What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-09 compared with 2022-02-09 · 209 added, 89 removed, 675 unchanged (31% of the section changed)

4 unchanged sentences

(Dollars in thousands, except per share amounts)

December 31, September 30,

March 31, September 30,

Cash and cash equivalents (includes interest-earning deposits of $ 110,444 and $ 24,289 )

6 unchanged sentences

Premises and equipment, net 96,952 99,127

Deferred income tax assets, net 12,399 —

Other assets 291,391 320,686

11 unchanged sentences

Common stock, $ .01 par value;

1,400,000,000 shares authorized, 138,842,784 and 138,832,284 shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively

1,400,000,000 shares authorized, 138,846,684 and 138,832,284 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively

Additional paid-in capital 1,189,999 1,189,633

9 unchanged sentences

(Dollars in thousands, except per share amounts)

For the Three Months Ended

For the Three Months Ended For the Six Months Ended

March 31, March 31,

2022 2021 2022 2021

INTEREST AND DIVIDEND INCOME:

11 unchanged sentences

PROVISION FOR CREDIT LOSSES ( 3,188 ) ( 2,964 ) ( 6,627 ) ( 4,496 )

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 49,053 45,345

NET INTEREST INCOME AFTER

PROVISION FOR CREDIT LOSSES 50,289 46,037 99,342 91,382

NON-INTEREST INCOME:

1 unchanged sentence

Insurance commissions 543 888 1,254 1,526

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

Other non-interest income 1,573 1,389 2,938 2,874

6 unchanged sentences

Advertising and promotional 1,494 1,484 2,558 2,322

Deposit and loan transaction costs 697 766

Federal insurance premium 777 634 1,416 1,255

Deposit and loan transaction costs 689 664 1,386 1,430

Office supplies and related expense 502 463 970 887

Loss on interest rate swap termination — 4,752 — 4,752

Other non-interest expense 1,217 1,903 2,136 2,986

12 unchanged sentences

(Dollars in thousands)

For the Three Months Ended

For the Three Months Ended For the Six Months Ended

March 31, March 31,

2022 2021 2022 2021

Net income $ 21,623 $ 20,444 $ 43,809 $ 39,342

Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $ 3,544 and $( 409 )

Changes in unrealized gains/losses on AFS securities, net of taxes of $ 21,123 , $ 6,756 , $ 24,667 , and $ 6,347

( 65,445 ) ( 20,934 ) ( 76,427 ) ( 19,794 )

Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $( 1,277 ) and $( 1,220 )

Comprehensive income $ 15,165 $ 24,032

Changes in unrealized losses on cash flow hedges, net of taxes of $( 4,153 ), $( 4,309 ), $( 5,430 ), and $( 5,529 )

12,864 13,352 16,825 17,346

Comprehensive income (loss) $ ( 30,958 ) $ 12,862 $ ( 15,793 ) $ 36,894

See accompanying notes to consolidated financial statements.

3 unchanged sentences

(Dollars in thousands, except per share amounts)

For the Three Months Ended December 31, 2021

For the Six Months Ended March 31, 2022

Additional Unearned Total

10 unchanged sentences

Balance at December 31, 2021 1,388 1,189,827 ( 30,974 ) 79,745 ( 23,326 ) 1,216,660

For the Three Months Ended December 31, 2020

Net income 21,623 21,623

Other comprehensive loss, net of tax ( 52,581 ) ( 52,581 )

ESOP activity 48 413 461

Stock-based compensation 124 124

Cash dividends to stockholders ($ 0.085 per share)

( 11,535 ) ( 11,535 )

Balance at March 31, 2022 $ 1,388 $ 1,189,999 $ ( 30,561 ) $ 89,833 $ ( 75,907 ) $ 1,174,752

CAPITOL FEDERAL FINANCIAL, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(Dollars in thousands, except per share amounts)

For the Six Months Ended March 31, 2021

Additional Unearned Total

12 unchanged sentences

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

Net income 20,444 20,444

Other comprehensive loss, net of tax ( 7,582 ) ( 7,582 )

ESOP activity 132 413 545

Stock-based compensation 134 134

Stock options exercised 24 24

Cash dividends to stockholders ($ 0.085 per share)

( 11,518 ) ( 11,518 )

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

See accompanying notes to consolidated financial statements.

