Capitol Federal Financial, Inc. 10-Q

Item 1. Financial Statements CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) March 31, September 30, 2023 2022 ASSETS: Cash and cash equivalents (includes interest-earning deposits of $ 21,830 and $ 27,467 ) $ 60,207 $ 49,194 Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $ 1,671,538 and $ 1,768,490 ) 1,505,808 1,563,307 Loans receivable, net (allowance for credit losses ("ACL") of $ 19,889 and $ 16,371 ) 7,958,567 7,464,208 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 128,096 100,624 Premises and equipment, net 92,415 94,820 Income taxes receivable, net 3,890 1,266 Deferred income tax assets, net 24,383 33,884 Other assets 312,404 317,594 TOTAL ASSETS $ 10,085,770 $ 9,624,897 LIABILITIES: Deposits $ 6,144,435 $ 6,194,866 Borrowings 2,696,604 2,132,154 Advances by borrowers 60,195 80,067 Other liabilities 112,502 121,311 Total liabilities 9,013,736 8,528,398 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, 136,144,725 and 138,858,884 shares issued and outstanding as of March 31, 2023 and September 30, 2022, respectively 1,361 1,388 Additional paid-in capital 1,168,059 1,190,213 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 28,910 ) ( 29,735 ) Retained earnings 50,167 80,266 Accumulated other comprehensive (loss) income ("AOCI"), net of tax ( 118,643 ) ( 145,633 ) Total stockholders' equity 1,072,034 1,096,499 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,085,770 $ 9,624,897 See accompanying notes to consolidated financial statements. 3 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) For the Three Months Ended For the Six Months Ended March 31, March 31, 2023 2022 2023 2022 INTEREST AND DIVIDEND INCOME: Loans receivable $ 69,319 $ 55,412 $ 134,138 $ 111,200 Cash and cash equivalents 10,977 949 27,648 963 Mortgage-backed securities ("MBS") 4,748 4,821 9,559 9,446 FHLB stock 3,607 2,240 7,765 3,471 Investment securities 895 800 1,776 1,608 Total interest and dividend income 89,546 64,222 180,886 126,688 INTEREST EXPENSE: Borrowings 31,447 8,732 65,055 16,317 Deposits 16,140 8,389 28,044 17,656 Total interest expense 47,587 17,121 93,099 33,973 NET INTEREST INCOME 41,959 47,101 87,787 92,715 PROVISION FOR CREDIT LOSSES 891 ( 3,188 ) 4,551 ( 6,627 ) NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 41,068 50,289 83,236 99,342 NON-INTEREST INCOME: Deposit service fees 3,122 3,300 6,583 6,730 Insurance commissions 877 543 1,672 1,254 Other non-interest income 1,084 1,573 2,180 2,938 Total non-interest income 5,083 5,416 10,435 10,922 NON-INTEREST EXPENSE: Salaries and employee benefits 12,789 14,023 26,487 27,751 Information technology and related expense 5,789 4,493 10,859 8,925 Occupancy, net 3,568 3,493 7,042 6,872 Regulatory and outside services 1,305 1,272 2,838 2,640 Advertising and promotional 1,333 1,494 2,166 2,558 Federal insurance premium 1,246 777 2,058 1,416 Deposit and loan transaction costs 690 689 1,301 1,386 Office supplies and related expense 631 502 1,264 970 Other non-interest expense 1,280 1,217 2,389 2,136 Total non-interest expense 28,631 27,960 56,404 54,654 INCOME BEFORE INCOME TAX EXPENSE 17,520 27,745 37,267 55,610 INCOME TAX EXPENSE 3,331 6,122 6,838 11,801 NET INCOME $ 14,189 $ 21,623 $ 30,429 $ 43,809 Basic earnings per share ("EPS") $ 0.11 $ 0.16 $ 0.23 $ 0.32 Diluted EPS $ 0.11 $ 0.16 $ 0.23 $ 0.32 Basic weighted average common shares 133,150,224 135,676,722 133,903,769 135,651,609 Diluted weighted average common shares 133,150,224 135,676,722 133,903,769 135,651,609 See accompanying notes to consolidated financial statements. 4 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) For the Three Months Ended For the Six Months Ended March 31, March 31, 2023 2022 2023 2022 Net income $ 14,189 $ 21,623 $ 30,429 $ 43,809 Other comprehensive income (loss), net of tax: Changes in unrealized gains/losses on AFS securities, net of taxes of $( 5,415 ), $ 21,123 , $( 9,626 ), and $ 24,667 16,777 ( 65,445 ) 29,827 ( 76,427 ) Changes in unrealized gains/losses on cash flow hedges, net of taxes of $ 910 , $( 4,153 ), $ 915 , and $( 5,430 ) ( 2,818 ) 12,864 ( 2,837 ) 16,825 Comprehensive income $ 28,148 $ ( 30,958 ) $ 57,419 $ ( 15,793 ) 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 Six Months Ended March 31, 2023 Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2022 $ 1,388 $ 1,190,213 $ ( 29,735 ) $ 80,266 $ ( 145,633 ) $ 1,096,499 Net income 16,240 16,240 Other comprehensive income, net of tax 13,031 13,031 ESOP activity ( 72 ) 413 341 Stock-based compensation 89 89 Repurchase of common stock ( 27 ) ( 22,169 ) ( 22,196 ) Cash