Capitol Federal Financial, Inc. 10-Q

Item 1. Financial Statements CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts) June 30, September 30, 2023 2022 ASSETS: Cash and cash equivalents (includes interest-earning deposits of $ 308,127 and $ 27,467 ) $ 329,409 $ 49,194 Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $ 1,624,837 and $ 1,768,490 ) 1,444,867 1,563,307 Loans receivable, net (allowance for credit losses ("ACL") of $ 22,399 and $ 16,371 ) 7,963,360 7,464,208 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 116,012 100,624 Premises and equipment, net 91,713 94,820 Income taxes receivable, net 5,894 1,266 Deferred income tax assets, net 26,889 33,884 Other assets 315,983 317,594 TOTAL ASSETS $ 10,294,127 $ 9,624,897 LIABILITIES: Deposits $ 6,092,840 $ 6,194,866 Borrowings 2,986,162 2,132,154 Advances by borrowers 40,982 80,067 Other liabilities 112,858 121,311 Total liabilities 9,232,842 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, 136,158,569 and 138,858,884 shares issued and outstanding as of June 30, 2023 and September 30, 2022, respectively 1,361 1,388 Additional paid-in capital 1,167,979 1,190,213 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 28,497 ) ( 29,735 ) Retained earnings 47,148 80,266 Accumulated other comprehensive (loss) income ("AOCI"), net of tax ( 126,706 ) ( 145,633 ) Total stockholders' equity 1,061,285 1,096,499 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,294,127 $ 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 Nine Months Ended June 30, June 30, 2023 2022 2023 2022 INTEREST AND DIVIDEND INCOME: Loans receivable $ 71,918 $ 56,886 $ 206,056 $ 168,086 Cash and cash equivalents 10,009 3,968 37,657 4,931 Mortgage-backed securities ("MBS") 4,562 5,048 14,121 14,494 FHLB stock 3,260 2,695 11,025 6,166 Investment securities 895 815 2,671 2,423 Total interest and dividend income 90,644 69,412 271,530 196,100 INTEREST EXPENSE: Borrowings 31,449 11,644 96,504 27,961 Deposits 24,445 7,787 52,489 25,443 Total interest expense 55,894 19,431 148,993 53,404 NET INTEREST INCOME 34,750 49,981 122,537 142,696 PROVISION FOR CREDIT LOSSES 1,324 937 5,875 ( 5,690 ) NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 33,426 49,044 116,662 148,386 NON-INTEREST INCOME: Deposit service fees 3,404 3,601 9,987 10,331 Insurance commissions 888 788 2,560 2,042 Other non-interest income 1,522 1,726 3,702 4,664 Total non-interest income 5,814 6,115 16,249 17,037 NON-INTEREST EXPENSE: Salaries and employee benefits 13,200 14,581 39,687 42,332 Information technology and related expense 6,118 4,343 16,977 13,268 Occupancy, net 3,556 3,721 10,598 10,593 Regulatory and outside services 1,436 1,572 4,274 4,212 Advertising and promotional 1,447 1,068 3,613 3,626 Federal insurance premium 1,231 784 3,289 2,200 Deposit and loan transaction costs 615 664 1,916 2,050 Office supplies and related expense 546 494 1,810 1,464 Other non-interest expense 1,187 1,163 3,576 3,299 Total non-interest expense 29,336 28,390 85,740 83,044 INCOME BEFORE INCOME TAX EXPENSE 9,904 26,769 47,171 82,379 INCOME TAX EXPENSE 1,602 5,617 8,440 17,418 NET INCOME $ 8,302 $ 21,152 $ 38,731 $ 64,961 Basic earnings per share ("EPS") $ 0.06 $ 0.16 $ 0.29 $ 0.48 Diluted EPS $ 0.06 $ 0.16 $ 0.29 $ 0.48 Basic weighted average common shares 133,198,755 135,724,658 133,668,764 135,675,959 Diluted weighted average common shares 133,198,755 135,724,658 133,668,764 135,675,959 See accompanying notes to consolidated financial statements. 4 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) For the Three Months Ended For the Nine Months Ended June 30, June 30, 2023 2022 2023 2022 Net income $ 8,302 $ 21,152 $ 38,731 $ 64,961 Other comprehensive income (loss), net of tax: Changes in unrealized gains/losses on AFS securities, net of taxes of $ 3,475 , $ 10,043 , $( 6,151 ), and $ 34,710 ( 10,765 ) ( 31,117 ) 19,062 ( 107,544 ) Changes in unrealized gains/losses on cash flow hedges, net of taxes of $( 872 ), $( 1,646 ), $ 43 , and $( 7,076 ) 2,702 5,099 ( 135 ) 21,924 Comprehensive income (loss) $ 239 $ ( 4,866 ) $ 57,658 $ ( 20,659 ) See accompanying notes to consolidated financial statements. 