Capitol Federal Financial, Inc. 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Capitol Federal Financial, Inc. and subsidiary (the “Company”) as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended September 30, 2023, of the Company and our report dated November 29, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP Kansas City, Missouri November 29, 2023 55 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Capitol Federal Financial, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Capitol Federal Financial, Inc. and subsidiary (the "Company") as of September 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 29, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses — Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The allowance for credit losses (ACL) is a valuation amount that is deducted from the amortized cost basis of loans, which represents management’s current expectations of total expected credit losses included in the Company’s loan portfolio as of the balance sheet date. In management’s ACL model, average historical loss rates on loan pools with similar risk characteristics are compared to historical data and a correlation is estimated using regression analysis. Each quarter, the Company's ACL model pairs the results of the regression analysis with a third party provided economic forecast in order to project future loss rates for a reasonable and supportable time period before reverting back to long-term historical averages for each economic index. The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for prepayments and curtailments. The ACL model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life, which are discounted back to the reporting date using each loan's effective yield to arrive at a present value of future cash flows, which is compared to the amortized cost basis of the loan pool to determine the 56 amount of ACL necessary. Management evaluates qualitative factors not included in historical loss rates, macroeconomic forecasts, or other model inputs and/or other ACL assumptions, considering risks related to loan portfolio attributes and external factors, and adjusts the modeled ACL as deemed appropriate based upon the assessment. We identified the allowance for credit losses estimated by the third-party economic forecast and qualitative factor adjustments as a critical audit matter because of the significant estimates and assumptions required by management in determining the ACL. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists, when performing audit procedures to evaluate the reasonableness of management’s significant estimates and assumptions. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the ACL model included the following, among others: • We tested the effectiveness of controls over the Company’s ACL model including those over the determination of the qualitative adjustments and management’s review of the adequacy of the ACL. • With the assistance of our credit specialists, we evaluated the appropriateness of the ACL model, data elements utilized in the ACL model such as portfolio segmentation into loan pools, forecast and reversion to mean time periods, and economic forecasts, and evaluated reasonableness of the use of qualitative factor adjustments to the outputs of the modeled ACL. • We evaluated the economic forecast used, including reasonableness and basis for the selected economic forecast by comparing to internal and external sources. • We evaluated the qualitative factor adjustments including reasonableness and basis for the adjustments which include market and economic conditions and/or portfolio performance metrics. • We reviewed independent economic statistics, such as common macroeconomic indicators as well as industry peers, and we used data analytics to identify changes in the loan portfolio to assess the completeness of management’s qualitative adjustments. /s/ Deloitte & Touche LLP Kansas City, Missouri November 29, 2023 We have served as the Company's auditor since 1974. 57 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2023 and 2022 (Dollars in thousands, except per share amounts) 2023 2022 ASSETS: Cash and cash equivalents (includes interest-earning deposits of $ 213,830 and $ 27,467 ) $ 245,605 $ 49,194 Available-for-sale ("AFS") securities, at estimated fair value (amortized cost of $ 1,385,992 and $ 1,768,490 ) 1,384,482 1,563,307 Loans receivable, net (allowance for credit losses ("ACL") of $ 23,759 and $ 16,371 ) 7,970,949 7,464,208 Federal Home Loan Bank Topeka ("FHLB") stock, at cost 110,714 100,624 Premises and equipment, net 91,531 94,820 Income taxes receivable, net 8,531 1,266 Deferred income tax assets, net 29,605 33,884 Other assets 336,044 317,594 TOTAL ASSETS $ 10,177,461 $ 9,624,897 LIABILITIES: Deposits $ 6,051,220 $ 6,194,866 Borrowings 2,879,125 2,132,154 Advances by borrowers 62,993 80,067 Other liabilities 140,069 121,311 Total liabilities 9,133,407 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, 135,936,375 and 138,858,884 shares issued and outstanding as of September 30, 2023 and 2022, respectively 1,359 1,388 Additional paid-in capital 1,166,643 1,190,213 Unearned compensation, Employee Stock Ownership Plan ("ESOP") ( 28,083 ) ( 29,735 ) Retained earnings ( 104,565 ) 80,266 Accumulated other comprehensive income (loss) ("AOCI"), net of tax 8,700 ( 145,633 ) Total stockholders' equity 1,044,054 1,096,499 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,177,461 $ 9,624,897 See accompanying notes to consolidated financial statements. 58 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 (Dollars in thousands, except per share amounts) 2023 2022 2021 INTEREST AND DIVIDEND INCOME: Loans receivable $ 280,087 $ 228,531 $ 229,897 Cash and cash equivalents 43,796 18,304 144 Mortgage-backed securities ("MBS") 18,520 19,406 21,399 FHLB stock 13,821 10,031 3,916 Investment securities 3,565 3,268 2,825 Total interest and dividend income 359,789 279,540 258,181 INTEREST EXPENSE: Borrowings 124,250 52,490 34,774 Deposits 82,267 34,456 48,406 Total interest expense 206,517 86,946 83,180 NET INTEREST INCOME 153,272 192,594 175,001 PROVISION FOR CREDIT LOSSES 6,838 ( 4,630 ) ( 8,510 ) NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 146,434 197,224 183,511 NON-INTEREST INCOME: Deposit service fees 12,745 13,798 12,282 Insurance commissions 3,487 2,947 3,030 Gain on sale of Visa Class B shares — — 7,386 Net loss from securities transactions ( 192,622 ) — — Other non-interest income 4,935 6,085 5,388 Total non-interest income ( 171,455 ) 22,830 28,086 NON-INTEREST EXPENSE: Salaries and employee benefits 51,491 56,600 56,002 Information technology and related expense 23,425 18,311 17,922 Occupancy, net 14,236 14,370 14,045 Regulatory and outside services 6,039 6,192 5,764 Federal insurance premium 4,456 3,020 2,545 Advertising and promotional 4,305 5,178 5,133 Deposit and loan transaction costs 2,694 2,797 2,761 Office supplies and related expense 2,499 1,951 1,715 Loss on interest rate swap termination — — 4,752 Other non-interest expense 4,789 4,432 4,930 Total non-interest expense 113,934 112,851 115,569 (LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE ( 138,955 ) 107,203 96,028 INCOME TAX (BENEFIT) EXPENSE ( 37,296 ) 22,750 19,946 NET (LOSS) INCOME $ ( 101,659 ) $ 84,453 $ 76,082 Basic (loss) earnings per share ("EPS") $ ( 0.76 ) $ 0.62 $ 0.56 Diluted EPS $ ( 0.76 ) $ 0.62 $ 0.56 See accompanying notes to consolidated financial statements. 59 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 (Dollars in thousands) 2023 2022 2021 Net (loss) income $ ( 101,659 ) $ 84,453 $ 76,082 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on AFS securities arising during the period, net of taxes of $( 2,696 ), $ 51,565 , and $ 6,116 8,355 ( 159,770 ) ( 19,077 ) Reclassification adjustment for net losses on AFS securities included in net income, net of taxes of $( 47,000 ), $ 0 , and $ 0 145,622 — — Unrealized gains (losses) on cash flow hedges arising during the period, net of taxes of $( 1,923 ), $( 8,177 ), and $( 1,775 ) 5,957 25,339 5,712 Reclassification adjustment for cash flow hedge amounts included in net income, net of taxes of $ 1,808 , $( 1,647 ), and $( 4,378 ) ( 5,601 ) 5,103 13,565 Comprehensive income (loss) $ 52,674 $ ( 44,875 ) $ 76,282 See accompanying notes to consolidated financial statements. 60 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 (Dollars in thousands, except per share amounts) Additional Unearned Total Common Paid-In Compensation Retained Stockholders' Stock Capital ESOP Earnings AOCI Equity Balance at September 30, 2020 $ 1,389 $ 1,189,853 $ ( 33,040 ) $ 143,162 $ ( 16,505 ) $ 1,284,859 Cumulative effect of adopting Accounting Standards Update ("ASU") 2016-13 ( 2,288 ) ( 2,288 ) Net income, fiscal year 2021 76,082 76,082 Other comprehensive income, net of tax 200 200 ESOP activity 383 1,653 2,036 Restricted stock activity, net ( 16 ) ( 16 ) Stock-based compensation 496 496 Repurchase of common stock ( 1 ) ( 1,407 ) ( 122 ) ( 1,530 ) Stock options exercised 324 324 Cash dividends to stockholders ($ 0.87 per share) ( 117,890 ) ( 117,890 ) Balance at September 30, 2021 1,388 1,189,633 ( 31,387 ) 98,944 ( 16,305 ) 1,242,273 Net income, fiscal year 2022 84,453 84,453 Other comprehensive loss, net of tax ( 129,328 ) ( 129,328 ) ESOP activity 88 1,652 1,740 Restricted stock activity, net ( 6 ) ( 6 ) Stock-based compensation 498 498 Cash dividends to stockholders ($ 0.76 per share) ( 103,131 ) ( 103,131 ) Balance at September 30, 2022 1,388 1,190,213 ( 29,735 ) 80,266 ( 145,633 ) 1,096,499 Net loss, fiscal year 2023 ( 101,659 ) ( 101,659 ) Other comprehensive income, net of tax 154,333 154,333 ESOP activity ( 473 ) 1,652 1,179 Stock-based compensation 327 327 Repurchase of common stock ( 29 ) ( 23,424 ) ( 23,453 ) Cash dividends to stockholders ($ 0.62 per share) ( 83,172 ) ( 83,172 ) Balance at September 30, 2023 $ 1,359 $ 1,166,643 $ ( 28,083 ) $ ( 104,565 ) $ 8,700 $ 1,044,054 See accompanying notes to consolidated financial statements. 61 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 (Dollars in thousands) 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ ( 101,659 ) $ 84,453 $ 76,082 Adjustments to reconcile net income to net cash provided by operating activities: FHLB stock dividends ( 13,821 ) ( 10,031 ) ( 3,916 ) Provision for credit losses 6,838 ( 4,630 ) ( 8,510 ) Originations of loans receivable held-for-sale ("LHFS") ( 1,217 ) ( 1,088 ) ( 1,780 ) Proceeds from sales of LHFS 1,222 1,113 1,825 Amortization and accretion of premiums and discounts on securities 3,016 4,967 6,206 Depreciation and amortization of premises and equipment 9,039 9,365 9,372 Amortization of intangible assets 1,069 1,372 1,578 Amortization of deferred amounts related to FHLB advances, net 1,643 1,804 1,582 Common stock committed to be released for allocation - ESOP 1,179 1,740 2,036 Stock-based compensation 327 498 496 Provision for deferred income taxes ( 45,520 ) 2,047 ( 1,668 ) Gain on the sale of Visa Class B shares — — ( 7,386 ) Net loss from securities transactions 192,622 — — Changes in: Unrestricted cash collateral from derivative counterparties, net 1,940 12,050 — Other assets, net 2,528 6,661 12,751 Income taxes payable/receivable, net ( 7,303 ) ( 2,197 ) 105 Other liabilities ( 4,372 ) ( 10,823 ) ( 14,306 ) Net cash provided by operating activities 47,531 97,301 74,467 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of AFS securities — ( 88,026 ) ( 1,079,351 ) Proceeds from calls, maturities and principal reductions of AFS securities 186,860 323,025 594,294 Proceeds from the redemption of FHLB stock 358,491 302,243 25,386 Purchase of FHLB stock ( 354,760 ) ( 319,415 ) ( 1,029 ) Net change in loans receivable ( 520,229 ) ( 381,561 ) 132,800 Proceeds from sale of participating interest in loans receivable 5,563 — — Purchase of premises and equipment ( 6,281 ) ( 5,557 ) ( 9,410 ) Proceeds from sale of other real estate owned ("OREO") 533 692 194 Proceeds from the sale of Visa Class B shares — — 7,386 Proceeds from sale of assets held-for-sale — — 2,619 Proceeds from bank-owned life insurance ("BOLI") death benefit 720 1,023 443 Net cash (used in) investing activities ( 329,103 ) ( 167,576 ) ( 326,668 ) (Continued) 62 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 (Dollars in thousands) 2023 2022 2021 CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid ( 83,172 ) ( 103,131 ) ( 117,890 ) Net change in deposits ( 143,646 ) ( 402,530 ) 405,988 Proceeds from borrowings 4,293,870 1,454,402 1,143,800 Repayments on borrowings ( 3,548,542 ) ( 906,902 ) ( 1,346,800 ) Change in advances by borrowers ( 17,074 ) 7,338 7,008 Payment of FHLB prepayment penalties — — ( 5,077 ) Repurchase of common stock ( 23,453 ) — ( 4,568 ) Stock options exercised — — 324 Net cash provided by financing activities 477,983 49,177 82,785 NET INCREASE / (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 196,411 ( 21,098 ) ( 169,416 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH: Beginning of year 49,194 70,292 239,708 End of year $ 245,605 $ 49,194 $ 70,292 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax payments $ 5,424 $ 13,559 $ 13,057 Interest payments $ 188,908 $ 83,833 $ 83,646 See accompanying notes to consolidated financial statements. (Concluded) 63 CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - Capitol Federal Financial, Inc. (the "Company") provides a full range of retail banking services through its wholly-owned subsidiary, Capitol Federal Savings Bank (the "Bank"), a federal savings bank, which has 46 traditional and five in-store banking offices serving primarily the metropolitan areas of Topeka, Wichita, Lawrence, Manhattan, Emporia and Salina, Kansas and portions of the Kansas City metropolitan area. The Bank emphasizes mortgage lending, primarily originating and purchasing one- to four-family loans, and providing personal retail financial services, along with offering commercial banking and lending products. Basis of Presentation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. The Bank has two wholly owned subsidiaries, Capitol Funds, Inc. and Capital City Investments, Inc. Capitol Funds, Inc. has a wholly-owned subsidiary, Capitol Federal Mortgage Reinsurance Company. Capital City Investments, Inc. is a real estate and investment holding company. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates and assumptions. Cash, Cash Equivalents and Restricted Cash - Cash, cash equivalents, and restricted cash reported in the statement of cash flows which consisted entirely of cash and cash equivalents at September 30, 2023 and 2022, respectively. Restricted cash relates to the collateral postings to/from the Bank's derivative counterparties associated with the Bank's interest rate swaps. There was no restricted cash included in other assets on the consolidated balance sheet at September 30, 2023 or September 30, 2022. See additional discussion regarding the interest rate swaps in "Note 8. Deposits and Borrowed Funds." Net Presentation of Cash Flows Related to Borrowings - At times, the Bank enters into certain FHLB advances with contractual maturities of 90 days or less. Cash flows related to these advances are reported on a net basis in the consolidated statements of cash flows. Securities - Securities include MBS and agency debentures issued primarily by United States Government-Sponsored Enterprises ("GSEs"), including Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Banks, United States Government agencies, including Government National Mortgage Association (GNMA), corporate bonds, and municipal bonds. Securities are classified as held-to-maturity ("HTM"), AFS, or trading based on management's intention for holding the securities on the date of purchase. Generally, classifications are made in response to liquidity needs, asset/liability management strategies, and the market interest rate environment at the time of purchase. Accrued interest receivable for all securities is reported in other assets on the consolidated balance sheet and totaled $ 3.1 million and $ 4.2 million at September 30, 2023 and 2022, respectively. The Company excludes accrued interest from the amortized cost of securities and does not measure ACL for accrued interest. Interest accrued but not received is reversed against interest income. Securities that management has the intention and ability to hold to maturity are classified as HTM and reported at amortized cost. Such securities are adjusted for the amortization of premiums and discounts which are recognized as adjustments to interest income over the life of the securities using the level-yield method. At September 30, 2023 and 2022, the portfolio did not contain any securities classified as HTM. Securities that management may sell if necessary for liquidity or asset management purposes are classified as AFS and reported at fair value, with unrealized gains and non-credit losses reported as a component of AOCI within stockholders' equity, net of deferred income taxes. The amortization of premiums and discounts are recognized as adjustments to interest income over the life of the securities using the level-yield method. Gains or losses on the disposition of AFS securities are 64 recognized using the specific identification method. The Company primarily uses prices obtained from third-party pricing services to determine the fair value of securities. See additional discussion of fair value of AFS securities in "Note 14. Fair Value of Financial Instruments." Securities that are purchased and held principally for resale in the near future are classified as trading securities and are reported at fair value, with unrealized gains and losses included in non-interest income in the consolidated statements of income. During the fiscal years ended September 30, 2023 and 2022, neither the Company nor the Bank maintained a trading securities portfolio. Allowance for Credit Losses on AFS Debt Securities - Management monitors AFS debt securities for impairment on an ongoing basis and performs a formal review quarterly. If an AFS debt security is in an unrealized loss position at the time of the quarterly review, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost. If either condition is met, the entire loss in fair value is recognized in current earnings. If neither condition is met, and the Company does not expect to recover the amortized cost basis, the Company determines whether the decline in fair value resulted from credit losses or other factors. In making this assessment, management considers the security structure, the cause(s) and severity of the loss, expectations of future performance including recent events specific to the issuer or industry including the issuer's financial condition and current ability to make future payments in a timely manner, and external credit ratings and recent downgrades in such ratings. Management's assessment involves a high degree of subjectivity and judgment that is based on information available at a point in time. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss has occurred, and an ACL is recorded. The ACL is limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL on AFS debt securities are recorded as an increase or decrease in the provision for credit losses on the consolidated statements of income. Losses are charged against the ACL on securities when management believes the collectability of an AFS security is in doubt or when either of the conditions regarding intent or requirement to sell is met. Interest accrued on AFS debt securities but not received is also reversed against interest income. As of September 30, 2023 and 2022, the Company did not identify any credit losses related to the Company's AFS debt securities so there was no ACL on AFS debt securities as of those dates. Loans Receivable - Loans receivable that management has the intention and ability to hold for the foreseeable future are carried at amortized cost, excluding accrued interest. Amortized cost is the amount of unpaid principal, net of undisbursed loan funds, unamortized premiums and discounts, and deferred loan fees and costs. Net loan fees and costs, and premiums and discounts are amortized as yield adjustments to interest income using the level-yield method. Loans are presented on the consolidated balance sheet net of the related ACL. Interest on loans receivable is accrued based on the principal amount outstanding. Accrued interest receivable for loans is reported in other assets on the consolidated balance sheet and totaled $ 25.0 million and $ 19.4 million at September 30, 2023 and 2022, respectively. The Company does not calculate ACL for accrued interest. Interest accrued but not received is reversed against interest income. Loan endorsements - Certain existing one- to four- family loan customers, including customers whose loans were purchased from a correspondent lender, have the opportunity, for a fee, to endorse their original loan terms to current loan terms being offered by the Bank, without being required to complete the standard application and underwriting process. The fee received for each endorsement is deferred and amortized as an adjustment to interest income over the life of the loan. If the change in loan terms resulting from the endorsement is deemed to be more than minor, all existing unamortized deferred loan origination fees and costs are recognized at the time of endorsement. If the change in loan terms is deemed to be minor, the fee received for the endorsement is added to the net remaining unamortized deferred fee or deferred cost balance. Troubled debt restructurings - For borrowers experiencing financial difficulties, the Bank may grant a concession to the borrower. Such concessions generally involve extensions of loan maturity dates, the granting of periods during which reduced payment amounts are required, and/or reductions in interest rates. The Bank does not forgive principal or interest, nor does it commit to lend additional funds to these borrowers, except for situations generally involving the capitalization of delinquent interest and/or escrow on one- to four-family loans and consumer loans, not to exceed the original loan amount. 65 In the case of commercial loans, the Bank generally does not forgive principal or interest or commit to lend additional funds unless the borrower provides additional collateral or other enhancements to improve the credit quality. Delinquent loans - A loan is considered delinquent when payment has not been received within 30 days of its contractual due date. The number of days delinquent is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment. Nonaccrual loans - The accrual of income on loans is generally discontinued when interest or principal payments are 90 days in arrears. We also report certain troubled debt restructuring ("TDR") loans as nonaccrual loans that are required to be reported as such pursuant to regulatory reporting requirements. Loans on which the accrual of income has been discontinued are designated as nonaccrual and all delinquent accrued interest is reversed. A nonaccrual one- to four-family or consumer loan is returned to accrual status once the contractual payments have been made to bring the loan less than 90 days past due or, in the case of a TDR loan, the borrower has made the required consecutive loan payments. A nonaccrual commercial loan is returned to accrual status once the loan has been current for a minimum of six months, all fees and interest are paid current, the loan has a sufficient debt service coverage ratio, and the loan is well secured and within policy. Allowance for Credit Losses on Loans Receivable - The ACL is a valuation amount that is deducted from the amortized cost basis of loans. It represents management's current expectations of total expected credit losses included in the Company's loan portfolio as of the balance sheet date and is determined using relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts, along with the application of qualitative factors when necessary. The ACL is recorded upon origination or purchase of a loan and is updated at subsequent reporting dates. Changes in the ACL are recorded through increases or decreases to the provision for credit losses in the consolidated statements of income. The ACL is an estimate that requires significant judgment including projections of the macroeconomic environment as of a point in time. The macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses. The Bank's ACL is measured on a collective ("pool") basis, with loans aggregated into pools based on similar risk characteristics such as collateral type, historical loss experience, loan-to-value ("LTV") for one- to four-family loans, and payment sources for commercial loans. Loans that do not share similar risk characteristics are evaluated on an individual basis. Charge-offs against the related ACL amounts for any loan type may be recorded at any time if the Bank has knowledge of the existence of a probable loss. One- to four-family loans and consumer home equity loans are deemed to be collateral dependent and individually evaluated for loss when the loan is generally 180 days delinquent, and any identified losses are charged-off at that time. Losses are based on new collateral values obtained through appraisals, less estimated costs to sell. Anticipated private mortgage insurance proceeds are taken into consideration when calculating the loss amount. If the Bank holds the first and second mortgage, both loans are combined when evaluating whether there is a potential loss on the loan. When a non-real estate secured consumer loan is 120 days delinquent, any identified losses are charged-off. Commercial loans are individually evaluated for loss if management determines they exhibit