TFS Financial CORP

Previous wording

Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in 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.

Current wording

Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in 2007, and continue to be, 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 we've been the developer of a community of 40 homes, intended to serve the low- to moderate income home owner. 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.

Previous wording

The 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 with 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 committed to our mission, business model, and strategic approach. 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.

Current wording

The unprecedented implications of the prolonged period of inversion in the yield curve, influenced by the FRS's restrictive monetary policy resulted in a heightened exposure of certain risks inherent in the banking industry. The yield curve is currently positive, normalizing in mid-September just prior to the FRS's 100 basis point rate cuts between September and December 2024. Taking all of this into consideration, we remain committed to our mission, business model, and strategic approach. 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.

Previous wording

Capital ratios remain a source of financial strength for the Company and the Association as all capital ratios, including the Company's Common Equity Tier 1 Capital ratio of 18.82%, exceed the regulatory requirement to be considered "Well Capitalized". Additional details on our capital ratios are reported in the Liquidity and Capital Resources section of this Item 2.

Current wording

Capital ratios remain a source of financial strength for the Company and the Association as all capital ratios, including the Company's Common Equity Tier 1 Capital ratio of 18.32%, exceed the regulatory requirement to be considered "Well Capitalized". Additional details on our capital ratios are reported in the Liquidity and Capital Resources section of this Item 2.

Previous wording

The Company maintains high-quality core deposits distributed primarily across our Ohio and Florida branch network in products tailored toward consumers seeking non-transactional savings. As of June 30, 2024, 96.2% of our $8.81 billion retail deposit base consists of accounts structured under the FDIC insured limit of $250,000. The Company has the ability to fund 100% of all uninsured deposit balances through sources described later in this Item 2 under the heading Liquidity and Capital Resources.

Current wording

The Company maintains high-quality core deposits distributed primarily across our Ohio and Florida branch network in products tailored toward consumers seeking non-transactional savings. As of December 31, 2024, 95.9% of our $9.11 billion retail deposit base consists of accounts structured under the FDIC insured limit of $250,000. The Company has the ability to fund 100% of all uninsured deposit balances through sources described later in this Item 2 under the heading Liquidity and Capital Resources.

Previous wording

The Company retains ample and diverse sources of liquidity and funding, beyond deposits. At June 30, 2024, our combined additional borrowing capacity under the Association's blanket pledge arrangements with the FHLB of Cincinnati and the FRB Cleveland along with our ability to purchase Fed Funds through arrangements with other institutions totaled $3.77 billion. We also hold marketable securities that could be sold and converted to cash. Further details about liquidity and funding are described in the section labelled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth of this Item 2.

Current wording

The Company retains ample and diverse sources of liquidity and funding, beyond deposits. At December 31, 2024, our combined additional borrowing capacity under the Association's blanket pledge arrangements with the FHLB of Cincinnati and the FRB Cleveland along with our ability to purchase Fed Funds through arrangements with other institutions totaled $3.12 billion. We also hold marketable securities that could be sold and converted to cash. Further details about liquidity and funding are described in the section labelled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth of this Item 2.

Previous wording

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 where short-term rates exceed long-term rates, both of which have occurred over recent periods. Conversely, rapid and substantial decreases in short-term rates can also pose a challenge when interest rates on our ELOC portfolio, indexed to the prime rate, reprice more quickly than interest rates on borrowings and certificate of deposit accounts which generally reprice at maturity. These economic environments may result in decreases in our net interest income and our net interest margin.

Current wording

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 where short-term rates exceed long-term rates, both of which occurred in the past two years. Although the yield curve became positive in early September 2024, rapid and substantial decreases in short-term rates can also pose a challenge when interest rates on our home equity line of credit portfolio, indexed to the prime rate, reprice more quickly than interest rates on borrowings and certificate of deposit accounts which generally reprice at maturity. These economic environments may result in decreases in our net interest income and our net interest margin.

