-89 — — — 51 — 4,091 — 4,142 90+/FC — — 116 — 192 3,369 — 3,677 Correspondent purchased Current 630,977 334,042 88,413 136,572 162,017 668,685 — 2,020,706 30-89 760 — — — 921 948 — 2,629 90+/FC — — 169 504 — 2,584 — 3,257 Bulk purchased Current — — — — — 170,809 — 170,809 30-89 — — — — — 555 — 555 90+/FC — — — — — 3,003 — 3,003 1,590,219 1,041,012 416,106 388,651 444,471 2,300,036 — 6,180,495 Commercial: Commercial real estate Current 323,491 149,244 94,972 61,651 38,962 84,957 5,231 758,508 30-89 — — — — — 37 — 37 90+/FC — 627 225 232 — — — 1,084 Commercial and industrial Current 32,651 10,168 6,988 2,212 1,155 595 12,474 66,243 30-89 — — — — — — — — 90+/FC — — — 87 48 — — 135 356,142 160,039 102,185 64,182 40,165 85,589 17,705 826,007 Consumer: Home equity Current 3,295 2,218 1,465 1,575 536 2,357 73,958 85,404 30-89 — — — — — 121 375 496 90+/FC — 60 — — — 4 421 485 Other Current 3,491 1,631 1,088 944 465 105 339 8,063 30-89 — — 2 — — — — 2 90+/FC — 3 6 1 3 — — 13 6,786 3,912 2,561 2,520 1,004 2,587 75,093 94,463 Total $ 1,953,147 $ 1,204,963 $ 520,852 $ 455,353 $ 485,640 $ 2,388,212 $ 92,798 $ 7,100,965 78 Delinquent and Nonaccrual Loans - The following tables present the amortized cost at September 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 September 30, 2021 and 2020, all loans 90 or more days delinquent were on nonaccrual status. September 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 $ 4,142 $ 3,677 $ 7,819 $ 3,971,717 $ 3,979,536 Correspondent purchased 2,629 3,257 5,886 2,020,706 2,026,592 Bulk purchased 555 3,003 3,558 170,809 174,367 Commercial: Commercial real estate 37 1,084 1,121 758,508 759,629 Commercial and industrial — 135 135 66,243 66,378 Consumer: Home equity 496 485 981 85,404 86,385 Other 2 13 15 8,063 8,078 $ 7,861 $ 11,654 $ 19,515 $ 7,081,450 $ 7,100,965 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 September 30, 2021 and 2020 was $ 799 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 $ 170 thousand at September 30, 2021 and $ 183 thousand at September 30, 2020. 79 The following table presents the amortized cost at September 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 September 30, 2021, all of which were individually evaluated for loss and any identified losses have been charged off. September 30, 2021 September 30, 2020 Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans (Dollars in thousands) One- to four-family: Originated $ 4,965 $ 2,237 $ 5,037 Correspondent purchased 3,257 307 2,433 Bulk purchased 3,134 1,564 2,938 Commercial: Commercial real estate 1,496 485 1,663 Commercial and industrial 134 86 157 Consumer: Home equity 494 84 305 Other 13 — 8 $ 13,493 $ 4,763 $ 12,541 TDRs - The following tables present the amortized cost for the current year and, prior to the adoption of CECL, the recorded investment for prior years, prior to restructuring and immediately after restructuring in all loans restructured during the years 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 Year Ended September 30, 2021 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 7 $ 1,685 $ 1,576 Correspondent purchased — — — Bulk purchased — — — Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: Home equity — — — Other — — — 7 $ 1,685 $ 1,576 80 For the Year Ended September 30, 2020 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 5 $ 241 $ 242 Correspondent purchased 1 192 191 Bulk purchased 1 75 134 Commercial: Commercial real estate 1 837 837 Commercial and industrial 1 1,683 1,709 Consumer: Home equity 2 45 44 Other — — — 11 $ 3,073 $ 3,157 For the Year Ended September 30, 2019 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 3 $ 385 $ 386 Correspondent purchased — — — Bulk purchased 2 377 377 Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: Home equity — — — Other — — — 5 $ 762 $ 763 The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured. For the Year Ended September 30, 2021 September 30, 2020 September 30, 2019 Number of Amortized Number of Recorded Number of Recorded Contracts Cost Contracts Investment Contracts Investment (Dollars in thousands) One- to four-family: Originated — $ — 1 $ 38 1 $ 45 Correspondent purchased — — — — — — Bulk purchased — — 1 134 — — Commercial: Commercial real estate — — — — — — Commercial and industrial — — — — — — Consumer: Home equity — — 1 9 — — Other — — — — — — — $ — 3 $ 181 1 $ 45 81 Impaired Loans - The following information pertains to impaired loans, by class, as of September 30, 2020 (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. Unpaid Recorded Principal Related Investment Balance ACL (Dollars in thousands) With no related allowance recorded One- to four-family: Originated $ 12,385 $ 12,813 $ — Correspondent purchased 1,955 2,058 — Bulk purchased 3,843 4,302 — Commercial: Commercial real estate 1,052 1,379 — Commercial and industrial 99 244 — Consumer: Home equity 280 360 — Other — 45 — 19,614 21,201 — With an allowance recorded One- to four-family: Originated — — — Correspondent purchased — — — Bulk purchased — — — Commercial: Commercial real estate 660 660 83 Commercial and industrial 1,269 1,268 240 Consumer: Home equity — — — Other — — — 1,929 1,928 323 Total One- to four-family: Originated $ 12,385 $ 12,813 — Correspondent purchased 1,955 2,058 — Bulk purchased 3,843 4,302 — Commercial: Commercial real estate 1,712 2,039 83 Commercial and industrial 1,368 1,512 240 Consumer: Home equity 280 360 — Other — 45 — $ 21,543 $ 23,129 $ 323 82 The following information pertains to impaired loans, by class, for the periods presented (prior to the adoption of CECL). For the Year Ended September 30, 2020 September 30, 2019 Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized (Dollars in thousands) With no related allowance recorded One- to four-family: Originated $ 13,918 $ 606 $ 16,030 $ 671 Correspondent purchased 1,878 73 2,071 82 Bulk purchased 4,720 179 5,257 180 Commercial: Commercial real estate 725 15 — — Commercial and industrial 41 — 5 — Consumer: Home equity 318 20 417 28 Other — — — — 21,600 893 23,780 961 With an allowance recorded One- to four-family: Originated — — — — Correspondent purchased — — — — Bulk purchased — — — — Commercial: Commercial real estate 51 — — — Commercial