Company Quick10K Filing
Capitol Federal Financial
Price13.83 EPS1
Shares141 P/E21
MCap1,956 P/FCF24
Net Debt-254 EBIT244
TEV1,702 TEV/EBIT7
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-12-31 Filed 2021-02-09
10-K 2020-09-30 Filed 2020-11-25
10-Q 2020-06-30 Filed 2020-08-07
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10-Q 2015-12-31 Filed 2016-02-09
10-K 2015-09-30 Filed 2015-11-25
10-Q 2015-06-30 Filed 2015-08-04
10-Q 2015-03-31 Filed 2015-05-05
10-Q 2014-12-31 Filed 2015-02-04
10-K 2014-09-30 Filed 2014-11-26
10-Q 2014-06-30 Filed 2014-08-01
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10-Q 2013-12-31 Filed 2014-02-04
10-K 2013-09-30 Filed 2013-11-29
10-Q 2013-06-30 Filed 2013-08-05
10-Q 2013-03-31 Filed 2013-05-03
10-Q 2012-12-31 Filed 2013-02-04
10-K 2012-09-30 Filed 2012-11-29
10-Q 2012-06-30 Filed 2012-08-03
10-Q 2012-03-31 Filed 2012-05-07
10-Q 2011-12-31 Filed 2012-02-06
10-K 2011-09-30 Filed 2011-11-29
10-Q 2011-06-30 Filed 2011-08-04
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10-Q 2010-12-31 Filed 2011-02-09
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8-K 2020-10-28
8-K 2020-10-16
8-K 2020-07-29
8-K 2020-07-28
8-K 2020-07-23
8-K 2020-04-29
8-K 2020-04-21
8-K 2020-03-25
8-K 2020-01-30
8-K 2020-01-28
8-K 2020-01-24
8-K 2019-10-30
8-K 2019-10-16
8-K 2019-07-30
8-K 2019-07-17
8-K 2019-06-04
8-K 2019-04-29
8-K 2019-04-17
8-K 2019-01-29
8-K 2019-01-22
8-K 2019-01-18
8-K 2018-10-26
8-K 2018-10-12
8-K 2018-09-05
8-K 2018-08-30
8-K 2018-07-30
8-K 2018-07-18
8-K 2018-05-31
8-K 2018-04-30
8-K 2018-04-18
8-K 2018-01-29
8-K 2018-01-23
8-K 2018-01-19

CFFN 10Q Quarterly Report

Part I - - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 cffn-123120xex311.htm
EX-31.2 cffn-123120xex312.htm
EX-32 cffn-123120xex32.htm

Capitol Federal Financial Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
151296302012201420172020
Assets, Equity
0.10.10.10.00.00.02018201820192020
Rev, G Profit, Net Income
1.00.60.2-0.2-0.6-1.02012201420172020
Ops, Inv, Fin

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
Form 10-Q
________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission file number: 001-34814
Capitol Federal Financial, Inc.
(Exact name of registrant as specified in its charter)
Maryland27-2631712
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
700 South Kansas Avenue,Topeka,Kansas66603
(Address of principal executive offices)(Zip Code)

(785) 235-1341
(Registrant's telephone number, including area code)
_____________________________________
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock,
par value $0.01 per share
CFFNThe NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer            Accelerated filer ☐        Non-accelerated filer ☐
Smaller reporting company         Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

As of February 2, 2021, there were 138,808,396 shares of Capitol Federal Financial, Inc. common stock outstanding.



PART I - FINANCIAL INFORMATIONPage Number
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.




PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
December 31, September 30,
20202020
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $139,031 and $172,430)
$168,032 $185,148 
Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $1,880,972 and $1,529,605)
1,913,866 1,560,950 
Loans receivable, net (allowance for credit losses ("ACL") of $26,125 and $31,527)
7,004,094 7,202,851 
Federal Home Loan Bank Topeka ("FHLB") stock, at cost84,693 93,862 
Premises and equipment, net101,238 101,875 
Other assets335,041 342,532 
TOTAL ASSETS$9,606,964 $9,487,218 
LIABILITIES:
Deposits$6,410,842 $6,191,408 
Borrowings1,734,275 1,789,313 
Advance payments by borrowers for taxes and insurance33,216 65,721 
Income taxes payable, net3,180 795 
Deferred income tax liabilities, net9,318 8,180 
Accounts payable and accrued expenses139,585 146,942 
Total liabilities8,330,416 8,202,359 
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized, no shares issued or outstanding
  
Common stock, $.01 par value; 1,400,000,000 shares authorized, 138,792,496 and 138,956,296 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively
1,388 1,389 
Additional paid-in capital1,188,636 1,189,853 
Unearned compensation, Employee Stock Ownership Plan ("ESOP")(32,627)(33,040)
Retained earnings130,522 143,162 
Accumulated other comprehensive (loss) income ("AOCI"), net of tax(11,371)(16,505)
Total stockholders' equity1,276,548 1,284,859 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$9,606,964 $9,487,218 
See accompanying notes to consolidated financial statements.

3


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
For the Three Months Ended
December 31,
20202019
INTEREST AND DIVIDEND INCOME:
Loans receivable$60,694 $69,914 
Mortgage-backed securities ("MBS")5,710 6,102 
FHLB stock1,069 1,826 
Investment securities683 1,507 
Cash and cash equivalents51 687 
Total interest and dividend income68,207 80,036 
INTEREST EXPENSE:
Deposits14,067 17,962 
Borrowings10,327 13,377 
Total interest expense24,394 31,339 
NET INTEREST INCOME43,813 48,697 
PROVISION FOR CREDIT LOSSES(1,532)225 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES45,345 48,472 
NON-INTEREST INCOME:
Deposit service fees2,947 3,062 
Insurance commissions638 691 
Other non-interest income1,485 1,751 
Total non-interest income5,070 5,504 
NON-INTEREST EXPENSE:
Salaries and employee benefits14,138 13,471 
Information technology and related expense4,233 4,141 
Occupancy, net3,379 3,207 
Regulatory and outside services1,585 1,343 
Advertising and promotional838 1,410 
Deposit and loan transaction costs766 711 
Federal insurance premium621  
Office supplies and related expense424 519 
Other non-interest expense1,083 1,698 
Total non-interest expense27,067 26,500 
INCOME BEFORE INCOME TAX EXPENSE23,348 27,476 
INCOME TAX EXPENSE4,450 4,965 
NET INCOME$18,898 $22,511 
Basic earnings per share ("EPS")$0.14 $0.16 
Diluted EPS$0.14 $0.16 
Basic weighted average common shares135,397,691 137,898,010 
Diluted weighted average common shares135,398,884 137,976,122 
See accompanying notes to consolidated financial statements.
4


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
For the Three Months Ended
December 31,
20202019
Net income$18,898 $22,511 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $(409) and $145
1,140 (452)
Changes in unrealized gains (losses) on cash flow hedges, net of taxes of $(1,220) and $(1,741)
3,994 5,424 
Comprehensive income$24,032 $27,483 
See accompanying notes to consolidated financial statements.

5


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except per share amounts)
For the Three Months Ended December 31, 2020
AdditionalUnearnedTotal
CommonPaid-InCompensationRetainedStockholders'
StockCapitalESOPEarningsAOCIEquity
Balance at September 30, 2020$1,389 $1,189,853 $(33,040)$143,162 $(16,505)$1,284,859 
Net income18,898 18,898 
Other comprehensive income, net of tax5,134 5,134 
Cumulative effect of adopting Accounting Standards Update ("ASU") 2016-13, net of tax(2,288)(2,288)
ESOP activity80 413 493 
Restricted stock activity, net(8)(8)
Stock-based compensation118 118 
Repurchase of common stock(1)(1,407)(122)(1,530)
Cash dividends to stockholders ($0.215 per share)
(29,128)(29,128)
Balance at December 31, 2020$1,388 $1,188,636 $(32,627)$130,522 $(11,371)$1,276,548 
For the Three Months Ended December 31, 2019
AdditionalUnearnedTotal
CommonPaid-InCompensationRetainedStockholders'
Stock Capital ESOP Earnings AOCI Equity
Balance at September 30, 2019$1,414 $1,210,226 $(34,692)$174,277 $(14,899)$1,336,326 
Cumulative effect of adopting ASU 2016-02, net of tax88 88 
Net income22,511 22,511 
Other comprehensive income, net of tax4,972 4,972 
ESOP activity169 413 582 
Restricted stock activity, net(1)(1)
Stock-based compensation166 166 
Stock options exercised1 612 613 
Cash dividends to stockholders ($0.425 per share)
(58,663)(58,663)
Balance at December 31, 2019$1,415 $1,211,172 $(34,279)$138,213 $(9,927)$1,306,594 
See accompanying notes to consolidated financial statements.