3 unchanged sentences

(Dollars in thousands)

For the Three Months Ended

For the Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

11 unchanged sentences

Stock-based compensation 247 252

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

Other assets, net 5,092 6,731

11 unchanged sentences

Proceeds from sale of other real estate owned ("OREO") 487 97

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

Proceeds from bank-owned life insurance ("BOLI") death benefit 803 443

4 unchanged sentences

(Dollars in thousands)

For the Three Months Ended

For the Six Months Ended

CASH FLOWS FROM FINANCING ACTIVITIES:

6 unchanged sentences

Repurchase of common stock — ( 4,568 )

Stock options exercised — 24

Net cash (used in) provided by financing activities ( 42,299 ) 202,125

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS 88,253 ( 22,866 )

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

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 102,157 ( 68,256 )

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

Beginning of period 70,292 239,708

16 unchanged sentences

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

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $ 135.5 million and $ 42.3 million at December 31, 2021 and September 30, 2021, respectively, and restricted cash and cash equivalents of $ 23.1 million and $ 28.0 million at December 31, 2021 and September 30, 2021, 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.

Cash, Cash Equivalents and Restricted Cash - Cash, cash equivalents and restricted cash reported in the statement of cash flows include cash and cash equivalents of $ 166.9 million and $ 42.3 million at March 31, 2022 and September 30, 2021, respectively, and restricted cash of $ 5.6 million and $ 28.0 million at March 31, 2022 and September 30, 2021, respectively, which was included in other assets on the consolidated balance sheet.

The restricted cash relates to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps.

See additional discussion regarding the interest rate swaps in Note 5.

Borrowed Funds.

Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into certain FHLB advances with contractual maturities of 90 days or less.

Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows.

Recent Accounting Pronouncements - In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings ("TDRs") and Vintage Disclos ures.

This ASU eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Additionally, this ASU requires that an entity disclose current-period gross write-offs by year of origination for financing receivables within the scope of Accounting Standards Codification ("ASC") 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost .

This ASU is effective for the Company on October 1, 2023.

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

EARNINGS PER SHARE

2 unchanged sentences

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

For the Three Months Ended

For the Three Months Ended For the Six Months Ended

March 31, March 31,

2022 2021 2022 2021

(Dollars in thousands, except per share amounts)

13 unchanged sentences

The majority of the MBS and investment securities portfolios are composed of securities issued by United States Government-Sponsored Enterprises ("GSEs").

December 31, 2021

March 31, 2022

Gross Gross Estimated

16 unchanged sentences

The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.

December 31, 2021

March 31, 2022

Less Than 12 Months Equal to or Greater Than 12 Months

15 unchanged sentences

$ 1,398,300 $ 12,488 $ 10,612 $ 65

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

The unrealized losses at March 31, 2022 were a result of an increase in market yields from the time the securities were purchased.

In general, as market yields rise, the fair value of securities will decrease;

as market yields fall, the fair value of securities will increase.

Management did not record ACL on securities in an unrealized loss position at December 31, 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 December 31, 2021, by contractual maturity, are shown below.

Management did not record an ACL on securities in an unrealized loss position at March 31, 2022 because scheduled coupon payments have been made, management anticipates that the entire principal balance will be collected as scheduled, and neither does the Company intend to sell the securities, nor is it more likely than not that the Company will be required to sell the securities before the recovery of the remaining amortized cost amount, which could be at maturity.

The amortized cost and estimated fair value of AFS debt securities as of March 31, 2022, by contractual maturity, are shown below.

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

10 unchanged sentences

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

For the Three Months Ended

For the Three Months Ended For the Six Months Ended

March 31, March 31,

2022 2021 2022 2021

(Dollars in thousands)

1 unchanged sentence

Non-taxable 10 32 28 70

$ 800 $ 629 $ 1,608 $ 1,312

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

December 31, 2021 September 30, 2021

March 31, 2022 September 30, 2021

(Dollars in thousands)

3 unchanged sentences

$ 290,458 $ 395,848

During the prior year, the Company sold its Visa Class B shares.

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

All other dispositions of securities during the six months ended March 31, 2022 and March 31, 2021 were the result of principal repayments, calls, or maturities.

LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

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

December 31, 2021 September 30, 2021

March 31, 2022 September 30, 2021

(Dollars in thousands)

14 unchanged sentences

ACL 15,312 19,823

Discounts/unearned loan fees 29,363 29,556

Deferred loan fees/discounts 29,264 29,556

Premiums/deferred costs ( 34,703 ) ( 34,448 )

11 unchanged sentences

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.

Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or 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.

5 unchanged sentences

The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income.

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

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 commercial and industrial loans.

As a result of these additional complexities, variables and risks, commercial and industrial loans require more thorough underwriting and servicing than other types of loans.

Consumer loans - The Bank offers a variety of consumer loans, the majority of which are home equity loans and 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.

19 unchanged sentences

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

At December 31, 2021 and September 30, 2021, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

December 31, 2021

At March 31, 2022 and September 30, 2021, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off.

March 31, 2022

Current Fiscal Fiscal Fiscal Fiscal Revolving

32 unchanged sentences

Total $ 598,648 $ 1,967,407 $ 1,096,029 $ 479,921 $ 401,418 $ 2,482,916 $ 97,783 $ 7,124,122

In the table below, certain commercial loans are presented in the "Fiscal Year 2021" column and are reported as special mention or substandard.

These loans were generally first originated in prior years but were renewed or modified in fiscal year 2021.

September 30, 2021

35 unchanged sentences

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

December 31, 2021

March 31, 2022

Current Fiscal Fiscal Fiscal Fiscal Revolving

68 unchanged sentences

Delinquent and Nonaccrual Loans - The following tables present the amortized cost, at the dates indicated, 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 loans.

At December 31, 2021 and September 30, 2021, all loans 90 or more days delinquent were on nonaccrual status.

December 31, 2021

At March 31, 2022 and September 30, 2021, all loans 90 or more days delinquent were on nonaccrual status.

March 31, 2022

90 or More Days Total Total

25 unchanged sentences

$ 7,861 $ 11,654 $ 19,515 $ 7,081,450 $ 7,100,965

The amortized cost of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of December 31, 2021 and September 30, 2021 was $ 845 thousand and $ 799 thousand, 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 $ 319 thousand at December 31, 2021 and $ 170 thousand at September 30, 2021.

The following table presents the amortized cost at December 31, 2021 and September 30, 2021, by class, of loans classified as nonaccrual.

The amortized cost of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of March 31, 2022 and September 30, 2021 was $ 2.9 million and $ 799 thousand, respectively, which is included in loans 90 or more days delinquent or in foreclosure in the tables above.

There was no residential OREO held as of March 31, 2022.

The following table presents the amortized cost at March 31, 2022 and September 30, 2021, by class, of loans classified as nonaccrual.

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

December 31, 2021 September 30, 2021

March 31, 2022 September 30, 2021

Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans Nonaccrual Loans with No ACL

9 unchanged sentences

$ 11,989 $ 3,735 $ 13,493 $ 4,763

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

TDRs - The following tables present the amortized cost prior to restructuring and immediately after restructuring in all loans restructured during the periods presented.

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

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

For the Three Months Ended

December 31, 2021 December 31, 2020

For the Three Months Ended For the Six Months Ended

March 31, 2022 March 31, 2022

Number Pre- Post- Number Pre- Post-

11 unchanged sentences

4 $ 243 $ 243 5 $ 267 $ 267

For the Three Months Ended For the Six Months Ended

March 31, 2021 March 31, 2021

Number Pre- Post- Number Pre- Post-

of Restructured Restructured of Restructured Restructured

Contracts Outstanding Outstanding Contracts Outstanding Outstanding

(Dollars in thousands)

One- to four-family:

Originated 2 $ 871 $ 762 6 $ 1,518 $ 1,407

Correspondent purchased — — — — — —

Bulk purchased — — — — — —

Commercial real estate — — — — — —

Commercial and industrial — — — — — —

Home equity — — — — — —

Other — — — — — —

2 $ 871 $ 762 6 $ 1,518 $ 1,407

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

For the Three Months Ended

December 31, 2021 December 31, 2020

Number of Amortized Number of Recorded

Contracts Cost Contracts Investment

For the Three Months Ended For the Six Months Ended

March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021

Number of Amortized Number of Amortized Number of Amortized Number of Amortized

Contracts Cost Contracts Cost Contracts Cost Contracts Cost

(Dollars in thousands)