5 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Dollars in thousands, except per share amounts) For the Nine Months Ended June 30, 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 Net income 8,302 8,302 Other comprehensive loss, net of tax ( 8,063 ) ( 8,063 ) ESOP activity ( 155 ) 413 258 Stock-based compensation 75 75 Cash dividends to stockholders ($ 0.085 per share) ( 11,321 ) ( 11,321 ) Balance at June 30, 2023 $ 1,361 $ 1,167,979 $ ( 28,497 ) $ 47,148 $ ( 126,706 ) $ 1,061,285 (Continued) 6 For the Nine Months Ended June 30, 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 Net income 21,152 21,152 Other comprehensive loss, net of tax ( 26,018 ) ( 26,018 ) ESOP activity ( 5 ) 413 408 Restricted stock activity, net ( 3 ) ( 3 ) Stock-based compensation 126 126 Cash dividends to stockholders ($ 0.285 per share) ( 38,677 ) ( 38,677 ) Balance at June 30, 2022 $ 1,388 $ 1,190,117 $ ( 30,148 ) $ 72,308 $ ( 101,925 ) $ 1,131,740 See accompanying notes to consolidated financial statements. (Concluded) 7 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Nine Months Ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 38,731 64,961 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 11,025 ) ( 6,166 ) Provision for credit losses 5,875 ( 5,690 ) Originations of loans receivable held-for-sale ("LHFS") ( 218 ) ( 1,089 ) Proceeds from sales of LHFS 215 1,113 Amortization and accretion of premiums and discounts on securities 2,296 4,027 Depreciation and amortization of premises and equipment 6,816 7,020 Amortization of intangible assets 821 1,049 Amortization of deferred amounts related to FHLB advances, net 1,262 1,347 Common stock committed to be released for allocation - ESOP 935 1,356 Stock-based compensation 238 373 Changes in: Unrestricted cash collateral from derivative counterparties, net 1,070 2,620 Other assets, net 912 6,307 Income taxes payable/receivable, net ( 4,660 ) ( 2,921 ) Deferred income tax liabilities, net 878 2,182 Other liabilities ( 10,083 ) ( 13,095 ) Net cash provided by operating activities 34,063 63,394 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities — ( 86,993 ) Proceeds from calls, maturities and principal reductions of AFS securities 141,357 261,160 Proceeds from the redemption of FHLB stock 263,807 188,618 Purchase of FHLB stock ( 268,170 ) ( 196,727 ) Net change in loans receivable ( 510,851 ) ( 151,805 ) Proceeds from sale of participating interest in loans receivable 5,563 — Purchase of premises and equipment ( 4,397 ) ( 4,492 ) Proceeds from sale of other real estate owned ("OREO") 533 503 Proceeds from bank-owned life insurance ("BOLI") death benefit 720 1,023 Net cash (used in) provided by investing activities ( 371,438 ) 11,287 (Continued) 8 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Nine Months Ended June 30, 2023 2022 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 71,849 ) ( 91,597 ) Net change in deposits ( 102,026 ) ( 267,513 ) Proceeds from borrowings 4,293,870 1,079,402 Repayments on borrowings ( 3,441,124 ) ( 793,702 ) Change in advances by borrowers ( 39,085 ) ( 16,774 ) Repurchase of common stock ( 22,196 ) — Net cash provided by (used in) financing activities 617,590 ( 90,184 ) NET INCREASE / (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 280,215 ( 15,503 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH: Beginning of period 49,194 70,292 End of period 329,409 54,789 See accompanying notes to consolidated financial statements. (Concluded) 9 Notes to Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The consolidated financial statements include the accounts of Capitol Federal Financial, Inc.® (the "Company") and its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"). The Bank has two wholly-owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 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 $ 329.4 million and $ 49.2 million at June 30, 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 June 30, 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. 