6


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Three Months Ended
December 31,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$18,898 $22,511 
Adjustments to reconcile net income to net cash provided by operating activities:
FHLB stock dividends(1,069)(1,826)
Provision for credit losses(1,532)225 
Originations of loans receivable held-for-sale ("LHFS")(364) 
Proceeds from sales of LHFS366  
Amortization and accretion of premiums and discounts on securities1,017 228 
Depreciation and amortization of premises and equipment2,304 2,286 
Amortization of intangible assets422 500 
Amortization of deferred amounts related to FHLB advances, net254 2 
Common stock committed to be released for allocation - ESOP493 582 
Stock-based compensation118 166 
Changes in:
Other assets, net1,942 1,237 
Income taxes payable/receivable, net2,372 3,808 
Deferred income tax liabilities, net248 (597)
Accounts payable and accrued expenses(6,266)(2,312)
Net cash provided by operating activities19,203 26,810 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of AFS securities(504,780)(149,359)
Proceeds from calls, maturities and principal reductions of AFS securities152,396 123,810 
Proceeds from the redemption of FHLB stock10,238 421 
Net change in loans receivable203,698 (12,844)
Purchase of premises and equipment(2,058)(3,882)
Proceeds from sale of other real estate owned ("OREO")53 585 
Proceeds from bank-owned life insurance ("BOLI") death benefit443 490 
Net cash used in investing activities(140,010)(40,779)
(Continued)
7


CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Three Months Ended
December 31,
20202019
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid(29,128)(58,663)
Net change in deposits219,434 3,984 
Proceeds from borrowings305,000 362,400 
Repayments on borrowings(358,000)(412,400)
Change in advance payments by borrowers for taxes and insurance(32,505)(38,402)
Payment of FHLB prepayment penalties(2,292) 
Repurchase of common stock(4,568) 
Stock options exercised 613 
Net cash provided by (used in) financing activities97,941 (142,468)
NET DECREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS(22,866)(156,437)
CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS:
Beginning of period239,708 253,700 
End of period$216,842 $97,263 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Operating lease right-of-use assets obtained$ $15,658 
Operating lease liabilities obtained$ $15,543 
See accompanying notes to consolidated financial statements.(Concluded)
8


Notes to Consolidated Financial Statements (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal Financial, Inc.® (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents - Cash, cash equivalents, restricted cash and restricted cash equivalents reported in the statement of cash flows include cash and cash equivalents of $168.0 million and $185.1 million at December 31, 2020 and September 30, 2020, respectively, and restricted cash and cash equivalents of $48.8 million and $54.6 million at December 31, 2020 and September 30, 2020, respectively, which was included in other assets on the consolidated balance sheet.  The restricted cash and cash equivalents relate to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps.  See additional discussion regarding the interest rate swaps in Note 5. Borrowed Funds.

Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSEs"), including Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association ("GNMA"), and municipal bonds. Securities are classified as held-to maturity ("HTM"), AFS, or trading based on management's intention for holding the securities on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at the time of purchase.

Accrued interest receivable for all securities is reported in other assets on the consolidated balance sheet. When the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, the practical expedient to exclude accrued interest from all required disclosures of amortized cost was elected. Additionally, an election was made to not measure ACL for accrued interest receivables. Interest accrued but not received is reversed against interest income.

