TFS Financial Corp
Annual Report 2023

Plain-text annual report

Strong ★ Stable ★ Safe 2023 Annual Report Strong ★ Stable ★ Safe Above: On April 24, 2023, Marc Stefanski and his family, along with the Third Federal Management Team and Board of Directors, ring the closing bell at Nasdaq in honor of the 85th anniversary of Third Federal.Dear Stockholders, This year, we celebrated our 85th anniversary. We are still committed today to the mission we have had since 1938 – to help our customers achieve the American Dream of homeownership and financial security. In addition to celebrating 85 years in business, Third Federal has even more to be proud of during the past year. In 2023, a year when interest rates continued to climb, we saw a 6 percent growth in our loan portfolio, and nearly $1.5 billion in new equity lines of credit originations. Delinquencies in our mortgage portfolio were at .15 percent for the year and we generated $529 million of deposit growth. Our Tier 1 capital ratio remained strong at 11 percent – more than double the regulatory requirement, and independent rating agency Bauer Financial has awarded us 5 stars (superior) for our strength and stability for each quarter since 1988. Third Federal remains strong, stable and safe, despite economic conditions. And since 1938, we have been able to expand our reach, regardless of economic cycles. We are built to last and will continue to find new opportunities to grow and meet the needs of our customers during the next 85 years and beyond. Thank you for your steadfast support of Third Federal. Sincerely, Marc A. Stefanski Chairman and CEO   UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________________ FORM 10-K ________________________________ ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from to Commission File Number 001-33390 ___________________________________________ TFS FINANCIAL CORPORATION (Exact Name of Registrant as Specified in its Charter) ___________________________________________ United States of America (State or Other Jurisdiction of Incorporation or Organization) 7007 Broadway Avenue Cleveland, Ohio (Address of Principal Executive Offices) 52-2054948 (I.R.S. Employer Identification No.) 44105 (Zip Code) (216) 441-6000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange in which registered Common Stock, par value $0.01 per share TFSL Securities registered pursuant to Section 12(g) of the Act: None ___________________________________________ The NASDAQ Stock Market, LLC Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer", "accelerated filer,” "smaller reporting company," and "emerging growth company" Rule 12b-2 of the Exchange Act: Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company Emerging growth company ☐ ☐ If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes x No ☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No x The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on March 31, 2023, as reported by the NASDAQ Global Select Market, was approximately $651.97 million. At November 20, 2023, there were 280,359,173 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 81.01% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company. Portions of the registrant’s Proxy Statement for the 2024 Annual Meeting of Shareholders are incorporated by reference in Part III hereof to the extent indicated therein. DOCUMENTS INCORPORATED BY REFERENCE TFS Financial Corporation INDEX Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities [Reserved] Management’s Discussion and Analysis of Financial Condition and Results of Operation Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Item 9A. Item 9B. Item 9C. Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Item 16. Financial Statements and Supplementary Data Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary FORM 10-K EXHIBIT INDEX SIGNATURES 4 36 45 45 45 45 45 47 47 63 66 66 66 69 69 69 71 71 72 72 72 72 121 123 2 TFS Financial Corporation provides the following list of acronyms and other terms as a tool for the reader. The acronyms and other terms identified below are used throughout the document. GLOSSARY OF TERMS ACL: Allowance for Credit Losses ACT: Tax Cuts and Jobs Act FDIC: Federal Deposit Insurance Corporation FHFA: Federal Housing Finance Agency AOCI: Accumulated Other Comprehensive Income ARM: Adjustable-Rate Mortgage FHLB: Federal Home Loan Bank FICO: Fair Isaac Corporation ASC: Accounting Standards Codification ASU: Accounting Standards Update Association: Third Federal Savings and Loan Association of Cleveland BOLI: Bank Owned Life Insurance FRB-Cleveland: Federal Reserve Bank of Cleveland Freddie Mac: Federal Home Loan Mortgage Corporation FRS: Board of Governors of the Federal Reserve System GAAP: Generally Accepted Accounting Principles Ginnie Mae: Government National Mortgage Association BSA: Bank Secrecy Act BTFP: Bank Term Funding Program CARES Act: Coronavirus Aid, Relief and Economic Security HPI: Home Price Index GVA: General Valuation Allowance HOLA: Home Owners' Loan Act Act CDs: Certificates of Deposit CECL: Current Expected Credit Losses CET1: Common Equity Tier 1 IRR: Interest Rate Risk IRS: Internal Revenue Service IVA: Individual Valuation Allowance LDI: Liability Driven Investment CFPB: Consumer Financial Protection Bureau LIBOR: London Interbank Offer Rate CLTV: Combined Loan-to-Value LIHTC: Low Income Housing Tax Credit Company: TFS Financial Corporation and its subsidiaries LIP: Loans-in-Process LTV: Loan-to-Value COSO: Committee of Sponsoring Organizations of the MMK: Money Market Account Treadway Commission OCC: Office of the Comptroller of the Currency CRA: Community Reinvestment Act OCI: Other Comprehensive Income DFA: Dodd-Frank Wall Street Reform and Consumer OTS: Office of Thrift Supervision Protection Act DIF: Deposit Insurance Fund EaR: Earnings at Risk EPS: Earnings per Share ESG: Environmental, Social and Governance ESOP: Third Federal Employee (Associate) Stock Ownership Plan EVE: Economic Value of Equity Fannie Mae: Federal National Mortgage Association FASB: Financial Accounting Standards Board PCAOB: Public Company Accounting Oversight Board PMI: Private Mortgage Insurance PMIC: PMI Mortgage Insurance Co. QTL: Qualified Thrift Lender REMICs: Real Estate Mortgage Investment Conduits SEC: United States Securities and Exchange Commission SOFR: Secured Overnight Financing Rate TDR: Troubled Debt Restructuring Third Federal Savings, MHC: Third Federal Savings and Loan Association of Cleveland, MHC 3 PART I Item 1. Business Forward Looking Statements This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include, among other things: ● statements of our goals, intentions and expectations; ● statements regarding our business plans and prospects and growth and operating strategies; ● statements concerning trends in our provision for credit losses and charge-offs on loans and off-balance sheet exposures; statements regarding the trends in factors affecting our financial condition and results of operations, including credit quality of our loan and investment portfolios; and ● estimates of our risks and future costs and benefits. ● These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events: significantly increased competition among depository and other financial institutions, including with respect to our ability to charge overdraft fees; ● ● inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments, or our ability to originate loans; ● general economic conditions, either globally, nationally or in our market areas, including employment prospects, real estate values and conditions that are worse than expected; ● the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets, and changes in estimates of the allowance for credit losses; ● decreased demand for our products and services and lower revenue and earnings because of a recession or other events; ● changes in consumer spending, borrowing and savings habits; ● adverse changes and volatility in the securities markets, credit markets or real estate markets; ● our ability to manage market risk, credit risk, liquidity risk, reputational risk, regulatory risk and compliance risk; ● our ability to access cost-effective funding; legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements and changes related to our ability to pay dividends and the ability of Third Federal Savings, MHC to waive dividends; changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board; the adoption of implementing regulations by a number of different regulatory bodies, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us; ● ● ● ● our ability to enter new markets successfully and take advantage of growth opportunities; ● future adverse developments concerning Fannie Mae or Freddie Mac; ● changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury, the Federal Reserve System, Fannie Mae, the OCC, FDIC, and others; ● the continuing governmental efforts to restructure the U.S. financial and regulatory system; ● the ability of the U.S. Government to remain open, function properly and manage federal debt limits; ● changes in policy and/or assessment rates of taxing authorities that adversely affect us or our customers; ● changes in accounting and tax estimates; ● changes in our organization and changes in expense trends, including but not limited to trends affecting non-performing assets, charge-offs and provisions for credit losses; ● changes in the value of our goodwill or other intangible assets; ● the inability of third-party providers to perform their obligations to us; ● our ability to retain key employees; ● civil unrest; ● ● cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems; and the impact of wide-spread pandemic, including COVID-19, and related government action, on our business and the economy. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Please see Item 1A. Risk Factors for a discussion of certain risks related to our business. 4  TFS FINANCIAL CORPORATION TFS Financial Corporation (“we,” “us,” or “our”) was organized in 1997 as the mid-tier stock holding company for the Association. We completed our initial public stock offering in 2007 and issued 100,199,618 shares of common stock, or 30.16% of our post-offering outstanding common stock, to subscribers in the offering. Additionally, at the time of the public offering, 5,000,000 shares of our common stock, or 1.50% of our outstanding shares, were issued to the newly formed charitable foundation, Third Federal Foundation. Third Federal Savings, MHC, our mutual holding company parent, held and continues to hold, the remainder of our outstanding common stock (227,119,132 shares). Net proceeds from our initial public stock offering were approximately $886 million and reflected the costs we incurred in completing the offering as well as a $106.5 million loan to the ESOP related to its acquisition of shares in the initial public stock offering. Our ownership of the Association remains our primary business activity. We also operate Third Capital, Inc. as a wholly- owned subsidiary. See THIRD CAPITAL, INC. below. As the holding company of the Association, we are authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan holding companies, which include making equity investments and the acquisition of banking and financial services companies. Our cash flow depends primarily on earnings from the investment of proceeds we retained from the initial offering, and any dividends we receive from the Association and Third Capital, Inc. All of our officers are also officers of the Association. In addition, we use the services of the support staff of the Association from time to time. We may hire additional associates, as needed, to the extent we expand our business in the future. THIRD CAPITAL, INC. Third Capital, Inc. is a Delaware corporation that was organized in 1998 as our wholly-owned subsidiary. At September 30, 2023, Third Capital, Inc. had consolidated assets of $9.0 million, and for the fiscal year ended September 30, 2023, Third Capital, Inc. had consolidated net income of $0.2 million. Third Capital, Inc. has no separate operations other than as the holding company for its operating subsidiaries, and as a minority investor or partner in other entities. As of September 30, 2023, the only remaining entity in which Third Capital, Inc. has an investment in is Third Cap Associates, Inc., an Ohio corporation that owns 49% and 60% of two title agencies that provide escrow and settlement services in the States of Ohio, Florida and New Jersey, primarily to customers of the Association. For the fiscal year ended September 30, 2023, Third Cap Associates, Inc. recorded net income of $0.2 million. THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND General The Association is a federally chartered savings and loan association headquartered in Cleveland, Ohio, that was organized in 1938. In 1997, the Association reorganized into its current two-tier mutual holding company structure. The Association’s principal business consists of originating and servicing residential real estate mortgage loans and attracting retail savings deposits. The Association’s business strategy is to originate mortgage loans with interest rates that are competitive with those of similar products offered by other financial institutions in its markets. Similarly, the Association offers checking accounts, savings accounts and certificate of deposit accounts, each bearing interest rates that are competitive with similar products offered by other financial institutions in its markets. The Association expects to continue to pursue this business philosophy. While this strategy does not enable the Association to earn the highest rates of interest on loans that it offers or to pay the lowest rates on its deposit accounts, the Association believes that this strategy is the primary reason for its successful growth in the past and will continue to be a successful strategy in the future. The Association attracts retail deposits from the general public in the areas surrounding its main office and its branch offices. It also utilizes its internet website, direct mail solicitation and its customer service call center to generate loan applications and attract retail deposits. Longer-term brokered CDs and advances from the FHLB of Cincinnati as well as shorter-term brokered CDs and advances from the FHLB of Cincinnati, hedged to longer effective durations by interest rate exchange contracts, are also used as cost-effective funding alternatives. In addition to residential real estate mortgage loans, the Association originates residential construction loans to individuals for the construction of their personal residences by a qualified builder. The Association also offers home equity loans and lines of credit subject to certain property and credit performance conditions. The Association retains in its portfolio a large portion of the loans that it originates. The Association also purchases residential real estate mortgage loans through a correspondent lending partnership. Loans that the Association sells consist primarily of long-term, fixed-rate residential real estate mortgage loans. The Association retains the servicing rights on all loans that it sells. The Association’s revenues are derived primarily from interest on loans and, to a lesser extent, 5 interest on interest-earning deposits in other financial institutions, deposits maintained at the FRS, federal funds sold, investment securities, including mortgage-backed securities and dividends from FHLB of Cincinnati stock. The Association also generates revenues from fees and service charges. The Association’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and securities and proceeds from loan sales. The Association’s website address is www.thirdfederal.com. Filings of the Company made with the SEC are available, without charge, on the Association’s website. Information on that website is not and should not be considered a part of this document. Market Area The Association conducts its operations from its main office in Cleveland, Ohio, and from 37 additional, full-service branches and four loan production offices located throughout the states of Ohio and Florida. In Ohio, the Association maintains 21 full-service offices located in the northeast Ohio counties of Cuyahoga, Lake, Lorain, Medina and Summit, one regional loan production office located in the central Ohio (Columbus, Ohio) and three loan production offices located in the southern Ohio counties of Butler and Hamilton (Cincinnati, Ohio). In Florida, the Association maintains 16 full-service branches located in the counties of Pasco, Pinellas, Hillsborough, Sarasota, Lee, Collier, Palm Beach and Broward. The Association also provides savings products in all 50 states and first mortgage refinance loans in 21 states and the District of Columbia. Home equity lines of credit are provided in 25 states and the District of Columbia. First mortgage loans and bridge loans to purchase homes are provided in 13 states while other equity loan products are provided in eight states. These products are provided through its branch network for customers in its core markets of Ohio, Florida, Kentucky and Indiana as well as its customer service call center and its internet site for all customers not served by its branch network. Competition The Association faces intense competition in its market areas both in making loans and attracting deposits. Its market areas have a high concentration of financial institutions, including large money centers and regional banks, community banks and credit unions, and it faces additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Some of its competitors offer products and services that the Association currently does not offer, such as commercial business loans, trust services and private banking. The majority of the Association’s deposits are held in its offices located in Cuyahoga County, Ohio. As of June 30, 2023 (the latest date for which information is publicly available), the Association had $5.0 billion of deposits in Cuyahoga County, and ranked fifth among all financial institutions with offices in the county in terms of deposits, with a market share of 4.67%. As of that date, the Association had $6.5 billion of deposits in the State of Ohio, and ranked eleventh among all financial institutions in the state in terms of deposits, with a market share of 1.19%. As of June 30, 2023 (the latest date for which information is publicly available), the Association had $2.6 billion of deposits in the State of Florida, and ranked 34th among all financial institutions in terms of deposits, with a market share of 0.31%. This market share data excludes deposits held by credit unions, whose deposits are not insured by the FDIC. Many financial institutions, including institutions that compete in our markets, have targeted retail deposit gathering as a more attractive funding source than borrowings, and have become more active and more competitive in their deposit product pricing. The combination of reduced demand for borrowed funds and more competition with respect to rates paid to depositors has created an increasingly difficult marketplace for attracting deposits, which could adversely affect future operating results. From October 2022 through August 2023 (the latest date for which information is publicly available), per data furnished by MarketTrac®, the Association had the second largest market share of conventional purchase mortgage loans originated in Cuyahoga County, Ohio. For the same period, it also had the second largest market share of conventional purchase mortgage loans originated in the seven northeast Ohio counties which comprise the Cleveland and Akron metropolitan statistical areas. In addition, based on the same statistics, the Association has consistently been one of the twenty largest lenders in both Franklin County (Columbus, Ohio) and Hamilton County (Cincinnati, Ohio) since it entered those markets in 1999. The Association’s primary strategy for increasing and retaining its customer base is to offer competitive deposit and loan rates and other product features, delivered with exceptional customer service, in each of the markets it serves. We rely on the reputation that has been built during the Association’s 85-year history of serving its customers and the communities in which it operates, the Association’s high capital levels, and the Association's extensive liquidity alternatives which, in combination, serve to maintain and nurture customer and marketplace confidence. At September 30, 2023, our ratio of shareholders’ equity to total assets was 11.4%. For the fiscal year ended September 30, 2023, the Association's liquidity ratio averaged 5.53% (which we compute as the sum of cash and cash equivalents plus unpledged investment securities for which 6 ready markets exist, divided by total average assets). See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources. We continue to utilize a multi-faceted approach to support our efforts to instill customer and marketplace confidence. First, we provide thorough and timely information to all of our associates so as to prepare them for their day-to-day interactions with customers and other individuals who are not part of the Company. We believe that it is important that our customers and others sense the comfort level and confidence of our associates throughout their dealings. Second, we encourage our management team to maintain a presence and to be available in our branches and other areas of customer contact, so as to provide more opportunities for informal contact and interaction with our customers and community members. Third, our CEO remains accessible to both local and national media, as a spokesman for our institution as well as an observer and interpreter of financial marketplace situations and events. Fourth, we periodically include advertisements in local newspapers and online that display our strong capital levels and history of service. We also continue to emphasize our traditional tagline—“STRONG * STABLE * SAFE”—in our advertisements, website, online presence and branch displays. Finally, for customers who adhere to the old adage of trust but verify, we refer them to the safety/security rankings of a nationally recognized, independent rating organization that specializes in the evaluation of financial institutions, which has awarded the Association its highest rating for more than one hundred consecutive quarters. Lending Activities The Company’s principal lending activity is the origination of fixed-rate and adjustable-rate, first mortgage loans to purchase or refinance residential real estate. Adjustable-rate and up to 30-year fixed-rate first mortgage loans to refinance real estate are offered in 21 states and the District of Columbia. Also, the Company offers adjustable-rate and up to 30-year fixed- rate first mortgage loans to purchase real estate in 13 states. Further, the Company originates residential construction loans to individuals (for the construction of their personal residences by a qualified builder) in Ohio and Florida. The Company also purchases first mortgage loans originated in Ohio, Pennsylvania and North Carolina through a correspondent lending partnership. Additionally, the Company offers home equity lines of credit in 25 states and the District of Columbia and home equity loans in eight states. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation-Monitoring and Limiting Our Credit Risk for additional information regarding home equity loans and lines of credit. At September 30, 2023, fixed-rate and adjustable-rate, first mortgage residential real estate loans totaled $12.12 billion, or 79.7% of our loan portfolio, home equity loans and lines of credit totaled $3.03 billion, or 19.9% of our loan portfolio, and residential construction loans totaled $48.4 million, or 0.4% of our loan portfolio. At September 30, 2023, adjustable-rate, residential real estate, first mortgage loans totaled $4.76 billion and comprised 31.3% of our loan portfolio. 7 Loan Portfolio Composition. The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location, at the indicated periods, excluding loans held for sale. The majority of our Home Today loan portfolio is secured by properties located in Ohio and the balances of other loans are immaterial. Therefore, neither was segregated by geographic location. Real estate loans: Residential Core (1) Ohio Florida Other Total Residential Home Today Total (1) Home equity loans and lines of credit Ohio Florida California Other Total Construction Ohio Florida Total Other loans Total loans receivable Deferred loan expenses, net Loans in process Allowance for credit losses on loans Total loans receivable, net September 30, 2023 2022 Amount Percent Amount Percent (Dollars in thousands) $ $ 6,893,547 2,135,853 3,048,758 12,078,158 46,508 773,324 666,517 513,904 1,076,781 3,030,526 41,153 7,253 48,406 4,411 15,208,009 60,807 (25,754) (77,315) 15,165,747 $ 79.4% 0.3 19.9 0.4 — 100.0% $ 6,432,780 2,120,892 2,986,187 11,539,859 53,255 706,641 537,724 432,540 956,973 2,633,878 111,098 10,661 121,759 3,263 14,352,014 50,221 (72,273) (72,895) 14,257,067 80.4% 0.4 18.4 0.8 — 100.0% ______________________ (1) Residential Core and Home Today loans are primarily one- to four-family residential mortgage loans. See the Residential Real Estate Mortgage Loans section which follows for a further description of Residential Core and Home Today loans. 8 The following table provides an analysis of our residential mortgage loans disaggregated by refreshed FICO score, year of origination and portfolio at September 30, 2023. The Company treats the FICO score information as demonstrating that underwriting guidelines reduce risk rather than as a credit quality indicator utilized in the evaluation of credit risk. Balances are adjusted for deferred loan fees, expenses and any applicable loans-in-process. September 30, 2023 2023 2022 2021 2020 2019 Prior Cost Basis To Term Total By fiscal year of origination Revolving Loans Revolving Loans Amortized Converted Real estate loans: Residential Core <680 680-740 741+ Unknown (1) $ 39,088 $ 93,657 $ 69,306 $ 38,772 $ 20,754 $ 160,407 $ — $ — $ 421,984 324,652 394,715 249,049 165,839 66,573 363,109 1,300,323 2,656,836 1,701,389 1,118,710 469,516 2,674,638 3,151 25,224 36,897 21,339 7,939 101,056 Total Residential Core 1,667,214 3,170,432 2,056,641 1,344,660 564,782 3,299,210 Residential Home Today (2) <680 680-740 741+ Unknown (1) Total Residential Home Today Home equity loans and lines of credit — — — — — — — — — — — — — — — <680 680-740 741+ Unknown (1) 4,252 50,262 2,395 9,496 1,024 3,062 155,451 60,174 19,947 166 293 96 — — — — — 315 783 5,938 77 — — — — — — — — — — — — 1,563,937 9,921,412 195,606 — 12,102,939 — — — — — 23,144 9,063 11,221 2,602 46,030 — — — — — 23,144 9,063 11,221 2,602 46,030 518 924 4,621 161 863 113,196 1,997 521,282 10,316 2,006,341 750 23,888 12,459 14,177 36,179 5,878 135,022 601,983 2,298,967 31,309 Total Home equity loans and lines of credit 210,131 72,358 24,129 7,113 6,224 13,926 2,664,707 68,693 3,067,281 Construction 680-740 741+ 4,958 6,688 Total Construction 11,646 531 10,224 10,755 — — — — — — — — — — — — — — — — — — 5,489 16,912 22,401 Total net real estate loans $ 1,888,991 $ 3,253,545 $ 2,080,770 $ 1,351,773 $ 571,006 $ 3,359,166 $ 2,664,707 $ 68,693 $ 15,238,651 (1) Market data necessary for stratification is not readily available. (2) No new originations of Home Today loans since fiscal 2016. 9 The following table provides an analysis of our residential mortgage loans by origination LTV, origination year and portfolio at September 30, 2023. LTVs are not updated subsequent to origination except as part of the charge-off process. Balances are adjusted for deferred loan fees, expenses and any applicable loans-in-process. September 30, 2023 2023 2022 2021 2020 2019 Prior Cost Basis To Term Total By fiscal year of origination Revolving Loans Revolving Loans Amortized Converted Real estate loans: Residential Core <80% 80-89.9% 90-100% >100% Unknown (1) $ 622,590 $ 1,880,859 $ 1,415,562 $ 716,692 $ 255,603 $ 1,857,447 $ — $ — $ 6,748,753 819,230 1,073,057 593,771 570,026 279,224 1,330,002 225,394 214,898 46,228 57,744 29,697 109,425 — — — 1,618 — 1,080 — 198 — 258 737 1,599 Total Residential Core 1,667,214 3,170,432 2,056,641 1,344,660 564,782 3,299,210 Residential Home Today (2) <80% 80-89.9% 90-100% Total Residential Home Today Home equity loans and lines of credit — — — — — — — — — — — — — — — — — — — — 9,286 14,522 22,222 46,030 — — — — — — — — — — — — — 4,665,310 683,386 737 4,753 — 12,102,939 — — — — 9,286 14,522 22,222 46,030 <80% 80-89.9% 90-100% >100% Unknown (1) 202,698 70,125 23,607 7,077 7,433 2,201 — — — — 32 — 522 — — — 36 — — — 5,944 227 10,294 2,489,881 1,420 173,237 — 53 — 857 1,352 3 664 545 380 46,034 20,619 238 350 1,452 2,855,660 205,695 1,759 2,332 1,835 Total Home equity loans and lines of credit 210,131 72,358 24,129 7,113 6,224 13,926 2,664,707 68,693 3,067,281 Construction <80% 80-89.9% 7,463 4,183 6,149 4,606 Total Construction 11,646 10,755 — — — — — — — — — — — — — — — — — — 13,612 8,789 22,401 Total net real estate loans $ 1,888,991 $ 3,253,545 $ 2,080,770 $ 1,351,773 $ 571,006 $ 3,359,166 $ 2,664,707 $ 68,693 $ 15,238,651 (1) Market data necessary for stratification is not readily available. (2) No new originations of Home Today loans since fiscal 2016. Loan Portfolio Maturities. The following table summarizes the scheduled repayments of principal balances in the loan portfolio at September 30, 2023, according to each loan's final due date. Demand loans, loans having no stated repayment schedule or maturity, are reported as being due in the fiscal year ending September 30, 2024. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization. Due During the Years Ending September 30, 2024 2025 to 2028 2029 to 2038 2039 and beyond Residential Real Estate Core Home Today Home Equity Loans and Lines of Credit Construction Loans Other Loans Total (In thousands) $ 12,772 $ 311,246 2,017,470 38 $ 83 36,368 5,300 $ 62,414 176,777 1,162 $ 2,229 $ 338 3,529 — 2,182 21,501 374,081 2,236,326 9,736,670 10,019 2,786,035 43,377 — 12,576,101 Total loans receivable $ 12,078,158 $ 46,508 $ 3,030,526 $ 48,406 $ 4,411 $ 15,208,009 10 The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2023 that are contractually due after September 30, 2024. Due After September 30, 2024 Fixed Adjustable Total (In thousands) Real estate loans: Residential Core Residential Home Today Home Equity Loans and Lines of Credit Construction Other Loans Total loans receivable $ 7,304,740 $ 4,760,646 $ 12,065,386 46,470 46,405 65 325,520 47,244 2,699,706 — 3,025,226 47,244 2,182 2,182 $ 7,726,091 $ 7,460,417 $ 15,186,508 — Residential Real Estate Mortgage Loans. The Company’s primary lending activity is the origination of residential real estate mortgage loans. A comparison of 2023 data to the corresponding 2022 data can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. The Company currently offers fixed-rate conventional mortgage loans with terms of 30 years or less that are fully amortizing with monthly loan payments, and adjustable-rate mortgage loans that amortize over a period of up to 30 years, provide an initial fixed interest rate for three or five years and then adjust annually, subject to rate reset options as discussed later in this section. At September 30, 2023, there were no “interest only” residential real estate mortgage loans held in the Company's portfolio. The Company generally originates both fixed- and adjustable-rate mortgage loans in amounts up to $2 million, for single- family homes in most of our lending markets. The loans originated for larger dollar amounts are generally referred to as “jumbo loans.” The Company generally underwrites jumbo loans in a manner similar to conforming loans. Jumbo loans are not uncommon in the Company’s market areas. The Company offers “Smart Rate” adjustable-rate mortgage loan products secured by residential properties with interest rates that are fixed for an initial period of three or five years, after which the interest rate generally resets every year based upon a contractual spread or margin linked to the Prime Rate as published in the Wall Street Journal. As part of a loan retention program, these adjustable-rate loans provide the borrower with an attractive rate reset option, which allow the borrower to re- lock the rate an unlimited number of times at the Company’s then current lending rates, for another three or five years (which must be the same as the original lock period). Re-lock eligibility is subject to a satisfactory payment performance history by the borrower (current at the time of re-lock, and no foreclosures or bankruptcies since the Smart Rate application was taken). In addition to a satisfactory payment history, re-lock eligibility requires that the property continues to be the borrower's primary residence. The loan term cannot be extended in connection with a re-lock, nor can new funds be advanced. All interest rate caps and floors remain as originated. "Smart Rate" adjustable-rate mortgage loans represent over 99% of the adjustable-rate mortgage loan portfolio, with the difference representing the remaining balance of legacy adjustable-rate mortgage loan products with slightly different interest rate reset terms. Many of the borrowers who select adjustable-rate mortgage loans have shorter-term credit needs than those who select long-term, fixed-rate mortgage loans. Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans primarily because the underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default. All of the Company’s adjustable-rate mortgage loans are subject to periodic and lifetime limitations on interest rate changes. All adjustable-rate mortgage loans have initial and periodic caps of two percentage points on interest rate changes, with a cap of five or six percentage points for the life of the loan. The Company has never offered “Option ARM” loans, where borrowers can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. The Company has always considered the promotion of home ownership a primary goal. In that regard, it has historically offered affordable housing programs in all of its market areas. These programs are targeted toward low- and moderate-income home buyers. The Company’s philosophy has been to provide borrowers the opportunity for home ownership within their financial means. During fiscal 2016, the Company began to market its Home Ready mortgage loan product for low- and moderate-income homeowners. Third Federal’s Home Ready product is designed to be saleable to Fannie Mae under its Home Ready program. Previously, the Company’s primary affordable housing program was referred to as "Home Today". The vast majority of loans originated under the Home Today program had higher risk characteristics than our Core residential real estate mortgage loan, but the Company attempted to mitigate that higher risk through the use of private mortgage insurance and continued pre- and post-purchase counseling. As of September 30, 2023, the Company had $46.5 million of loans outstanding that were originated through its Home Today program, most of which were originated prior to March 2009. At September 30, 2023, of the loans that were originated under the Home Today program, 4.0% were delinquent 30 days or more compared to 11 0.1% for the portfolio of Core loans as of that date. At September 30, 2023, $0.9 million, or 1.9%, of loans originated under the Home Today program were delinquent 90 days and over and $4.6 million of Home Today loans were non-accruing loans, representing 14.5% of total non-accruing loans as of that date. See Delinquent Loans and Non-performing Assets and Restructured Loans for discussions of the asset quality of this portion of the Company’s loan portfolio. The Company currently retains the servicing rights on all loans sold in order to generate fee income and reinforce its commitment to customer service. One- to four-family residential mortgage real estate loans that have been sold were underwritten generally to Fannie Mae guidelines. At the time of the closing of these loans the Company owns the loans and subsequently sells them to Fannie Mae and others providing normal and customary representations and warranties, including representations and warranties related to compliance, generally with Fannie Mae underwriting standards. At the time of sale, the loans are free from encumbrances except for the mortgages filed by the Company which, with other underwriting documents, are subsequently assigned and delivered to Fannie Mae and others. During the fiscal years ended September 30, 2023 and 2022, the Company recognized servicing fees, net of amortization, related to these servicing rights of $4.5 million and $4.3 million, respectively. As of September 30, 2023 and 2022, the principal balance of loans serviced for others totaled $1.93 billion and $2.05 billion, respectively. At September 30, 2023, substantially all of the loans serviced for Fannie Mae and others were performing in accordance with their contractual terms and management believes that it had no material repurchase obligations associated with these loans at that date. However, at September 30, 2023, a reserve of $0.4 million has been maintained to cover potential losses on repurchases or reimbursements that may arise in connection with representations and warranties made at time of sale. The Company requires title insurance on all of its residential real estate mortgage loans. The Company also requires that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance up to $250 thousand) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. A majority of its residential real estate mortgage loans have a mortgage escrow account from which disbursements are made for real estate taxes and to a lesser extent for hazard insurance and flood insurance. The Company does not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan. For home purchase loans with LTV ratios at origination in excess of 85% but equal to or less than 90%, the Company generally requires private mortgage insurance. The Company offers a loan product allowing up to 95% LTV with no mortgage insurance for superior credit borrowers. LTV ratios in excess of 85% are not available for refinance transactions except for adjustable-rate, first mortgage loans and Home Ready loans. The Home Ready product requires private mortgage insurance on purchase transactions between 80.01% and 97% LTV and refinance transactions between 80.01% and 95% LTV. As of September 30, 2023, the Company had a total of $356.3 million of loans outstanding that were originated through the high LTV program. This program involves loans originated with higher interest rates than the Company's other residential real estate loans, and to qualify for this program the loan applicant must satisfy more stringent underwriting criteria (credit score, income qualification, and other criteria). Home Equity Loans and Home Equity Lines of Credit. The Company offers home equity loans and home equity lines of credit, which are primarily secured by a second mortgage on residences. The home equity product is offered in 25 states and the District of Columbia. Home equity lines of credit originated since 2013 require amortizing loan payments during the draw period. These offers were, and are, subject to certain property and credit performance conditions which, among other items, related to CLTV, geography, borrower income verification, minimum credit scores and draw period duration. At September 30, 2023 and 2022, home equity loans totaled $399.7 million, or 2.6%, and $261.0 million, or 1.8%, respectively, of total loans receivable (which included $68.8 million and $97.0 million, respectively, of home equity lines of credit which were in the amortization period and no longer eligible to be drawn upon and $9.5 million and $12.2 million of bridge loans), and home equity lines of credit totaled $2.63 billion, or 17.3%, and $2.37 billion, or 16.5%, respectively, of total loans receivable. Additionally, at September 30, 2023 and 2022, the undrawn amounts of home equity lines of credit totaled $4.70 billion and $4.08 billion, respectively. A bridge loan permits a borrower to utilize the existing equity in their current home to fund the purchase of a new home before the current home is sold. Bridge loans are originated for a one-year term, with no prepayment penalties. These loans have fixed interest rates, and are currently limited to a combined 80% LTV ratio (first and second mortgage liens). The Company charges a closing fee with respect to bridge loans. The Company originates its home equity loans and home equity lines of credit without application fees (except for bridge loans) or borrower-paid closing costs. Home equity loans are offered with fixed interest rates, are fully amortizing and have terms of up to 30 years. The Company’s home equity lines of credit are offered with adjustable rates of interest indexed to the Prime Rate, as reported in The Wall Street Journal. 12 The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of September 30, 2023. Home equity lines of credit in the draw period are reported according to geographical distribution. Home equity lines of credit in draw period (by state): Ohio Florida California Other (1) Total home equity lines of credit in draw period Home equity lines in repayment, home equity loans and bridge loans Total ______________________ Credit Exposure Principal Balance (Dollars in thousands) Percent Delinquent 90 days or More Mean CLTV Percent at Origination(2) Current Mean CLTV Percent(3) $ 2,169,190 $ 642,819 558,121 1,368,292 1,154,224 2,635,585 433,552 996,287 0.06 % 0.11 % 0.06 % 0.15 % 7,327,291 2,630,779 0.11 % 399,747 399,747 $ 7,727,038 $ 3,030,526 0.28 % 0.13 % 60 % 55 % 60 % 63 % 60 % 57 % 60 % 43 % 41 % 50 % 50 % 46 % 44 % 46 % (1) No other individual state has a committed or drawn balance greater than 10% of our total equity lending portfolio and 5% of total loans. (2) Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount. (3) Current Mean CLTV is based on best available first mortgage and property values as of September 30, 2023. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance. The principal balance of home equity lines of credit in the draw period that have a current mean CLTV over 80% or unknown is $9.8 million, or 0.4% at September 30, 2023. In recognition of previous past weakness in the housing market, we continue to conduct an expanded loan level evaluation of our home equity lines of credit which are delinquent 90 days or more. At September 30, 2023, 30.7% of the home equity lending portfolio was either in a first lien position (16.0%), in a subordinate (second) lien position behind a first lien that we held (12.3%) or behind a first lien that was held by a loan that we originated, sold and now service for others (2.4%). At September 30, 2023, 12.9% of the home equity line of credit portfolio in the draw period were making only the minimum payment on the outstanding line balance. Minimum payments include both a principal and interest component. Construction Loans. The Company originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Company’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Company offers construction/permanent loans with fixed or adjustable rates, and a current maximum loan-to-completed-appraised value ratio of 85%. At September 30, 2023, construction loans totaled $48.4 million, or 0.4% of total loans receivable. At September 30, 2023, the unadvanced portion of these construction loans totaled $25.8 million. Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. This is more likely to occur when home prices are falling. Loan Originations, Purchases, Sales, Participations and Servicing. Lending activities are primarily conducted by the Company’s loan personnel (all of whom are non-commissioned associates) operating at our main and branch office locations and at our loan production offices. All loans that the Company originates are underwritten pursuant to its policies and procedures, which, for real estate loans, are consistent with the ability to repay guidance provided by the CFPB. Loans 13 originated with the intent to sell and certain other long-term, fixed-rate loans, as described below, are originated using Fannie Mae processing and underwriting guidelines. The majority of loans, however, are originated using guidelines that are similar, but not identical to Fannie Mae processing and underwriting guidelines. The Company originates both adjustable-rate and fixed-rate loans and advertises extensively throughout its market area. Its ability to originate fixed- or adjustable-rate loans is dependent upon the relative consumer demand for such loans, which is affected by current market interest rates as well as anticipated future market interest rates. The Company’s loan origination and sales activity may be adversely affected by a rising interest rate environment or economic recession, which typically results in decreased loan demand. The Company’s residential real estate mortgage loan originations are generated by its in-house loan representatives, by direct mail solicitations, by referrals from existing or past customers, by referrals from local builders and real estate brokers, from calls to its telephone call center and from the internet. The Company also purchases first mortgage loans through a correspondent lending partnership. A vast majority of all loans originated are done so with the intent to hold. The Company later determines whether to sell or securitize the loans that it holds, after evaluating current and projected market interest rates, its interest rate risk objectives, its liquidity needs and other factors. During the fiscal year ended September 30, 2023, the Company sold, or committed to sell, to Fannie Mae, in either whole loan or security form, $77.2 million of long-term, fixed-rate residential real estate mortgage loans, all on a servicing retained basis. The Company has also previously sold to private parties, non-agency eligible, adjustable-rate loans on a servicing retained basis. Those sales evidenced the saleability of our loans that are not originated in accordance with agency specified procedures, including adjustable-rate loans. As described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Controlling Our Interest Rate Risk Exposure, only a portion of the Company's first mortgage loan originations and purchases are eligible for securitization and sale in Fannie Mae mortgage backed security form. The balance of loans held for sale was $3.3 million at September 30, 2023. In fiscal year 2022, the Company started a new program to originate loans with the intent to sell following a more traditional mortgage banking model including risk-based pricing and loan level price adjustments. The program is marketed under the name Mortgage Passport and is considered a division of the Association. Both purchase and refinance products are offered through Mortgage Passport in 19 states and the District of Columbia, excluding Ohio and Florida. The impact to the Company from the program to date is considered immaterial and therefore no breakout is provided. The Company also purchases fixed-rate and adjustable-rate, first mortgage loans originated in Ohio, Pennsylvania and North Carolina through a correspondent lending partnership. These loans are underwritten by the correspondent lender with generally the same standards as our originated portfolio using Fannie Mae processing and underwriting guidelines. During the fiscal year ended September 30, 2023, we purchased approximately $275.1 million of residential mortgage loans through our correspondent lending partnership. Historically, the Company has retained the servicing rights on all residential real estate mortgage loans that it has sold, and intends to continue this practice into the future. At September 30, 2023, the Company serviced loans owned by others with a principal balance of $1.93 billion. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. The Company retains a portion of the interest paid by the borrower on the loans it services as consideration for its servicing activities. Loan Approval Procedures and Authority. The Company’s lending activities follow written underwriting standards and loan origination procedures established by its Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the property that will secure the loan. To assess the borrower’s ability to repay, the Company reviews the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. The Company’s policies and loan approval limits are established by its Board of Directors. The Company’s Board of Directors has delegated authority to its Executive Committee (consisting of the Company’s Chief Executive Officer and two directors) to review and assign lending authorities to certain individuals of the Company to consider and approve loans within their designated authority. Residential real estate mortgage loans and construction loans require the approval of one individual with designated underwriting authority. The Company requires independent third-party valuations of real property. Appraisals are performed by independent licensed/certified appraisers. 