10 2. EARNINGS PER SHARE Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. For the Three Months Ended For the Nine Months Ended June 30, June 30, 2023 2022 2023 2022 (Dollars in thousands, except per share amounts) Net income $ 8,302 $ 21,152 $ 38,731 $ 64,961 Income allocated to participating securities ( 4 ) ( 11 ) ( 18 ) ( 35 ) Net income available to common stockholders $ 8,298 $ 21,141 $ 38,713 $ 64,926 Total basic average common shares outstanding 133,198,755 135,724,658 133,668,764 135,675,959 Effect of dilutive stock options — — — — Total diluted average common shares outstanding 133,198,755 135,724,658 133,668,764 135,675,959 Net EPS: Basic $ 0.06 $ 0.16 $ 0.29 $ 0.48 Diluted $ 0.06 $ 0.16 $ 0.29 $ 0.48 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 368,803 507,115 373,473 531,305 11 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"). June 30, 2023 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 1,099,824 $ 66 $ 135,171 $ 964,719 GSE debentures 519,983 — 44,224 475,759 Corporate bonds 4,000 — 623 3,377 Municipal bonds 1,030 — 18 1,012 $ 1,624,837 $ 66 $ 180,036 $ 1,444,867 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. June 30, 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 $ 74,190 $ 2,282 $ 877,286 $ 132,889 GSE debentures — — 475,759 44,224 Corporate bonds 1,723 277 1,654 346 Municipal bonds 1,012 18 — — $ 76,925 $ 2,577 $ 1,354,699 $ 177,459 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 12 The unrealized losses at June 30, 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 June 30, 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 June 30, 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 $ 24,501 One year through five years 494,983 451,258 Five years through ten years 5,030 4,389 525,013 480,148 MBS 1,099,824 964,719 $ 1,624,837 $ 1,444,867 The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented. For the Three Months Ended For the Nine Months Ended June 30, June 30, 2023 2022 2023 2022 (Dollars in thousands) Taxable $ 889 $ 813 $ 2,651 $ 2,393 Non-taxable 6 2 20 30 $ 895 $ 815 $ 2,671 $ 2,423 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. June 30, 2023 September 30, 2022 (Dollars in thousands) Federal Reserve Bank of Kansas City ("FRB of Kansas City") borrowings $ 693,853 $ 46,283 Public unit deposits 204,686 125,496 FHLB advances — 572,913 $ 898,539 $ 744,692 . 13 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at the dates presented is summarized as follows: June 30, 2023 September 30, 2022 (Dollars in thousands) One- to four-family: Originated $ 3,992,730 $ 3,988,469 Correspondent purchased 2,441,772 2,201,886 Bulk purchased 139,571 147,939 Construction 73,166 66,164 Total 6,647,239 6,404,458 Commercial: Commercial real estate 924,142 745,301 Commercial and industrial 106,609 79,981 Construction 193,308 141,062 Total 1,224,059 966,344 Consumer: Home equity 94,810 92,203 Other 8,632 8,665 Total 103,442 100,868 Total loans receivable 7,974,740 7,471,670 Less: ACL 22,399 16,371 Deferred loan fees/discounts 31,557 29,736 Premiums/deferred costs ( 42,576 ) ( 38,645 ) $ 7,963,360 $ 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 concentration in one- to four-family loans and geographic concentrations of these loans in Kansas and Missouri. One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. 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. The Bank has geographic concentrations of these loans in Kansas, Missouri and Texas. 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 14 construction participation loans, the Bank performs the same underwriting procedures as if the loan was being originated by the Bank. At the time of origination, 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. 15 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 June 30, 2023 and September 30, 2022, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. The commercial special mention loans presented in the "Current Fiscal Year" column are related to three loans in a single commercial relationship where the borrower has experienced some performance issues, but is beginning to trend in a positive direction. June 30, 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 $ 246,776 $ 588,085 $ 895,532 $ 583,237 $ 259,986 $ 1,454,283 $ — $ 4,027,899 Special Mention 292 1,339 791 1,076 1,139 8,507 — 13,144 Substandard — 155 109 559 732 7,363 — 8,918 Correspondent purchased Pass 335,623 523,658 621,396 253,451 64,274 665,666 — 2,464,068 Special Mention 309 167 1,386 420 358 2,150 — 4,790 Substandard — 229 — — 168 3,127 — 3,524 Bulk purchased Pass — — — — — 136,828 — 136,828 Special Mention — — — — — — — — Substandard — — — — — 3,237 — 3,237 583,000 1,113,633 1,519,214 838,743 326,657 2,281,161 — 6,662,408 Commercial: Commercial real estate Pass 294,232 260,807 229,427 122,602 82,804 80,446 10,747 1,081,065 Special Mention 2,495 28,441 — — — — — 30,936 Substandard — — — 594 219 286 — 1,099 Commercial and industrial Pass 26,765 24,093 13,291 3,788 2,931 871 20,275 92,014 Special Mention 13,468 — — — — — 936 14,404 Substandard — 11 — 73 — 83 — 167 336,960 313,352 242,718 127,057 85,954 81,686 31,958 1,219,685 Consumer: Home equity Pass 4,152 5,802 2,093 1,202 858 2,339 77,968 94,414 Special Mention — 46 — — — 73 234 353 Substandard — — — — 17 15 236 268 Other Pass 3,423 3,044 1,038 423 168 202 328 8,626 Special Mention — — — 5 — — — 5 Substandard — — — — — — — — 7,575 8,892 3,131 1,630 1,043 2,629 78,766 103,666 Total $ 927,535 $ 1,435,877 $ 1,765,063 $ 967,430 $ 413,654 $ 2,365,476 $ 110,724 $ 7,985,759 16 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 17 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. June 30, 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 $ 246,776 $ 589,424 $ 896,210 $ 583,892 $ 261,057 $ 1,464,668 $ — $ 4,042,027 30-89 292 — 222 696 800 4,345 — 6,355 90+/FC — 155 — 284 — 1,140 — 1,579 Correspondent purchased Current 335,623 523,658 620,223 253,305 64,274 666,621 — 2,463,704 30-89 309 167 2,559 566 358 2,840 — 6,799 90+/FC — 229 — — 168 1,482 — 1,879 Bulk purchased Current — — — — — 138,916 — 138,916 30-89 — — — — — — — — 90+/FC — — — — — 1,149 — 1,149 583,000 1,113,633 1,519,214 838,743 326,657 2,281,161 — 6,662,408 Commercial: Commercial real estate Current 296,415 289,248 229,427 122,602 82,804 80,466 10,747 1,111,709 30-89 312 — — — — 10 — 322 90+/FC — — — 594 219 256 — 1,069 Commercial and industrial Current 40,233 24,104 13,291 3,788 2,931 871 20,960 106,178 30-89 — — — — — — 251 251 90+/FC — — — 73 — 83 — 156 336,960 313,352 242,718 127,057 85,954 81,686 31,958 1,219,685 Consumer: Home equity Current 4,152 5,808 2,093 1,146 858 2,415 78,132 94,604 30-89 — 40 — 56 17 — 266 379 90+/FC — — — — — 12 40 52 Other Current 3,419 2,964 1,038 425 166 202 328 8,542 30-89 4 80 — 3 2 — — 89 90+/FC — — — — — — — — 7,575 8,892 3,131 1,630 1,043 2,629 78,766 103,666 Total $ 927,535 $ 1,435,877 $ 1,765,063 $ 967,430 $ 413,654 $ 2,365,476 $ 110,724 $ 7,985,759 18 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 19 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 June 30, 2023 and September 30, 2022, all loans 90 or more days delinquent were on nonaccrual status. June 30, 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 $ 6,355 $ 1,579 $ 7,934 $ 4,042,027 $ 4,049,961 Correspondent purchased 6,799 1,879 8,678 2,463,704 2,472,382 Bulk purchased — 1,149 1,149 138,916 140,065 Commercial: Commercial real estate 322 1,069 1,391 1,111,709 1,113,100 Commercial and industrial 251 156 407 106,178 106,585 Consumer: Home equity 379 52 431 94,604 95,035 Other 89 — 89 8,542 8,631 $ 14,195 $ 5,884 $ 20,079 $ 7,965,680 $ 7,985,759 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 June 30, 2023 and September 30, 2022 was $ 2.2 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 $ 328 thousand at September 30, 2022. There was no residential OREO held as of June 30, 2023. 20 The following table presents the amortized cost at June 30, 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. June 30, 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 $ 1,873 $ 530 $ 3,135 $ 1,018 Correspondent purchased 1,879 — 3,784 304 Bulk purchased 1,405 1,093 1,157 630 Commercial: Commercial real estate 1,099 446 1,084 449 Commercial and industrial 156 156 161 161 Consumer: Home equity 89 37 172 19 Other — — 1 — $ 6,501 $ 2,262 $ 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 Nine Months Ended June 30, 2023 June 30, 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 1 $ 110 $ 110 1 $ 110 $ 110 Correspondent purchased — — — — — — Bulk