TFS Financial CORP 10-Q

Item 1. Financial Statements TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (unaudited) (In thousands, except share data) June 30, 2023 September 30, 2022 ASSETS Cash and due from banks $ 23,278 $ 18,961 Other interest-earning cash equivalents 412,937 350,603 Cash and cash equivalents 436,215 369,564 Investment securities available for sale (amortized cost $ 562,238 and $ 501,597 , respectively) 513,303 457,908 Mortgage loans held for sale (at fair value) 595 9,661 Loans held for investment, net: Mortgage loans 14,897,681 14,276,478 Other loans 4,022 3,263 Deferred loan expenses, net 56,780 50,221 Allowance for credit losses on loans ( 74,803 ) ( 72,895 ) Loans, net 14,883,680 14,257,067 Mortgage loan servicing rights, net 7,545 7,943 Federal Home Loan Bank stock, at cost 247,098 212,290 Real estate owned, net 1,400 1,191 Premises, equipment, and software, net 34,901 34,531 Accrued interest receivable 49,837 40,256 Bank owned life insurance contracts 310,498 304,040 Other assets 109,916 95,428 TOTAL ASSETS $ 16,594,988 $ 15,789,879 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits $ 9,069,069 $ 8,921,017 Borrowed funds 5,452,228 4,793,221 Borrowers’ advances for insurance and taxes 74,359 117,250 Principal, interest, and related escrow owed on loans serviced 16,510 29,913 Accrued expenses and other liabilities 96,698 84,139 Total liabilities 14,708,864 13,945,540 Commitments and contingent liabilities Preferred stock, $ 0.01 par value, 100,000,000 shares authorized, none issued and outstanding — — Common stock, $ 0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 280,329,098 and 280,582,741 outstanding at June 30, 2023 and September 30, 2022, respectively 3,323 3,323 Paid-in capital 1,753,801 1,751,223 Treasury stock, at cost; 51,989,652 and 51,736,009 shares at June 30, 2023 and September 30, 2022, respectively ( 775,852 ) ( 771,986 ) Unallocated ESOP shares ( 28,167 ) ( 31,417 ) Retained earnings—substantially restricted 882,034 870,047 Accumulated other comprehensive income 50,985 23,149 Total shareholders’ equity 1,886,124 1,844,339 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 16,594,988 $ 15,789,879 See accompanying notes to unaudited interim consolidated financial statements. 4 Table of Contents TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) (In thousands, except share and per share data) For the Three Months Ended For the Nine Months Ended June 30, June 30, 2023 2022 2023 2022 INTEREST AND DIVIDEND INCOME: Loans, including fees $ 144,347 $ 99,576 $ 410,847 $ 280,820 Investment securities available for sale 3,712 1,282 10,229 3,597 Other interest and dividend earning assets 8,598 1,913 22,103 3,905 Total interest and dividend income 156,657 102,771 443,179 288,322 INTEREST EXPENSE: Deposits 48,905 17,214 118,636 53,361 Borrowed funds 38,973 14,255 111,339 43,074 Total interest expense 87,878 31,469 229,975 96,435 NET INTEREST INCOME 68,779 71,302 213,204 191,887 PROVISION (RELEASE) FOR CREDIT LOSSES — 4,000 ( 2,000 ) 1,000 NET INTEREST INCOME AFTER (RELEASE) FOR CREDIT LOSSES 68,779 67,302 215,204 190,887 NON-INTEREST INCOME: Fees and service charges, net of amortization 1,919 2,742 5,779 7,714 Net gain (loss) on the sale of loans 21 ( 51 ) 617 2,249 Increase in and death benefits from bank owned life insurance contracts 2,790 2,090 7,151 7,223 Other 1,113 896 2,782 2,236 Total non-interest income 5,843 5,677 16,329 19,422 NON-INTEREST EXPENSE: Salaries and employee benefits 25,332 28,756 84,125 82,133 Marketing services 7,023 4,830 21,407 17,007 Office property, equipment and software 7,246 6,762 20,848 20,225 Federal insurance premium and assessments 3,574 2,351 9,823 6,639 State franchise tax 1,230 1,197 3,706 3,658 Other expenses 8,472 7,860 21,736 19,742 Total non-interest expense 52,877 51,756 161,645 149,404 INCOME BEFORE INCOME TAXES 21,745 21,223 69,888 60,905 INCOME TAX EXPENSE 4,142 4,076 14,184 11,773 NET INCOME $ 17,603 $ 17,147 $ 55,704 $ 49,132 Earnings per share—basic and diluted $ 0.06 $ 0.06 $ 0.20 $ 0.17 Weighted average shares outstanding Basic 277,472,312 277,453,439 277,384,689 277,366,624 Diluted 278,590,810 278,555,759 278,507,602 278,767,989 See accompanying notes to unaudited interim consolidated financial statements. 5 Table of Contents TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (In thousands) For the Three Months Ended For the Nine Months Ended June 30, June 30, 2023 2022 2023 2022 Net income $ 17,603 $ 17,147 $ 55,704 $ 49,132 Other comprehensive income (loss), net of tax: Net change in unrealized (loss) on securities available for sale ( 6,127 ) ( 4,480 ) ( 3,915 ) ( 21,624 ) Net change in cash flow hedges 52,215 19,540 31,163 93,476 Net change in defined benefit plan obligation 196 725 588 903 Total other comprehensive income 46,284 15,785 27,836 72,755 Total comprehensive income $ 63,887 $ 32,932 $ 83,540 $ 121,887 See accompanying notes to unaudited interim consolidated financial statements. 6 Table of Contents TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) (In thousands, except share and per share data) For the Three Months Ended June 30, 2022 Common stock Paid-in capital Treasury stock Unallocated common stock held by ESOP Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Balance at March 31, 2022 $ 3,323 $ 1,748,589 $ ( 768,304 ) $ ( 33,584 ) $ 856,555 $ ( 10,831 ) $ 1,795,748 Net income — — — — 17,147 — 17,147 Other comprehensive income, net of tax — — — — — 15,785 15,785 ESOP shares allocated or committed to be released — 513 — 1,084 — — 1,597 Compensation costs for equity incentive plans — 947 — — — — 947 Purchase of treasury stock ( 243,200 shares) — — ( 3,520 ) — — — ( 3,520 ) Treasury stock allocated to equity incentive plan — ( 230 ) 140 — — — ( 90 ) Dividends declared to common shareholders ($ 0.2825 per common share) — — — — ( 14,560 ) — ( 14,560 ) Balance at June 30, 2022 $ 3,323 $ 1,749,819 $ ( 771,684 ) $ ( 32,500 ) $ 859,142 $ 4,954 $ 1,813,054 For the Three Months Ended June 30, 2023 Common stock Paid-in capital Treasury stock Unallocated common stock held by ESOP Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Balance at March 31, 2023 $ 3,323 $ 1,752,508 $ ( 775,852 ) $ ( 29,250 ) $ 879,046 $ 4,701 $ 1,834,476 Net income — — — — 17,603 — 17,603 Other comprehensive income, net of tax — — — — — 46,284 46,284 ESOP shares allocated or committed to be released — 232 — 1,083 — — 1,315 Compensation costs for equity incentive plans — 1,065 — — — — 1,065 Treasury stock allocated to equity incentive plan — ( 4 ) — — — — ( 4 ) Dividends declared to common shareholders ($ 0.2825 per common share) — — — — ( 14,615 ) — ( 14,615 ) Balance at June 30, 2023 $ 3,323 $ 1,753,801 $ ( 775,852 ) $ ( 28,167 ) $ 882,034 $ 50,985 $ 1,886,124 7 Table of Contents For the Nine Months Ended June 30, 2022 Common stock Paid-in capital Treasury stock Unallocated common stock held by ESOP Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Balance at September 30, 2021 $ 3,323 $ 1,746,887 $ ( 768,035 ) $ ( 35,751 ) $ 853,657 $ ( 67,801 ) $ 1,732,280 Net income — — — — 49,132 — 49,132 Other comprehensive income, net of tax — — — — — 72,755 72,755 ESOP shares allocated or committed to be released — 2,280 — 3,251 — — 5,531 Compensation costs for equity incentive plans — 2,906 — — — — 2,906 Purchase of treasury stock ( 312,259 shares) — — ( 4,710 ) — — — ( 4,710 ) Treasury stock allocated to equity incentive plan — ( 2,254 ) 1,061 — — — ( 1,193 ) Dividends declared to common shareholders ($ 0.8475 per common share) — — — — ( 43,647 ) — ( 43,647 ) Balance at June 30, 2022 $ 3,323 $ 1,749,819 $ ( 771,684 ) $ ( 32,500 ) $ 859,142 $ 4,954 $ 1,813,054 For the Nine Months Ended June 30, 2023 Common stock Paid-in capital Treasury stock Unallocated common stock held by ESOP Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Balance at September 30, 2022 $ 3,323 $ 1,751,223 $ ( 771,986 ) $ ( 31,417 ) $ 870,047 $ 23,149 $ 1,844,339 Net income — — — — 55,704 — 55,704 Other comprehensive income, net of tax — — — — — 27,836 27,836 ESOP shares allocated or committed to be released — 1,064 — 3,250 — — 4,314 Compensation costs for equity incentive plans — 3,284 — — — — 3,284 Purchase of treasury stock ( 361,869 shares) — — ( 5,000 ) — — — ( 5,000 ) Treasury stock allocated to equity incentive plan — ( 1,770 ) 1,134 — — — ( 636 ) Dividends declared to common shareholders ($ 0.8475 per common share) — — — — ( 43,717 ) — ( 43,717 ) Balance at June 30, 2023 $ 3,323 $ 1,753,801 $ ( 775,852 ) $ ( 28,167 ) $ 882,034 $ 50,985 $ 1,886,124 See accompanying notes to unaudited interim consolidated financial statements. 