and industrial 1,413 91 — — Consumer: Home equity — — — — Other — — — — 1,464 91 — — Total One- to four-family: Originated 13,918 606 16,030 671 Correspondent purchased 1,878 73 2,071 82 Bulk purchased 4,720 179 5,257 180 Commercial: Commercial real estate 776 15 — — Commercial and industrial 1,454 91 5 — Consumer: Home equity 318 20 417 28 Other — — — — $ 23,064 $ 984 $ 23,780 $ 961 83 Allowance for Credit Losses - The following is a summary of ACL activity, by loan portfolio segment, for the periods presented. Activity during fiscal years 2020 and 2019 occurred prior to the adoption of CECL. For the Year Ended September 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 ( 164 ) — ( 21 ) ( 185 ) ( 515 ) ( 15 ) ( 715 ) Recoveries 144 — — 144 50 43 237 Provision for credit losses ( 1 ) ( 262 ) ( 578 ) ( 841 ) ( 5,490 ) ( 134 ) ( 6,465 ) Ending balance $ 1,612 $ 2,062 $ 304 $ 3,978 $ 15,652 $ 193 $ 19,823 For the Year Ended September 30, 2020 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226 Charge-offs ( 64 ) — — ( 64 ) ( 349 ) ( 30 ) ( 443 ) Recoveries 41 — 265 306 110 28 444 Provision for credit losses 4,108 1,488 ( 485 ) 5,111 16,868 321 22,300 Ending balance $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527 84 For the Year Ended September 30, 2019 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,953 $ 1,861 $ 925 $ 5,739 $ 2,556 $ 168 $ 8,463 Charge-offs ( 75 ) — ( 26 ) ( 101 ) ( 124 ) ( 37 ) ( 262 ) Recoveries 22 — 106 128 49 98 275 Provision for credit losses ( 900 ) ( 658 ) ( 318 ) ( 1,876 ) 2,690 ( 64 ) 750 Ending balance $ 2,000 $ 1,203 $ 687 $ 3,890 $ 5,171 $ 165 $ 9,226 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). 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 85 The key assumptions in the Company's ACL model at September 30, 2021 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 September 30, 2021. The key assumptions utilized in estimating the Company's ACL at September 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 September 30, 2021. The forecasted economic indices applied to the model at September 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 September 30, 2021 was the national unemployment rate. The forecast national unemployment rate in the economic scenario selected by management at September 30, 2021 had the national unemployment rate gradually declining to 3.4 % at September 30, 2022 which was the end of our four-quarter forecast time period. • Forecast and reversion to mean time period - The forecasted time period and the reversion to mean time period were each four quarters for all of the economic indices at September 30, 2021. • Prepayment and curtailment assumptions - The assumptions used at September 30, 2021 were generally based on actual historical prepayment and curtailment speeds for each respective loan pool in the model. • Qualitative factors - The qualitative factors applied by management at September 30, 2021 included the following: ◦ The balance and trending of large-dollar special mention commercial loans; ◦ The economic uncertainties related to (1) the job market, specifically the unemployment rate and labor participation rate and how the significant federal aid may be impacting those measures and the true state of the financial position of borrowers and (2) the unevenness of the recovery in certain industries; and ◦ COVID-19 loan modifications related to commercial real estate loans. The decrease in ACL at September 30, 2021 compared to October 1, 2020 (CECL adoption date) was primarily a result of a negative provision for credit losses of $ 6.5 million. The negative provision for credit losses was due primarily to a reduction in the commercial loan ACL related to improvements in forecasted economic conditions since CECL adoption, partially offset by an increase in commercial loan qualitative factors as discussed above. Reserve for Off-Balance Sheet Credit Exposures - The following is a summary of the changes in reserve for off-balance sheet credit exposures during the period indicated. The negative provision for credit losses was due primarily to a reduction in the commercial loan reserves related to improvements in forecasted economic conditions since CECL adoption. For the Year Ended September 30, 2021 (Dollars in thousands) Beginning balance $ — Adoption of CECL 7,788 Balance at October 1, 2020 7,788 Provision for credit losses ( 2,045 ) Ending balance $ 5,743 86 5. PREMISES, EQUIPMENT AND LEASES A summary of the net carrying value of premises and equipment at September 30, 2021 and 2020 was as follows: 2021 2020 (Dollars in thousands) Land $ 15,706 $ 16,566 Building and improvements 120,065 116,595 Furniture, fixtures and equipment 57,129 57,504 192,900 190,665 Less accumulated depreciation 93,773 88,790 $ 99,127 $ 101,875 During the current year, management decided to relocate one of the Bank's branches. As a result, the Company classified as held-for-sale and subsequently sold the property where the branch was previously located. The sale of this property resulted in a loss of $ 940 thousand, which was included in other non-interest expense on the consolidated statements of income. The Company leases real estate property for branches, ATMs, and certain equipment. These leases have remaining terms that range from one year to 46 years, some of which include exercising renewal options that the Company considers to be reasonably certain. As of September 30, 2021, a right-of-use asset of $ 12.7 million was included in other assets and a lease liability of $ 12.8 million was included in other liabilities on the consolidated balance sheets. As of September 30, 2021, for the Company's operating leases, the weighted average remaining lease term was 21.8 years and the weighted average discount rate was 2.51 %. The following table presents lease expenses and supplemental cash flow information related to the Company's leases for the years indicated. For the Year Ended September 30, 2021 2020 (Dollars in thousands) Operating lease expense $ 1,404 $ 1,511 Variable lease expense 176 201 Short-term lease expense 2 17 Cash paid for amounts included in the measurement of lease liabilities 1,301 1,357 The following table presents