dividends to stockholders ($ 0.365 per share) ( 49,209 ) ( 49,209 ) Balance at December 31, 2022 $ 1,361 $ 1,168,061 $ ( 29,322 ) $ 47,297 $ ( 132,602 ) $ 1,054,795 Net income 14,189 14,189 Other comprehensive income, net of tax 13,959 13,959 ESOP activity ( 76 ) 412 336 Stock-based compensation 74 74 Cash dividends to stockholders ($ 0.085 per share) ( 11,319 ) ( 11,319 ) Balance at March 31, 2023 $ 1,361 $ 1,168,059 $ ( 28,910 ) $ 50,167 $ ( 118,643 ) $ 1,072,034 For the Six Months Ended March 31, 2022 Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2021 $ 1,388 $ 1,189,633 $ ( 31,387 ) $ 98,944 $ ( 16,305 ) $ 1,242,273 Net income 22,186 22,186 Other comprehensive loss, net of tax ( 7,021 ) ( 7,021 ) ESOP activity 74 413 487 Restricted stock activity, net ( 3 ) ( 3 ) Stock-based compensation 123 123 Cash dividends to stockholders ($ 0.305 per share) ( 41,385 ) ( 41,385 ) Balance at December 31, 2021 $ 1,388 $ 1,189,827 $ ( 30,974 ) $ 79,745 $ ( 23,326 ) $ 1,216,660 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 6 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Six Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 30,429 43,809 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 7,765 ) ( 3,471 ) Provision for credit losses 4,551 ( 6,627 ) Originations of loans receivable held-for-sale ("LHFS") ( 218 ) ( 678 ) Proceeds from sales of LHFS 215 697 Amortization and accretion of premiums and discounts on securities 1,559 2,983 Depreciation and amortization of premises and equipment 4,581 4,678 Amortization of intangible assets 548 700 Amortization of deferred amounts related to FHLB advances, net 886 897 Common stock committed to be released for allocation - ESOP 677 948 Stock-based compensation 163 247 Changes in: Unrestricted cash collateral from derivative counterparties, net ( 2,500 ) — Other assets, net 1,461 5,092 Income taxes payable/receivable, net ( 2,650 ) 186 Deferred income tax liabilities, net 787 1,027 Other liabilities ( 7,990 ) ( 13,996 ) Net cash provided by operating activities 24,734 36,492 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities — ( 58,546 ) Proceeds from calls, maturities and principal reductions of AFS securities 95,393 188,658 Proceeds from the redemption of FHLB stock 214,120 95,724 Purchase of FHLB stock ( 233,827 ) ( 93,288 ) Net change in loans receivable ( 503,585 ) ( 23,356 ) Proceeds from sale of participating interest in loans receivable 5,563 — Purchase of premises and equipment ( 2,269 ) ( 2,518 ) Proceeds from sale of other real estate owned ("OREO") 347 487 Proceeds from bank-owned life insurance ("BOLI") death benefit — 803 Net cash (used in) provided by investing activities ( 424,258 ) 107,964 (Continued) 7 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Six Months Ended March 31, 2023 2022 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 60,528 ) ( 52,920 ) Net change in deposits ( 50,431 ) 17,448 Proceeds from borrowings 3,092,000 793,702 Repayments on borrowings ( 2,528,436 ) ( 793,702 ) Change in advances by borrowers ( 19,872 ) ( 6,827 ) Repurchase of common stock ( 22,196 ) — Net cash provided by (used in) financing activities 410,537 ( 42,299 ) NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 11,013 102,157 CASH, CASH EQUIVALENTS AND RESTRICTED CASH: Beginning of period 49,194 70,292 End of period 60,207 172,449 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, 2022, filed with the Securities and Exchange Commission ("SEC"). Interim results are not necessarily indicative of results for a full year. Cash, Cash Equivalents and Restricted Cash - Cash, cash equivalents and restricted cash reported in the statement of cash flows consisted entirely of cash and cash equivalents of $ 60.2 million and $ 49.2 million at March 31, 2023 and September 30, 2022, respectively. At times, the Company holds restricted cash, which is reported in other assets on the consolidated balance sheet, related to collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps. There was no restricted cash at March 31, 2023 or September 30, 2022. 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 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 Accounting Standards Update ("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. While the adoption of this ASU is expected to result in enhanced disclosures, the Company does not expect the adoption of this ASU to have a material impact on the Company's consolidated financial condition or results of operations. 