Previous wording

•Promoting adjustable-rate loans and shorter-term fixed-rate loans;

Current wording

•Maintaining adjustable-rate loans and shorter-term fixed-rate loans;

Previous wording

At June 30, 2024, the Company’s Tier 1 (leverage) capital totaled $1.85 billion, or 10.82%, of net average assets and 18.82% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.70 billion, or 9.96%, of net average assets and 17.33% of risk-weighted assets. Each of these measures is in excess of the requirements in effect for the Association at June 30, 2024, for designation as “well capitalized” under regulatory prompt corrective action provisions. Beginning this fiscal year, the Company entered into the final two 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 2 for additional discussion regarding regulatory capital requirements.

Current wording

At December 31, 2024, the Company’s Tier 1 (leverage) capital totaled $1.85 billion, or 10.89%, of net average assets and 18.32% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.70 billion, or 9.96%, of net average assets and 16.74% of risk-weighted assets. Each of these measures is in excess of the requirements in effect for the Association at December 31, 2024, for designation as “well capitalized” under regulatory prompt corrective action provisions. Beginning this fiscal year, the Company entered into the final year 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 2 for additional discussion regarding regulatory capital requirements.

Previous wording

The following tables set forth our first mortgage loan production and balances segregated by loan structure at origination:

Current wording

The following tables set forth our first mortgage loan production and period end balances segregated by loan structure at origination:

Previous wording

The following table sets forth the balances as of June 30, 2024, for all ARM loans segregated by the next scheduled interest rate reset date:

Current wording

The following table sets forth the balances and yields as of December 31, 2024, for all ARM loans segregated by the next scheduled interest rate reset date:

Previous wording

At June 30, 2024 and September 30, 2023, 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 $30.4 million and $3.3 million, respectively.

Current wording

At December 31, 2024 and September 30, 2024, 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 $0.8 million and $17.8 million, respectively.

Previous wording

The following tables set forth the principal balance and interest yield as of June 30, 2024, for the portfolio of loans held for investment, by type of loan, structure and geographic location:

Current wording

The following tables set forth the principal balance and interest yield as of December 31, 2024, for the portfolio of loans held for investment, by type of loan, structure and geographic location. Weighted average yields are based on principal balances as of December 31, 2024.

Previous wording

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 June 30, 2024, the principal balance of home equity lines of credit (including those in repayment) that are structured to reset with each prime rate adjustment totaled $3.11 billion. Our home equity lending is discussed in the Lending Activities section of this Item 2.

Current wording

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 December 31, 2024, the principal balance of home equity lines of credit (including those in repayment) that are structured to reset with each prime rate adjustment totaled $3.51 billion. Our home equity lending is discussed in the Lending Activities section of this Item 2.

Previous wording

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 years) fixed-rate advances from the FHLB of Cincinnati, and shorter-term (e.g. one or three months) funding, the durations of which are extended by correlated interest rate exchange contracts ("swap"). Funding sources are discussed in more detail within this Item 2 in the sections entitled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growthand Liquidity and Capital Resources. 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.

Current wording

As a complement to our strategies to shorten the duration of our fixed rate 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. three years or greater) fixed-rate advances from the FHLB of Cincinnati, and shorter-term (e.g. one or three months) funding, the durations of which are extended by correlated interest rate exchange contracts ("swap"). Funding sources are discussed in more detail within this Item 2 in the sections entitled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growthand Liquidity and Capital Resources. 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.

Previous wording

The Association uses swaps to extend the duration of its funding sources. 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. 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 CDs. In these challenging economic times with an extended inverted yield curve, the Association has found it financially beneficial to use swaps to extend the duration of our liabilities with a relatively lower borrowing cost. For more details, refer to Notes 6.