8 Table of Contents TFS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands) For the Nine Months Ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 55,704 $ 49,132 Adjustments to reconcile net income to net cash provided by operating activities: ESOP and stock-based compensation expense 7,598 8,437 Depreciation and amortization 13,387 20,808 Deferred income taxes ( 174 ) ( 993 ) Provision (release) for credit losses ( 2,000 ) 1,000 Net gain on the sale of loans ( 617 ) ( 2,249 ) Net gain on sale of commercial property — ( 181 ) Other net (gains) losses ( 225 ) 552 Proceeds from sales of loans held for sale 34,819 26,536 Loans originated and principal repayments on loans for sale ( 33,940 ) ( 19,138 ) Increase in bank owned life insurance contracts ( 6,520 ) ( 6,305 ) Net increase in interest receivable and other assets ( 23,702 ) ( 20,085 ) Net increase (decrease) in accrued expenses and other liabilities 32,566 ( 6,401 ) Net cash provided by operating activities 76,896 51,113 CASH FLOWS FROM INVESTING ACTIVITIES: Loans originated ( 2,515,388 ) ( 4,124,864 ) Principal repayments on loans 1,868,345 2,652,578 Proceeds from sales, principal repayments and maturities of: Securities available for sale 62,563 137,185 Proceeds from sale of: Loans 23,018 78,015 Real estate owned 319 362 Premises, equipment and other assets — 389 Purchases of: FHLB stock ( 34,808 ) ( 26,107 ) Securities available for sale ( 124,190 ) ( 197,328 ) Premises and equipment ( 4,048 ) ( 1,502 ) Other 88 1,162 Net cash used in investing activities ( 724,101 ) ( 1,480,110 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 145,140 164,914 Net decrease in borrowers' advances for insurance and taxes ( 42,891 ) ( 41,579 ) Net decrease in principal and interest owed on loans serviced ( 13,403 ) ( 22,763 ) Net increase in short-term borrowed funds 518,050 755,000 Net increase (decrease) in Fed Funds purchased ( 225,000 ) — Proceeds from long-term borrowed funds 350,000 400,000 Repayment of long-term borrowed funds ( 2,232 ) ( 2,789 ) Cash collateral/settlements received from (provided to) derivative counterparties 33,561 125,277 Acquisition of treasury shares ( 5,636 ) ( 6,042 ) Dividends paid to common shareholders ( 43,733 ) ( 43,817 ) Net cash provided by financing activities 713,856 1,328,201 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 66,651 ( 100,796 ) CASH AND CASH EQUIVALENTS—Beginning of period 369,564 488,326 CASH AND CASH EQUIVALENTS—End of period $ 436,215 $ 387,530 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on deposits $ 116,252 $ 54,001 Cash paid for interest on borrowed funds 129,871 16,687 Cash paid (received) for interest on interest rate swaps ( 29,356 ) 28,026 Cash paid for income taxes 17,444 25,416 SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Transfer of loans to real estate owned 589 274 Transfer of loans from held for investment to held for sale 22,899 76,155 Transfer of loans from held for sale to held for investment 8,433 16,075 Treasury stock issued for stock benefit plans 1,769 2,328 See accompanying notes to unaudited interim consolidated financial statements. 9 Table of Contents TFS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands unless otherwise indicated) 1. BASIS OF PRESENTATION TFS Financial Corporation, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering and, to a much lesser extent, other financial services. As of June 30, 2023, approximately 81.0 % of the Company’s outstanding shares were owned by the federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC. The thrift subsidiary of TFS Financial Corporation is Third Federal Savings and Loan Association of Cleveland. The accounting and financial reporting policies followed by the Company conform in all material respects to U.S. GAAP and to general practices in the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the valuation of deferred tax assets, and the determination of pension obligations are particularly subject to change. The unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at June 30, 2023, and its consolidated results of operations and cash flows for the periods presented. Such adjustments are the only adjustments reflected in the unaudited interim financial statements. In accordance with SEC Regulation S-X for interim financial information, these financial statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022 contains audited consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023 or for any other period. Per ASC 606, Revenue from Contracts with Customers, an entity is required to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. Three of the Company's revenue streams within scope of Topic 606 are the sales of REO, interchange income, and deposit account and other transaction-based service fee income. Those streams are not material to the Company's consolidated financial statements and therefore quantitative information regarding these streams is not disclosed. 2. EARNINGS PER SHARE Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, and the 227,119,132 shares held by Third Federal Savings, MHC. For purposes of computing dilutive earnings per share, stock options and restricted and performance share units with a dilutive impact are added to the outstanding shares used in the basic earnings per share calculation. Unvested shares awarded pursuant to the Company's restricted stock plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. Performance share units, determined to be contingently issuable and not participating securities, are excluded from the calculation of basic EPS. At June 30, 2023 and 2022, respectively, the ESOP held 2,816,706 and 3,250,046 shares, respectively, that were neither allocated to participants nor committed to be released to participants. 10 Table of Contents The following is a summary of the Company's earnings per share calculations. For the Three Months Ended June 30, 2023 2022 Income Shares Per share amount Income Shares Per share amount (Dollars in thousands, except per share data) Net income $ 17,603 $ 17,147 Less: income allocated to restricted stock units 388 370 Basic earnings per share: Income available to common shareholders 17,215 277,472,312 $ 0.06 16,777 277,453,439 $ 0.06 Diluted earnings per share: Effect of dilutive potential common shares 1,118,498 1,102,320 Income available to common shareholders $ 17,215 278,590,810 $ 0.06 $ 16,777 278,555,759 $ 0.06 For the Nine Months Ended June 30, 2023 2022 Income Shares Per share amount Income Shares Per share amount (Dollars in thousands, except per share data) Net income $ 55,704 $ 49,132 Less: income allocated to restricted stock units 1,164 1,107 Basic earnings per share: Income available to common shareholders 54,540 277,384,689 $ 0.20 48,025 277,366,624 $ 0.17 Diluted earnings per share: Effect of dilutive potential common shares 1,122,913 1,401,365 Income available to common shareholders $ 54,540 278,507,602 $ 0.20 $ 48,025 278,767,989 $ 0.17 The following is a summary of outstanding stock options and restricted and performance share units that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive. For the Three Months Ended June 30, For the Nine Months Ended June 30, 2023 2022 2023 2022 Options to purchase shares 1,995,275 2,043,575 1,995,275 407,900 Restricted and performance stock units 107,669 122,991 57,669 — 3. INVESTMENT SECURITIES Investments available for sale are summarized in the tables below. June 30, 2023 Amortized Cost Gross Unrealized Fair Value Gains Losses REMICs $ 496,696 $ 5 $ ( 48,497 ) $ 448,204 Fannie Mae certificates 887 5 ( 7 ) 885 Freddie Mac certificates 1,142 — ( 37 ) 1,105 U.S. government and agency obligations 63,513 — ( 404 ) 63,109 Total $ 562,238 $ 10 $ ( 48,945 ) $ 513,303 11 Table of Contents September 30, 2022 Amortized Cost Gross Unrealized Fair Value Gains Losses REMICs $ 496,529 $ 1 $ ( 43,262 ) $ 453,268 Fannie Mae certificates 1,011 14 ( 4 ) 1,021 U.S. government and agency obligations 4,057 — ( 438 ) 3,619 Total $ 501,597 $ 15 $ ( 43,704 ) $ 457,908 At June 30, 2023 and September 30, 2022, respectively, investment securities included $ 59,454 and $ 0 of U.S. government obligations pledged as collateral on our open swap positions to meet margin requirements established by the clearing organization. Accrued interest on investment securities is $ 1,462 and $ 1,122 at June 30, 2023 and September 30, 2022, respectively, and is reported in accrued interest receivable on the CONSOLIDATED STATEMENTS OF CONDITION . The following is a summary of our securities portfolio by the period remaining until contractual maturity and yield at June 30, 2023. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Weighted average yields are not presented on a tax-equivalent basis and are calculated by multiplying each carry value by its yield and dividing the sum of these results by the total carry values. We did not hold any tax-exempt securities. June 30, 2023 September 30, 2022 Amortized Cost Fair Value Weighted Average Yield Amortized Cost Fair Value Weighted Average Yield Due in one year or less $ 59,562 $ 59,547 5.13 % $ — $ — — % Due after one to five years 11,150 10,529 2.08 15,476 14,775 2.06 Due after five to ten years 35,734 33,628 2.42 38,927 37,204 2.30 Ten years or greater 455,792 409,599 2.69 447,194 405,929 2.25 Total $ 562,238 $ 513,303 2.92 % $ 501,597 $ 457,908 2.25 % Gross unrealized losses on available for sale securities and the estimated fair value of the related securities, aggregated by the length of time the securities have been in a continuous loss position, at June 30, 2023 and September 30, 2022, were as follows: June 30, 2023 Less Than 12 Months 12 Months or More Total Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Available for sale— REMICs $ 134,466 $ 4,728 $ 307,936 $ 43,769 $ 442,402 $ 48,497 Fannie Mae certificates 375 7 — — 375 7 Freddie Mac certificates 1,105 37 — — 1,105 37 U.S. government and agency obligations 59,454 13 3,655 391 63,109 404 Total $ 195,400 $ 4,785 $ 311,591 $ 44,160 $ 506,991 $ 48,945 12 Table of Contents September 30, 2022 Less Than 12 Months 12 Months or More Total Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Estimated Fair Value Unrealized Loss Available for sale— REMICs $ 261,795 $ 17,260 $ 190,739 $ 26,002 $ 452,534 $ 43,262 Fannie Mae certificates 217 4 — — 217 4 Freddie Mac certificates — — — — — — U.S. government and agency obligations 3,619 438 — — 3,619 438 Total $ 265,631 $ 17,702 $ 190,739 $ 26,002 $ 456,370 $ 43,704 The unrealized losses on investment securities were attributable to an increase in market interest rates. The investment portfolio is comprised entirely of securities issued by U.S. government entities and agencies, which support an expectation of zero loss estimates since principal and interest payments due on these securities carry the full faith and credit guaranty of the U.S. government. In addition, the U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed. Since the decline in value is attributable to an increase in market interest rates and not credit quality and because the Company has neither the intent to sell the securities nor is it more likely than not the Company will be required to sell the securities prior to recovery of the amortized cost, the Company did not record an allowance for credit losses at of June 30, 2023 . 