future minimum payments, rounded to the nearest thousand, for operating leases with initial or remaining terms in excess of one year as of September 30, 2021 (dollars in thousands): Fiscal year 2022 $ 1,210 Fiscal year 2023 1,224 Fiscal year 2024 993 Fiscal year 2025 759 Fiscal year 2026 711 Thereafter 13,477 Total future minimum lease payments 18,374 Amounts representing interest ( 5,552 ) Present value of net future minimum lease payments $ 12,822 87 6. LOW INCOME HOUSING PARTNERSHIPS The Bank's investment in low income housing partnerships, which is included in other assets in the consolidated balance sheets, was $ 101.2 million and $ 89.7 million at September 30, 2021 and 2020, respectively. The Bank's obligations related to unfunded commitments, which are included in other liabilities in the consolidated balance sheets, were $ 51.6 million and $ 44.5 million at September 30, 2021 and 2020, respectively. The majority of the commitments at September 30, 2021 are projected to be funded through the end of calendar year 2023 . For fiscal year 2021, the net income tax benefit associated with these investments, which consists of proportional amortization expense and affordable housing tax credits and other related tax benefits, was reported in income tax expense in the consolidated statements of income. The amount of proportional amortization expense recognized during fiscal years 2021, 2020 and 2019 was $ 8.4 million, $ 7.9 million and $ 6.8 million, respectively, and the amount of affordable housing tax credits and other related tax benefits was $ 10.5 million, $ 9.8 million and $ 8.6 million, respectively, resulting in a net income tax benefit of $ 2.1 million, $ 1.9 million and $ 1.8 million, respectively. There were no impairment losses during fiscal years 2021, 2020, or 2019 resulting from the forfeiture or ineligibility of tax credits or other circumstances. 7. INTANGIBLE ASSETS The Company recognized goodwill of $ 8.0 million associated with an acquisition in 2018. The goodwill was calculated as the consideration exchanged in excess of the fair value of assets, net of the fair value of liabilities assumed. Certain purchase accounting adjustments were applied during the measurement period in fiscal year 2019, resulting in a $1.3 million increase in goodwill associated with the acquisition. The Company also recognized $ 10.1 million of other intangible assets in conjunction with the acquisition which is largely composed of core deposit intangibles. These other intangible assets are being amortized over their estimated lives, which management determined to be 8.0 years at the time of acquisition. Changes in the carrying amount of the Company's intangible assets, which are included in other assets on the consolidated balance sheet, are presented in the following table. Core Deposit and Goodwill Other Intangibles (Dollars in thousands) Balance at September 30, 2018 $ 7,989 $ 9,819 Purchase accounting adjustments 1,335 — Less: Amortization — ( 2,316 ) Balance at September 30, 2019 9,324 7,503 Less: Amortization — ( 1,964 ) Balance at September 30, 2020 9,324 5,539 Less: Amortization — ( 1,578 ) Balance at September 30, 2021 $ 9,324 $ 3,961 As of September 30, 2021, there was no impairment recorded on goodwill or other intangible assets. The estimated amortization expense for the next five years related to the core deposit and other intangible assets as of September 30, 2021 is presented in the following table (dollars in thousands): 2022 $ 1,371 2023 1,069 2024 775 2025 523 2026 223 88 8. DEPOSITS AND BORROWED FUNDS Deposits - Non-interest-bearing deposits totaled $ 543.8 million and $ 451.4 million as of September 30, 2021 and 2020, respectively. Certificates of deposit with a minimum denomination of $250 thousand were $ 597.4 million and $ 643.0 million as of September 30, 2021 and 2020, respectively. Deposits in excess of $250 thousand may not be fully insured by the Federal Deposit Insurance Corporation. Borrowings - FHLB borrowings at September 30, 2021 consisted of $ 1.58 billion in FHLB advances, of which $ 1.23 billion were fixed-rate advances and $ 365.0 million were variable-rate advances, and no borrowings against the variable-rate FHLB line of credit. FHLB borrowings at September 30, 2020 consisted of $ 1.79 billion in FHLB advances, of which $ 1.15 billion were fixed-rate advances and $ 640.0 million were variable-rate advances, and no borrowings against the variable-rate FHLB line of credit. On November 12, 2021 , the line of credit was renewed by FHLB for a one-year period. Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window." FHLB advances at September 30, 2021 and 2020 were comprised of the following: 2021 2020 (Dollars in thousands) FHLB advances $ 1,590,000 $ 1,793,000 Deferred prepayment penalty ( 7,150 ) ( 3,687 ) $ 1,582,850 $ 1,789,313 Weighted average contractual interest rate on FHLB advances 1.18 % 1.41 % Weighted average effective interest rate on FHLB advances (1) 1.88 2.31 (1) The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the adjustable-rate FHLB advances. At September 30, 2021 and 2020, the Bank had entered into interest rate swap agreements with a total notional amount of $ 365.0 million and $ 640.0 million, respectively, in order to hedge the variable cash flows associated with $ 365.0 million and $ 640.0 million, respectively, of adjustable-rate FHLB advances. At September 30, 2021 and 2020, the interest rate swap agreements had an average remaining term to maturity of 4.1 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 September 30, 2021 and September 30, 2020, the interest rate swaps were in a loss position with a total fair value of $ 27.7 million and $ 53.1 million, respectively, which was reported in other liabilities on the consolidated balance sheet. During fiscal year 2021, $ 13.6 million was reclassified from AOCI. Of this amount, $ 10.0 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 fiscal year 2020, $ 6.3 million was reclassified from AOCI as an increase to interest expense. At September 30, 2021, the Company estimated that $ 9.2 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 $ 28.0 million at September 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. 