9 2. EARNINGS PER SHARE Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. For the Three Months Ended For the Six Months Ended March 31, March 31, 2023 2022 2023 2022 (Dollars in thousands, except per share amounts) Net income $ 14,189 $ 21,623 $ 30,429 $ 43,809 Income allocated to participating securities ( 6 ) ( 12 ) ( 14 ) ( 24 ) Net income available to common stockholders $ 14,183 $ 21,611 $ 30,415 $ 43,785 Total basic average common shares outstanding 133,150,224 135,676,722 133,903,769 135,651,609 Effect of dilutive stock options — — — — Total diluted average common shares outstanding 133,150,224 135,676,722 133,903,769 135,651,609 Net EPS: Basic $ 0.11 $ 0.16 $ 0.23 $ 0.32 Diluted $ 0.11 $ 0.16 $ 0.23 $ 0.32 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 373,541 543,031 375,808 543,400 10 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 United States Government-Sponsored Enterprises ("GSEs"). March 31, 2023 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,146,526 $ 196 $ 124,742 $ 1,021,980 GSE debentures 519,981 — 40,741 479,240 Corporate bonds 4,000 — 438 3,562 Municipal bonds 1,031 — 5 1,026 $ 1,671,538 $ 196 $ 165,926 $ 1,505,808 September 30, 2022 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,243,270 $ 365 $ 155,011 $ 1,088,624 GSE debentures 519,977 — 50,150 469,827 Corporate bonds 4,000 — 305 3,695 Municipal bonds 1,243 — 82 1,161 $ 1,768,490 $ 365 $ 205,548 $ 1,563,307 The following tables summarize the estimated fair value and gross unrealized losses of those AFS securities on which an unrealized loss at the dates presented was reported and the continuous unrealized loss position for less than 12 months and equal to or greater than 12 months as of the dates presented. March 31, 2023 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 $ 87,004 $ 2,056 $ 911,575 $ 122,686 GSE debentures — — 479,240 40,741 Corporate bonds 3,562 438 — — Municipal bonds 1,026 5 — — $ 91,592 $ 2,499 $ 1,390,815 $ 163,427 September 30, 2022 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 $ 338,013 $ 22,563 $ 715,281 $ 132,448 GSE debentures — — 469,827 50,150 Corporate bonds 3,695 305 — — Municipal bonds 1,161 82 — — $ 342,869 $ 22,950 $ 1,185,108 $ 182,598 11 The unrealized losses at March 31, 2023 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 an ACL on securities in an unrealized loss position at March 31, 2023 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, 2023, 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 $ 25,000 $ 24,286 One year through five years 494,981 454,954 Five years through ten years 5,031 4,588 525,012 483,828 MBS 1,146,526 1,021,980 $ 1,671,538 $ 1,505,808 The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented. For the Three Months Ended For the Six Months Ended March 31, March 31, 2023 2022 2023 2022 (Dollars in thousands) Taxable $ 888 $ 790 $ 1,762 $ 1,580 Non-taxable 7 10 14 28 $ 895 $ 800 $ 1,776 $ 1,608 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. March 31, 2023 September 30, 2022 (Dollars in thousands) FHLB advances $ 576,765 $ 572,913 Public unit deposits 155,864 125,496 Federal Reserve Bank of Kansas City ("FRB of Kansas City") borrowings 42,723 46,283 $ 775,352 $ 744,692 . 12 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at the dates presented is summarized as follows: March 31, 2023 September 30, 2022 (Dollars in thousands) One- to four-family: Originated $ 4,003,823 $ 3,988,469 Correspondent purchased 2,468,647 2,201,886 Bulk purchased 142,527 147,939 Construction 68,355 66,164 Total 6,683,352 6,404,458 Commercial: Commercial real estate 874,718 745,301 Commercial and industrial 90,200 79,981 Construction 216,685 141,062 Total 1,181,603 966,344 Consumer: Home equity 92,506 92,203 Other 8,664 8,665 Total 101,170 100,868 Total loans receivable 7,966,125 7,471,670 Less: ACL 19,889 16,371 Deferred loan fees/discounts 30,830 29,736 Premiums/deferred costs ( 43,161 ) ( 38,645 ) $ 7,958,567 $ 7,464,208 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 geographic concentrations of these loans in Kansas, Missouri, and Texas. 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. Properties securing one- to four-family loans are appraised by either staff appraisers or fee appraisers, both of which are independent of the loan origination function. The underwriting standards for loans purchased from correspondent lenders are generally similar to the Bank's internal underwriting standards. The underwriting of loans purchased from correspondent lenders on a loan-by-loan basis is performed by the Bank's underwriters. The Bank also originates owner-occupied construction-to-permanent loans secured by one- to four-family residential real estate. Construction draw requests and the supporting documentation are reviewed and approved by designated personnel. The Bank also performs regular documented inspections of the construction project to ensure the funds are being used for the intended purpose and the project is being completed according to the plans and specifications provided. Commercial loans - The Bank's commercial real estate and commercial construction loans are originated by the Bank or 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 13 was being originated by the Bank. At the time of origination, loan-to-value ("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. 