Securities that management has the intention and ability to hold to maturity are classified as HTM and reported at amortized cost. Such securities are adjusted for the amortization of premiums and discounts which are recognized as adjustments to interest income over the life of the securities using the level-yield method. At December 31, 2020 and September 30, 2020, the portfolio did not contain any securities classified as HTM.

Securities that management may sell if necessary for liquidity or asset management purposes are classified as AFS and reported at fair value, with unrealized gains and non-credit losses reported as a component of AOCI within stockholders' equity, net of deferred income taxes. The amortization of premiums and discounts are recognized as adjustments to interest income over the life of the securities using the level-yield method. Gains or losses on the disposition of AFS securities are recognized using the specific identification method. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. See additional discussion of fair value of AFS securities in "Note 6. Fair Value of Financial Instruments."

Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in non-interest income in the consolidated statements of income. Neither the Company nor the Bank maintained a trading securities portfolio during the three months ended December 31, 2020 or during fiscal year 2020.

Allowance for Credit Losses on AFS Debt Securities - Management monitors AFS debt securities for impairment on an ongoing basis and performs a formal review quarterly. If an AFS debt security is in an unrealized loss position at the time of the quarterly review, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost. If either condition is met, the entire loss in fair value is recognized in current earnings. If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors. In making this assessment, management considers the security structure, the cause(s) and severity of the loss, expectations of future performance including recent events specific to the issuer or industry including
9


the issuer's financial condition and current ability to make future payments in a timely manner, and external credit ratings and recent downgrades in such ratings. Management's assessment involves a high degree of subjectivity and judgment that is based on information available at a point in time. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an ACL is recorded, which became effective October 1, 2020 when the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses. The ACL is limited by the amount that the fair value is less than the amortized cost basis. Any impairment not recorded through the provision for credit losses is recognized in other comprehensive income. Prior to the adoption of ASU 2016-13, management assessed all known facts and circumstances to determine whether an other-than-temporary loss should be recognized for impaired securities. If an other-than-temporary impairment had occurred, the difference between the amortized cost and fair value was recognized as a loss in earnings and the security was written down to fair value.

Changes in the ACL on AFS debt securities are recorded as an increase or decrease in the provision for credit losses on the consolidated statements of income. Losses are charged against the ACL on securities when management believes the collectability of an AFS security is in doubt or when either of the conditions regarding intent or requirement to sell is met. As of October 1, 2020 and December 31, 2020, the Company did not identify any credit losses related to the Company's AFS debt securities so there was no ACL on AFS debt securities as of those dates.

Loans Receivable - Loans receivable that management has the intention and ability to hold for the foreseeable future are carried at amortized cost, excluding accrued interest. Amortized cost is the amount of unpaid principal, net of undisbursed loan funds, unamortized premiums and discounts, and deferred loan origination fees and costs. Net loan origination fees and costs, and premiums and discounts are amortized as yield adjustments to interest income using the level-yield method. Loans are presented on the consolidated balance sheet net of the ACL on loans.

Interest on loans is accrued based on the principal amount outstanding. When the Company adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, the practical expedient to exclude all accrued interest receivable from all required disclosures of amortized cost was elected. Additionally, an election was made to not measure ACL for accrued interest receivables.

Loan endorsements - Certain existing one- to four- family loan customers, including customers whose loans were purchased from a correspondent lender, have the opportunity, for a fee, to endorse their original loan terms to current loan terms being offered by the Bank, without being required to complete the standard application and underwriting process. The fee received for each endorsement is deferred and amortized as an adjustment to interest income over the life of the loan.  If the change in loan terms resulting from the endorsement is deemed to be more than minor, the loan is treated as a new loan and all existing unamortized deferred loan origination fees and costs are recognized at the time of endorsement.  If the change in loan terms is deemed to be minor, the fee received for the endorsement is added to the net remaining unamortized deferred fee or deferred cost balance.