89 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. FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, when necessary. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40 % of a borrowing institution's regulatory total assets without the pre-approval of FHLB senior management. In July 2021, the president of FHLB approved an increase, through July 2022, in the Bank's borrowing limit to 50 % of Bank Call Report total assets. At September 30, 2021, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was 16 %. Maturity of Borrowed Funds and Certificates of Deposit - The following table presents the scheduled maturity of FHLB advances, at par, and certificates of deposit as of September 30, 2021: FHLB Certificates Advances of Deposit Amount Amount (Dollars in thousands) 2022 $ 175,000 $ 1,655,108 2023 300,000 593,098 2024 315,000 313,206 2025 400,000 129,805 2026 250,000 51,530 Thereafter 150,000 844 $ 1,590,000 $ 2,743,591 9. INCOME TAXES Income tax expense for the years ended September 30, 2021, 2020, and 2019 consisted of the following: 2021 2020 2019 (Dollars in thousands) Current: Federal $ 17,586 $ 17,610 $ 22,030 State 4,028 4,068 4,742 21,614 21,678 26,772 Deferred: Federal ( 1,405 ) ( 4,857 ) ( 456 ) State ( 263 ) ( 731 ) 95 ( 1,668 ) ( 5,588 ) ( 361 ) $ 19,946 $ 16,090 $ 26,411 90 The Company's effective tax rates were 20.8 %, 20.0 %, and 21.9 % for the years ended September 30, 2021, 2020, and 2019, respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense resulted from the following: 2021 2020 2019 Amount % Amount % Amount % (Dollars in thousands) Federal income tax expense computed at statutory Federal rate $ 20,166 21.0 % $ 16,932 21.0 % $ 25,337 21.0 % Increases (decreases) in taxes resulting from: State taxes, net of Federal tax effect 3,102 3.2 2,626 3.3 4,024 3.3 Low income housing tax credits, net ( 2,085 ) ( 2.1 ) ( 1,897 ) ( 2.4 ) ( 1,745 ) ( 1.4 ) ESOP related expenses, net ( 662 ) ( 0.7 ) ( 525 ) ( 0.6 ) ( 757 ) ( 0.6 ) Acquired BOLI policies — — ( 636 ) ( 0.8 ) — — Other ( 575 ) ( 0.6 ) ( 410 ) ( 0.5 ) ( 448 ) ( 0.4 ) $ 19,946 20.8 % $ 16,090 20.0 % $ 26,411 21.9 % The components of the net deferred income tax liabilities as of September 30, 2021 and 2020 were as follows: 2021 2020 (Dollars in thousands) Deferred income tax assets: Unrealized loss on interest rate swaps $ 6,763 $ 12,916 ACL 4,163 6,553 Lease liabilities 3,129 3,590 Salaries, deferred compensation and employee benefits 2,017 1,622 ESOP compensation 1,422 1,360 Reserve for off-balance sheet credit exposures 1,402 — Low income housing partnerships 522 655 Net purchase discounts related to acquired loans 287 577 Other 417 2,717 Gross deferred income tax assets 20,122 29,990 Valuation allowance ( 72 ) ( 1,808 ) Gross deferred income tax asset, net of valuation allowance 20,050 28,182 Deferred income tax liabilities: FHLB stock dividends 12,563 15,699 Premises and equipment 4,256 4,625 Lease right-of-use assets 3,088 3,588 ACL 2,892 2,388 Unrealized gain on AFS securities 1,501 7,617 Deposit intangible 1,047 1,475 Other 513 970 Gross deferred income tax liabilities 25,860 36,362 Net deferred tax liabilities $ 5,810 $ 8,180 91 The State of Kansas allows for a bad debt deduction on savings and loan institutions' privilege tax returns of up to 5% of Kansas taxable income. Due to the low level of net loan charge-offs experienced by the Bank historically, at times, the Bank's bad debt deduction on the Kansas privilege tax return has been in excess of actual net charge-offs, resulting in a state deferred tax liability, which is presented separately from the federal deferred tax asset related to ACL. The Company assesses the available positive and negative evidence surrounding the recoverability of its deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances. At September 30, 2021 and 2020, the Company had a valuation allowance of $ 72 thousand and $ 1.8 million, respectively, related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return. The companies included in the consolidated Kansas corporate income tax return are the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., as the Bank files a Kansas privilege tax return. Based on the nature of the operations of the holding company, Capitol Funds, Inc. and Capital City Investments, Inc., management believes there will not be sufficient taxable income to fully utilize the deferred tax assets noted above; therefore, a valuation allowance has been recorded for the related amounts at September 30, 2021 and 2020. The decrease in the valuation allowance at September 30, 2021 compared to September 30, 2020 was due primarily to the expiration of operating losses generated during fiscal year 2011, which resulted in the removal of the related deferred tax asset and corresponding valuation allowance. ASC 740 Income Taxes prescribes a process by which a tax position taken, or expected to be taken, on an income tax return is determined based upon the technical merits of the position, along with whether the tax position meets a more-likely-than-not-recognition threshold, to determine the amount, if any, of unrecognized tax benefits to recognize in the financial statements. Estimated penalties and interest related to unrecognized tax benefits are included in income tax expense in the consolidated statements of income. For the years ended September 30, 2021, 2020, and 2019 the Company had no unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction and the state of Kansas, as well as other states where it has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest income derived from sources within a given state. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for fiscal years ending before 2018 . 