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES LOAN PORTFOLIOS Loans held for investment consist of the following: June 30, 2023 September 30, 2022 Real estate loans: Residential Core $ 11,945,781 $ 11,539,859 Residential Home Today 48,240 53,255 Home equity loans and lines of credit 2,866,204 2,633,878 Construction 61,963 121,759 Real estate loans 14,922,188 14,348,751 Other loans 4,022 3,263 Add (deduct): Deferred loan expenses, net 56,780 50,221 Loans in process ( 24,507 ) ( 72,273 ) Allowance for credit losses on loans ( 74,803 ) ( 72,895 ) Loans held for investment, net $ 14,883,680 $ 14,257,067 Loans are carried at amortized cost, which includes outstanding principal balance adjusted for any unamortized premiums or discounts, net of deferred fees and expenses. Accrued interest is $ 48,372 and $ 39,124 as of June 30, 2023 and September 30, 2022, respectively, and is reported in accrued interest receivable on the CONSOLIDATED STATEMENTS OF CONDITION. A large concentration of the Company’s lending is in Ohio and Florida. As of June 30, 2023 and September 30, 2022, the percentage of aggregate Residential Core, Home Today and Construction loans secured by properties in Ohio was 57 % and 56 %, respectively, and the percentage of loans secured by properties in Florida was 18 %, as of both dates. As of June 30, 2023 and September 30, 2022, home equity loans and lines of credit were concentrated in the states of Ohio ( 26 % and 27 % respectively), Florida ( 22 % and 20 % respectively), and California ( 17 % and 16 % respectively). 13 Table of Contents Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay-option adjustable-rate mortgages). The portfolio contains "Smart Rate" adjustable-rate mortgage loans whereby the interest rate is locked initially for three or five years then resets annually, subject to periodic rate adjustments caps and various re-lock options available to the borrower. Although the borrower is qualified for its loan at a higher rate than the initial rate offered, the adjustable-rate feature may impact a borrower's ability to afford the higher payments upon rate reset during periods of rising interest rates while this repayment risk may be reduced in a declining or low rate environment. With limited historical loss experience compared to other types of loans in the portfolio, judgment is required by management in assessing the allowance required on adjustable-rate mortgage loans. The principal amount of adjustable-rate mortgage loans included in the Residential Core portfolio was $ 4,755,783 and $ 4,668,089 at June 30, 2023 and September 30, 2022, respectively. Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers and most loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after 2016. Home Today loans have greater credit risk than traditional residential real estate mortgage loans. Home equity loans and lines of credit, which are comprised primarily of home equity lines of credit, represent a significant portion of the residential real estate portfolio and include monthly principal and interest payments throughout the entire term. Once the draw period on lines of credit has expired, the accounts are included in the home equity loan balance. The full credit exposure on home equity lines of credit is secured by the value of the collateral real estate at the time of origination. The Company originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Company’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Company offers construction/permanent loans with fixed or adjustable-rates, and a current maximum loan-to-completed-appraised value ratio of 85 %. Other loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment, and forgivable down payment assistance loans, which are unsecured loans used as down payment assistance to borrowers qualified through partner housing agencies. The Company records a liability for the down payment assistance loans which are forgiven in equal increments over a pre-determined term, subject to residency requirements. Loans held for sale include loans originated with the intent to sell which are generally priced in alignment with secondary market pricing and may be subject to loan level pricing adjustments. Additionally, loans originated for the held for investment portfolio may later be identified for sale and transferred to the held for sale portfolio, which may include loans originated within the parameters of programs established by Fannie Mae. During the three and nine months ended June 30, 2023 and June 30, 2022, reclassifications to the held for sale portfolio included loans that were sold during the period, including those in contracts pending settlement at the end of the period, and loans originated for the held for investment portfolio that were later identified for sale. At June 30, 2023 and September 30, 2022, respectively, mortgage loans held for sale totaled $ 595 and $ 9,661 . During the three and nine months ended June 30, 2023, the principal balance of loans sold was $ 23,583 and $ 58,146 (including no loans in contracts pending settlement) compared to $ 2,633 and $ 104,299 (including $ 831 of contracts pending settlement) during the three and nine months ended June 30, 2022. During the three and nine months ended June 30, 2023, the amortized cost of loans originated as held for sale that were subsequently transferred to the held for investment portfolio was $ 0 and $ 8,433 , as compared to $ 0 and $ 16,075 during the three and nine months ended June 30, 2022. DELINQUENCY and NON-ACCRUAL An aging analysis of the amortized cost in loan receivables that are past due at June 30, 2023 and September 30, 2022 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due, regardless of the number of days in each month. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process. 14 Table of Contents 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total June 30, 2023 Real estate loans: Residential Core $ 4,390 $ 3,042 $ 6,053 $ 13,485 $ 11,954,458 $ 11,967,943 Residential Home Today 1,142 347 1,026 2,515 45,243 47,758 Home equity loans and lines of credit 2,859 843 3,092 6,794 2,894,860 2,901,654 Construction — — — — 37,106 37,106 Total real estate loans 8,391 4,232 10,171 22,794 14,931,667 14,954,461 Other loans — — — — 4,022 4,022 Total $ 8,391 $ 4,232 $ 10,171 $ 22,794 $ 14,935,689 $ 14,958,483 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total September 30, 2022 Real estate loans: Residential Core $ 2,725 $ 1,491 $ 9,281 $ 13,497 $ 11,545,784 $ 11,559,281 Residential Home Today 1,341 770 861 2,972 49,836 52,808 Home equity loans and lines of credit 1,599 796 2,321 4,716 2,661,416 2,666,132 Construction — — — — 48,478 48,478 Total real estate loans 5,665 3,057 12,463 21,185 14,305,514 14,326,699 Other loans — — — — 3,263 3,263 Total $ 5,665 $ 3,057 $ 12,463 $ 21,185 $ 14,308,777 $ 14,329,962 Loans are placed in non-accrual status when they are contractually 90 days or more past due. The number of days past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment. Loans with a partial charge-off are placed in non-accrual and will remain in non-accrual status until, at a minimum, the loss is recovered. Loans restructured in TDRs that were in non-accrual status prior to the restructurings and loans with forbearance plans that were subsequently modified in TDRs are reported in non-accrual status for a minimum of six months after restructuring. Loans restructured in TDRs with a high debt-to-income ratio at the time of modification are placed in non-accrual status for a minimum of 12 months. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status. The amortized cost of loan receivables in non-accrual status is summarized in the following table. Non-accrual with no ACL describes non-accrual loans which have no quantitative or individual valuation allowance, primarily because they have already been collaterally reviewed and any required charge-offs have been taken, but may be included in consideration of qualitative allowance factors. Balances are adjusted for deferred loan fees and expenses. There are no loans 90 or more days past due and still accruing at June 30, 2023 or September 30, 2022. June 30, 2023 September 30, 2022 Non-accrual with No ACL Total Non-accrual Non-accrual with No ACL Total Non-accrual Real estate loans: Residential Core $ 15,910 $ 18,309 $ 20,995 $ 22,644 Residential Home Today 4,990 5,290 5,753 6,037 Home equity loans and lines of credit 6,349 7,023 6,668 6,925 Total non-accrual loans $ 27,249 $ 30,622 $ 33,416 $ 35,606 At June 30, 2023 and September 30, 2022, respectively, the amortized cost in non-accrual loans includes $ 20,451 and $ 23,159 which are performing according to the terms of their agreement, of which $ 11,774 and $ 13,526 are loans in Chapter 7 15 Table of Contents bankruptcy status, primarily where all borrowers have filed, and have not reaffirmed or been dismissed. At June 30, 2023 and September 30, 2022, real estate loans include $ 9,230 and $ 9,833 , respectively, of loans that were in the process of foreclosure. Interest on loans in accrual status is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. The Company has elected not to measure an allowance for credit losses on accrued interest receivable amounts since amounts are written off timely. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid payment first. The amount of interest income recognized on non-accrual loans was $ 145 and $ 503 for the three and nine months ended June 30, 2023 and $ 112 and $ 549 for three and nine months ended June 30, 2022, respectively. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. A non-accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in non-accrual status when collectability is uncertain, such as a TDR that has not met minimum payment requirements, a loan with a partial charge-off, a home equity loan or line of credit with a delinquent first mortgage greater than 90 days past due, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. ALLOWANCE FOR CREDIT LOSSES For all classes of loans, a loan is considered collateral-dependent when, based on current information and events, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral or foreclosure is probable. Factors considered in determining that a loan is collateral-dependent may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan. Charge-offs on residential mortgage loans, home equity loans and lines of credit, and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the amortized cost in the loans. Partial or full charge-offs are also recognized for the amount of credit losses on loans considered collateral-dependent when the borrower is experiencing financial difficulty as described by meeting the conditions below. • For residential mortgage loans, payments are greater than 180 days delinquent; • For home equity loans and lines of credit, and residential loans restructured in TDR, payments are greater than 90 days delinquent; • For all classes of loans restructured in a TDR with a high debt-to-income ratio at time of modification; • For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan; • For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy; • For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed; • For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent; and • For all classes of loans, it becomes evident that a loss is probable. Collateral-dependent residential mortgage loans and construction loans are charged-off to the extent the amortized cost in the loan, net of anticipated mortgage insurance claims, exceeds the fair value, less estimated costs to dispose of the underlying property. Management can determine if the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged-off to the extent the amortized cost in the loan plus the balance of any senior liens exceeds the fair value, less estimated costs to dispose of the underlying property, or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio identified as collateral-dependent will continue to be reported as such until it is no longer considered collateral-dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off will continue to be individually evaluated for credit loss until, at a minimum, the loss has been recovered. Residential mortgage loans, home equity loans and lines of credit and construction loans restructured in TDRs that are not evaluated based on collateral are separately evaluated for credit losses on a loan by loan basis at each reporting date for as long as they are reported as TDRs. The credit loss evaluation is based on the present value of expected future cash flows discounted at the effective interest rate of the original loan. Expected future cash flows include a discount factor representing a potential for default. Valuation allowances are recorded for the excess of the amortized costs over the result of the cash flow analysis. Loans discharged in Chapter 7 bankruptcy are reported as TDRs and also evaluated based on the present value of expected future cash flows unless evaluated based on collateral. These loans are evaluated using expected future cash flows because the borrower, 16 Table of Contents not liquidation of the collateral, is expected to be the source of repayment for the loan. Other loans are not considered for restructuring. At June 30, 2023 and September 30, 2022, respectively, allowances on individually reviewed TDRs (IVAs), evaluated for credit losses based on the present value of cash flows, were $ 9,742 and $ 10,284 . All other individually evaluated loans received a charge-off, if applicable. The allowance for credit losses represents the estimate of lifetime losses in the loan portfolio and unfunded loan commitments. The allowance is estimated at each reporting date using relevant available information relating to past events, current conditions and supportable forecasts. The Company utilizes loan level regression models with forecasted economic data to derive the probability of default and loss given default factors. These factors are used to calculate the loan level credit loss over a 24-month period with an immediate reversion to historical mean loss rates for the remaining life of the loans. Historical credit loss experience provides the basis for the estimation of expected credit losses. Qualitative adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency status or likely recovery of previous loan charge-offs. Qualitative adjustments for expected changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors, are recognized when forecasted economic data used in the model differs from management's view or contains significant unobservable changes within a short period, particularly when those changes are directionally positive. Identifiable model limitations may also lead to qualitative adjustments, such as those made to reflect the expected recovery of loan amounts previously charged-off, beyond what the model is able to project. The qualitative adjustments resulted in a negative ending balance on the allowance for credit losses for the Home Today portfolio, where recoveries are expected to exceed charge-offs over the remaining life of that portfolio. The net qualitative adjustment at June 30, 2023 was a reduction of $ 10,620 . Adjustments are evaluated quarterly based on current facts and circumstances. 17 Table of Contents Activity in the allowance for credit losses by portfolio segment is summarized as follows. See Note 11. LOAN COMMITMENTS AND CONTINGENT LIABILITIES for further details on the allowance for unfunded commitments. For the Three Months Ended June 30, 2023 Beginning Balance Provisions (Releases) Charge-offs Recoveries Ending Balance Real estate loans: Residential Core $ 53,772 $ 587 $ ( 35 ) $ 227 $ 54,551 Residential Home Today ( 1,212 ) ( 283 ) ( 34 ) 434 ( 1,095 ) Home equity loans and lines of credit 21,232 ( 1,272 ) ( 22 ) 1,194 21,132 Construction 346 ( 131 ) — — 215 Total real estate loans $ 74,138 $ ( 1,099 ) $ ( 91 ) $ 1,855 $ 74,803 Total Unfunded Loan Commitments (1) 26,653 1,099 — — 27,752 Total Allowance for Credit Losses $ 100,791 $ — $ ( 91 ) $ 1,855 $ 102,555 For the Three Months Ended June 30, 2022 Beginning Balance Provisions (Releases) Charge-offs Recoveries Ending Balance Real estate loans: Residential Core $ 46,469 $ 4,337 $ ( 23 ) $ 669 $ 51,452 Residential Home Today ( 850 ) ( 543 ) ( 91 ) 592 ( 892 ) Home equity loans and lines of credit 18,425 ( 1,162 ) ( 191 ) 1,522 18,594 Construction 280 ( 159 ) — 175 296 Total real estate loans $ 64,324 $ 2,473 $ ( 305 ) $ 2,958 $ 69,450 Total Unfunded Loan Commitments (1) 26,601 1,527 — — 28,128 Total Allowance for Credit Losses $ 90,925 $ 4,000 $ ( 305 ) $ 2,958 $ 97,578 For the Nine Months Ended June 30, 2023 Beginning Balance Provisions (Releases) Charge-offs Recoveries Ending Balance Real estate loans: Residential Core $ 53,506 $ 455 $ ( 241 ) $ 831 $ 54,551 Residential Home Today ( 997 ) ( 1,527 ) ( 278 ) 1,707 ( 1,095 ) Home equity loans and lines of credit 20,032 ( 1,520 ) ( 580 ) 3,200 21,132 Construction 354 ( 139 ) — — 215 Total real estate loans $ 72,895 $ ( 2,731 ) $ ( 1,099 ) $ 5,738 $ 74,803 Total Unfunded Loan Commitments (1) 27,021 731 — — 27,752 Total Allowance for Credit Losses $ 99,916 $ ( 2,000 ) $ ( 1,099 ) $ 5,738 $ 102,555 18 Table of Contents For the Nine Months Ended June 30, 2022 Beginning Balance Provisions (Releases) Charge-offs Recoveries Ending Balance Real estate loans: Residential Core $ 44,523 $ 4,811 $ ( 181 ) $ 2,299 $ 51,452 Residential Home Today 15 ( 2,789 ) ( 197 ) 2,079 ( 892 ) Home equity loans and lines of credit 19,454 ( 4,004 ) ( 802 ) 3,946 18,594 Construction 297 ( 176 ) — 175 296 Total real estate loans $ 64,289 $ ( 2,158 ) $ ( 1,180 ) $ 8,499 $ 69,450 Total Unfunded Loan Commitments (1) 24,970 3,158 — — 28,128 Total Allowance for Credit Losses $ 89,259 $ 1,000 $ ( 1,180 ) $ 8,499 $ 97,578 (1) For all periods presented, the total allowance for unfunded loan commitments is recorded in other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION and primarily relates to undrawn home equity lines of credit. CLASSIFIED LOANS The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade as of the dates presented. Revolving loans reported at amortized cost include home equity lines of credit currently in their draw period. Revolving loans converted to term are home equity lines of credit that are in repayment. Home equity loans and bridge loans are segregated by origination year. Loans, or the portions of loans, classified as loss are fully charged-off in the period in which they are determined to be uncollectible; therefore they are not included in the following table. No Home Today loans are classified Special Mention and all construction loans are classified Pass for both periods presented. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process. Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term By fiscal year of origination 2023 2022 2021 2020 2019 Prior Total June 30, 2023 Real estate loans: Residential Core Pass $ 1,235,437 $ 3,219,992 $ 2,111,578 $ 1,382,092 $ 579,632 $ 3,411,770 $ — $ — $ 11,940,501 Special Mention — — — — 107 1,032 — — 1,139 Substandard — 407 942 1,623 1,262 22,069 — — 26,303 Total Residential Core 1,235,437 3,220,399 2,112,520 1,383,715 581,001 3,434,871 — — 11,967,943 Residential Home Today (1) Pass — — — — — 41,341 — — 41,341 Substandard — — — — — 6,417 — — 6,417 Total Residential Home Today — — — — — 47,758 — — 47,758 Home equity loans and lines of credit Pass 133,688 76,909 25,741 7,628 6,549 14,794 2,554,622 69,140 2,889,071 Special Mention — — — — 33 — 2,626 502 3,161 Substandard — — 145 97 — 121 3,835 5,224 9,422 Total Home equity loans and lines of credit 133,688 76,909 25,886 7,725 6,582 14,915 2,561,083 74,866 2,901,654 Total Construction 14,871 21,941 294 — — — — — 37,106 Total real estate loans Pass 1,383,996 3,318,842 2,137,613 1,389,720 586,181 3,467,905 2,554,622 69,140 14,908,019 Special Mention — — — — 140 1,032 2,626 502 4,300 Substandard — 407 1,087 1,720 1,262 28,607 3,835 5,224 42,142 Total real estate loans $ 1,383,996 $ 3,319,249 $ 2,138,700 $ 1,391,440 $ 587,583 $ 3,497,544 $ 2,561,083 $ 74,866 $ 14,954,461 (1) No new originations of Home Today loans since fiscal 2016. 19 Table of Contents Revolving Loans Amortized Cost Basis Revolving Loans Converted To Term By fiscal year of origination 2022 2021 2020 2019 2018 Prior Total September 30, 2022 Real estate loans: Residential Core Pass $ 3,349,200 $ 2,251,075 $ 1,488,763 $ 629,090 $ 665,116 $ 3,141,907 $ — $ — $ 11,525,151 Special Mention — 292 — 108 464 816 — — 1,680 Substandard — 1,195 3,188 1,142 1,883 25,042 — — 32,450 Total Residential Core 3,349,200 2,252,562 1,491,951 630,340 667,463 3,167,765 — — 11,559,281 Residential Home Today (1) Pass — — — — — 45,408 — — 45,408 Substandard — — — — — 7,400 — — 7,400 Total Residential Home Today — — — — — 52,808 — — 52,808 Home equity loans and lines of credit Pass 98,904 30,614 9,204 8,036 6,965 11,247 2,400,095 89,448 2,654,513 Special Mention — 191 — — — — 898 640 1,729 Substandard — — 54 20 19 127 2,996 6,674 9,890 Total Home equity loans and lines of credit 98,904 30,805 9,258 8,056 6,984 11,374 2,403,989 96,762 2,666,132 Total Construction 37,810 10,668 — — — — — — 48,478 Total real estate loans Pass 3,485,914 2,292,357 1,497,967 637,126 672,081 3,198,562 2,400,095 89,448 14,273,550 Special Mention — 483 — 108 464 816 898 640 3,409 Substandard — 1,195 3,242 1,162 1,902 32,569 2,996 6,674 49,740 Total real estate loans $ 3,485,914 $ 2,294,035 $ 1,501,209 $ 638,396 $ 674,447 $ 3,231,947 $ 2,403,989 $ 96,762 $ 14,326,699 (1) No new originations of Home Today loans since fiscal 2016. The home equity lines of credit converted from revolving to term loans during the three and nine months ended June 30, 2023 totaled $ 802 and $ 1,697 and during the three and nine months ended June 30, 2022 totaled $ 211 and $ 462 , respectively. The amount of conversions to term loans is expected to remain low for several years since the length of the draw period on new originations changed from five to ten years in 2016. Residential loans are internally assigned a grade that complies with the guidelines outlined in the OCC’s Handbook for Rating Credit Risk. Pass loans are assets well protected by the current paying capacity of the borrower. Special Mention loans have a potential weakness, as evaluated based on delinquency status or nature of the product, that the Company deems to deserve management’s attention and may result in further deterioration in their repayment prospects and/or the Company’s credit position. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Also included in Substandard are performing home equity loans and lines of credit where the customer has a severely delinquent first mortgage to which the performing home equity loan or line of credit is subordinate and all loans in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. Loss loans are considered uncollectible and are charged off when identified. Loss loans are of such little value that their continuance as bankable assets is not warranted even though partial recovery may be effected in the future. At June 30, 2023 and September 30, 2022, respectively, $ 73,805 and $ 75,904 of TDRs individually evaluated for credit loss have adequately performed under the terms of the restructuring and are classified as Pass loans. Other loans are internally assigned a grade of non-performing when they become 90 days or more past due. At June 30, 2023 and September 30, 2022, no other loans were graded as non-performing. TROUBLED DEBT RESTRUCTURINGS Initial concessions granted for loans restructured as TDRs may include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also may occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company. 20 Table of Contents The amortized cost in TDRs by category as of June 30, 2023 and September 30, 2022 is shown in the tables below. June 30, 2023 Initial Restructuring Multiple Restructurings Bankruptcy Total Residential Core $ 29,283 $ 16,181 $ 9,684 $ 55,148 Residential Home Today 9,747 10,441 1,762 21,950 Home equity loans and lines of credit 21,709 2,473 974 25,156 Total $ 60,739 $ 29,095 $ 12,420 $ 102,254 September 30, 2022 Initial Restructuring Multiple Restructurings Bankruptcy Total Residential Core $ 30,071 $ 17,583 $ 10,896 $ 58,550 Residential Home Today 10,359 11,485 1,995 23,839 Home equity loans and lines of credit 22,636 2,743 1,268 26,647 Total $ 63,066 $ 31,811 $ 14,159 $ 109,036 TDRs may be restructured more than once. Among other requirements, a subsequent restructuring may be available for a borrower upon the expiration of temporary restructuring terms if the borrower is unable to resume contractually scheduled loan payments. If the borrower is experiencing an income curtailment that temporarily has reduced their capacity to repay, such as loss of employment, reduction of work hours, non-paid leave or short-term disability, a temporary restructuring is considered. If the borrower lacks the capacity to repay the loan at the current terms due to a permanent condition, a permanent restructuring is considered. In evaluating the need for a subsequent restructuring, the borrower’s ability to repay is generally assessed utilizing a debt to income and cash flow analysis. For all TDRs restructured during the three and nine months ended June 30, 2023 and June 30, 2022 (set forth in the tables below), the pre-restructured outstanding amortized cost was not materially different from the post-restructured outstanding amortized cost. The following tables set forth the amortized cost in TDRs restructured during the periods presented. For the Three Months Ended June 30, 2023 Initial Restructuring Multiple Restructurings Bankruptcy Total Residential Core $ 708 $ 688 $ 104 $ 1,500 Residential Home Today 113 5 — 118 Home equity loans and lines of credit 764 — — 764 Total $ 1,585 $ 693 $ 104 $ 2,382 For the Three Months Ended June 30, 2022 Initial Restructuring Multiple Restructurings Bankruptcy Total Residential Core $ 1,276 $ 606 $ 268 $ 2,150 Residential Home Today 6 396 — 402 Home equity loans and lines of credit 244 45 23 312 Total $ 1,526 $ 1,047 $ 291 $ 2,864 21 For the Nine Months Ended June 30, 2023 Initial Restructuring Multiple Restructurings Bankruptcy Total Residential Core $ 2,585 $ 1,431 $ 653 $ 4,669 Residential Home Today 289 322 32 643 Home equity loans and lines of credit 1,121 71 — 1,192 Total $ 3,995 $ 1,824 $ 685 $ 6,504 For the Nine Months Ended June 30, 2022 Initial Restructuring Multiple Restructurings Bankruptcy Total Residential Core $ 3,536 $ 1,298 $ 772 $ 5,606 Residential Home Today 202 766 48 1,016 Home equity loans and lines of credit 478 95 165 738 Total $ 4,216 $ 2,159 $ 985 $ 7,360 The tables below summarize information about TDRs restructured within 12 months of the period presented for which there was a subsequent payment default, at least 30 days past due on one scheduled payment, during the periods presented. For the Three Months Ended June 30, 2023 2022 TDRs That Subsequently Defaulted Number of Contracts Amortized Cost Number of Contracts Amortized Cost Residential Core 3 $ 456 6 $ 701 Residential Home Today 5 108 5 89 Home equity loans and lines of credit 1 57 3 254 Total 9 $ 621 14 $ 1,044 For the Nine Months Ended June 30, 2023 2022 TDRs That Subsequently Defaulted Number of Contracts Amortized Cost Number of Contracts Amortized Cost Residential Core 3 $ 456 6 $ 701 Residential Home Today 6 164 7 97 Home equity loans and lines of credit 1 57 3 254 Total 10 $ 677 16 $ 1,052 5. DEPOSITS Deposit account balances are summarized as follows: June 30, 2023 September 30, 2022 Checking accounts $ 1,051,152 $ 1,210,035 Savings accounts, excluding money market accounts 1,515,630 1,364,821 Money market accounts 411,385 481,650 Certificates of deposit 6,086,282 5,862,274 9,064,449 8,918,780 Accrued interest 4,620 2,237 Total deposits $ 9,069,069 $ 8,921,017 22 Table of Contents The aggregate amount of CDs in denominations of more than $250 was $ 804,695 and $ 733,301 at June 30, 2023, and September 30, 2022, respectively. In accordance with the DFA, the maximum amount of federal deposit insurance is $250 per depositor for each account ownership category. Brokered certificates of deposits (exclusive of acquisition costs and subsequent amortization), which are used as a cost effective funding alternative, totaled $ 667,757 at June 30, 2023, and $ 575,236 at September 30, 2022. The FDIC places restrictions on banks with regard to issuing brokered deposits based on the bank's capital classification. As a well-capitalized institution at June 30, 2023 and September 30, 2022, the Association may accept brokered deposits without FDIC restrictions. 