unique risk characteristics. Specific allocations of ACL are established and/or losses are charged-off prior to a loan becoming 120 days delinquent when it is determined, through the analysis of any available current financial information regarding the borrower, that the borrower is not able to service the debt and there is little or no prospect for near term improvement. In the case of secured loans, the loan is deemed to be collateral dependent when this occurs, and the specific allocation of ACL and/or charge-off amount is based on a comparison of the amounts due from the borrower and calculated current fair value of the collateral after consideration of estimated costs to sell. The primary credit risk characteristics inherent in the one- to four-family and consumer loan portfolios are a decline in economic conditions, such as elevated levels of unemployment or underemployment, and declines in residential real estate values. Any one or a combination of these events may adversely affect the ability of borrowers to repay their loans, resulting in increased delinquencies, non-performing assets, charge-offs, and provisions for credit losses. Although the commercial loan portfolio is subject to the same risk of declines in economic conditions, the primary risk characteristics inherent in this portfolio include the ability of the borrower to sustain sufficient cash flows from leases and business operations, the ability to control operational or business expenses to satisfy their contractual debt payments, and the ability to utilize personal or business resources to pay their contractual debt payments if the cash flows are not sufficient. Additionally, if the Bank were to repossess the secured collateral of a commercial real estate loan, the pool of potential buyers is more limited than that for a residential property. Therefore, the Bank could hold the property for an extended period of time, or be forced to sell at a 66 discounted price, resulting in additional losses. Our commercial and industrial loans are primarily secured by accounts receivable, inventory and equipment, which may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. For loans evaluated for credit losses on a pool basis, average historical loss rates are calculated for each pool using the Company's historical charge-offs, or peer data when the Company's own historical loss rates are not reflective of future loss expectations, and outstanding loan balances during a historical time period. The historical time periods can be different based on the individual pool and represent management's credit expectations for the pool of loans over the remaining contractual life. Generally, the historical time periods are at least one economic cycle. These historical loss rates are compared to historical data related to economic variables including national unemployment rate, changes in commercial real estate price index, changes in home values, and changes in the United States gross domestic product during the same time periods over which the historical loss rates were calculated, and a correlation is estimated using regression analysis. Each quarter, the Company's model pairs the results of the regression analysis with an economic forecast of these same macroeconomic variables, which is provided by a third party, in order to project future loss rates. The forecast is applied for a reasonable and supportable time period, as determined by management, before reverting back to long-term historical averages at the macroeconomic variable level using a straight-line method. The forecast-adjusted loss rate is applied to the loans over their remaining contractual lives, adjusted for expected prepayments and curtailments. The contractual term excludes expected extensions, renewals and modifications unless there is a reasonable expectation that a TDR will be executed. In the case of revolving lines of credit, since the rate of principal reduction is generally at the discretion of the borrower, remaining contractual lives are calculated by estimating future cash flows expected to be received from the borrower until the outstanding balance has been reduced to zero. Using all of these inputs, the model generates aggregated estimated cash flows for the time period that remains in each loan's contractual life. These cash flows are discounted back to the reporting date using each loan's effective yield, to arrive at a present value of future cash flows. Each loan pool's ACL is equal to the aggregate shortage, if any, of the present value of future cash flows compared to the amortized cost basis of the loan pool. Additionally, qualitative factors are considered for items not included in historical loss rates, macroeconomic forecasts, or other model inputs and/or other ACL processes, as deemed appropriate by management's current assessment of risks related to loan portfolio attributes and external factors. Such qualitative factor considerations include changes in the Bank's loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual and/or expected changes in economic conditions, real estate values, and/or other economic developments in which the Bank operates. Management assesses the potential impact of such items and adjusts the modeled ACL as deemed appropriate based upon the assessment. Reserve for Off-Balance Sheet Credit Exposures - The Company's off-balance sheet credit exposures are comprised of unfunded portions of existing loans, such as lines of credit and construction loans, and commitments to originate or purchase loans that are not unconditionally cancellable by the Company. Expected credit losses on these amounts are calculated using the same methodology that is applied in the ACL model and qualitative factors are also considered; however, the estimate of credit risk for off-balance sheet credit exposures also takes into consideration the likelihood that funding of the unfunded amount/commitment will occur. The reserve for these off-balance sheet credit exposures is recorded as a liability and is presented in other liabilities on the consolidated balance sheet. Changes to the reserve on off-balance sheet credit exposures are recorded through increases or decreases to the provision for credit losses on the consolidated statements of income. Federal Home Loan Bank Stock - As a member of FHLB, the Bank is required to acquire and hold shares of FHLB stock. The Bank's holding requirement varies based on the Bank's activities, primarily the Bank's outstanding borrowings, with FHLB. FHLB stock is carried at cost and is considered a restricted asset because it cannot be pledged as collateral or bought or sold on the open market and it also has certain redemption restrictions. Management conducts a quarterly evaluation to determine if any FHLB stock impairment exists. The quarterly impairment evaluation focuses primarily on the capital adequacy and liquidity of FHLB, while also considering the impact that legislative and regulatory developments may have on FHLB. Stock and cash dividends received on FHLB stock are reflected as dividend income in the consolidated statements of income. 67 Premises, Equipment, and Leases - Land is carried at cost. Buildings, leasehold improvements, and furniture, fixtures and equipment are carried at cost less accumulated depreciation and leasehold amortization. Buildings, furniture, fixtures and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases. The costs for major improvements and renovations are capitalized, while maintenance, repairs and minor improvements are charged to operating expenses as incurred. Gains and losses on dispositions are recorded as non-interest income or non-interest expense as incurred. The Company leases real estate property for branches, ATMs, and certain equipment. The Company determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease. Operating lease right-of-use assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The right-of-use assets associated with operating leases are recorded in other assets in the Company's consolidated balance sheets. The lease liabilities associated with operating leases are included in other liabilities on the consolidated balance sheets. The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset. The lease liability is decreased as periodic lease payments are made. The Company performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable. The calculated amounts of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. If, at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Company cannot practically determine the interest rate implicit in the lease, so the Company's incremental borrowing rate is used as the discount rate for the lease. The Company uses FHLB advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception based upon the term of the lease. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Company's consolidated statements of income. For facility-related leases, the Company elected, by lease class, to not separate lease and non-lease components. Lease expense is recognized on a straight-line basis over the lease term. Variable lease expense primarily represents payments such as common area maintenance, real estate taxes, and utilities and are recognized as expense in the period when those payments are incurred. Short-term lease expense relates to leases with an initial term of 12 months or less. The Company has elected to not record a right-of-use asset or lease liability for short-term leases. Low Income Housing Partnerships - As part of the Bank's community reinvestment initiatives, the Bank invests in affordable housing limited partnerships ("low income housing partnerships") that make equity investments in affordable housing properties. The Bank is a limited partner in each partnership in which it invests. A separate, unrelated third party is the general partner. The Bank receives affordable housing tax credits and other tax benefits for these investments. Other Assets - Included in other assets on the consolidated balance sheet are the Company's intangible assets, which consist of goodwill, deposit intangibles and other intangibles. Goodwill is assessed for impairment on an annual basis, or more frequently in certain circumstances. The test for impairment is performed by comparing the fair value of the reporting unit with its carrying amount. If the fair value is determined to be less than the carrying amount, an impairment is recorded. The Company's intangible assets primarily relate to core deposits. These intangible assets are amortized based upon the expected economic benefit over an estimated life determined at the time of acquisition and are tested for impairment whenever events or circumstances change. Interest Rate Swaps - The Company uses interest rate swaps as part of its interest rate risk management strategy to hedge the variable cash outflows associated with certain borrowings. Interest rate swaps are carried at fair value in the Company's 68 consolidated financial statements. For interest rate swaps that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value of such agreements are recorded in AOCI and are subsequently reclassified into interest expense in the period that interest on the borrowings affects earnings. The ineffective portion of the change in fair value of the interest rate swap is recognized directly in earnings. Effectiveness is assessed using regression analysis. At the inception of a hedge, the Company documents certain items, including the relationship between the hedging instrument and the hedged item, the risk management objective and the nature of the risk being hedged, a description of how effectiveness will be measured and an evaluation of hedged transaction effectiveness. Income Taxes - The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income tax expense (benefit) represents the change in deferred income tax assets and liabilities excluding the tax effects of the change in net unrealized gain (loss) on AFS securities and interest rate swaps. Income tax related penalties and interest, if any, are included in income tax expense in the consolidated statements of income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that management considers it more likely than not that a deferred tax asset will not be recovered, a valuation allowance is recorded. All positive and negative evidence is reviewed in determining how much of a valuation allowance is recognized on a quarterly basis. Accounting Standards Codification ("ASC") Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position taken, or expected to be taken, in a tax return. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense in the consolidated statements of income. Accrued interest and penalties related to unrecognized tax benefits are included within the related tax liabilities line in the consolidated balance sheet. Employee Stock Ownership Plan - The funds borrowed by the ESOP from the Company to purchase the Company's common stock are being repaid from dividends paid on unallocated ESOP shares and, if necessary, contributions by the Bank. The ESOP shares pledged as collateral are reported as a reduction of stockholders' equity at cost. As ESOP shares are committed to be released from collateral each quarter, the Company records compensation expense based on the average market price of the Company's stock during the quarter. Additionally, the ESOP shares become outstanding for EPS computations once they are committed to be released. Stock-based Compensation - The Company has share-based plans under which stock options and restricted stock awards have been granted. Compensation expense is recognized over the service period of the share-based payment award. The Company utilizes a fair-value-based measurement method in accounting for the share-based payment transactions. The Company applies the modified prospective method in which compensation cost is recognized over the service period for all awards granted. Trust Asset Management - Assets (other than cash deposits with the Bank) held in fiduciary or agency capacities for customers are not included in the accompanying consolidated balance sheets, since such items are not assets of the Company or its subsidiaries. Revenue Recognition - Non-interest income within the scope of ASC Topic 606 is recognized by the Company when performance obligations, under the terms of the contract, are satisfied. This income is measured as the amount of consideration expected to be received in exchange for the providing of services. The majority of the Company's applicable non-interest income continues to be recognized at the time when services are provided to its customers. See "Note 16. Revenue Recognition" for additional information. Segment Information - As a community-oriented financial institution, substantially all of the Bank's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company's only operating segment for financial reporting purposes. 69 Earnings Per Share - Basic EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or resulted in the issuance of common stock. These potentially dilutive shares would then be included in the weighted average number of shares outstanding for the period using the treasury stock method. Shares issued and shares reacquired during any period are weighted for the portion of the period that they were outstanding. In computing both basic and diluted EPS, the weighted average number of common shares outstanding includes the ESOP shares previously allocated to participants and shares committed to be released for allocation to participants and shares of restricted stock which have vested. ESOP shares that have not been committed to be released are excluded from the computation of basic and diluted EPS. Unvested restricted stock awards contain nonforfeitable rights to dividends and are treated as participating securities in the computation of EPS pursuant to the two-class method. Recent Accounting Pronouncements - In March 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings 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 ASC 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost . This ASU is effective for the Company on October 1, 2023. The Company intends to apply a modified retrospective approach when adopting the ASU. Upon adoption, a cumulative-effect adjustment will be recognized in retained earnings, net of tax. While the adoption of this ASU will result in enhanced disclosures, the adoption of this ASU will not have a material impact on the Company's consolidated financial condition and results of operations. 2. EARNINGS PER SHARE Shares acquired by the ESOP are not included in basic average shares outstanding until the shares are committed for allocation or vested to an employee's individual account. Unvested shares awarded pursuant to the Company's restricted stock benefit plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. For the Year Ended September 30, 2023 2022 2021 (Dollars in thousands, except per share amounts) Net (loss) income $ ( 101,659 ) $ 84,453 $ 76,082 Loss (Income) allocated to participating securities 51 ( 45 ) ( 50 ) Net (loss) income available to common stockholders $ ( 101,608 ) $ 84,408 $ 76,032 Total basic average common shares outstanding 133,556,864 135,700,447 135,481,232 Effect of dilutive stock options — — 14,363 Total diluted average common shares outstanding 133,556,864 135,700,447 135,495,595 Net EPS: Basic $ ( 0.76 ) $ 0.62 $ 0.56 Diluted $ ( 0.76 ) $ 0.62 $ 0.56 Antidilutive stock options, excluded from the diluted average common shares outstanding calculation 369,421 516,603 206,284 70 3. SECURITIES The following tables reflect the amortized cost, estimated fair value, and gross unrealized gains and losses of AFS securities at the dates presented. The majority of the MBS and investment securities portfolios are composed of securities issued by GSEs. September 30, 2023 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (Dollars in thousands) MBS $ 901,440 $ 113 $ 819 $ 900,734 GSE debentures 479,610 — 182 479,428 Corporate bonds 4,000 — 622 3,378 Municipal bonds 942 — — 942 $ 1,385,992 $ 113 $ 1,623 $ 1,384,482 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. September 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 $ 6,179 $ 109 $ 34,555 $ 710 GSE debentures — — 24,818 182 Corporate bonds — — 3,378 622 $ 6,179 $ 109 $ 62,751 $ 1,514 71 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 The unrealized losses at September 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. As of September 30, 2023, management intended to sell securities with an estimated fair value of $ 1.30 billion; therefore an unrealized loss of $ 192.6 million associated with those securities was recognized in the consolidated statement of income for the year ended September 30, 2023 as a net loss from securities transactions. Management did not record an ACL on the remaining securities in an unrealized loss position at September 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 September 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 $ 72,800 $ 72,618 One year through five years 406,810 406,810 Five years through ten years 4,942 4,320 484,552 483,748 MBS 901,440 900,734 $ 1,385,992 $ 1,384,482 The following table presents the taxable and non-taxable components of interest income on investment securities for the periods presented. For the Year Ended September 30, 2023 2022 2021 (Dollars in thousands) Taxable $ 3,538 $ 3,234 $ 2,710 Non-taxable 27 34 115 $ 3,565 $ 3,268 $ 2,825 72 The following table summarizes the carrying value of securities pledged as collateral for the obligations indicated below as of the dates presented. September 30, 2023 2022 (Dollars in thousands) Federal Reserve Bank of Kansas City ("FRB of Kansas City") borrowings $ 519,195 $ 46,283 Public unit deposits 178,396 125,496 FHLB advances — 572,913 $ 697,591 $ 744,692 During fiscal year 2021, the Company sold its Visa Class B shares. The proceeds and realized gain related to the sale of the Visa Class B shares were each $ 7.4 million. All other dispositions of securities during fiscal years 2023, 2022, and 2021 were the result of principal repayments, calls, or maturities. In October 2023, the Bank sold $ 1.30 billion of AFS securities. The Bank received gross proceeds of $ 1.27 billion from the sale and realized gross losses of $ 14.9 million and gross gains of $ 1.6 million, which will be reported in the Company's consolidated statement of income for fiscal year 2024. 73 4. LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Loans receivable, net at September 30, 2023 and 2022 is summarized as follows: 2023 2022 (Dollars in thousands) One- to four-family: Originated $ 3,978,837 $ 3,988,469 Correspondent purchased 2,405,911 2,201,886 Bulk purchased 137,193 147,939 Construction 69,974 66,164 Total 6,591,915 6,404,458 Commercial: Commercial real estate 995,788 745,301 Commercial and industrial 112,953 79,981 Construction 178,746 141,062 Total 1,287,487 966,344 Consumer: Home equity 95,723 92,203 Other 9,256 8,665 Total 104,979 100,868 Total loans receivable 7,984,381 7,471,670 Less: ACL 23,759 16,371 Deferred loan fees/discounts 31,335 29,736 Premiums/deferred costs ( 41,662 ) ( 38,645 ) $ 7,970,949 $ 7,464,208 As of September 30, 2023 and 2022, the Bank serviced loans for others aggregating $ 44.2 million and $ 49.8 million, respectively. Such loans are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees withheld from investors and certain charges collected from borrowers, such as late payment fees. The Bank held borrowers' escrow balances on loans serviced for others of $ 972 thousand and $ 1.1 million as of September 30, 2023 and 2022, respectively. Lending Practices and Underwriting Standards - Originating one- to four-family loans is the Bank's primary lending business. The Bank also purchases one- to four-family loans from correspondent lenders and originates consumer loans primarily secured by one- to four-family residential properties and originates and participates in commercial loans. The Bank has a loan concentration in one- to four-family loans and a geographic concentration of these loans in Kansas and Missouri. One- to four-family loans - Full documentation to support an applicant's credit and income, and sufficient funds to cover all applicable fees and reserves at closing, are required on all loans. 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. 74 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 was being originated by the Bank. At the time of origination, LTV ratios on commercial real estate loans generally do not exceed 85 % of the appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 . For commercial construction loans, LTV ratios generally do not exceed 80 % of the projected appraised value of the property securing the loans and the minimum debt service coverage ratio is generally 1.15 , but it applies to the projected cash flows, and the borrower must have successful experience with the construction and operation of properties similar to the subject property. Appraisals on properties securing these loans are performed by independent state certified fee appraisers. The Bank's commercial and industrial loans are generally made in the Bank's market areas and are underwritten on the basis of the borrower's ability to service the debt from income. 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. See discussion regarding the credit risks for these loan segments in "Note 1. Summary of Significant Accounting Policies - Allowance for Credit Losses on Loans Receivable." These segments are further divided into classes for purposes of providing disaggregated credit quality information about the loan portfolio. The classes are: one- to four-family - originated, one- to four-family - correspondent purchased, one- to four-family - bulk purchased, consumer - home equity, consumer - other, commercial - commercial real estate, and commercial - commercial and industrial. One- to four-family construction loans are included in the originated class and commercial construction loans are included in the commercial real estate class. As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to loan classification and delinquency status. Loan Classification - In accordance with the Bank's asset classification policy, management regularly reviews the problem loans in the Bank's portfolio to determine whether any loans require classification. Loan classifications are defined as follows: • Special mention - These loans are performing loans on which known information about the collateral pledged or the possible credit problems of the borrower(s) have caused management to have doubts as to the ability of the borrower(s) to comply with present loan repayment terms and which may result in the future inclusion of such loans in the nonaccrual loan categories. • Substandard - A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility the Bank will sustain some loss if the deficiencies are not corrected. • Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts and conditions and values highly questionable and improbable. • Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as assets on the books is not warranted. 