10. EMPLOYEE STOCK OWNERSHIP PLAN The ESOP trust acquired 3,024,574 shares ( 6,846,728 shares post-corporate reorganization) of common stock in the Company's initial public offering and 4,726,000 shares of common stock in the Company's corporate reorganization in December of 2010. Both acquisitions of common stock were made with proceeds from loans from the Company, secured by shares of the Company's stock purchased in each offering. The Bank has agreed to make cash contributions to the ESOP trust on an annual basis sufficient to enable the ESOP trust to make the required annual loan payments to the Company on September 30 of each year. The loan for the shares acquired in the initial public offering matured on September 30, 2013 . The loan for the shares acquired in the corporate reorganization matures on September 30, 2040 . As annual loan payments are made on each September 30th, shares are released from collateral and allocated to qualified employees based on the proportion of their qualifying compensation to total qualifying compensation. On September 30, 2021, 165,198 shares were released from collateral. On September 30, 2022, 165,198 shares will be released from collateral. As ESOP shares are committed to be released from collateral, the Company records compensation expense. Dividends on unallocated ESOP shares are applied to the debt service payments of the loan secured by the unallocated shares. Dividends on unallocated ESOP shares in excess of the debt service payment are recorded as compensation expense and distributed to participants or participants' ESOP accounts. Compensation expense related to the ESOP was $ 2.3 million for the year ended September 30, 2021, $ 2.0 million for the year ended September 30, 2020, and $ 3.1 million for the year ended September 30, 2019. Of these amounts, $ 383 thousand, $ 336 thousand, and $ 549 thousand related to the difference between the market price of the Company's stock when the shares were acquired by the ESOP trust and the average market price of the Company's stock during the years ended September 30, 2021, 2020, and 2019, respectively. The amount included in compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments was $ 219 thousand, $ 0 and $ 906 thousand for the years ended September 30, 2021, 2020, and 2019, respectively. 92 Shares may be withdrawn from the ESOP trust due to diversification (a participant may begin to diversify at least 25 % of their ESOP shares at age 50 ), retirement, termination, or death of the participant. The following is a summary of shares held in the ESOP trust as of September 30, 2021 and 2020: 2021 2020 (Dollars in thousands) Allocated ESOP shares 4,168,102 4,200,964 Unreleased ESOP shares 3,138,762 3,303,960 Total ESOP shares 7,306,864 7,504,924 Fair value of unreleased ESOP shares $ 36,064 $ 30,628 11. STOCK-BASED COMPENSATION The Company has a Stock Option Plan, a Restricted Stock Plan, and an Equity Incentive Plan, all of which are considered share-based plans. The Stock Option Plan and Restricted Stock Plan expired in April 2015. No additional grants can be made from these two plans; however, awards granted under these two plans remain outstanding until they are individually vested, forfeited or expire. The objectives of the Equity Incentive Plan are to provide additional compensation to certain officers, directors and key employees by facilitating their acquisition of an equity interest in the Company and enable the Company to retain personnel of experience and ability in key positions of responsibility. Stock Option Plans – There are currently 61,565 stock options outstanding as a result of grants awarded from the Stock Option Plan. The Equity Incentive Plan had 5,907,500 stock options originally eligible to be granted and, as of September 30, 2021, the Company had 4,214,316 stock options still available for future grants under this plan. This plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested, forfeited, or expire. The Company may issue incentive and nonqualified stock options under the Equity Incentive Plan. The incentive stock options expire no later than 10 years from the date of grant, and the nonqualified stock options expire no later than 15 years from the date of grant. The vesting period of the stock options under the Equity Incentive Plan generally has ranged from 3 years to 5 years. The stock option exercise price cannot be less than the market value at the date of the grant as defined by each plan. The fair value of stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model. At September 30, 2021, the Company had 545,087 stock options outstanding with a weighted average exercise price of $ 12.32 per option and a weighted average contractual life of 3.3 years, and 545,087 options exercisable with a weighted average exercise price of $ 12.32 per option and a weighted average contractual life of 3.3 years. The exercise price may be paid in cash, shares of common stock, or a combination of both. New shares are issued by the Company upon the exercise of stock options. Restricted Stock Plans – The Equity Incentive Plan had 2,363,000 shares originally eligible to be granted as restricted stock and, as of September 30, 2021, the Company had 1,612,319 shares available for future grants of restricted stock under this plan. This plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested or forfeited. The vesting period of the restricted stock awards under the Equity Incentive Plan has generally ranged from 3 years to 5 years. At September 30, 2021, the Company had 80,250 unvested shares of restricted stock with a weighted average grant date fair value of $ 13.43 per share. Compensation expense is calculated based on the fair market value of the common stock at the date of the grant, as defined by the plan, and is recognized over the vesting time period. Compensation expense attributable to restricted stock awards during the years ended September 30, 2021, 2020, and 2019 totaled $ 480 thousand, $ 540 thousand, and $ 501 thousand, respectively. The fair value of restricted stock that vested during the years ended September 30, 2021, 2020, and 2019 totaled $ 441 thousand, $ 535 thousand, and $ 294 thousand, respectively. As of September 30, 2021, there was $ 760 thousand of unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.2 years. 