The Company transferred $108.8 million in residential first lien home equity loans from loans held for investment to loans held for sale during the nine-month period ended June 30, 2024. Other than the loans held for investment transfer to loans held for sale, during the nine-month period ended June 30, 2024, there were no significant changes in the Company’s lending activities as disclosed in the Company’s Annual Report on Form 10-K, for the fiscal year ended September 30, 2023. As discussed in Note 11, on October 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the previously required incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.

At June 30, 2024 and September 30, 2023, the Company owned $444,000 of residential real estate where physical possession has been obtained. At June 30, 2024 and September 30, 2023, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $509,000 and $539,000, respectively.

The following table provides the components of loans as of September 30, 2023, prior to the adoption of ASU 2016-13 (in thousands):

The following table presents the balance in the allowance for credit losses by portfolio segment and based on impairment method as of September 30, 2023:

The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended June 30, 2024 and 2023:


	Beginning Balance		Provisions (Credits)		Charge-Offs		Recoveries		Ending Balance

June 30, 2024:		(In thousands)
Residential real estate	$	6,381	$	150	$	(35)	$	59	$	6,555
Commercial real estate		1,645		(33)		—		—		1,612
Single tenant net lease		3,764		109		—		—		3,873
SBA commercial real estate		2,872		254		(37)		—		3,089
Multifamily		410		(48)		—		—		362
Residential construction		351		19		—		—		370
Commercial construction		431		(61)		—		—		370
Land and land development		174		(1)		—		—		173
Commercial business		1,484		192		(8)		—		1,668
SBA commercial business		1,434		(209)		(24)		11		1,212
Consumer		446		129		(95)		25		505
	$	19,392	$	501	$	(199)	$	95	$	19,789

June 30, 2023:
Residential real estate	$	3,537	$	603	$	(8)	$	—	$	4,132
Commercial real estate		1,783		—		—		—		1,783
Single tenant net lease		3,726		(3)		—		—		3,723
SBA commercial real estate		2,607		(263)		(39)		3		2,308
Multifamily		326		(61)		—		—		265
Residential construction		246		81		—		—		327
Commercial construction		83		123		—		—		206
Land and land development		198		3		—		—		201
Commercial business		1,322		162		—		9		1,493
SBA commercial business		2,088		(177)		—		11		1,922
Consumer		542		(27)		(46)		9		478
	$	16,458	$	441	$	(93)	$	32	$	16,838

The following table presents the activity in the allowance for credit losses by portfolio segment for the nine months ended June 30, 2024 and 2023:


	Beginning Balance		Adoption of ASC 326		Provisions (Credits)		Charge-Offs		Recoveries		Ending Balance

		(In thousands)
June 30, 2024:
Residential real estate	$	4,641	$	1,037	$	845	$	(35)	$	67	$	6,555
Commercial real estate		1,777		255		(420)		—		—		1,612
Single tenant net lease		3,810		222		(159)		—		—		3,873
SBA commercial real estate		1,922		511		633		(39)		62		3,089
Multifamily		268		(21)		115		—		—		362
Residential construction		434		(226)		162		—		—		370
Commercial construction		282		43		45		—		—		370
Land and land development		307		(74)		(60)		—		—		173
Commercial business		1,714		(495)		483		(34)		—		1,668
SBA commercial business		1,247		160		(186)		(48)		39		1,212
Consumer		498		17		226		(305)		69		505
	$	16,900	$	1,429	$	1,684	$	(461)	$	237	$	19,789

June 30, 2023:
Residential real estate	$	2,716	$	—	$	1,409	$	(8)	$	15	$	4,132
Commercial real estate		1,590		—		193		—		—		1,783
Single tenant net lease		3,838		—		(115)		—		—		3,723
SBA commercial real estate		2,578		—		(157)		(116)		3		2,308
Multifamily		251		—		14		—		—		265
Residential construction		305		—		22		—		—		327
Commercial construction		107		—		99		—		—		206
Land and land development		212		—		(11)		—		—		201
Commercial business		1,193		—		231		—		69		1,493
SBA commercial business		2,122		—		(49)		(190)		39		1,922
Consumer		448		—		161		(167)		36		478
	$	15,360	$	—	$	1,797	$	(481)	$	162	$	16,838

The following table presents the average balance of impaired loans individually evaluated for impairment as of June 30, 2023, prior to the Company’s adoption of ASU 2016-13 and interest income recognized on impaired loans for the three- and nine-month periods ended June 30, 2023. The Company did not recognize any interest income on impaired loans using the cash receipts method during the three- and nine-month periods ended June 30, 2023.