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. 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. 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. 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. 14 The following tables set forth, as of the dates indicated, the amortized cost of loans by class of financing receivable, year of origination or most recent credit decision, and loan classification. All revolving lines of credit are presented separately, regardless of origination year. Loans classified as doubtful or loss are individually evaluated for loss. At March 31, 2023 and September 30, 2022, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. March 31, 2023 Current Fiscal Fiscal Fiscal Fiscal Revolving Fiscal Year Year Year Year Prior Line of Year 2022 2021 2020 2019 Years Credit Total (Dollars in thousands) One- to four-family: Originated Pass $ 166,083 $ 578,258 $ 912,340 $ 597,495 $ 267,725 $ 1,511,800 $ — $ 4,033,701 Special Mention 184 1,192 760 1,365 1,274 9,070 — 13,845 Substandard — 187 110 277 734 7,269 — 8,577 Correspondent purchased Pass 309,170 531,455 633,831 261,631 66,403 690,477 — 2,492,967 Special Mention — 396 1,013 — 353 1,761 — 3,523 Substandard — — — — 168 3,313 — 3,481 Bulk purchased Pass — — — — — 139,489 — 139,489 Special Mention — — — — — — — — Substandard — — — — — 3,543 — 3,543 475,437 1,111,488 1,548,054 860,768 336,657 2,366,722 — 6,699,126 Commercial: Commercial real estate Pass 228,869 301,638 231,200 120,670 83,873 83,290 8,676 1,058,216 Special Mention — 28,439 — — — — — 28,439 Substandard — — — 594 219 288 — 1,101 Commercial and industrial Pass 19,289 25,176 14,267 4,337 3,191 1,063 22,082 89,405 Special Mention — — — — — — — — Substandard — 16 — 73 — 83 610 782 248,158 355,269 245,467 125,674 87,283 84,724 31,368 1,177,943 Consumer: Home equity Pass 2,548 5,997 2,162 1,342 890 2,643 76,618 92,200 Special Mention — 46 — — — — 245 291 Substandard — — — — 18 15 198 231 Other Pass 2,382 3,479 1,301 549 221 389 333 8,654 Special Mention — — — 5 — — — 5 Substandard — — — 4 — — 2 6 4,930 9,522 3,463 1,900 1,129 3,047 77,396 101,387 Total $ 728,525 $ 1,476,279 $ 1,796,984 $ 988,342 $ 425,069 $ 2,454,493 $ 108,764 $ 7,978,456 15 September 30, 2022 Fiscal Fiscal Fiscal Fiscal Fiscal Revolving Year Year Year Year Year Prior Line of 2022 2021 2020 2019 2018 Years Credit Total (Dollars in thousands) One- to four-family: Originated Pass $ 563,460 $ 930,019 $ 624,274 $ 281,342 $ 212,037 $ 1,406,444 $ — $ 4,017,576 Special Mention 47 457 1,111 518 428 7,641 — 10,202 Substandard 158 — 278 1,106 256 8,968 — 10,766 Correspondent purchased Pass 494,854 651,363 273,626 69,752 104,150 627,390 — 2,221,135 Special Mention — — — 355 1,186 1,197 — 2,738 Substandard — — — 168 513 4,783 — 5,464 Bulk purchased Pass — — — — — 144,840 — 144,840 Special Mention — — — — — — — — Substandard — — — — — 3,637 — 3,637 1,058,519 1,581,839 899,289 353,241 318,570 2,204,900 — 6,416,358 Commercial: Commercial real estate Pass 366,794 221,001 111,689 86,456 41,322 46,383 7,436 881,081 Special Mention 565 — — — — — — 565 Substandard 436 — 594 221 239 30 — 1,520 Commercial and industrial Pass 38,442 17,453 5,708 4,212 919 630 11,413 78,777 Special Mention — — — — — — — — Substandard — — 78 — 73 10 1,052 1,213 406,237 238,454 118,069 90,889 42,553 47,053 19,901 963,156 Consumer: Home equity Pass 6,447 2,375 1,486 982 992 2,020 77,448 91,750 Special Mention — 66 — — — — 233 299 Substandard — — — 18 — 3 331 352 Other Pass 4,207 1,977 843 408 651 201 369 8,656 Special Mention — — 7 — — — — 7 Substandard 1 — — — — — — 1 10,655 4,418 2,336 1,408 1,643 2,224 78,381 101,065 Total $ 1,475,411 $ 1,824,711 $ 1,019,694 $ 445,538 $ 362,766 $ 2,254,177 $ 98,282 $ 7,480,579 16 Delinquency Status - The following tables set forth, as of the dates indicated, 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 as of the dates indicated. All revolving lines of credit are presented separately, regardless of origination year. March 31, 2023 