93 12. COMMITMENTS AND CONTINGENCIES The following table summarizes the Bank's loan commitments as of September 30, 2021 and 2020: 2021 2020 (Dollars in thousands) Originate fixed-rate $ 85,492 $ 96,126 Originate adjustable-rate 52,288 21,801 Purchase/participate fixed-rate 124,128 65,600 Purchase/participate adjustable-rate 6,767 65,080 $ 268,675 $ 248,607 Commitments to originate loans are commitments to lend to a customer. Commitments to purchase/participate in loans represent commitments to purchase loans from correspondent lenders on a loan-by-loan basis or participate in commercial loans with a lead bank. The Bank evaluates each borrower's creditworthiness on a case-by-case basis. Commitments generally have expiration dates or other termination clauses and one- to four-family loan commitments may require the payment of a rate lock fee. Some of the commitments are expected to expire without being fully drawn upon; therefore, the amount of total commitments disclosed in the table above does not necessarily represent future cash requirements. As of September 30, 2021 and 2020, there were no significant loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans. As of September 30, 2021 and 2020, the Bank had approved but unadvanced lines of credit of $ 287.9 million and $ 283.2 million, respectively. In the normal course of business, the Company and the Bank are named defendants in various lawsuits and counterclaims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the year ended September 30, 2021, or future periods. 13. REGULATORY CAPITAL REQUIREMENTS The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Under regulatory capital adequacy guidelines, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Additionally, the Bank must meet specific capital guidelines to be considered well capitalized per the regulatory framework for prompt corrective action. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. The Bank and the Company must maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. Effective January 1, 2020, the regulatory agencies, including the Office of the Comptroller of Currency and FRB, created a community bank leverage ratio ("CBLR") for institutions with total consolidated assets of less than $10 billion and that meet other qualifying criteria. Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well-capitalized ratio requirements. Management elected to use the CBLR framework for the Bank and Company as of the effective date. In April 2020, as directed by Section 4012 of the CARES Act, the regulatory agencies introduced temporary changes to the CBLR. These changes, which subsequently were adopted as a final rule, temporarily reduced the CBLR requirement to 8% through the end of calendar year 2020. Beginning in calendar year 2021, the CBLR requirement increased to 8.5% and will return to 9% in calendar year 2022. 94 Management believes, as of September 30, 2021, that the Bank and Company meet all capital adequacy requirements to which they are subject and there were no conditions or events subsequent to September 30, 2021 that would change the Bank's or Company's category. For Capital Actual Adequacy Purposes Amount Ratio Amount Ratio (Dollars in thousands) As of September 30, 2021 Bank $ 1,114,325 11.5 % $ 822,194 8.5 % Company 1,246,259 12.9 822,053 8.5 As of September 30, 2020 Bank 1,168,808 12.4 754,884 8.0 Company 1,287,854 13.7 754,767 8.0 Generally, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to the earnings of the previous two calendar years and current year-to-date earnings. It is generally required that the Bank remain well capitalized before and after the proposed distribution. The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. So long as the Bank continues to remain well capitalized after each capital distribution and operates in a safe and sound manner, it is management's belief that the regulators will continue to allow the Bank to distribute its net income to the Company, although no assurance can be given in this regard. In conjunction with the Company's corporate reorganization in December 2010, a "liquidation account" was established for the benefit of certain depositors of the Bank in an amount equal to Capitol Federal Savings Bank MHC's ownership interest in the retained earnings of Capitol Federal Financial as of June 30, 2010. As of September 30, 2021, the balance of this liquidation account was $ 103.9 million. Under applicable federal banking regulations, neither the Company nor the Bank is permitted to pay dividends on its capital stock to its stockholders if stockholders' equity would be reduced below the amount of the liquidation account at that time. 95 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value Measurements – The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments. The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are: • Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. • Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument. The Company bases its fair values on the price that would be received from the sale of a financial instrument in an orderly transaction between market participants at the measurement date under current market conditions. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The following is a description of valuation methodologies used for financial instruments measured at fair value on a recurring basis. AFS Securities - The Company's AFS securities portfolio is carried at estimated fair value. The majority of the securities within the AFS portfolio were issued by GSEs. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of its securities. On a quarterly basis, management corroborates a sample of prices obtained from the third-party pricing service for Level 2 securities by comparing them to an independent source. If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third-party pricing service, then the variance is researched by management. The Company did not have to adjust prices obtained from the third-party pricing service when determining the fair value of its securities during the years ended September 30, 2021 and 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 8. Deposits and Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted 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 years ended September 30, 2021 and 2020. (Level 2) 96 The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2021 or 2020. September 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 $ 1,493,993 $ — $ 1,493,993 $ — GSE debentures 516,326 — 516,326 — Municipal bonds 4,289 — 4,289 — $ 2,014,608 $ — $ 2,014,608 $ — Liabilities: Interest rate swaps $ 27,719 $ — $ 27,719 $ — 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 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 on an individual basis. Those collateral dependent assets that are evaluated on an individual basis 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. 