6. BORROWED FUNDS At June 30, 2023, the Association had a maximum borrowing capacity of $9,479,848, of which $5,452,228 was outstanding. Borrowings from the FHLB of Cincinnati are secured by the Association’s investment in the common stock of the FHLB of Cincinnati, as well as by a blanket pledge of its mortgage portfolio not otherwise pledged. The Association also has the ability to purchase Fed Funds through arrangements with other institutions. Finally, the ability to borrow from the FRB-Cleveland Discount Window is available to the Association and is secured by a pledge of specific loans in the Association’s mortgage portfolio. Total borrowings at June 30, 2023 are summarized in the table below: Borrowing Capacity Borrowings Available Borrowings Outstanding FHLB $ 8,673,387 $ 3,245,833 $ 5,427,554 FRB Cleveland 136,461 136,461 — Fed Funds Purchased 670,000 670,000 — Subtotal $ 9,479,848 $ 4,052,294 5,427,554 Accrued Interest 24,674 Total Borrowings $ 5,452,228 Maturities of borrowings at June 30, 2023 are summarized in the table below. Amount Weighted Average Rate Maturing in: 12 months or less $ 793,050 2.58 % 13 to 24 months 975,000 2.02 25 to 36 months 900,599 2.70 37 to 48 months 725,000 2.75 49 to 60 months 827,408 3.63 Over 60 months 1,206,497 3.37 Total Advances 5,427,554 2.86 % Accrued interest 24,674 Total $ 5,452,228 All borrowings have fixed rates during their term ranging up to 240 months. Interest is payable monthly for long-term advances and at maturity for FHLB swap based three-month and overnight advances. The table above reflects the effective maturities and fixed interest rates of the $3,600,000 of short-term FHLB advances that are tied to interest rate swaps discussed in Note 13. DERIVATIVE INSTRUMENTS. For the three and nine month periods ended June 30, 2023 and June 30, 2022, net interest expense related to short-term borrowings was $ 29,406 and $ 82,681 , and $ 10,425 and $ 33,465 , respectively. 23 Table of Contents 7. OTHER COMPREHENSIVE INCOME (LOSS) The change in accumulated other comprehensive income (loss) by component is as follows: For the Three Months Ended For the Three Months Ended June 30, 2023 June 30, 2022 Unrealized Gains (Losses) on Securities Available for Sale Cash Flow Hedges Defined Benefit Plan Total Unrealized Gains (Losses) on Securities Available for Sale Cash Flow Hedges Defined Benefit Plan Total Balance at beginning of period $ ( 31,687 ) $ 47,831 $ ( 11,443 ) $ 4,701 $ ( 16,183 ) $ 15,726 $ ( 10,374 ) $ ( 10,831 ) Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $ 17,617 and $ 3,338 ( 6,127 ) 65,980 — 59,853 ( 4,480 ) 16,073 630 12,223 Amounts reclassified, net of tax expense (benefit) of $( 3,993 ) and $ 1,031 — ( 13,765 ) 196 ( 13,569 ) — 3,467 95 3,562 Other comprehensive income (loss) ( 6,127 ) 52,215 196 46,284 ( 4,480 ) 19,540 725 15,785 Balance at end of period $ ( 37,814 ) $ 100,046 $ ( 11,247 ) $ 50,985 $ ( 20,663 ) $ 35,266 $ ( 9,649 ) $ 4,954 For the Nine Months Ended For the Nine Months Ended June 30, 2023 June 30, 2022 Unrealized Gains (Losses) on Securities Available for Sale Cash Flow Hedges Defined Benefit Plan Total Unrealized Gains (Losses) on Securities Available for Sale Cash Flow Hedges Defined Benefit Plan Total Balance at beginning of period $ ( 33,899 ) $ 68,883 $ ( 11,835 ) $ 23,149 $ 961 $ ( 58,210 ) $ ( 10,552 ) $ ( 67,801 ) Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $ 16,597 and $ 15,615 ( 3,915 ) 59,763 — 55,848 ( 21,624 ) 74,683 616 53,675 Amounts reclassified, net of tax expense (benefit) of $( 8,215 ) and $ 5,517 — ( 28,600 ) 588 ( 28,012 ) — 18,793 287 19,080 Other comprehensive income (loss) ( 3,915 ) 31,163 588 27,836 ( 21,624 ) 93,476 903 72,755 Balance at end of period $ ( 37,814 ) $ 100,046 $ ( 11,247 ) $ 50,985 $ ( 20,663 ) $ 35,266 $ ( 9,649 ) $ 4,954 The following table presents the reclassification adjustment out of accumulated other comprehensive income (loss) included in net income and the corresponding line item on the CONSOLIDATED STATEMENTS OF INCOME for the periods indicated: 24 Table of Contents Amounts Reclassified from Accumulated Other Comprehensive Income Amounts Reclassified from Accumulated Other Comprehensive Income Details about Accumulated Other Comprehensive Income Components For the Three Months Ended June 30, For the Nine Months Ended June 30, Line Item in the Consolidated Statements of Income 2023 2022 2023 2022 Cash flow hedges: Interest (income) expense $ ( 17,817 ) $ 4,469 $ ( 36,992 ) $ 24,225 Interest expense Net income tax effect 4,052 ( 1,002 ) 8,392 ( 5,432 ) Income tax expense Net of income tax expense ( 13,765 ) 3,467 ( 28,600 ) 18,793 Amortization of defined benefit plan: Actuarial loss 255 124 765 372 (a) Net income tax effect ( 59 ) ( 29 ) ( 177 ) ( 85 ) Income tax expense Net of income tax expense 196 95 588 287 Total reclassifications for the period $ ( 13,569 ) $ 3,562 $ ( 28,012 ) $ 19,080 (a) This item is included in the computation of net periodic pension cost. See Note 9. DEFINED BENEFIT PLAN for additional disclosure. 8. INCOME TAXES The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various state and city jurisdictions. The Company’s combined federal and state effective income tax rate was 20.3 % and 19.3 % for the nine months ended June 30, 2023 and June 30, 2022, respectively. The increase in the effective tax rate is primarily due to excess tax deficiencies associated with equity compensation during the nine months ended June 30, 2023 compared to excess tax benefits in the nine months ended June 30, 2022, as well as an increase in state tax rates for the current year. The Company is no longer subject to income tax examinations in its major jurisdictions for tax years prior to 2019. The Company recognizes interest and penalties on income tax assessments or income tax refunds, where applicable, in the financial statements as a component of its provision for income taxes. The Company makes certain investments in limited partnerships, which invest in affordable housing projects that qualify for the Low Income Housing Tax Credit. The Company acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnership. The Company accounts for its interests in LIHTCs using the proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income taxes was not material during the nine months ended June 30, 2023 and June 30, 2022. 9. DEFINED BENEFIT PLAN The Third Federal Savings Retirement Plan (the “Plan”) is a defined benefit pension plan. Effective December 31, 2002, the Plan was amended to limit participation to employees who met the Plan’s eligibility requirements on that date. Effective December 31, 2011, the Plan was amended to freeze future benefit accruals for participants in the Plan. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, and those eligible participants who no longer receive service credits under the Plan, participate in a separate tier of the Company’s defined contribution 401(k) Savings Plan. Benefits under the Plan are based on years of service and the employee’s average annual compensation (as defined in the Plan) through December 31, 2011. The funding policy of the Plan is consistent with the funding requirements of U.S. federal and other governmental laws and regulations. 25 Table of Contents The components of net periodic cost recognized in other non-interest expense in the CONSOLIDATED STATEMENTS OF INCOME are as follows: Three Months Ended Nine Months Ended June 30, June 30, 2023 2022 2023 2022 Interest cost $ 831 $ 611 $ 2,493 $ 1,832 Expected return on plan assets ( 968 ) ( 1,301 ) ( 2,904 ) ( 3,903 ) Amortization of net loss 255 124 765 372 Recognized net loss due to settlement — 815 — 815 Net periodic (benefit) cost $ 118 $ 249 $ 354 $ ( 884 ) There were no required minimum employer contributions during the nine months ended June 30, 2023. There are no required minimum employer contributions expected during the remainder of the fiscal year ending September 30, 2023. 10. EQUITY INCENTIVE PLAN In December 2022, 174,550 restricted stock units were granted to certain directors, officers and managers of the Company and 102,000 performance share units were granted to certain officers of the Company. During the nine months ended June 30, 2023, there were 4,394 performance shares earned and added to those granted in December 2020, according to the targeted performance formula. The awards were made pursuant to the Amended and Restated 2008 Equity Incentive Plan, which was approved at the annual meeting of shareholders held on February 22, 2018. The following table presents share-based compensation expense recognized during the periods presented. There was no stock option expense for either period presented. Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Restricted stock units expense $ 802 $ 760 $ 2,550 $ 2,406 Performance share units expense 263 187 734 500 Total stock-based compensation expense $ 1,065 $ 947 $ 3,284 $ 2,906 At June 30, 2023, 2,281,775 shares were subject to vested options, with a weighted average exercise price of $ 15.18 per share and a weighted average grant date fair value of $ 2.54 per share. At June 30, 2023, 574,085 restricted stock units and 218,071 performance share units with a weighted average grant date fair value of $ 16.49 and $ 15.87 per unit, respectively, are unvested. Expected future compensation expense relating to the 1,339,833 restricted stock units and 218,071 performance share units outstanding as of June 30, 2023 is $ 3,422 over a weighted average period of 2.3 years and $ 1,722 over a weighted average period of 2.0 years, respectively. Each unit is equivalent to one share of common stock. 11. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Company enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to originate loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire from five to 10 years following the date that the line of credit was established, subject to various conditions, including compliance with payment obligations, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in assets on the CONSOLIDATED STATEMENTS OF CONDITION . The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Company generally uses the same credit policies in making commitments as it does for on-balance sheet instruments. The allowance related to off-balance sheet commitments is recorded in other liabilities in the CONSOLIDATED STATEMENTS OF CONDITION. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES for discussion on 26 Table of Contents credit loss methodology . Interest rate risk on commitments to extend credit results from the possibility that interest rates may move unfavorably from the position of the Company since the time the commitment was made. At June 30, 2023, the Company had commitments to originate and purchase loans and related allowances as follows: Commitment Allowance Fixed-rate mortgage loans $ 201,033 $ 665 Adjustable-rate mortgage loans 78,100 326 Home equity loans and lines of credit 162,721 2,425 Total $ 441,854 $ 3,416 At June 30, 2023, the Company had unfunded commitments outstanding and related allowances as follows: Commitment Allowance Home equity lines of credit $ 4,601,352 $ 24,119 Construction loans 24,507 217 Total $ 4,625,859 $ 24,336 At June 30, 2023, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity, was $ 4,631,746 . At June 30, 2023 and September 30, 2022, the Company had $ 7,092 and $ 0 , respectively, in commitments to sell mortgage loans. At June 30, 2023 and September 30, 2022, the Company had $ 84,764 and $ 0 , respectively, in commitments to purchase mortgage loans, which are included in mortgage loan commitments above. The above commitments are expected to be funded through normal operations. The Company is undergoing an escheat audit covering Ohio, Kentucky and Florida. Any potential loss that may result from this matter is not reasonably estimable at June 30, 2023. The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operation, or statements of cash flows. 12. FAIR VALUE Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. A fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At June 30, 2023 and September 30, 2022, there were no pending agency contracts held for sale. There was a net loss of $ 0 on the sale of loans for all periods during the three and nine months ending June 30, 2023 and a net loss of $ 6 for both three and nine months ending June 30, 2022, related to the changes in fair value of loans held for sale during the period in which loans were subject to pending agency contracts. Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value. Investment Securities Available for Sale— Investment securities available for sale are recorded at fair value on a recurring basis. At June 30, 2023 and September 30, 2022, respectively, this includes $ 513,303 and $ 457,908 of investments in U.S. government and agency obligations including U.S. Treasury notes and investments in highly liquid collateralized mortgage obligations, that can include items issued by Fannie Mae, Freddie Mac and Ginnie Mae, measured using the market approach. The fair values of investment securities represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities. 27 Table of Contents Mortgage Loans Held for Sale— The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At June 30, 2023 and September 30, 2022, there were $ 595 and $ 9,661 , respectively of loans held for sale measured at fair value. At June 30, 2023 and September 30, 2022 there were no loans carried at cost. Interest income on mortgage loans held for sale is recorded in interest income on loans. Collateral-dependent Loans — Collateral-dependent loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated using a fair value measurement, such as the fair value of the underlying collateral. Credit loss is measured using a market approach based on the fair value of the collateral, less estimated costs to dispose, for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES . To calculate the credit loss of collateral-dependent loans, the fair market values of the collateral, estimated using third-party appraisals in the majority of instances, are reduced by calculated estimated costs to dispose, derived from historical experience and recent market conditions. Any indicated credit loss is recognized by a charge to the allowance for credit losses. Subsequent increases in collateral values or principal pay downs on loans with recognized credit loss could result in a collateral-dependent loan being carried below its fair value. When no credit loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum recovery the Company can expect. The amortized cost of loans individually evaluated for credit loss based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of estimated costs to dispose on fair values is determined at the time of credit loss or when additional credit loss is recognized and is included in quantitative information about significant unobservable inputs later in this note. Loans held for investment that have been restructured in TDRs, are performing according to the restructured terms of the loan agreement and not evaluated based on collateral are individually evaluated for credit loss using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At June 30, 2023 and September 30, 2022, respectively, this included $ 102,254 and $ 76,692 in amortized cost of TDRs with related allowances for loss of $ 9,742 and $ 10,284 . Real Estate Owned— Real estate owned includes real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of the cost basis or fair value, less estimated costs to dispose. The carrying amounts of real estate owned at June 30, 2023 and September 30, 2022 were $ 1,400 and $ 1,191 , respectively. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At June 30, 2023 and September 30, 2022, these adjustments were not significant to reported fair values. At June 30, 2023 and September 30, 2022, respectively, $ 1,591 and $ 1,192 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis, where the cost basis equals or exceeds the estimated fair values, less estimated costs to dispose, of $ 191 and $ 156 , respectively. Real estate owned includes $ 0 and $ 155 of properties carried at their original or adjusted cost basis at June 30, 2023 and September 30, 2022, respectively. Derivatives— Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio, forward commitments on contracts to deliver mortgage loans and interest rate swaps designated as cash flow hedges. Derivatives not designated as cash flow hedges are reported at fair value in Other assets or Other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION with changes in value recorded in current earnings. Derivatives qualifying as cash flow hedges are settled daily, bringing the fair value to $ 0 . Refer to Note 13. DERIVATIVE INSTRUMENTS for additional information on cash flow hedges and other derivative instruments. The fair value of interest rate lock commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy. 28 Table of Contents Assets and liabilities carried at fair value on a recurring basis in the CONSOLIDATED STATEMENTS OF CONDITION at June 30, 2023 and September 30, 2022 are summarized below. Recurring Fair Value Measurements at Reporting Date Using June 30, 2023 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Assets Investment securities available for sale: REMICs $ 448,204 $ — $ 448,204 $ — Fannie Mae certificates 885 — 885 — Freddie Mac securities 1,105 — 1,105 — U.S. government and agency obligations 63,109 — 63,109 — Derivatives: Forward commitments for the sale of mortgage loans 8 — 8 — Total $ 513,311 $ — $ 513,311 $ — Liabilities Derivatives: Interest rate lock commitments $ 47 $ — $ — $ 47 Total $ 47 $ — $ — $ 47 Recurring Fair Value Measurements at Reporting Date Using September 30, 2022 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Assets Investment securities available for sale: REMICs $ 453,268 $ — $ 453,268 $ — Fannie Mae certificates 1,021 — 1,021 — U.S. government and agency obligations 3,619 — 3,619 — Total $ 457,908 $ — $ 457,908 $ — Liabilities Derivatives: Interest rate lock commitments $ 333 $ — $ — $ 333 Total $ 333 $ — $ — $ 333 The table below presents a reconciliation of the beginning and ending balances and the location within the CONSOLIDATED STATEMENTS OF INCOME where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Beginning balance $ ( 23 ) $ 247 $ ( 333 ) $ 525 (Loss)/Gain during the period due to changes in fair value: Included in other non-interest income ( 24 ) ( 319 ) 286 ( 597 ) Ending balance $ ( 47 ) $ ( 72 ) $ ( 47 ) $ ( 72 ) Change in unrealized gains for the period included in earnings for assets held at end of the reporting date $ ( 47 ) $ ( 72 ) $ ( 47 ) $ ( 72 ) 29 Table of Contents Summarized in the tables below are those assets measured at fair value on a nonrecurring basis. Nonrecurring Fair Value Measurements at Reporting Date Using June 30, 2023 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Collateral-dependent loans, net of allowance $ 38,973 $ — $ — $ 38,973 Mortgage loans held for sale 595 — 595 — Real estate owned (1) 1,591 — — 1,591 Total $ 41,159 $ — $ 595 $ 40,564 Nonrecurring Fair Value Measurements at Reporting Date Using September 30, 2022 Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Collateral-dependent loans, net of allowance $ 47,121 $ — $ — $ 47,121 Mortgage loans held for