Current wording

(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 CDs. The Association has found it financially beneficial to use swaps to extend the duration of our liabilities with a relatively lower borrowing cost. For more details, refer to Notes 6. BORROWED FUNDSand 13. DERIVATIVE INSTRUMENTS of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

Previous wording

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 mortgages with terms of 15 years or more, Home Ready and some loans purchased through our correspondent lending partner) are originated under Fannie Mae guidelines 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, 10-year fixed-rate loans, and first mortgage loans secured by certain property types) are originated under our internally derived underwriting standards, 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.

Current wording

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 mortgages with terms of 15 years or more, Home Ready and certain loans purchased through our correspondent lending partner) are originated under Fannie Mae guidelines 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, 10-year fixed-rate loans, and first mortgage loans secured by certain property types) are originated under our proprietary underwriting and closing process and 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.

Previous wording

During the nine months ended June 30, 2024, $190.7 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, $5.3 million were originated through our traditional mortgage banking brand, known as "Mortgage Passport", and $185.4 million were originated or purchased as other agency-compliant first mortgage loans. At June 30, 2024, loans classified as held for sale totaled $30.4 million. At June 30, 2024, we serviced $1.96 billion of loans we originated and later sold to investors.

Current wording

During the three months ended December 31, 2024, $72.0 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 or committed loans, $56.6 million were originated as agency-compliant first mortgage loans, $4.5 million were purchased through a correspondent lending partnership, $10.3 million were originated under Fannie Mae's Home Ready initiative, and $0.6 million were originated through our mortgage banking brand, known as "Mortgage Passport." At December 31, 2024, loans classified as held for sale totaled $0.8 million. At December 31, 2024, we serviced $1.99 billion of loans we originated and later sold to investors.

Previous wording

We continue to consider liquidity and balance sheet management, as well as secondary market pricing, in evaluating the opportunity to sell loans. Additionally, we've expanded our ability to sell certain fixed-rate loans to Fannie Mae through the use of more traditional mortgage banking activities, including a proprietary approach to risk-based pricing and loan-level pricing adjustments in markets outside of Ohio and Florida. This approach is not expected to significantly impact our financial results in fiscal year 2024. Loan sales are discussed in more detail within the Liquidity and Capital Resources section of this Item 2.

Current wording

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 using a proprietary approach to loan-level price adjustments in markets outside of Ohio and Florida using our "Mortgage Passport" brand to expand our ability to sell certain fixed-rate loans to Fannie Mae. Loan sales are discussed in more detail within the Liquidity and Capital Resources section of this Item 2.

Previous wording

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 June 30, 2024, 89% 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.

Current wording

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 December 31, 2024, 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 are at least 150 days past due, but not later than 180 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.

Previous wording

In an effort to limit our credit risk exposure consistent 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 during the current quarter, the average credit score was 777 and the average LTV was 71% at origination. Our current delinquency levels reflect the higher credit standards to which we subject all new originations. As of June 30, 2024, loans originated or purchased had a balance of $15.29 billion, of which $28.5 million, or 0.2%, were delinquent.

Current wording

In an effort to limit our credit risk exposure and keep it consistent 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 during the current quarter, the average credit score was 777 and the average LTV was 67% at origination. Our current delinquency levels reflect the higher credit standards to which we subject all new originations. As of December 31, 2024, loans originated or purchased had a balance of $15.41 billion, of which $36.2 million, or 0.2%, were delinquent.

Previous wording

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 June 30, 2024, approximately 57.9% and 17.4% of the combined total of our residential Core and construction loans held for investment and approximately 24.1% and 22.8% 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 24 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 loans originated in the nine months ended June 30, 2024, 20.4% are secured by properties in states other than Ohio or Florida.

Current wording

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 December 31, 2024, approximately 58.2% and 17.3% of the combined total of our residential Core and construction loans were held for investment, and approximately 23.1% and 22.3% 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 25 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 loans originated in the three months ended December 31, 2024, 20.2% are secured by properties in states other than Ohio or Florida.

Previous wording

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. At June 30, 2024, 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 9.96%. We expect to continue to remain a well capitalized institution.