Current Fiscal Fiscal Fiscal Fiscal Revolving Fiscal Year Year Year Year Prior Line of Year 2022 2021 2020 2019 Years Credit Total (Dollars in thousands) One- to four-family: Originated Current $ 166,267 $ 579,374 $ 913,210 $ 598,648 $ 269,733 $ 1,523,705 $ — $ 4,050,937 30-89 — 76 — 489 — 3,538 — 4,103 90+/FC — 187 — — — 896 — 1,083 Correspondent purchased Current 309,170 531,455 633,934 261,073 66,403 692,624 — 2,494,659 30-89 — 396 910 558 353 1,269 — 3,486 90+/FC — — — — 168 1,658 — 1,826 Bulk purchased Current — — — — — 141,522 — 141,522 30-89 — — — — — 289 — 289 90+/FC — — — — — 1,221 — 1,221 475,437 1,111,488 1,548,054 860,768 336,657 2,366,722 — 6,699,126 Commercial: Commercial real estate Current 228,649 330,077 231,200 120,670 83,873 83,243 8,676 1,086,388 30-89 220 — — — — 79 — 299 90+/FC — — — 594 219 256 — 1,069 Commercial and industrial Current 19,289 25,176 14,267 4,337 3,191 1,063 22,692 90,015 30-89 — 16 — 73 — — — 89 90+/FC — — — — — 83 — 83 248,158 355,269 245,467 125,674 87,283 84,724 31,368 1,177,943 Consumer: Home equity Current 2,548 6,043 2,162 1,342 891 2,609 76,766 92,361 30-89 — — — — 17 37 262 316 90+/FC — — — — — 12 33 45 Other Current 2,376 3,460 1,290 555 221 389 332 8,623 30-89 5 19 11 — — — 1 36 90+/FC 1 — — 3 — — 2 6 4,930 9,522 3,463 1,900 1,129 3,047 77,396 101,387 Total $ 728,525 $ 1,476,279 $ 1,796,984 $ 988,342 $ 425,069 $ 2,454,493 $ 108,764 $ 7,978,456 17 September 30, 2022 Fiscal Fiscal Fiscal Fiscal Fiscal Revolving Year Year Year Year Year Prior Line of 2022 2021 2020 2019 2018 Years Credit Total (Dollars in thousands) One- to four-family: Originated Current $ 563,507 $ 930,476 $ 625,110 $ 282,598 $ 212,549 $ 1,417,268 $ — $ 4,031,508 30-89 — — 553 — 64 3,506 — 4,123 90+/FC 158 — — 368 108 2,279 — 2,913 Correspondent purchased Current 494,854 651,363 273,626 70,107 105,336 629,150 — 2,224,436 30-89 — — — — — 1,117 — 1,117 90+/FC — — — 168 513 3,103 — 3,784 Bulk purchased Current — — — — — 146,399 — 146,399 30-89 — — — — — 921 — 921 90+/FC — — — — — 1,157 — 1,157 1,058,519 1,581,839 899,289 353,241 318,570 2,204,900 — 6,416,358 Commercial: Commercial real estate Current 367,795 221,001 111,689 86,456 41,322 46,383 7,436 882,082 30-89 — — — — — — — — 90+/FC — — 594 221 239 30 — 1,084 Commercial and industrial Current 38,442 17,453 5,786 4,212 919 630 12,465 79,907 30-89 — — — — — — — — 90+/FC — — — — 73 10 — 83 406,237 238,454 118,069 90,889 42,553 47,053 19,901 963,156 Consumer: Home equity Current 6,447 2,441 1,429 1,000 980 1,999 77,633 91,929 30-89 — — 57 — 12 24 226 319 90+/FC — — — — — — 153 153 Other Current 4,205 1,964 844 404 651 201 368 8,637 30-89 2 13 6 4 — — 1 26 90+/FC 1 — — — — — — 1 10,655 4,418 2,336 1,408 1,643 2,224 78,381 101,065 Total $ 1,475,411 $ 1,824,711 $ 1,019,694 $ 445,538 $ 362,766 $ 2,254,177 $ 98,282 $ 7,480,579 18 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 March 31, 2023 and September 30, 2022, all loans 90 or more days delinquent were on nonaccrual status. March 31, 2023 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 $ 4,103 $ 1,083 $ 5,186 $ 4,050,937 $ 4,056,123 Correspondent purchased 3,486 1,826 5,312 2,494,659 2,499,971 Bulk purchased 289 1,221 1,510 141,522 143,032 Commercial: Commercial real estate 299 1,069 1,368 1,086,388 1,087,756 Commercial and industrial 89 83 172 90,015 90,187 Consumer: Home equity 316 45 361 92,361 92,722 Other 36 6 42 8,623 8,665 $ 8,618 $ 5,333 $ 13,951 $ 7,964,505 $ 7,978,456 September 30, 2022 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 $ 4,123 $ 2,913 $ 7,036 $ 4,031,508 $ 4,038,544 Correspondent purchased 1,117 3,784 4,901 2,224,436 2,229,337 Bulk purchased 921 1,157 2,078 146,399 148,477 Commercial: Commercial real estate — 1,084 1,084 882,082 883,166 Commercial and industrial — 83 83 79,907 79,990 Consumer: Home equity 319 153 472 91,929 92,401 Other 26 1 27 8,637 8,664 $ 6,506 $ 9,175 $ 15,681 $ 7,464,898 $ 7,480,579 The amortized cost of mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as of March 31, 2023 and September 30, 2022 was $ 1.9 million and $ 2.0 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 $ 160 thousand at March 31, 2023 and $ 328 thousand at September 30, 2022. 