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023				2023
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Balance		Recognized		Balance		Recognized
Loans with no related allowance recorded:
Residential real estate	$	3,306	$	16	$	3,070	$	46
Commercial real estate		969		8		970		21
Single tenant net lease		—		—		—		—
SBA commercial real estate		8,427		—		8,189		—
Multifamily		375		4		384		14
Residential construction		—		—		—		—
Commercial construction		—		—		—		—
Land and land development		—		—		—		—
Commercial business		815		11		947		35
SBA commercial business		1,070		—		986		—
Consumer		54		—		65		—
	$	15,016	$	39	$	14,611	$	116

Loans with an allowance recorded:
Residential real estate	$	250	$	—	$	125	$	—
Commercial real estate		—		—		—		—
Single tenant net lease		—		—		—		—
SBA commercial real estate		1,201		—		1,433		—
Multifamily		—		—		—		—
Residential construction		—		—		—		—
Commercial construction		—		—		—		—
Land and land development		—		—		—		—
Commercial business		135		—		101		—
SBA commercial business		1,138		—		1,202		—
Consumer		196		—		190		—
	$	2,920	$	—	$	3,051	$	—

Total:
Residential real estate	$	3,556	$	16	$	3,195	$	46
Commercial real estate		969		8		970		21
Single tenant net lease		—		—		—		—
SBA commercial real estate		9,628		—		9,622		—
Multifamily		375		4		384		14
Residential construction		—		—		—		—
Commercial construction		—		—		—		—
Land and land development		—		—		—		—
Commercial business		950		11		1,048		35
SBA commercial business		2,208		—		2,188		—
Consumer		250		—		255		—
	$	17,936	$	39	$	17,662	$	116

The following table presents impaired loans individually evaluated for impairment as of September 30, 2023, prior to the adoption of ASU 2016-13.


			Unpaid
	Recorded		Principal		Related
	Balance		Balance		Allowance

	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	1,989	$	2,139	$	—
Commercial real estate		551		627		—
Single tenant net lease		—		—		—
SBA commercial real estate		7,415		9,397		—
Multifamily		318		362		—
Residential construction		—		—		—
Commercial construction		—		—		—
Land and land development		—		—		—
Commercial business		870		972		—
SBA commercial business		684		1,799		—
Consumer		44		58		—
	$	11,871	$	15,354	$	—

Loans with an allowance recorded:
Residential real estate	$	1,323	$	1,328	$	74
Commercial real estate		317		317		2
Single tenant net lease		—		—		—
SBA commercial real estate		—		—		—
Multifamily		—		—		—
Residential construction		—		—		—
Commercial construction		—		—		—
Land and land development		—		—		—
Commercial business		1,076		1,165		111
SBA commercial business		438		637		187
Consumer		189		189		189
	$	3,343	$	3,636	$	563

Total:
Residential real estate	$	3,312	$	3,467	$	74
Commercial real estate		868		944		2
Single tenant net lease		—		—		—
SBA commercial real estate		7,415		9,397		—
Multifamily		318		362		—
Residential construction		—		—		—
Commercial construction		—		—		—
Land and land development		—		—		—
Commercial business		1,946		2,137		111
SBA commercial business		1,122		2,436		187
Consumer		233		247		189
	$	15,214	$	18,990	$	563

The table below presents the amortized cost basis of loans on nonaccrual and loans past due 90 or more days and still accruing interest. Also presented is the balance of loans on nonaccrual status at June 30, 2024 for which there was no related allowance for credit losses.

The Company recognized no interest income related to nonaccrual loans for the three - and nine - month periods ended June 30, 2024.