Coronavirus Disease 2019 ("COVID-19") loan modifications - In March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. Generally, loan modifications under these programs ("COVID-19 loan modifications") for one- to four-family loans and consumer loans consist of a three-month payment forbearance of principal, interest, and in some cases, escrow. COVID-19 loan modifications of commercial loans mainly consist of up to a six-month interest-only payment period, but an option for a three- to six-month forbearance of principal and interest was also available to our borrowers. The Company has followed the loan modification criteria within the Coronavirus Aid, Relief, and Economic Security ("CARES") Act or Interagency guidance when determining if a borrower's modification is subject to troubled debt restructuring ("TDR") classification. If it is determined that the modification does not meet the criteria under the CARES Act or Interagency guidance to be excluded from TDR classification, the Company evaluates the loan modifications under its existing TDR framework. Loans subject to forbearance under the COVID-19 loan modification program are not reported as past due or placed on nonaccrual status during the forbearance time period, and interest income continues to be recognized over the contractual life of the loans. Loans reported as being modified under the Bank's COVID-19 loan modification program includes all loans modified under the programs, including loans classified as TDRs.

Troubled debt restructurings - For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower.  Such concessions generally involve extensions of loan maturity dates, the granting of periods during which reduced payment amounts are required, and/or reductions in interest rates.  The Bank does not forgive principal or interest, nor does it commit to lend additional funds to these borrowers, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family loans and consumer loans, not to exceed the original loan amount. In the case of commercial loans, the Bank does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve the credit quality.

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Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date. The number of days delinquent is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment.

Nonaccrual loans - The accrual of income on loans is generally discontinued when interest or principal payments are 90 days in arrears. We also report certain TDR loans as nonaccrual loans that are required to be reported as such pursuant to regulatory reporting requirements. Loans on which the accrual of income has been discontinued are designated as nonaccrual and outstanding interest previously credited beyond 90 days delinquent is reversed, except in the case of commercial loans in which all delinquent accrued interest is reversed. A nonaccrual one- to four-family or consumer loan is returned to accrual status once the contractual payments have been made to bring the loan less than 90 days past due or, in the case of a TDR loan, the borrower has made the required consecutive loan payments. A nonaccrual commercial loan is returned to accrual status once the loan has been current for a minimum of six months, all fees and interest are paid current, the loan has a sufficient debt service coverage ratio, and the loan is well secured and within policy.

Allowance for Credit Losses on Loans Receivable - The ACL is a valuation amount that is deducted from the amortized cost basis of loans. It represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date and is determined using relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts, along with the application of qualitative factors when necessary. ACL is recorded upon origination or purchase of a loan and is updated at subsequent reporting dates. Changes in the ACL are recorded through increases or decreases to the provision for credit losses in the consolidated statements of income. The ACL is an estimate that requires significant judgment including projections of the macroeconomic environment. The macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses.

The Bank's ACL is measured on a collective ("pool") basis, with loans aggregated into pools based on similar risk characteristics such as collateral type, historical loss experience, loan-to-value ("LTV") for one- to four-family loans, and payment sources for commercial loans. Loans that do not share similar risk characteristics are evaluated on an individual basis. Charge-offs against the related ACL amounts for any loan type may be recorded at any time if the Bank has knowledge of the existence of a probable loss.

One- to four-family loans and consumer home equity loans are deemed to be collateral dependent and individually evaluated for loss when the loan is generally 180 days delinquent, and any identified losses are charged-off at that time. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell. Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan. When a non-real estate secured consumer loan is 120 days delinquent, any identified losses are charged-off. For commercial loans, loans are individually evaluated for loss if management determines they exhibit unique risk characteristics. Specific allocations of ACL are established and/or losses are charged-off prior to a loan becoming 120 days delinquent when it is determined, through the analysis of any available current financial information regarding the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement. In the case of secured loans, the loan is deemed to be collateral dependent when this occurs, and the specific allocation of ACL and/or charge-off amount is based on a comparison of the amounts due from the borrower and calculated current fair value of the collateral after consideration of estimated costs to sell.

The primary credit risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic conditions, elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased delinquencies, non-performing assets, charge-offs, and provisions for credit losses. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or be forced to sell at a discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business.