19 The following table presents the amortized cost at March 31, 2023 and September 30, 2022, 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. March 31, 2023 September 30, 2022 Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans Nonaccrual Loans with No ACL (Dollars in thousands) One- to four-family: Originated $ 1,270 $ 332 $ 3,135 $ 1,018 Correspondent purchased 1,826 — 3,784 304 Bulk purchased 1,478 887 1,157 630 Commercial: Commercial real estate 1,100 446 1,084 449 Commercial and industrial 156 156 161 161 Consumer: Home equity 45 — 172 19 Other 6 — 1 — $ 5,881 $ 1,821 $ 9,494 $ 2,581 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 For the Six Months Ended March 31, 2023 March 31, 2023 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 — $ — $ — — $ — $ — Correspondent purchased — — — — — — Bulk purchased 1 239 257 1 239 257 Commercial: Commercial real estate — — — — — — Commercial and industrial — — — — — — Consumer: Home equity — — — — — — Other — — — — — — 1 $ 239 $ 257 1 $ 239 $ 257 20 For the Three Months Ended For the Six Months Ended March 31, 2022 March 31, 2022 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 1 $ 100 $ 100 2 $ 124 $ 124 Correspondent purchased — — — — — — Bulk purchased — — — — — — Commercial: Commercial real estate — — — — — — Commercial and industrial 2 124 124 2 124 124 Consumer: Home equity 1 19 19 1 19 19 Other — — — — — — 4 $ 243 $ 243 5 $ 267 $ 267 The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured. For the Three Months Ended For the Six Months Ended March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022 Number of Amortized Number of Amortized Number of Amortized Number of Amortized Contracts Cost Contracts Cost Contracts Cost Contracts Cost (Dollars in thousands) One- to four-family: Originated — $ — — $ — 1 $ 8 1 $ 684 Correspondent purchased — — — — — — — — Bulk purchased — — — — — — — — Commercial: Commercial real estate — — — — — — — — Commercial and industrial — — — — — — — — Consumer: Home equity — — — — — — — — Other — — — — — — — — — $ — — $ — 1 $ 8 1 $ 684 21 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 March 31, 2023 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,159 $ 2,987 $ 216 $ 5,362 $ 13,584 $ 243 $ 19,189 Charge-offs — — — — — ( 16 ) ( 16 ) Recoveries — — — — 1 1 2 Provision for credit losses ( 20 ) 87 5 72 637 5 714 Ending balance $ 2,139 $ 3,074 $ 221 $ 5,434 $ 14,222 $ 233 $ 19,889 For the Six Months Ended March 31, 2023 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,066 $ 2,734 $ 206 $ 5,006 $ 11,120 $ 245 $ 16,371 Charge-offs — — — — — ( 20 ) ( 20 ) Recoveries 1 — — 1 1 2 4 Provision for credit losses 72 340 15 427 3,101 6 3,534 Ending balance $ 2,139 $ 3,074 $ 221 $ 5,434 $ 14,222 $ 233 $ 19,889 For the Three Months Ended March 31, 2022 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 1,639 $ 2,082 $ 268 $ 3,989 $ 13,353 $ 193 $ 17,535 Charge-offs — — — — — ( 5 ) ( 5 ) Recoveries 2 — — 2 13 4 19 Provision for credit losses 68 47 ( 27 ) 88 ( 2,335 ) 10 ( 2,237 ) Ending balance $ 1,709 $ 2,129 $ 241 $ 4,079 $ 11,031 $ 202 $ 15,312 For the Six Months Ended March 31, 2022 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) 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 22 The key assumptions in the Company's ACL model include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. Management also considered certain qualitative factors when evaluating the adequacy of the ACL at March 31, 2023. The key assumptions utilized in estimating the Company's ACL at March 31, 2023 are discussed below. • Economic Forecast - Management considered several economic forecasts provided by a third party and selected an economic forecast that was the most appropriate considering the facts and circumstances at March 31, 2023. The forecasted economic indices applied to the model at March 31, 2023 were the national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the U.S. gross domestic product. The economic index most impactful to all loan pools within the model at March 31, 2023 was the national unemployment rate. The forecasted national unemployment rate in the economic scenario selected by management at March 31, 2023 had the national unemployment rate gradually increasing to 3.8 % by March 31, 2024 which was the end of our four quarter forecast time period. • Forecast and reversion to mean time periods - The forecasted time period and the reversion to mean time period were each four quarters for all of the economic indices at March 31, 2023. • Prepayment and curtailment assumptions - The assumptions used at March 31, 2023 were generally based on actual historical prepayment and curtailment speeds for each respective loan pool in the model. During the current year, there was a slowdown in portfolio prepayment speeds which reduced the projected prepayment speeds used in the model for generally all loan categories. • Qualitative factors - The qualitative factors applied by management at March 31, 2023 included the following: ◦ The economic uncertainties related to the unemployment rate, the labor force composition, and the labor participation rate that are not captured in the economic forecasts; and ◦ Other management considerations related to commercial real estate loans that were not captured via the model assumptions, such as the balance and trending of large dollar commercial real estate loans. 