	At June 30, 2024						At September 30, 2023
			Nonaccrual		Loans 90+				Loans 90+
	Total		Loans with No		Days		Total		Days
	Nonaccrual		Allowance For		Past Due		Nonaccrual		Past Due
	Loans		Credit Loses		Still Accruing		Loans		Still Accruing

	(In thousands)						(In thousands)

Residential real estate	$	4,047	$	2,568	$	—	$	2,426	$	—
Commercial real estate		622		496		—		511		—
Single tenant net lease		—		—		—		—		—
SBA commercial real estate		8,564		6,763		—		7,415		—
Multifamily		276		276		—		318		—
Residential construction		—		—		—		—		—
Commercial construction		—		—		—		—		—
Land and land development		—		—		—		—		—
Commercial business		1,464		1,300		—		1,946		—
SBA commercial business		1,751		1,290		—		1,099		—
Consumer		30		30		—		233		—

Total	$	16,754	$	12,723	$	—	$	13,948	$	—

The following table presents the amortized cost basis of collateral dependent loans by collateral type, which are individually evaluated to determine expected credit losses. Other collateral represents business assets, except for the case of consumer loans, which are collateralized by consumer non-real estate assets:


	30-59 Days		60-89 Days		90+ Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans

	(In thousands)

Residential real estate	$	566	$	449	$	2,422	$	3,437	$	532,690	$	536,127
Commercial real estate		1,006		—		496		1,502		184,152		185,654
Single tenant net lease		—		—		—		—		749,527		749,527
SBA commercial real estate		79		—		4,721		4,800		47,095		51,895
Multifamily		—		—		—		—		41,561		41,561
Residential construction		—		—		—		—		51,037		51,037
Commercial construction		—		—		—		—		20,271		20,271
Land and land development		3		—		—		3		16,403		16,406
Commercial business		—		—		37		37		134,432		134,469
SBA commercial business		19		—		473		492		18,361		18,853
Consumer		426		—		28		454		39,716		40,170

Total	$	2,099	$	449	$	8,177	$	10,725	$	1,835,245	$	1,845,970


	30-59 Days		60-89 Days		90+ Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans

	(In thousands)

Residential real estate	$	2,715	$	132	$	1,818	$	4,665	$	523,745	$	528,410
Commercial real estate		23		62		—		85		187,147		187,232
Single tenant net lease		—		—		—		—		757,388		757,388
SBA commercial real estate		764		—		3,877		4,641		42,437		47,078
Multifamily		—		—		—		—		34,892		34,892
Residential construction		—		—		—		—		24,924		24,924
Commercial construction		—		—		—		—		14,588		14,588
Land and land development		40		—		—		40		17,194		17,234
Commercial business		112		—		86		198		117,396		117,594
SBA commercial business		130		—		682		812		16,127		16,939
Consumer		137		5		36		178		39,737		39,915

Total	$	3,921	$	199	$	6,499	$	10,619	$	1,775,575	$	1,786,194

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic conditions and trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Pass: Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company 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 make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted.

The following tables outline, as of June 30, 2024, the amount of each loan and lease classification and the amount categorized into each risk rating based on fiscal year of origination as well as current period gross charge-offs:


															Revolving
															Loans
													Revolving		Converted
(In thousands)	2024		2023		2022		2021		2020		Prior		Loans		To Term		Total

Residential real estate
Pass	$	58,322	$	37,531	$	46,218	$	19,153	$	11,474	$	55,790	$	304,556	$	—	$	533,044
Special mention		—		—		—		—		—		—		—		—		—
Substandard		443		767		278		273		—		507		797		—		3,065
Doubtful		—		—		—		—		—		18		—		—		18
Loss		—		—		—		—		—		—		—		—		—
Total residential real estate		58,765		38,298		46,496		19,426		11,474		56,315		305,353		—		536,127
YTD gross charge-offs		—		—		—		1		—		6		28		—		35

Commercial real estate
Pass		13,155		28,061		62,595		22,099		7,888		51,041		—		—	$	184,839
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		622		—		—		22		171		—		—		815
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total commercial real estate		13,155		28,683		62,595		22,099		7,910		51,212		—		—		185,654
YTD gross charge-offs		—		—		—		—		—		—		—		—		—

