TFS FINANCIAL CORP Management’s Report on Financial Condition and Results of Operations (Form 10-Q)

Forward-looking statements

   This report contains forward-looking statements, which can be identified by the use of such
words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar
expressions. These forward-looking statements include, among other things:
            ? statements of our goals, intentions and expectations;
            ? statements regarding our business plans and prospects and 

growth and exploitation

              strategies;
            ? statements concerning trends in our provision for credit 

losses and charges

              on loans and off-balance sheet exposures;
            ? statements regarding the trends in factors affecting our 

financial situation and

              results of operations, including asset quality of our loan 

and investment

              portfolios; and
            ? estimates of our risks and future costs and benefits.

   These forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors that could affect
the actual outcome of future events:
            ? significantly increased competition among depository and 

other financier

              institutions;
            ? inflation and changes in the interest rate environment that 

reduce our interest

              margins or reduce the fair value of financial instruments;
            ? general economic conditions, either globally, nationally or 

in our market areas,

              including employment prospects, real estate values and 

worse conditions

              than expected;
            ? the strength or weakness of the real estate markets and of 

the consumer and

              commercial credit sectors and its impact on the credit 

quality of our loans and

              other assets, and changes in estimates of the allowance for 

credit losses;

            ? decreased demand for our products and services and lower 

income and earnings

              because of a recession or other events;
            ? changes in consumer spending, borrowing and savings habits;
            ? adverse changes and volatility in the securities markets, 

credit or real markets

              estate markets;
            ? our ability to manage market risk, credit risk, liquidity 

risk, reputation

              risk, and regulatory and compliance risk;
            ? our ability to access cost-effective funding;
            ? legislative or regulatory changes that adversely affect our 

business, including

              changes in regulatory costs and capital requirements and 

changes related to our

              ability to pay dividends and the ability of Third Federal 

Savings, MHC to renounce

              dividends;
            ? changes in accounting policies and practices, as may be

adopted by the bank

              regulatory agencies, the Financial Accounting Standards Board 

or the public

              Company Accounting Oversight Board;
            ? the adoption of implementing regulations by a number of

different regulations

              bodies, and uncertainty in the exact nature, extent and 

moment of such

              regulations and the impact they will have on us;
            ? our ability to enter new markets successfully and take

growth advantage

              opportunities, and the possible short-term dilutive effect of potential
              acquisitions or de novo branches, if any;
            ? our ability to retain key employees;
            ? future adverse developments concerning Fannie Mae or Freddie Mac;
            ? changes in monetary and fiscal policy of the U.S. Government,

including policies

              of the U.S. Treasury and the FRS and changes in the level of 

government support

              of housing finance;
            ? the continuing governmental efforts to restructure the U.S. 

financial and

              regulatory system;
            ? the ability of the U.S. Government to remain open, function 

properly and manage

              federal debt limits;
            ? changes in policy and/or assessment rates of taxing 

authorities who harm

              affect us or our customers;
            ? changes in accounting and tax estimates;
            ? changes in our organization, or compensation and benefit 

plans and changes in

              expense trends (including, but not limited to trends

affecting non-performers

              assets, charge-offs and provisions for credit losses);
            ? the inability of third-party providers to perform their

obligations to us;

            ? civil unrest;
            ? cyber-attacks, computer viruses and other technological risks 

who may violate the

              security of our websites or other systems to obtain

unauthorized access to

              confidential information, destroy data or disable our

systems; and

            ? the impact of wide-spread pandemic, including COVID-19, and 

government bound

              action, on our business and the economy.
    Because of these and other uncertainties, our actual future results may be materially
different from the results indicated by any forward-looking statements. Any forward-looking
statement made by us in this report speaks only as of the date on which it is made. We
undertake no obligation to publicly update any forward-looking statements, whether as a result
of new information, future developments or otherwise, except as may be required by law. Please
see Part II Other Information Item 1A. Risk Factors for a discussion of certain risks related
to our business.