14 Delinquent Loans. The following tables set forth the amortized cost in loan delinquencies by type, segregated by geographic location and duration of delinquency as of the dates indicated. The majority of our Home Today loan portfolio is secured by properties located in Ohio and there are no other loans with delinquent balances. There were no delinquencies in the construction loan portfolio for the fiscal years presented. September 30, 2023 Real estate loans: Residential Core Ohio Florida Other Total Residential Core Residential Home Today Home equity loans and lines of credit Ohio Florida California Other Total Home equity loans and lines of credit Total September 30, 2022 Real estate loans: Residential Core Ohio Florida Other Total Residential Core Residential Home Today Home equity loans and lines of credit Ohio Florida California Other Total Home equity loans and lines of credit Total Loans Delinquent For 30-89 Days 90 Days or More (Dollars in thousands) Total $ 2,616 $ 1,207 1,620 5,443 989 910 973 529 1,549 3,961 4,410 $ 1,340 2,518 8,268 855 600 813 790 1,673 3,876 $ 10,393 $ 12,999 $ 7,026 2,547 4,138 13,711 1,844 1,510 1,786 1,319 3,222 7,837 23,392 Loans Delinquent For 30-89 Days 90 Days or More (Dollars in thousands) Total $ $ 2,862 $ 1,009 345 4,216 2,111 630 438 427 900 2,395 8,722 $ 4,332 $ 1,066 3,883 9,281 861 679 694 444 504 2,321 12,463 $ 7,194 2,075 4,228 13,497 2,972 1,309 1,132 871 1,404 4,716 21,185 Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.09% of total net loans at September 30, 2023 and at September 30, 2022. The percentage of loans seriously delinquent to total net loans decreased in the residential Core portfolio from 0.06% to 0.05%. Such loans in the residential Home Today portfolio remained at 0.01%. Home equity loans and lines of credit portfolio increased from 0.02% to 0.03%. Although delinquencies remain at or near historic lows, recent economic trends and rising interest rates have led to increased early stage delinquencies in the home equity loans and lines of credit portfolio. Interest rates on home equity lines of credit are tied to the prime rate of interest which has increased significantly over the fiscal year, resulting in higher and less affordable monthly payments for some borrowers. Non-performing Assets and Restructured Loans. Within 15 days of a borrower’s delinquency, per the Company's collection procedures, it attempts personal, direct contact with the borrower to determine the reason for the delinquency, to ensure that the borrower correctly understands the terms of the loan and to emphasize the importance of making payments on or before the due date. If necessary, subsequent late charges and delinquent notices are issued and the borrower’s account will be 15 monitored on a regular basis thereafter. The Company also mails system-generated reminder notices on a monthly basis. When a loan is more than 30 days past due, the Company attempts to contact the borrower and develop a plan of repayment. By the 90th day of delinquency, the Company may recommend foreclosure. The loan will be evaluated based on collateral prior to the 180th day of delinquency. For further discussion on evaluating collateral-dependent loans, see Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Loans are placed in non-accrual status when they are contractually 90 days or more past due or if collection of principal or interest in full is in doubt. Loans restructured in TDRs that were in non-accrual status prior to the restructurings remain in non- accrual status for a minimum of six months after restructuring. Loans with a partial charge-off remain in non-accrual until, at a minimum, the loss is recovered. Additionally, home equity loans and lines of credit which are subordinate to a first mortgage lien where the customer is severely delinquent and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status. For discussion on interest recognition and further discussion on non-accrual, see Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The table below sets forth the amortized costs and categories of our non-performing assets and TDRs at the dates indicated. There were no construction loans reported as non-accrual for the fiscal years presented. Non-accrual loans: Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Total non-accrual loans(1)(2) Real estate owned Total non-performing assets Ratios: Total non-accrual loans to total loans Total non-accrual loans to total assets Total non-performing assets to total assets TDRs (not included in non-accrual loans above): Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Total ____________________ September 30, 2023 2022 (Dollars in thousands) $ 19,414 $ 22,644 4,623 7,877 31,914 1,444 6,037 6,925 35,606 1,191 $ 33,358 $ 36,797 0.21 % 0.19 % 0.20 % 0.25 % 0.23 % 0.23 % $ $ 40,894 17,184 19,775 77,853 $ $ 43,101 18,380 22,060 83,541 (1) At September 30, 2023 and 2022, the totals include $17.8 million and $21.9 million, respectively, in TDRs that are less than 90 days past due but included with non-accrual loans for a minimum period of six months from the restructuring date due to their non-accrual status or forbearance plan prior to restructuring, because of a prior partial charge-off or because all borrowers have filed Chapter 7 bankruptcy and have not reaffirmed or dismissed. (2) At September 30, 2023 and 2022, the totals include $3.7 million and $3.6 million in TDRs that are 90 days or more past due, respectively. Non-accrual loans continue to decline primarily due to a decrease in the population of TDRs, in general, and those moved to accruing after a sufficient period of demonstrated payment performance. Since many of the accounts exiting the non-accrual population are TDRs paying as agreed or paid in full and closed, we do not expect any material impact to interest income or the allowance once the non-accrual population stabilizes. Collateral-Dependent Loans. A loan is considered collateral-dependent when, based on current information and events, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral or foreclosure is probable. For discussion on collateral-dependent measurement, see Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 The amortized cost of collateral-dependent loans includes accruing TDRs and loans that are returned to accrual status when contractual payments are less than 90 days past due. These loans continue to be individually evaluated based on collateral until, at a minimum, contractual payments are less than 30 days past due. Also, the amortized cost of non-accrual loans includes loans that are not included in the amortized cost of collateral-dependent loans because they are included in loans collectively evaluated for credit loss. The table below sets forth a reconciliation of the amortized costs and categories between non-accrual loans and collateral- dependent loans at the dates indicated. Non-Accrual Loans Accruing Collateral-Dependent TDRs Other Accruing Collateral-Dependent Loans Less: Loans Collectively Evaluated Total Collateral-Dependent Loans For the Years Ended September 30, 2023 2022 (Dollars in thousands) 31,914 $ 4,299 6,663 (4,647) 38,229 $ 35,606 7,279 6,426 (2,190) 47,121 $ $ In response to the economic challenges facing many borrowers, we continue to restructure loans. Loan restructuring is a method used to help families keep their homes and preserve neighborhoods. This involves making changes to the borrowers’ loan terms through interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions including those beyond the original agreement; capitalization of delinquent payments in special situations; or some combination of the aforementioned. Loans discharged through Chapter 7 bankruptcy are also reported as TDRs per OCC interpretive guidance. For discussion on TDR measurement, see Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. We had $99.5 million of TDRs (accrual and non-accrual) recorded at September 30, 2023, of which $53.9 million are Residential Core, $21.2 million are Home Today and $24.4 million are Home equity loans and lines of credit. This is a $9.5 million decrease in the amortized cost of TDRs from September 30, 2022. 17 The following table sets forth the amortized cost of accrual and non-accrual TDRs, by the types of concessions granted, as of September 30, 2023. Initial concessions granted by loans restructured as TDRs can include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also can occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company. Accrual Residential Core Residential Home Today Home equity loans and lines of credit Total Non-Accrual, Performing Residential Core Residential Home Today Home equity loans and lines of credit Total Non-Accrual, Non-Performing Residential Core Residential Home Today Home equity loans and lines of credit Total Total TDRs Residential Core Residential Home Today Home equity loans and lines of credit Total Initial Restructuring Multiple Restructurings Bankruptcy Total (Dollars in thousands) $ $ $ $ $ $ $ $ 26,229 $ 8,903 18,536 53,668 $ 1,363 $ 460 1,540 3,363 $ 10,342 $ 7,485 966 18,793 $ 4,304 $ 2,270 1,443 8,017 $ 4,323 $ 796 273 5,392 $ 5,029 $ 833 606 6,468 $ 954 $ 1,084 $ 225 $ 27 987 359 51 62 — 1,968 $ 1,494 $ 287 $ 28,546 $ 15,730 $ 9,577 $ 9,390 21,063 10,114 2,460 1,691 879 58,999 $ 28,304 $ 12,147 $ 40,894 17,184 19,775 77,853 10,696 3,563 3,589 17,848 2,263 448 1,038 3,749 53,853 21,195 24,402 99,450 TDRs in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan was not accruing interest or in a forbearance plan at the time of restructuring, continues to not accrue interest, and is performing according to the terms of the restructuring; but it has not been current for at least six consecutive months since its restructuring, has a partial charge-off, or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status, where all borrowers have filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring. Real Estate Owned. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until sold. When property is acquired, it is recorded at the estimated fair market value at the date of foreclosure, less estimated costs to sell, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions. Subsequent to acquisition, real estate owned is carried at the lower of the cost basis or estimated fair market value, less estimated costs to sell. Increases in the fair market value are recognized through income not exceeding the valuation allowance. Holding costs and declines in estimated fair market value result in charges to expense after acquisition. At September 30, 2023, we had $1.4 million in real estate owned. Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current payment capacity of the borrower or the collateral pledged has a defined weakness that jeopardizes the liquidation of the debt. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or 18 improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve management's attention and may result in further deterioration in their repayment prospects and/or the Company's credit position, are required to be designated as special mention. When assets meet the classification criteria for either substandard or doubtful, they exhibit similar risk characteristics that result in expected credit losses through the model outputs or qualitative factors. As a result of the allowance analysis, a portion of the credit loss allowance is allocated to such assets. The allowance for credit losses is the amount estimated by management to represent the lifetime losses in our loan portfolio and off-balance sheet commitments. When we classify a problem asset as loss, we charge-off that portion of the asset that is uncollectible. Our determinations as to the classification of our assets and the amount of our credit loss allowances are subject to review by the Company's primary federal regulator, the OCC, which can require that we establish additional credit loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of assets at September 30, 2023, the amortized cost of classified assets consists of substandard assets of $44.3 million, including $1.4 million of real estate owned, and $5.3 million of assets designated special mention. As of September 30, 2023, there were no individual assets with balances exceeding $1.0 million that were classified as substandard. Substandard assets at September 30, 2023 include $12.4 million of loans 90 or more days past due and $37.3 million of loans less than 90 days past due displaying a weakness sufficient to warrant an adverse classification. Of the $37.3 million of loans less than 90 days past due, $29.2 million are TDRs, and the remaining $8.1 million are non-TDRs primarily made up of loans that had their forbearance term extended greater than 12 months, regardless of forbearance plan status at September 30, 2023. Allowance for Credit Losses. We provide for credit losses based on a life of loan methodology. Accordingly, all credit losses are charged to, and all recoveries are credited to, the related allowance. Additions to the allowance for credit losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating lifetime credit losses. We regularly review the loan portfolio and off-balance sheet exposures and make provisions (or releases) for losses in order to maintain the allowance for credit losses in accordance with U.S. GAAP. Our allowance for credit losses consists of three components: (1) individual valuation allowances (IVAs) established for any loans dependent on cash flows, such as performing TDRs; (2) general valuation allowances (GVAs) for loans, which are comprised of quantitative GVAs, general allowances for credit losses for each loan type based on historical loan loss experience and qualitative GVAs, which are adjustments to the quantitative GVAs, maintained to cover uncertainties that affect the estimate of expected credit losses for each loan type; and (3) GVAs for off-balance sheet credit exposures, which are comprised of expected lifetime losses on unfunded loan commitments to extend credit where the obligations are not unconditionally cancellable. The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include: • changes in lending policies and procedures including underwriting standards, collection, charge-off or recovery practices; • • • • management's view of changes in national, regional, and local economic and business conditions and trends including treasury yields, housing market factors and trends, such as the status of loans in foreclosure, real estate in judgment and real estate owned, and unemployment statistics and trends and how it aligns with economic modeling forecasts; changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw period and adjustable-rate mortgage loans nearing a rate reset; changes in the experience, ability or depth of lending management; changes in the volume or severity of past due loans, volume of non-accrual loans, or the volume and severity of adversely classified loans including the trending of delinquency statistics (both current and historical), historical loan loss experience and trends, the frequency and magnitude of multiple restructurings of loans previously the subject of TDRs, and uncertainty surrounding borrowers’ ability to recover from temporary hardships for which short-term loan restructurings are granted; changes in the quality of the loan review system; changes in the value of the underlying collateral including asset disposition loss statistics (both current and historical) and the trending of those statistics, and additional charge-offs and recoveries on individually reviewed loans; • • 19 • • • existence of any concentrations of credit; effect of other external factors such as competition, market interest rate changes or legal and regulatory requirements including market conditions and regulatory directives that impact the entire financial services industry; and limitations within our models to predict life of loan net losses. When loan restructurings qualify as TDRs and the loans are performing according to the terms of the restructuring, we record an IVA based on the present value of expected future cash flows, which includes a factor for potential subsequent defaults, discounted at the effective interest rate of the original loan contract. Potential defaults are distinguished from multiple restructurings as borrowers who default are generally not eligible for subsequent restructurings. At September 30, 2023, the balance of such individual valuation allowances was $9.5 million. In instances when loans require multiple restructurings, additional valuation allowances may be required. The new valuation allowance on a loan that has multiple restructurings is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the restructured agreement. The estimated exposure for additional loss related to multiple loan restructurings as well as additional losses on individually reviewed TDRs are included as a $1.4 million component of our qualitative GVA at September 30, 2023. Home equity loans and lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and credit lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and decreasing housing prices, these higher loan-to-value ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has a vested interest in keeping the loan current when compared to a borrower with little or no equity in the property. In light of the past weakness in the housing market and uncertainty with respect to future employment levels and economic prospects, we conduct an expanded loan level evaluation of our home equity loans and lines of credit, including bridge loans used to aid borrowers in buying a new home before selling their old one, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. We have established an allowance for our unfunded commitments on this portfolio, which is recorded in other liabilities. Our home equity loans and lines of credit portfolio continues to comprise a significant portion of our gross charge-offs. At September 30, 2023, we had an amortized cost of $3.07 billion in home equity loans and home equity lines of credit outstanding, of which $3.9 million, or 0.1%, were delinquent 90 days or more. The allowance for credit losses is evaluated based upon the combined total of the quantitative and qualitative GVAs and IVAs. Periodically, the carrying value of loans and factors impacting our credit loss analysis are evaluated and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions. For more information regarding the allowance for credit losses, see Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. 20 The following table sets forth activity for credit losses segregated by geographic location for the periods indicated. The majority of our Home Today loan portfolio is secured by properties located in Ohio, and therefore was not segregated by state. Allowance balance for credit losses on loans (beginning of the year) Adoption of ASU 2016-13 for allowance for credit losses on loans Charge-offs on real estate loans: Residential Core Ohio Florida Other Total Residential Core Total Residential Home Today Home equity loans and lines of credit Ohio Florida California Other Total Home equity loans and lines of credit Total charge-offs Recoveries on real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Construction Total recoveries Net recoveries Release of allowance for credit losses on loans Allowance balance for loans (end of the year) At or For the Years Ended September 30, 2023 2022 2021 (Dollars in thousands) $ 72,895 — $ 64,289 — $ 46,937 24,095 257 — — 257 320 293 78 14 280 665 1,242 1,126 2,451 4,079 — 7,656 6,414 (1,994) 77,315 $ 234 — 13 247 249 625 154 29 146 954 1,450 2,932 2,648 5,352 175 11,107 9,657 (1,051) 72,895 $ 1,587 377 1 1,965 552 1,112 784 168 632 2,696 5,213 2,385 2,362 5,621 20 10,388 5,175 (11,918) 64,289 $ Allowance balance for credit losses on unfunded commitments (beginning of the year) Adoption of ASU 2016-13 for allowance for credit losses on unfunded commitments Provision for credit losses on unfunded commitments Allowance balance for unfunded loan commitments (end of the year) Allowance balance for all credit losses (end of the year) Ratios: Allowance for credit losses to non-accrual loans at end of the year Allowance for credit losses to the total amortized cost in loans at end of the year $ 27,021 $ 24,970 $ — — 494 27,515 104,830 $ $ — 2,051 27,021 99,916 $ 22,052 2,918 24,970 89,259 242.26 % 204.73 % 145.96 % 0.51 % 0.51 % 0.51 % 21 The following table sets forth additional information with respect to net recoveries (charge-offs) by category for the periods indicated. Net recoveries to average loans outstanding during the year Real estate loans: Residential Core Residential Home Today Home Equity loans and lines of credit Total net recoveries to average loans outstanding For the Years Ended September 30, 2023 2022 2021 (Dollars in thousands) 0.01 % 0.01 % 0.02 % 0.04 % 0.02 % 0.02 % 0.03 % 0.07 % — % 0.02 % 0.02 % 0.04 % We continue to evaluate loans becoming delinquent for potential losses and record provisions for the estimate of those losses. We reported net recoveries in each quarter for the past five years, primarily due to improvements in the values of properties used to secure loans that were fully or partially charged off after the 2008 collapse of the housing market. Charge- offs are recognized on loans identified as collateral-dependent and subject to individual review when the collateral value does not sufficiently support full repayment of the obligation. Recoveries are recognized on previously charged-off loans as borrowers perform their repayment of the obligations or as loans with improved collateral positions reach final resolution. During the fiscal year ended September 30, 2023, recoveries exceeded loan charge-offs by $6.4 million. Gross charge-offs decreased and delinquent loans continue to be evaluated for potential losses, and provisions are recorded for the estimate of potential losses of those loans. Subject to changes in the economic environment, a moderate level of charge-offs are expected as delinquent loans are resolved in the future and uncollected balances are charged against the allowance. Allocation of Allowance for Credit Losses. The following table sets forth the allowance for credit losses allocated by loan category, the percent of allowance in each category to the total allowance on loans, and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. This table does not include allowance for credit losses on unfunded loan commitments, which are primarily related to undrawn home equity lines of credit. At September 30, 2023 Percent of Allowance to Total Allowance Percent of Loans in Category to Total Loans Amount 2022 Percent of Allowance to Total Allowance Percent of Loans in Category to Total Loans Amount (Dollars in thousands) $ 55,375 71.6 % 79.4 % $ 53,506 73.4 % 80.4 % Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Construction (1,236) 23,047 129 (1.6) 29.8 0.2 0.3 19.9 0.4 (997) 20,032 354 (1.4) 27.5 0.5 0.4 18.4 0.8 Allowance for credit losses on loans $ 77,315 100.0 % 100.0 % $ 72,895 100.0 % 100.0 % During the fiscal year ended September 30, 2023, the total allowance for credit losses increased to $104.8 million, from $99.9 million at September 30, 2022. The total allowance for credit losses is comprised of the asset portion, which is applied to the loan portfolio and the liability portion, which is applied to off-balance sheet exposures, primarily related to undrawn equity exposures. During the fiscal year ended September 30, 2023 the asset and liability portions of the total allowance increased to $77.3 million from $72.9 million and to $27.5 million from $27.0 million, respectively. We recorded a $1.5 million net release for credit losses for the year, consisting of a $2.0 million release from credit losses on loans and a $0.5 million reclassification to credit losses on off-balance sheet exposures. Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. Changes in the allowance for credit losses on loan balances during the fiscal year ended 22 September 30, 2023 were generally related to new growth in the residential Core and home equity loans and lines of credit portfolios, partially offset by some deterioration in the economic forecasts. The amortized cost of the residential Core portfolio increased 4.5%, or $543.7 million, and its total allowance increased 3.5% or $1.9 million as of September 30, 2023 compared to September 30, 2022. The amortized cost of the home equity loans and lines of credit portfolio increased 15.0%, or $401.1 million, and its total allowance increased 15.1% to $23.0 million from $20.0 million at September 30, 2022. As we are no longer originating loans under our Home Today program, there is an expected net recovery position for this portfolio which was $1.2 million at September 30, 2023 and $1.0 million at September 30, 2022. Under the CECL methodology, the life of loan concept allows for qualitative adjustments for the expected future recoveries of previously charged-off loans, which is driving the allowance balance for the Home Today loans negative. Refer to the "Activity in the Allowances for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 5. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for more information. The allowance for credit losses represents the estimate of lifetime loss in our loan portfolio and unfunded loan commitments. Our analysis for evaluating the adequacy of and the appropriateness of our allowance for credit losses is continually refined as relevant information, relating to past events, current conditions and supportable forecasts become available. During the years ended September 30, 2023 and 2022, no material changes were made to the allowance for credit losses. Investments The Association’s Board of Directors is responsible for establishing and overseeing the Association’s investment policy. The investment policy is reviewed at least annually by management and any changes to the policy are recommended to the Board of Directors, or a committee thereof, and are subject to its approval. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for pledging requirements, and consistency with our interest rate risk management strategy. The Association’s Investment Committee, which consists of the Association's chief operating officer, chief financial officer and other members of management, oversees the Association's investing activities and strategies. The portfolio manager is responsible for making securities portfolio decisions in accordance with established policies. The portfolio manager has the authority to purchase and sell securities within specific guidelines established in the investment policy, but historically the portfolio manager has executed purchases only after extensive discussions with other Investment Committee members. All transactions are formally reviewed by the Investment Committee at least quarterly. Any investment which, subsequent to its purchase, fails to meet the guidelines of the policy is reported to the Investment Committee, who decides whether to hold or sell the investment. The Association’s investment policy requires that the Association invest primarily in debt securities issued by the U.S. Government, agencies of the U.S. Government, and government-sponsored entities, which include Fannie Mae and Freddie Mac. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations and real estate mortgage investment conduits issued or backed by securities issued by these governmental agencies and government-sponsored entities. The investment policy also permits investments in asset-backed securities, banker’s acceptances, money market funds, term federal funds, repurchase agreements and reverse repurchase agreements. The Association’s investment policy does not permit investment in municipal bonds, corporate debt obligations, preferred or common stock of government agencies or equity securities other than the Association's required investment in the common stock of the FHLB of Cincinnati. As of September 30, 2023, we held no asset-backed securities or securities with sub-prime credit risk exposure, nor did we hold any banker’s acceptances, term federal funds, repurchase agreements or reverse repurchase agreements. As a federal savings association, the Association is not permitted to invest in equity securities. This general restriction does not apply to the Company. The Association’s investment policy permits the use of interest rate agreements (caps, floors and collars) and interest rate exchange contracts (swaps) in managing our interest rate risk exposure. The use of financial futures, however, is prohibited without specific approval from its Board of Directors. FASB ASC 320, “Investments-Debt and Equity Securities,” requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our ability and intent. Securities designated as available- for- sale are reported at fair value, while securities designated as held to maturity are reported at amortized cost. As a result of previous guidance from the Company's primary regulator that indicated that the Company's reported balance of liquid assets could not include any investment security not classified as available- for- sale, all investment securities held by the Company are classified as available for sale. We do not have a trading portfolio. 23 The fair value of our investment portfolio at September 30, 2023 consisted of $0.8 million in fixed-rate securities guaranteed by Fannie Mae, $443.0 million of REMICs collateralized only by securities guaranteed by Fannie Mae, $1.0 million of securities guaranteed by Freddie Mac, and $63.5 million of U.S. Government obligations. U.S. Government Obligations. While U.S. Government securities generally provide lower yields than other investment options authorized in the Association's and Company's investment policies, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and interest rate exchange contracts (swaps) and as an interest rate risk hedge in the event of significant mortgage loan prepayments. Mortgage-Backed Securities. We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae. The U.S. Treasury Department has established financing agreements to ensure that Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed. Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities (generally Ginnie Mae, Fannie Mae and Freddie Mac) pool and resell the participation interests in the form of securities to investors such as the Association, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. While there has been significant disruption in the demand for private issuer mortgage-backed securities, the U.S. Treasury support for Fannie Mae and Freddie Mac guarantees has maintained an orderly market for the mortgage-backed securities the Company typically purchases. In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations. Investments in mortgage-backed securities involve a risk that the timing of actual payments will be earlier or later than the timing estimated when the mortgage-backed security was purchased, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modifications that could cause amortization or accretion adjustments. REMICs are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage- backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders. Sources of Funds General. Deposits traditionally have been the primary source of funds for the Association’s lending and investment activities. The Association also borrows, primarily from the FHLB of Cincinnati, to supplement cash flow, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage its cost of funds. Additional sources of funds are borrowings from the FRB-Cleveland Discount Window, scheduled loan payments, maturing investments, loan prepayments, collateralized wholesale borrowings, Fed Fund purchases, income on other earning assets, the proceeds from loan sales, and brokered deposits. As a result of unfavorable market conditions, proceeds from loan sales decreased during fiscal year 2023, which required an increase of borrowings from the FHLB of Cincinnati. Deposits. The Association obtains deposits primarily from the areas in which its branch offices are located, as well as from its customer service call center, its internet website, and from brokered deposits. It relies on its competitive pricing, convenient locations, and customer service to attract and retain its non-brokered deposits. It offers a variety of retail deposit accounts with a range of interest rates and terms. Its retail deposit accounts consist of savings accounts, money market accounts, checking accounts, CDs, individual retirement accounts, and other qualified plan accounts. Interest rates paid, maturity terms, service fees, and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, interest rates paid by competitors, and our deposit growth goals. At September 30, 2023, deposits totaled $9.45 billion. Checking accounts totaled $983.4 million (including $891.0 million of interest-bearing checking accounts) and savings accounts totaled $1.81 billion (including $1.72 billion of higher yield savings accounts and MMKs). At September 30, 2023, the Association had a total of $6.65 billion in CDs (including $1.16 24 billion of brokered CDs), of which $3.42 billion had remaining maturities of one year or less. Based on historical experience and its current pricing strategy, management believes the Association will retain a large portion of these accounts upon maturity. The following table sets forth the distribution of the Association’s average total deposit accounts, by account type, for the fiscal years indicated. Additional details on deposit accounts can be found in Note 9. DEPOSITS of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2023 2022 2021 For the Years Ended September 30, Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate (Dollars in thousands) Deposit type: Checking Savings Certificates of deposit Total Deposits $ 1,093,036 12.1 % 0.56 % $ 1,326,882 14.7 % 0.32 % $ 1,079,699 11.8 % 0.11 % 1,798,663 20.0 % 1.37 % 1,859,990 20.7 % 0.24 % 1,742,042 19.0 % 0.17 % 6,123,979 67.9 % 2.34 % 5,826,286 64.6 % 1.17 % 6,339,412 69.2 % 1.47 % $ 9,015,678 100.0 % 1.93 % $ 9,013,158 100.0 % 0.85 % $ 9,161,153 100.0 % 1.06 % The following table sets forth the distribution of the Association’s total deposit accounts, by account type, at September 30, 2023. Deposit type Interest Bearing: Checking Savings accounts, excluding money market accounts Money market accounts Certificates of deposit, including accrued interest Total Deposits At September 30, 2023 Balance Percent (Dollars in thousands) Weighted Average Cost of Funds $ 983,396 1,460,601 346,479 6,659,344 $ 9,449,820 10.4 % 15.5 % 3.7 % 70.4 % 100.0 % 0.05 % 1.49 % 2.62 % 3.47 % 2.77 % As of September 30, 2023 and September 30, 2022, the total amount of the Association's uninsured deposits were $322.5 million and $366.7 million, respectively. As of September 30, 2023, the aggregate amount of the Association’s outstanding certificate of deposits in amounts greater than $250 thousand was approximately $230.9 million. The following table sets forth the maturity of those CDs as of September 30, 2023. Three months or less Over three months through six months Over six months through one year More than one year Total At September 30, 2023 (In thousands) $ $ 35,616 38,758 16,466 140,029 230,869 Borrowings. At September 30, 2023, the Association had $5.27 billion of borrowings outstanding, consisting of $5.25 billion from the FHLB of Cincinnati and $22.8 million of accrued interest. Borrowings from the FHLB of Cincinnati are secured by the Association’s investment in the common stock of the FHLB of Cincinnati as well as by a blanket pledge of its mortgage portfolio not otherwise pledged. Our current, maximum borrowing capacity with the FHLB of Cincinnati is $6.63 billion. The Association also has the ability to purchase overnight Fed Funds up to $585.0 million through arrangements with other institutions. The ability to borrow from the FRB-Cleveland Discount Window is also available to the Association and is secured by a pledge of specific loans in the Association’s mortgage portfolio. At September 30, 2023, the Association had the 25 capacity to borrow up to $126.4 million from the FRB-Cleveland. A maturity schedule and available borrowing capacity schedule can be found in Note 10. BORROWED FUNDS of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The following tables set forth information relating to a category of short-term borrowings for which the average balance outstanding during the period was at least 30% of shareholders' equity at the end of each period shown. There are no borrowings with original terms between 30 and 90 days. Borrowings (30 days and under): Balance at end of year Maximum outstanding at any month-end Average balance during year Average interest rate during the fiscal year Weighted average interest rate at end of year Borrowings (90 days to 12 months): Balance at end of year Maximum outstanding at any month-end Average balance during year Average interest rate during the fiscal year Weighted average interest rate at end of year Federal Taxation At or For the Fiscal Years Ended September 30, 2023 2022 2021 (Dollars in thousands) $ 592,000 $ 1,806,000 $ 810,263 $2,000,000 $ 2,000,000 $ 682,487 $ $ $ 4.16 % 5.38 % 1.59 % 3.04 % — — — — % — % At or For the Fiscal Years Ended September 30, 2023 2022 2021 (Dollars in thousands) $ 3,150,000 $ 3,600,000 $ 2,668,420 $ 1,550,000 $ 2,425,000 $ 2,000,323 $ 2,450,000 $ 2,925,000 $ 2,693,533 5.00 % 5.58 % 0.77 % 3.12 % 0.23 % 0.23 % General. The Company and the Association are subject to federal income taxation in the same general manner as other corporations, with certain exceptions. Prior to the completion of our initial public stock offering in 2007, the Company and the Association were included as part of Third Federal Savings, MHC’s consolidated tax group. However, upon completion of the offering, the Company and the Association were no longer a part of Third Federal Savings, MHC’s consolidated tax group because Third Federal Savings, MHC no longer owned at least 80% of the common stock of the Company. As a result of the Company's stock repurchase program which reduced the number of outstanding shares of the Company, at September 30, 2023, Third Federal Savings, MHC, owned 81.01% of the common stock of the Company and the Company and the Association can, again, be a part of Third Federal Savings, MHC’s consolidated tax group. Beginning on September 30, 2007 and for each subsequent fiscal year thereafter, the Company has filed consolidated tax returns with the Association and Third Capital Inc., its wholly-owned subsidiaries. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or its subsidiaries. Bad Debt Reserves. Historically, the Third Federal Savings, MHC consolidated group used the specific charge-off method to account for bad debt deductions for income tax purposes, and the Company has used and intends to use the specific charge- off method to account for tax bad debt deductions in the future. Taxable Distributions and Recapture. Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if the Association failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain subject to recapture if the Association makes certain non-dividend distributions, repurchases any of its common stock, pays dividends in excess of earnings and profits, or fails to qualify as a bank for tax purposes. 26 At September 30, 2023, the total federal pre-base year bad debt reserve of the Association was approximately $105.0 million. State Taxation Following its initial public stock offering in 2007, the Company converted from a qualified passive investment company domiciled in the State of Delaware to a qualified holding company in Ohio. The Third Federal Savings, MHC consolidated group is subject to the Ohio Financial Institutions Tax. The Financial Institutions Tax is based on total equity capital apportioned to Ohio using a single gross receipts factor. Ohio equity capital is taxed at a three-tiered rate of 0.8% on the first $200 million, 0.4% on amounts greater than $200 million and less than or equal to $1.3 billion, and 0.25% on amounts greater than $1.3 billion. SUPERVISION AND REGULATION General The Company is a savings and loan holding company, and is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of, the FRS. The Company is also subject to the rules and regulations of the SEC under the federal securities laws. The Association is a federal savings association that is currently examined and supervised by the OCC and the CFPB, and is subject to examination by the FDIC under certain circumstances. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market risk. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the public. The Association also is a member of and owns stock in the FHLB of Cincinnati, which is one of the eleven regional banks in the FHLB System. The Association is also regulated to a lesser extent by the FRS. The OCC will examine the Association and prepare reports for the consideration of the Association’s Board of Directors on any operating deficiencies. The CFPB has examination and enforcement authority over the Association with respect to consumer protection laws and regulations. The Association’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Association’s mortgage documents. Any change in these laws or regulations, whether by the FDIC, OCC, FRS, CFPB or Congress, could have a material impact on the Company, the Association, and their operations. Certain statutes and regulations that are applicable to the Association and the Company are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Association and the Company, and is qualified in its entirety by reference to the actual statutes and regulations. Federal Banking Regulation Business Activities. A federal savings association derives its lending and investment powers from the HOLA, and federal regulations. Under these laws and regulations, the Association may invest in mortgage loans secured by residential real estate without limitations as a percentage of assets, and may invest in non-residential real estate loans up to 400% of capital in the aggregate. The Association may also invest in commercial business loans up to 20% of assets in the aggregate and consumer loans up to 35% of assets in the aggregate, and in certain types of debt securities and certain other assets. The Association may also establish subsidiaries that may engage in certain activities not otherwise permissible for an association, including real estate investment and securities and insurance brokerage. A federal savings association may elect to exercise national bank powers without converting to a national bank charter. Among other things, the election allows a federal savings association to engage in commercial and commercial real estate lending without the aggregate limits applicable to federal savings associations. By exercising the election, the federal savings association also becomes subject to many of the same duties, restrictions, liabilities, conditions and limitations applicable to national banks, some of which are more restrictive than those applicable to federal savings associations. A federal savings association making the election retains its federal savings association charter and continues to be treated as a federal savings association for purposes of corporate governance. The election is available to federal savings associations that had total consolidated assets of $20 billion or less as of December 31, 2017. The Association has not exercised the election as of September 30, 2023. 27 Capital Requirements. Federal regulations require FDIC insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio, and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk- weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long- term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of AOCI, up to 45% of net unrealized gains on available for sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available for sale- securities). The Association exercised its opt-out election during 2015. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four- family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors. Federal savings associations must also meet a statutory “tangible capital” standard of 1.5% of total adjusted assets. Tangible capital is generally defined as Tier 1 capital for this purpose. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% in addition to the minimum capital requirements. At September 30, 2023, the Association exceeded the fully phased in regulatory requirement for the "capital conservation buffer." In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary. As presented in Note 3. REGULATORY MATTERS of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, at September 30, 2023, the Association exceeded all regulatory capital requirements to be considered “Well Capitalized.” Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2023, the Association was in compliance with the loans-to-one borrower limitations. Qualified Thrift Lender Test. As a federal savings association, the Association must satisfy the qualified thrift lender test. Under the QTL test, the Association must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a federal savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the federal savings association’s business. The Association also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code. A federal savings association that fails the QTL test must operate under specified restrictions. Under the DFA, non- compliance with the QTL test may subject the Association to agency enforcement action for a violation of law. At September 30, 2023, the Association satisfied the QTL test. 28 Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the capital account. A federal savings association must file an application with the OCC for approval of a capital distribution if: • • • • the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years; the savings association would not be at least adequately capitalized following the distribution; the distribution would violate any applicable statute, regulation, agreement or condition imposed by a regulator; or the savings association is not eligible for expedited treatment of its filings. Regardless of whether an application is required, every federal savings association that is a subsidiary of a holding company must still file a notice with the FRS at least 30 days before the board of directors declares a dividend or approves a capital distribution. The OCC and the FRS have established similar criteria for approving an application or notice, and may disapprove an application or notice if: • • • the savings association would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statute, regulation or agreement. In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if the institution would be undercapitalized after the distribution. The Association, in compliance with the preceding requirements, paid a $40 million cash dividend to the Company during the fiscal year ended September 30, 2023, a $56 million cash dividend to the Company during the fiscal year ended September 30, 2022 and a $55 million cash dividend to the Company during the fiscal year ended September 30, 2021. There were no dividends paid to the Company by Third Capital, the Company's other wholly owned subsidiary, during the fiscal years ended September 30, 2023, 2022 or 2021. The Company's eighth stock repurchase program, for the repurchase of 10,000,000 shares of its common stock, was announced on October 27, 2016 and began on January 6, 2017. As of September 30, 2023, 5,191,951 shares remain to be purchased under the program. Under current FRS regulations, Third Federal Savings, MHC is required to obtain the approval of its members (depositors and certain loan customers of the Association) every 12 months to enable Third Federal Savings, MHC to waive its right to receive dividends on the Company’s common stock that Third Federal Savings, MHC owns. Starting in 2014, Third Federal Savings, MHC has received this approval of its members at every meeting held. Third Federal Savings, MHC has the approval to waive the receipt of dividends up to an aggregate of $1.13 per share on the common stock of the Company for the 12 months following the special meeting of members held on July 11, 2023. Third Federal Savings, MHC waived its right to receive a $0.2825 per share dividend payment on September 26, 2023. As a result of the 2022, 2021, and 2020 approvals, Third Federal Savings, MHC previously waived its right to receive an aggregate of $1.13 per share on common stock for the period ended June 30, 2023, $1.13 per share for the period ended June 30, 2022, and $1.12 per share for the period ended June 30, 2021. Liquidity. A federal savings association is required to identify, measure, monitor and control its funding and liquidity risk and maintain a sufficient amount of liquid assets to ensure its safe and sound operation. The Association maintains a liquid asset portfolio comprised of agency securities that are collateralized by mortgages, in addition to cash and cash equivalents, to maintain sufficient liquidity to fund business operations. Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility under the CRA and federal regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings association, the OCC is required to assess the savings association’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A federal savings association’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications such as branches, mergers, minority stock offerings or second-step conversion, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and/or the Department of Justice. In March 2021, the Association received a "Needs to Improve" CRA rating in its most recent federal evaluation dated February 24, 2020. 29 On October 24, 2023, the FDIC, the Federal Reserve and the OCC released a final rule revising the framework used to evaluate banks' records of community reinvestment under the CRA. Under the revised framework, banks with assets of at least $2 billion, such as the Association, are considered large banks and will have their retail lending, retail services and products, community development financing, and community development services subject to periodic evaluation. Depending on a large bank's geographic concentrations of lending, the evaluation of retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment areas in which the bank has deposit- taking facilities. The rule becomes effective April 1, 2024. Most provisions of the final rule will apply beginning January 1, 2026, and the remaining provisions will apply beginning January 1, 2027. The Association is evaluating the impact of the final rule. Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. An affiliate includes a company that controls, is controlled by, or is under common control with an insured depository institution such as the Association. Third Federal Savings, MHC and the Company are affiliates of the Association. In general, specified covered transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, covered transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to 130% of the amount of the transaction must be provided by affiliates in order to receive loans from the insured depository institution. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are substantially the same or at least as favorable to the institution as comparable transactions with non-affiliates. Federal savings associations are required to maintain detailed records of all transactions with affiliates. The Association’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the FRS. Among other things, these provisions require that extensions of credit to insiders: (i) subject to certain exceptions for loan programs made available to all employees, be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and (ii) do not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Association’s capital. In addition, extensions of credit in excess of certain limits must be approved by the Association’s Board of Directors. Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has the authority to bring enforcement action against all “institution-affiliated parties,” a term that includes shareholders who participate in the affairs of the association, as well as attorneys, appraisers and accountants who knowingly or recklessly participate in violations of law or regulation, breaches of fiduciary duty, or unsafe or unsound practices. Formal enforcement actions by the OCC may include issuance of a capital directive, formal agreement, or cease and desist order against institutions, and can also include the removal of officers and/or directors of the institution. Civil money penalties can be assessed for various types of conduct against the institution and/or its officers and directors. The maximum civil money penalties that can be assessed are generally based on the type and severity of the violation, unsafe and unsound practice or other action, and are adjusted annually for inflation. The OCC can appoint receivers and conservators for the institutions it supervises if certain circumstances are met. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular federal savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances. Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems, audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to 30 submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and authorized to take supervisory actions against undercapitalized federal savings associations. For this purpose, a federal savings association is placed in one of the following five categories based on its capital: • well capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total risk-based capital, and 6.5% common equity Tier 1 ratios, and is not subject to any written agreement, order, capital directive or prompt corrective action directive issued under certain statutes and regulations, to maintain a specific capital level for any capital measure); adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital and 4.5% common equity Tier 1 ratios); undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital, or 4.5% common equity Tier 1 ratios); significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital, 6% total risk-based capital or 3% common equity Tier 1 ratios); and critically undercapitalized (less than or equal to 2% tangible capital to total assets). • • • • Generally, the OCC is required to appoint a receiver or conservator for a federal savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a federal savings association receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis, procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types and levels of activities the federal savings association will engage in while the capital restoration plan is in effect, and assurances that the capital restoration plan will not appreciably increase the current risk profile of the federal savings association. Any holding company for a federal savings association required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the federal savings association’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the federal savings association to adequately capitalized status. This guarantee remains in place until the OCC notifies the federal savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the OCC has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the required guarantee will result in certain operating restrictions on the federal savings association, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors. As of September 30, 2023, the Association exceeded all regulatory requirements to be considered “Well Capitalized” as presented in the table below (dollar amounts in thousands). Total Capital to Risk Weighted Assets Tier 1 (Leverage) Capital to Net Average Assets Tier I Capital to Risk-Weighted Assets Common Equity Tier I to Risk-Weighted Assets Actual Required (Well Capitalized) Amount Ratio Amount Ratio $ 1,709,596 1,640,657 1,640,657 1,640,657 17.87 % $ 956,762 834,948 765,410 621,896 9.82 % 17.15 % 17.15 % 10.00 % 5.00 % 8.00 % 6.50 % Insurance of Deposit Accounts. The DIF of the FDIC insures deposits at FDIC-insured depository institutions such as the Association. Deposit accounts in the Association are insured by the FDIC, generally up to a maximum of $250,000 per separately insured depositor. As of September 30, 2023, 96.1% of our $8.29 billion retail deposit base consists of accounts structured under the FDIC insured limit of $250,000. The FDIC charges insured depository institutions assessments to maintain the DIF. The FDIC bases its assessments on each institution’s total assets less Tier 1 capital, with an assessment schedule based on perceived risk to the DIF. Institutions with over $10 billion of total assets, such as the Association, are classified for assessment purposes as "Large Institutions". Such Large Institutions are generally subject to a pricing system that includes a separate “scorecard” methodology designed to 31 measure risk to the DIF. The assessment range for Large Institutions (inclusive of adjustments specified by the FDIC) is 2.5 to 42 basis points. On November 16, 2023, the FDIC approved a final rule to implement a special assessment on certain banking organizations with financial institution subsidiaries with more than $5 billion in assets, in order to recover the costs associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank in March 2023. The special assessment will be collected beginning with the first quarterly assessment period of 2024 at an annual rate of approximately 13.4 basis points for an anticipated total of eight quarterly periods and is subject to periodic adjustments. The assessment base is equal to uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion. Because the Association's uninsured deposits at the measurement date were below $5 billion, the Association will not be subject to this special assessment. Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Association does not believe that it is taking, or is subject to, any action, condition or violation that could lead to termination of its deposit insurance. Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution. Federal Home Loan Bank System. The Association is a member of the FHLB System, which consists of 11 regional FHLBs. The FHLB System provides a central credit facility primarily for member institutions. As a member of the FHLB of Cincinnati, the Association is required to acquire and hold shares of capital stock in the FHLB. As of September 30, 2023, outstanding borrowings (including accrued interest) from the FHLB of Cincinnati were $5.27 billion and the Association was in compliance with the stock investment requirement. Other Regulations Interest and other charges collected or contracted for by the Association are subject to state usury laws and federal laws concerning interest rates. The Association’s operations are also subject to federal laws and regulations applicable to credit transactions, such as the: • Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; • Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; • Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; • Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; • Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and Implementing regulations of the relevant federal agencies charged with the responsibility of implementing such federal • laws that have supervisory authority over the Association. The operations of the Association also are subject to: • The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; • The Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; • The Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from those images, the same legal standing as the original paper check; • The Bank Secrecy Act and Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which require the Association to implement a compliance program to detect and prevent money laundering, terrorist financing, and illicit crime. Together, the BSA and USA PATRIOT Act require the Association to implement internal controls, conduct customer due diligence, maintain records, and file reports. 32 • Regulations of the Office of Foreign Assets Control that enforce economic and trade sanctions against targeted foreign countries, regimes, and other designated individuals and organizations; and • The Gramm-Leach-Bliley Act, which placed limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. • The Dodd-Frank Act, which holds lenders accountable for ensuring a borrower's ability to repay a mortgage. Loans defined as a "qualified mortgage" must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%, as well as the verification and documentation of the income and financial resources relied upon to qualify the borrower on the loan. Upon the loan being underwritten based on a fully amortizing payment schedule and maximum interest rate during the first five years, as well as meeting the other qualifications above, the loan is determined to be a "qualified mortgage" and therefore presumed to have complied with the ability-to-repay standard under the Dodd-Frank Act. Holding Company Regulation General. Third Federal Savings, MHC, and the Company are non-diversified savings and loan holding companies within the meaning of the HOLA. As such, Third Federal Savings, MHC and the Company are registered with the FRS and subject to FRS regulations, examinations, supervision and reporting requirements. In addition, the FRS has enforcement authority over Third Federal Savings, MHC and the Company. Among other things, this authority permits the FRS to restrict or prohibit activities that are determined to be a serious risk to the Association. As federal corporations, Third Federal Savings, MHC and the Company are generally not subject to state business organization laws. Permitted Activities. Pursuant to Section 10(o) of the HOLA and FRS regulations, a mutual holding company, such as Third Federal Savings, MHC and its mid-tier holding company, the Company, may, with appropriate regulatory approval, engage in the following activities: (i) (ii) investing in the stock of a savings association; acquiring a mutual association through the merger of such association into a savings association subsidiary of the Company or an interim savings association subsidiary of the Company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) (v) (vi) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association has its home offices; furnishing or performing management services for a savings association subsidiary of such company; holding, managing or liquidating assets owned or acquired from a savings association subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity: (A) that the FRS, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the FRS, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; (x) if the savings and loan holding company meets the criteria to qualify as a financial holding company, any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the FRS. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (x) above, and has a period of two years to cease any nonconforming activities and divest any nonconforming investments. The HOLA prohibits a savings and loan holding company, such as the Company, from directly or indirectly acquiring more than 5% of a class of voting securities of, or acquiring "control" as defined in FRS regulations of, another savings institution or savings and loan holding company, without prior written approval of the FRS. It also prohibits the acquisition or 33 retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities other than those permitted by the HOLA or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the FRS must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors. The FRS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) (ii) the approval of interstate supervisory acquisitions by savings and loan holding companies; and the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition. Capital. Savings and loan holding companies were historically not subject to specific regulatory capital requirements. The DFA, however, required the FRS to promulgate consolidated capital requirements for all depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to depository institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities could no longer be included as Tier 1 capital, as was previously permitted for bank holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions, including the capital conservation buffer, apply to savings and loan holding companies. We are in compliance with the holding company consolidated capital requirements and the capital conservation buffer as of September 30, 2023. Dividends and Repurchases. The FRS has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization's capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company's net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend, the proposed dividend is not covered by earnings for the period for which it is being paid or the company's overall rate of earnings retention is inconsistent with the company's capital needs and overall financial condition. The guidance also provides for prior consultation with supervisory staff for material increases in the amount of a company's common stock dividend. The ability of a holding company to pay dividends may be restricted if a subsidiary depository institution becomes undercapitalized. The policy statement also provides for regulatory review prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions. Source of Strength. The DFA extended the “source of strength” doctrine, which had traditionally been applicable to bank holding companies, to savings and loan holding companies. FRS regulations require that all savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. Waivers of Dividends by Third Federal Savings, MHC. Federal regulations require Third Federal Savings, MHC to notify the FRS of any proposed waiver of its receipt of dividends from the Company. The OTS, the previous regulator for Third Federal Savings, MHC, allowed dividend waivers provided that its Board of Directors determined that the waiver was consistent with the Board's fiduciary duties and the waiver would not be detrimental to the safety and soundness of its subsidiary institution. In February 2008, the Company declared its first quarterly dividend and Third Federal Savings, MHC waived its right to receive each dividend paid by the Company. Section 625(a) of DFA preserved, for mutual holding companies that had reorganized into mutual holding company form, issued minority stock and waived dividends prior to December 1, 2009, including Third Federal Savings, MHC, the right to waive dividends if the waiver was not detrimental to the safe and sound operation of the savings association and the board of directors expressly determined that the waiver was consistent with the fiduciary duties of the board to the mutual members of the mutual holding company. However, on August 12, 2011, the FRS issued an interim final rule that added a requirement that a majority of the mutual holding company’s members eligible to vote must approve a dividend waiver by a mutual holding company within 12 months prior to the declaration of the dividend being waived. Third Federal Savings, MHC received the approval of its members (depositors and certain loan customers of the Association) with respect to the waiver of dividends, and subsequently received the non-objection of the FRB-Cleveland, to waive dividends aggregating up to $1.13 per share on the common stock of the Company for the 12 34 months following the special meeting of members held on July 11, 2023. Third Federal Savings, MHC previously received the approval of its members every calendar year beginning in 2014. Conversion of Third Federal Savings, MHC to Stock Form. Federal regulations permit Third Federal Savings, MHC to convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). There can be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current intention or plan to undertake a Conversion Transaction. In a Conversion Transaction, a new stock holding company would be formed as the successor to the Company, Third Federal Savings, MHC’s corporate existence would end, and certain depositors of the Association would receive the right to subscribe for additional shares of common stock of the new holding company. In a Conversion Transaction, each share of common stock held by stockholders other than Third Federal Savings, MHC (“Minority Stockholders”) would be automatically converted into a number of shares of common stock of the new holding company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock in the new holding company as they owned in the Company immediately prior to the Conversion Transaction. Under a provision of the DFA applicable to Third Federal Savings, MHC, Minority Stockholders should not be diluted because of any dividends waived by Third Federal Savings, MHC (and waived dividends should not be considered in determining an appropriate exchange ratio), in the event Third Federal Savings, MHC converts to stock form. Any such Conversion Transaction would require various member and stockholder approvals, as well as regulatory approval. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 and related regulations address, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with this law and related regulations. Human Capital Resources At September 30, 2023, we employed 995 associates, nearly all of whom are full-time and of which approximately 74% are women. At September 30, 2022, we employed 1,025 associates. As a financial institution, approximately 42% of our associates are employed at our branch and loan production offices, and another 14% are employed at our customer care call center. The success of our business is highly dependent on our associates, who provide value to our customers and communities through their dedication to our mission, helping customers achieve the American dream of home ownership and financial security. Our workplace culture is grounded in a set of core values – love (a genuine concern for others), trust, respect, a commitment to excellence and a little bit of fun – which is lived out daily in our work. We seek to hire well-qualified associates who are also a good fit for our value system. Our selection and promotion processes are without bias and include the active recruitment of minorities and women. We encourage and support the growth and development of our associates and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through quarterly performance and development conversations between associates and their managers, internally developed training programs, customized corporate training engagements and educational reimbursement programs. Reimbursement is available to associates enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or knowledge relevant to our business, in compliance with Section 127 of the Internal Revenue Code, and for seminars, conferences, and other training events associates attend in connection with their job duties. On an ongoing basis, we further promote the health and wellness of our associates by strongly encouraging work-life balance, offering flexible work schedules, keeping the associate portion of health care premiums to a minimum and sponsoring various wellness programs, whereby associates are compensated for incorporating healthy habits into their daily routines. Associate retention helps us operate efficiently and achieve one of our business objectives, which is being a low-cost provider. Our voluntary turnover rate, at 4.4% for the twelve months ending September 30, 2023, excluding retirements, remains one of the lowest in the industry. We believe our commitment to living out our core values, actively prioritizing concern for our associates’ well-being, supporting our associates’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing associates. In addition, nearly all of our associates are stockholders of the Company through participation in our Associate Stock Ownership Plan, which aligns associate and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates. At September 30, 2023, 38% of our current staff had been with us for fifteen years or more. 35 Item 1A. Risk Factors The material risks and uncertainties that management believes affect us are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference herein, as well as in other documents we file with the SEC. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors. See also, “Forward-Looking Statements.” Risks Related to Economic Conditions Our financial condition, results of operation, and stock price may be negatively impacted by unrelated bank failures and negative depositor confidence in depository institutions. Further, if we are unable to adequately manage our liquidity, deposits, capital levels, and interest rate risk, which have come under greater scrutiny in light of recent bank failures, it may have a material adverse effect on our financial condition and results of operations. On March 8, 2023, Silvergate Bank, La Jolla, CA, announced its decision to voluntarily liquidate its assets and wind down operations. On March 10, 2023, Silicon Valley Bank, Santa Clara, CA, was closed by the California Department of Financial Protection and Innovation, and on March 12, 2023, Signature Bank, New York, NY, was closed by the New York State Department of Financial Services. Additionally, on May 1, 2023, First Republic Bank, San Francisco, CA, was closed by the FDIC and sold to JP Morgan Chase & Co. These events led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions. Notably, the liquidation of Silvergate Bank and the failures of Silicon Valley Bank and Signature Bank were not generally related to the credit quality of their assets, but to poor liquidity management, mismatched funding of long-term assets with short-term funds, and unique business models. The financial distress these banks experienced appears to have been caused in large part by high exposure to certain industries, including cryptocurrency and venture capital and start-up companies operating in the technology space, which have experienced significant volatility and fluctuations in cash flows over the past several years. These banks also had high levels of uninsured deposits, which may be less likely to remain at the bank over time and less stable as a source of funding than insured deposits. Silicon Valley Bank in particular appears to have experienced a severe lack of liquidity, forcing it to sell long-term investment securities at significant losses. Ultimately, it was unable to meet its financial commitments and satisfy the cash requirements of its customers. These bank failures led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions, which in turn led to a greater focus by institutions, investors, and regulators on the on-balance sheet liquidity of and funding sources for financial institutions and the composition of its deposits. Notwithstanding, our efforts to promote deposit insurance coverage with our customers and otherwise effectively manage our liquidity, deposit portfolio retention, and other related matters, our financial condition, results of operation, and stock price may be adversely affected by future negative events within the banking sector and adverse customer or investor responses to such events. Inflation can have an adverse impact on our business and on our customers. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there has been a rise in inflation and the Federal Reserve Board has raised certain benchmark interest rates in an effort to combat inflation. As inflation increases, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our non-interest expense. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us. The reversal of the historically low interest rate environment may further adversely affect our net interest income and profitability. The Federal Reserve Board decreased benchmark interest rates significantly, to near zero, in response to the COVID-19 pandemic. The Federal Reserve Board is reversing its policy of near zero interest rates given its concerns over inflation. Market interest rates have risen in response to the Federal Reserve Board's recent rate increases. The increase in market interest rates has had and, as discussed below, is expected to continue to have an adverse effect on our net interest income and profitability. Future changes in interest rates could reduce our net income. 36 Our net income largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. Generally, during a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities because, like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. An example of this occurs when interest rates paid on certificates of deposit experience a significant increase. In this circumstance, a CD customer may determine that it is in his/her best interest to incur the existing penalty for early withdrawal, tender the certificate for cash and either reinvest the proceeds in a new CD with us, or withdraw the funds and leave us. As a result, we either establish a new, higher rate certificate (if the customer stays with us), or we must fund the customer’s withdrawal by: (1) reducing our cash reserves; (2) selling assets to generate cash to fund the withdrawal; (3) attracting deposits from another customer at the then-higher interest rate; or (4) borrowing from a wholesale lender like the FHLB of Cincinnati, again at the then-higher interest rate. Each of these alternatives can have an unfavorable impact on us. Changes in interest rates can also have an unfavorable impact on our net interest income if mortgage interest rates decline. Our customers may seek to refinance, without penalty, their mortgage loans with us or repay their mortgage loans with us and borrow from another lender. When that happens, either the yield that we earn on the customer’s loan is reduced (if the customer refinances with us), or the mortgage is paid off and we are faced with the challenge of reinvesting the cash received to repay the mortgage in a lower interest rate environment. This is frequently referred to as reinvestment risk, which is the risk that we may not be able to reinvest the proceeds of loan prepayments at rates that are comparable to the rates we earned on the loans prior to receipt of the repayment. Reinvestment risk also exists with the securities in our investment portfolio that are backed by mortgage loans. Our net interest income can also be negatively impacted when assets and funding sources with seemingly similar, but not identical re-pricing characteristics, react differently to changing interest rates. An example is our home equity lines of credit loan portfolio and our interest-bearing checking and savings deposit products. Interest rates charged on our home equity lines of credit loans are linked to the prime rate of interest, which generally adjusts in a direct relationship to changes in the FRS’s Federal Funds target rate. Similarly, our interest-bearing checking and savings deposit products are generally expected to adjust when changes are made to the Federal Funds target rate. However, to the extent that increases or decreases are made to the Federal Funds target rate, and those increases or decreases translate into increases or decreases of the prime rate and the rate charged on our home equity lines of credit loans, but do not extend to equivalent adjustments to our interest-bearing checking and savings deposit products, we can experience a reduction in our net interest income. At September 30, 2023, we held $2.70 billion of home equity lines of credit loans and $2.61 billion of interest-bearing checking and savings deposits. Our net income can also be reduced by the impact that changes in interest rates can have on the value of our capitalized mortgage servicing rights. As of September 30, 2023, we serviced $1.93 billion of loans sold to third parties, and the mortgage servicing rights associated with such loans had an amortized cost of $7.4 million and an estimated fair value, at that date, of $15.9 million. Because the estimated life and estimated income to be derived from servicing the underlying mortgage loans generally increase with rising interest rates and decrease with falling interest rates, the value of mortgage servicing rights generally increases as interest rates rise and decreases as interest rates fall. If interest rates fall and the value of our capitalized servicing rights decrease, we may be required to recognize an additional impairment charge against income for the amount by which amortized cost exceeds estimated fair market value. Our securities portfolio may be impacted by fluctuations in market value, potentially reducing AOCI and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Changes in interest rates can also have an adverse effect on our financial condition, as our available for sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the available for sale securities, net of taxes. The declines in market value could result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels. In general, changes in market and competitive interest rates result from events that we do not control and over which we generally have little or no influence. As a result, mitigation of the adverse effects of changing interest rates is generally limited to controlling the composition of the assets and liabilities that we hold. To monitor our positions, we maintain an interest rate risk modeling system which is designed to measure our interest rate risk sensitivity. Using customized modeling software, the Association prepares periodic estimates of the amounts by which the net present value of its cash flows from assets, liabilities and off balance sheet items (the institution’s EVE) would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach in measuring the interest rate sensitivity of EVE. At September 30, 2023, in the event of an immediate 200 basis point increase in all interest rates, our model projects that we would experience a $324.7 million, or 31.45%, decrease in EVE. Our calculations further 37 project that, at September 30, 2023, in the event that market interest rates used in the simulation were adjusted in equal monthly amounts (termed a "ramped" format) during the twelve month measurement period to an aggregate increase in 200 basis points, we would expect our projected net interest income for the twelve months ended September 30, 2024 to decrease by 2.71%. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk. A worsening of economic conditions could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could have an adverse effect on our results of operations. Our performance is significantly impacted by the general economic conditions in our primary markets in Ohio and Florida, and surrounding areas. We also originate loans in other states which will be impacted by national or regional economic conditions. A deterioration in economic conditions is likely to result in high levels of unemployment, which would weaken local economies and could result in additional defaults of mortgage loans. Most of the loans in our loan portfolio are secured by real estate located in our primary market areas. Negative conditions, such as layoffs, in the markets where collateral for a mortgage loan is located could adversely affect a borrower’s ability to repay the loan and the value of the collateral securing the loan. Declines in the U.S. housing market, falling home prices and increasing foreclosures, as well as unemployment and under- employment, all negatively impact the credit performance of mortgage loans and can result in significant write-downs of asset values by financial institutions. In response to a significant decline in general economic conditions, many lenders and institutional investors may reduce or cease providing funding to borrowers, including other financial institutions. This market turmoil and tightening of credit could lead to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of general business activity. The resulting economic pressure on consumers and lack of confidence in the financial markets could adversely affect our business, financial condition and results of operations. In response, we would expect to face the following risks in connection with these events: • • • • • Increased regulation of our industry, heightened supervisory scrutiny related to the USA PATRIOT Act, Bank Secrecy Act, Fair Lending and other laws and regulations, along with enhanced monitoring of compliance with such regulation. Each aspect of amplified supervision and regulation will in all likelihood increase our costs, may be accompanied by the risk of unexpected fines, sanctions, penalties, litigation and corresponding management diversion and may limit our ability to pursue business opportunities and return capital to our shareholders. Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future behaviors. The processes we use to estimate losses inherent in our credit exposure require difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of viable estimation and which may, in turn, impact the reliability of our evaluation processes, the comfort of our regulators with respect to the adequacy of our allowance for credit losses and who may require adjustments thereto, and ultimately could result in increased provisions for loan losses and reduced levels of earnings and capital. Our ability to engage in sales of mortgage loans to third parties (including mortgage loan securitization transactions with governmental entities) on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including deteriorating investor expectations. Competition in our industry could intensify as a result of increasing consolidation of financial services companies in connection with current market conditions. Risks Related to Laws and Regulations Changes in laws and regulations and the cost of compliance with new laws and regulations may adversely affect our operations and our income. We are subject to extensive regulation, supervision and examination by the FRS, the OCC, the CFPB and the FDIC. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for credit losses and determine the level of deposit insurance premiums assessed. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any change in these regulations and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. The potential exists for additional federal or state laws and regulations, or changes in policy, affecting lending and funding practices and liquidity standards. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the FRS, the OCC, the CFPB and the FDIC, govern the activities in 38 which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability. We received a “Needs to Improve” Community Reinvestment Act rating in our most recent federal examination. This could, at a minimum, result in denial of certain corporate applications such as those related to branches, mergers, minority stock offerings or a second-step conversion. All savings associations have a responsibility under the Community Reinvestment Act and federal regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings association, the OCC is required to assess the savings association’s record of compliance with the Community Reinvestment Act. The Association received a “Needs to Improve” Community Reinvestment Act rating in its most recent federal examination that analyzed home mortgage lending data for the period January 1, 2015 through December 31, 2019. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as those related to branches, mergers, minority stock offerings or a second-step conversion, or in restrictions on its activities. The FRS may require the Company to commit capital resources to support the Association, and we may not have sufficient access to such capital resources. Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the FRS may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Thus, any borrowing of funds needed to raise capital required to make a capital injection becomes more difficult and expensive, and could have an adverse effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds when we need to do so. Monetary policies and regulations of the FRS could adversely affect our business, financial condition and results of operations. In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the FRS. An important function of the FRS is to regulate the money supply and credit conditions. Among the instruments used by the FRS to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the FRS have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted. Risks Related to our Lending Activities Our lending activities provide lower interest rates than financial institutions that originate more commercial loans. Our principal lending activity consists of originating, and essentially all of our loan portfolio consists of, residential real estate mortgage loans. We originate our loans with a focus on limiting credit risk exposure and not necessarily to generate the highest return possible or maximize our interest rate spread. In addition, residential real estate mortgage loans generally have lower interest rates than commercial business loans, commercial real estate loans and consumer loans. As a result, we may generate lower interest rate spreads and rates of return when compared to our competitors who originate more consumer or commercial loans than we do. We intend to continue our focus on residential real estate lending. 39 Secondary mortgage market conditions could have a material impact on our financial condition and results of operations. Loan sales provide a significant portion of our non-interest income. In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for residential real estate loans and increased investor yield requirements for these loans. These conditions may fluctuate or worsen in the future. A prolonged period of secondary market illiquidity could have a material adverse effect on our financial condition and results of operations. If we are required to repurchase mortgage loans that we have previously sold, it would negatively affect our earnings. We sell mortgage loans in the secondary market under agreements that contain representations and warranties related to, among other things, the origination, characteristics of the mortgage loans and subsequent servicing. We may be required to repurchase mortgage loans that we have sold in cases of borrower default or breaches of these representations and warranties, and we would be subject to increased risk of disputes and repurchase demands as our volume of loan sales increases. If we are required to repurchase mortgage loans or provide indemnification or other recourse, this could significantly increase our costs and thereby affect our future earnings. If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings could decrease. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for credit losses, we review our loans, our loss and delinquency experience, and evaluate economic conditions. If our assumptions or the results of our analyses are incorrect, our allowance for credit losses may not be sufficient to cover future losses, resulting in additions to our allowance. Material additions to our allowance would materially decrease our net income. See Note 5. LOANS AND ALLOWANCES FOR CREDIT LOSSES for additional information on the CECL methodology. In addition, bank regulators periodically review our allowance for credit losses and, as a result of such reviews, we may decide to increase our provision for loans losses or recognize further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as a result of such review or otherwise, may have a material adverse effect on our financial condition and results of operation. Risks Related to Competitive Matters Strong competition within our market areas may limit our growth and profitability. Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, money market funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Competitive factors driven by consumer sentiment or otherwise can also reduce our ability to generate fee income, such as through overdraft fees. Troubled financial institutions may not significantly increase the interest rates paid to depositors in pursuit of retail deposits when wholesale funding sources are not available to them. Furthermore, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. Our profitability depends upon our continued ability to successfully compete in our market areas. For additional information see PART 1 Item 1. Business-THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND-Competition. We continually encounter technological change, and may have fewer resources than many of our larger competitors to continue to invest in technological improvements. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology- driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We also may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Risks Related to Our Operations 40 Cyber-attacks, other security breaches or failure or interruption of information systems could adversely affect our operations, net income or reputation. We rely heavily on communications and information systems to conduct our business. We regularly collect, process, transmit and store significant amounts of data and confidential information regarding our customers, associates and others and concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf. A number of our associates work at remote locations, increasing the number of surfaces that require protection. Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an on-going threat targeting the customers of popular financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to associate error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses. If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss. Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur. If mishandling, misuse or loss of the information did occur, the Company would make all commercially reasonable efforts to detect and address any such event. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. We believe that we have not experienced any material breaches. Customer or associate fraud subjects us to additional operational risks. Associate errors, as well as associate and customer misconduct, could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Our loans to individuals, our deposit relationships and related transactions are also subject to exposure to the risk of loss due to fraud and other financial crimes. Misconduct by our associates could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent associate errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Associate errors could also subject us to financial claims for negligence. We have not experienced any material financial losses from associate errors, misconduct or fraud. However, if our internal controls fail to prevent or promptly detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our financial condition and results of operations. If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected. Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject to, including credit, liquidity, operational, regulatory compliance and reputational. However, as with any risk management framework, there are inherent limitations to our risk management strategies as risks may exist, or develop in the future, that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and results of operations could be materially adversely affected. Our operations rely on numerous external vendors. We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the 41 contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent that such an agreement is not renewed by the third-party vendor, or is renewed on terms less favorable to us. Our Vendor Management program helps mitigate risks and is structured to minimize the cost and time required to replace a vendor in the event of a failure or the vendor's inability to meet service level agreements. Our board of directors relies to a large degree on management and outside consultants in overseeing cybersecurity risk management. The Association has a standing Technology Steering Committee, consisting of several senior managers (CFO, CIO, CSO, CXO, and CRO/ISO). The Committee meets quarterly, or more frequently if needed, and reports to the Board of Directors after each meeting through Committee minutes. The Association also engages outside consultants to support its cybersecurity efforts. The directors of the Association do not have significant experience in cybersecurity risk management in other business entities comparable to the Association and rely on the Information Security Officer (ISO) and Chief Information Officer (CIO) for cybersecurity guidance. Our funding sources may prove insufficient to replace deposits at maturity and support our future growth. A lack of liquidity could adversely affect our financial condition and results of operations and result in regulatory limits being placed on us. We must maintain funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources may include FHLB advances, federal funds purchased, and brokered certificates of deposits. While we emphasize the generation of low-cost core deposits as a source of funding, there is strong competition for such deposits in our market area. Additionally, deposit balances can decrease if customers perceive alternative investments as providing a better risk/return trade-off. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Further, if we are required to rely more heavily on more expensive funding sources to support liquidity and future growth, our revenues may not increase proportionately to cover our increased costs. In this case, our operating margins and profitability would be adversely affected. Alternatively, we may need to sell a portion or our investment and/or loan portfolio in order to raise funds, which, depending upon market conditions, could result in us realizing a loss on the sale of such assets. A lack of liquidity could also attract increased regulatory scrutiny and potential restraints imposed on us by regulators. Depending on the capitalization status and regulatory treatment of depository institutions, including whether an institution is subject to a supervisory prompt corrective action directive, certain additional regulatory restrictions and prohibitions may apply, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. Risk Related to Our Corporate Structure Our sources of funds are limited because of our holding company structure. The Company is a separate legal entity from its subsidiaries and does not have significant operations of its own. Dividends from the Association provide a significant source of cash for the Company. The availability of dividends from the Association is limited by various statutes and regulations. Under these statutes and regulations, the Association is not permitted to pay dividends on its capital stock to the Company, its sole stockholder, if the dividend would reduce the stockholders' equity of the Association below the amount of the liquidation account established in connection with the mutual-to-stock conversion. Federal savings associations may pay dividends without the approval of its primary federal regulator only if they meet applicable regulatory capital requirements before and after the payment of the dividends and total dividends do not exceed net income to date over the calendar year plus its retained net income over the preceding two years. If in the future, the Company utilizes its available cash and the Association is unable to pay dividends to the Company, the Company may not have sufficient funds to pay dividends or fund stock repurchases. Restrictions on our ability to pay dividends to stockholders could adversely affect the value of our common stock. The value of the Company’s common stock is significantly affected by our ability to pay dividends to our public stockholders. The Company’s ability to pay dividends to our stockholders is subject to the availability of cash at the Company, 42 which is dependent on the Association having sufficient earnings to make capital distributions to the Company. Moreover, our ability to pay dividends, and the amount of such dividends, is affected by the ability of Third Federal Savings, MHC, our mutual holding company, to waive the receipt of dividends declared by the Company. Federal regulations require Third Federal Savings, MHC, to notify the FRS of any proposed waiver of its receipt of dividends from the Company. In August 2011, the FRS issued an interim final rule pursuant to the DFA, providing that the FRS “may not” object to dividend waivers by grandfathered mutual holding companies, such as Third Federal Savings, MHC, under standards substantially similar to those previously required by the OTS. However, the interim final rule added a requirement that a majority of the mutual holding company’s members eligible to vote must approve a dividend waiver by a mutual holding company within twelve months prior to the declaration of the dividend being waived. As part of its rule making process, the FRS is reviewing comments on the interim final rule and there can be no assurance that the final rule will not require such a member vote. Third Federal Savings, MHC, has received the approval of its members in 10 separate meetings (held in either July or August of each year from 2014 through 2023) to waive the receipt of dividends for a twelve-month period, and the FRS has “non-objected” to Third Federal Savings, MHC’s waiver each time. However, future approvals of members and non- objections from the FRS are not assured and if not obtained, the discontinuance of dividend payments would adversely affect the value of our common stock. Public stockholders own a minority of the outstanding shares of our common stock and are not able to exercise voting control over most matters put to a vote of stockholders. Third Federal Savings, MHC, as our majority shareholder, is able to control the outcome of virtually all matters presented to our shareholders for their approval, including any proposal to acquire us. The same directors and officers who manage the Association also manage the Company and Third Federal Savings, MHC. The board of directors of Third Federal Savings, MHC must ensure that the interests of depositors of the Association (as members of Third Federal Savings, MHC) are represented and considered in matters put to a vote of stockholders of the Company. Therefore, Third Federal Savings, MHC, may take action that the public stockholders believe to be contrary to their interests. For example, Third Federal Savings, MHC, may exercise its voting control to defeat a stockholder nominee for election to the board of directors of the Company. Additionally, Third Federal Savings, MHC, may prevent the sale of control or merger of the Company or its subsidiaries, or a second-step conversion of Third Federal Savings, MHC, even if such a transaction were favored by a majority of the public shareholders of the Company. Risks Related to Accounting Matters Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and on our financial condition and/or operating results. In preparing periodic reports we are required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for credit losses and the determination of pension obligations. Changes in accounting standards could affect reported earnings. The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively. Other Risks Related to Our Business Hurricanes or other adverse weather events could negatively affect the economy in our Florida market area or cause disruptions to our branch office locations, which could have an adverse effect on our business or results of operations. A significant portion of our branch operations are conducted in Florida, a geographic region with coastal areas that are susceptible to hurricanes and tropical storms. Such weather events can disrupt our operations, result in damage to our branch office locations and negatively affect the local economy in which we operate. We cannot predict whether or to what extent damage caused by future hurricanes or tropical storms will affect our operations or the economy in our market area, but such 43 weather events could result in fewer loan originations and greater delinquencies, foreclosures or loan losses. These, and other negative effects of future hurricanes or tropical storms may adversely affect our business or results of operations. We are subject to environmental liability risk associated with lending activities or properties we own. A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our policies, which require us to perform an environmental review before initiating any foreclosure action on non- residential real property, may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us. Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers. Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations, as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes, and the like. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior. Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our performance. Our reputation is one of the most valuable components of our business and is critical to our success. The ability to attract and retain customers, investors, employees and advisors may depend upon external perceptions of the Company. Damage to the Company's reputation could cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, compliance failures, unethical behavior and the misconduct of employees, advisors and counterparties. Adverse developments with respect to the financial services industry may also, by association, negatively impact the Company's reputation or result in greater regulatory or legislative scrutiny or litigation against the Company. Furthermore, shareholders, customers and other stakeholders have begun to consider how corporations are addressing ESG issues. Governments, investors, customers and the general public are increasingly focused on ESG practices and disclosures, and views about ESG are diverse and rapidly changing. These shifts in investing priorities may result in adverse effects on the trading price of the Company’s common stock if investors determine that the Company has not made sufficient progress on ESG matters. We could also face potential negative ESG-related publicity in traditional media or social media if shareholders or other stakeholders determine that we have not adequately considered or addressed ESG matters. If the Company, or our relationships with certain customers, vendors or suppliers, became the subject of negative publicity, our ability to attract and retain customers and employees, and our financial condition and results of operations, could be adversely impacted. A protracted government shutdown may result in reduced loan originations and related gains on sales and could negatively affect our financial condition and results of operations. During any protracted federal government shutdown, we may not be able to close certain loans and we may not be able to recognize non-interest income on the sale of loans. Some of the loans we originate are sold directly to government agencies, and some of these sales may be unable to be consummated during a shutdown. In addition, we believe that some borrowers may decide not to proceed with their home purchase and not close on their loans, which would result in a permanent loss of the related non-interest income. A federal government shutdown could also result in reduced income for government employees or 44 employees of companies that engage in business with the federal government, which could result in greater loan delinquencies, increased in our non-performing, criticized, and classified assets, and a decline in demand for our products and services. Item 1B. Unresolved Staff Comments None. Item 2. Properties We operate from our main office in Cleveland, Ohio, our 37 full-service branch offices located in Ohio and Florida and our four loan production offices located in Ohio. Our branch offices are located in the Ohio counties of Cuyahoga, Lake, Lorain, Medina and Summit and in the Florida counties of Broward, Collier, Hillsborough, Lee, Palm Beach, Pasco, Pinellas and Sarasota. Our loan production offices are located in the Ohio counties of Butler, Delaware and Hamilton. The Company owns the building in which its home office and executive offices are located, and six other office locations. The net book value of our land, premises, equipment and software was $34.7 million at September 30, 2023, a $177 thousand increase from September 30, 2022 due to a $2.0 million increase in DP equipment and a $479 thousand increase in building improvements. These increases were primarily offset by depreciation. Item 3. Legal Proceedings The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operation, or statements of cash flows. Item 4. Mine Safety Disclosures Not applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed and traded on the NASDAQ Global Select Market under the symbol “TFSL”. As of November 14, 2023, we had 6,044 shareholders of record, which does not include persons or entities holding shares in “nominee” or “street” name through brokerage firms. Through September 30, 2010, Third Federal Savings, MHC, waived its right to receive dividends. The waivers complied with regulatory authorizations (in the form of non-objection) obtained by Third Federal Savings, MHC. Any requests for future regulatory authorizations to waive receipts of dividends will be submitted to the FRS. Please refer to the preceding discussion of dividend waivers presented in Part I, Item 1. Business-SUPERVISION AND REGULATION-Holding Company Regulation- Waivers of Dividends by Third Federal Savings, MHC. Regulatory non-objection is subject to periodic regulatory review and no assurances can be given regarding future regulatory non-objection. In addition, interim final rules issued by the FRS in 2011 require that a majority of the mutual holding company's members eligible to vote must approve a dividend waiver by a mutual holding company within 12 months prior to the declaration of the dividend being waived. There can be no assurance that a final rule will not require such a member vote. At a special meeting of members of Third Federal Savings, MHC, the members (depositors and certain loan customers of the Association) voted to approve Third Federal Savings, MHC's proposed waiver of dividends aggregating up to $1.13 per share on the common stock of the Company for the 12 months following the special meeting of members held on July 11, 2023. The members approved the waiver by casting 60% of the eligible votes, with 97% of the votes cast, or 58% of the total eligible votes, in favor of the waiver. Third Federal Savings, MHC is the 81% majority shareholder of the Company. Following the receipt of the members’ approval at the July 11, 2023 special meeting, Third Federal Savings, MHC filed a notice with, and subsequently received the non-objection of, the FRB-Cleveland for the proposed dividend waivers. 45 In the table and graph that follow, we have provided summary information regarding the performance of the cumulative total return of our common stock from September 30, 2018 through September 30, 2023, relative to the cumulative total return on stocks included in the S&P U.S. BMI Banks Index, KBW NASDAQ Bank Index and NASDAQ Composite, in each case for the same period. The cumulative return data is presented in dollars, based on starting investments of $100 and assuming the reinvestment of dividends. Index (with base price at 9/30/2018) 9/30/2018 9/30/2019 9/30/2020 9/30/2021 9/30/2022 9/30/2023 Measurement Date TFS Financial Corporation S&P U.S. BMI Banks Index KBW NASDAQ Bank Index NASDAQ Composite Index Source: S&P Global Market Intelligence 100.00 127.48 110.47 151.61 111.00 110.02 100.00 100.00 100.32 98.25 73.65 74.43 134.01 136.50 102.95 103.11 99.73 87.45 100.00 100.52 141.70 184.58 136.12 171.65 We did not sell any equity securities during the fiscal year ended September 30, 2023. We did not purchase any stock during the quarter ended September 30, 2023. On October 27, 2016, the Company announced that the Board of Directors approved the Company's eighth stock repurchase program, which authorizes the repurchase of up to 10,000,000 shares of the Company's outstanding common stock. Purchases under the program will be on an ongoing basis and subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses of capital, and our financial performance. Repurchased shares will be held as treasury stock and be available for general corporate use. For the fiscal year ended September 30, 2023, stock repurchases totaled 361,869 shares at an average price per share of $13.82. The program has 5,191,951 shares yet to be purchased as of September 30, 2023. The program has no expiration date. 46 Period EndingIndex ValueTotal Return PerformanceTFS Financial CorporationS&P U.S. BMI Banks IndexKBW NASDAQ Bank IndexNASDAQ Composite Index09/30/1809/30/1909/30/2009/30/2109/30/2209/30/235075100125150175200 Item 6. [Reserved] Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Our business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to our customers. Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in April 2007, the nation’s largest mutually-owned savings and loan association based on total assets. We credit our success to our continued emphasis on our primary values: “Love, Trust, Respect, and a Commitment to Excellence, along with Having Fun.” Our values are reflected in the design and pricing of our loan and deposit products, as described below. Our values are further reflected in a long-term revitalization program encompassing the three-mile corridor of the Broadway-Slavic Village neighborhood in Cleveland, Ohio where our main office was established and continues to be located and where the educational programs we have established and/or support are located. We intend to continue to adhere to our primary values and to support our customers and the communities in which we operate, as we pursue our mission to help people achieve the dream of home ownership and financial security while creating value for our customers, our communities, our associates and our shareholders. The bank failures of three large domestic regional banks during the first half of 2023 negatively impacted consumer confidence and increased stress across the banking sector. The unprecedented implications of 2022 and 2023 fiscal policy coupled with geopolitics impacting energy markets and supply-chain constraints from global shutdowns culminated into high levels of inflation. The subsequent restrictive monetary policy approach has resulted in a heightened exposure of certain banking industry practices. Taking all of this into consideration, we remain confident that our business model and strategic approach remain appropriate. Specifically, (1) our capital ratios remain a primary source of financial strength; (2) our core deposits remain stable and the majority of our deposit accounts fall within FDIC insurance limits; (3) we maintain adequate access to contingent sources of liquidity; and (4) our risk management practices around an array of financial disciplines are robust and commensurate to an institution of our size and complexity. The following tables present select financial data of the Company for the five most recent fiscal years. Selected Financial Condition Data: Total assets Cash and cash equivalents Investment securities - available for sale Loans held for sale Loans, net Bank owned life insurance Prepaid expenses and other assets Deposits Borrowed funds Shareholders’ equity 2023 2022 At September 30, 2021 (In thousands) 2020 2019 $ 16,917,979 $ 15,789,879 $ 14,057,450 $ 14,642,221 $ 14,542,356 466,746 508,324 3,260 369,564 457,908 9,661 488,326 421,783 8,848 498,033 453,438 36,871 275,143 547,864 3,666 15,165,747 312,072 117,270 9,449,820 5,273,637 1,927,361 14,257,067 304,040 95,428 8,921,017 4,793,221 1,844,339 12,509,035 297,332 91,586 8,993,605 3,091,815 1,732,280 13,103,062 222,919 104,832 9,225,554 3,521,745 1,671,853 13,195,745 217,481 87,957 8,766,384 3,902,981 1,696,754 47 Selected Operating Data: Interest income Interest expense Net interest income 2023 For the Years Ended September 30, 2020 2021 2022 (In thousands, except per share amounts) 2019 $ 611,919 $ 409,333 $ 389,351 $ 455,298 $ 482,087 328,352 283,567 141,937 267,396 157,721 231,630 213,030 242,268 216,666 265,421 Provision (release) for credit losses on loans (1,500) 1,000 (9,000) 3,000 (10,000) Net interest income after provision (release) for credit losses on loans Non-interest income Non-interest expenses Earnings before income tax Income tax expense Net earnings after income tax expense Earnings per share Basic Diluted Cash dividends declared per share 285,067 21,429 213,129 93,367 266,396 23,804 198,146 92,054 240,630 55,299 195,835 100,094 239,268 53,251 192,274 100,245 18,117 75,250 $ 17,489 74,565 $ 19,087 81,007 $ 16,928 83,317 $ 275,421 20,464 193,673 102,212 21,975 80,237 0.27 $ 0.26 $ 1.13 $ 0.26 $ 0.26 $ 1.13 $ 0.29 $ 0.29 $ 1.12 $ 0.30 $ 0.29 $ 1.11 $ 0.29 0.28 1.02 $ $ $ $ 48 At or For The Years Ended September 30, 2021 2020 2022 2023 2019 Selected Financial Ratios and Other Data: Performance Ratios: Return on average assets Return on average equity Interest rate spread(1) Net interest margin(2) Efficiency ratio(3) Non-interest expense to average total assets Average interest-earning assets to average interest-bearing liabilities Asset Quality Ratios: Non-performing assets as a percent of total assets Non-accruing loans as a percent of total loans Allowance for credit losses on loans as a percent of non-accruing loans Allowance for credit losses on loans as a percent of total loans Capital Ratios: Association 0.46 % 4.00 % 1.57 % 0.51 % 4.14 % 1.75 % 0.56 % 4.77 % 1.52 % 0.56 % 4.88 % 1.52 % 0.56 % 4.58 % 1.73 % 1.80 % 1.92 % 1.66 % 69.88 % 68.04 % 68.25 % 65.06 % 67.75 % 1.88 % 1.69 % 1.31 % 1.34 % 1.35 % 1.29 % 1.36 % 111.36 % 112.42 % 111.92 % 111.41 % 112.28 % 0.20 % 0.21 % 0.23 % 0.25 % 0.32 % 0.35 % 0.37 % 0.41 % 0.50 % 0.54 % 242.26 % 204.73 % 145.96 % 87.95 % 54.60 % 0.29 % 0.51 % 0.51 % 0.51 % 0.36 % Total capital to risk-weighted assets(4) 17.87 % 18.84 % 21.00 % 19.96 % 19.56 % Tier 1 (leverage) capital to net average assets(4) 9.82 % 10.33 % 11.15 % 10.39 % 10.54 % Tier 1 capital to risk-weighted assets(4) 17.15 % 18.25 % 20.43 % 19.37 % 19.07 % Common equity tier 1 capital to risk-weighted assets(4) 17.15 % 18.25 % 20.43 % 19.37 % 19.07 % TFS Financial Corporation Total capital to risk-weighted assets(4) 19.85 % 21.18 % 23.75 % 22.71 % 22.22 % Tier 1 (leverage) capital to net average assets(4) 10.96 % 11.66 % 12.65 % 11.88 % 12.05 % Tier 1 capital to risk-weighted assets(4) 19.13 % 20.59 % 23.18 % 22.13 % 21.73 % Common equity tier 1 capital to risk-weighted assets(4) 19.13 % 20.59 % 23.18 % 22.13 % 21.73 % Average equity to average total assets 11.58 % 12.23 % 11.72 % 11.50 % 12.30 % Other Data: Association: Number of full service offices Loan production offices ______________________ 37 4 37 5 37 7 37 7 37 8 (1) Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest- bearing liabilities for the year. (2) The net interest margin represents net interest income as a percent of average interest-earning assets for the year. (3) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income. (4) In April 2020, the Simplifications to the Capital Rule ("Rule") was adopted, which simplified certain aspects of the capital rule under Basel III. The impact of the Rule was not material to previously reported regulatory capital ratios. Management believes that the following matters are those most critical to our success: (1) controlling our interest rate risk exposure; (2) monitoring and limiting our credit risk; (3) maintaining access to adequate liquidity and diverse funding sources to support our growth; and (4) monitoring and controlling our operating expenses. Controlling Our Interest Rate Risk Exposure. Historically, our greatest risk has been our exposure to changes in interest rates. When we hold longer-term, fixed-rate assets, funded by liabilities with shorter-term re-pricing characteristics, we are exposed to potentially adverse impacts from changing interest rates, and most notably rising interest rates. Generally, and particularly over extended periods of time that encompass full economic cycles, interest rates associated with longer-term 49 assets, like fixed-rate mortgages, have been higher than interest rates associated with shorter-term funding sources, like deposits. This difference has been an important component of our net interest income and is fundamental to our operations. A challenge to our business model occurs when there is a rapid and substantial increase in short-term rates or there is an extended inverted yield curve, which have both occurred over recent periods. This economic environment has resulted in a decrease in our net interest margin. To mitigate our interest rate risk in general and to address the current rate environment specifically, we utilize a variety of strategies that include: • Maintaining regulatory capital in excess of levels required to be considered well capitalized; • Promoting adjustable-rate loans and shorter-term fixed-rate loans; • Marketing home equity lines of credit, which carry an adjustable rate of interest, indexed to the prime rate; • Opportunistically extending the duration of our funding sources; • Utilizing interest rate swaps to convert short-term FHLB advances and brokered certificates of deposit into long-term, fixed-rate borrowings; and • Selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. Levels of Regulatory Capital At September 30, 2023, the Company’s Tier 1 (leverage) capital totaled $1.83 billion, or 10.96% of net average assets and 19.13% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.64 billion, or 9.82% of net average assets and 17.15% of risk-weighted assets. Each of these measures is in excess of the requirements currently in effect for the Association for designation as “well capitalized” under regulatory prompt corrective action provisions, which set minimum levels of 5.00% of net average assets and 8.00% of risk-weighted assets. Beginning this fiscal year, the Company entered into the final three years of the five-year transitional period, as provided by a final rule, after CECL was adopted in fiscal year 2021. Refer to the Liquidity and Capital Resources section of this Item 7 for additional discussion regarding regulatory capital requirements. Promotion of Adjustable-Rate Loans and Shorter-Term, Fixed-Rate Loans We offer our "Smart Rate" adjustable-rate mortgage loan, which provides us with improved interest rate risk characteristics when compared to a 30-year, fixed-rate mortgage loan. We also offer a 10-year, fully amortizing fixed-rate, first mortgage loan. The 10-year, fixed-rate loan has a more desirable interest rate risk profile when compared to loans with fixed-rate terms of 15 to 30 years and can help to more effectively manage interest rate risk exposure, yet provides our borrowers with the certainty of a fixed interest rate throughout the life of the obligation. The following tables set forth our first mortgage loan production and balances segregated by loan structure at origination. For the Years Ended September 30, 2023 2022 Amount Percent Amount Percent First Mortgage Loan Originations and Purchases: (Dollars in thousands) ARM (all Smart Rate) production Fixed-rate production: Terms less than or equal to 10 years Terms greater than 10 years Total fixed-rate production $ 624,773 33.7 % $ 1,029,156 28.2 % 34,710 1,195,562 1,230,272 1.9 64.4 66.3 470,806 2,146,021 2,616,827 12.9 58.9 71.8 Total First Mortgage Loan Originations and Purchases: $ 1,855,045 100.0 % $ 3,645,983 100.0 % 50 September 30, 2023 September 30, 2022 Amount Percent Amount Percent Balances of First Mortgage Loans Held For Investment: (Dollars in thousands) ARM (primarily Smart Rate) Loans Fixed-rate Loans: Terms less than or equal to 10 years Terms greater than 10 years Total fixed-rate loans $ 4,760,843 39.2 % $ 4,668,089 40.3 % 1,088,048 6,275,775 7,363,823 9.0 51.8 60.8 1,350,436 5,574,589 6,925,025 11.6 48.1 59.7 Total First Mortgage Loans Held For Investment: $ 12,124,666 100.0 % $ 11,593,114 100.0 % The following table sets forth the balances as of September 30, 2023 for all ARM loans segregated by the next scheduled interest rate reset date. During the Fiscal Years Ending September 30, (in thousands) Current Balance of ARM Loans Scheduled for Interest Rate Reset 2024 2025 2026 2027 2028 2029 Total $381,797 699,104 1,464,792 1,650,442 510,582 54,126 $4,760,843 At September 30, 2023 and September 30, 2022, mortgage loans held for sale, all of which were long-term, fixed-rate first mortgage loans and all of which were held for sale to Fannie Mae, totaled $3.3 million and $9.7 million, respectively. 51 Loan Portfolio Yield The following tables set forth the principal balance and interest yield as of September 30, 2023 for the portfolio of loans held for investment, by type of loan, structure and geographic location. Total Loans: Fixed-Rate Terms less than or equal to 10 years Terms greater than 10 years Total Fixed-Rate loans ARMs Home Equity Loans and Lines of Credit Construction and Other loans Total Loans Receivable Residential Mortgage Loans Ohio Florida Other Total Residential Mortgage Loans Home Equity Loans and Lines of Credit Ohio Florida California Other Total Home Equity Loans and Lines of Credit Construction and Other loans Total Loans Receivable Marketing of Home Equity Lines of Credit September 30, 2023 Balance Percent Yield (Dollars in thousands) $ 1,088,048 6,275,775 7.2 % 41.3 7,363,823 48.5 4,760,843 3,030,526 52,817 31.3 19.9 0.3 $ 15,208,009 100.0 % 2.67 % 3.85 % 3.68 % 3.11 % 7.39 % 5.11 % 4.25 % September 30, 2023 Balance Fixed-Rate Balance Percent Yield (Dollars in thousands) $ 6,938,036 $ 5,322,695 45.6 % 2,137,804 3,048,826 12,124,666 1,032,002 1,009,126 7,363,823 88,340 68,801 47,129 43,231 773,324 666,517 513,904 1,076,781 3,030,526 52,817 $ 15,208,009 $ 247,501 20.0 52,817 7,664,141 0.3 100.0 % 14.1 20.0 79.7 5.1 4.4 3.4 7.1 3.65 % 3.29 % 3.15 % 3.46 % 7.33 % 7.31 % 7.34 % 7.52 % 7.39 % 5.11 % 4.25 % We actively market home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate which provides interest rate sensitivity to that portion of our assets and is a meaningful strategy to manage our interest rate risk profile. Increasing our investments in loans with variable rates of interest help to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. We strive to grow the home equity line of credit portfolio through offering competitive rates, marketing efforts, and by utilizing partners to attract more home equity line of credit customers. At September 30, 2023, the principal balance of home equity lines of credit totaled $2.63 billion. Our home equity lending is discussed in the preceding Lending Activities section of Item 1. Business in Part I. THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND. Extending the Duration of Funding Sources As a complement to our strategies to shorten the duration of our interest-earning assets, as described above, we also seek to lengthen the duration of our interest-bearing funding sources. These efforts include monitoring the relative costs of alternative funding sources such as retail certificates of deposit, brokered certificates of deposit, longer-term (e.g. four to six 52 years) fixed-rate advances from the FHLB of Cincinnati, and shorter-term (e.g. three months) funding, the durations of which are extended by correlated interest rate exchange contracts ("swap"). All of our swaps are subject to collateral pledges and require specific structural features to qualify for hedge accounting treatment. Hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive income (loss) in the equity section of the balance sheet, rather than being included in operating results of the income statement. The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment. The Association is a party to interest rate swap agreements. Each of the Association's swap agreements is registered on the Chicago Mercantile Exchange and involves the exchange of interest payment amounts based on a notional principal balance. No exchange of principal amounts occur and the notional principal amount does not appear on our balance sheet. The Association uses swaps to extend the duration of its funding sources. In each of the Association's agreements, interest paid is based on a fixed rate of interest throughout the term of each agreement while interest received is based on an interest rate that resets and compounds daily over a specified interval (generally three months) throughout the term of each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that point in time. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the conditions of the agreement. Concurrent with the execution of each swap, the Association enters into a short-term borrowing in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap. Each individual swap agreement has been designated as a cash flow hedge of interest rate risk associated with either the Company's variable rate borrowings from the FHLB of Cincinnati or brokered CD's. In these challenging economic times with an extended inverted yield curve, the Association has found it financially beneficial to increase the use of swaps to lower our borrowing costs and extend the duration of our liabilities. For more details, refer to Notes 10. BORROWED FUNDS and 17. DERIVATIVE INSTRUMENTS to the unaudited consolidated financial statements. Each funding alternative is monitored and evaluated based on its effective interest payment rate, options exercisable by the creditor (early withdrawal, right to call, etc.), and collateral requirements. Refer to Notes 10. DEPOSITS and 17. BORROWED FUNDS for additional details on balances. The interest payment rate is a function of market influences that are specific to the nuances and market competitiveness/breadth of each funding source. Generally, early withdrawal options, subject to a fee, are available to our retail CD customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB of Cincinnati; and we are not subject to early termination options with respect to our interest rate exchange contracts. Additionally, collateral pledges are not provided with respect to our retail CDs or our brokered CDs, but are required for our advances from the FHLB of Cincinnati as well as for our interest rate exchange contracts. We will continue to evaluate the structure of our funding sources based on current needs. Other Interest Rate Risk Management Tools We also manage interest rate risk by selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more and Home Ready) are originated under Fannie Mae procedures and are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. Currently, certain types of loans (i.e. our Smart Rate adjustable-rate loans, home purchase fixed- rate loans and 10-year fixed-rate loans) are originated under our legacy procedures, which are not eligible for sale to Fannie Mae. We can also manage interest rate risk by selling non-Fannie Mae compliant mortgage loans to private investors, although those transactions may be limited to loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral. Additionally, sales to private investors are dependent upon favorable market conditions, including motivated buyers, and involve more complicated negotiations and longer settlement timelines. Loan sales are discussed in more detail within the Liquidity and Capital Resources section of this Item 7. During the fiscal year ended September 30, 2023, $77.2 million of agency-compliant, long-term (15 to 30 years), fixed- rate mortgage loans were sold, or committed to be sold, to Fannie Mae on a servicing retained basis. Of these sold loans, $43.5 million were originated through Mortgage Passport, and $33.7 million were originated as other agency-compliant first mortgage loans. At September 30, 2023, loans that are classified as held for sale total $3.3 million. As of September 30, 2023, we serviced $1.93 billion of loans we originated and later sold to investors. We continue to consider liquidity and balance sheet management, as well as secondary market pricing, in evaluating the opportunity to sell loans. Additionally, we are expanding our ability to sell certain fixed-rate loans to Fannie through the use of more traditional mortgage banking activities, including a proprietary approach to risk-based pricing and loan-level pricing adjustments. This approach is concentrated in markets outside of Ohio and Florida. Some additional startup and marketing costs have been incurred, but are not expected to significantly impact our financial results in fiscal year 2023. Loan sales are discussed in more detail within the Liquidity and Capital Resources section of this Item 7. 53 Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the memory of the 2008 housing market collapse and financial crisis is a constant reminder to focus on credit risk. In response to the evolving economic landscape, we continuously revise and update our quarterly analysis and evaluation procedures, as needed, for each category of our lending with the objective of identifying and recognizing all appropriate credit losses. At September 30, 2023, 90% of our assets consisted of residential real estate loans (both “held for sale” and “held for investment”) and home equity loans and lines of credit. Our analytic procedures and evaluations include specific reviews of all home equity loans and lines of credit that become 90 or more days past due, as well as specific reviews of all first mortgage loans that become 180 or more days past due. We transfer performing home equity lines of credit subordinate to first mortgages delinquent greater than 90 days to non-accrual status. We also charge-off performing loans to collateral value and classify those loans as non-accrual within 60 days of notification of all borrowers filing Chapter 7 bankruptcy, that have not reaffirmed or been dismissed, regardless of how long the loans have been performing. In an effort to align our credit risk exposure with the low risk appetite approved by the Board of Directors, the credit eligibility criteria is evaluated to ensure a successful homeowner has the primary source of repayment, followed by a collateral position that allows for a secondary source of repayment, if needed. Products that do not result in an effective mix of repayment ability are not offered. We use stringent, conservative lending standards for underwriting to reduce our credit risk. For first mortgage loans originated or purchased during the current fiscal year, the average credit score was 774, and the average LTV was 71% at origination. The delinquency level related to loan originations prior to 2009, compared to originations or purchases in 2009 and after, reflect the higher credit standards to which we have subjected all new originations. As of September 30, 2023, loans originated prior to 2009 had a balance of $276.5 million, of which $5.5 million, or 2.0%, were delinquent, while loans originated or purchased in 2009 and after had a balance of $15.0 billion, of which $17.8 million, or 0.1%, were delinquent. One aspect of our credit risk concern relates to high concentrations of our loans that are secured by residential real estate in specific states, particularly Ohio and Florida, where a large portion of our historical lending has occurred. At September 30, 2023, approximately 57.2% and 17.7% of the combined total of our residential Core and construction loans held for investment and approximately 25.5% and 22.0% of our home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively. In an effort to moderate the concentration of our credit risk exposure in individual states, we have utilized direct mail marketing, our internet site and our customer service call center to extend our lending activities to other attractive geographic locations. Currently, in addition to Ohio and Florida, we are actively lending in 23 other states and the District of Columbia, and as a result of that activity, the concentration ratios of the combined total of our residential Core and construction loans held for investment in Ohio and Florida have trended downward from their September 30, 2010 levels when the concentrations were 79.1% in Ohio and 19.0% in Florida. Of the total mortgage loan originations and purchases for the year ended September 30, 2023, 25.8% are secured by properties in states other than Ohio or Florida. Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth. For most insured depositories, customer and community confidence are critical to their ability to maintain access to adequate liquidity and to conduct business in an orderly manner. We believe that a well capitalized institution is one of the most important factors in nurturing customer and community confidence. Accordingly, we plan to manage the pace of our growth in a manner that reflects our emphasis on high capital levels. At September 30, 2023, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a “well capitalized” status) was 9.82%. The Association's Tier 1 (leverage) capital ratio at September 30, 2023 included the negative impact of a $40 million cash dividend payment that the Association made to the Company, its sole shareholder, in December 2022. Because of its intercompany nature, this dividend payment did not impact the Company's consolidated capital ratios. We expect to continue to remain a well capitalized institution. In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits (including brokered deposits), borrowing from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. To attract deposits, we typically offer rates that are competitive with the rates on similar products offered by other financial institutions. At September 30, 2023, deposits totaled $9.45 billion (including $1.16 billion of brokered CDs), while borrowings totaled $5.27 billion and borrowers’ advances and servicing escrows totaled $154.2 million, combined. In evaluating funding sources, we consider many factors, including cost, collateral, duration and optionality, current availability, expected sustainability, impact on operations and capital levels. We preserve the availability of alternative funding sources through various mechanisms. First, by maintaining high capital levels, we retain the flexibility to increase our balance sheet size without jeopardizing our capital adequacy. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. Second, we pledge available real estate mortgage loans with the FHLB of Cincinnati and the FRB-Cleveland. At September 30, 2023, the 54 Association had the ability to borrow a maximum of $6.63 billion from the FHLB of Cincinnati and $126.4 million from the FRB-Cleveland Discount Window. As of September 30, 2023, our capacity for additional borrowing from FHLB of Cincinnati was $1.38 billion, Third, we have the ability to purchase overnight Fed Funds up to $585.0 million through various arrangements with other institutions. Fourth, we invest in high quality marketable securities that exhibit limited market price variability and, to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At September 30, 2023, our investment securities portfolio totaled $508.3 million. Finally, cash flows from operating activities have been a regular source of funds. During the fiscal years ended September 30, 2023 and 2022, cash flows from operations totaled $90.7 million and $38.9 million, respectively. Overall, while customer and community confidence can never be assured, the Company believes that our liquidity is adequate and that we have adequate access to alternative funding sources. Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. Our ratio of non-interest expense to average assets was 1.31% for the fiscal year ended September 30, 2023 and 1.34% for the fiscal year ended September 30, 2022. As of September 30, 2023, our average assets per full-time associate and our average deposits per full-time associate were $17.1 million and $9.5 million, respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average deposits (exclusive of brokered accounts) held at our branch offices ($224.0 million per branch office as of September 30, 2023) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses as we grow our business. Critical Accounting Policies and Estimates Critical accounting policies and estimates are defined as those that involve significant judgments and uncertainties, and could potentially give rise to materially different results under different assumptions and conditions. We believe that the most critical accounting policies and estimates upon which our financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, relate to the allowance for credit losses, income taxes and pension benefits. Allowance for Credit Losses. The allowance for credit losses is the amount estimated by management as necessary to absorb credit losses related to both the loan portfolio and off-balance sheet commitments based on a life of loan methodology. The amount of the allowance is based on significant estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses. At September 30, 2023, the allowance for credit losses was $102.6 million or 0.67% of total loans. An increase or decrease of 10% in the allowance at September 30, 2023 would result in a $10.3 million charge or release, respectively, to income before income taxes. As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the charge-offs for specific loans. Assumptions are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. Management carefully reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans. Management performs a quarterly evaluation of the adequacy of the allowance for credit losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic concentrations, economic forecasts and how they correlate to management's view of the future, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. Refer to Note 5. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and the Lending Activities section of Item 1. Business in Part I. for further discussion. Actual loan losses may be significantly more than the allowances we have established, which would have a materially adverse effect on our financial results. Income Taxes. Accounting for income taxes involves critical accounting policies and estimates due to the subjective nature of certain estimates that are involved in the calculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis 55 and the tax basis of our assets and liabilities. We must assess the realization of the deferred tax asset and, to the extent that we believe that recovery is not likely, a valuation allowance is established. Adjustments to increase or decrease existing valuation allowances, if any, are charged or credited, respectively, to income tax expense. At September 30, 2023, no valuation allowances were outstanding. Even though we have determined a valuation allowance is not required for deferred tax assets at September 30, 2023, there is no guarantee that those assets will be recognizable in the future. Pension Benefits. The determination of our obligations and expense for pension benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate and expected long-term rate of return on plan assets. Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions could materially affect future pension obligations and expense. Comparison of Financial Condition at September 30, 2023 and September 30, 2022 Total assets increased $1.13 billion, or 7.1%, to $16.92 billion at September 30, 2023, from $15.79 billion at September 30, 2022. This increase was mainly due to new loan originations exceeding the total of loan sales and principal repayments. Cash and cash equivalents increased $97.1 million, or 26.3%, to $466.7 million at September 30, 2023, from $369.6 million at September 30, 2022. Cash is managed to maintain the level of liquidity described later in the Liquidity and Capital Resources section of the Overview. Investment securities, all of which are classified as available for sale, increased $50.4 million, or 11.0%, to $508.3 million at September 30, 2023, from $457.9 million at September 30, 2022. Investment securities increased as $144.7 million in purchases exceeded the combined effect of $83.6 million in principal repayments, a $9.7 million increase in unrealized losses and $1.0 million of premium amortization that occurred during the year ended September 30, 2023. There were no sales of investment securities during the year ended September 30, 2023. Loans held for investment, net of deferred loan fees and allowance for credit losses, increased $908.7 million, or 6.4%, to $15.17 billion at September 30, 2023, from $14.26 billion at September 30, 2022, as new originations and additional draws on existing accounts exceeded loan sales and repayments. Residential mortgage loans increased $531.6 million, or 4.6%, to $12.12 billion at September 30, 2023. In addition, there was a $396.6 million increase in the balance of home equity loans and lines of credit during the year ended September 30, 2023. During the fiscal year ended September 30, 2023, $624.8 million of three- and five-year “Smart Rate” loans were originated while $1.23 billion of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated or purchased. Of the total $1.86 billion in first mortgage loans originated and purchased for the fiscal year ended September 30, 2023, 11% were refinance transactions and 89% were purchases, while 34% were adjustable-rate mortgages and 66% were fixed-rate mortgages. Fixed-rate loans with terms of 10 years or less accounted for 2% of total first mortgage loan originations and purchases. During the fiscal year ended September 30, 2023, we completed $77.2 million in loan sales to Fannie Mae, which included $43.5 million of loans originated through our Mortgage Passport program and $33.7 million of agency-compliant first mortgage loans originated through our traditional lending programs. Commitments originated for home equity lines of credit and equity and bridge loans were $1.70 billion for the year ended September 30, 2023, compared to $2.16 billion for the year ended September 30, 2022. At September 30, 2023, pending commitments to originate new home equity lines of credit were $64.2 million and equity and bridge loans were $80.9 million. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information. The allowance for credit losses was $104.8 million, or 0.69% of total loans receivable, at September 30, 2023, and included a $27.5 million liability for unfunded commitments. At September 30, 2022, the allowance for credit losses was $99.9 million, or 0.70% of total loans receivable and included a $27.0 million liability for unfunded commitments. Refer to Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for additional discussion. The amount of FHLB stock owned increased $34.8 million, or 16.4%, to $247.1 million at September 30, 2023, from $212.3 million at September 30, 2022. FHLB stock ownership requirements dictate the amount of stock owned at any given time. Total bank owned life insurance contracts increased $8.0 million, to $312.0 million at September 30, 2023, from $304.0 million at September 30, 2022, primarily due to changes in cash surrender value. Deposits increased $528.8 million, or 5.9%, to $9.45 billion at September 30, 2023, from $8.92 billion at September 30, 2022. The increase in deposits resulted primarily from a $786.7 million increase in CDs, partially offset by a $22.9 million 56 decrease in savings accounts (consisting of an $135.2 million decrease in money market accounts in the state of Florida and a $95.8 million increase in our high yield savings accounts) and a $226.6 million decrease in interest-bearing checking accounts. The balance of brokered CDs at September 30, 2023 was $1.16 billion, which is an increase of $587.4 million from the balance of $575.2 million at September 30, 2022. Based on FDIC insurance limits by ownership structure, the total uninsured deposits were $322.5 million and $366.7 million at September 30, 2023 and September 30, 2022, respectively. Borrowed funds increased $480.4 million, or 10.0%, to $5.27 billion at September 30, 2023, from $4.79 billion at September 30, 2022. The increase was primarily used to fund loan growth. The total balance of borrowed funds at September 30, 2023, all from the FHLB, included $592.0 million of overnight advances, $1.51 billion of term advances with a weighted average maturity of approximately 2.2 years, and $3.15 billion of short-term advances aligned with interest rate swap contracts. Interest rate swaps have been used to extend the duration of short-term borrowings at inception by paying a fixed rate of interest and receiving a variable rate. Refer to the Extending the Duration of Funding Sources section of the Overview and Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk for additional discussion regarding short-term borrowings and interest-rate swaps. Borrowers' advances for insurance and taxes increased by $7.2 million, or 6%, to $124.4 million at September 30, 2023, from $117.2 million at September 30, 2022. This change is consistent with increases in our residential mortgage loan portfolio. Accrued expenses and other liabilities increased by $28.8 million to $112.9 million at September 30, 2023 from $84.1 million at September 30, 2022. The increase is primarily due to a $13.2 million deferred tax increase, a $9.3 million increase on interest rate swap accruals, a $3.1 million increase in real estate tax payments remitted on behalf of borrowers, and a $4.0 million increase related to margin requirements on interest rate swaps. Total shareholders’ equity increased $83.0 million, or 4.5%, to $1.93 billion at September 30, 2023, from $1.84 billion at September 30, 2022. Activity reflects $75.3 million of net income in the current year, reduced by dividends of $58.3 million and $5.0 million of repurchases of outstanding common stock. Other changes include a $62.1 million net positive change in accumulated other comprehensive income, primarily related to changes in market values due to fluctuations in market interest rates and maturities of swap contracts, and $9.0 million of positive change related to activity in the Company's stock compensation and employee stock ownership plans. During the fiscal year ended September 30, 2023, a total of 361,869 shares of our common stock were repurchased at an average cost of $13.82 per share. The Company's eighth stock repurchase program allows for a total of 10,000,000 shares to be repurchased, with 5,191,951 shares remaining to be repurchased at September 30, 2023. As a result of a mutual member vote, Third Federal Savings and Loan Association of Cleveland, MHC ("the MHC"), the mutual holding company that owns approximately 81% of the outstanding stock of the Company, was able to waive receipt of its share of each dividend paid. Refer to Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for additional details regarding the repurchase of shares of common stock and the payment of dividends. 57 Analysis of Net Interest Income Net interest income represents the difference between the income we earn on our interest-earning assets and the expense we pay on our interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest- bearing liabilities and the rates earned on such assets and the rates paid on such liabilities. Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other information at and for the fiscal years indicated. No tax-equivalent yield adjustments were made, as the effects thereof were not material. Average balances are derived from daily average balances. Non-accrual loans are included in the computation of average balances, but only cash payments received on those loans during the period presented are reflected in the yield. The yields set forth below include the effect of deferred fees, deferred expenses, discounts and premiums that are amortized or accreted to interest income or interest expense. For the Fiscal Years Ended September 30, 2023 Interest Income/ Expense Average Balance Yield/ Cost Average Balance 2022 Interest Income/ Expense Yield/ Cost Average Balance 2021 Interest Income/ Expense Yield/ Cost (Dollars in thousands) Interest-earning assets: Interest-earning cash equivalents Investment securities $ 356,450 23,636 $ 16,826 1,123 4.72% $ 384,947 3,643 4.75% $ 3,178 43 0.83 % $ 567,035 — 1.18 % $ 673 — Mortgage-backed securities 464,919 13,247 2.85% 439,269 5,458 1.24 % 428,590 3,822 Loans (1) Federal Home Loan Bank stock 14,657,265 233,013 565,610 15,113 3.86% 13,258,517 173,506 6.49% 395,691 4,963 2.98 % 12,800,542 155,322 2.86 % 381,887 2,969 Total interest-earning assets 15,735,283 611,919 3.89% 14,259,882 409,333 2.87 % 13,951,489 389,351 Non-interest-earning assets Total assets Interest-bearing liabilities: Checking accounts Savings accounts Certificates of deposit Borrowed funds 515,123 $ 16,250,406 482,501 $ 14,742,383 532,786 $ 14,484,275 $ 1,093,036 6,081 0.56% $ 1,326,882 4,186 0.32 % $ 1,079,699 1,140 1,798,663 6,123,979 24,686 143,434 1.37% 1,859,990 2.34% 5,826,286 4,553 68,204 0.24 % 1,742,042 1.17 % 6,339,412 2,992 93,187 5,114,045 154,151 3.01% 3,671,323 64,994 1.77 % 3,303,925 60,402 0.12 % — % 0.89 % 2.98 % 1.91 % 2.79 % 0.11 % 0.17 % 1.47 % 1.83 % 1.27 % Total interest-bearing liabilities Non-interest-bearing liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest income Interest rate spread (2) 14,129,723 239,387 14,369,110 1,881,296 $ 16,250,406 328,352 2.32% 12,684,481 255,388 141,937 1.12 % 12,465,078 321,958 157,721 12,939,869 1,802,514 $ 14,742,383 12,787,036 1,697,239 $ 14,484,275 $ 283,567 $ 267,396 $ 231,630 1.57 % 1.75 % 1.52 % Net interest-earning assets (3) $ 1,605,560 $ 1,575,401 $ 1,486,411 Net interest margin (4) Average interest-earning assets to average interest-bearing liabilities 1.80 % 1.88 % 1.66 % 111.36 % 112.42 % 111.92 % (1) Loans include both mortgage loans held for sale and loans held for investment. (2) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (4) Net interest margin represents net interest income divided by total interest-earning assets. 58 Rate/Volume Analysis. The following table presents the effects of changing rates (yields) and volumes (average balances) on our net interest income for the fiscal years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume. Interest-earning assets: Interest-earning cash equivalents Investment securities Mortgage-backed securities Loans Federal Home Loan Bank stock Total interest-earning assets Interest-bearing liabilities: Checking accounts Savings accounts Certificates of deposit Borrowed funds For the Fiscal Years Ended September 30, 2023 vs. 2022 For the Fiscal Years Ended September 30, 2022 vs. 2021 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate Net Volume Rate Net (In thousands) $ (218) $ 13,866 $ 13,648 1,080 384 696 $ (143) $ 2,648 $ 2,505 43 — 43 337 44,983 7,452 124,936 7,789 169,919 97 13,668 2,162 7,988 10,150 381 1,539 136 1,613 1,636 13,804 1,994 47,960 154,626 202,586 14,046 5,936 19,982 (569) 2,464 1,895 (145) 20,278 20,133 315 214 2,731 1,346 3,046 1,560 3,654 71,576 75,230 (7,106) (17,877) (24,983) 31,978 57,179 89,157 6,419 (1,827) 4,592 Total interest-bearing liabilities 34,918 151,497 186,415 (158) (15,627) (15,785) Net change in net interest income $ 13,042 $ 3,129 $ 16,171 $ 14,204 $ 21,563 $ 35,767 Comparison of Operating Results for the Fiscal Years Ended September 30, 2023 and 2022 General. Net income of $75.3 million for the year ended September 30, 2023 increased $0.7 million compared to $74.6 million for the year ended September 30, 2022. The increase was primarily due to an increase in net interest income, offset by the combined effect of higher non-interest expenses and lower earnings on non-interest income items. Interest and Dividend Income. Interest and dividend income increased $202.6 million, or 49%, to $611.9 million during the year ended September 30, 2023 compared to $409.3 million during the prior year. Interest income on loans increased $169.9 million, or 43%, to $565.6 million for the year ended September 30, 2023 compared to $395.7 million for the year ended September 30, 2022. This increase was primarily attributed to an 88 basis point increase in yield on loans and a $1.40 billion increase in the average balance of loans to $14.66 billion for the current year compared to $13.26 billion during the prior year. Interest income on investment securities increased $8.8 million to $14.3 million during the year. The increase was largely due to mortgage-backed securities, which increased $7.7 million, or 140%, to $13.2 million during the current year compared to $5.5 million during the year ended September 30, 2022. This increase was attributed to a 161 basis point increase in the average yield on mortgage-backed securities, combined with a $25.6 million increase in the average balance of mortgage-backed securities to $464.9 million for the current year compared to $439.3 million during the prior year. Interest Expense. Interest expense increased $186.5 million, or 131%, to $328.4 million during the current year compared to $141.9 million during the year ended September 30, 2022. The increase primarily resulted from an increase in interest expense on deposits and borrowed funds. Interest expense on CDs increased $75.2 million, or 110%, to $143.4 million during the year ended September 30, 2023 compared to $68.2 million during the year ended September 30, 2022. The increase was attributed primarily to a 117 basis point increase in the average rate paid on CDs to 2.34% during the current year from 1.17% during the prior year. Additionally, there was a $297.7 million, or 5%, increase in the average balance of CDs to $6.12 billion from $5.83 billion during the prior year. Interest expense on savings and checking accounts increased $20.1 million and $1.9 million, respectively, to $24.7 million and $6.1 million during the year ended September 30, 2023, compared to the prior year due to an increase in the average rates we 59 paid on the deposits. Rates were adjusted on deposits in response to changes in market interest rates, as well as to changes in the rates paid by our competition. Interest expense on borrowed funds increased $89.2 million, or 137%, to $154.2 million during the year ended September 30, 2023 from $65.0 million during the year ended September 30, 2022. The increase was attributed to a combination of a $1.44 billion, or 39%, increase in the average balance of borrowed funds to $5.11 billion during the current year from $3.67 billion during the prior year, and a 124 basis point increase in the average rate paid for these funds to 3.01% during the year ended September 30, 2023 from 1.77% for the year ended September 30, 2022. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion. Net Interest Income. Net interest income increased $16.2 million, or 6%, to $283.6 million during the year ended September 30, 2023 from $267.4 million during the year ended September 30, 2022. The increase consisted of a $202.6 million increase in interest income, offset by a $186.5 million increase in interest expense. Average interest-earning assets increased during the current year by $1.48 billion, or 10%, when compared to the year ended September 30, 2022. Average interest- bearing liabilities increased by $1.45 billion. The average yield on interest earning assets increased 102 basis points to 3.89% from 2.87%, compared to a 120 basis point increased in the average rate paid on interest-bearing liabilities to 2.32% in the current year from 1.12% in the prior year. The interest rate spread was 1.57% for the fiscal year ended September 30, 2023 compared to 1.75% at September 30, 2022. The net interest margin was 1.80% for the fiscal year ended September 30, 2023 and 1.88% for the fiscal year ended September 30, 2022. The decrease in our interest rate spread and net interest margin is primarily due to the impact of a prolonged period of historically low interest rate environment followed by a rapid and meaningful rise in interest rates, that started in March 2022, along with an extended period of yield curve inversion. Refer to Controlling Our Interest Rate Risk Exposure of the Overview section for further discussion. Provision (Release) for Credit Losses. We recorded a release to the allowance for credit losses of $1.5 million during the year ended September 30, 2023 compared to a $1.0 million provision for the allowance during the year ended September 30, 2022. As delinquencies in the portfolio are resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan, uncollected balances have been charged against the allowance for credit losses previously provided. Recoveries of amounts charged against the allowance for credit losses occur when collateral values increase and homes are sold or when borrowers repay the amounts previously charged-off. For the fiscal year ended September 30, 2023, we recorded net recoveries of $6.4 million, as compared to net recoveries of $9.7 million for the year ended September 30, 2022. Credit loss provisions (releases) are recorded with the objective of aligning our allowance for credit loss balances with our current estimates of loss in the portfolio. Refer to the Lending Activities section of the Overview and Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for further discussion. Non-Interest Income. Non-interest income decreased $2.4 million, or 10%, to $21.4 million during the year ended September 30, 2023 compared to $23.8 million during the year ended September 30, 2022. The decrease in non-interest income was partly due to a decrease in loan fees and net gain on sale of loans of $2.1 million and $0.5 million, respectively during the year ended September 30, 2023, offset by a $1.2 million net positive change in the fair value of commitments to originate held for sale loans. Loans sold during the fiscal year ended September 30, 2023 were $77.2 million compared to loan sales of $128.1 million during the year ended September 30, 2022. The decrease in loan sales during the year was primarily due to the significant increase in interest rates in a relatively short period of time. Non-Interest Expense. Non-interest expense increased $15.0 million, or 8%, to $213.1 million during the fiscal year ended September 30, 2023 compared to $198.1 million during the fiscal year ended September 30, 2022. This increase resulted primarily from increases in salary and employee benefits, marketing expenses and federal insurance premium and assessments. Income Tax Expense. The provision for income taxes was $18.1 million during the year ended September 30, 2023 compared to $17.5 million during the year ended September 30, 2022. The provision for the current year included $17.3 million of federal income tax provision and $0.8 million of state income tax provision. The provision for the year ended September 30, 2022 included $17.1 million of federal income tax provision and $0.4 million of state income tax provision. Our combined effective tax rate was 19.4% during the year ended September 30, 2023 and 19.0% during the year ended September 30, 2022. For a comparison of operating results for the fiscal years ended September 30, 2022 and 2021, see the Company's Form 10-K for the fiscal year ended September 30, 2022. Liquidity and Capital Resources Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB of Cincinnati, borrowings from the FRB-Cleveland 60 Discount Window, overnight Fed Funds through various arrangements with other institutions, proceeds from brokered CDs transactions, principal repayments and maturities of securities, and sales of loans. In addition to the primary sources of funds described above, we have the ability to obtain funds through the use of collateralized borrowings in the wholesale markets, and from sales of securities. Also, debt issuance by the Company and access to the equity capital markets via a supplemental minority stock offering or a full conversion (second-step) transaction remain as other potential sources of liquidity, although these channels generally require up to nine months of lead time. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Association’s Investment Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the sum of cash and cash equivalents plus unencumbered investment securities for which ready markets exist, divided by total average assets). For the year ended September 30, 2023, the liquidity ratio averaged 5.53% for the Association. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2023. We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, scheduled liability maturities and the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2023, cash and cash equivalents totaled $466.7 million, which represented an increase of 26% from September 30, 2022. Investment securities classified as available for sale, which provide additional sources of liquidity, totaled $508.3 million at September 30, 2023. During the year ended September 30, 2023, loan sales, including commitments to sell, totaled $77.2 million, which included sales to Fannie Mae consisting of $66.5 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans and $10.7 million of loans that qualified under Fannie Mae's Home Ready initiative. At September 30, 2023, $3.3 million of long-term, fixed-rate residential first mortgage loans were classified as "held for sale". Our cash flows are derived from operating activities, investing activities and financing activities as reported in our CONSOLIDATED STATEMENTS OF CASH FLOWS included in the CONSOLIDATED FINANCIAL STATEMENTS. At September 30, 2023, we had $349.4 million in outstanding commitments to originate or purchase loans. In addition to commitments to originate loans, we had $4.70 billion in unfunded home equity lines of credit to borrowers. CDs due within one year of September 30, 2023 totaled $3.42 billion, or 36.2% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, sales of investment securities, other deposit products, including new CDs, brokered CDs, FHLB advances, borrowings from the FRB-Cleveland Discount Window or other collateralized borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the CDs due on or before September 30, 2024. We believe, however, based on past experience, that a significant portion of such deposits will remain with us. Generally, we have the ability to attract and retain deposits by adjusting the interest rates offered. Our primary investing activities are originating residential mortgage loans, home equity loans and lines of credit and purchasing investments. During the year ended September 30, 2023, we originated or purchased $1.86 billion of residential mortgage loans, and $1.70 billion of commitments for home equity loans and lines of credit, while during the year ended September 30, 2022, we originated $3.65 billion of residential mortgage loans and $2.16 billion of commitments for home equity loans and lines of credit. We purchased $144.7 million of securities during the year ended September 30, 2023, and $250.0 million during the year ended September 30, 2022. Also, during the year ended September 30, 2023, we purchased $279.2 million of long-term, fixed-rate first mortgage loans. Financing activities consist primarily of changes in deposit accounts, changes in the balances of principal and interest owed on loans serviced for others, FHLB advances, including any collateral requirements related to interest rate swap agreements and borrowings from the FRB-Cleveland Discount Window. We experienced a net increase in total deposits of $528.8 million during the year ended September 30, 2023 compared to a net decrease of $72.5 million during the year ended September 30, 2022. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. During the year ended September 30, 2023, there was a $587.4 million 61 increase in the balance of brokered CDs (exclusive of acquisition costs and subsequent amortization), which had a balance of $1.16 billion at September 30, 2023. At September 30, 2022, the balance of brokered CDs was $575.2 million. Principal and interest received on loans serviced for others and owed to investors experienced a net decrease of $0.1 million to $29.8 million during the year ended September 30, 2023, compared to a net decrease of $11.6 million to $29.9 million during the year ended September 30, 2022. During the year ended September 30, 2023, we increased our borrowed funds by $480.4 million to manage future interest costs, to fund new loan originations, and to actively manage our liquidity ratio. In March 2021, we received a second consecutive “Needs to Improve” rating on our CRA examination covering the period ended December 31, 2019. The FHFA practice is to place member institutions in this situation on restriction. If this restriction is established, we will not have access to FHLB long-term advances (maturities greater than one year) until our rating improves. However, we have not received notice of this restriction as of November 21, 2023. Existing advances and future advances with less than a one year term, including 90 day advances used to facilitate longer term interest rate swap agreements, will not be affected. We expect no impact to our ability to access funding. Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Cincinnati, the FRB-Cleveland Discount Window, and arrangements with other institutions to purchase overnight Fed Funds, each of which provides an additional source of funds. On September 28, 2023, the FHLB of Cincinnati approved a revision to their Credit Policy Manual to decrease the allowable borrowing limit from 50% to 40% of total assets, therefore decreasing the maximum borrowing capacity for the Company. In order to ensure adequate borrowing capacity with the FHLB, the Company has started replacing 90-day FHLB advances with like-term brokered deposits. In March 2023, the Federal Reserve created the BTFP as an additional source of liquidity. The program offers loans up to one year in length against pledges of high-quality securities, such as U.S. Treasuries, agency debt and mortgage-backed securities, owned as of March 21, 2023. The BTFP is scheduled to end on March 11, 2024. At September 30, 2023, we had $5.25 billion of FHLB of Cincinnati advances, no outstanding borrowings from the FRB- Cleveland Discount Window and no outstanding borrowings in the form of Fed Funds. Additionally, at September 30, 2023, we had $1.16 billion of brokered CDs. During the year ended September 30, 2023, we had average outstanding borrowed funds of $5.11 billion, as compared to $3.67 billion during the year ended September 30, 2022. Refer to the Extending the Duration of Funding Sources section of the Overview and the General section of Item 7A. Quantitative and Qualitative Disclosures About Market Risk for further discussion. The Association and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The Basel III capital framework for U.S. banking organizations ("Basel III Rules") includes both a revised definition of capital and guidelines for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. In 2020, the Association adopted the Simplifications to the Capital Rule ("Rule") which simplified certain aspects of the capital rule under Basel III. The impact of the Rule was not material to the Association's regulatory ratios. In 2019, a final rule adopted by the federal banking agencies provided banking organizations with the option to phase in, over a three-year period, the adverse day-one regulatory capital effects of the adoption of the CECL accounting standard. In 2020, as part of its response to the impact of COVID-19, U.S. federal banking regulatory agencies issued a final rule which provides banking organizations that implement CECL during the 2020 calendar year the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period, which the Association and Company have adopted. During the two-year delay, the Association and Company added back to CET1, 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses. After two years the quarterly transitional amounts along with the initial adoption impact of CECL is fixed and will be phased out of CET1 capital over the three-year period. The Association is subject to the "capital conservation buffer" requirement level of 2.5%. The requirement limits capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" in addition to the minimum capital requirements. At September 30, 2023, the Association exceeded the regulatory requirement for the "capital conservation buffer". As of September 30, 2023, the Association exceeded all regulatory capital requirements to be considered "Well Capitalized". In addition to the operational liquidity considerations described above, which are primarily those of the Association, the Company, as a separate legal entity, also monitors and manages its own, parent company-only liquidity, which provides the source of funds necessary to support all of the parent company's stand-alone operations, including its capital distribution strategies which encompass its share repurchase and dividend payment programs. The Company's primary source of liquidity is dividends received from the Association. The amount of dividends that the Association may declare and pay to the Company in any calendar year, without the receipt of prior approval from the OCC but with prior notice to the FRB-Cleveland, cannot 62 exceed net income for the current calendar year-to-date period plus retained net income (as defined) for the preceding two calendar years, reduced by prior dividend payments made during those periods. In December 2022, the Company received a $40.0 million cash dividend from the Association. Because of its intercompany nature, this dividend payment had no impact on the Company's capital ratios or its consolidated statement of condition but reduced the Association's reported capital ratios. At September 30, 2023, the Company had, in the form of cash and a demand loan from the Association, $173.7 million of funds readily available to support its stand-alone operations. The Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock was approved by the Board of Directors on October 27, 2016, and repurchases began on January 6, 2017. There were 4,808,049 shares repurchased under that program between its start date and September 30, 2023. During the year ended September 30, 2023, the Company repurchased $5.0 million of its common stock. The payment of dividends, support of asset growth and strategic stock repurchases are planned to continue in the future as the focus for future capital deployment activities. Third Federal Savings, MHC has the approval of its members to waive dividends aggregating up to $1.13 per share on the common stock of the Company for the 12 months following the special meeting of members held on July 11, 2023, and subsequently received the non-objection from the FRB. Impact of Inflation and Changing Prices Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation. Recent Accounting Pronouncements Refer to Note 20. RECENT ACCOUNTING PRONOUNCEMENTS of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for pending and adopted accounting guidance. Item 7A. Quantitative and Qualitative Disclosures About Market Risk General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk has historically been interest rate risk. In general, our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and advances from the FHLB of Cincinnati. As a result, a fundamental component of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established risk parameter limits deemed appropriate given our business strategy, operating environment, capital, liquidity and performance objectives. Additionally, our Board of Directors has authorized the formation of an Asset/Liability Management Committee comprised of key operating personnel, which is responsible for managing this risk in a manner that is consistent with the guidelines and risk limits approved by the Board of Directors. Further, the Board has established the Directors Risk Committee, which, among other responsibilities, conducts regular oversight and review of the guidelines, policies and deliberations of the Asset/Liability Management Committee. We manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. Refer to the Overview section of Item 7 for additional discussion on how we manage interest rate risk. Economic Value of Equity. Using customized modeling software, the Company and Association prepare periodic estimates of the amounts by which the net present value of cash flows from assets, liabilities and off-balance sheet items (the institution’s economic value of equity or EVE) would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach in measuring the interest rate sensitivity of EVE. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumption that instantaneous changes (measured in basis points) occur at all maturities along the United States Treasury yield curve and other relevant market interest rates. A basis point equals one, one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is tailored specifically to our organization, which, we believe, improves its predictive accuracy. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. The following table presents the estimated changes in the Company's EVE at September 30, 2023 that would result from the indicated instantaneous changes in the United States Treasury yield curve and other relevant market interest rates. 63 TFS Financial Corporation Change in Interest Rates (basis points) (1) Estimated EVE (2) Estimated Increase (Decrease) in EVE Amount Percent +300 +200 +100 0 -100 -200 -300 (Dollars in thousands) $ 740,527 $ (513,451) 928,976 1,111,172 1,253,978 1,365,669 1,422,575 1,411,363 (325,002) (142,806) — 111,691 168,597 157,385 (40.95) % (25.92) % (11.39) % — % 8.91 % 13.44 % 12.55 % EVE as a Percentage of Present Value of Assets (3) EVE Ratio (4) Increase (Decrease) (basis points) 5.28 % 6.44 % 7.49 % 8.21 % 8.70 % 8.83 % 8.56 % (293) (177) (72) — 49 62 35 The following table presents the estimated changes in the Association's EVE at September 30, 2023 that would result from the indicated instantaneous changes in the United States Treasury yield curve and other relevant market interest rates. Third Federal Savings and Loan Association Change in Interest Rates (basis points) (1) Estimated EVE (2) Estimated Increase (Decrease) in EVE Amount Percent +300 +200 +100 0 -100 -200 -300 (Dollars in thousands) $ 519,419 $ (512,967) 707,707 889,739 1,032,386 1,143,898 1,200,628 1,189,237 (324,679) (142,647) — 111,512 168,242 156,851 (49.69) % (31.45) % (13.82) % — % 10.80 % 16.30 % 15.19 % EVE as a Percentage of Present Value of Assets (3) EVE Ratio (4) Increase (Decrease) (basis points) 3.71 % 4.91 % 6.00 % 6.77 % 7.30 % 7.46 % 7.22 % (306) (186) (77) — 53 69 45 _________________ (1) Assumes an instantaneous uniform change in interest rates at all maturities. (2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. (3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. (4) EVE Ratio represents EVE divided by the present value of assets. The tables above indicate that at September 30, 2023, in the event of an increase of 200 basis points in all interest rates, the Company and Association would experience a 25.92% and 31.45% decrease in EVE, respectively. In the event of a 100 basis point decrease in interest rates, the Company and Association would experience a 8.91% and 10.80% increase in EVE, respectively. 64 The following tables are based on the calculations contained in the previous tables, and set forth the change in the EVE at a +200 basis point rate of shock at September 30, 2023, with comparative information as of September 30, 2022. By regulation, the Association must measure and manage its interest rate risk for interest rate shocks relative to established risk tolerances in EVE. TFS Financial Corporation Risk Measure (+200 bp Rate Shock) Pre-Shock EVE Ratio Post-Shock EVE Ratio Sensitivity Measure in basis points Percentage Change in EVE Ratio Risk Measure (+200 bp Rate Shock) Pre-Shock EVE Ratio Post-Shock EVE Ratio Sensitivity Measure in basis points Percentage Change in EVE Ratio Third Federal Savings and Loan Association At September 30, 2023 2022 8.21 % 6.44 % (177) (25.92) % 11.00 % 9.25 % (175) (20.25) % At September 30, 2023 2022 6.77 % 4.91 % (186) (31.45) % 9.08 % 6.71 % (237) (29.92) % The manner in which actual yields, costs and consumer behavior respond to changes in market interest rates may vary from the inherent methodologies used to measure interest rate risk through changes in EVE. In this regard, the EVE tables presented above assume: • no new growth or business volumes; • that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, except for reductions to reflect mortgage loan principal repayments along with modeled prepayments and defaults, and deposit decays; and • that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE tables provide an indication of our interest rate risk exposure as of the indicated dates, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and will differ from actual results. In addition to our core business activities, which seek to originate Smart Rate (adjustable) loans, home equity lines of credit (adjustable) and 10-year fixed-rate loans funded by borrowings from the FHLB and intermediate term CDs (including brokered CDs), and which are intended to have a favorable impact on our IRR profile, the impact of several other items and events resulted in the 279 and 231 basis point deterioration in the Pre-Shock EVE Ratio (base valuation) measures at September 30, 2023, when compared to the measures at September 30, 2022 for the Company and Association, respectively. Factors contributing to these deteriorations included increases in market interest rates, capital actions by the Association, and changes due to business activity. While our core business activities, as described at the beginning of this paragraph, are generally intended to have a positive impact on our IRR profile, the actual impact is determined by a number of factors, including the pace of mortgage asset additions to our balance sheet (including consideration of outstanding commitments to originate those assets), in comparison to the pace of the addition of duration extending funding sources. Our simulation model possesses random patterning capabilities and accommodates extensive regression analytics applicable to the prepayment and decay profiles of our borrower and depositor portfolios. The model facilitates the generation of alternative modeling scenarios and provides us with timely decision making data that is integral to our IRR management processes. Modeling our IRR profile and measuring our IRR exposure are processes that are subject to continuous revision, refinement, modification, enhancement, back testing and validation. We continually evaluate, challenge and update the methodology and assumptions used in our IRR model, including behavioral equations that have been derived based on third- party studies of our customers' historical performance patterns. Changes to the methodology and/or assumptions used in the model will result in reported IRR profiles and reported IRR exposures that will be different, and perhaps significantly, from the results reported above. Earnings at Risk. In addition to EVE calculations, we use our simulation model to analyze the sensitivity of our net interest income to changes in interest rates (the institution’s EaR). Net interest income is the difference between the interest income that we earn on our interest-earning assets, such as loans and securities, and the interest that we pay on our interest- 65 bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for prospective 12 and 24 month periods using customized (based on our portfolio characteristics) assumptions with respect to loan prepayment rates, default rates and deposit decay rates, and the implied forward yield curve as of the market date for assumptions related to projected interest rates. We then calculate what the estimated net interest income would be for the same period under numerous interest rate scenarios. The simulation process is subject to continual enhancement, modification, refinement and adaptation. As of September 30, 2023, the estimated EaR for the 12 months ending September 30, 2024 would decrease by 1.75% for the Company and 2.71% for the Association in the event that market interest rates used in the simulation were adjusted in incremental amounts (termed a "ramped" format) during the 12 month measurement period to an aggregate increase in 200 basis points. The Company and Association use the "ramped" assumption in preparing the EaR simulation estimates for use in its public disclosures. The Company and Association continue to calculate instantaneous scenarios, and as of September 30, 2023, the estimated EaR for the 12 months ending September 30, 2024, would decrease by 5.16% and 6.91%, respectively, in the event of an instantaneous 200 basis point increase in market interest rates. The manner in which actual yields, costs and consumer behavior respond to changes in market interest rates may vary from the inherent methodologies used to measure interest rate risk through EaR. In this regard, the interest rate risk information presented above assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. In addition to the preparation of computations as described above, we also formulate simulations based on a variety of non-linear changes in interest rates and a variety of non-constant balance sheet composition scenarios. Other Considerations. The EVE and EaR analyses are similar in that they both start with the same month end balance sheet amounts, weighted average coupon and maturity. The underlying prepayment, decay and default assumptions are also the same and they both start with the same month end "markets" (Treasury and FHLB yield curves, etc.). From that similar starting point, the models follow divergent paths. EVE is a stochastic model using 150 different interest rate paths to compute market value at the account level for each of the categories on the balance sheet whereas EaR uses the implied forward curve to compute interest income/expense at the account level for each of the categories on the balance sheet. EVE is considered as a point in time calculation with a "liquidation" view of the Company and Association where all the cash flows (including interest, principal and prepayments) are modeled and discounted using discount factors derived from the current market yield curves. It provides a long term view and helps to define changes in equity and duration as a result of changes in interest rates. On the other hand, EaR is based on balance sheet projections going one year and two years forward and assumes new business volume and pricing to calculate net interest income under different interest rate environments. EaR is calculated to determine the sensitivity of net interest income under different interest rate scenarios. With each of these models, specific policy limits have been established for the Association that are compared with the actual month end results. These limits have been approved by the Association's Board of Directors and are used as benchmarks to evaluate and moderate interest rate risk. In the event that there is a breach of policy limits that extends beyond two consecutive quarter end measurement periods, management is responsible for taking such action, similar to those described under the preceding heading of General, as may be necessary in order to return the Association's interest rate risk profile to a position that is in compliance with the policy. Item 8. Financial Statements and Supplementary Data The Financial Statements are included in Part IV, Item 15 of this Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Disclosure Controls and Procedures Under the supervision of and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that 66 evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Changes in Internal Control Over Financial Reporting No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management’s Report Regarding Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such terms are defined in Rule 13a-15(f) of the Exchange Act of 1934. Our system of internal controls is designed to provide reasonable assurance that the financial statements that we provide to the public are fairly presented. Our internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets, (ii) provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (iii) 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 our financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Accordingly, absolute assurance cannot be provided that the effectiveness of the internal control systems may not become inadequate in future periods because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2023. In making this assessment, the criteria set forth by the COSO in Internal Control-Integrated Framework (2013) was utilized. Management concluded that the Company's internal control over financial reporting was effective as of September 30, 2023, based on those criteria. The effectiveness of the Company's internal control over financial reporting as of September 30, 2023 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein. The Sarbanes-Oxley Act Section 302 Certifications have been filed as Exhibit 31.1 and Exhibit 31.2 to this Annual Report on Form 10-K. 67 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of TFS Financial Corporation Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of TFS Financial Corporation and subsidiaries (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 21, 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 Regarding 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 Cleveland, Ohio November 21, 2023 68 Item 9B. Other Information Securities Trading Plans of Directors and Executive Officers Transactions in our securities by our executive officers are required to be made in accordance with our Insider Trading Policy and Guidelines with Respect to Certain Transactions in Company Securities, which, among other things, requires that the transaction be in accordance with applicable U.S. federal securities laws that prohibit trading while in the possession of material nonpublic information. Rule 10b5-1 under the Securities Exchange Act of 1934 provides an affirmative defense that enables prearranged transactions in securities in a manner that avoids concerns about initiating transactions at a future date while possibly in possession of material nonpublic information. During this quarter, Marc A. Stefanski, Chairman, CEO, and President of the Company, completed the transactions that were contemplated in the Trading Plan adopted on June 14, 2023 that was intended to satisfy the affirmative defense conditions of the Exchange Act Rule 10b5-1(c) and authorized a designated option for 286,500 shares of common stock be exercised, after a 90-day cooling off period, in the event that the Company's stock equals or exceeds a predetermined share amount. On September 18, 2023, Daniel F. Weir, Director of the Company, adopted a Trading Plan that is intended to satisfy the affirmative defense conditions of the Exchange Act Rule 10b5-1(c) and authorizes a sale of a total of 100,000 shares of common stock on designated days, each for designated amount of shares, to be exercised, after a 90-day cooling off period, without regard to a predetermined share trading value. The Trading Plan expires upon the earlier of (1) February 08, 2024, (2) the execution of all of the orders relating to such trades as specified in the plan, (3) the date Broker receives notice of liquidation, dissolution, bankruptcy, or insolvency of the client, (4) the date the Broker receives notice of the Client's death, or (5) the termination of the Trading Plan in accordance with Section 9(b) or Section 16. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance Incorporated by reference from the Notice of Annual Meeting and Proxy Statement for the 2024 Annual Meeting of Shareholders (the “Proxy Statement”) sections entitled “Proposal One: Election of Directors,” “Executive Compensation,” “Delinquent Section 16(a) Reports” and “Corporate Governance.” Such information will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report. 