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. At March 31, 2023 and September 30, 2022, the Bank's off-balance sheet credit exposures totaled $ 1.02 billion and $ 992.6 million, respectively. For the Three Months Ended For the Six Months Ended March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022 (Dollars in thousands) Beginning balance $ 5,591 $ 4,623 $ 4,751 $ 5,743 Provision for credit losses 177 ( 951 ) 1,017 ( 2,071 ) Ending balance $ 5,768 $ 3,672 $ 5,768 $ 3,672 5. BORROWED FUNDS FHLB Borrowings and Interest Rate Swaps - At March 31, 2023 and September 30, 2022, the Bank had entered into interest rate swap agreements with an aggregate 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, 2023 and September 30, 2022, the interest rate swap agreements had an average remaining term to maturity of 2.6 years and 3.1 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 both March 31, 2023 and September 30, 2022, the interest rate swaps were in a gain position with a total fair value of $ 8.8 million and $ 12.5 million respectively, which was reported in other assets on the consolidated balance sheet. During the three and six month periods ended March 31, 2023, $ 1.3 million and $ 2.1 million, respectively, was reclassified from AOCI as a decrease to interest expense. During the three and six month periods ended March 31, 2022, $ 1.7 million and $ 3.5 million was reclassified from AOCI as an increase to interest expense. At March 31, 2023, the Company estimated that $ 7.2 million of interest expense associated with the interest rate swaps would be reclassified from AOCI as a decrease 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 held cash collateral of $ 9.6 million and $ 12.1 million at March 31, 2023 and September 30, 2022, respectively. During the current six month period, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy involved borrowing up to $ 2.60 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 quarter end, or earlier if the strategy was not profitable. The proceeds of the borrowings, net of the required FHLB stock holdings, were deposited at the FRB of Kansas City. 23 6. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value Measurements - The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with 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 the fair value of its financial instruments on the price that would be received from the sale of an 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 six months ended March 31, 2023 or during fiscal year 2022. 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) • Corporate Bonds and 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 adjustments to AOCI in stockholders' equity. See "Note 5. Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted cash flow analysis with independent observable market-based inputs from a third party. No adjustments were made to the estimated fair values obtained from the counterparty during the six months ended March 31, 2023 or during fiscal year 2022. (Level 2) 24 The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at March 31, 2023 or September 30, 2022. March 31, 2023 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 $ 1,021,980 $ — $ 1,021,980 $ — GSE debentures 479,240 — 479,240 — Corporate bonds 3,562 — 3,562 — Municipal bonds 1,026 — 1,026 — 1,505,808 — 1,505,808 — Interest rate swaps 8,795 — 8,795 — $ 1,514,603 $ — $ 1,514,603 $ — September 30, 2022 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 $ 1,088,624 $ — $ 1,088,624 $ — GSE debentures 469,827 — 469,827 — Corporate bonds 3,695 — 3,695 — Municipal bonds 1,161 — 1,161 — 1,563,307 — 1,563,307 — Interest rate swaps 12,547 — 12,547 — $ 1,575,854 $ — $ 1,575,854 $ — 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 - 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. The fair value of collateral dependent loans/loans individually evaluated for loss on a non-recurring basis during the six months ended March 31, 2023 and 2022 that were still held in the portfolio as of March 31, 2023 and 2022 was $ 3.6 million and $ 4.2 million, respectively. 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. 