                                       33

————————————————– ——————————

Contents

Overview

Our business strategy is to operate as a well-capitalized and profitable
financial institution dedicated to providing exceptional personal service to our
customers.
Since being organized in 1938, we grew to become, at the time of our initial
public offering of stock in 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 shareholders, our customers, our
communities and our associates.
Beyond working through the challenges COVID-19 presents to the organization and
society, management believes that the following matters are those most critical
to our success: (1) controlling our interest rate risk exposure; (2) monitoring
and limiting our credit risk; (3) maintaining access to adequate liquidity and
diverse funding sources to support our growth; and (4) monitoring and
controlling our operating expenses.
Controlling Our Interest Rate Risk Exposure. Historically, our greatest risk has
been our exposure to changes in interest rates. When we hold longer-term,
fixed-rate assets, funded by liabilities with shorter-term re-pricing
characteristics, we are exposed to potentially adverse impacts from changing
interest rates, and most notably rising interest rates. Generally, and
particularly over extended periods of time that encompass full economic cycles,
interest rates associated with longer-term assets, like fixed-rate mortgages,
have been higher than interest rates associated with shorter-term funding
sources, like deposits. This difference has been an important component of our
net interest income and is fundamental to our operations. We manage the risk of
holding longer-term, fixed-rate mortgage assets primarily by maintaining
regulatory capital in excess of levels required to be well capitalized, by
promoting adjustable-rate loans and shorter-term fixed-rate loans, by marketing
home equity lines of credit, which carry an adjustable rate of interest indexed
to the prime rate, by opportunistically extending the duration of our funding
sources and selectively selling a portion of our long-term, fixed-rate mortgage
loans in the secondary market. The decision to extend the duration of some of
our funding sources through interest rate swap contracts over the past few years
has also caused additional interest rate risk exposure, as the current low
market interest rates are lower than the rates in effect when most of the swap
contracts were executed. This rate difference is reflected in the level of cash
flow hedges included in accumulated other comprehensive loss.
Levels of Regulatory Capital
At December 31, 2021, the Company's Tier 1 (leverage) capital totaled $1.80
billion, or 12.72% of net average assets and 22.97% of risk-weighted assets,
while the Association's Tier 1 (leverage) capital totaled $1.55 billion, or
10.93% of net average assets and 19.73% of risk-weighted assets. Each of these
measures was more than twice the requirements currently in effect for the
Association for designation as "well capitalized" under regulatory prompt
corrective action provisions, which set minimum levels of 5.00% of net average
assets and 8.00% of risk-weighted assets. Refer to the Liquidity and Capital
Resources section of this Item 2 for additional discussion regarding regulatory
capital requirements.
Promotion of Adjustable-Rate Loans and Shorter-Term Fixed-Rate Loans
We market an adjustable-rate mortgage loan that provides us with improved
interest rate risk characteristics when compared to a 30-year, fixed-rate
mortgage loan. Our "Smart Rate" adjustable-rate mortgage offers borrowers an
interest rate lower than that of a 30-year, fixed-rate loan. The interest rate
of the Smart Rate mortgage is locked for three or five years then resets
annually. The Smart Rate mortgage contains a feature to re-lock the rate an
unlimited number of times at our then-current interest rate and fee schedule,
for another three or five years (which must be the same as the original lock
period) without having to complete a full refinance transaction. Re-lock
eligibility is subject to a satisfactory payment performance history by the
borrower (current at the time of re-lock, and no foreclosures or bankruptcies
since the Smart Rate application was taken). In addition to a satisfactory
payment history, re-lock eligibility requires that the property continues to be
the borrower's primary residence. The loan term cannot be extended in connection
with a re-lock nor can new funds be advanced. All interest rate caps and floors
remain as originated.
We also offer a ten-year, fully amortizing fixed-rate, first mortgage loan. The
ten-year, fixed-rate loan has a more desirable interest rate risk profile when
compared to loans with fixed-rate terms of 15 to 30 years and can help to more
effectively manage interest rate risk exposure, yet provides our borrowers with
the certainty of a fixed interest rate throughout the life of the obligation.
                                       34