97 The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during fiscal years 2021 and 2020 that were still held in the portfolio as of September 30, 2021 and 2020 was $ 7.4 million and $ 5.7 million, respectively. The one- to four-family loans included in this amount were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10 %. Fair values were estimated through current appraisals. Management does not adjust or apply a discount to the appraised value of one- to four-family loans, except for the estimated sales cost noted above, and the primary unobservable input for these loans was the appraisal. For commercial loans, if the most recent appraisal or book value of the collateral does not reflect current market conditions due to the passage of time and/or other factors, management will make adjustments to the existing appraised or book value based on knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable inputs for commercial loans individually evaluated during the year ended September 30, 2021 were downward adjustments to the book value of the collateral for lack of marketability. During fiscal year 2021, the adjustments ranged from 7 % to 50 %, with a weighted average of 21 %. During fiscal year 2020, the adjustments ranged from 4 % to 50 %, with a weighted average of 18 %. The basis utilized in calculating the weighted averages for these adjustments was the original unadjusted value of each collateral item. Fair values of collateral dependent loans/loans individually evaluated for loss cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the loan and, as such, are classified as Level 3. OREO – OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower of cost or fair value. The fair value for OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10 %. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO measured on a non-recurring basis during fiscal years 2021 and 2020 that was still held in the portfolio as of September 30, 2021 and 2020 was $ 170 thousand and $ 183 thousand, respectively. The carrying value of the properties equaled the fair value of the properties at September 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. 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. 98 The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows: 2021 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 42,262 $ 42,262 $ 42,262 $ — $ — AFS securities 2,014,608 2,014,608 — 2,014,608 — Loans receivable 7,081,142 7,534,278 — — 7,534,278 FHLB stock 73,421 73,421 73,421 — — Liabilities: Deposits 6,597,396 6,649,954 3,838,656 2,811,298 — Borrowings 1,582,850 1,611,414 — 1,611,414 — Interest rate swaps 27,719 27,719 — 27,719 — 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 — 99 15. ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables present the changes in the components of AOCI, net of tax, for the years presented. For the Year Ended September 30, 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 ( 19,077 ) 5,712 ( 13,365 ) Amount reclassified from AOCI, net of taxes of $( 4,378 ) — 13,565 13,565 Other comprehensive income (loss) ( 19,077 ) 19,277 200 Ending balance $ 4,651 $ ( 20,956 ) $ ( 16,305 ) For the Year Ended September 30, 2020 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 10,150 $ ( 25,049 ) $ ( 14,899 ) Other comprehensive income (loss), before reclassifications 13,578 ( 21,458 ) ( 7,880 ) Amount reclassified from AOCI, net of taxes of $( 2,014 ) — 6,274 6,274 Other comprehensive income (loss) 13,578 ( 15,184 ) ( 1,606 ) Ending balance $ 23,728 $ ( 40,233 ) $ ( 16,505 ) For the Year Ended September 30, 2019 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 2,990 ) $ 7,330 $ 4,340 Transfer of HTM securities to AFS securities 2,336 — 2,336 Other comprehensive income (loss), before reclassifications 10,804 ( 32,817 ) ( 22,013 ) Amount reclassified from AOCI, net of taxes of $( 141 ) — 438 438 Other comprehensive income (loss) 13,140 ( 32,379 ) ( 19,239 ) Ending balance $ 10,150 $ ( 25,049 ) $ ( 14,899 ) 100 16. REVENUE RECOGNITION On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers , and all subsequent ASUs that modified the principles for recognizing revenue. The Company's primary sources of revenue consist of net interest income on financial assets and liabilities, which are not within the scope of the amended ASU. In addition, certain non-interest income revenue streams, such as loan servicing fees, derivatives, and BOLI, are not in-scope of the amended ASU. Based on an assessment of non-interest income revenue streams and a review of the related contracts with customers, the Company concluded the amended ASU did not significantly change the Company's revenue recognition methods. The Company elected to implement the amended ASU using the modified retrospective application with a cumulative adjustment, which increased opening retained earnings at October 1, 2018 by $ 394 thousand related to contracts that were not complete upon adoption. The amount was related to the change in the recognition of revenue related to certain insurance commissions. Details of the Company's primary types of non-interest income revenue streams by financial statement line item reported in the consolidated statements of income that are within the scope of ASC Topic 606 are below. During fiscal years 2021, 2020 and 2019, revenue from contracts with customers totaled $ 16.5 million, $ 14.8 million and $ 16.6 million, respectively. Deposit Service Fees Interchange Transaction Fees - Interchange transaction fee income primarily consists of interchange fees earned on a transactional basis through card payment networks. The performance obligation for these types of transactions is satisfied as services are rendered for each transaction and revenue is recognized daily concurrently with the transaction processing services