Steps to reproduce the issue

1. Install fresh Joomla 4.4.4
2. Create a category "Colors" with this structure:

• Colors
  • Blue
    • Baby Blue
    • Sky Blue
  • Green
    • Leaf Green
    • Mint Green

3. Create an "Article - Categories" module with the following setup:

Parent Category: Colors
Category Descriptions: Hide
Number of Articles: Hide
Subcategories: Hide
First Subcategories: All
Maximum Level Depth: 1

Expected result

The module displays first subcategories only:

• Blue
• Green

Actual result

The module displays all categories including subcategories as a flat list:

Blue
Baby Blue
Sky Blue
Green
Leaf Green
Mint Green

System information (as much as possible)

Apache 2.4.54
PHP 8.2
MySQL 5.7.39