————————————————– ——————————

Contents

The following tables set forth our first mortgage loan production and balances
segregated by loan structure at origination. Originations outpaced loan sales
and repayments resulting in an increase of residential mortgage loans held for
investment; the first balance increase in this population since the start of the
COVID-19 pandemic.
                                                     For the Three Months Ended December         For the Three Months Ended December
                                                                   31, 2021                                   31, 2020
                                                          Amount               Percent               Amount                Percent
                                                                                  (Dollars in thousands)
First Mortgage Loan Originations:
ARM (all Smart Rate) production                      $     211,892                24.2  %       $      368,034                32.8  %

Package production:

  Terms less than or equal to 10 years                     124,766                14.2                 203,121                18.1
  Terms greater than 10 years                              540,430                61.6                 550,697                49.1
    Total fixed-rate production                            665,196                75.8                 753,818                67.2
Total First Mortgage Loan Originations               $     877,088               100.0  %       $    1,121,852               100.0  %


                                                              December 31, 2021                              September 30, 2021
                                                          Amount                 Percent                 Amount                  Percent
                                                                                    (Dollars in thousands)
Balance of Residential Mortgage Loans Held For
Investment:
ARM (primarily Smart Rate) Loans                   $       4,541,152                43.9  %       $        4,646,760                45.2  %

Fixed rate:

  Terms less than or equal to 10 years                     1,304,751                12.6                   1,309,407                12.7
  Terms greater than 10 years                              4,502,717                43.5                   4,322,931                42.1
    Total fixed-rate                                       5,807,468                56.1                   5,632,338                54.8
Total Residential Mortgage Loans Held For
Investment                                         $      10,348,620               100.0  %       $       10,279,098               100.0  %


The following table shows the balances at December 31, 2021 for all ARM loans separated by the next scheduled interest rate reset date.

                                       Current Balance of ARM Loans 

Provided for

                                                  Interest Rate Reset
During the Fiscal Years Ending
September 30,                                        (In thousands)
2022                                $                                      169,908
2023                                                                       316,426
2024                                                                       427,953
2025                                                                       762,743
2026                                                                     1,827,194
2027                                                                     1,036,928
   Total                            $                                    4,541,152


At December 31, 2021 and September 30, 2021, 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 $38.1 million and $8.8 million,
respectively.


                                       35

————————————————– ——————————

Contents

Loan Portfolio Return

The following tables present the balance and interest yield at
December 31, 2021 portfolio of loans held for investment purposes, by type of loan, structure and geographical location.

                                                                December 31, 2021
                                                        Balance           Percent      Yield
                                                             (Dollars in thousands)
      Total Loans:
      Fixed Rate

Duration less than or equal to 10 years $1,304,751 10.3% 2.69%

         Terms greater than 10 years                      4,502,717        35.4  %     3.51  %
      Total Fixed-Rate loans                              5,807,468        45.7  %     3.32  %

      ARMs                                                4,541,152        35.7  %     2.70  %
      Home Equity Loans and Lines of Credit               2,277,761       

17.9% 2.50%

      Construction and Other Loans                           93,401        

0.7% 3.10%

      Total Loans Receivable                       $     12,719,782       100.0  %     2.95  %


                                                                                  December 31, 2021
                                                                            Fixed Rate
                                                        Balance               Balance              Percent               Yield
                                                                                (Dollars in thousands)
Residential Mortgage Loans
Ohio                                                $  5,738,255          $  4,193,414                 45.1  %             3.26  %
Florida                                                1,894,052               833,970                 14.9  %             2.96  %
Other                                                  2,716,313               780,084                 21.4  %             2.67  %
   Total Residential Mortgage Loans                   10,348,620             5,807,468                 81.4  %             3.05  %
Home Equity Loans and Lines of Credit
Ohio                                                     635,495                41,541                  5.0  %             2.57  %
Florida                                                  454,210                29,141                  3.6  %             2.51  %
California                                               350,758                18,309                  2.8  %             2.50  %
Other                                                    837,298                17,098                  6.5  %             2.45  %
   Total Home Equity Loans and Lines of
Credit                                                 2,277,761               106,089                 17.9  %             2.50  %
Construction and Other Loans                              93,401                93,401                  0.7  %             3.10  %
Total Loans Receivable                              $ 12,719,782          $  6,006,958                100.0  %             2.95  %