75 The following table sets forth, as of 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 and revolving lines of credit converted to term loans are presented separately, regardless of origination year. Loans classified as doubtful or loss are individually evaluated for loss. At September 30, 2023 and September 30, 2022, there were no loans classified as doubtful, and all loans classified as loss were fully charged-off. September 30, 2023 Revolving Line of Current Fiscal Fiscal Fiscal Fiscal Revolving Credit Fiscal Year Year Year Year Prior Line of Converted Year 2022 2021 2020 2019 Years Credit to Term Total (Dollars in thousands) One- to four-family: Originated Pass $ 318,569 $ 597,298 $ 874,518 $ 568,081 $ 251,773 $ 1,398,616 $ — $ — $ 4,008,855 Special Mention — 1,883 1,468 767 1,863 8,067 — — 14,048 Substandard 292 155 221 564 939 7,954 — — 10,125 Correspondent purchased Pass 346,084 517,976 607,968 246,926 62,744 643,520 — — 2,425,218 Special Mention 308 674 1,674 420 357 1,133 — — 4,566 Substandard — — — 564 — 5,402 — — 5,966 Bulk purchased Pass — — — — — 134,464 — — 134,464 Special Mention — — — — — — — — — Substandard — — — — — 3,208 — — 3,208 665,253 1,117,986 1,485,849 817,322 317,676 2,202,364 — — 6,606,450 Commercial: Commercial real estate Pass 403,269 301,164 208,942 81,478 82,027 79,170 10,448 — 1,166,498 Special Mention 2,483 — — — — — — — 2,483 Substandard 67 — — 594 219 255 — — 1,135 Commercial and industrial Pass 30,206 23,166 11,740 3,228 2,693 748 27,104 — 98,885 Special Mention 13,191 — — — — — 699 — 13,890 Substandard — — — 73 — 82 — — 155 449,216 324,330 220,682 85,373 84,939 80,255 38,251 — 1,283,046 Consumer: Home equity Pass 5,501 5,624 1,955 1,069 746 2,224 72,119 6,205 95,443 Special Mention — 46 — — — 21 62 195 324 Substandard — — — — — 15 125 48 188 Other Pass 4,758 2,693 787 338 133 129 412 — 9,250 Special Mention — — — 4 — — — 1 5 Substandard 2 — — — — — — — 2 10,261 8,363 2,742 1,411 879 2,389 72,718 6,449 105,212 Total $ 1,124,730 $ 1,450,679 $ 1,709,273 $ 904,106 $ 403,494 $ 2,285,008 $ 110,969 $ 6,449 $ 7,994,708 76 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 77 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 and revolving lines of credit converted to term loans are presented separately, regardless of origination year. September 30, 2023 Revolving Line of Current Fiscal Fiscal Fiscal Fiscal Revolving Credit Fiscal Year Year Year Year Prior Line of Converted Year 2022 2021 2020 2019 Years Credit to Term Total (Dollars in thousands) One- to four-family: Originated Current $ 318,211 $ 598,283 $ 875,563 $ 567,975 $ 253,546 $ 1,407,090 $ — $ — $ 4,020,668 30-89 358 898 644 1,437 820 5,960 — — 10,117 90+/FC 292 155 — — 209 1,587 — — 2,243 Correspondent purchased Current 346,084 518,650 608,573 247,346 62,652 643,739 — — 2,427,044 30-89 308 — 1,069 564 449 2,862 — — 5,252 90+/FC — — — — — 3,454 — — 3,454 Bulk purchased Current — — — — — 136,577 — — 136,577 30-89 — — — — — 153 — — 153 90+/FC — — — — — 942 — — 942 665,253 1,117,986 1,485,849 817,322 317,676 2,202,364 — — 6,606,450 Commercial: Commercial real estate Current 404,867 301,164 208,942 81,478 82,027 79,188 10,448 — 1,168,114 30-89 36 — — — — — — — 36 90+/FC 916 — — 594 219 237 — — 1,966 Commercial and industrial Current 43,397 23,166 11,740 3,228 2,690 748 27,684 — 112,653 30-89 — — — — 2 — 57 — 59 90+/FC — — — 73 1 82 62 — 218 449,216 324,330 220,682 85,373 84,939 80,255 38,251 — 1,283,046 Consumer: Home equity Current 5,428 5,631 1,955 990 746 2,195 71,986 6,312 95,243 30-89 73 39 — 79 — 50 239 125 605 90+/FC — — — — — 15 81 11 107 Other Current 4,737 2,613 765 338 132 129 412 — 9,126 30-89 17 80 22 4 1 — — 1 125 90+/FC 6 — — — — — — — 6 10,261 8,363 2,742 1,411 879 2,389 72,718 6,449 105,212 Total $ 1,124,730 $ 1,450,679 $ 1,709,273 $ 904,106 $ 403,494 $ 2,285,008 $ 110,969 $ 6,449 $ 7,994,708 78 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 79 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 September 30, 2023 and 2022, all loans 90 or more days delinquent were on nonaccrual status. The increase in loans 30 to 89 days delinquent during the current year was due mainly to delinquencies returning to more historical levels as government payment assistance programs expired. September 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 $ 10,117 $ 2,243 $ 12,360 $ 4,020,668 $ 4,033,028 Correspondent purchased 5,252 3,454 8,706 2,427,044 2,435,750 Bulk purchased 153 942 1,095 136,577 137,672 Commercial: Commercial real estate 36 1,966 2,002 1,168,114 1,170,116 Commercial and industrial 59 218 277 112,653 112,930 Consumer: Home equity 605 107 712 95,243 95,955 Other 125 6 131 9,126 9,257 $ 16,347 $ 8,936 $ 25,283 $ 7,969,425 $ 7,994,708 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 September 30, 2023 and 2022 was $ 2.5 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 $ 219 thousand at September 30, 2023 and $ 328 thousand at September 30, 2022. 80 The following table presents the amortized cost at September 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. 2023 2022 Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans Nonaccrual Loans with No ACL (Dollars in thousands) One- to four-family: Originated $ 2,457 $ 471 $ 3,135 $ 1,018 Correspondent purchased 3,739 285 3,784 304 Bulk purchased 942 630 1,157 630 Commercial: Commercial real estate 1,984 446 1,084 449 Commercial and industrial 218 155 161 161 Consumer: Home equity 107 3 172 19 Other 6 — 1 — $ 9,453 $ 1,990 $ 9,494 $ 2,581 TDRs - The following tables present the amortized cost for the periods presented, prior to restructuring and immediately after restructuring in all loans restructured during the years presented. These tables do not reflect the amortized cost at the end of the periods indicated. Any increase in the amortized cost at the time of the restructuring was generally due to the capitalization of delinquent interest and/or escrow balances. For the Year Ended September 30, 2023 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 1 $ 110 $ 110 Correspondent purchased 1 282 285 Bulk purchased 1 239 257 Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: Home equity 1 38 38 Other — — — 4 $ 669 $ 690 81 For the Year Ended September 30, 2022 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 3 $ 156 $ 156 Correspondent purchased — — — Bulk purchased — — — Commercial: Commercial real estate — — — Commercial and industrial 2 124 124 Consumer: Home equity 1 19 19 Other — — — 6 $ 299 $ 299 For the Year Ended September 30, 2021 Number Pre- Post- of Restructured Restructured Contracts Outstanding Outstanding (Dollars in thousands) One- to four-family: Originated 7 $ 1,685 $ 1,576 Correspondent purchased — — — Bulk purchased — — — Commercial: Commercial real estate — — — Commercial and industrial — — — Consumer: Home equity — — — Other — — — 7 $ 1,685 $ 1,576 The following table provides information on TDRs that became delinquent during the periods presented within 12 months after being restructured. For the Years Ended September 30, 2023 September 30, 2022 September 30, 2021 Number of Amortized Number of Amortized Number of Amortized Contracts Cost Contracts Cost Contracts Cost (Dollars in thousands) One- to four-family: Originated 1 $ 8 2 $ 697 — $ — Correspondent purchased — — — — — — Bulk purchased — — — — — — Commercial: Commercial real estate — — — — — — Commercial and industrial — — — — — — Consumer: Home equity — — 1 19 — — Other — — — — — — 1 $ 8 3 $ 716 — $ — 82 Allowance for Credit Losses - The following table summarizes ACL activity, by loan portfolio segment, for the periods presented. The Bank adopted ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("CECL") on October 1, 2020. For the Year Ended September 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 — — — — ( 75 ) ( 40 ) ( 115 ) Recoveries 6 — — 6 1 2 9 Provision for credit losses 77 238 1 316 7,134 44 7,494 Ending balance $ 2,149 $ 2,972 $ 207 $ 5,328 $ 18,180 $ 251 $ 23,759 The increase in ACL during the current year was primarily a result of the outlook for worsening economic forecast conditions compared to the prior year, along with a reduction in the projected prepayment speeds used in the model for all loan categories. For the Year Ended September 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 ( 9 ) — — ( 9 ) ( 40 ) ( 21 ) ( 70 ) Recoveries 138 — — 138 101 17 256 Provision for credit losses 325 672 ( 98 ) 899 ( 4,593 ) 56 ( 3,638 ) Ending balance $ 2,066 $ 2,734 $ 206 $ 5,006 $ 11,120 $ 245 $ 16,371 For the Year Ended September 30, 2021 One- to Four-Family Correspondent Bulk Originated Purchased Purchased Total Commercial Consumer Total (Dollars in thousands) Beginning balance $ 6,085 $ 2,691 $ 467 $ 9,243 $ 21,800 $ 484 $ 31,527 Adoption of CECL ( 4,452 ) ( 367 ) 436 ( 4,383 ) ( 193 ) ( 185 ) ( 4,761 ) Balance at October 1, 2020 1,633 2,324 903 4,860 21,607 299 26,766 Charge-offs ( 164 ) — ( 21 ) ( 185 ) ( 515 ) ( 15 ) ( 715 ) Recoveries 144 — — 144 50 43 237 Provision for credit losses ( 1 ) ( 262 ) ( 578 ) ( 841 ) ( 5,490 ) ( 134 ) ( 6,465 ) Ending balance $ 1,612 $ 2,062 $ 304 $ 3,978 $ 15,652 $ 193 $ 19,823 83 The key assumptions in the Company's ACL model at September 30, 2023 include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. Management also considered certain qualitative factors when evaluating the adequacy of the ACL at September 30, 2023. The key assumptions utilized in estimating the Company's ACL at September 30, 2023 are discussed below. • Economic Forecast - Management considered several economic forecasts provided by a third party and selected a weighted economic forecast that was the most appropriate considering the facts and circumstances at September 30, 2023. The forecasted economic indices applied to the model at September 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 September 30, 2023 was the national unemployment rate. The forecasted national unemployment rate in the economic scenario selected by management at September 30, 2023 had the national unemployment rate gradually increasing to 4.1 % by September 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 September 30, 2023. • Prepayment and curtailment assumptions - The assumptions used at September 30, 2023 were generally based on actual historical prepayment and curtailment speeds, adjusted by management as deemed necessary. The prepayment and curtailment assumptions vary for each respective loan pool in the model. • Qualitative factors - The qualitative factors applied by management at September 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 third-party economic forecast scenarios; and ◦ Other management considerations related to commercial loans to account for credit risks not fully reflected in the discounted cash flow model. 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 September 30, 2023 and 2022, the Bank's off-balance sheet credit exposures totaled $ 837.7 million and $ 992.6 million, respectively. For the Years Ended September 30, 2023 September 30, 2022 (Dollars in thousands) Beginning balance $ 4,751 $ 5,743 (Release)/provision for credit losses ( 656 ) ( 992 ) Ending balance $ 4,095 $ 4,751 84 5. PREMISES, EQUIPMENT AND LEASES A summary of the net carrying value of premises and equipment at September 30, 2023 and 2022 was as follows: 2023 2022 (Dollars in thousands) Land $ 16,045 $ 16,222 Building and improvements 123,830 122,196 Furniture, fixtures and equipment 52,364 49,795 Total premises and equipment 192,239 188,213 Less accumulated depreciation 100,708 93,393 Premises and equipment, net $ 91,531 $ 94,820 The Company leases real estate for branches, ATMs, and certain equipment. These leases have remaining terms that range from three months to 44 years, some of which include exercising renewal options that the Company considers to be reasonably certain. A right-of-use asset of $ 11.3 million and $ 11.6 million was included in other assets and a lease liability of $ 11.6 million and $ 11.8 million was included in other liabilities on the consolidated balance sheets, as of September 30, 2023 and September 30, 2022 respectively. As of September 30, 2023, for the Company's operating leases, the weighted average remaining lease term was 24.0 years and the weighted average discount rate was 2.59 %. During fiscal year 2021, management decided to relocate one of the Bank's branches. As a result, the Company classified the branch location as held-for-sale and subsequently sold the property. The sale of this property resulted in a loss of $ 940 thousand, which was included in other non-interest expense on the consolidated statements of income. The following table presents lease expenses and supplemental cash flow information related to the Company's leases for the years indicated. For the Year Ended September 30, 2023 2022 2021 (Dollars in thousands) Operating lease expense $ 1,307 $ 1,397 $ 1,404 Variable lease expense 189 164 176 Short-term lease expense 41 2 2 Cash paid for amounts included in the measurement of lease liabilities 1,211 1,312 1,301 The following table presents future minimum payments, rounded to the nearest thousand, for operating leases with initial or remaining terms in excess of one year as of September 30, 2023 (dollars in thousands): Fiscal year 2024 $ 1,134 Fiscal year 2025 899 Fiscal year 2026 851 Fiscal year 2027 808 Fiscal year 2028 804 Thereafter 12,146 Total future minimum lease payments 16,642 Amounts representing interest ( 5,020 ) Present value of net future minimum lease payments $ 11,622 85 6. LOW INCOME HOUSING PARTNERSHIPS The Bank's investment in low income housing partnerships, which is included in other assets in the consolidated balance sheets, was $ 121.8 million and $ 111.9 million at September 30, 2023 and 2022, respectively. The Bank's obligations related to unfunded commitments, which are included in other liabilities in the consolidated balance sheets, were $ 63.6 million and $ 57.9 million at September 30, 2023 and 2022, respectively. The majority of the commitments at September 30, 2023 are projected to be funded through the end of calendar year 2026 . For fiscal years 2023, 2022, and 2021, the net income tax benefit associated with these investments, which consists of proportional amortization expense and affordable housing tax credits and other related tax benefits, was reported in income tax expense in the consolidated statements of income. The amount of proportional amortization expense recognized during fiscal years 2023, 2022 and 2021 was $ 10.1 million, $ 9.3 million and $ 8.4 million, respectively, and the amount of affordable housing tax credits and other related tax benefits was $ 12.4 million, $ 11.6 million and $ 10.5 million, respectively, resulting in a net income tax benefit of $ 2.3 million, $ 2.3 million and $ 2.1 million, respectively. There were no impairment losses during fiscal years 2023, 2022, or 2021 resulting from the forfeiture or ineligibility of tax credits or other circumstances. 