Current wording

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. At December 31, 2024, 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 9.96%. The Association's Tier 1 (leverage) capital ratio at December 31, 2024 included the negative impact of a $40 million cash dividend payment that the Association made to the Company, its sole shareholder, in December 2024. Because of its intercompany nature, this dividend payment did not impact the Company's consolidated capital ratios which are reported in the Liquidity and Capital Resources section of this Item 2. We expect to continue to remain a well capitalized institution.

Previous wording

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 June 30, 2024, deposits totaled $10.03 billion (including $1.22 billion of brokered CDs), while borrowings totaled $4.83 billion and borrowers’ advances and servicing escrows totaled $83.6 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.

Current wording

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 December 31, 2024, deposits totaled $10.21 billion (including $1.10 billion of brokered CDs), while borrowings totaled $4.66 billion and borrowers’ advances and servicing escrows totaled $179.4 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.

Previous wording

While our retail deposit customers provide our primary source of funding, we maintain many alternative funding sources. First, we pledge available real estate mortgage loans with the FHLB of Cincinnati and the FRB-Cleveland. At June 30, 2024, the Association had the ability to borrow a maximum of $7.48 billion from the FHLB of Cincinnati and $646.0 million from the FRB-Cleveland Discount Window. As of June 30, 2024, our capacity for additional borrowing from the FHLB of Cincinnati was $2.68 billion. Second, we have the ability to purchase overnight Fed Funds up to $445.0 million through various arrangements with other institutions. Third, 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 June 30, 2024, our investment securities portfolio totaled $523.0 million. Finally, cash flows from operating activities have been a regular source of funds. During the nine months ended June 30, 2024 and 2023, cash flows from operations provided $147.3 million and $76.9 million, respectively.

Current wording

While our retail deposit customers provide our primary source of funding, we maintain many alternative funding sources. First, we pledge available real estate mortgage loans with the FHLB of Cincinnati and the FRB-Cleveland. At December 31, 2024, the Association had the ability to borrow a maximum of $6.77 billion from the FHLB of Cincinnati and $594.0 million from the FRB-Cleveland Discount Window. As of December 31, 2024, our capacity for additional borrowing from the FHLB of Cincinnati was $2.13 billion. Second, we have the ability to purchase overnight Fed Funds up to $395.0 million through various arrangements with other institutions. Third, 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 December 31, 2024, our investment securities portfolio totaled $507.7 million. Fourth, selling loans in the secondary market is a regular source of liquidity. During the three months ended December 31, 2024, we sold, or committed to sell $72.0 million in loans to Fannie Mae. Finally, cash flows from operating activities have been a regular source of funds. During the three months ended December 31, 2024 and 2023, cash flows from operations provided $45.5 million and $36.3 million, respectively.

Previous wording

Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. We have successfully been able to reduce our operating expenses to offset the pressure of margin compression resulting from the extended inverted yield curve. Our ratio of annualized non-interest expense to average assets was 1.20% for the nine months ended June 30, 2024, and 1.34% for the nine months ended June 30, 2023. As of June 30, 2024, our average assets per full-time employee and our average deposits per full-time employee were $18.5 million and $10.9 million, respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average deposits (exclusive of brokered CDs) held at our branch offices ($238.1 million per branch office as of June 30, 2024) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses to help safeguard against margin compression.

Current wording

Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. We have successfully been able to reduce our operating expenses to help offset the pressure of margin compression resulting from until recently, the prolonged inverted yield curve. Our ratio of annualized non-interest expense to average assets was 1.13% for the three months ended December 31, 2024, and 1.19% for the three months ended December 31, 2023. As of December 31, 2024, our average assets per full-time employee and our average deposits per full-time employee were $18.4 million and $11.0 million, respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average deposits (exclusive of brokered CDs) held at our branch offices ($246.2 million per branch office as of December 31, 2024) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses to help offset margin compression.