purchased — — — 1 239 257 Commercial: Commercial real estate — — — — — — Commercial and industrial — — — — — — Consumer: Home equity 1 38 38 1 38 38 Other — — — — — — 2 $ 148 $ 148 3 $ 387 $ 405 21 For the Three Months Ended For the Nine Months Ended June 30, 2022 June 30, 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 — $ — $ — 2 $ 124 $ 124 Correspondent purchased — — — — — — Bulk purchased — — — — — — Commercial: Commercial real estate — — — — — — Commercial and industrial — — — 2 124 124 Consumer: Home equity — — — 1 19 19 Other — — — — — — — $ — $ — 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 Nine Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 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 — — 1 19 — — 1 19 Other — — — — — — — — — $ — 1 $ 19 1 $ 8 2 $ 703 22 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 June 30, 2023 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,139 $ 3,074 $ 221 $ 5,434 $ 14,222 $ 233 $ 19,889 Charge-offs — — — — — ( 11 ) ( 11 ) Recoveries 1 — — 1 — — 1 Provision for credit losses 15 7 18 40 2,463 17 2,520 Ending balance $ 2,155 $ 3,081 $ 239 $ 5,475 $ 16,685 $ 239 $ 22,399 For the Nine Months Ended June 30, 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 — — — — — ( 31 ) ( 31 ) Recoveries 2 — — 2 1 2 5 Provision for credit losses 87 347 33 467 5,564 23 6,054 Ending balance $ 2,155 $ 3,081 $ 239 $ 5,475 $ 16,685 $ 239 $ 22,399 For the Three Months Ended June 30, 2022 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 1,709 $ 2,129 $ 241 $ 4,079 $ 11,031 $ 202 $ 15,312 Charge-offs — — — — — ( 10 ) ( 10 ) Recoveries 126 — — 126 52 7 185 Provision for credit losses 69 308 ( 17 ) 360 407 29 796 Ending balance $ 1,904 $ 2,437 $ 224 $ 4,565 $ 11,490 $ 228 $ 16,283 For the Nine Months Ended June 30, 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 ) ( 16 ) ( 30 ) Recoveries 137 — — 137 101 12 250 Provision for credit losses 159 375 ( 80 ) 454 ( 4,253 ) 39 ( 3,760 ) Ending balance $ 1,904 $ 2,437 $ 224 $ 4,565 $ 11,490 $ 228 $ 16,283 23 The key assumptions in the Company's ACL model include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. Management also considered certain qualitative factors when evaluating the adequacy of the ACL at June 30, 2023. The key assumptions utilized in estimating the Company's ACL at June 30, 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 June 30, 2023. The forecasted economic indices applied to the model at June 30, 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 June 30, 2023 was the national unemployment rate. The forecasted national unemployment rate in the economic scenario selected by management at June 30, 2023 had the national unemployment rate gradually increasing to 4.0 % by June 30, 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 June 30, 2023. • Prepayment and curtailment assumptions - The assumptions used at June 30, 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 June 30, 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. 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 June 30, 2023 and September 30, 2022, the Bank's off-balance sheet credit exposures totaled $ 909.7 million and $ 992.6 million, respectively. For the Three Months Ended For the Nine Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (Dollars in thousands) Beginning balance $ 5,768 $ 3,672 $ 4,751 $ 5,743 (Release)/provision for credit losses ( 1,196 ) 141 ( 179 ) ( 1,930 ) Ending balance $ 4,572 $ 3,813 $ 4,572 $ 3,813 5. BORROWED FUNDS FHLB Borrowings and Interest Rate Swaps - As of June 30, 2023 and September 30, 2022, the Bank held 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 June 30, 2023 and September 30, 2022, the interest rate swap agreements had an average remaining term to maturity of 2.3 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 June 30, 2023 and September 30, 2022, the interest rate swaps were in a gain position with a total fair value of $ 12.4 million and $ 12.5 million respectively, which was reported in other assets on the consolidated balance sheet. During the three and nine month periods ended June 30, 2023, $ 1.7 million and $ 3.7 million, respectively, was reclassified from AOCI as a decrease to interest expense. During the three and nine month periods ended June 30, 2022, $ 1.3 million and $ 4.8 million was reclassified from AOCI as an increase to interest expense. At June 30, 2023, the Company estimated that $ 8.9 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 $ 13.1 million and $ 12.1 million at June 30, 2023 and September 30, 2022, respectively. During the current nine month period, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy involved borrowing on the Bank's FHLB line of credit 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. 