provided to the cardholder. In order to participate in the card payment networks, the Company must pay various transaction related costs established by the networks ("interchange network charges"), including membership fees and a per unit charge for each transaction. The Company is acting as an agent for its debit card customers when they are utilizing the card payment networks; therefore interchange transaction fee income is reported net of interchange network charges. Interchange network charges totaled $ 3.6 million, $ 3.2 million and $ 3.4 million for fiscal years 2021, 2020 and 2019, respectively. Service Charges on Deposit Accounts - Service charges on deposit accounts consist of account maintenance and transaction-based fees such as overdrafts, insufficient funds, wire transfers and the use of out-of-network ATMs. The Company's performance obligation is satisfied over a period of time, generally a month, for account maintenance and at the time of service for transaction-based fees. Revenue is recognized after the performance obligation is satisfied. Payments are typically collected from the customer's deposit account at the time the transaction is processed and/or at the end of the customer's statement cycle (typically monthly). Insurance Commissions Commissions are received on insurance product sales. The Company acts in the capacity of an agent between the Company's customer and the insurance carrier. The Company's performance obligation is satisfied when the terms of the policy have been agreed upon and the insurance policy becomes effective. Additionally, the Company earns performance-based incentives ("contingent insurance commissions") based on certain criteria established by the insurance carriers. Upon adoption of the amended ASU, contingent insurance commissions are accrued based upon management's expectations. Previously, contingent insurance commissions were recognized when the funds were received. Other Non-Interest Income Trust Asset Management Income - The Company provides trust asset management services to customers. The Company primarily earns fees for these services over time as the monthly services are provided and the Company assesses revenue at each month end. Fees are charged based on a tiered scale of the market value of the individual trust asset accounts at the end of the month. 101 17. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY) The Company serves as the holding company for the Bank (see "Note 1. Summary of Significant Accounting Policies"). The Company's (parent company only) balance sheets at the dates presented, and the related statements of income and cash flows for each of the years presented are as follows: BALANCE SHEETS SEPTEMBER 30, 2021 and 2020 (Dollars in thousands, except per share amounts) 2021 2020 ASSETS: Cash and cash equivalents $ 75,553 $ 82,466 Investment in the Bank 1,110,339 1,165,813 Note receivable - ESOP 37,213 38,614 Receivable from the Bank 18,158 — Income taxes receivable, net 467 492 Other assets 625 707 TOTAL ASSETS $ 1,242,355 $ 1,288,092 LIABILITIES: Deferred income tax liabilities, net 82 91 Other liabilities — 3,142 Total liabilities 82 3,233 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, 138,832,284 and 138,956,296 shares issued and outstanding as of September 30, 2021 and 2020, respectively 1,388 1,389 Additional paid-in capital 1,189,633 1,189,853 Unearned compensation - ESOP ( 31,387 ) ( 33,040 ) Retained earnings 98,944 143,162 AOCI, net of tax ( 16,305 ) ( 16,505 ) Total stockholders' equity 1,242,273 1,284,859 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,242,355 $ 1,288,092 102 STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands) 2021 2020 2019 INTEREST AND DIVIDEND INCOME: Dividend income from the Bank $ 132,063 $ 68,329 $ 129,409 Interest income from other investments 1,509 2,036 2,428 Total interest and dividend income 133,572 70,365 131,837 INTEREST EXPENSE — — 403 NET INTEREST INCOME 133,572 70,365 131,434 NON-INTEREST INCOME — — 14 NON-INTEREST EXPENSE: Salaries and employee benefits 908 988 829 Regulatory and outside services 287 292 286 Other non-interest expense 608 622 652 Total non-interest expense 1,803 1,902 1,767 INCOME BEFORE INCOME TAX EXPENSE AND EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 131,769 68,463 129,681 INCOME TAX (BENEFIT) EXPENSE ( 62 ) 28 57 INCOME BEFORE EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY 131,831 68,435 129,624 EQUITY IN EXCESS OF DISTRIBUTION OVER EARNINGS OF SUBSIDIARY ( 55,749 ) ( 3,895 ) ( 35,381 ) NET INCOME $ 76,082 $ 64,540 $ 94,243 103 STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2021, 2020, and 2019 (Dollars in thousands) 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 76,082 $ 64,540 $ 94,243 Adjustments to reconcile net income to net cash provided by operating activities: Equity in excess of distribution over earnings of subsidiary 55,749 3,895 35,381 Depreciation of equipment 45 45 37 Loss on disposal of premises and equipment — — 8 Provision for deferred income taxes ( 9 ) 91 — Changes in: Receivable from the Bank ( 18,257 ) — — Income taxes receivable/payable 25 ( 63 ) 57 Other assets 21 ( 60 ) 54 Other liabilities ( 5 ) 13 ( 86 ) Net cash provided by operating activities 113,651 68,461 129,694 CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on note receivable from ESOP 1,401 1,357 1,314 Purchase of equipment — — ( 423 ) Proceeds from the redemption of common equity securities related to the redemption of junior subordinated debentures — — 302 Net cash provided by investing activities 1,401 1,357 1,193 CASH FLOWS FROM FINANCING ACTIVITIES: Net payment from subsidiary related to restricted stock awards 169 319 1,245 Cash dividends paid ( 117,890 ) ( 93,862 ) ( 134,929 ) Repurchase of common stock ( 4,568 ) ( 20,767 ) — Repayment of other borrowings — — ( 10,052 ) Stock options exercised 324 638 1,485 Net cash used in financing activities ( 121,965 ) ( 113,672 ) ( 142,251 ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( 6,913 ) ( 43,854 ) ( 11,364 ) CASH AND CASH EQUIVALENTS: Beginning of year 82,466 126,320 137,684 End of year $ 75,553 $ 82,466 $ 126,320 104 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.