Previous wording

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 life of loan 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 is a general valuation allowance (GVA) on our portfolio made up of:

Current wording

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 is a general valuation allowance (GVA) on our portfolio made up of:

Previous wording

On October 1, 2023, the Individual Valuation Allowance (IVA) established for any loans dependent on cash flows, such as performing TDRs, was eliminated with the adoption of ASU 2022-02. Subsequently, all non-collaterally dependent modifications have an allowance estimated through the lifetime loss model. 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, among other:

Current wording

On October 1, 2023, the IVA established for any loans dependent on cash flows, such as performing TDRs, was eliminated with the adoption of ASU 2022-02. Subsequently, all non-collateral dependent modifications have an allowance estimated through the lifetime loss model. 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, among other:

Previous wording

•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;

Current wording

•changes in the nature and volume of the portfolios including home equity lines of credit utilization and adjustable-rate mortgage loans nearing a rate reset;

Previous wording

•limitations within our models to predict life of loan net losses.

Current wording

•limitations within our models to predict lifetime net losses on the loan portfolio.

Previous wording

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. 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. In general, a considerable portion of our gross charge-offs originate from our home equity loans and lines of credit portfolios. At June 30, 2024, we had an amortized cost of $3.63 billion in home equity loans and home equity lines of credit outstanding, of which $4.4 million, or 0.12%, were delinquent 90 days or more.

Current wording

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. Given the higher risk inherent in home equity loans and lines of credit and our experience during periods of weak housing markets and potential 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 December 31, 2024, we had an amortized cost of $3.55 billion in home equity lines of credit and $613.7 million in home equity loans outstanding, of which $5.1 million, or 0.12%, were delinquent 90 days or more.

Previous wording

The following table sets forth activity for credit losses segregated by geographic location for the periods indicated. The majority of our Residential Core and Home Today loan portfolios are secured by properties located in Ohio, and therefore were not segregated by state.

Current wording

The following table sets forth activity for credit losses segregated by geographic location for the periods indicated. The majority of our Residential Core and Home Today loan portfolios is secured by properties located in Ohio, and therefore were not segregated by state. There were no charge-offs in the Home equity loan portfolio for the periods indicated.

Previous wording

The following table sets forth additional information with respect to net recoveries by category for the periods indicated. Net recoveries on Construction loans were immaterial and therefore were not included in the table below.

Current wording

The following table sets forth additional information with respect to net recoveries by category for the periods indicated rounded to the nearest tenth of a percent.

Previous wording

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 collateral 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 obligations or as loans with improved collateral positions reach final resolution. During the nine months ended June 30, 2024 and June 30, 2023, recoveries exceeded loan charge-offs by $3.6 million and $4.6 million, respectively.

Current wording

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 six 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 obligations or as loans with improved collateral positions reach final resolution. During the three months ended December 31, 2024 and December 31, 2023, recoveries exceeded loan charge-offs by $1.4 million and $1.0 million, respectively, and gross charge-offs decreased slightly. Delinquent loans continue to be evaluated for potential losses and provisions are recorded for the estimate of potential losses of those loans.

Previous wording

During the three months ended June 30, 2024, the total allowance for credit losses increased to $95.7 million, from $94.8 million at March 31, 2024. 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 three months ended June 30, 2024, the asset portion of the total allowance decreased to $67.5 million from $68.2 million, and the liability portion of the total allowance increased to $28.2 million from $26.7 million. We recorded a $0.5 million net release of allowance for credit losses for the period, consisting of a $2.0 million release of provision on loans and a $1.5 million provision for unfunded commitments.

Current wording

During the three months ended December 31, 2024 and September 30, 2024, the total allowance for credit losses remained at $97.8 million. 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 three months ended December 31, 2024, the asset portion of the total allowance increased to $70.6 million from $70.0 million, and the liability portion of the total allowance decreased to $27.2 million from $27.8 million. We recorded a $1.5 million net release of allowance for credit losses for the period, consisting of a $0.9 million release of provision on loans and a $0.6 million reclassification to credit losses on off-balance sheet exposures.