9 unchanged sentences

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

For the Three Months Ended December 31, 2021

For the Three Months Ended March 31, 2022

One- to Four-Family

7 unchanged sentences

Ending balance $ 1,709 $ 2,129 $ 241 $ 4,079 $ 11,031 $ 202 $ 15,312

For the Three Months Ended December 31, 2020

For the Six Months Ended March 31, 2022

One- to Four-Family

3 unchanged sentences

Beginning balance $ 1,612 $ 2,062 $ 304 $ 3,978 $ 15,652 $ 193 $ 19,823

Charge-offs ( 4 ) — — ( 4 ) ( 10 ) ( 6 ) ( 20 )

Recoveries 11 — — 11 49 5 65

Provision for credit losses 90 67 ( 63 ) 94 ( 4,660 ) 10 ( 4,556 )

Ending balance $ 1,709 $ 2,129 $ 241 $ 4,079 $ 11,031 $ 202 $ 15,312

For the Three Months Ended March 31, 2021

One- to Four-Family

Correspondent Bulk

Originated Purchased Purchased Total Commercial Consumer Total

(Dollars in thousands)

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

Charge-offs ( 110 ) — ( 21 ) ( 131 ) — ( 7 ) ( 138 )

Recoveries 57 — — 57 8 3 68

Provision for credit losses 51 ( 53 ) ( 84 ) ( 86 ) ( 2,558 ) ( 14 ) ( 2,658 )

Ending balance $ 1,536 $ 1,705 $ 747 $ 3,988 $ 19,157 $ 252 $ 23,397

For the Six Months Ended March 31, 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 )

5 unchanged sentences

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

Management also considered certain qualitative factors when evaluating the adequacy of the ACL at December 31, 2021.

The key assumptions utilized in estimating the Company's ACL at December 31, 2021 are discussed below.

• Economic Forecast - Management considered several economic forecasts provided by a third party and selected the economic forecast believed to be the most appropriate considering the facts and circumstances at December 31, 2021.

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

Management also considered certain qualitative factors when evaluating the adequacy of the ACL at March 31, 2022.

The key assumptions utilized in estimating the Company's ACL at March 31, 2022 are discussed below.

The forecasted economic indices applied to the model at March 31, 2022 were the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the U.S.

gross domestic product.

The economic index most impactful to all loan pools within the model at December 31, 2021 was the national unemployment rate.

The forecast national unemployment rate in the economic scenario selected by management at December 31, 2021 had the national unemployment rate gradually declining to 3.5 % by December 31, 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 December 31, 2021.

• Prepayment and curtailment assumptions - The assumptions used at December 31, 2021 were generally based on actual historical prepayment and curtailment speeds for each respective loan pool in the model over the trailing 12 months.

• Qualitative factors - The qualitative factors applied by management at December 31, 2021 included the following:

The economic index most impactful to all loan pools within the model at March 31, 2022 was the national unemployment rate.

The forecast national unemployment rate in the economic scenario selected by management at March 31, 2022 had the national unemployment rate gradually declining to 3.4 % by March 31, 2023 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 March 31, 2022.

• Prepayment and curtailment assumptions - The assumptions used at March 31, 2022 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 March 31, 2022 included the following:

◦ The economic uncertainties related to (1) the job market, the labor force composition, the unemployment rate, and labor participation rate and how the significant federal assistance and other factors may be impacting those measures and (2) the unevenness of the recovery in certain industries in which the Bank has lending relationships;

1 unchanged sentence

◦ Coronavirus Disease 2019 ("COVID-19") loan modifications related to commercial real estate loans.

The decrease in ACL during the current quarter was primarily a result of a negative provision for credit losses of $ 2.3 million.

The negative provision for credit losses associated with the ACL was due primarily to a reduction in the large-dollar special mention commercial loan qualitative factor due to two large-dollar special mention commercial loans moving to the pass classification during the current quarter.

Additionally, the economic uncertainty qualitative factor for commercial loans also decreased during the current quarter as economic conditions continued to improve for the industries related to this qualitative factor.

The decrease in ACL during the current year-to-date period was primarily a result of a negative provision for credit losses of $ 4.6 million which was due to (1) a reduction in the large-dollar special mention commercial loan qualitative factor due to two large-dollar special mention commercial loans moving to the pass classification during the December 31, 2021 quarter, (2) a reduction in model-calculated ACL for commercial loans due to an increase in projected commercial loan prepayment speeds as a result of management's outlook for prepayment activity and the composition and nature of our commercial loan portfolio, (3) a decrease in the commercial loan COVID-19 modification qualitative factor due to loans exiting their deferral time periods and resuming full payments per their original contracts during the current quarter, and (4) a decrease in the economic uncertainty qualitative factor for commercial loans due to improvement in economic conditions through March 31, 2022.