For loans evaluated for credit losses on a pool basis, average historical loss rates are calculated for each pool using the Company's historical charge-offs, or peer data when the Company's own historical loss rates are not reflective of future loss expectations, and outstanding loan balances during a historical time period. The historical time periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. Generally, the historical time periods are at least one economic cycle. These historical loss rates are compared to historical data related to economic variables including national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the
11


United States gross domestic product during the same time periods over which the historical loss rates were calculated, and a correlation is estimated using regression analysis. Each quarter, the Company's ACL model pairs the results of the regression analysis with an economic forecast of these same macroeconomic variables, which is provided by a third party, in order to project future loss rates. The forecast is applied for a reasonable and supportable time period, as determined by management, before reverting back to long-term historical averages at the macroeconomic variable level using a straight-line method. The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for expected prepayments and curtailments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a TDR will be executed. In the case of revolving lines of credit, since the rate of principal reduction is generally at the discretion of the borrower, remaining contractual lives are calculated by estimating future cash flows expected to be received from the borrower until the outstanding balance has been reduced to zero.

Using all of these inputs, the ACL model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life. These cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at a present value of future cash flows. Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of future cash flows compared to the amortized cost basis of the loan pool.

Additionally, qualitative factors are considered for items not included in historical loss rates, macroeconomic forecasts, or other model inputs and/or other ACL processes, as deemed appropriate by management's current assessment of risks related to loan portfolio attributes and external factors. Such qualitative factor considerations include changes in the loan portfolio composition and credit concentrations, changes in lending policies and procedures and underwriting standards, changes in balances and/or trends in asset quality and/or loan credit performance, model imprecision, and/or external factors such as significant unique events or conditions. Management assesses the potential impact of such items and adjusts the modeled ACL as deemed appropriate based upon the assessment.

Reserve for Off-Balance Sheet Credit Exposures - The Company's off-balance sheet credit exposures are comprised of unfunded portions of existing loans, such as lines of credit and construction loans, and commitments to originate or purchase loans that are not unconditionally cancellable by the Company. Expected credit losses on these amounts are calculated using the same methodology that is applied in the ACL model; however, the estimate of credit risk for off-balance sheet credit exposures also takes into consideration the likelihood that funding of the commitment will occur. The reserve for these off-balance sheet credit exposures is recorded as a liability and is presented in accounts payable and accrued expenses on the consolidated balance sheet. Changes to the reserve on off-balance sheet credit exposures are recorded through increases or decreases to the provision for credit losses on the consolidated statements of income.

Recent Accounting Pronouncements - In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU, as amended, replaces the incurred loss methodology in GAAP, which required credit losses to be recognized when it is probable that a loss has been incurred, with an expected credit loss methodology, which is commonly known as the current expected credit loss ("CECL") methodology. The CECL methodology requires an entity to measure, at each reporting date, the expected credit losses of financial assets not measured at fair value, such as loans and off-balance sheet credit exposures, over their remaining contractual lives. Under the CECL methodology, expected credit losses are measured at each reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the ASU amends the current credit loss measurements for AFS debt securities. Credit losses related to AFS debt securities will be recorded through the ACL rather than as a direct write-down. The ASU also requires enhanced disclosures related to credit quality and significant estimates and judgments used by management when estimating credit losses. The ASU, as amended, became effective for the Company on October 1, 2020.

The Company adopted the ASU, as amended, on October 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Financial results for reporting periods beginning after October 1, 2020 are reported in accordance with the new ASU, as amended, while prior period amounts continue to be reported in accordance with previous GAAP. Upon adoption, the Company recorded a cumulative-effect adjustment for the change in the ACL and reserve for off-balance sheet credit exposures of $2.3 million, net of tax of $739 thousand, which was recognized as a decrease in retained
12


earnings. The following table presents the impact of the cumulative-effect adjustment for the change in the ACL and reserve for off-balance sheet credit exposures.
September 30,
2020
October 1, 2020
Balance
Cumulative-Effect Adjustment
Balance
(Dollars in thousands)
ACL
One- to four-family:
Originated
$6,085 $(4,452)$1,633 
Correspondent purchased
2,691 (367)2,324 
Bulk purchased
467 436 903 
Commercial:
Commercial real estate
20,349 699 21,048 
Commercial and industrial
1,451 (892)559 
Consumer:
Home equity
370 (289)81 
Other
114 104 218 
Total ACL
31,527 (4,761)26,766 
Reserve for off-balance sheet credit exposures
 7,788 7,788 
ACL and reserve for off-balance sheet credit exposures
$31,527 $3,027 $34,554 