sale 9,661 — 9,661 — Real estate owned (1) 1,192 — — 1,192 Total $ 57,974 $ — $ 9,661 $ 48,313 (1) Amounts represent fair value measurements of properties before deducting estimated costs to dispose. The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy. The interest rate lock commitments include mortgage origination applications . Fair Value June 30, 2023 Valuation Technique(s) Unobservable Input Range Weighted Average Collateral-dependent loans, net of allowance $ 38,973 Market comparables of collateral discounted to estimated net proceeds Discount appraised value to estimated net proceeds based on historical experience: • Residential Properties 0 - 28 % 4.7 % Interest rate lock commitments $( 47 ) Quoted Secondary Market pricing Closure rate 0 - 100 % 89.6 % Fair Value September 30, 2022 Valuation Technique(s) Unobservable Input Range Weighted Average Collateral-dependent loans, net of allowance $ 47,121 Market comparables of collateral discounted to estimated net proceeds Discount appraised value to estimated net proceeds based on historical experience: • Residential Properties 0 - 28 % 4.7 % Interest rate lock commitments $( 333 ) Quoted Secondary Market pricing Closure rate 0 - 100 % 93.7 % 30 Table of Contents The following tables present the estimated fair value of the Company’s financial instruments and their carrying amounts as reported in the CONSOLIDATED STATEMENTS OF CONDITION . June 30, 2023 Carrying Fair Level 1 Level 2 Level 3 Amount Value Assets: Cash and due from banks $ 23,278 $ 23,278 $ 23,278 $ — $ — Interest-earning cash equivalents 412,937 412,937 412,937 — — Investment securities available for sale 513,303 513,303 — 513,303 — Mortgage loans held for sale 595 595 — 595 — Loans, net: Mortgage loans held for investment 14,879,658 13,597,855 — — 13,597,855 Other loans 4,022 4,022 — — 4,022 Federal Home Loan Bank stock 247,098 247,098 N/A — — Accrued interest receivable 49,837 49,837 — 49,837 — Cash collateral received from or held by counterparty 33,181 33,181 33,181 — — Derivatives 8 8 — 8 — Liabilities: Checking and passbook accounts $ 2,978,167 $ 2,978,167 $ — $ 2,978,167 $ — Certificates of deposit 6,090,902 5,981,006 — 5,981,006 — Borrowed funds 5,452,228 5,439,566 — 5,439,566 — Borrowers’ advances for insurance and taxes 74,359 74,359 — 74,359 — Principal, interest and escrow owed on loans serviced 16,510 16,510 — 16,510 — Derivatives 47 47 — — 47 31 Table of Contents September 30, 2022 Carrying Fair Level 1 Level 2 Level 3 Amount Value Assets: Cash and due from banks $ 18,961 $ 18,961 $ 18,961 $ — $ — Interest-earning cash equivalents 350,603 350,603 350,603 — — Investment securities available for sale 457,908 457,908 — 457,908 — Mortgage loans held for sale 9,661 9,661 — 9,661 — Loans, net: Mortgage loans held for investment 14,253,804 13,106,346 — — 13,106,346 Other loans 3,263 3,263 — — 3,263 Federal Home Loan Bank stock 212,290 212,290 N/A — — Accrued interest receivable 40,256 40,256 — 40,256 — Cash collateral received from or held by counterparty 26,045 26,045 26,045 — — Liabilities: Checking and passbook accounts $ 3,056,506 $ 3,056,506 $ — $ 3,056,506 $ — Certificates of deposit 5,864,511 5,733,418 — 5,733,418 — Borrowed funds 4,793,221 4,734,377 — 4,734,377 — Borrowers’ advances for insurance and taxes 117,250 117,250 — 117,250 — Principal, interest and escrow owed on loans serviced 29,913 29,913 — 29,913 — Derivatives 333 333 — — 333 13. DERIVATIVE INSTRUMENTS The Company enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy. For hedges of the Company's borrowing and deposits program, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the Company's FHLB borrowings and brokered certificates of deposit. Cash flow hedges are initially assessed for effectiveness using regression analysis. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in OCI and are subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Quarterly, a qualitative analysis is performed to monitor the ongoing effectiveness of the hedging instrument. All derivative positions were initially and continue to be highly effective at June 30, 2023. The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of lost revenue from adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME . In addition, the Company is party to derivative instruments when it enters into interest rate lock commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME . In accordance with the reference rate reform, for every LIBOR referenced interest rate swap with a reset date after the LIBOR cessation date, counterparties received a LIBOR referenced instrument maturing on the first reset date after the LIBOR cessation date, and a forward starting SOFR instrument. Both the LIBOR-based and SOFR-based instruments are included in the notional value disclosed, which creates a one-time increase in notional amounts outstanding for this quarter as all LIBOR-based instruments will mature by September 30, 2023. Additionally, under previously adopted ASU 2020-04, Reference Rate Reform (Topic 848), the Company has elected and applied certain optional expedients for eligible hedging relationships impacted by the LIBOR cessation. 32 Table of Contents The following tables provide the notional values and fair values, and the locations of the fair values within the CONSOLIDATED STATEMENTS OF CONDITION , at the reporting dates, for all derivative instruments. June 30, 2023 Weighted Average Notional Value Fair Value Term (years) Fixed-Rate Payments Derivatives designated as hedging instruments Cash flow hedges: Interest rate swaps Other Assets LIBOR swaps (1) $ 1,400,000 $ — 0.2 1.84 % SOFR swaps (2) (3) 3,640,000 — 3.9 3.49 Other Liabilities SOFR swaps (2) 175,000 — 5.4 3.97 Total cash flow hedges: Interest rate swaps (3) $ 5,215,000 $ — 4.1 2.91 % September 30, 2022 Weighted Average Notional Value Fair Value Term (years) Fixed-Rate Payments Cash flow hedges: Interest rate swaps Other Assets LIBOR swaps (1) $ 1,550,000 $ — 2.7 1.88 % Total cash flow hedges: Interest rate swaps $ 1,550,000 $ — 2.7 1.88 % (1) LIBOR swap contracts that reset on or after July 1st, 2023 will transition to a SOFR-based rate. (2) All swap contracts entered into after October 1, 2022 are based on a SOFR-based rate. (3) Total notional value includes $ 1,400,000 of forward-starting SOFR-based swaps for the LIBOR transition. June 30, 2023 September 30, 2022 Notional Value Fair Value Notional Value Fair Value Derivatives not designated as hedging instruments Interest rate lock commitments Other Liabilities $ 6,748 $ ( 47 ) $ 9,170 $ ( 333 ) Forward Commitments for the sale of mortgage loans Other Assets 7,092 8 — — Total derivatives not designated as hedging instruments $ 13,840 $ ( 39 ) $ 9,170 $ ( 333 ) 33 Table of Contents The following tables present the net gains and losses recorded within the CONSOLIDATED STATEMENTS OF INCOME and the CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME relating to derivative instruments. Three Months Ended Nine Months Ended Location of Gain or (Loss) June 30, June 30, Recognized in Income 2023 2022 2023 2022 Cash flow hedges Amount of gain/(loss) recognized Other comprehensive income $ 85,399 $ 20,520 $ 77,689 $ 96,345 Amount of gain/(loss) reclassified from AOCI Interest expense: Borrowed funds 17,817 ( 4,469 ) 36,992 ( 24,225 ) Derivatives not designated as hedging instruments Interest rate lock commitments Other non-interest income $ ( 24 ) $ ( 319 ) $ 286 $ ( 597 ) Forward commitments for the sale of mortgage loans Net gain/(loss) on the sale of loans 84 ( 13 ) 8 ( 13 ) The Company estimates that $ 93,512 of the amounts reported in AOCI will be reclassified as a reduction to interest expense during the twelve months ending June 30, 2024. Derivatives contain an element of credit risk which arises from the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. The Company's exposure is limited to the replacement value of the contracts rather than the notional or principal amounts. Credit risk is minimized through counterparty margin payments, transaction limits and monitoring procedures. All of the Company's swap transactions are cleared through a registered clearing broker to a central clearing organization. The clearing organization establishes daily cash and upfront cash or securities margin requirements to cover potential exposure in the event of default. This process shifts the risk away from the counterparty, since the clearing organization acts as the middleman on each cleared transaction. At June 30, 2023 and September 30, 2022, there was $ 33,181 and $ 26,045 , respectively, of cash collateral included in other assets, and $ 59,454 and $ 0 , respectively, included in investment securities related to initial margin requirements that are held by the central clearing organization . For derivative transactions cleared through certain clearing parties, variation margin payments are recognized as settlements on a daily basis. The fair value of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. 14. RECENT ACCOUNTING PRONOUNCEMENTS Issued but not yet adopted as of June 30, 2023 In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326). The amendments in this update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when the borrower is experiencing financial difficulty. This will be done by applying the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, this amendment requires that an entity disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. This update is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact that this accounting guidance may have on its consolidated financial condition and/or results of operations. The Company plans to adopt this guidance as of October 1, 2023. 34 Table of Contents