Previous wording

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 three months ended June 30, 2024, were related to a decrease in the residential Core portfolio balance primarily due to aging and decreases in qualitative factors, partially offset by new growth in the home equity loans and lines of credit portfolio.

Current wording

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. While the allowance for credit losses on loan balances remained consistent during the three months ended December 31, 2024, the home equity loans and line of credit portfolios increased primarily due to new growth. This was offset by decreases in the Core portfolio balances primarily due to aging.

Previous wording

The amortized cost of the residential Core portfolio decreased 1.9%, or $225.8 million, and its total allowance decreased 5.2%, or $2.5 million, as of June 30, 2024, compared to March 31, 2024. The amortized cost of the home equity loans and lines of credit portfolio increased 8.1%, or $271.2 million, and its total allowance increased 10.3% to $25.4 million, from $23.0 million at March 31, 2024. As we are no longer originating loans under our Home Today program, there is an expected net recovery position for this portfolio which was $3.1 million at June 30, 2024, and $2.6 million at March 31, 2024. 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 to be negative. Refer to the"Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for more information.

Current wording

The amortized cost of the residential Core portfolio decreased 1.9%, or $214.0 million, and its total allowance decreased 4.3%, or $1.9 million, as of December 31, 2024, compared to September 30, 2024. The amortized cost of the home equity lines of credit portfolio increased 5.7%, or $190.0 million, and its total allowance increased 9.7% to $18.2 million, from $16.6 million at September 30, 2024. The amortized cost of the home equity loans increased 8.3%, or $46.8 million, and its total allowance increased 6.3% to $12.4 million, from $11.6 million at September 30, 2024. As we are no longer originating loans under our Home Today program, there is an expected net recovery position for this portfolio which was $2.5 million at December 31, 2024, and $2.7 million at September 30, 2024. 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 to be negative. Refer to the"Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for more information.

Previous wording

The following table provides the amortized cost and an analysis of our residential mortgage loans disaggregated by refreshed FICO score, year of origination and portfolio at June 30, 2024. 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.

Current wording

The following table provides the amortized cost and an analysis of our real estate loans held for investment disaggregated by refreshed FICO score, year of origination and portfolio at December 31, 2024. FICO scores are updated quarterly as available. 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. 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.

Previous wording

The following table provides amortized cost and an analysis of our residential mortgage loans by origination LTV, origination year and portfolio at June 30, 2024. Subsequent to origination, LTVs are only updated for our home equity loans and lines of credit and for residential mortgage loans collaterally reviewed.

Current wording

The following table provides amortized cost and an analysis of our real estate loans held for investment by origination LTV, origination year and portfolio at December 31, 2024. Subsequent to origination, LTVs are only updated for our home equity loans and lines of credit and for collateral-dependent residential mortgage loans.

Previous wording

At June 30, 2024, the unpaid principal balance of the home equity loans and lines of credit portfolio consisted of $537.5 million in home equity loans (including $59.9 million of home equity lines of credit, which are in repayment and no longer eligible to be drawn upon, and $11.3 million in bridge loans) and $3.05 billion in home equity lines of credit.

Current wording

At December 31, 2024, the unpaid principal balance of the home equity loans and lines of credit portfolio consisted of $608.5 million in home equity loans (which included $11.6 million in bridge loans) and $3.51 billion in home equity lines of credit (which included $58.0 million of home equity lines of credit which are in repayment and no longer eligible to be drawn upon).

Previous wording

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 home equity loans, home equity lines of credit and bridge loan portfolio as of June 30, 2024. Home equity lines of credit in the draw period are reported according to geographic distribution.

Current wording

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 home equity loans, home equity lines of credit and bridge loan portfolios as of December 31, 2024. Home equity lines of credit in the draw period are reported according to geographic distribution.