7. INTANGIBLE ASSETS Changes in the carrying amount of the Company's intangible assets associated with an acquisition in 2018, which are included in other assets on the consolidated balance sheet, are presented in the following table. Core Deposit and Goodwill Other Intangibles (Dollars in thousands) Balance at September 30, 2020 $ 9,324 $ 5,539 Less: Amortization — ( 1,578 ) Balance at September 30, 2021 9,324 3,961 Less: Amortization — ( 1,372 ) Balance at September 30, 2022 9,324 2,589 Less: Amortization — ( 1,069 ) Balance at September 30, 2023 $ 9,324 $ 1,520 As of September 30, 2023, there was no impairment recorded on goodwill or other intangible assets. The estimated amortization expense for the next five years related to the core deposit and other intangible assets as of September 30, 2023 is presented in the following table (dollars in thousands): 2024 $ 774 2025 523 2026 223 2027 — 2028 — 86 8. DEPOSITS AND BORROWED FUNDS Deposits - Non-interest-bearing deposits totaled $ 558.3 million and $ 591.4 million as of September 30, 2023 and 2022, respectively. Certificates of deposit with a minimum denomination of $250 thousand were $ 521.0 million and $ 334.3 million as of September 30, 2023 and 2022, respectively. Deposits in excess of $250 thousand may not be fully insured by the Federal Deposit Insurance Corporation. Borrowings - Borrowings at September 30, 2023 consisted of $ 2.38 billion in FHLB advances, of which $ 2.02 billion were fixed-rate advances and $ 365.0 million were variable-rate advances, and $ 500.0 million of borrowings from the Federal Reserve's Bank Term Funding Program ("BTFP"). There were no borrowings against the variable-rate FHLB line of credit at September 30, 2023. FHLB borrowings at September 30, 2022 consisted of $ 2.06 billion in FHLB advances, of which $ 1.70 billion were fixed-rate advances and $ 365.0 million were variable-rate advances, and $ 75.0 million of borrowings against the variable-rate FHLB line of credit. Additionally, the Bank is authorized to borrow from the Federal Reserve Bank's "discount window" but there were no such borrowings at September 30, 2023 or 2022. FHLB advances and BTFP borrowings at September 30, 2023 and 2022 were comprised of the following: 2023 2022 (Dollars in thousands) FHLB advances $ 2,382,828 $ 2,062,500 BTFP borrowings 500,000 — Deferred prepayment penalty - FHLB advances ( 3,703 ) ( 5,346 ) $ 2,879,125 $ 2,057,154 Weighted average contractual interest rate on FHLB advances 3.41 % 2.42 % Weighted average effective interest rate on FHLB advances (1) 3.06 2.44 Weighted average contractual interest rate on BTFP borrowings 4.70 — (1) The effective interest rate includes the net impact of deferred amounts and interest rate swaps related to the adjustable-rate FHLB advances. FHLB borrowings are secured by certain qualifying loans pursuant to a blanket collateral agreement with FHLB and certain securities, when necessary. Per FHLB's lending guidelines, total FHLB borrowings cannot exceed 40 % of a borrowing institution's regulatory total assets without the pre-approval of FHLB senior management. In July 2023, the president of FHLB approved an increase, through October 2023, in the Bank's FHLB borrowing limit to 50 % of Bank Call Report total assets. In October 2023, the president of the FHLB approved the increase to 50% through October 2024. At September 30, 2023, the ratio of the par value of the Bank's FHLB borrowings to the Bank's Call Report total assets was 23 %. The amount that can be borrowed under the BTFP is based upon the par value of securities pledged as collateral, the term can be up to one year in length, and the borrowings can be prepaid without penalty. Advances can be requested under the BTFP until at least March 11, 2024. Subsequent to September 30, 2023, the Bank repaid the $ 500.0 million of BTFP borrowings. At both September 30, 2023 and 2022, the Bank had entered into interest rate swap agreements with a total notional amount of $ 365.0 million in order to hedge the variable cash flows associated with $ 365.0 million of adjustable-rate FHLB advances. At September 30, 2023 and 2022, the interest rate swap agreements had an average remaining term to maturity of 2.1 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 September 30, 2023 and September 30, 2022, the interest rate swaps were in a gain position with a total fair value of $ 13.0 million and $ 12.5 million, respectively, which was reported in other assets on the consolidated balance sheet. During fiscal year 2023, $ 5.6 million was reclassified from AOCI as a decrease to interest expense. During fiscal year 2022, $ 5.1 million was reclassified from AOCI as an increase to interest expense. At September 30, 2023, the Company estimated that $ 7.9 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 87 its derivative counterparties and posts collateral on a daily basis. The Bank held cash collateral of $ 14.0 million at September 30, 2023 and $ 12.1 million at September 30, 2022. During the current and prior year, the Bank utilized a leverage strategy (the "leverage strategy") to increase earnings. The leverage strategy involved borrowing up to $ 2.60 billion by entering into short-term FHLB advances, depending on the rates offered by FHLB, with all of the balance being paid down at each quarter end, or earlier if the strategy is not profitable. The proceeds of the borrowings, net of the required FHLB stock holdings, were deposited at the FRB of Kansas City. During the year ended September 30, 2021, the Bank terminated interest rate swaps with a notional amount of $ 200.0 million which were tied to FHLB advances totaling $ 200.0 million. The interest rate swaps were designated as cash flow hedges and involved the receipt of variable amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the interest rate swap agreements. Since it was management's intention to prepay the related FHLB advances, it was no longer probable that the original forecasted transactions subject to the cash flow hedges would occur. Therefore, the termination of the interest rate swaps resulted in the reclassification of unrealized losses, net of tax, totaling $ 3.6 million ($ 4.8 million pretax) from AOCI into earnings. During the year ended September 30, 2021, the Bank prepaid fixed-rate FHLB advances totaling $ 400.0 million with a weighted average contractual interest rate of 1.29 % and a weighted average remaining term of 0.9 years, and replaced these advances with fixed-rate FHLB advances totaling $ 400.0 million with a weighted average contractual interest rate of 0.80 % and a weighted average term of 5.0 years. The Bank paid penalties of $ 5.1 million to FHLB as a result of prepaying these FHLB advances. The weighted average effective interest rate of the new advances was 1.03 %. The majority of the prepayment penalties are being recognized in interest expense over the life of the new FHLB advances. Scheduled Repayment of Borrowed Funds and Maturity of Certificates of Deposit - The following table presents the scheduled repayment of FHLB advances and BTFP borrowings, at par, and the maturity of certificates of deposit as of September 30, 2023. With the exception of amortizing advances, FHLB advances are payable at maturity Amortizing FHLB advances are presented based on scheduled repayment dates. At September 30, 2023, the Bank's FHLB advances had maturities ranging from November 2023 to June 2028. At September 30, 2023, the BTFP borrowings maturity date was May 6, 2024. Certificates of Deposit Borrowings Amount (Dollars in thousands) 2024 $ 1,019,672 $ 1,490,023 2025 679,672 681,402 2026 604,672 361,295 2027 427,172 138,297 2028 151,640 58,973 Thereafter — 202 $ 2,882,828 $ 2,730,192 88 9. INCOME TAXES Income tax expense for the years ended September 30, 2023, 2022, and 2021 consisted of the following: 2023 2022 2021 (Dollars in thousands) Current: Federal $ 6,789 $ 17,105 $ 17,586 State 1,435 3,598 4,028 8,224 20,703 21,614 Deferred: Federal ( 39,209 ) 1,632 ( 1,405 ) State ( 6,311 ) 415 ( 263 ) ( 45,520 ) 2,047 ( 1,668 ) $ ( 37,296 ) $ 22,750 $ 19,946 The Company's effective tax rates were 26.8 %, 21.2 %, and 20.8 % for the years ended September 30, 2023, 2022, and 2021, respectively. The differences between such effective rates and the statutory Federal income tax rate computed on income before income tax expense resulted from the following: 2023 2022 2021 Amount % Amount % Amount % (Dollars in thousands) Federal income tax expense computed at statutory Federal rate $ ( 29,180 ) 21.0 % $ 22,513 21.0 % $ 20,166 21.0 % Increases (decreases) in taxes resulting from: State taxes, net of Federal tax effect ( 5,412 ) 3.9 3,399 3.2 3,102 3.2 Low income housing tax credits, net ( 2,303 ) 1.6 ( 2,238 ) ( 2.1 ) ( 2,085 ) ( 2.1 ) ESOP related expenses, net ( 652 ) 0.5 ( 641 ) ( 0.6 ) ( 662 ) ( 0.7 ) Other 251 ( 0.2 ) ( 283 ) ( 0.3 ) ( 575 ) ( 0.6 ) $ ( 37,296 ) 26.8 % $ 22,750 21.2 % $ 19,946 20.8 % 89 The components of the net deferred income tax assets (liabilities) as of September 30, 2023 and 2022 were as follows: 2023 2022 (Dollars in thousands) Deferred income tax assets: Net loss on securities transactions $ 47,006 $ — ACL 4,989 3,438 Lease liabilities 2,835 2,883 ESOP compensation 1,510 1,472 Salaries, deferred compensation and employee benefits 1,269 2,044 Reserve for off-balance sheet credit exposures 999 1,159 Unrealized loss on AFS securities 368 50,064 Net purchase discounts related to acquired loans 149 102 Low income housing partnerships 92 337 Other 912 891 Gross deferred income tax assets 60,129 62,390 Valuation allowance ( 30 ) ( 80 ) Gross deferred income tax asset, net of valuation allowance 60,099 62,310 Deferred income tax liabilities: FHLB stock dividends 17,547 14,590 Unrealized gain on interest rate swaps 3,176 3,061 Premises and equipment 3,164 3,614 ACL 2,936 3,145 Lease right-of-use assets 2,748 2,821 Deposit intangible 411 692 Other 512 503 Gross deferred income tax liabilities 30,494 28,426 Net deferred tax assets $ 29,605 $ 33,884 The State of Kansas allows for a bad debt deduction on savings and loan institutions' privilege tax returns of up to 5% of Kansas taxable income. Due to the low level of net loan charge-offs experienced by the Bank historically, at times, the Bank's bad debt deduction on the Kansas privilege tax return has been in excess of actual net charge-offs, resulting in a state deferred tax liability, which is presented separately from the federal deferred tax asset related to ACL. The Company assesses the available positive and negative evidence surrounding the recoverability of its deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary under the circumstances. At September 30, 2023 and 2022, the Company had a valuation allowance of $ 30 thousand and $ 80 thousand, respectively, related to the net operating losses generated by the Company's consolidated Kansas corporate income tax return as management believes there will not be sufficient taxable income to fully utilize these deferred tax assets. For this reason, a valuation allowance was recorded for the related amounts at September 30, 2023 and 2022. No additional valuation allowances were recorded for the Company's other deferred tax assets as management believes it is more likely than not that these amounts will be realized through the reversal of the Company's existing taxable temporary differences and projected future taxable income. ASC 740 Income Taxes prescribes a process by which a tax position taken, or expected to be taken, on an income tax return is determined based upon the technical merits of the position, along with whether the tax position meets a more-likely-than-not-recognition threshold, to determine the amount, if any, of unrecognized tax benefits to recognize in the financial statements. Estimated penalties and interest related to unrecognized tax benefits are included in income tax expense in the consolidated statements of income. For the years ended September 30, 2023, 2022, and 2021 the Company had no unrecognized tax benefits. 