Reserve for Off-Balance Sheet Credit Exposures - The following is a summary of the changes in reserve for off-balance sheet credit exposures during the periods indicated.

The negative provision for credit losses in the current quarter was due primarily to improvements in economic conditions in certain industries in which the Bank has lending relationships.

For the Three Months Ended For the Three Months Ended

December 31, 2021 December 31, 2020

The negative provision for credit losses in the current year period was due primarily to a reduction in the commercial loan economic uncertainty qualitative factor and to a reduction in the reserves for commercial construction loans due mainly to a reduction in the model-calculated amount as noted for the ACL.

For the Three Months Ended For the Six Months Ended

March 31, 2022 March 31, 2022

(Dollars in thousands)

Beginning balance $ 4,623 Beginning balance $ 5,743

Provision for credit losses ( 951 ) Provision for credit losses ( 2,071 )

Ending balance $ 3,672 Ending balance $ 3,672

For the Three Months Ended For the Six Months Ended

March 31, 2021 March 31, 2021

(Dollars in thousands)

Beginning balance $ 6,433 Beginning balance $ —

Provision for credit losses ( 306 ) Adoption of CECL 7,788

3 unchanged sentences

BORROWED FUNDS

FHLB Borrowings and Interest Rate Swaps - At December 31, 2021 and September 30, 2021, the Bank had entered into interest rate swap agreements with a total notional amount of $ 365.0 million in order to hedge the variable cash flows associated with $ 365.0 million of adjustable-rate FHLB advances.

At December 31, 2021 and September 30, 2021, the interest rate swap agreements had an average remaining term to maturity of 3.8 years and 4.1 years, respectively.

FHLB Borrowings and Interest Rate Swaps - At March 31, 2022 and September 30, 2021, the Bank had entered into interest rate swap agreements with a total notional amount of $ 365.0 million in order to hedge the variable cash flows associated with $ 365.0 million of adjustable-rate FHLB advances.

At March 31, 2022 and September 30, 2021, the interest rate swap agreements had an average remaining term to maturity of 3.6 years and 4.1 years, respectively.

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.

At December 31, 2021 and September 30, 2021, the interest rate swaps were in a loss position with a total fair value of $ 22.5 million and $ 27.7 million, respectively, which was reported in other liabilities on the consolidated balance sheet.

During the three months ended December 31, 2021 and December 31, 2020, $ 1.8 million and $ 3.0 million, respectively, was reclassified from AOCI as an increase to interest expense.

At December 31, 2021, the Company estimated that $ 8.0 million of interest expense associated with the interest rate swaps would be reclassified from AOCI as an increase to interest expense on FHLB borrowings during the next 12 months.

At March 31, 2022 and September 30, 2021, the interest rate swaps were in a loss position with a total fair value of $ 5.5 million and $ 27.7 million, respectively, which was reported in other liabilities on the consolidated balance sheet.

During the three and six months ended March 31, 2022, $ 1.7 million and $ 3.5 million, respectively, was reclassified from AOCI as an increase to interest expense.

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

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

At March 31, 2022, the Company estimated that $ 3.4 million of interest expense associated with the interest rate swaps would 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 $ 23.1 million at December 31, 2021 and $ 28.0 million at September 30, 2021.

The Bank posted cash collateral of $ 5.6 million at March 31, 2022 and $ 28.0 million at September 30, 2021.

During the current quarter, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings.

The leverage strategy involves borrowing up to $ 2.10 billion either on the Bank's line of credit with FHLB or by entering into short-term FHLB advances, depending on the rates offered by FHLB, with all of the balance being paid down at each quarter end, or earlier if we determine that the strategy is not profitable.

The proceeds of the borrowings, net of the required FHLB stock holdings, are deposited at the FRB of Kansas City.

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

Since it was management's intention to prepay the related FHLB advances, it was no longer probable that the original forecasted transactions subject to the cash flow hedges would 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Measurements - The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825.

The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis.