69 The table below sets forth information, as of September 30, 2023, regarding our executive officers other than Marc A. Stefanski and Meredith S. Weil. Name Kathleen (Kitty) M. Danckers Russell C. Holmes Susanne N. Miller Timothy W. Mulhern Andrew J. Rubino Bradley T. Stefanski Gavin B. Stefanski Cathy W. Zbanek Title Chief Risk Officer Chief Retail Officer, the Association Chief Accounting Officer Chief Financial Officer (1) Chief Information Officer, the Association Chief Strategy Officer, the Association Chief Experience Officer, the Association Chief Synergy Officer, the Association Age 61 60 58 57 48 35 35 50 (1) On October 26, 2023, the Board of Directors appointed Mr. Mulhern to the role of Chief Innovation Officer of the Association and appointed Ms. Weil as Chief Financial Officer effective January 1, 2024. The executive officers of the Company and the Association are elected annually and hold office until their respective successors are elected or until death, resignation, retirement or removal by the Board of Directors. The Business Background of Our Executive Officers The business experience for the past five years of each of our executive officers other than Mr. Stefanski and Ms. Weil is set forth below. Unless otherwise indicated, executive officers have held their positions for the past five years. Kathleen (Kitty) M. Danckers has been with the Association since 1997, and was named Chief Risk Officer in June 2020. During her time with the Association, Ms. Danckers has served in various management roles including as a Regional Manager of Retail Operations, Manager of Information Services and Operations Support, and continues to serve as the Chief Information Security Officer. Ms. Danckers holds a BA in Computer Science, Mathematics and German from St. Catherine University. Ms. Danckers is a Fulbright Scholar. Russell C. Holmes has been with the Association since 2013 in retail delivery management and was named Chief Retail Officer in 2020. He most recently served as Ohio regional manager, managing all branch and loan production offices in the state. With 35 years in the banking business, Mr. Holmes joined Third Federal from Key Bank where he served as SVP District Retail Leader for Eastern Ohio. He holds a BS in Business Administration from the University of Akron, and received a Distinguished Business Alumni Award in 2009, and a Distinguished Alumni Award from the University’s multicultural department in 2013. Susanne N. Miller joined the Association in 1998 and was appointed Chief Accounting Officer in 2020. During her time with the Association, Ms. Miller has held various retail and accounting roles, and served on company-wide strategic project teams. Since 2007, she has worked as a manager in the Accounting Department, overseeing procedure implementation, corporate tax reporting and financial statement preparation. Ms. Miller holds a BS in Accounting from the University of Akron. Timothy W. Mulhern was named the Chief Financial Officer in January 2022. Mr. Mulhern joined the Association in 2003 as a project manager where he led key strategic business initiatives including a state loan expansion project, and IT projects to replace the company’s front-end servicing application, and implementation of an updated loan origination system. Mr. Mulhern moved to IT management, then to operations where he managed various departments including Loan Servicing, Default Servicing and Deposit Operations. He was named the Chief Credit Officer in August 2018, and Director of Internal Audit in June 2019, where he earned his CIA credentials. Mr. Mulhern joined the Finance Department in February 2021. He holds a Bachelor’s Degree in Accounting from John Carroll University and an MBA from the Weatherhead School of Management at Case Western Reserve University. Prior to joining Third Federal, Mr. Mulhern was in public accounting with Coopers & Lybrand where he earned his CPA credentials, and more than a decade as a small business owner. Andrew J. Rubino has been with the Association since 2000, joining the company as a business analyst. He was named Chief Information Officer in 2021. Mr. Rubino has held a variety of leadership positions throughout the company, serving as Information Security Officer and managing several strategic areas of the company, including: Loan Production, Customer Care, Internet Services, Operations Support and Marketing, most recently serving as Chief Marketing Officer. He holds both a BS in Management Information Systems and an MBA from the University of Akron. 70 Bradley T. Stefanski has been with the Association since 2014, and was named Chief Strategy Officer in March 2022. He began his career at Third Federal in the Risk Management Department, working on the development of the company’s Market Risk Management Program, including modeling and testing; before moving to Loan Production and the branch system, where he spent four years in roles in Underwriting, retail management, and Operations Support project development. Mr. Stefanski then joined the Finance Department in 2021 to help drive strategic initiatives. He holds a BA in Sociology and Economics from Colgate University. Bradley T. Stefanski is the son of our Chairman of the Board, Chief Executive Officer and President, Marc A. Stefanski, and brother of our Vice Chairman of the Board, Ashley H. Williams. Gavin B. Stefanski joined the Association in 2018 in the Management Training Program, supporting the company’s branch system in Southern and Northeast Ohio. Mr. Stefanski was named Underwriting Manager in 2019, Loan Production Manager in 2021, and became Chief Lending Officer in March 2022. He was named Chief Experience Officer in May 2023. Prior to Third Federal, he managed multi-billion dollar and strategic clients for ODW Logistics, a national supply chain solutions company in Hamilton, Ohio, where he was responsible for developing and maintaining customized total freight management solutions driving high revenue growth for ODW. Mr. Stefanski holds a BS in Business from the Farmer School of Business at Miami University. Gavin B. Stefanski is the nephew of our Chairman of the Board, Chief Executive Officer and President, Marc A. Stefanski, and cousin of our Vice Chairman of the Board, Ashley H. Williams. Cathy W. Zbanek joined the Association in 2001, and was named Chief Synergy Officer in 2020. In her role, Ms. Zbanek is responsible for fostering the internal synergy of the organization as well as customer engagement. She most recently served as Chief Marketing and Human Resources Officer since 2013. Prior to her roles on the executive team, Ms. Zbanek directed several of the company’s key strategic business projects as well as systems design and development. She also managed several Third Federal departments, including Customer Service and Marketing. Before joining the Association, Ms. Zbanek served as a senior consultant with Waterstone Consulting, working in their Management Consulting Group. Her experience also includes working with the consulting group, Price Waterhouse Coopers. She holds a BA in Economics and Psychology from the University of Pennsylvania. The Company has adopted a policy statement entitled CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS that applies to our chief executive officer and our senior financial officers. A copy of the CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS is available on our website, www.thirdfederal.com. Item 11. Executive Compensation Incorporated by reference from the sections of the Proxy Statement entitled “Executive Compensation,” “Report of the Compensation Committee,” and “Director Compensation.” Such information will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Incorporated by reference from the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.” Such information will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report. The Company’s only equity compensation program that was not approved by shareholders is its employee stock ownership plan, which was established in conjunction with our initial stock offering completed in 2007. 71 The following table provides information as of September 30, 2023 regarding our Amended and Restated 2008 Equity Incentive Plan that was approved by shareholders on February 22, 2018. The original plan was approved by shareholders on May 29, 2008. Plan Category Equity Compensation Plans Approved by Stockholders Equity Compensation Plans Not Approved by Stockholders Total ______________________ Number of Shares to be Issued Upon Exercise of Outstanding Options, Rights and Warrants Weighted-Average Exercise Price of Outstanding Options, Rights and Warrants Number of Shares Remaining Available for Future Issuance Under the Plan 3,549,879 $ 8.81 (1) 7,138,688 N/A 3,549,879 N/A $ 8.81 (1) N/A 7,138,688 (1) Weighted-Average Exercise Price of Outstanding Options, Rights and Warrants is calculated using 1,339,833 shares of restricted stock awards at $0.00, 218,071 shares of performance share units at $0.00, and 1,991,975 shares of stock option awards at $15.69. Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated by reference from the sections of the Proxy Statement entitled “Certain Relationships and Related Transactions” and “Corporate Governance.” Such information will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report. Item 14. Principal Accounting Fees and Services Incorporated by reference from the section of the Proxy Statement entitled “Fees Paid to Deloitte & Touche LLP (PCAOB ID No. 34).” Such information will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report. PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements The following documents are filed as part of this Annual Report on Form 10-K: a. The consolidated financial statements of TFS Financial Corporation and subsidiaries contained in Part II, Item 8 of this Annual Report on Form 10-K: • • • • • • Consolidated Statements of Condition as of September 30, 2023 and 2022; Consolidated Statements of Income for the years ended September 30, 2023, 2022 and 2021; Consolidated Statements of Comprehensive Income for the years ended September 30, 2023, 2022 and 2021; Consolidated Statements of Shareholders' Equity for the years ended September 30, 2023, 2022 and 2021; Consolidated Statements of Cash Flows for the years ended September 30, 2023, 2022 and 2021; and Notes to the Consolidated Financial Statements b. The exhibits listed in the Exhibits Index beginning on Page 121 of this Annual Report on Form 10-K. Item 16. Form 10-K Summary Not applicable. 72 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of TFS Financial Corporation Opinion on the Financial Statements We have audited the accompanying consolidated statements of condition of TFS Financial Corporation and subsidiaries (the "Company") as of September 30, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), shareholders' 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 21, 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 5 to the financial statements Critical Audit Matter Description The allowance for credit losses (“ACL”) is management’s estimate of expected credit losses in the loan portfolio, including off- balance sheet commitments. As discussed in Notes 1 and 5 of the consolidated financial statements, the ACL is an amount which represents management’s best estimate of expected credit losses over the contractual life of the Company’s loan portfolio as of the balance sheet date. We have identified the general valuation allowance ("GVA"), which is a component of ACL, for both the loan portfolio and off-balance sheet commitments, as a critical audit matter. GVA for the loan portfolio is comprised of quantitative general valuation allowances for credit losses based on historical loan loss, and qualitative adjustments to the quantitative general valuation allowances to cover uncertainties that affect the estimate of expected credit losses. GVA for off- balance sheet commitments is comprised of expected lifetime losses on unfunded loan commitments to extend credit where the obligations are not unconditionally cancellable. As of September 30, 2023, the Company's loan portfolio totaled $15.2 billion, and the related ACL was $77.3 million, including $67.8 million GVA. The Company's off-balance sheet commitments totaled $5.1 billion, and the related GVA was $27.5 million. The GVA is established using relevant available information, relating to past events, current conditions, and reasonable and supportable forecasts. The Company utilizes loan level regression models with forecasted economic data to derive the probability of default and loss given default factors. These factors are used to calculate the loan level credit loss over a 24- month reasonable and supportable period with an immediate reversion to historical mean loss rates for the remaining life of the loans. Qualitative adjustments are then made to account for factors that management does not believe are captured in the Current Expected Credit Losses ("CECL") quantitative models. The determination of the appropriate level of the allowance for 73 the loan portfolio inherently involves a high degree of subjectivity and requires significant estimates of current credit risks using both quantitative and qualitative analyses. Auditing certain aspects of the GVA, including the (1) model methodology, (2) model accuracy, (3) model assumptions, (4) selection of relevant risk characteristics, (5) interpretation of the results, and (6) use of qualitative adjustments, involves especially subjective and complex judgment. Given the significant judgment in determining the GVA estimate, performing audit procedures to evaluate the reasonableness of management’s estimate of the GVA requires a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the GVA included the following, among others: • We tested the effectiveness of controls over the Company’s (1) model methodology, (2) model accuracy, (3) model assumptions, (4) selection of relevant risk characteristics, (5) interpretation of the results, and (6) use of qualitative adjustments. • With the assistance of our credit specialists, we evaluated the reasonableness of the (1) model methodology, (2) model accuracy, (3) model assumptions, (4) selection of relevant risk characteristics, and (5) interpretation of the results. • We evaluated trends in the total GVA for consistency with trends in loan portfolio growth and credit performance. • We tested the accuracy and completeness of key risk characteristics input into the model by agreeing to source information. • We assessed the Company's method for determining the qualitative factor adjustments and the effect of those factors on the GVA compared with relevant credit risk factors and credit trends. /s/ Deloitte & Touche LLP Cleveland, Ohio November 21, 2023 We have served as the Company's auditor since 2000. 74 TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION As of September 30, 2023 and 2022 (In thousands, except share data) ASSETS Cash and due from banks Other interest-earning cash equivalents Cash and cash equivalents Investment securities available for sale (amortized cost $561,715 and $501,597, respectively) Mortgage loans held for sale Loans held for investment, net: Mortgage loans Other loans Deferred loan expenses, net Allowance for credit losses on loans Loans, net Mortgage loan servicing assets, net Federal Home Loan Bank stock, at cost Real estate owned, net Premises, equipment, and software, net Accrued interest receivable Bank owned life insurance contracts Other assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits Borrowed funds Borrowers’ advances for insurance and taxes Principal, interest, and related escrow owed on loans serviced Accrued expenses and other liabilities Total liabilities Commitments and contingent liabilities Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 280,359,173 and 280,582,741 outstanding at September 30, 2023 and September 30, 2022, respectively Paid-in capital Treasury stock, at cost; 51,959,577 and 51,736,009 shares at September 30, 2023 and September 30, 2022, respectively Unallocated ESOP shares Retained earnings—substantially restricted Accumulated other comprehensive income Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY See accompanying notes to consolidated financial statements. 2023 2022 $ 29,134 437,612 466,746 508,324 3,260 $ 18,961 350,603 369,564 457,908 9,661 15,177,844 4,411 60,807 (77,315) 15,165,747 7,400 247,098 1,444 34,708 53,910 312,072 117,270 $ 16,917,979 14,276,478 3,263 50,221 (72,895) 14,257,067 7,943 212,290 1,191 34,531 40,256 304,040 95,428 $ 15,789,879 $ 9,449,820 5,273,637 124,417 29,811 112,933 14,990,618 $ 8,921,017 4,793,221 117,250 29,913 84,139 13,945,540 — — 3,323 1,755,027 3,323 1,751,223 (776,101) (27,084) 886,984 85,212 1,927,361 $ 16,917,979 (771,986) (31,417) 870,047 23,149 1,844,339 $ 15,789,879 75 TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For each of the three years in the period ended September 30, 2023 (In thousands, except share and per share data) INTEREST AND DIVIDEND INCOME: Loans, including fees Investment securities available for sale Other interest and dividend earning assets Total interest and dividend income INTEREST EXPENSE: Deposits Borrowed funds Total interest expense NET INTEREST INCOME PROVISION (RELEASE) FOR CREDIT LOSSES NET INTEREST INCOME AFTER PROVISION (RELEASE) FOR CREDIT LOSSES NON-INTEREST INCOME: Fees and service charges, net of amortization Net gain on the sale of loans Increase in and death benefits from bank owned life insurance contracts Other Total non-interest income NON-INTEREST EXPENSE: Salaries and employee benefits Marketing services Office property, equipment, and software Federal insurance premium and assessments State franchise tax Other expenses Total non-interest expense INCOME BEFORE INCOME TAXES INCOME TAX EXPENSE NET INCOME Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted 2023 2022 2021 $ 565,610 $ 14,370 395,691 $ 5,501 31,939 611,919 174,201 154,151 328,352 283,567 (1,500) 8,141 409,333 76,943 64,994 141,937 267,396 1,000 381,887 3,822 3,642 389,351 97,319 60,402 157,721 231,630 (9,000) 285,067 266,396 240,630 7,840 498 9,355 3,736 9,934 1,136 9,984 2,750 21,429 23,804 9,602 33,082 9,961 2,654 55,299 112,785 109,339 108,867 25,288 27,734 13,452 4,891 28,979 213,129 93,367 21,263 26,783 9,361 4,859 26,541 198,146 92,054 18,117 75,250 $ 17,489 74,565 $ 19,174 25,710 9,085 4,663 28,336 195,835 100,094 19,087 81,007 0.27 $ 0.26 $ 0.26 $ 0.26 $ 0.29 0.29 $ $ $ 277,436,382 278,583,454 277,370,762 278,686,365 276,694,594 278,576,254 See accompanying notes to consolidated financial statements. 76 TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For each of the three years in the period ended September 30, 2023 (In thousands) 2023 2022 2021 $ 75,250 $ 74,565 $ 81,007 (7,274) (34,860) (3,733) 66,649 2,688 127,093 (1,283) 56,096 11,801 62,063 64,164 $ 137,313 $ 165,515 $ 145,171 90,950 Net income Other comprehensive income (loss), net of tax: Net change in unrealized (losses) gains on securities available for sale Net change in cash flow hedges Net change in defined benefit plan obligation Total other comprehensive income (loss) Total comprehensive income See accompanying notes to consolidated financial statements. 77 TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For each of the three years in the period ended September 30, 2023 (In thousands, except share and per share data) Common stock Paid-in capital Treasury stock Unallocated common stock held by ESOP Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity Balance at September 30, 2020 $ 3,323 $ 1,742,714 $ (767,649) $ (40,084) $ 865,514 $ (131,965) $ 1,671,853 Comprehensive income Cumulative effect from changes in accounting principle, net of tax1 Net income Other comprehensive income net of tax ESOP shares allocated or committed to be released Compensation costs for equity incentive plans Treasury stock allocated to (from) equity incentive plan Dividends declared to common shareholders ($1.1225 per common share) — — — — — — — — — — 3,936 5,442 — — — — — (5,205) (386) — — — 4,333 — — (35,763) 81,007 — — (35,763) 81,007 — — — — 64,164 64,164 — — — 8,269 5,442 (5,591) — — — (57,101) — (57,101) Balance at September 30, 2021 3,323 1,746,887 (768,035) (35,751) 853,657 (67,801) 1,732,280 — 74,565 — 74,565 Comprehensive income Net income Other comprehensive income, net of tax ESOP shares allocated or committed to be released Compensation costs for equity incentive plans Purchase of treasury stock (337,259 shares) Treasury stock allocated to (from) equity incentive plan Dividends declared to common shareholders ($1.13 per common share) — — — — — — — Comprehensive income Net income Other comprehensive income, net of tax ESOP shares allocated or committed to be released Compensation costs for equity incentive plans Purchase of treasury stock (361,869 shares) Treasury stock allocated to (from) equity incentive plan Dividends declared to common shareholders ($1.13 per common share) — — — — — — — — — 2,729 3,946 — — — — — (5,049) (2,339) 1,098 — 4,334 — — — — — — — — — — — (58,175) — — 1,427 4,240 — — — — — (5,000) (1,863) 885 — 4,333 — — — — — — — — — — — (58,313) 90,950 90,950 — — — — — 7,063 3,946 (5,049) (1,241) (58,175) 62,063 62,063 — — — — — 5,760 4,240 (5,000) (978) (58,313) Balance at September 30, 2022 3,323 1,751,223 (771,986) (31,417) 870,047 23,149 1,844,339 — 75,250 — 75,250 Balance at September 30, 2023 1 Related to ASU 2016-13 adopted October 1, 2020. $ 3,323 $ 1,755,027 $ (776,101) $ See accompanying notes to consolidated financial statements. (27,084) $ 886,984 $ 85,212 $ 1,927,361 78 TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For each of the three years in the period ended September 30, 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: ESOP and stock-based compensation expense Depreciation and amortization Deferred income taxes Provision (release) for credit losses Net gain on the sale of loans Net gain on sale of commercial property Other net (gains) losses Proceeds from sales of loans held for sale Loans originated and principal repayments on loans held for sale Increase in bank owned life insurance contracts Net (increase) decrease in interest receivable and other assets Net increase (decrease) in accrued expenses and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Loans originated or purchased Principal repayments on loans Proceeds from sales, principal repayments and maturities of: Securities available for sale Proceeds from sale of: Loans Real estate owned Premises, equipment and other assets Purchases of: Bank-owned life insurance FHLB stock Securities available for sale Premises, equipment, and software, net Other Net cash (used in) provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits Net increase (decrease) in borrowers' advances for insurance and taxes Net decrease in principal and interest owed on loans serviced Net increase (decrease) in short-term borrowed funds Proceeds/(Repayments) from Fed Funds purchased Proceeds from long-term borrowed funds Repayment of long-term borrowed funds Cash collateral/settlements received from (provided to) derivative counterparties Acquisition of treasury shares Dividends paid to common shareholders Net cash provided by (used in) financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS—Beginning of year CASH AND CASH EQUIVALENTS—End of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on deposits Cash paid for interest on borrowed funds Cash (received)/ paid for interest on interest rate swaps Cash paid for income taxes SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Transfer of loans to real estate owned Transfer of loans from held for investment to held for sale Transfer of loans from held for sale to held for investment Treasury stock issued for stock benefit plans 2023 2022 2021 (In thousands) $ 75,250 $ 74,565 $ 81,007 10,000 18,115 3,732 (1,500) (498) — (199) 43,124 (45,082) (9,355) (39,360) 36,495 90,722 11,009 27,035 (26,876) 1,000 (1,136) (181) 810 41,495 (66,162) (8,432) (13,043) (1,155) 38,929 13,711 32,568 (14,249) (9,000) (33,082) — 689 63,913 (67,024) (7,979) 7,697 14,904 83,155 (3,549,306) 2,605,262 (5,273,730) 3,447,529 (4,874,761) 4,756,761 83,567 163,568 317,066 33,635 484 — 87,671 429 389 — (34,808) (144,663) (5,101) 2,299 (1,008,631) — (49,507) (250,022) (2,700) 1,278 (1,875,095) 520,029 7,167 (101) 417,000 (225,000) 350,000 (77,876) 88,144 (5,978) (58,294) 1,015,091 97,182 369,564 466,746 $ (72,511) 7,617 (11,563) 875,000 225,000 600,000 (3,646) 162,094 (6,290) (58,297) 1,717,404 (118,762) 488,326 369,564 $ $ 739,699 206 — (70,000) (25,990) (297,466) (1,337) 3,178 547,356 (231,949) (1,903) (4,419) (525,000) — 100,000 (4,689) 89,970 (5,591) (56,637) (640,218) (9,707) 498,033 488,326 $ 169,153 $ 194,601 (50,416) 21,776 76,558 $ 37,120 29,138 39,602 98,535 16,043 45,031 25,772 869 33,543 8,433 1,863 1,283 86,077 22,741 2,412 330 698,917 — 5,310 See accompanying notes to consolidated financial statements. 79 TFS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended September 30, 2023, 2022, and 2021 (Dollars in thousands unless otherwise indicated) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business—TFS Financial Corporation, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering, and other financial services. Third Federal Savings and Loan Association of Cleveland, MHC, its federally chartered mutual holding company parent, owned 81.01% of the outstanding shares of common stock of the Company at September 30, 2023. The Company’s primary operating subsidiaries include the Association and Third Capital, Inc. The Association is a federal savings association, which provides retail loan and savings products to its customers in Ohio and Florida, through its 37 full-service branches, four loan production offices, customer service call center and internet site. The Association also provides savings products, purchase mortgages, first mortgage refinance loans, home equity lines of credit, and home equity loans in states outside of its branch footprint. The Association also acquires first mortgage loans through a correspondent lending partnership. Third Capital, Inc. was formed to hold non-thrift investments and subsidiaries. The accounting and reporting policies of TFS Financial Corporation and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. No material subsequent events have occurred requiring recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements. The following is a description of the significant accounting and reporting policies, which the Company follows in preparing and presenting its consolidated financial statements. Basis of Consolidation and Reporting—The consolidated financial statements of the Company include the accounts of TFS Financial Corporation and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash and Cash Equivalents—Cash and cash equivalents consist of working cash on hand, and demand and interest bearing deposits at other financial institutions with maturities of three months or less. For purposes of reporting cash flows, cash and cash equivalents also includes federal funds sold, when applicable. The Company has acknowledged informal agreements with banks where it maintains deposits. Under these agreements, service fees charged to the Company are waived provided certain average compensating balances are maintained throughout each month. Investment Securities—Our fixed-maturity securities are accounted for on an available-for-sale basis. Securities held as available-for-sale are reported at fair value, with the corresponding unrealized gains and (losses), net of deferred income taxes, reported in AOCI. Management determines the appropriate classification of investment securities based on its intent and ability to hold at the time of purchase. Purchases of securities are accounted for on a trade-date or settlement-date basis, depending on the settlement terms. Realized gains and (losses) on securities are computed on a specific identification basis. Realized gains and (losses) also include changes in fair value on derivatives not designated as hedging instruments. Sales of securities are accounted for on a trade-date or settlement-date basis, depending on the settlement terms. A decline in the fair value of any available for sale security, below cost, is evaluated for credit loss. Credit loss is recognized in earnings if management intends, or will more likely than not be required, to sell the security before the recovery of its amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, then a credit loss exists and an allowance would be recognized as a credit loss expense, limited to the difference between fair value and amortized cost. Non-credit related loss is recognized in OCI, net of applicable deferred income taxes. To determine whether a credit loss exists, the Company considers, among other things, adverse conditions related to the security, industry, geographic area, the payment schedule of the debt security and likelihood that the issuer will be able to make 80 payments that increase in the future, failure of the issuer to make scheduled payments and all available information relevant to the securities collectability, changes in ratings assigned by a rating agency, and other credit enhancements that affect the securities expected performance. Investment income consist of interest and accretion (net of amortization). Interest is recognized on an accrual basis using the level-yield method. Premiums and discounts are amortized using the level-yield method. Derivative Instruments—Derivative instruments are carried at fair value in the Company's financial statements. For derivative instruments that are designated and qualify as cash flow hedges, changes in the fair value of the derivative instrument are reported as a component of OCI, net of tax, and reclassified into earnings in the same period during which the hedged transaction affects earnings. The earnings effect of the hedging instrument will be presented in the same income statement line item as the earnings effect of the hedged item. AOCI will be adjusted to a balance that reflects the cumulative change in the fair value of the hedging instrument. 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, an evaluation of hedge transaction effectiveness and the benchmark interest rate or contractually specified interest rate being hedged. Hedge accounting is discontinued prospectively when (1) a derivative is no longer highly effective in offsetting changes in the fair value or cash flow of a hedged item, (2) a derivative expires or is sold, (3) a derivative is de-designated as a hedge, because it is unlikely that a forecasted transaction will occur, or (4) it is determined that designation of a derivative as a hedge is no longer appropriate. When hedge accounting is discontinued, the Company would continue to carry the derivative on the statement of condition at its fair value; however, changes in its fair value would be recorded in earnings instead of through OCI. For derivative instruments not designated as hedging instruments, the Company recognizes gains and (losses) on the derivative instrument in current earnings during the period of change. Mortgage Banking Activity—Mortgage loans originated or purchased and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Mortgage loans included in pending agency contracts to sell and securitize loans are carried at fair value. Fair value is based on quoted secondary market pricing for loan portfolios with similar characteristics and includes consideration of deferred fees (costs). Net unrealized gains or losses on loans carried at fair value, are recognized in a valuation allowance by charges to income. The Company retains servicing on loans that are sold and initially recognizes an asset for mortgage loan servicing rights based on the fair value of the servicing rights. Residential mortgage loans represent the single class of servicing rights and are measured at the lower of cost or fair value on a recurring basis. Mortgage loan servicing rights are reported net of accumulated amortization, which is recorded in proportion to, and over the period of, estimated net servicing revenues. The Company monitors prepayments and changes amortization of mortgage servicing rights accordingly. Fair values are estimated using discounted cash flows based on current interest rates and prepayment assumptions, and impairment is monitored each quarterly reporting period. The impairment analysis is based on predominant risk characteristics of the loans serviced, such as type, fixed- and adjustable-rate loans, original terms and interest rates. The amount of impairment recognized is the amount by which the mortgage loan servicing assets exceed their fair value. Servicing fee income net of amortization and other loan fees collected on loans serviced for others are included in Fees and service charges, net of amortization on the CONSOLIDATED STATEMENTS OF INCOME. Loans and Related Deferred Loan Expenses, net—Loans originated or purchased with the intent to hold into the foreseeable future are carried at unpaid principal balances adjusted for partial charge-offs, the allowance for credit losses and net deferred loan expenses. Interest on loans is accrued and credited to income as earned. Interest on loans is not recognized in income when collectability is uncertain. Loan fees and certain direct loan origination costs are deferred and recognized as an adjustment to interest income using the level-yield method over the contractual lives of related loans, if the loans are held for investment. If the loans are held for sale, net deferred fees (costs) are generally not amortized, but rather are recognized when the related loans are sold. Loans are classified as TDRs when the original contractual terms are restructured to provide a concession to a borrower experiencing financial difficulty under terms that would not otherwise be available and the restructuring is the result of an agreement between the Company and the borrower or is imposed by a court or law. Concessions granted in TDRs may include a reduction of the stated interest rate, a reduction or forbearance of principal, an extension of the maturity date, a significant delay in payments, the removal of one or more borrowers from the obligation, or any combination of these. 81 Allowance for Credit Losses—The allowance for credit losses represents the estimate of lifetime losses in our loan portfolio and off-balance sheet commitments. The allowance for credit losses is assessed on a quarterly basis and provisions (releases) for credit losses are made accordingly. The allowance is established using relevant available information, relating to past events, current conditions and supportable economic forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Qualitative adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency status or likely recovery of previous loan charge-offs. The allowance for credit losses is increased by recoveries and decreased by charge-offs. Also, qualitative adjustments were made to reflect expected recovery of loan amounts previously charged-off, beyond what the model is able to project. For further discussion on the allowance for credit losses, non-accrual, and TDRs, see Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES. Real Estate Owned, net—Real estate owned, net represents real estate acquired through foreclosure or deed in lieu of foreclosure and is initially recorded at fair value, less estimated costs to sell. Subsequent to acquisition, real estate owned is carried at the lower of cost or fair value, less estimated selling costs. Management performs periodic valuations and a valuation allowance is established by a charge to income for any excess of the carrying value over the fair value, less estimated costs to sell the property. Recoveries in fair value during the holding period are recognized until the valuation allowance is reduced to zero. Costs related to holding and maintaining the property are charged to expense. Premises, Equipment, and Software, net—Depreciation and amortization of premises, equipment and software is computed on a straight-line basis over the estimated useful lives of the related assets. Estimated lives are 31.5 years for office facilities and three to 10 years for equipment and software. Amortization of leasehold or building improvements is computed on a straight-line basis over the lesser of the economic useful life of the improvement or term of the lease, typically 10 years. Leases—At inception, all contracts are evaluated to determine if the arrangement contains a lease based on the terms and conditions. As a lessee, the Company recognizes leases with terms greater than one year on the CONSOLIDATED STATEMENTS OF CONDITION as lease assets (a right-of-use asset) and lease liabilities (a liability to make lease payments), measured on a discounted basis. For further discussion on leases, see Note 8. LEASES. Bank Owned Life Insurance Contracts—Life insurance is provided under both whole and split dollar life insurance agreements. Policy premiums were prepaid and the Company will recover the premiums paid from the proceeds of the policies. The Company recognizes death benefits and growth in the cash surrender value of the policies in other non-interest income. Goodwill—The excess of purchase price over the fair value of net assets of acquired companies is classified as goodwill and reported in Other Assets. Goodwill was $9,732 at September 30, 2023 and 2022. Goodwill is reviewed for impairment on an annual basis as of September 30. No impairment was identified as of September 30, 2023 or 2022. Taxes on Income—Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. Additional information about policies related to income taxes is included in Note 12. INCOME TAXES. Deposits—Interest on deposits is accrued and charged to expense monthly and is paid or credited in accordance with the terms of the accounts. Treasury Stock—Acquisitions of treasury stock through stock repurchases are recorded at cost using the cost method of accounting. Repurchases may be made through open market purchases, block trades and in negotiated private transactions, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. Repurchased shares will be available for general corporate purposes. Accumulated Other Comprehensive Income (Loss)—AOCI consists of changes in pension obligations, changes in unrealized gains (losses) on securities available for sale and cash flow hedges, each of which is net of the related income tax effects. The Company's policy is to release income tax effects from AOCI only when the entire portfolio to which the underlying transactions relate to is liquidated, sold or extinguished. Revenue from Contracts with Customers—The core principle of the guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. Three of the Company's revenue streams within scope of Topic 82 606 are the sales of REO, interchange income, and deposit account and other transaction-based service fee income. Those streams are immaterial and therefore quantitative information regarding these streams is not disclosed. Pension Benefits—The determination of our obligations and expense for pension benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate and expected long-term rate of return on plan assets. Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions could materially affect future pension obligations and expense. Share-Based Compensation—Compensation expense for awards of equity instruments is recognized on a straight-line basis over the requisite service period based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718 “Compensation—Stock Compensation”. All vested equity instruments are settled in stock. Forfeitures are recognized as they occur. Share-based compensation expense is included in Salaries and employee benefits in the CONSOLIDATED STATEMENTS OF INCOME. Tax benefits or deficiencies recognized for the difference between realized deductions and cumulative book compensation cost on share-based compensation awards are included in operating cash flows on the CONSOLIDATED STATEMENTS OF CASH FLOW. The grant date fair value of stock options is estimated using the Black-Scholes option-pricing model using assumptions for the expected option term, expected stock price volatility, risk-free interest rate, and expected dividend yield. Due to limited historical data on exercise of share options, the simplified method is used to estimate expected option term. Marketing Costs—Marketing costs are expensed as incurred. Earnings per Share—Basic EPS is computed by dividing net income by the weighted-average number of shares of common stock outstanding. Outstanding shares include shares sold to subscribers, shares held by the Third Federal Foundation, shares of the Employee Stock Ownership Plan which have been allocated or committed to be released for allocation to participants, and shares held by Third Federal Savings, MHC. Unvested shares awarded in the Company's share-based compensation plan are treated as participating securities for purposes of the two-class method when they contain nonforfeitable rights to dividends, but are not included in the number of shares in the computation of basic EPS. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. Diluted EPS is computed using the same method as basic EPS, but the weighted-average number of shares reflects the potential dilution, if any, of unexercised stock options, unvested shares of performance share units and unvested shares of restricted stock units that could occur if stock options were exercised and performance share units and restricted stock units were issued and converted into common stock. These potentially dilutive shares would then be included in the number of weighted-average shares outstanding for the period using the treasury stock method. At September 30, 2023, 2022 and 2021, potentially dilutive shares include stock options, restricted stock units and performance share units issued through share-based compensation plans. 2. STOCK TRANSACTIONS TFS Financial Corporation completed its initial public stock offering on April 20, 2007 and sold 100,199,618 shares, or 30.16% of its post-offering outstanding common stock, to subscribers in the offering. Third Federal Savings, MHC, the Company’s mutual holding company parent, holds 227,119,132 shares of TFS Financial Corporation’s outstanding common stock. TFS Financial Corporation issued 5,000,000 shares of common stock, or 1.50% of its post-offering outstanding common stock, to Third Federal Foundation. Pursuant to the eighth repurchase program for the repurchase of 10,000,000 shares authorized by the Board of Directors in October, 2016, 361,869 shares were repurchased during the year ended September 30, 2023, 337,259 shares were repurchased during the year ended September 30, 2022, and no shares were repurchased during the year ended September 30, 2021. At September 30, 2023, there were 5,191,951 shares remaining to be purchased under the eighth repurchase program. The Company previously repurchased 51,300,000 shares of the Company’s common stock as part of the previous seven Board of Directors-approved share repurchase programs. In total, the Company has repurchased 56,108,049 shares of the Company's common stock as of September 30, 2023. 3. REGULATORY MATTERS The Association is 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 direct material effect on the financial statements of the Association. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital 83 guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in table below) of common equity Tier 1, Tier 1, and Total capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to net average assets (as defined). The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet assets to broad risk categories. In 2019, a final rule adopted by the federal banking agencies provided banking organizations with the option to phase in, over a three-year period, the adverse day-one regulatory capital effects of the adoption of the CECL accounting standard. In 2020, as part of its response to the impact of COVID-19, U.S. federal banking regulatory agencies issued a final rule which provides banking organizations that implement CECL during the 2020 calendar year the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period, which the Association and Company have adopted. During the two-year delay, the Association and Company added back to CET1 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses. Beginning this fiscal year, the cumulative transitional amounts became fixed and will be phased out of CET1 capital over the subsequent three-year period. At September 30, 2023, the Association exceeded all regulatory capital requirements and is considered “well capitalized” under regulatory guidelines. The Association operates under the capital requirements for the standardized approach of the Basel III capital framework for U.S. banking organizations (“Basel III Rules”), which limits capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% in addition to the minimum capital requirements. At September 30, 2023, the Association exceeded the fully phased-in regulatory requirement for the "capital conservation buffer". The following table summarizes the actual capital amounts and ratios of the Association as of September 30, 2023 and 2022, compared to the minimum capital adequacy requirements and the requirements for classification as a well capitalized institution. Minimum Requirements For Capital Adequacy Purposes To be “Well Capitalized” Under Prompt Corrective Action Provision Actual Amount Ratio Amount Ratio Amount Ratio September 30, 2023 Total Capital to Risk-Weighted Assets $ 1,709,596 17.87 % $ 765,410 8.00 % $ 956,762 10.00 % Tier 1 (Leverage) Capital to Net Average Assets 1,640,657 9.82 % 667,958 4.00 % 834,948 5.00 % Tier 1 Capital to Risk-Weighted Assets Common Equity Tier 1 Capital to Risk-Weighted Assets September 30, 2022 Total Capital to Risk-Weighted Assets Tier 1 (Leverage) Capital to Net Average Assets Tier 1 Capital to Risk-Weighted Assets Common Equity Tier 1 Capital to Risk-Weighted Assets 1,640,657 17.15 % 574,057 6.00 % 765,410 8.00 % 1,640,657 17.15 % 430,543 4.50 % 621,896 6.50 % $ 1,666,677 1,614,615 1,614,615 18.84 % $ 707,788 10.33 % 625,020 18.25 % 530,841 8.00 % $ 884,734 781,275 4.00 % 707,788 6.00 % 10.00 % 5.00 % 8.00 % 1,614,615 18.25 % 398,130 4.50 % 575,077 6.50 % The Association paid dividends of $40,000 and $56,000 to the Company during the fiscal years ended September 30, 2023 and 2022, respectively. As permitted under interim final rules issued by the FRS on August 12, 2011, a majority of Third Federal Savings, MHC's members eligible to vote approved Third Federal Savings, MHC waiving dividends aggregating up to $1.13 per share on the common stock of the Company for the 12 month following the special meeting of members held on July 11 2023. Unless the FRS amends its interim rule, a member vote will be required for Third Federal Savings, MHC to waive its right to receive dividends beyond July 11, 2024. 84 4. INVESTMENT SECURITIES Available-for-sale securities are summarized in the tables below. REMICs Fannie Mae certificates Freddie Mac certificates U.S. Government and agency obligations Total REMICs Fannie Mae certificates U.S. Government and agency obligations Total September 30, 2023 Gross Unrealized Gains Losses Fair Value Amortized Cost $ 495,874 $ — $ (52,867) $ 443,007 834 1,141 1 — (21) (97) 814 1,044 63,866 $ 561,715 $ — 63,459 (407) 1 $ (53,392) $ 508,324 September 30, 2022 Gross Unrealized Gains Losses Fair Value Amortized Cost $ 496,529 $ 1 $ (43,262) $ 453,268 1,011 4,057 14 — (4) (438) 1,021 3,619 $ 501,597 $ 15 $ (43,704) $ 457,908 At September 30, 2023, and September 30, 2022, investment securities included $59,813 and $0, respectively, of U.S. government obligations pledged as collateral on our open swap positions to meet requirements established by the clearing organization. Accrued interest on investment securities is $1,907 and $1,122 at September 30, 2023, and September 30, 2022, respectively, and is reported in accrued interest receivable on the CONSOLIDATED STATEMENTS OF CONDITION. The following is a summary of our securities portfolio by remaining period to contractual maturity and yield at September 30, 2023. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Weighted average yields are not presented on a tax-equivalent basis and are calculated by multiplying each carry value by its yield and dividing the sum of these results by the total carry values. We did not hold any tax-free securities. Due in one year or less Due after one to five years Due after five to 10 years 10 years or greater Total September 30, 2023 September 30, 2022 Amortized Cost Fair Value Weighted Average Yield Amortized Cost Fair Value Weighted Average Yield $ 59,948 $ 59,936 5.13 % $ — $ — 10,529 31,372 9,929 29,381 2.00 % 15,476 14,775 2.42 % 38,927 37,204 459,866 409,078 2.82 % 447,194 405,929 $ 561,715 $ 508,324 3.03 % $ 501,597 $ 457,908 — % 2.06 % 2.30 % 2.25 % 2.25 % 85 Gross unrealized losses on available- for- sale securities and the estimated fair value of the related securities, aggregated by the length of time the securities have been in a continuous unrealized loss position, at September 30, 2023 and 2022, were as follows: Less Than 12 Months September 30, 2023 12 Months or More Total Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Available for sale— REMICs Fannie Mae certificates $ 80,452 $ 578 Freddie Mac certificates U.S. Government and agency obligations 1,045 59,813 $ 141,888 $ 1,749 21 97 11 1,878 $ 362,555 $ — — 3,646 $ 366,201 $ 51,118 — — 396 51,514 $ 443,007 $ 578 1,045 63,459 $ 508,089 $ 52,867 21 97 407 53,392 Total Available for sale— REMICs Fannie Mae certificates Less Than 12 Months September 30, 2022 12 Months or More Total Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss $ 261,795 $ 17,260 $ 190,739 $ 26,002 $ 452,534 $ 43,262 217 4 438 — — — — 217 3,619 4 438 U.S. Government and agency obligations 3,619 Total $ 265,631 $ 17,702 $ 190,739 $ 26,002 $ 456,370 $ 43,704 The unrealized losses on investment securities were primarily attributable to an increase in market interest rates. The investment portfolio is comprised entirely of securities issued by U.S. government entities and agencies, which support the expectation of zero, other than temporary, loss estimates since principal and interest payments due on these securities carry the full faith and credit guaranty of the U.S. government. In addition, the U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed. Since the decline in value is primarily attributable to an increase in market interest rates and not credit quality and because the Company has neither the intent to sell the securities nor is it more likely than not the Company will be required to sell the securities prior to recovery of the amortized cost, the Company did not record an allowance for credit losses as of September 30, 2023. 