Single tenant net lease commercial real estate
Pass		24,129		149,782		275,648		71,766		100,282		127,920		—		—		749,527
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total single tenant net lease		24,129		149,782		275,648		71,766		100,282		127,920		—		—		749,527
YTD gross charge-offs		—		—		—		—		—		—		—		—		—

SBA commercial real estate
Pass		3,785		8,769		8,913		6,821		7,168		6,405		43		—		41,904
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		162		143		1,766		6,296		—		—		8,367
Doubtful		—		—		—		—		—		1,624		—		—		1,624
Loss		—		—		—		—		—		—		—		—		—
Total SBA commercial real estate		3,785		8,769		9,075		6,964		8,934		14,325		43		—		51,895
YTD gross charge-offs		—		—		—		—		11		28		—		—		39


								Revolving
								Loans
							Revolving	Converted
(In thousands)	2024	2023	2022	2021	2020	Prior	Loans	To Term	Total

Multifamily real estate
Pass	5,177	2,585	11,490	5,464	11,247	5,322	—	—	41,285
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	276	—	—	276
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total multifamily real estate	5,177	2,585	11,490	5,464	11,247	5,598	—	—	41,561
YTD gross charge-offs	—	—	—	—	—	—	—	—	—

Residential construction
Pass	8,495	28,250	14,292	—	—	—	—	—	51,037
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	—	—	—	—
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total residential construction	8,495	28,250	14,292	—	—	—	—	—	51,037
YTD gross charge-offs	—	—	—	—	—	—	—	—	—

Commercial construction
Pass	68	15,960	4,243	—	—	—	—	—	20,271
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	—	—	—	—
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total commercial construction	68	15,960	4,243	—	—	—	—	—	20,271
YTD gross charge-offs	—	—	—	—	—	—	—	—	—

Land and land development
Pass	696	8,080	5,206	982	383	1,059	—	—	16,406
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	—	—	—	—	—	—	—	—
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total land and land development	696	8,080	5,206	982	383	1,059	—	—	16,406
YTD gross charge-offs	—	—	—	—	—	—	—	—	—


								Revolving
								Loans
							Revolving	Converted
(In thousands)	2024	2023	2022	2021	2020	Prior	Loans	To Term	Total

Commercial business
Pass	38,268	51,632	25,228	11,249	788	5,797	—	—	132,962
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	948	164	44	4	347	—	—	1,507
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total commercial business	38,268	52,580	25,392	11,293	792	6,144	—	—	134,469
YTD gross charge-offs	—	—	—	32	—	2	—	—	34

SBA commercial business
Pass	5,016	2,568	716	1,203	3,998	3,113	384	—	16,998
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	—	—	54	86	1,698	—	—	1,838
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	17	—	—	17
Total SBA commercial business	5,016	2,568	716	1,257	4,084	4,828	384	—	18,853
YTD gross charge-offs	—	—	—	5	5	38	—	—	48

Consumer
Pass	3,892	4,057	3,310	450	207	86	28,138	—	40,140
Special mention	—	—	—	—	—	—	—	—	—
Substandard	—	4	—	—	—	—	26	—	30
Doubtful	—	—	—	—	—	—	—	—	—
Loss	—	—	—	—	—	—	—	—	—
Total consumer	3,892	4,061	3,310	450	207	86	28,164	—	40,170
YTD gross charge-offs	—	4	—	1	—	—	300	—	305

Total loans
Pass	161,003	337,275	457,859	139,187	143,435	256,533	333,121	—	1,828,413
Special mention	—	—	—	—	—	—	—	—	—
Substandard	443	2,341	604	514	1,878	9,295	823	—	15,898
Doubtful	—	—	—	—	—	1,642	—	—	1,642
Loss	—	—	—	—	—	17	—	—	17
Total loans	161,446	339,616	458,463	139,701	145,313	267,487	333,944	—	1,845,970
YTD gross charge-offs	—	4	—	39	16	74	328	—	461