17 unchanged sentences

If the price provided by the independent source varies by more than a predetermined percentage from the price received from the third party pricing service, then the variance is researched by management.

The Company did not have to adjust prices obtained from the third party pricing service when determining the fair value of its securities during the three months ended December 31, 2021 or during fiscal year 2021.

The Company did not have to adjust prices obtained from the third party pricing service when determining the fair value of its securities during the six months ended March 31, 2022 or during fiscal year 2021.

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

9 unchanged sentences

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

No adjustments were made to the estimated fair values obtained from the counterparty during the three months ended December 31, 2021 or during fiscal year 2021.

No adjustments were made to the estimated fair values obtained from the counterparty during the six months ended March 31, 2022 or during fiscal year 2021.

The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented.

The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2021 or September 30, 2021.

December 31, 2021

The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at March 31, 2022 or September 30, 2021.

March 31, 2022

Quoted Prices Significant Significant

25 unchanged sentences

Those collateral dependent assets that are evaluated on an individual basis are considered financial assets measured at fair value on a non-recurring basis.

The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during the three months ended December 31, 2021 and 2020 that were still held in the portfolio as of December 31, 2021 and 2020 was $ 3.3 million and $ 5.9 million, respectively.

The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during the six months ended March 31, 2022 and 2021 that were still held in the portfolio as of March 31, 2022 and 2021 was $ 4.2 million and $ 7.4 million, respectively.

The one- to four-family loans included in this amount were individually evaluated to determine if the carrying value of the loan was in excess of the fair value of the collateral, less estimated selling costs of 10 %.

3 unchanged sentences

Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace.

The primary significant unobservable inputs for commercial loans individually evaluated during the three months ended December 31, 2021 and December 31, 2020 were downward adjustments to the book value of the collateral for lack of marketability.

During the three months ended December 31, 2021, the adjustments ranged from 9 % to 56 %, with a weighted average of 21 %.

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

The primary significant unobservable inputs for commercial loans individually evaluated during the six months ended March 31, 2022 and March 31, 2021 were downward adjustments to the book value of the collateral for lack of marketability.

During the six months ended March 31, 2022, the adjustments ranged from 9 % to 56 %, with a weighted average of 21 %.

During the six months ended March 31, 2021, the adjustments ranged from 7 % to 50 %, with a

weighted average of 23 %.

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

5 unchanged sentences

Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3.

There was no OREO measured on a non-recurring basis during the three months ended December 31, 2021.

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

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

There was no OREO measured on a non-recurring basis during the six months ended March 31, 2022.

The fair value of OREO measured on a non-recurring basis during the six months ended March 31, 2021 that was still held in the portfolio as of March 31, 2021 was $ 105 thousand.

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

Fair Value Disclosures - The Company estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented.

2 unchanged sentences

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

December 31, 2021

March 31, 2022

Carrying Estimated Fair Value

21 unchanged sentences

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

For the Three Months Ended December 31, 2021

For the Three Months Ended March 31, 2022

Unrealized Unrealized

9 unchanged sentences

Ending balance $ ( 71,776 ) $ ( 4,131 ) $ ( 75,907 )

For the Three Months Ended December 31, 2020

For the Six Months Ended March 31, 2022

Unrealized Unrealized

9 unchanged sentences

Ending balance $ ( 71,776 ) $ ( 4,131 ) $ ( 75,907 )

For the Three Months Ended March 31, 2021

Unrealized Unrealized

Gains (Losses) Gains (Losses)

on AFS on Cash Flow Total

Securities Hedges AOCI

(Dollars in thousands)

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

Other comprehensive income (loss), before reclassifications ( 20,934 ) 6,931 ( 14,003 )

Amount reclassified from AOCI, net of taxes of $( 2,072 )

— 6,421 6,421

Other comprehensive income (loss) ( 20,934 ) 13,352 ( 7,582 )

Ending balance $ 3,934 $ ( 22,887 ) $ ( 18,953 )

For the Six Months Ended March 31, 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 ( 19,794 ) 7,955 ( 11,839 )

Amount reclassified from AOCI, net of taxes of $( 3,031 )

— 9,391 9,391

Other comprehensive income (loss) ( 19,794 ) 17,346 ( 2,448 )

Ending balance $ 3,934 $ ( 22,887 ) $ ( 18,953 )

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

What changed 10-Q

Item 1. Financial Statements