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 adjust 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 six months ended March 31, 2023 and March 31, 2022 were downward adjustments to the book value of the 25 collateral for lack of marketability. During the six months ended March 31, 2023, the adjustments ranged from 8 % to 100 %, with a weighted average of 21 %. During the six months ended March 31, 2022, the adjustments ranged from 9 % to 56 %, with a weighted average of 21 %. The basis utilized in calculating the weighted averages for these adjustments was the original unadjusted value of each collateral item. OREO - OREO primarily represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at lower of cost or fair value. The fair value for OREO is estimated through current appraisals or listing prices, less estimated selling costs of 10 %. Management does not adjust or apply a discount to the appraised value or listing price, except for the estimated sales costs noted above. The primary significant unobservable input for OREO was the appraisal or listing price. Fair values of foreclosed property cannot be determined with precision and may not be realized in an actual sale of the property and, as such, are classified as Level 3. The fair value of OREO measured on a non-recurring basis during the six months ended March 31, 2023 that was still held in the portfolio as of March 31, 2023 was $ 93 thousand. There was no OREO measured on a non-recurring basis during the six months ended March 31, 2022. The carrying value of the properties equaled the fair value of the properties at March 31, 2023 and 2022. Fair Value Disclosures - The Company estimated fair value amounts using available market information and a variety of valuation methodologies as of the dates presented. Considerable judgment is required to interpret market data to develop the estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company would realize from a current market exchange at subsequent dates. The carrying amounts and estimated fair values of the Company's financial instruments by fair value hierarchy, at the dates presented, were as follows: March 31, 2023 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 60,207 $ 60,207 $ 60,207 $ — $ — AFS securities 1,505,808 1,505,808 — 1,505,808 — Loans receivable 7,958,567 7,513,314 — — 7,513,314 FHLB stock 128,096 128,096 128,096 — — Interest rate swaps 8,795 8,795 — 8,795 — Liabilities: Deposits 6,144,435 6,103,436 3,670,486 2,432,950 — Borrowings 2,696,604 2,643,537 203,400 2,440,137 — September 30, 2022 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 49,194 $ 49,194 $ 49,194 $ — $ — AFS securities 1,563,307 1,563,307 — 1,563,307 — Loans receivable 7,464,208 6,889,211 — — 6,889,211 FHLB stock 100,624 100,624 100,624 — — Interest rate swaps 12,547 12,547 — 12,547 — Liabilities: Deposits 6,194,866 6,124,835 3,991,114 2,133,721 — Borrowings 2,132,154 1,910,779 75,000 1,835,779 — 26 7. ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables present the changes in the components of AOCI, net of tax, for the periods indicated. For the Three Months Ended March 31, 2023 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 142,069 ) $ 9,467 $ ( 132,602 ) Other comprehensive income (loss), before reclassifications 16,777 ( 1,495 ) 15,282 Amount reclassified from AOCI, net of taxes of $ 427 — ( 1,323 ) ( 1,323 ) Other comprehensive income (loss) 16,777 ( 2,818 ) 13,959 Ending balance $ ( 125,292 ) $ 6,649 $ ( 118,643 ) For the Six Months Ended March 31, 2023 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 155,119 ) $ 9,486 $ ( 145,633 ) Other comprehensive income (loss), before reclassifications 29,827 ( 780 ) 29,047 Amount reclassified from AOCI, net of taxes of $ 664 — ( 2,057 ) ( 2,057 ) Other comprehensive income (loss) 29,827 ( 2,837 ) 26,990 Ending balance $ ( 125,292 ) $ 6,649 $ ( 118,643 ) For the Three Months Ended March 31, 2022 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 6,331 ) $ ( 16,995 ) $ ( 23,326 ) Other comprehensive income (loss), before reclassifications ( 65,445 ) 11,151 ( 54,294 ) Amount reclassified from AOCI, net of taxes of $( 553 ) — 1,713 1,713 Other comprehensive income (loss) ( 65,445 ) 12,864 ( 52,581 ) Ending balance $ ( 71,776 ) $ ( 4,131 ) $ ( 75,907 ) For the Six Months Ended March 31, 2022 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 4,651 $ ( 20,956 ) $ ( 16,305 ) Other comprehensive income (loss), before reclassifications ( 76,427 ) 13,329 ( 63,098 ) Amount reclassified from AOCI, net of taxes of $( 1,128 ) — 3,496 3,496 Other comprehensive income (loss) ( 76,427 ) 16,825 ( 59,602 ) Ending balance $ ( 71,776 ) $ ( 4,131 ) $ ( 75,907 ) 27