90 The Company files income tax returns in the U.S. federal jurisdiction and the state of Kansas, as well as other states where it has either established nexus under an economic nexus theory or has exceeded enumerated nexus thresholds based on the amount of interest income derived from sources within a given state. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for fiscal years ending before 2020 . 10. EMPLOYEE STOCK OWNERSHIP PLAN The ESOP trust acquired 3,024,574 shares ( 6,846,728 shares post-corporate reorganization) of common stock in the Company's initial public offering and 4,726,000 shares of common stock in the Company's corporate reorganization in December 2010. Both acquisitions of common stock were made with proceeds from loans from the Company, secured by shares of the Company's stock purchased in each offering. The Bank has agreed to make cash contributions to the ESOP trust on an annual basis sufficient to enable the ESOP trust to make the required annual loan payments to the Company on September 30 th of each year. The loan for the shares acquired in the initial public offering matured on September 30, 2013 . The loan for the shares acquired in the corporate reorganization matures on September 30, 2040 . As annual loan payments are made on each September 30 th , shares are released from collateral and allocated to qualified employees based on the proportion of their qualifying compensation to total qualifying compensation. On September 30, 2023, 165,198 shares were released from collateral. On September 30, 2024, 165,198 shares will be released from collateral. As ESOP shares are committed to be released from collateral, the Company records compensation expense. Dividends on unallocated ESOP shares are applied to the debt service payments of the loan secured by the unallocated shares. Dividends on unallocated ESOP shares in excess of the debt service payment are recorded as compensation expense and distributed to participants or participants' ESOP accounts. Compensation expense related to the ESOP was $ 1.2 million for the year ended September 30, 2023, $ 1.7 million for the year ended September 30, 2022, and $ 2.3 million for the year ended September 30, 2021. Of these amounts, $ 472 thousand of income, $ 88 thousand of expense, and $ 383 thousand of expense related to the difference between the market price of the Company's stock when the shares were acquired by the ESOP trust and the average market price of the Company's stock during the years ended September 30, 2023, 2022, and 2021, respectively. The Company's stock market price averaged below $10 per share during the year ended September 30, 2023 which is why income rather than expense was recognized for market price differences. There was no compensation expense for dividends on unallocated ESOP shares in excess of the debt service payments for the years ended September 30, 2023 or 2022; for the year ended September 30, 2021, the amount of dividends on unallocated ESOP shares in excess of the debt service payments was $ 219 thousand. Shares may be withdrawn from the ESOP trust due to diversification (a participant may begin to diversify at least 25 % of their ESOP shares at age 50 ), retirement, termination, or death of the participant. The following is a summary of shares held in the ESOP trust as of September 30, 2023 and 2022: 2023 2022 (Dollars in thousands) Allocated ESOP shares 4,223,478 4,276,467 Unreleased ESOP shares 2,808,366 2,973,564 Total ESOP shares 7,031,844 7,250,031 Fair value of unreleased ESOP shares $ 13,396 $ 24,681 91 11. STOCK-BASED COMPENSATION The Company has a Stock Option Plan, a Restricted Stock Plan, and an Equity Incentive Plan, all of which are considered share-based plans. The Stock Option Plan and Restricted Stock Plan expired in April 2015. No additional grants can be made from these two plans; however, awards granted under these two plans remain outstanding until they are individually vested, forfeited or expire. The objectives of the Equity Incentive Plan are to provide additional compensation to certain officers, directors and key employees by facilitating their acquisition of an equity interest in the Company and enable the Company to retain personnel of experience and ability in key positions of responsibility. Stock Option Plans – There are currently 61,565 stock options outstanding as a result of grants awarded from the Stock Option Plan. The Equity Incentive Plan had 5,907,500 stock options originally eligible to be granted and, as of September 30, 2023, the Company had 4,410,029 stock options still available for future grants under this plan. The Equity Incentive Plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested, forfeited, or expire. The Company may issue incentive and nonqualified stock options under the Equity Incentive Plan. The incentive stock options expire no later than 10 years from the date of grant, and the nonqualified stock options expire no later than 15 years from the date of grant. The vesting period of the stock options under the Equity Incentive Plan generally has ranged from 3 years to 5 years. The stock option exercise price cannot be less than the market value at the date of the grant as defined by each plan. The fair value of stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model. At September 30, 2023, the Company had 349,374 stock options outstanding with a weighted average exercise price of $ 12.50 per option and a weighted average contractual life of 2.5 years, all of which were exercisable. The exercise price may be paid in cash, shares of common stock, or a combination of both. New shares are issued by the Company upon the exercise of stock options. Restricted Stock Plans – The Equity Incentive Plan had 2,363,000 shares originally eligible to be granted as restricted stock and, as of September 30, 2023, the Company had 1,528,475 shares available for future grants of restricted stock under this plan. As noted above, this plan will expire on January 24, 2027 and no additional grants may be made after expiration, but awards granted under this plan remain outstanding until they are individually vested or forfeited. The vesting period of the restricted stock awards under the Equity Incentive Plan has generally ranged from 3 years to 5 years. At September 30, 2023, the Company had 88,444 unvested shares of restricted stock with a weighted average grant date fair value of $ 9.52 per share. Compensation expense is calculated based on the fair market value of the common stock at the date of the grant, as defined by the plan, and is recognized over the vesting period. Compensation expense attributable to restricted stock awards during the years ended September 30, 2023, 2022, and 2021 totaled $ 327 thousand, $ 492 thousand, and $ 480 thousand, respectively. The fair value of restricted stock that vested during the years ended September 30, 2023, 2022, and 2021 totaled $ 285 thousand, $ 408 thousand, and $ 441 thousand, respectively. As of September 30, 2023, there was $ 617 thousand of unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted average period of 2.8 years. 92 12. COMMITMENTS AND CONTINGENCIES The following table summarizes the Bank's loan commitments as of September 30, 2023 and 2022: 2023 2022 (Dollars in thousands) Originate fixed-rate $ 44,767 $ 103,618 Originate adjustable-rate 29,343 73,749 Purchase/participate fixed-rate 1,246 74,490 Purchase/participate adjustable-rate 520 73,461 $ 75,876 $ 325,318 Commitments to originate loans are commitments to lend to a customer. Commitments to purchase/participate in loans represent commitments to purchase loans from correspondent lenders on a loan-by-loan basis or participate in commercial loans with a lead bank. The Bank evaluates each borrower's creditworthiness on a case-by-case basis. Commitments generally have expiration dates or other termination clauses, and one- to four-family loan commitments may require the payment of a fee. Some of the commitments are expected to expire without being fully drawn upon; therefore, the amount of total commitments disclosed in the table above does not necessarily represent future cash requirements. As of September 30, 2023 and 2022, there were no significant loan-related commitments that met the definition of derivatives or commitments to sell mortgage loans. As of September 30, 2023 and 2022, the Bank had approved but unadvanced lines of credit of $ 293.9 million and $ 282.4 million, respectively. In the normal course of business, the Company and the Bank are named defendants in various lawsuits and counterclaims. In the opinion of management, after consultation with legal counsel, none of the currently pending suits are expected to have a materially adverse effect on the Company's consolidated financial statements for the year ended September 30, 2023, or future periods. 13. REGULATORY CAPITAL REQUIREMENTS The Bank and the Company are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements. Under regulatory capital adequacy guidelines, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Additionally, the Bank must meet specific capital guidelines to be considered well capitalized per the regulatory framework for prompt corrective action. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. The Bank and the Company must maintain certain minimum capital ratios as set forth in the table below for capital adequacy purposes. The Bank is required to maintain a capital conservation buffer of 2.50% above certain minimum risk-based capital ratios for capital adequacy purposes in order to be considered well capitalized and to avoid certain restrictions on capital distributions and other payments including dividends, share repurchases, and certain compensation. Management believes, as of September 30, 2023, that the Bank and Company met all capital adequacy requirements to which they were subject, including the capital conservation buffer, and there were no conditions or events subsequent to September 30, 2023 that would change the Bank's or Company's category. At September 30, 2022, the Bank and Company met the requirements to elect the community bank leverage ratio ("CBLR"). Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules and to have met the well capitalized ratio requirements. 93 To Be Well Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Bank As of September 30, 2023 Tier 1 leverage $ 903,969 8.5 % $ 423,358 4.0 % $ 529,197 5.0 % Common Equity Tier 1 ("CET1") capital 903,969 16.0 254,670 4.5 367,856 6.5 Tier 1 capital 903,969 16.0 339,559 6.0 452,746 8.0 Total capital 931,823 16.5 452,746 8.0 565,932 10.0 As of September 30, 2022 CBLR 1,090,222 9.0 1,090,015 9.0 N/A N/A Company As of September 30, 2023 Tier 1 leverage 1,024,880 9.7 423,312 4.0 N/A N/A CET1 capital 1,024,880 18.1 254,681 4.5 N/A N/A Tier 1 capital 1,024,880 18.1 339,574 6.0 N/A N/A Total capital 1,052,734 18.6 452,766 8.0 N/A N/A As of September 30, 2022 CBLR 1,230,851 10.2 1,089,869 9.0 N/A N/A Generally, savings institutions, such as the Bank, may make capital distributions during any calendar year equal to the earnings of the previous two calendar years and current year-to-date earnings. It is generally required that the Bank remain well capitalized before and after the proposed distribution. The Company's ability to pay dividends is dependent, in part, upon its ability to obtain capital distributions from the Bank. So long as the Bank continues to remain well capitalized after each capital distribution and operates in a safe and sound manner, it is management's belief that the regulators will continue to allow the Bank to distribute its net income to the Company, although no assurance can be given in this regard. In conjunction with the Company's corporate reorganization in December 2010, a "liquidation account" was established for the benefit of certain depositors of the Bank in an amount equal to Capitol Federal Savings Bank MHC's ownership interest in the retained earnings of Capitol Federal Financial as of June 30, 2010. As of September 30, 2023, the balance of this liquidation account was $ 85.3 million. Under applicable federal banking regulations, neither the Company nor the Bank is permitted to pay dividends to its stockholders if stockholders' equity would be reduced below the amount of the liquidation account at that time. 94 14. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value Measurements – The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with ASC 820 and ASC 825. The Company's AFS securities and interest rate swaps are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other financial instruments on a non-recurring basis, such as OREO and loans individually evaluated for impairment. These non-recurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual financial instruments. The Company groups its financial instruments at fair value in three levels based on the markets in which the financial instruments are traded and the reliability of the assumptions used to determine fair value. These levels are: • Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. • Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company's own estimates of assumptions that market participants would use in pricing the financial instrument. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the financial instrument. The Company bases 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 years ended September 30, 2023 and 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 AOCI in stockholders' equity. See "Note 8. Deposits and Borrowed Funds" for additional information. The estimated fair values of the interest rates swaps are obtained from the counterparty and are determined by a discounted cash flow analysis using observable market-based inputs. On a quarterly basis, management corroborates the estimated fair values by internally calculating the estimated fair value using a discounted cash flow analysis with independent observable market-based inputs from a third party. No adjustments were made to the estimated fair values obtained from the counterparty during the years ended September 30, 2023 and 2022. (Level 2) 95 The following tables provide the level of valuation assumption used to determine the carrying value of the Company's financial instruments measured at fair value on a recurring basis at the dates presented. The Company did no t have any Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2023 or 2022. September 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 $ 900,734 $ — $ 900,734 $ — GSE debentures 479,428 — 479,428 — Corporate bonds 3,378 — 3,378 — Municipal bonds 942 — 942 — 1,384,482 — 1,384,482 — Interest rate swaps 13,018 — 13,018 — $ 1,397,500 $ — $ 1,397,500 $ — 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 fiscal years 2023 and 2022 that were still held in the portfolio as of September 30, 2023 and 2022 was $ 4.0 million and $ 4.7 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 96 knowledge of local market conditions, recent transactions, and estimated selling costs, if applicable. Adjustments to appraised or book values are generally based on assumptions not observable in the marketplace. The primary significant unobservable inputs for commercial loans individually evaluated during the year ended September 30, 2023 were downward adjustments to the book value of the collateral for lack of marketability. During fiscal year 2023, the adjustments ranged from 5 % to 100 %, with a weighted average of 20 %. During fiscal year 2022, the adjustments ranged from 8 % to 100 %, 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 the 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 fiscal year 2023 that was still held in the portfolio at September 30, 2023. The OREO held at September 30, 2023 was measured during fiscal year 2022. The fair value of OREO measured on a non-recurring basis during fiscal year 2022 that was still held in the portfolio as of September 30, 2022 was $ 328 thousand. The carrying value of the properties equaled the fair value of the properties at September 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: 2023 Carrying Estimated Fair Value Amount Total Level 1 Level 2 Level 3 (Dollars in thousands) Assets: Cash and cash equivalents $ 245,605 $ 245,605 $ 245,605 $ — $ — AFS securities 1,384,482 1,384,482 — 1,384,482 — Loans receivable 7,970,949 7,358,462 — — 7,358,462 FHLB stock 110,714 110,714 110,714 — — Interest rate swaps 13,018 13,018 — 13,018 — Liabilities: Deposits 6,051,220 6,004,975 3,321,028 2,683,947 — Borrowings 2,879,125 2,802,849 — 2,802,849 — 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 — 97 15. ACCUMULATED OTHER COMPREHENSIVE INCOME The following tables present the changes in the components of AOCI, net of tax, for the years presented. The amounts reclassified from AOCI related to the Bank's cash flow hedges are reported as increases in interest expense within the consolidated statements of income for each year presented, except for $ 3.6 million in fiscal year 2021, which was reported in the loss on interest rate swap termination line item within the consolidated statements of income. See "Note 8. Deposits and Borrowed Funds" for additional information regarding reclassifications from AOCI related to the Bank's cash flow hedges. For the Year Ended September 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 8,355 5,957 14,312 Amount reclassified from AOCI, net of taxes of $ 1,808 — ( 5,601 ) ( 5,601 ) Reclassification adjustment for net losses on AFS securities included in net income, net of taxes of $( 47,000 ) 145,622 — 145,622 Other comprehensive income (loss) 153,977 356 154,333 Ending balance $ ( 1,142 ) $ 9,842 $ 8,700 For the Year Ended September 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 ( 159,770 ) 25,339 ( 134,431 ) Amount reclassified from AOCI, net of taxes of $( 1,647 ) — 5,103 5,103 Other comprehensive income (loss) ( 159,770 ) 30,442 ( 129,328 ) Ending balance $ ( 155,119 ) $ 9,486 $ ( 145,633 ) For the Year Ended September 30, 2021 Unrealized Unrealized Gains (Losses) Gains (Losses) on AFS on Cash Flow Total Securities Hedges AOCI (Dollars in thousands) Beginning balance $ 23,728 $ ( 40,233 ) $ ( 16,505 ) Other comprehensive income (loss), before reclassifications ( 19,077 ) 5,712 ( 13,365 ) Amount reclassified from AOCI, net of taxes of $( 4,378 ) — 13,565 13,565 Other comprehensive income (loss) ( 19,077 ) 19,277 200 Ending balance $ 4,651 $ ( 20,956 ) $ ( 16,305 ) 98 16. REVENUE RECOGNITION Details of the Company's primary types of non-interest income revenue streams by financial statement line item reported in the consolidated statements of income that are within the scope of ASC Topic 606 are below. During fiscal years 2023, 2022 and 2021, revenue from contracts with customers totaled $ 17.6 million, $ 18.1 million and $ 16.5 million, respectively. Deposit Service Fees Interchange Transaction Fees - Interchange transaction fee income primarily consists of interchange fees earned on a transactional basis through card payment networks. The performance obligation for these types of transactions is satisfied as services are rendered for each transaction and revenue is recognized daily concurrently with the transaction processing services provided to the cardholder. In order to participate in the card payment networks, the Company must pay various transaction related costs established by the networks ("interchange network charges"), including membership fees and a per unit charge for each transaction. The Company is acting as an agent for its debit card customers when they are utilizing the card payment networks; therefore, interchange transaction fee income is reported net of interchange network charges. Interchange network charges totaled $ 4.0 million, $ 3.6 million and $ 3.6 million for fiscal years 2023, 2022 and 2021, respectively. Service Charges on Deposit Accounts - Service charges on deposit accounts consist of account maintenance fees and transaction-based fees such as those for overdrafts, insufficient funds, wire transfers and the use of out-of-network ATMs. The Company's performance obligation is satisfied over a period of time, generally a month, for account maintenance and at the time of service for transaction-based fees. Revenue is recognized after the performance obligation is satisfied. Payments are typically collected from the customer's deposit account at the time the transaction is processed and/or at the end of the customer's statement cycle (typically monthly). Insurance Commissions Commissions are received on insurance product sales. The Company acts in the capacity of an agent between the Company's customer and the insurance carrier. The Company's performance obligation is satisfied when the terms of the policy have been agreed upon and the insurance policy becomes effective. Additionally, the Company earns performance-based incentives ("contingent insurance commissions") based on certain criteria established by the insurance carriers. Contingent insurance commissions are accrued based upon management's expectations. Other Non-Interest Income Trust Asset Management Income - The Company provides trust asset management services to customers. The Company primarily earns fees for these services over time as the services are provided and the Company assesses fees at each month end. Fees are charged based on a tiered scale of the market value of the individual trust asset accounts at the end of the month. 99 17. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY) The Company serves as the holding company for the Bank (see "Note 1. Summary of Significant Accounting Policies"). The Company's (parent company only) balance sheets at the dates presented, and the related statements of income and cash flows for each of the years presented are as follows: BALANCE SHEETS SEPTEMBER 30, 2023 and 2022 (Dollars in thousands, except per share amounts) 2023 2022 ASSETS: Cash and cash equivalents $ 83,400 $ 103,977 Investment in the Bank 923,143 955,871 Note receivable - ESOP 34,273 35,767 Receivable from the Bank 2,438 — Income taxes receivable, net 331 454 Other assets 540 583 TOTAL ASSETS $ 1,044,125 $ 1,096,652 LIABILITIES: Deferred income tax liabilities, net $ 60 $ 72 Payable to the Bank — 81 Other liabilities 11 — Total liabilities 71 153 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, 135,936,375 and 138,858,884 shares issued and outstanding as of September 30, 2023 and 2022, respectively 1,359 1,388 Additional paid-in capital 1,166,643 1,190,213 Unearned compensation - ESOP ( 28,083 ) ( 29,735 ) Retained earnings ( 104,565 ) 80,266 AOCI, net of tax 8,700 ( 145,633 ) Total stockholders' equity 1,044,054 1,096,499 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,044,125 $ 1,096,652 100 STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 (Dollars in thousands) 2023 2022 2021 INTEREST AND DIVIDEND INCOME: Dividend income from the Bank $ 86,217 $ 111,745 $ 132,063 Interest income from other investments 2,236 1,484 1,509 Total interest and dividend income 88,453 113,229 133,572 NON-INTEREST EXPENSE: Salaries and employee benefits 906 843 908 Regulatory and outside services 275 259 287 Other non-interest expense 694 614 608 Total non-interest expense 1,875 1,716 1,803 INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE AND EQUITY IN UNDISTRIBUTED (EXCESS OF DISTRIBUTION OVER) EARNINGS OF SUBSIDIARY 86,578 111,513 131,769 INCOME TAX EXPENSE (BENEFIT) 71 ( 49 ) ( 62 ) INCOME BEFORE (EXCESS OF DISTRIBUTION OVER) / EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 86,507 111,562 131,831 (EXCESS OF DISTRIBUTION OVER)/ EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY ( 188,166 ) ( 27,109 ) ( 55,749 ) NET (LOSS) INCOME $ ( 101,659 ) $ 84,453 $ 76,082 101 STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 2023, 2022, and 2021 (Dollars in thousands) 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ ( 101,659 ) $ 84,453 $ 76,082 Adjustments to reconcile net income to net cash provided by operating activities: Equity in excess of distribution over earnings of subsidiary 188,166 27,109 55,749 Depreciation of equipment 45 46 45 Provision for deferred income taxes ( 12 ) ( 10 ) ( 9 ) Changes in: Receivable from/payable to the Bank ( 2,519 ) 18,239 ( 18,257 ) Income taxes receivable/payable 123 13 25 Other assets ( 2 ) ( 10 ) 21 Other liabilities 11 — ( 5 ) Net cash provided by operating activities 84,153 129,840 113,651 CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on note receivable from ESOP 1,494 1,446 1,401 Net cash provided by investing activities 1,494 1,446 1,401 CASH FLOWS FROM FINANCING ACTIVITIES: Net payment from subsidiary related to restricted stock awards 401 269 169 Cash dividends paid ( 83,172 ) ( 103,131 ) ( 117,890 ) Repurchase of common stock ( 23,453 ) — ( 4,568 ) Stock options exercised — — 324 Net cash used in financing activities ( 106,224 ) ( 102,862 ) ( 121,965 ) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 20,577 ) 28,424 ( 6,913 ) CASH AND CASH EQUIVALENTS: Beginning of year 103,977 75,553 82,466 End of year $ 83,400 $ 103,977 $ 75,553 102 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.