			Special
September 30, 2023:	Pass		Mention		Substandard		Doubtful		Loss		Total

	(In thousands)
Residential real estate	$	525,735	$	—	$	2,653	$	22	$	—	$	528,410
Commercial real estate		186,520		—		712		—		—		187,232
Single tenant net lease		757,388		—		—		—		—		757,388
SBA commercial real estate		39,092		278		6,083		1,625		—		47,078
Multifamily		34,574		—		318		—		—		34,892
Residential construction		24,924		—		—		—		—		24,924
Commercial construction		14,588		—		—		—		—		14,588
Land and land development		17,234		—		—		—		—		17,234
Commercial business		115,647		40		1,907		—		—		117,594
SBA commercial business		14,572		—		2,327		40		—		16,939
Consumer		39,871		—		44		—		—		39,915

Total	$	1,770,145	$	318	$	14,044	$	1,687	$	—	$	1,786,194

Effective October 1, 2023, the Company prospectively adopted ASU 2022-02, which eliminated the accounting for TDRs while establishing a new standard for the treatment of modifications made to borrowers experiencing financial difficulties (Financial Difficulty Modifications, or “FDMs”). As such, effective with the adoption of the standard, the Company prospectively will not include FDMs in the calculation of nonperforming loans, nonperforming assets or classified assets. Prior period data, which included TDRs, has not been adjusted.

An FDM may result when a borrower is in financial distress and may be in the form of principal forgiveness, an interest rate reduction, a term extension or a significant payment delay. In some cases, the Company may provide multiple types of modifications for a single loan. One type of modification, such as payment delay, may be granted initially. However, if the borrower continues to experience financial difficulty, another modification, such as term extension and/or interest rate reduction may be granted. Additionally, modifications with a term extension or interest rate reduction are intended to reduce the borrower’s monthly payment, while modifications with a payment delay, which typically allow borrowers to make monthly payments or interest only payments for a period of time, are structured to cure the payment defaults by making delinquent payments due at maturity.

There were no new FDMs made or modifications of existing FDMs during the three-and nine-months ended June 30, 2024.

The following table summarizes the Company’s recorded investment in TDRs at June 30, 2023, prior to adoption of ASU 2022-02. There was $101,000 of specific reserve included in the allowance for loan losses related to TDRs at June 30, 2023.

The following table summarizes information regarding TDRs that were restructured during the three- and nine-month periods ended June 30, 2023:

At June 30, 2023, the Company had committed to lend $1,000 to customers with outstanding loans classified as TDRs.

There were no principal charge-offs as a result of loans previously designated as TDRs during the three-month period ended June 30, 2023. There were principal charge-offs totaling $6,000 as a result of loans previously designated as TDRs during the nine-month period ended June 30, 2023. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

During the three- and nine-month periods ended June 30, 2023, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default.

The Company originates loans to commercial customers under the SBA 7(a) program and other programs, and typically sells the guaranteed portion of the SBA loans with servicing rights retained. Loan servicing rights on originated SBA loans that have been sold are initially recorded at fair value. Capitalized SBA servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of SBA servicing rights is assessed using the present value of estimated future cash flows.

The aggregate fair value of SBA loan servicing rights approximates its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the SBA loan servicing rights include the discount rate and prepayment speed assumptions. For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the SBA loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in other noninterest income in the consolidated statements of income.

The unpaid principal balance of SBA loans serviced for others was $209.7 million, $209.6 million and $223.2 million at June 30, 2024, September 30, 2023 and June 30, 2023, respectively. Contractually specified late fees and ancillary fees expensed on SBA loans were $2,000 for the three-months ended June 30, 2024 and a credit of $6,000 for the nine-months ended June 30, 2024. Contractually specified late fees and ancillary fees expensed on SBA loans were $35,000 and $70,000 for the three- and nine-month periods ended June 30, 2023, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $457,000 and $1.4 million for the three- and nine-month periods ended June 30, 2024, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans was $578,000 and $1.7 million for the three- and nine-month periods ended June 30, 2023, respectively. Net servicing income and costs related to SBA loans are included in other noninterest income in the consolidated statements of income.

An analysis of SBA loan servicing rights for the three-and nine-month periods ended June 30, 2024 and 2023 is as follows:

There was no valuation allowance related to SBA loan servicing rights at June 30, 2024. There was a valuation allowance of $60,000 related to SBA loan servicing rights at September 30, 2023.

