TFS Financial CORP (TFSL) FY 2023 MD&A

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.

47

Table of Contents

48

Table of Contents

______________________

(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

Table of Contents

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.

50

Table of Contents

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.

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

Table of Contents

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.

Marketing of Home Equity Lines of Credit

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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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.

(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

Table of Contents

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.

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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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.