The Company elected the practical expedient to exclude accrued interest receivable from the amortized cost of financing receivables and AFS debt securities. Accrued interest totaled $20.0 million and $3.1 million at December 31, 2020 for loans receivable and AFS securities, respectively, and was included in other assets on the consolidated balance sheet. Additionally, an election was made not to measure ACL for accrued interest receivables. All interest accrued on loans but not received is reversed against interest income once it becomes more than 90 days past due. Interest accrued on AFS debt securities but not received is also reversed against interest income.

The enhanced disclosures required by the ASU, as amended, are included in the relevant significant accounting policies above and in "Note 4. Loans Receivable and Allowance for Credit Losses."

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosures Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds certain disclosure requirements for fair value measurements. The ASU adds disclosure requirements for the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU, which was adopted on October 1, 2020, did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software licenses). The ASU was adopted by the Company on October 1, 2020. The Company includes hosting arrangements that are service contracts in its evaluation of projects for capitalization. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This ASU makes clarifications and corrections to the application of the guidance contained in each of the amended topics. According to the provisions of the ASU, entities that have not adopted ASU 2017-12 prior to the issuance of ASU 2019-04 shall adopt the provisions of both ASUs at the same time. Since the Company previously adopted ASU 2017-12, the related provisions included in ASU 2019-04 were adopted at the same time. The Company adopted the non-hedging amendments contained in ASU 2019-04, including amendments related to ASU 2016-13, on October 1, 2020. The adoption of this ASU did not have a material impact on the Company's consolidated financial condition, results of operations, or disclosures. For additional information regarding the impact of adopting ASU 2016-13, see ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments above.

13


2. EARNINGS PER SHARE
Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security.
For the Three Months Ended
December 31,
20202019
(Dollars in thousands, except per share amounts)
Net income$18,898 $22,511 
Income allocated to participating securities(13)(19)
Net income available to common stockholders$18,885 $22,492 
Average common shares outstanding135,397,242 137,897,561 
Average committed ESOP shares outstanding449 449 
Total basic average common shares outstanding135,397,691 137,898,010 
Effect of dilutive stock options1,193 78,112 
Total diluted average common shares outstanding135,398,884 137,976,122 
Net EPS:
Basic$0.14 $0.16 
Diluted$0.14 $0.16 
Antidilutive stock options, excluded from the diluted average
common shares outstanding calculation431,212 435,750 

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3. SECURITIES
The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by GSEs.
December 31, 2020
GrossGrossEstimated
AmortizedUnrealizedUnrealizedFair
CostGainsLossesValue
(Dollars in thousands)
MBS$1,427,216 $32,178 $94 $1,459,300 
GSE debentures444,964 747  445,711 
Municipal bonds 8,792 63  8,855 
$1,880,972 $32,988 $94 $1,913,866 

September 30, 2020
GrossGrossEstimated
AmortizedUnrealizedUnrealizedFair
CostGainsLossesValue
(Dollars in thousands)
MBS$1,149,922 $31,212 $331 $1,180,803 
GSE debentures369,967 414 41 370,340 
Municipal bonds 9,716 91  9,807 
$1,529,605 $31,717 $372 $1,560,950 

The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented.
December 31, 2020
Less Than 12 MonthsEqual to or Greater Than 12 Months
EstimatedUnrealizedEstimatedUnrealized
Fair ValueLossesFair ValueLosses
(Dollars in thousands)
MBS$40,462 $93 $110 $1 
GSE debentures    
Municipal bonds     
$40,462 $93 $110 $1 

September 30, 2020