86 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES LOAN PORTFOLIOS Loans held for investment consist of the following: Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Construction Real estate loans Other loans Add (deduct): Deferred loan expenses, net Loans-in-process Allowance for credit losses on loans Loans held for investment, net September 30, 2023 September 30, 2022 $ 12,078,158 $ 11,539,859 53,255 2,633,878 121,759 14,348,751 3,263 46,508 3,030,526 48,406 15,203,598 4,411 60,807 (25,754) (77,315) 50,221 (72,273) (72,895) $ 15,165,747 $ 14,257,067 Loans are carried at amortized cost, which includes outstanding principal balance adjusted for any unamortized premiums or discounts, net of deferred fees and expenses. Accrued interest is $51,989 and $39,124 as of September 30, 2023 and September 30, 2022, respectively, and is reported in accrued interest receivable on the CONSOLIDATED STATEMENTS OF CONDITION. A large concentration of the Company’s lending is in Ohio and Florida. As of September 30, 2023, and September 30, 2022, the percentage of aggregate Residential Core, Home Today and Construction loans secured by properties in Ohio was 57% and 56%, respectively, and the percentage of loans secured by properties in Florida was 18% as of both dates. As of September 30, 2023 and September 30, 2022, home equity loans and lines of credit were concentrated in the states of Ohio (26% and 27%, respectively), Florida (22% and 20%, respectively), and California (17% and 16%, respectively). Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay-option adjustable-rate mortgages). The portfolio contains "Smart Rate" adjustable-rate mortgage loans whereby the interest rate is locked initially for three or five years then resets annually, subject to periodic rate adjustments caps and various re-lock options available to the borrower. Although the borrower is qualified for its loan at a higher rate than the initial rate offered, the adjustable-rate feature may impact a borrower's ability to afford the higher payments upon rate reset during periods of rising interest rates while this repayment risk may be reduced in a declining or low rate environment. With limited historical loss experience compared to other types of loans in the portfolio, judgment is required by management in assessing the allowance required on adjustable-rate mortgage loans. The principal amount of adjustable-rate mortgage loans included in the Residential Core portfolio was $4,760,843 and $4,668,089 at September 30, 2023 and September 30, 2022, respectively. Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers. Most loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after September 30, 2016. Home Today loans have greater credit risk than traditional residential real estate mortgage loans. Home equity loans and lines of credit, which are comprised primarily of home equity lines of credit, represent a significant portion of the residential real estate portfolio and include monthly principal and interest payments throughout the entire term. Once the draw period on lines of credit has expired, the accounts are included in the home equity loan balance. The full credit exposure on home equity lines of credit is secured by the value of the collateral real estate at the time of origination. The Company originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Company’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent 87 amortizing loan without the expense of a second closing. The Company offers construction/permanent loans with fixed or adjustable-rates, and a current maximum loan-to-completed-appraised value ratio of 85%. Other loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment, and forgivable down payment assistance loans, which are unsecured loans used as down payment assistance to borrowers qualified through partner housing agencies. The Company records a liability for the down payment assistance loans which are forgiven in equal increments over a pre-determined term, subject to residency requirements. Loans held for sale include loans originated with the intent to sell which are generally priced in alignment with secondary market pricing and may be subject to loan level pricing adjustments. Additionally, loans originated or purchased for the held for investment portfolio may later be identified for sale and transferred to the held for sale portfolio, which may include loans originated or purchased within the parameters of programs established by Fannie Mae. During the years ended September 30, 2023 and September 30, 2022, reclassifications to the held for sale portfolio included loans that were sold during the period, including those in contracts pending settlement at the end of the period, and loans originated for the held for investment portfolio that were later identified for sale. At September 30, 2023 and September 30, 2022, mortgage loans held for sale totaled $3,260 and $9,661, respectively. During the years ended September 30, 2023 and September 30, 2022, the principal balance of loans sold was $77,205 and $128,118, respectively. During the years ended September 30, 2023 and September 30, 2022, the amortized cost of loans classified as held for sale that were subsequently transferred to the held for investment portfolio was $8,433 and $22,741, respectively. These transfers were due to changes in market pricing, affected by the rise in long-term interest rates, and managements' intent to hold the loans in portfolio until maturity for the foreseeable future. During the year ended September 30, 2021, there were no transfers to the held for investment portfolio. DELINQUENCY and NON-ACCRUAL An aging analysis of the amortized cost in loan receivables that are past due at September 30, 2023 and September 30, 2022 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due, regardless of the number of days in each month. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process. 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total September 30, 2023 Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Construction Total real estate loans Other loans Total $ 3,680 $ 1,763 $ 8,268 $ 13,711 $ 12,089,228 $ 12,102,939 666 3,271 — 7,617 — 323 690 — 855 3,876 — 1,844 44,186 46,030 7,837 3,059,444 3,067,281 — 22,401 22,401 2,776 12,999 23,392 15,215,259 15,238,651 — — — 4,411 4,411 $ 7,617 $ 2,776 $ 12,999 $ 23,392 $ 15,219,670 $ 15,243,062 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total September 30, 2022 Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit $ Construction Total real estate loans Other loans Total 2,725 $ 1,491 $ 1,341 1,599 — 770 796 — 9,281 $ 13,497 $ 11,545,784 $ 11,559,281 52,808 2,666,132 48,478 49,836 2,661,416 48,478 2,972 4,716 — 861 2,321 — 5,665 — 3,057 — 12,463 — 21,185 — 14,305,514 3,263 14,326,699 3,263 $ 5,665 $ 3,057 $ 12,463 $ 21,185 $ 14,308,777 $ 14,329,962 88 Loans are placed in non-accrual status when they are contractually 90 days or more past due. The number of days past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment. Loans with a partial charge-off are placed in non-accrual and will remain in non-accrual status until, at a minimum, the loss is recovered. Loans restructured in TDRs that were in non-accrual status prior to the restructurings and loans with forbearance plans that were subsequently modified are reported in non-accrual status for a minimum of six months after restructuring. Loans restructured in TDRs with a high debt-to-income ratio at the time of modification are placed in non-accrual status for a minimum of 12 months. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status. The amortized cost of loan receivables in non-accrual status is summarized in the following table. Non-accrual with no ACL describes non-accrual loans which have no quantitative or individual valuation allowance, primarily because they have already been collaterally reviewed and any required charge-offs have been taken, but may be included in consideration of qualitative allowance factors. Balances are adjusted for deferred loan fees and expenses. There are no loans 90 or more days past due and still accruing at September 30, 2023 or September 30, 2022. Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Total non-accrual loans September 30, 2023 September 30, 2022 Non-accrual with No ACL Total Non-accrual Non-accrual with No ACL Total Non-accrual $ $ 15,691 $ 19,414 $ 20,995 $ 4,511 7,035 27,237 $ 4,623 7,877 31,914 $ 5,753 6,668 33,416 $ 22,644 6,037 6,925 35,606 At September 30, 2023 and September 30, 2022, the amortized cost in non-accrual loans includes $18,915 and $23,159, respectively, which are performing according to the terms of their agreement, of which $11,508 and $13,526, respectively, are loans in Chapter 7 bankruptcy status, primarily where all borrowers have filed, and have not reaffirmed or been dismissed. At September 30, 2023 and September 30, 2022, real estate loans include $9,144 and $9,833, respectively, of loans that are in the process of foreclosure. Interest on loans in accrual status is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. The Company has elected not to measure an allowance for credit losses on accrued interest receivable amounts since amounts are written off timely. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid payment first. The amount of interest income recognized on non-accrual loans was $663 and $740 for the years ended September 30, 2023 and September 30, 2022, respectively. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. A non- accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in non-accrual status when collectability is uncertain, such as a TDR that has not met minimum payment requirements, a loan with a partial charge-off, a home equity loan or line of credit with a delinquent first mortgage greater than 90 days past due, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. ALLOWANCE FOR CREDIT LOSSES For all classes of loans, a loan is considered collateral-dependent when, based on current information and events, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral or foreclosure is probable. Factors considered in determining that a loan is collateral-dependent may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan. Charge-offs on residential mortgage loans, home equity loans and lines of credit, and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the amortized cost in the loans. Partial or full charge-offs are also recognized for the amount of credit losses on loans considered collateral-dependent when the borrower is experiencing financial difficulty as described by meeting the conditions below. 89 • For residential mortgage loans, payments are greater than 180 days delinquent; • For home equity loans and lines of credit, and residential loans restructured in a TDR, payments are greater than 90 days delinquent; • For all classes of loans restructured in a TDR with a high debt-to-income ratio at time of modification; • For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan; • For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy; • For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed; • For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent; and • For all classes of loans, it becomes evident that a loss is probable. Collateral-dependent residential mortgage loans and construction loans are charged-off to the extent the amortized cost in the loan, net of anticipated mortgage insurance claims, exceeds the fair value, less estimated costs to dispose of the underlying property. Management can determine if the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged-off to the extent the amortized cost in the loan plus the balance of any senior liens exceeds the fair value, less estimated costs to dispose of the underlying property, or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio identified as collateral- dependent will continue to be reported as such until it is no longer considered collateral-dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off will continue to be individually evaluated for credit loss until, at a minimum, the loss has been recovered. Residential mortgage loans, home equity loans and lines of credit and construction loans restructured in TDRs that are not evaluated based on collateral are separately evaluated for credit losses on a loan by loan basis at each reporting date for as long as they are reported as TDRs. The credit loss evaluation is based on the present value of expected future cash flows discounted at the effective interest rate of the original loan. Expected future cash flows include a discount factor representing a potential for default. Valuation allowances are recorded for the excess of the amortized costs over the result of the cash flow analysis. Loans discharged in Chapter 7 bankruptcy are reported as TDRs and also evaluated based on the present value of expected future cash flows unless evaluated based on collateral. These loans are evaluated using expected future cash flows because the borrower, not liquidation of the collateral, is expected to be the source of repayment for the loan. Other loans are not considered for restructuring. At September 30, 2023 and September 30, 2022, allowances on individually reviewed TDRs (IVAs), evaluated for credit losses based on the present value of cash flows were $9,546 and $10,284, respectively. All other individually evaluated loans received a charge-off, if applicable. The allowance for credit losses represents the estimate of lifetime losses in the loan portfolio and unfunded loan commitments. The allowance is estimated at each reporting date using relevant available information relating to past events, current conditions and supportable forecasts. The Company utilizes loan level regression models with forecasted economic data to derive the probability of default and loss given default factors. These factors are used to calculate the loan level credit loss over a 24-month period with an immediate reversion to historical mean loss rates for the remaining life of the loans. Historical credit loss experience provides the basis for the estimation of expected credit losses. Qualitative adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency status or likely recovery of previous loan charge-offs. Qualitative adjustments for expected changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors, are recognized when forecasted economic data used in the model differs from management's view or contains significant unobservable changes within a short period, particularly when those changes are directionally positive. Identifiable model limitations may also lead to qualitative adjustments, such as those made to reflect the expected recovery of loan amounts previously charged-off, beyond what the model is able to project. The qualitative adjustments resulted in a negative ending balance on the allowance for credit losses for the Home Today portfolio, where recoveries are expected to exceed charge-offs over the remaining life of that portfolio.The net qualitative adjustment at September 30, 2023 was a net reduction of $13,425, compared to a net reduction of $7,085 at September 30, 2022. Adjustments are evaluated quarterly based on current facts and circumstances. 90 Activity in the allowance for credit losses by portfolio segment is summarized as follows. See Note 15. COMMITMENTS AND CONTINGENT LIABILITIES for further details on the allowance for unfunded commitments. For the Year Ended September 30, 2023 Beginning Balance Provisions (Releases) Charge-offs Recoveries Ending Balance Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Construction Total real estate loans Total Unfunded Loan Commitments (1) Total Allowance for Credit Losses $ $ $ $ 53,506 $ (997) 1,000 $ (2,370) 20,032 354 (399) (225) (257) $ (320) (665) — 4,079 — 1,126 $ 2,451 55,375 (1,236) 72,895 $ 27,021 $ (1,994) $ 494 $ (1,242) $ — $ 7,656 $ — $ 99,916 $ (1,500) $ (1,242) $ 7,656 $ 104,830 23,047 129 77,315 27,515 Real estate loans: Residential Core Residential Home Today Home equity loans and lines of credit Construction Total real estate loans Total Unfunded Loan Commitments (1) Total Allowance for Credit Losses For the Year Ended September 30, 2022 Beginning Balance Provisions (Releases) Charge-offs Recoveries Ending Balance $ 44,523 $ 15 6,298 $ (3,411) (247) $ (249) 2,932 $ 2,648 19,454 (3,820) 297 (118) (954) — 5,352 175 53,506 (997) 20,032 354 $ $ $ 64,289 $ (1,051) $ (1,450) $ 11,107 $ 72,895 24,970 $ 2,051 $ — $ — $ 27,021 89,259 $ 1,000 $ (1,450) $ 11,107 $ 99,916 (1) Total allowance for unfunded loan commitments is recorded in other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION and primarily relates to undrawn home equity lines of credit. 91 Total Residential Core Residential Home Today (1) Pass Substandard Total Residential Home Today Home equity loans and lines of credit Pass Special Mention Substandard Total Home equity loans and lines of credit Total Construction Total real estate loans CLASSIFIED LOANS The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade as of the dates presented. Revolving loans reported at amortized cost include home equity lines of credit currently in their draw period. Revolving loans converted to term are home equity lines of credit that are in repayment. Home equity loans and bridge loans are segregated by origination year. Loans, or the portions of loans, classified as loss are fully charged-off in the period in which they are determined to be uncollectible; therefore they are not included in the following table. No Home Today loans are classified Special Mention and all construction loans are classified Pass for both periods presented. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process. By fiscal year of origination Revolving Loans Revolving Loans Amortized Converted 2023 2022 2021 2020 2019 Prior Cost Basis To Term Total September 30, 2023 Real estate loans: Residential Core Pass $ 1,667,029 $ 3,169,609 $ 2,054,744 $ 1,342,854 $ 563,955 $ 3,275,978 $ — $ — $ 12,074,169 Special Mention Substandard — 185 — 823 612 1,285 — 1,806 106 721 1,025 22,207 1,667,214 3,170,432 2,056,641 1,344,660 564,782 3,299,210 — — — — — — — — — — — — — — — 40,335 5,695 46,030 — — — — — — — — 1,743 27,027 — 12,102,939 — — — 40,335 5,695 46,030 210,131 72,229 23,989 6,965 6,192 13,704 2,657,028 63,399 3,053,637 — — 129 — — 140 210,131 11,646 72,358 10,755 24,129 — 52 96 7,113 — 32 — 102 120 2,830 4,849 370 4,924 3,515 10,129 6,224 13,926 2,664,707 68,693 3,067,281 — — — — 22,401 Pass 1,888,806 3,252,593 2,078,733 1,349,819 570,147 3,330,017 2,657,028 63,399 15,190,542 Special Mention Substandard — 185 129 823 612 1,425 52 1,902 138 721 1,127 28,022 2,830 4,849 370 4,924 5,258 42,851 Total real estate loans $ 1,888,991 $ 3,253,545 $ 2,080,770 $ 1,351,773 $ 571,006 $ 3,359,166 $ 2,664,707 $ 68,693 $ 15,238,651 (1) No new originations of Home Today loans since fiscal 2016. 92 By fiscal year of origination Revolving Loans Revolving Loans Amortized Converted 2022 2021 2020 2019 2018 Prior Cost Basis To Term Total September 30, 2022 Real estate loans: Residential Core Pass $ 3,349,200 $ 2,251,075 $ 1,488,763 $ 629,090 $ 665,116 $ 3,141,907 $ — $ — $ 11,525,151 Special Mention Substandard Total Residential Core Residential Home Today (1) Pass Substandard Total Residential Home Today Home equity loans and lines of credit Pass Special Mention Substandard Total Home equity loans and lines of credit Total Construction Total real estate loans — — 292 1,195 — 3,188 108 1,142 464 1,883 816 25,042 3,349,200 2,252,562 1,491,951 630,340 667,463 3,167,765 — — — — — — — — — — — — — — — 45,408 7,400 52,808 — — — — — — — — 1,680 32,450 — 11,559,281 — — — 45,408 7,400 52,808 98,904 30,614 9,204 8,036 6,965 11,247 2,400,095 89,448 2,654,513 — — 191 — 98,904 37,810 30,805 10,668 — 54 9,258 — — 20 8,056 — — 19 — 127 898 2,996 640 6,674 1,729 9,890 6,984 11,374 2,403,989 96,762 2,666,132 — — — — 48,478 Pass 3,485,914 2,292,357 1,497,967 637,126 672,081 3,198,562 2,400,095 89,448 14,273,550 Special Mention Substandard — — 483 1,195 — 3,242 108 1,162 464 1,902 816 32,569 898 2,996 640 6,674 3,409 49,740 Total real estate loans $ 3,485,914 $ 2,294,035 $ 1,501,209 $ 638,396 $ 674,447 $ 3,231,947 $ 2,403,989 $ 96,762 $ 14,326,699 (1) No new originations of Home Today loans since fiscal 2016. The home equity lines of credit converted from revolving to term loans during the years ended September 30, 2023 and September 30, 2022, totaled $2,492 and $436, respectively. The amount of conversions to term loans is expected to remain low for several years since the length of the draw period on new originations changed from five to 10 years in 2016. Residential loans are internally assigned a grade that complies with the guidelines outlined in the OCC’s Handbook for Rating Credit Risk. Pass loans are assets well protected by the current paying capacity of the borrower. Special Mention loans have a potential weakness, as evaluated based on delinquency status or nature of the product, that the Company deems to deserve management’s attention and may result in further deterioration in their repayment prospects and/or the Company’s credit position. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Also included in Substandard are performing home equity loans and lines of credit where the customer has a severely delinquent first mortgage to which the performing home equity loan or line of credit is subordinate and all loans in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. Loss loans are considered uncollectible and are charged-off when identified. Loss loans are of such little value that their continuance as bankable assets is not warranted even though partial recovery may be effected in the future. At September 30, 2023 and September 30, 2022, respectively, $73,172 and $75,904 of TDRs individually evaluated for credit loss have adequately performed under the terms of the restructuring and are classified as Pass loans. Other loans are internally assigned a grade of non-performing when they become 90 days or more past due. At September 30, 2023 and September 30, 2022, no other loans were graded as non-performing. 93 TROUBLED DEBT RESTRUCTURINGS Initial concessions granted for loans restructured as TDRs may include reduction of interest rate, extension of amortization period, capitalization of delinquent amounts, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also may occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company. The amortized cost in TDRs by category as of September 30, 2023 and September 30, 2022 is shown in the tables below. September 30, 2023 Residential Core Residential Home Today Home equity loans and lines of credit Total September 30, 2022 Residential Core Residential Home Today Home equity loans and lines of credit Total Initial Restructuring Multiple Restructurings Bankruptcy Total 28,546 $ 9,390 21,063 58,999 $ 15,730 $ 10,114 2,460 28,304 $ 9,577 $ 1,691 879 12,147 $ 53,853 21,195 24,402 99,450 Initial Restructuring Multiple Restructurings Bankruptcy Total 30,071 $ 17,583 $ 10,896 $ 10,359 22,636 11,485 2,743 1,995 1,268 58,550 23,839 26,647 63,066 $ 31,811 $ 14,159 $ 109,036 $ $ $ $ TDRs may be restructured more than once. Among other requirements, a subsequent restructuring may be available for a borrower upon the expiration of temporary restructuring terms if the borrower is unable to resume contractually scheduled loan payments. If the borrower is experiencing an income curtailment that temporarily has reduced their capacity to repay, such as loss of employment, reduction of work hours, non-paid leave or short-term disability, a temporary restructuring is considered. If the borrower lacks the capacity to repay the loan at the current terms due to a permanent condition, a permanent restructuring is considered. In evaluating the need for a subsequent restructuring, the borrower’s ability to repay is generally assessed utilizing a debt to income and cash flow analysis. For all TDRs restructured during the years ended September 30, 2023 and September 30, 2022 (set forth in the tables below), the pre-restructured outstanding amortized cost was not materially different from the post-restructured outstanding amortized cost. The following tables set forth the amortized cost in TDRs restructured during the periods presented. Residential Core Residential Home Today Home equity loans and lines of credit Total Residential Core Residential Home Today Home equity loans and lines of credit Total For the Year Ended September 30, 2023 Initial Restructuring Multiple Restructurings Bankruptcy Total 2,866 $ 356 1,289 4,511 $ 1,784 $ 342 233 2,359 $ 1,037 $ 31 1 1,069 $ 5,687 729 1,523 7,939 For the Year Ended September 30, 2022 Initial Restructuring Multiple Restructurings Bankruptcy Total 3,823 $ 202 510 4,535 $ 1,533 $ 1,071 175 2,779 $ 1,142 $ 45 163 1,350 $ 6,498 1,318 848 8,664 $ $ $ $ 94 Residential Core Residential Home Today Home equity loans and lines of credit Total For the Year Ended September 30, 2021 Initial Restructuring Multiple Restructurings Bankruptcy Total $ $ 9,364 $ 1,981 $ 1,614 $ 362 1,466 1,432 1,223 103 417 11,192 $ 4,636 $ 2,134 $ 12,959 1,897 3,106 17,962 The table below summarizes information about TDRs restructured within 12 months of the period presented for which there was a subsequent payment default (at least 30 days past due on one scheduled payment) during the periods presented. TDRs That Subsequently Defaulted Residential Core Residential Home Today Home equity loans and lines of credit Total For the Year Ended September 30, 2023 For the Year Ended September 30, 2022 For the Year Ended September 30, 2021 Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment 6 $ 5 1 12 $ 575 207 46 828 5 $ 5 2 12 $ 780 90 108 978 6 $ 948 7 1 14 $ 194 42 1,184 6. MORTGAGE LOAN SERVICING RIGHTS The Company sells certain types of loans through whole loan sales and through securitizations. In each case, the Company retains a servicing interest in the loans or securitized loans. Certain assumptions and estimates are used to determine the fair value allocated to these retained interests at the date of transfer and at subsequent measurement dates. These assumptions and estimates include loan repayment rates and discount rates. Changes in interest rates can affect the average life of loans and mortgage-backed securities and the related servicing rights. A reduction in interest rates normally results in increased prepayments, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that the Company may not be able to reinvest the proceeds of loan and securities prepayments at rates that are comparable to the rates earned on the loans or securities prior to receipt of the repayment. During 2023, 2022 and 2021, $77,206, $128,118 and $796,512, respectively, of mortgage loans were securitized and/or sold including accrued interest thereon. In these transactions, the Company retained residual interests in the form of mortgage loan servicing rights. Primary economic assumptions used to measure the value of the Company’s retained interests at the date of sale resulting from the completed transactions were as follows (per annum): Primary prepayment speed assumptions (weighted average annual rate) Weighted average life (years) Amortized cost to service loans (weighted average) Weighted average discount rate 2023 17.6 % 25.3 0.12 % 12 % 2022 11.9 % 24.1 0.12 % 12 % 95 Key economic assumptions and the sensitivity of the current fair value of mortgage loan servicing rights to immediate 10% and 20% adverse changes in those assumptions are as presented in the following table. The three key economic assumptions that impact the valuation of the mortgage loan servicing rights are: (1) the prepayment speed, or how long the mortgage servicing right will be outstanding; (2) the estimate of servicing costs that will be incurred in fulfilling the mortgage servicing right responsibilities; and (3) the discount factor applied to future net cash flows to convert them to present value. The Company established these factors based on independent analysis of our portfolio and reviews these assumptions periodically to ensure that they reasonably reflect current market conditions and our loan portfolio experience. Fair value of mortgage loan servicing rights Prepayment speed assumptions (weighted average annual rate) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Estimated prospective annual cost to service loans (weighted average) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Discount rate Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change September 30, 2023 $ 15,916 9.4 % (629) (1,180) 0.12 % (1,446) (2,869) 12.0 % (590) (1,114) $ $ $ $ $ $ These sensitivities are hypothetical and should be used with caution. As indicated in the table above, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship in the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which could magnify or counteract the sensitivities. Servicing rights are evaluated periodically for impairment based on the fair value of those rights. Twenty-one risk tranches are used in evaluating servicing rights for impairment, segregated primarily by interest rate stratum within original term to maturity categories with additional strata for less uniform account types. Activity in mortgage servicing rights is summarized as follows: Balance—beginning of year Additions from loan securitizations/sales Amortization (1) Net change in valuation allowance Balance—end of year Fair value of capitalized amounts Year Ended September 30, 2023 2022 2021 $ 7,943 $ 8,941 $ 7,860 322 657 3,836 (865) (1,655) (2,764) — 7,400 $ 9 $ 8,941 $ 15,916 $ 15,288 $ 17,454 — 7,943 $ (1) Year ended September 30, 2021, amounts include $199 related to the repurchase of loans previously sold and serviced by the Company. The Company receives annual servicing fees ranging from 0.02% to 0.84% of the outstanding loan balances. Servicing income, net of amortization of capitalized servicing rights, included in non-interest income, amounted to $4,516 in 2023, $4,251 in 2022 and $3,260 in 2021. The unpaid principal balance of mortgage loans serviced for others was approximately $1,933,249, $2,051,110 and $2,262,875 at September 30, 2023, 2022 and 2021, respectively. The ratio of capitalized servicing rights to the unpaid principal balance of mortgage loans serviced for others was 0.38%, 0.39%, and 0.40% at September 30, 2023, 2022 and 2021, respectively. 96 7. PREMISES, EQUIPMENT AND SOFTWARE, NET Premises, equipment and software at cost are summarized as follows: Land Office buildings Furniture, fixtures and equipment Software Leasehold improvements Less: accumulated depreciation and amortization Total September 30, 2023 2022 $ 8,610 $ 8,610 62,090 40,634 21,591 11,018 61,312 39,899 20,048 11,071 143,943 140,940 (109,235) (106,409) $ 34,708 $ 34,531 During the years ended September 30, 2023, 2022 and 2021, depreciation and amortization expense on premises, equipment, and software was $4,921, $5,393 and $5,422, respectively. 8. LEASES As a lessee, the Company enters into operating leases of buildings and land. The Company occupies certain banking branches, loan production and customer service offices and a disaster recovery site through non-cancellable operating leases with remaining terms from less than one year to 13 years. Most of the leases have fixed payment terms with annual fixed- escalation clauses. Certain leases have annual rent escalations based on subsequent year-to-year changes in the consumer price index. These year-to-year changes in the consumer price index are excluded from the calculation of right-of-use assets and lease liabilities and recognized as expense in the period in which they are incurred. Additionally, all variable lease costs that are not based on an index or rate, such as "common area maintenance" costs, are expensed as incurred. Most of the Company's leases include options to extend for periods that range from three to five years. The leases do not have early-termination options. The Company has not included term extensions in the calculation of the lease term, as the Company does not consider it reasonably certain that the options will be exercised. As the interest rate implicit in all of the Company's lease contracts is not readily determinable, the Company utilized its incremental borrowing rate, which is the rate that would be incurred to borrow on a collateralized basis over a similar term on an amount equal to the total contractual lease payments in a similar economic environment. The incremental borrowing rate utilized for all the Company's leases is the FHLB Advance rate based on the lease term at commencement in determining the present value of lease payments. Operating lease expense for the years ended September 30, 2023 and 2022, totaled $5,573 and $5,576, respectively. Variable lease expense for the years ended September 30, 2023 and 2022, totaled $1,514 and $1,479, respectively. During the years ended September 30, 2023 and 2022, the Company paid $5,556 and $5,572, respectively, in cash for amounts included in the measurement of lease liabilities. As of September 30, 2023 and 2022, the Company has not entered into any material leases that have not yet commenced. The following table summarizes information relating to the Company's operating leases: Right-of-use assets (a) Lease liabilities (b) Weighted Average Remaining Lease Term Weighted Average Discount Rate September 30, 2023 $37,517 $18,209 5.10 years 2.44% 2022 $30,189 $15,775 5.06 years 1.49% (a) Included in Other assets in the CONSOLIDATED STATEMENTS OF CONDITION (b) Included in Accrued expenses and other liabilities in the CONSOLIDATED STATEMENTS OF CONDITION 97 The following table summarizes the maturities of lease liabilities at the periods presented: Maturing in: 12 months or less 13 to 24 months 25 to 36 months 37 to 48 months 49 to 60 months over 60 months Total minimum lease payments Less imputed interest Total lease liabilities 9. DEPOSITS September 30, 2023 2022 $ 5,478 $ 4,763 3,288 2,067 1,347 2,577 19,520 1,311 $ 18,209 $ 4,953 3,903 3,044 1,810 591 2,230 16,531 756 15,775 Deposit account balances are summarized by interest rate as follows: Checking accounts Savings accounts, excluding money market accounts Money market accounts Subtotal Certificates of deposit Subtotal Accrued interest Total deposits Stated Interest Rate 0.00–1.00% 0.00–4.22 0.00–3.93 0.00–0.99 1.00–1.99 2.00–2.99 3.00–3.99 4.00–4.99 5.00 and above September 30, 2023 2022 Amount Percent Amount Percent $ 983,396 1,460,601 346,479 2,790,476 981,728 685,170 941,842 1,173,211 1,346,720 1,520,311 6,648,982 9,439,458 10,362 10.4 % $ 1,210,035 1,364,821 15.5 481,650 3.7 3,056,506 29.6 3,157,495 10.4 1,002,227 7.2 1,320,579 10.0 378,587 12.4 3,386 14.3 — 16.1 5,862,274 70.4 8,918,780 100.0 2,237 — 13.6 % 15.3 5.4 34.3 35.4 11.2 14.8 4.2 0.1 — 65.7 100.0 — $ 9,449,820 100.0 % $ 8,921,017 100.0 % At September 30, 2023 and 2022, the weighted average interest rate was 0.05% and 0.81% on checking accounts; 1.49% and 0.79% on savings accounts; 2.62% and 0.95% on money market accounts; 3.47% and 1.37% on certificates of deposit, respectively; and 2.77% and 1.18% on total deposits, respectively. The aggregate amount of CD's in denominations of $250 or more was $845,375 and $733,301 at September 30, 2023 and 2022, respectively. In accordance with the DFA, the maximum amount of deposit insurance is $250 per depositor. Brokered CD's (exclusive of acquisition costs and subsequent amortization), which are used as an additional funding alternative, totaled $1,162,601 and $575,236 at September 30, 2023 and 2022, respectively. The FDIC places restrictions on banks with regard to issuing brokered deposits based on the bank's capital classification. As a well-capitalized institution at September 30, 2023 and September 30, 2022, the Association may accept brokered deposits without FDIC restrictions. 98 The scheduled maturity of certificates of deposit is as follows: 12 months or less 13 to 24 months 25 to 36 months 37 to 48 months 49 to 60 months Over 60 months Total Interest expense on deposits is summarized as follows: September 30, 2023 Amount Percent Weighted Average Rate $ 3,419,349 51.4 % 3.46 % 764,512 1,506,491 501,945 440,012 16,673 11.5 % 2.01 % 22.7 % 4.07 % 7.5 % 2.92 % 6.6 % 4.22 % 0.3 % 1.72 % $ 6,648,982 100.0 % 3.44 % Year Ended September 30, 2022 2023 2021 Certificates of deposit Checking accounts Savings and money market accounts Total $ 143,434 $ 68,204 $ 93,187 6,081 24,686 4,186 4,553 1,140 2,992 $ 174,201 $ 76,943 $ 97,319 99 10. BORROWED FUNDS At September 30, 2023, the Association had a maximum borrowing capacity of $7,344,253, of which $5,273,637 was outstanding. Borrowings from the FHLB of Cincinnati are secured by the Association’s investment in the common stock of the FHLB of Cincinnati, as well as by a blanket pledge of its mortgage portfolio not otherwise pledged. The Association also has the ability to purchase Fed Funds through arrangements with other institutions. Finally, the ability to borrow from the FRB- Cleveland Discount Window is available to the Association and is secured by a pledge of specific loans in the Association’s mortgage portfolio. Total borrowings at September 30, 2023 are summarized in the table below: FHLB FRB Cleveland Fed Funds purchased Subtotal Accrued interest Total borrowings Borrowing Capacity Borrowings Available Borrowings Outstanding $ 6,632,811 $ 1,381,951 $ 5,250,860 126,442 585,000 126,442 585,000 — — $ 7,344,253 $ 2,093,393 5,250,860 22,777 $ 5,273,637 Maturities of borrowings at September 30, 2023 are summarized in the table below: Maturing in: 12 months or less 13 to 24 months 25 to 36 months 37 to 48 months 49 to 60 months over 60 months Total advances Accrued interest Total Amount Weighted Average Rate $ 1,417,000 700,000 775,548 725,000 577,273 1,056,039 5,250,860 22,777 5,273,637 $ $ 3.19 % 2.26 % 2.74 % 2.90 % 3.80 % 3.36 % 3.06 % All borrowings have fixed rates during their term ranging up to 240 months. Interest is payable monthly for long-term advances and at maturity for FHLB three-month advances and overnight advances. The table above reflects the effective maturities and fixed interest rates of the $3,150,000 of short-term FHLB advances that are tied to interest rate swaps discussed in Note 17. DERIVATIVE INSTRUMENTS. For the years ended September 30, 2023, 2022 and 2021, net interest expense related to short-term borrowings was $115,329, $49,828 and $50,975, respectively. 100 11. OTHER COMPREHENSIVE INCOME (LOSS) The change in AOCI by component is as follows: Fiscal year 2021 activity Balance at September 30, 2020 Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $8,656 Amounts reclassified, net of tax expense (benefit) of $9,907 Other comprehensive income (loss) Balance at September 30, 2021 Fiscal year 2022 activity Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $21,242 Amounts reclassified, net of tax expense (benefit) of $5,212 Other comprehensive income (loss) Balance at September 30, 2022 Fiscal year 2023 activity Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $31,998 Amounts reclassified, net of tax expense (benefit) of $(13,383) Other comprehensive income (loss) Balance at September 30, 2023 Unrealized Unrealized Gains (Losses) on Securities Available for Sale Cash Flow Hedges Defined Benefit Plan Total $ 4,694 $ (114,306) $ (22,353) $ (131,965) (3,733) — (3,733) 20,914 35,182 56,096 9,937 1,864 11,801 27,118 37,046 64,164 $ 961 $ (58,210) $ (10,552) $ (67,801) (34,860) 109,452 — 17,641 (34,860) 127,093 (1,665) 382 (1,283) 72,927 18,023 90,950 $ (33,899) $ 68,883 $ (11,835) $ 23,149 (7,274) 112,851 — (7,274) (46,202) 66,649 1,904 784 2,688 107,481 (45,418) 62,063 $ (41,173) $ 135,532 $ (9,147) $ 85,212 The following table presents the reclassification adjustment out of AOCI included in net income and the corresponding line item on the CONSOLIDATED STATEMENTS OF INCOME for the periods indicated: Details about AOCI Components Cash flow hedges: Interest (income) expense Net income tax effect For the Years Ended September 30, 2021 2022 2023 Line Item in the Statement of Income $ (59,821) $ 22,740 $ 44,534 Interest expense 13,619 (5,099) (9,352) Income tax expense Net of income tax expense (benefit) $ (46,202) $ 17,641 $ 35,182 Amortization of defined benefit plan: Actuarial loss Net income tax effect Net of income tax expense $ 1,020 $ (236) 784 495 $ (113) (a) 2,419 (555) Income tax expense 382 1,864 Total reclassifications for the period $ (45,418) $ 18,023 $ 37,046 (a) These items are included in the computation of net period pension cost. See Note 13. EMPLOYEE BENEFIT PLANS for additional disclosure. 101 12. INCOME TAXES The components of the income tax provision are as follows: Year Ended September 30, 2023 2022 2021 Current tax expense (benefit): Federal State Deferred tax expense (benefit): Federal State Income tax provision $ 13,602 $ 41,812 $ 31,043 2,230 2,553 781 3,681 (24,691) (13,548) 53 (638) $ 18,117 $ 17,489 $ 19,087 (2,185) Reconciliation from tax at the federal statutory rate to the income tax provision is as follows: Tax at statutory rate State tax, net Non-taxable income from bank owned life insurance contracts Non-deductible compensation Equity based compensation Employee (Associate) Stock Ownership Plan Other, net Income tax provision Year Ended September 30, 2023 2022 2021 21.0 % 21.0 % 21.0 % 0.7 (2.1) 1.0 0.2 (1.5) 0.1 0.3 (2.3) 1.4 (0.1) (1.2) (0.1) 1.3 (2.1) 0.9 (1.3) (0.8) 0.1 19.4 % 19.0 % 19.1 % Temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that gave rise to significant portions of net deferred taxes relate to the following: Deferred tax assets: Loan loss reserve Deferred compensation Lease liability Property, equipment and software basis difference Other Total deferred tax assets Deferred tax liabilities: FHLB stock basis difference Mortgage servicing rights Pension Goodwill Lease ROU asset Fair value adjustment Deferred loan costs, net of fees Other Total deferred tax liabilities Net deferred tax asset (liability) 102 September 30, 2023 2022 $ 29,390 $ 27,659 4,215 4,251 975 2,099 40,930 5,135 1,514 2,843 2,158 4,160 20,969 15,005 2,328 54,112 4,198 3,599 1,413 2,220 39,089 5,017 1,551 2,119 2,132 3,514 — 13,371 2,219 29,923 $ (13,182) $ 9,166 In the accompanying CONSOLIDATED STATEMENTS OF CONDITION the net deferred tax asset or liability is included in Accrued expenses and other liabilities, and Other assets for September 30, 2023 and 2022, respectively. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. There was no valuation allowance required at September 30, 2023 or 2022. Retained earnings at September 30, 2023 and 2022 included approximately $104,861, for which no provision for federal or state income tax has been made. This amount represents allocations of income during years prior to 1988 to bad debt deductions for tax purposes only. These qualifying and non-qualifying base year reserves and supplemental reserves will be recaptured into income in the event of certain distributions and redemptions. Such recapture would create income for tax purposes only, which would be subject to the then current corporate income tax rate. However, recapture would not occur upon the reorganization, merger, or acquisition of the Association, nor if the Association is merged or liquidated tax-free into a bank or undergoes a charter change. If the Association fails to qualify as a bank or merges into a non-bank entity, these reserves will be recaptured into income. The provisions of Accounting for Uncertainty in Income Taxes, codified within FASB ASC 740 “Income Taxes,” prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position taken or expected to be taken in a tax return. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Tax positions must meet a more-likely-than-not recognition threshold in order for the related tax benefit to be recognized or continue to be recognized. As of September 30, 2023 and 2022, the Company had no unrecognized tax benefits. The Company does not anticipate the total amount of unrecognized tax benefits to significantly change within the next twelve months. The Company recognizes interest and penalties on income tax assessments or income tax refunds, where applicable, in the financial statements as a component of its provision for income taxes. The Company recognized $0, $0, and $9 of interest expense or penalties on income tax assessments, and $0, $34, and $116 of interest on income tax refunds related to net operating loss carrybacks during the years ended September 30, 2023, 2022 and 2021, respectively. There was no interest related to income tax assessments accrued at September 30, 2023 or 2022. The Company’s effective income tax rate was 19.4%, 19.0% and 19.1% for the years ended September 30, 2023, 2022 and 2021, respectively. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and city jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations in its major jurisdictions for tax years prior to 2020. The Company makes certain investments in limited partnerships which invest in affordable housing projects that qualify for the LIHTC. The Company acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnership. The Company accounts for its interests in LIHTCs using the proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income taxes was not material for the years ended September 30, 2023, 2022 and 2021. 103 13. EMPLOYEE BENEFIT PLANS Defined Benefit Plan—The Third Federal Savings Retirement Plan (the “Plan”) is a defined benefit pension plan. Effective December 31, 2002, the Plan was amended to limit participation to employees who met the Plan’s eligibility requirements on that date. Effective December 31, 2011, the Plan was amended to freeze future benefit accruals for participants in the Plan. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, and those eligible participants who no longer receive service credits under the Plan, participate in a separate tier of the Company’s defined contribution 401(k) Savings Plan. Benefits under the Plan are based on years of service and the employee’s average annual compensation (as defined in the Plan) through December 31, 2011. The funding policy of the Plan is consistent with the funding requirements of U.S. federal and other governmental laws and regulations. During fiscal year 2022, a settlement adjustment was recognized as a result of lump sum payments exceeding the interest costs for the year. There were no settlement adjustments made during fiscal year 2023. The following table sets forth the change in projected benefit obligation for the defined benefit plan: Projected benefit obligation at beginning of year Interest cost Actuarial (gain) loss and other Settlement Benefits paid Projected benefit obligation at end of year September 30, 2023 2022 $ 65,015 $ 88,276 2,628 (19,783) 3,324 (3,764) — (4,292) (4,140) (1,814) $ 60,435 $ 65,015 The following table reconciles the beginning and ending balances of the fair value of Plan assets and presents the funded status of the Plan recognized in the CONSOLIDATED STATEMENTS OF CONDITION at the September 30 measurement dates. There were no employer contributions in the years ending September 30, 2023 and 2022. Fair value of plan assets at beginning of year Actual return on plan assets Benefits paid Settlement Fair value of plan assets at end of year Funded status of the plan—asset (liability) September 30, 2023 2022 $ 74,042 $ 97,971 2,481 (17,823) (4,140) — (1,814) (4,292) $ 72,383 $ 74,042 $ 11,948 $ 9,027 The components of net periodic cost recognized in other non-interest expense in the CONSOLIDATED STATEMENTS OF INCOME are as follows: Interest Cost Expected return on plan assets Amortization of net loss and other Recognized net loss due to settlement Net periodic benefit (income) cost Year Ended September 30, 2023 2022 2021 $ 3,324 $ (3,872) 1,020 — $ 472 $ 2,628 $ 2,536 (4,997) (4,987) 1,466 576 792 882 (203) (901) $ There were no contributions, required minimum or voluntary, made during the fiscal year ended September 30, 2023. As of September 30, 2023, the Plan had $0 invested in pooled separate accounts due to the Plan moving to an LDI strategy. The LDI strategy derisks the Plan by allocating more to long-duration, fixed income assets. The Plan's target asset allocation is now 80% in LDI fixed income and 20% in equity. At September 30, 2022, $43.8 million were invested in pooled separate accounts with a redemption notice of 7 days. 104 The following table summarizes Plan assets measured at fair value on a recurring basis as of September 30, 2023 and 2022. See FN 16. FAIR VALUE for more information on how our fair value hierarchy is evaluated: September 30, 2023 Cash equivalents Fixed income: U.S. government obligations Corporate debt securities Government strips Total fixed income Mutual equity funds Total (1) Recurring Fair Value Measurements at Reporting Date Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ 1,001 $ 1,001 $ — $ 2,550 42,573 8,617 53,740 15,791 2,550 — — 2,550 15,791 — 42,573 8,617 51,190 — $ 70,532 $ 19,342 $ 51,190 $ — — — — — — — (1) Plan assets measured at fair value on a recurring basis excludes approximately $1,851 of unsettled security transactions. September 30, 2022 Mutual equity funds Total Recurring Fair Value Measurements at Reporting Date Using Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ 30,271 $ 30,271 $ 30,271 $ 30,271 $ — $ — $ — — There are no redemption restrictions on Plan assets at September 30, 2023. Redemptions may be deferred for a longer period if conditions do not permit an orderly transfer or for certain investments of an illiquid nature. The following additional information is provided with respect to the Plan: Assumptions and dates used to determine benefit obligations: Discount rate Rate of compensation increase Assumptions used to determine net periodic benefit cost: Discount rate Long-term rate of return on plan assets Rate of compensation increase (graded scale) 2023 September 30, 2022 2021 5.75 % n/a 5.35 % n/a 2.85 % n/a 5.35 % 5.50 % n/a 4.60 % 5.50 % n/a 2.80 % 5.50 % n/a The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the Plan and the Long-Term Capital Market Assumptions for the corresponding fiscal year end. Management evaluates the historical performance of the various asset categories, as well as current expectations in determining the adequacy of the assumed rates of return in meeting Plan obligations. If warranted, the assumption is modified. 