24 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 nine months ended June 30, 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 nine months ended June 30, 2023 or during fiscal year 2022. (Level 2) 25 The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at June 30, 2023 or September 30, 2022. June 30, 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 $ 964,719 $ — $ 964,719 $ — GSE debentures 475,759 — 475,759 — Corporate bonds 3,377 — 3,377 — Municipal bonds 1,012 — 1,012 — 1,444,867 — 1,444,867 — Interest rate swaps 12,369 — 12,369 — $ 1,457,236 $ — $ 1,457,236 $ — 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 nine months ended June 30, 2023 and 2022 that were still held in the portfolio as of June 30, 2023 and 2022 was $ 3.9 million and $ 4.3 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 nine months ended June 30, 2023 and June 30, 2022 were downward adjustments to the book value of the 26 collateral for lack of marketability. During the nine months ended June 30, 2023, the adjustments ranged from 8 % to 100 %, with a weighted average of 21 %. During the nine months ended June 30, 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. There was no OREO measured on a non-recurring basis during the nine months ended June 30, 2023. The fair value of OREO measured on a non-recurring basis during the nine months ended June 30, 2022 that was still held in the portfolio as of June 30, 2022 was $ 258 thousand. The carrying value of the properties equaled the fair value of the properties at June 30, 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: June 30, 2023 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 329,409 $ 329,409 $ 329,409 $ — $ — AFS securities 1,444,867 1,444,867 — 1,444,867 — Loans receivable 7,963,360 7,547,542 — — 7,547,542 FHLB stock 116,012 116,012 116,012 — — Interest rate swaps 12,369 12,369 — 12,369 — Liabilities: Deposits 6,092,840 6,041,135 3,452,891 2,588,244 — Borrowings 2,986,162 2,913,752 — 2,913,752 — 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 — 27 7. ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables present the changes in the components of AOCI, net of tax, for the periods indicated. For the Three Months Ended June 30, 2023 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 125,292 ) $ 6,649 $ ( 118,643 ) Other comprehensive income (loss), before reclassifications ( 10,765 ) 4,369 ( 6,396 ) Amount reclassified from AOCI, net of taxes of $ 538 — ( 1,667 ) ( 1,667 ) Other comprehensive income (loss) ( 10,765 ) 2,702 ( 8,063 ) Ending balance $ ( 136,057 ) $ 9,351 $ ( 126,706 ) For the Nine Months Ended June 30, 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 19,062 3,589 22,651 Amount reclassified from AOCI, net of taxes of $ 1,202 — ( 3,724 ) ( 3,724 ) Other comprehensive income (loss) 19,062 ( 135 ) 18,927 Ending balance $ ( 136,057 ) $ 9,351 $ ( 126,706 ) For the Three Months Ended June 30, 2022 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ ( 71,776 ) $ ( 4,131 ) $ ( 75,907 ) Other comprehensive income (loss), before reclassifications ( 31,117 ) 3,798 ( 27,319 ) Amount reclassified from AOCI, net of taxes of $( 420 ) — 1,301 1,301 Other comprehensive income (loss) ( 31,117 ) 5,099 ( 26,018 ) Ending balance $ ( 102,893 ) $ 968 $ ( 101,925 ) For the Nine Months Ended June 30, 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 ( 107,544 ) 17,127 ( 90,417 ) Amount reclassified from AOCI, net of taxes of $( 1,548 ) — 4,797 4,797 Other comprehensive income (loss) ( 107,544 ) 21,924 ( 85,620 ) Ending balance $ ( 102,893 ) $ 968 $ ( 101,925 ) 28