The Company originates residential mortgage loans for sale in the secondary market and retains servicing for certain of these loans when they are sold. MSRs retained for originated loans that have been sold are accounted for at fair value. The fair value of MSRs are determined using the present value of estimated expected net servicing income using assumptions about expected mortgage loan prepayment rates, discount rate, servicing costs, and other economic factors, which are determined based on current market conditions. Changes in these underlying assumptions could cause the fair value of MSRs to change significantly in the future. Changes in fair value of MSRs are recorded in mortgage banking income in the accompanying consolidated statements of income. MSRs are subject to changes in value from, among other things, changes in interest rates, prepayments of the underlying loans and changes in the credit quality of the underlying loans.

At September 30, 2023, the Company had entered into a letter of intent to sell substantially all of the Company’s residential MSRs, which closed on November 30, 2023. Additionally, the Company sold the remaining residential MSRs during the quarter ended March 31, 2024. Due to the pending residential MSR sales, a valuation model was not used to calculate the fair value of residential MSRs September 30, 2023. The fair value was estimated using known information, including the anticipated sale prices, estimated expenses, and contingencies related to the pending residential MSR sales, which represent Level 3 fair value inputs. Prior to September 30, 2023, a valuation model employed by an independent third party calculated the present value of future cash flows and was used to value the MSRs on a monthly basis. Management periodically compared the valuation model inputs and results to published industry data in order to validate the model results and assumptions.

The unpaid principal balance of residential mortgage loans serviced for others was $4.77 billion at September 30, 2023. There was no unpaid principal balance of residential mortgage loans serviced for others at June 30, 2024 due to the sale of all of the Company’s residential MSRs during the six-month period ended March 31, 2024, which also resulted in the elimination of custodial escrow balances. Custodial escrow balances maintained in connection with the foregoing loan servicing and other liabilities was $47.9 million at September 30, 2023. There were no custodial escrow balances maintained in connection with loan servicing and other liabilities at June 30, 2024. Contractually specified servicing fees (net of direct servicing expenses), late fees and other ancillary fees related to residential mortgage loans serviced for others were a net debit of $12,000 and a net credit of $1.5 million for the three- and nine-month periods ended June 30, 2024, respectively. Contractually specified servicing fees (net of direct servicing expenses), late fees and other ancillary fees related to residential mortgage loans serviced for others were $2.4 million and $7.2 million for the three- and nine-month periods ended June 30, 2023, respectively. Contractually specified servicing fees are included in mortgage banking income in the consolidated statements of income.

Changes in the carrying value of MSRs accounted for at fair value for the three-and nine-month periods ended June 30, 2024 and 2023 were as follows:

The Company also periodically sells single tenant net lease loans with servicing rights retained. Loan servicing rights on these nonresidential mortgage loans are initially recorded at fair value and are then amortized in proportion to and over the period of estimated net servicing income. Impairment of nonresidential MSRs is assessed using the present value of estimated future cash flows. The aggregate fair value of nonresidential MSRs approximates its carrying value. A valuation model employed by management calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the nonresidential MSRs include the discount rate and prepayment speed assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in other noninterest income in the consolidated statements of income.

The unpaid principal balance of nonresidential mortgage loans serviced for others was $35.2 million, $40.4 million and $43.5 million at June 30, 2024, September 30, 2023 and June 30, 2023, respectively. Contractually specified servicing fees, late fees and other ancillary fees related to nonresidential mortgage loans serviced for others were $1,000 and $5,000 for the three- and nine-month periods ended June 30, 2024, respectively. Contractually specified servicing fees, late fees and other ancillary fees related to nonresidential mortgage loans serviced for others were $8,000 and $22,000 for the three- and nine-month periods

ended June 30, 2023, respectively. Contractually specified servicing fees on nonresidential mortgage loans serviced for others are included in other noninterest income in the consolidated statements of income.

An analysis of nonresidential MSRs for the three-and nine-month periods ended June 30, 2024 and 2023 is as follows:

There was no valuation allowance related to nonresidential MSRs at June 30, 2024 and September 30, 2023.