105 The following table provides estimates of expected future benefit payments during each of the next five fiscal years, as well as in the aggregate for years six through 10. Additionally, the table includes the minimum employer contributions expected during the next fiscal year: Expected Benefit Payments During the Fiscal Years Ending September 30: 2024 2025 2026 2027 2028 Aggregate expected benefit payments during the five fiscal year period beginning October 1, 2028, and ending September 30, 2033 Minimum employer contributions expected to be paid during the fiscal year ending September 30, 2024 $ 5,870 3,890 4,060 4,260 4,210 23,330 — For the fiscal years ended September 30, 2023, 2022, and 2021, AOCI includes pretax net actuarial losses of $11,862, $15,255, and $13,686, respectively, which have not been recognized as components of net periodic benefit costs as of the measurement date. The Company expects that $628 of net actuarial losses will be recognized as AOCI components of net periodic benefit cost during the fiscal year ended September 30, 2024. 401(k) Savings Plan—The Company maintains a 401(k) savings plan that is comprised of three tiers. The first tier allows eligible employees to contribute up to 75% of their compensation to the plan, subject to limitations established by the Internal Revenue Service, with the Company matching 100% of up to 4% on funds contributed. The second tier permits the Company to make a profit-sharing contribution at its discretion. The first and second tiers cover substantially all employees who have reached age 18 and have worked 30 days of service in one year of service. The third tier permits the Company to make discretionary contributions allocable to eligible employees including those eligible employees who are participants, but no longer receiving service credits, under the Company’s defined benefit pension plan. Voluntary contributions made by employees are vested at all times whereas Company contributions and Company matching contributions are subject to various vesting periods which range from immediately vested to fully vesting upon five years of service. The total of the Company’s matching and discretionary contributions related to the 401(k) savings plan for the years ended September 30, 2023, 2022 and 2021 was $4,297, $4,295 and $4,187, respectively. Employee (Associate) Stock Ownership Plan—The Company established an ESOP for its employees effective January 1, 2006. The ESOP is a tax-qualified plan designed to invest primarily in the Company’s common stock and provides employees with an opportunity to receive a funded retirement benefit, based on the value of the Company’s common stock. The ESOP covers all eligible employees of the Company and its wholly-owned subsidiaries. Employees are eligible to participate in the ESOP after attainment of age 18, completion of 1,000 hours of service, and employment on the last day of the plan’s calendar year. Company contributions to the plan are at the discretion of the Board of Directors. The ESOP is accounted for in accordance with the provisions for stock compensation in FASB ASC 718. Compensation expense for the ESOP is based on the market price of the Company’s stock and is recognized as shares are committed to be released to participants. The total compensation expense related to this plan in the 2023, 2022 and 2021 fiscal years was $5,761, $7,063 and $8,270, respectively. The ESOP was authorized to purchase, and did purchase, 11,605,824 shares of the Company’s common stock at a price of $10 per share with a 2006 plan year cash contribution and the proceeds of a loan from the Company to the ESOP. The outstanding loan principal balance as of September 30, 2023 and 2022 was $37,254 and $41,927, respectively. Shares of the Company’s common stock pledged as collateral for the loan are released from the pledge for allocation to participants as loan payments are made. At September 30, 2023, 8,897,453 shares have been allocated to participants and 325,005 shares were committed to be released. Shares that are committed to be released will be allocated to participants at the end of the plan year (December 31). ESOP shares that are unallocated or not yet committed to be released totaled 2,708,371 at September 30, 2023, and had a fair market value of $32,013. Participants have the option to receive dividends on allocated shares in cash or leave the dividend in the ESOP. Dividends are reinvested in Company stock for those participants who choose to leave their dividends in the ESOP or who do not make an election. The purchase of Company stock for reinvestment of dividends is made in the open market on or about the date of the cash disbursement to the participants who opt to take dividends in cash. Dividends on unallocated shares held in the Employer Stock fund were paid to the trustee to be used to make payments on the outstanding loan obligation. 106 14. EQUITY INCENTIVE PLAN The TFS Financial Corporation Amended and Restated 2008 Equity Incentive Plan, approved by shareholders in February 2018 and the 2008 Equity Incentive Plan, approved by shareholders in May 2008, are collectively referred to as the "Equity Plan”. The amended and restated plan is substantially similar to the previous plan, except that the number of future shares eligible to be granted has been reduced to 8,450,000 shares, of which 7,138,688 shares remain available for future award, and the term to grant shares has been extended to February 21, 2028. The Company recorded excess tax benefits (expense) of $(224), $109, and $1,331 related to share-based compensation awards for the years ended September 2023, 2022 and 2021, respectively. The following table presents share-based compensation expense and the related tax benefit recognized during the periods presented: Restricted stock units expense Performance share units expense Stock option expense Total stock-based compensation expense Tax benefit related to share-based compensation expense Year Ended September 30, 2023 2022 2021 $ $ $ 3,366 $ 874 — 4,240 $ 3,206 $ 739 — 3,945 $ 778 $ 677 $ 4,160 1,214 68 5,442 999 Restricted stock units vest over a one to 10 year service period. The product of the number of units granted and the grant date market price of the Company’s common stock determines the fair value of restricted stock units under the Equity Plan. The Company recognizes compensation expense for the fair value of restricted stock units on a straight-line basis over the requisite service period. The following is a summary of the status of the Company’s restricted stock units as of September 30, 2023, and changes therein during the year then ended: Outstanding at September 30, 2022 Granted Released Forfeited Outstanding at September 30, 2023 (1) Number of Shares Awarded Weighted Average Grant Date Fair Value 1,257,898 $ 174,550 $ (91,765) $ (850) $ 1,339,833 $ 14.17 13.69 17.86 17.77 13.85 (1) Includes 765,748 shares with a weighted average grant date fair value of $11.87 that have vested but will not be issued until the recipients are no longer employed by the Company. The weighted average grant date fair value of restricted stock units granted during the years ended September 30, 2023, 2022 and 2021 was $13.69, $17.80 and $17.77 per share, respectively. The total fair value of restricted stock units vested during the years ended September 30, 2023, 2022 and 2021 was $1,639, $2,058, and $6,981, respectively. Expected future compensation expense relating to the non-vested restricted stock units at September 30, 2023, is $2,606 over a weighted average period of 2.43 years. Performance share units vest in the form of Company common stock issued at the end of a three-year period, based on the pro-rata achievement of performance based metrics over a two-year period. The range of payout is 0% to 150% of the number of share units granted. For performance stock units, fair value is estimated as the product of the number of performance units granted, adjusted for the probability of achievement, and the grant date market price of the Company’s common stock. The Company recognizes compensation expense for the fair value of performance share units on a straight-line basis over the requisite service period, based on the performance condition that is probable of achievement. Probability of achievement is reassessed at each reporting period and the cumulative effect of a change in estimate, if any, is recognized in the period of change. Cash dividend equivalents are accrued and paid only if and when the underlying units become vested and payable. 107 The following is a summary of the status of the Company’s performance share units as of September 30, 2023, and changes therein during the year then ended. No awards were forfeited during the year ended September 30, 2023. Outstanding at September 30, 2022 Granted Released Performance adjustment Outstanding at September 30, 2023 Number of Shares Awarded Weighted Average Grant Date Fair Value 169,954 102,000 (58,277) 4,394 218,071 18.46 13.69 19.76 17.77 15.87 The weighted average grant date fair value of performance share units granted during the year ended September 30, 2023, 2022 and 2021 was $13.69, $17.80, and $17.77, respectively. The total fair value of performance share units vested during the years ended September 30, 2023, 2022 and 2021, totaled $1,152, $1,112, and $14, respectively. Expected future compensation expense relating to the non-vested performance share units at September 30, 2023, is $1,196 over a weighted average period of 1.81 years. Stock options have a contractual term of 10 years and vest over a one to seven year service period. The Company recognizes compensation expense for the fair values of these awards, which have installment vesting, on a straight-line basis over the requisite service period of the awards. The following is a summary of the Company’s stock option activity and related information for the Equity Plan for the year ended September 30, 2023. There were no stock options granted during 2023, 2022 and 2021. Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value Number of Stock Options Outstanding at September 30, 2022 2,361,175 $ 15.14 3.32 $ Exercised Forfeited or expired Outstanding at September 30, 2023 Vested and exercisable, at September 30, 2023 Vested or expected to vest, at September 30, 2023 (315,200) $ 11.64 (54,000) $ 14.94 1,991,975 $ 15.69 1,991,975 $ 15.69 1,991,975 $ 15.69 $ $ 2.66 $ 2.66 $ 2.66 $ 429 820 — — — — The total intrinsic value of options exercised during the years ended September 30, 2023, 2022 and 2021 was $820, $551 and $8,605, respectively. There were no non-vested options outstanding as of September 30, 2023. Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares. 15. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Company enters into commitments with off-balance-sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to originate or purchase loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire from five to 10 years following the date that the line of credit was established, subject to various conditions including compliance with payment obligation, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the CONSOLIDATED STATEMENTS OF CONDITION. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Company generally uses the same credit policies in making commitments as it does for on-balance-sheet instruments. The allowance for credit losses related to off-balance sheet commitments is recorded in other liabilities in the CONSOLIDATED STATEMENTS OF CONDITION. Refer to Note 5. LOANS AND ALLOWANCES FOR CREDIT LOSSES for discussion on 108 credit loss methodology. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made. At September 30, 2023, the Company had commitments to originate or purchase loans and related allowances as follows: Fixed-rate mortgage loans Adjustable-rate mortgage loans Home equity loans and lines of credit Total Commitment Allowance $ 130,448 $ 44,034 174,942 $ 349,424 $ 673 232 2,547 3,452 At September 30, 2023, the Company had unfunded commitments outstanding and related allowances as follows: Home equity lines of credit Construction loans Total Commitment Allowance $ 4,696,512 $ 23,811 25,754 252 $ 4,722,266 $ 24,063 At September 30, 2023, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity, is $4,728,215. At September 30, 2023 and September 30, 2022, the Company had $2,094 and $0, respectively, in commitments to sell mortgage loans. At September 30, 2023 and September 30, 2022, the Company had $51,275 and $0, respectively, in commitments to purchase mortgage loans, which are included in mortgage loan commitments above. The above commitments are expected to be funded through normal operations. The Company is undergoing an escheat audit covering Ohio, Kentucky and Florida. Any potential loss that may result from this matter is not reasonably estimable at September 30, 2023. The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operation, or statements of cash flows. 16. FAIR VALUE Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. A fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value, mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At September 30, 2023 and September 30, 2022, there were no pending agency contracts held for sale. For the years ended September 30, 2023, 2022, and 2021, net gain (loss) on the sale of loans includes $0, $0 and $134, respectively, related to unrealized gains or losses during the period due to changes in the fair value of loans held for sale subject to pending agency contracts. Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value. Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. At September 30, 2023 and 2022, this includes $508,324 and $457,908, respectively, of investments in U.S. government and agency obligations including U.S. Treasury notes and investments in highly liquid collateralized mortgage obligations, that can include items issued by Fannie Mae, Freddie Mac, and Ginnie Mae, measured using the market approach. The fair values of investment securities represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities. 109 Mortgage Loans Held for Sale—The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At September 30, 2023 and 2022, there were $3,260 and $9,661, respectively, of loans held for sale measured at fair value. At September 30, 2023 and 2022 there were no loans held for sale carried at cost. Interest income on mortgage loans held for sale is recorded in interest income on loans. Collateral-Dependent Loans—Collateral-dependent loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated using a fair value measurement, such as the fair value of the underlying collateral. Credit loss is measured using a market approach based on the fair value of the collateral, less estimated costs to dispose, for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 5. LOANS AND ALLOWANCES FOR CREDIT LOSSES. To calculate the credit loss of collateral-dependent loans, the fair market values of the collateral, estimated using third-party appraisals in the majority of instances, are reduced by calculated estimated costs to dispose, derived from historical experience and recent market conditions. Any indicated credit loss is recognized by a charge to the allowance for credit losses. Subsequent increases in collateral values or principal pay downs on loans with recognized credit loss could result in a collateral-dependent loan being carried below its fair value. When no credit loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum repayment the Company can expect. The amortized cost of loans individually evaluated for credit loss based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of estimated costs to dispose on fair values is determined at the time of credit loss or when additional credit loss is recognized and is included in quantitative information about significant unobservable inputs later in this note. Loans held for investment that have been restructured in TDRs, are performing according to the restructured terms of the loan agreement and are not evaluated based on collateral, are individually evaluated for credit loss using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At September 30, 2023 and 2022, this included $74,691 and $76,692, respectively, in amortized costs of TDRs with related allowances for loss of $9,546 and $10,284. Real Estate Owned—Real estate owned includes real estate acquired as a result of foreclosure, or by deed in lieu of foreclosure, and is carried at the lower of the cost basis or fair value, less estimated costs to dispose. The carrying amounts of real estate owned at September 30, 2023 and September 30, 2022 were $1,444 and $1,191, respectively. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At September 30, 2023 and 2022, these adjustments were not significant to reported fair values. At September 30, 2023 and 2022, respectively, $1,413 and $1,192 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis where the cost basis equals or exceeds the estimated fair values, less estimated costs to dispose, of $163 and $156, respectively. Real estate owned includes $194 and $155 of properties carried at their original or adjusted cost basis at September 30, 2023 and 2022, respectively. Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio, forward commitments on contracts to deliver mortgage loans, and interest rate swaps designated as cash flow hedges. Derivatives not designated as cash flow hedges are reported at fair value in Other assets or Other liabilities on the CONSOLIDATED STATEMENT OF CONDITION with changes in value recorded in current earnings. Derivatives qualifying as cash flow hedges are settled daily, bringing their fair value to $0. Refer to Note 17. DERIVATIVE INSTRUMENTS for additional information on cash flow hedges and other derivative instruments. The fair value of interest rate lock commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy. 110 Assets and liabilities carried at fair value on a recurring basis in the CONSOLIDATED STATEMENTS OF CONDITION at September 30, 2023 and 2022 are summarized below. Recurring Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2023 Assets Investment securities available for sale: REMIC’s Fannie Mae certificates Freddie Mac certificates U.S. government and agency obligations Derivatives: Forward commitments for the sale of mortgage loans Total Liabilities Derivatives: $ 443,007 $ 814 — $ — 443,007 $ 814 1,044 63,459 11 — — — 1,044 63,459 11 $ 508,335 $ — $ 508,335 $ Interest rate lock commitments Total $ 1 1 $ — — $ — — $ — — — — — — 1 1 Recurring Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2022 Assets Investment securities available for sale: REMIC’s Fannie Mae certificates U.S. government and agency obligations Total Liabilities Derivatives: $ 453,268 $ — $ 453,268 $ 1,021 3,619 — — 1,021 3,619 $ 457,908 $ — $ 457,908 $ Interest rate lock commitments Total 333 $ 333 $ — — $ — — $ — — — — 333 333 The table below presents a reconciliation of the beginning and ending balances and the location within the CONSOLIDATED STATEMENTS OF INCOME where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Beginning balance (Loss)/Gain during the period due to changes in fair value: Included in other non-interest income Ending balance Change in unrealized gains for the period included in earnings for assets held at end of the reporting date 111 Interest Rate Lock Commitments Year Ended September 30, 2023 2022 2021 (333) $ 525 $ 1,194 332 (1) $ (858) (333) $ (669) 525 (1) $ (333) $ 525 $ $ $ Summarized in the tables below are those assets measured at fair value on a nonrecurring basis. Nonrecurring Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2023 Collateral-dependent loans, net of allowance Mortgage loans held for sale Real estate owned(1) Total $ $ 38,289 $ 3,260 1,413 42,962 $ — $ — — — $ — $ 3,260 — 3,260 $ 38,289 — 1,413 39,702 ______________________ (1) Amounts represent fair value measurements of properties before deducting estimated costs to dispose. Nonrecurring Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2022 Collateral-dependent loans, net of allowance $ 47,121 $ — $ — $ 47,121 Mortgage loans held for sale Real estate owned(1) Total ______________________ 9,661 1,192 — — 9,661 — $ 57,974 $ — $ 9,661 $ — 1,192 48,313 (1) Amounts represent fair value measurements of properties before deducting estimated costs to dispose. The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy. The interest rate lock commitments include mortgage origination applications. Fair Value September 30, 2023 $38,289 Valuation Technique(s) Unobservable Input Range Weighted Average Market comparables of collateral discounted to estimated net proceeds Discount appraised value to estimated net proceeds based on historical experience: • Residential Properties 0 - 30% 4.8% $(1) Quoted Secondary Market pricing Closure rate 0 - 100% 99.5% Fair Value September 30, 2022 $47,121 Valuation Technique(s) Unobservable Input Range Weighted Average Market comparables of collateral discounted to estimated net proceeds Discount appraised value to estimated net proceeds based on historical experience: • Residential Properties 0 - 28% 4.7% ($333) Quoted Secondary Market pricing Closure rate 0 - 100% 93.7% Collateral- dependent loans, net of allowance Interest rate lock commitments Collateral- dependent loans, net of allowance Interest rate lock commitments 112 — — — — — — — — — — — — — 1 The following tables present the estimated fair value of the Company's financial instruments and their carrying amounts as reported in the CONSOLIDATED STATEMENTS OF CONDITION. Assets: Cash and due from banks Interest earning cash equivalents Investment securities available for sale Mortgage loans held for sale Loans, net: Mortgage loans held for investment Other loans Federal Home Loan Bank stock Accrued interest receivable Cash collateral received from or held by counterparty Derivatives Liabilities: Carrying Amount September 30, 2023 Estimated Fair Value Total Level 1 Level 2 Level 3 $ 29,134 $ 437,612 29,134 $ 29,134 $ 437,612 437,612 — $ — 508,324 3,260 508,324 3,260 15,161,336 4,411 13,262,711 4,411 — — — — 508,324 3,260 — — 13,262,711 4,411 247,098 53,910 247,098 53,910 N/A — — 53,910 24,887 24,887 24,887 11 11 — — 11 Checking and passbook accounts $ 2,790,476 $ 2,790,476 $ — $ 2,790,476 $ Certificates of deposit Borrowed funds Borrowers’ advances for taxes and insurance Principal, interest and escrow owed on loans serviced Derivatives 6,659,344 6,571,674 5,273,637 5,256,278 124,417 124,417 29,811 29,811 1 1 — — — — — 6,571,674 5,256,278 124,417 29,811 — 113 Assets: Cash and due from banks $ 18,961 $ 18,961 $ 18,961 $ — $ Carrying Amount September 30, 2022 Estimated Fair Value Total Level 1 Level 2 Level 3 Interest earning cash equivalents Investment securities available for sale Mortgage loans held for sale Loans, net: Mortgage loans held for investment Other loans Federal Home Loan Bank stock Accrued interest receivable Cash collateral received from or held by counterparty Liabilities: 350,603 457,908 9,661 350,603 457,908 350,603 — 9,661 — 457,908 9,661 — — — 14,253,804 3,263 13,106,346 3,263 — — 13,106,346 3,263 212,290 40,256 212,290 40,256 N/A — — 40,256 26,045 26,045 26,045 — Checking and passbook accounts $ 3,056,506 $ 3,056,506 $ — $ 3,056,506 $ Certificates of deposit Borrowed funds Borrowers’ advances for taxes and insurance Principal, interest and escrow owed on loans serviced Derivatives 5,864,511 5,733,418 4,793,221 4,734,377 117,250 117,250 29,913 333 29,913 333 — — — — — 5,733,418 4,734,377 117,250 29,913 — — — — — — — — — — — — — 333 17. DERIVATIVE INSTRUMENTS The Company enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy. For hedges of the Company's borrowing and deposit program, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the Company's FHLB borrowings and brokered certificates of deposit. Cash flow hedges are initially assessed for effectiveness using regression analysis. Changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Quarterly, a quantitative analysis is preformed to monitor the ongoing effectiveness of the hedging instrument. All derivative positions were initially, and continue to be, highly effective at September 30, 2023. The Company enters into forward commitments for the sale of mortgage loans primarily to protect against the risk of lost revenue from adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME. In addition, the Company is party to derivative instruments when it enters into interest rate lock commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME. In accordance with the reference rate reform, for every LIBOR referenced interest rate swap with a reset date after the LIBOR cessation date, counterparties received a LIBOR referenced instrument maturing on the first reset date after the LIBOR cessation date, and a forward starting SOFR instrument. At September 30, 2023, all previous LIBOR referenced swaps have transitioned to a SOFR-based rate. Additionally, under previously adopted ASU 2020-04, Reference Rate Reform (Topic 848), the Company has elected and applied certain optional expedients for eligible hedging relationships impacted by the LIBOR cessation. 114 The following tables provide the locations within the CONSOLIDATED STATEMENTS OF CONDITION, notional values and fair values, at the reporting dates, for all derivative instruments. Derivatives designated as hedging instruments Cash flow hedges: Interest rate swaps Other Assets SOFR swaps Total cash flow hedges: Interest rate swaps Cash flow hedges: Interest rate swaps Other Assets LIBOR swaps Total cash flow hedges: Interest rate swaps September 30, 2023 Weighted Average Notional Value Fair Value Term (years) Fixed-Rate Payments $ 3,815,000 $ 3,815,000 $ — — 3.7 3.7 2.91 % 2.91 % September 30, 2022 Weighted Average Notional Value Fair Value Term (years) Fixed-Rate Payments $ 1,550,000 $ $ 1,550,000 $ — — 2.7 2.7 1.88 % 1.88 % September 30, 2023 September 30, 2022 Notional Value Fair Value Notional Value Fair Value Derivatives not designated as hedging instruments Interest rate lock commitments Other Liabilities Forward Commitments for the sale of mortgage loans Other Assets Total derivatives not designated as hedging instruments $ $ 1,830 $ (1) $ 9,170 $ (333) 2,094 11 — — 3,924 $ 10 $ 9,170 $ (333) The following tables present the net gains and losses recorded within the CONSOLIDATED STATEMENTS OF INCOME and the CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME relating to derivative instruments. Cash flow hedges Amount of gain/(loss) recognized Other comprehensive income $ 146,807 $ 141,163 $ 27,848 Location of Gain or (Loss) Recognized in Income Year Ended September 30, 2023 2022 2021 Amount of gain/(loss) reclassified from AOCI Derivatives not designated as hedging instruments Interest expense: Borrowed funds and Deposits 59,821 (22,740) (44,534) Interest rate lock commitments Forward commitments for the sale of mortgage loans Other non-interest income Net gain/(loss) on the sale of loans $ 332 $ (858) $ (669) 11 — 134 The Company estimates that $90,257 of the amounts reported in AOCI will be reclassified as a reduction to interest expense during the fiscal year ending September 30, 2024. 115 Derivatives contain an element of credit risk which arises from the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. The Company's exposure is limited to the replacement value of the contracts rather than the notional or principal amounts. Credit risk is minimized through counterparty margin payments, transaction limits and monitoring procedures. All of the Company's swap transactions are cleared through a registered clearing broker to a central clearing organization. The clearing organization establishes daily cash and upfront cash or securities margin requirements to cover potential exposure in the event of default. This process shifts the risk away from the counterparty, since the clearing organization acts as an intermediary on each cleared transaction. At September 30, 2023 and 2022, there was $24,887 and $26,045, respectively, of cash collateral included in other assets, and $59,813 and $0, respectively, included in investment securities related to initial margin requirements that are held by the central clearing organization. For derivative transactions cleared through certain clearing parties, variation margin payments are recognized as settlements on a daily basis. The fair value of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. 18. PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed financial statements for TFS Financial Corporation (parent company only) reflect the investments in, and transactions with, its wholly-owned subsidiaries. Intercompany activity is eliminated in the consolidated financial statements. Statements of Condition Assets: Cash and due from banks Investment securities - available for sale Other loans: Demand loan due from Third Federal Savings and Loan ESOP loan receivable Investments in: Third Federal Savings and Loan Non-thrift subsidiaries Prepaid federal and state taxes Deferred income taxes Accrued receivables and other assets Total assets Liabilities and shareholders’ equity: Line of credit due non-thrift subsidiary Accrued expenses and other liabilities Accrued federal and state income taxes Total liabilities Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding Common stock, 0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 280,359,173 and 280,582,741 outstanding at September 30, 2023 and September 30, 2022, respectively Paid-in capital Treasury stock, at cost; 51,959,577 and 51,736,009 shares at September 30, 2023 and September 30, 2022, respectively Unallocated ESOP shares Retained earnings—substantially restricted Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity 116 September 30, 2023 2022 $ 1,424 $ 3,646 1,341 3,619 172,307 37,254 184,772 41,927 1,704,315 1,605,306 8,268 738 200 9,786 8,104 — 296 9,158 $ 1,937,938 $ 1,854,523 $ 8,132 $ 2,445 — 10,577 7,485 2,532 167 10,184 — — 3,323 1,755,027 3,323 1,751,223 (776,101) (771,986) (27,084) (31,417) 886,984 85,212 870,047 23,149 1,927,361 1,844,339 $ 1,937,938 $ 1,854,523 Years Ended September 30, 2022 2021 2023 $ 9,047 $ 2,433 54 45 11,579 1,600 $ 1,400 6 43 3,049 351 351 11,228 30 40,000 40,030 97 97 2,952 30 56,000 56,030 4,825 1,253 13 217 6,308 44,950 (1,294) 46,244 4,534 1,456 13 223 6,226 52,756 (2,826) 55,582 164 1,732 1 — 1,897 7 7 1,890 85 55,000 55,085 4,917 1,566 3 176 6,662 50,313 (3,848) 54,161 17,260 1,723 74,565 (34,860) 28,843 163 75,250 (7,273) 66,649 2,688 62,064 24,738 2,108 81,007 (3,733) 56,096 11,801 64,164 $ 137,314 $ 165,515 $ 145,171 (1,283) 90,950 127,093 Statements of Comprehensive Income (Loss) Interest income: Demand loan due from Third Federal Savings and Loan ESOP loan Other interest income Investment securities available for sale Total interest income Interest expense: Borrowed funds from non-thrift subsidiaries Total interest expense Net interest income Non-interest income: Intercompany service charges Dividend from Third Federal Savings and Loan Total other income Non-interest expenses: Salaries and employee benefits Professional services Office property and equipment Other operating expenses Total non-interest expenses Income before income tax benefit Income tax benefit Income before undistributed earnings of subsidiaries Equity in undistributed earnings of subsidiaries (dividend in excess of earnings): Third Federal Savings and Loan Non-thrift subsidiaries Net income Change in net unrealized gain (loss) on securities available for sale Change in cash flow hedges Change in pension obligation Total other comprehensive income (loss) Total comprehensive income 117 Cash flows from operating activities: Statements of Cash Flows Net income Adjustments to reconcile net income to net cash provided by operating activities: (Equity in undistributed earnings of subsidiaries) dividend in excess of earnings: Third Federal Savings and Loan Non-thrift subsidiaries Deferred income taxes ESOP and stock-based compensation expense Net decrease (increase) in interest receivable and other assets Net increase (decrease) in accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchase of securities available for sale (Increase) decrease in balances lent to Third Federal Savings and Loan Net cash provided by (used in) investing activities Cash flows from financing activities: Principal reduction of ESOP loan Purchase of treasury shares Dividends paid to common shareholders Acquisition of treasury shares through net settlement Net increase (decrease) in borrowings from non-thrift subsidiaries Years Ended September 30, 2023 2022 2021 $ 75,250 $ 74,565 $ 81,007 (28,843) (163) 87 1,863 (1,351) (273) 46,570 — 12,465 12,465 4,673 (5,000) (58,294) (978) 647 (17,260) (1,723) 81 1,543 908 48 58,162 (4,071) 304 (3,767) 4,527 (5,049) (58,297) (1,241) 1,649 (24,738) (2,108) 204 1,843 12,593 (200) 68,601 — (12,222) (12,222) 4,063 — (56,637) (5,591) 1,787 Net cash used in financing activities (58,952) (58,411) (56,378) Net increase (decrease) in cash and cash equivalents Cash and cash equivalents—beginning of year Cash and cash equivalents—end of year 83 1,341 (4,016) 5,357 $ 1,424 $ 1,341 $ 1 5,356 5,357 19. EARNINGS PER SHARE Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants and the 227,119,132 shares held by Third Federal Savings, MHC. For purposes of computing dilutive earnings per share, stock options and restricted and performance share units with a dilutive impact are added to the outstanding shares used in the basic earnings per share calculation. Unvested shares awarded pursuant to the Company's restricted stock 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. Performance share units, determined to be contingently issuable and not participating securities, are excluded from the calculation of basic EPS. At September 30, 2023 and 2022, the ESOP held 2,708,371 and 3,141,711 shares, respectively, that were neither allocated to participants nor committed to be released to participants. 118 The following is a summary of the Company’s EPS calculations. Net income Less: income allocated to restricted stock units Basic earnings per share: Income available to common shareholders Diluted earnings per share: Effect of dilutive potential common shares Income available to common shareholders Net income Less: income allocated to restricted stock units Basic earnings per share: Income available to common shareholders Diluted earnings per share: Effect of dilutive potential common shares Income available to common shareholders Net income Less: income allocated to restricted stock units Basic earnings per share: Income available to common shareholders Diluted earnings per share: Effect of dilutive potential common shares Income available to common shareholders For the Year Ended September 30, 2023 Income Shares Per share amount (Dollars in thousands, except per share data) $ 75,250 1,569 73,681 277,436,382 $ 0.27 1,147,072 $ 73,681 278,583,454 $ 0.26 For the Year Ended September 30, 2022 Per share Income amount Shares (Dollars in thousands, except per share data) $ 74,565 1,510 73,055 277,370,762 $ 0.26 $ 73,055 1,315,603 278,686,365 $ 0.26 For the Year Ended September 30, 2021 Income Shares Per share amount (Dollars in thousands, except per share data) $ 81,007 1,555 79,452 276,694,594 $ 0.29 1,881,660 $ 79,452 278,576,254 $ 0.29 The following is a summary of outstanding stock options and restricted and performance share units that are excluded from the computation of diluted EPS because their inclusion would be anti-dilutive. Options to purchase shares Restricted and performance share units For the Year Ended September 30, 2023 1,991,975 57,669 2022 407,100 50,000 2021 133,800 — 119 20. RECENT ACCOUNTING PRONOUNCEMENTS Adopted in fiscal year ended September 30, 2023 In December of 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This ASU deferred the period of time entities can utilize the reference rate reform relief guidance from ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effect of Reference Rate Reform on Financial Reporting, to December 31, 2024 instead of the original December 31, 2022. This amendment is a result of the expectation that the LIBOR would cease to be published as of June 30, 2023. The FASB Board decided that this amendment would be effective for all entities upon issuance of ASU 2022-06. This update did not have a material impact on the Company's consolidated financial condition or results of operation. In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323). The amendments in this update expand the proportional amortization method, by election, to account for all investments made primarily for the purpose of receiving income tax credits or other tax benefits. Previously, this accounting method was only allowed for low-income housing tax credit investments. This update is effective for fiscal years beginning after December 15, 2023, with early adoption permitted in any interim period. The Company adopted this update effective April 1, 2023 and will consider the provisions on future tax credit investments, should they occur. This update did not have an immediate impact on our consolidated financial condition or results of operations. Issued but not yet adopted as of September 30, 2023 In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326). The amendments in this Update eliminate the accounting guidance for TDR by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when the borrower is experiencing financial difficulty. This will be done by applying the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, this amendment requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. This update is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company plans to adopt this guidance as of October 1, 2023 and apply the modified retrospective transition method that will evaluate loans previously identified as TDRs for credit loss under the Company’s current ACL policy. We expect to recognize an increase to opening retained earnings of $7,898, net of income taxes resulting from a pretax decrease to the allowance for credit losses on loans and unfunded commitments of $10,262 upon adoption. The enhanced disclosure requirements provided for by the ASU will be adopted on a prospective basis. The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company's consolidated financial statements or do not apply to its operations. 21. RELATED PARTY TRANSACTIONS The Company has periodically made loans and extensions of credit, in the ordinary course of business, to certain directors and executive officers. These loans were originated with normal credit terms, including interest rate and collateralization, and do not represent more than the normal risk of collection. The aggregate amount of loans to such related parties at both September 30, 2023 and 2022 was $0. 120 3.1 3.2 3.3 3.4 4.1 4.2 10.1 10.2 10.3 FORM 10-K EXHIBIT INDEX Exhibit Number Description of Exhibit Amended and Restated Charter of TFS Financial Corporation, dated January 16, 2007 If Incorporated by Reference, Documents with Which Exhibit was Previous Filed with SEC Amendment No. 2 to Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on February 9, 2006; Exhibit 3.2 therein) Amended and Restated Bylaws of TFS Financial Corporation Current Report on Form 8-K No. 001-33390 (filed with the SEC on April 28, 2008; Exhibit 3.2 therein) Amendment to Bylaws of TFS Financial Corporation Current Report on Form 8-K No. 001-33390 (filed with the SEC on October 29, 2018; Exhibit 3 therein) Amendment to Bylaws of TFS Financial Corporation Current Report on Form 8-K No. 001-33390 (filed with the SEC on July 1, 2022; Exhibit 3 therein) Form of Common Stock Certificate of TFS Financial Corporation Description of Registrant's Securities Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 4 therein) Annual Report on Form 10-K No. 001-33390 (filed with the SEC on November 24, 2020; Exhibit 4.2 therein) [Intentionally omitted] Financial, Retirement & Estate Planning Program as amended and restated January 1, 2006 Resolution Regarding Executive Physical Program, dated May 16, 2002 10.4 Company Car Program, dated February 24, 1995 10.5 Executive Retirement Benefit Plan I, dated January 1, 2006 10.6 Benefit Equalization Plan, dated January 1, 2005 10.7 Split Dollar Agreement, dated January 29, 2002 10.8 10.9 10.10 10.11 Resolution Regarding Supplemental Split Dollar Life Insurance Plan, dated August 22, 2002 [Intentionally omitted] TFS Financial Corporation Amended and Restated 2008 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement for the 2018 Annual Meeting of Stockholders) TFS Financial Corporation Management Incentive Compensation Plan (incorporated by reference to Appendix A to the definitive proxy statement for the 2018 Annual Meeting of Stockholders) 121 Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 10.2 therein) Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 10.3 therein) Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 10.4 therein) Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 10.5 therein) Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 10.6 therein) Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 10.7 therein) Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 10.8 therein) Proxy Statement on Schedule 14A, No. 001-33390 (filed with the SEC on January 9, 2018) Proxy Statement on Schedule 14A, No. 001-33390 (filed with the SEC on January 9, 2018) Exhibit Number 10.12 10.13 10.14 14 19 21.1 23.1 31.1 31.2 32 97 100 Description of Exhibit If Incorporated by Reference, Documents with Which Exhibit was Previous Filed with SEC First Amendment to the Restricted Stock Unit Award Agreement (August 11, 2008 award), dated August 9, 2012 Current Report on Form 8-K No. 001-33390 (filed with the SEC on August 9, 2012; Exhibit 10.1 therein) First Amendment to the Restricted Stock Unit Award Agreement (May 12, 2009 award), dated August 9, 2012 Current Report on Form 8K No. 001-33390 (filed with the SEC on August 9, 2012; Exhibit 10.2 therein) First Amendment to the Restricted Stock Unit Award Agreement (May 14, 2010 award), dated August 9, 2012 Current Report on Form 8K No. 001-33390 (filed with the SEC on August 9, 2012; Exhibit 10.3 therein) Code of Ethics Available on our website, www.thirdfederal.com Insider trading policies and procedures Filed herewith Subsidiaries of the registrant Registration Statement on Form S-1 No. 333-139295 (filed with the SEC on December 13, 2006; Exhibit 21 therein) Consent of Independent Registered Public Accounting Firm Certification of chief executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 Certification of chief financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 Certification of chief executive officer and chief financial officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 Filed herewith Filed herewith Filed herewith Filed herewith Policy relating to recovery of erroneously awarded compensation Filed herewith XBRL related documents 101.INS Interactive datafile 101.SCH Interactive datafile 101.CAL Interactive datafile 101.DEF Interactive datafile 101.LAB Interactive datafile 101.PRE Interactive datafile 104 Interactive datafile The following financial statements from TFS Financial Corporation’s Annual Report on Form 10- K for the year ended September 30, 2023 filed on November 21, 2023 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements. XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document Cover Page Interactive Datafile (embedded within the Inline XBRL document and included in Exhibit 101) 122 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TFS Financial Corporation Dated: November 21, 2023 /S/ MARC A. STEFANSKI Marc A. Stefanski Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: November 21, 2023 /S/ MARC A. STEFANSKI Marc A. Stefanski Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Dated: November 21, 2023 /S/ TIMOTHY W. MULHERN Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Dated: November 21, 2023 Timothy W. Mulhern Chief Financial Officer (Principal Financial Officer) /S/ SUSANNE N. MILLER Susanne N. Miller Chief Accounting Officer (Principal Accounting Officer) /S/ BARBARA J. ANDERSON Barbara J. Anderson, Director /S/ ANTHONY J. ASHER Anthony J. Asher, Director /S/ MARTIN J. COHEN Martin J. Cohen, Director /S/ ROBERT A. FIALA Robert A. Fiala, Director /S/ WILLIAM C. MULLIGAN William C. Mulligan, Director /S/ TERRENCE R. OZAN Terrence R. Ozan, Director /S/ JOHN P. RINGENBACH John P. Ringenbach, Director /S/ MEREDITH S. WEIL Meredith S. Weil, Director /S/ DANIEL F. WEIR Daniel F. Weir, Director /S/ ASHLEY H. WILLIAMS Ashley H. Williams, Director 123 [This page intentionally left blank] [This page intentionally left blank] THIRD FEDERAL MANAGEMENT TEAM BOARD OF DIRECTORS Marc A. Stefanski Chairman Ashley H. Williams Vice Chairman Barbara J. Anderson Anthony J. Asher Martin J. Cohen Robert A. Fiala William C. Mulligan Terrence R. Ozan John P. Ringenbach Meredith S. Weil Daniel F. Weir MANAGEMENT TEAM Marc A. Stefanski Chairman and Chief Executive Officer Kathleen (Kitty) M. Danckers Chief Risk Officer Russell C. Holmes Chief Retail Officer Susanne N. Miller Chief Accounting Officer Timothy W. Mulhern Chief Financial Officer Andrew J. Rubino Chief Information Officer Bradley T. Stefanski Chief Strategy Officer Gavin B. Stefanski Chief Experience Officer Meredith S. Weil Chief Operating Officer Cathy W. Zbanek Chief Synergy Officer INVESTOR RELATIONS Bo Sewell TFS Financial Corporation 7007 Broadway Avenue Cleveland, Ohio 44105-1441 (877) 513-2318 toll free investor_relations@thirdfederal.com CORPORATE HEADQUARTERS Third Federal Savings and Loan Association 7007 Broadway Avenue Cleveland, Ohio 44105-1441 (216) 441-6000 (800) 844-7333 toll free www.thirdfederal.com CONTACT INFORMATION TFS Financial Corporation 7007 Broadway Avenue Cleveland, Ohio 44105-1441 (877) 513-2318 toll free TRANSFER AGENT Broadridge Corporate Issuer Solutions P.O. Box 1342 Brentwood, NY 11717 (888) 314-4808 toll free www.shareholder.broadridge.com/tfs RESPECT • EXCELLENCE LOVE • TRUST • FUN Top: As a part of the Third Federal 85th Anniversary, associates celebrating 25 years or more with the company were honored at a luncheon with Marc Stefanski.Middle: Marc Stefanski and members of the management team pose with Stefanski Scholarship recipients from Cleveland Central Catholic High School.Bottom: Third Federal associates celebrated the company’s 85th anniversary with celebrations in Ohio and Florida.

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