Marketing of Home Equity Lines of Credit
We actively market home equity lines of credit, which carry an adjustable rate
of interest indexed to the prime rate, which provides interest rate sensitivity
to that portion of our assets and is a meaningful strategy to manage our
interest rate risk profile. At December 31, 2021, the principal balance of home
equity lines of credit totaled $2.05 billion. Our home equity lending is
discussed in the Allowance for Credit Losses section of the Lending Activities.
Extending the Duration of Funding Sources
As a complement to our strategies to shorten the duration of our interest
earning assets, as described above, we also seek to lengthen the duration of our
interest bearing funding sources. These efforts include monitoring the relative
costs of alternative funding sources such as retail deposits, 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. three months)
advances from the FHLB of Cincinnati, the durations of which are extended by
correlated interest rate exchange contracts. Each funding alternative is
monitored and evaluated based on its effective interest payment rate, options
exercisable by the creditor (early withdrawal, right to call, etc.), and
collateral requirements. The interest payment rate is a function of market
influences that are specific to the nuances and
                                       36

————————————————– ——————————

Contents

market competitiveness/breadth of each funding source. Generally, early
withdrawal options are available to our retail CD customers but not to holders
of brokered CDs; issuer call options are not provided on our advances from the
FHLB of Cincinnati; and we are not subject to early termination options with
respect to our interest rate exchange contracts. Additionally, collateral
pledges are not provided with respect to our retail CDs or our brokered CDs, but
are required for our advances from the FHLB of Cincinnati as well as for our
interest rate exchange contracts. We will continue to evaluate the structure of
our funding sources based on current needs.
During the three months ended December 31, 2021, the balance of deposits
decreased $60.3 million, which included a $4.9 million increase in the balance
of brokered CDs (which is inclusive of acquisition costs and subsequent
amortization). Additionally, during the three months ended December 31, 2021, we
increased total FHLB of Cincinnati advances $88.8 million, by adding $150
million of new two-to-four year advances and $40 million in overnight
borrowings, partially offset by a $100.0 million decrease in 90 day advances and
their related swap contracts which matured and were paid off. The balance of our
advances from the FHLB of Cincinnati at December 31, 2021 consist of both
overnight and term advances from the FHLB of Cincinnati; as well as shorter-term
advances from the FHLB of Cincinnati that were matched/correlated to interest
rate exchange contracts that extended the effective durations of those
shorter-term advances. Interest rate swaps are discussed later in Part I, Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Other Interest Rate Risk Management Tools
We also manage interest rate risk by selectively selling a portion of our
long-term, fixed-rate mortgage loans in the secondary market. The sales of first
mortgage loans increased significantly during fiscal 2020 and fiscal 2021 due to
an increase in the number of fixed-rate refinances. At December 31, 2021, we
serviced $2.22 billion of loans for others. In deciding whether to sell loans to
manage interest rate risk, we also consider the level of gains to be recognized
in comparison to the impact to our net interest income. We are planning on
expanding our ability to sell certain fixed rate loans to Fannie Mae in fiscal
2022 and beyond, through the use of more traditional mortgage banking
activities, including risk-based pricing and loan-level pricing adjustments.
This concept will be tested in markets outside of Ohio and Florida, and some
additional startup and marketing costs will be incurred, but is not expected to
significantly impact our financial results in fiscal 2022. We can also manage
interest rate risk by selling non-Fannie Mae compliant mortgage loans to private
investors, although those transactions are dependent upon favorable market
conditions, including motivated private investors, and involve more complicated
negotiations and longer settlement timelines. Loan sales are discussed later in
this Part I, Item 2. under the heading Liquidity and Capital Resources, and in
Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Notwithstanding our efforts to manage interest rate risk, should a rapid and
substantial increase occur in general market interest rates, or an extended
period of a flat or inverted yield curve market persist, it is expected that,
prospectively and particularly over a multi-year time horizon, the level of our
net interest income would be adversely impacted.
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. Continuous analysis and evaluation updates will be important as
we monitor the potential impacts of the economic environment. At December 31,
2021, 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,
which were originated predominantly to borrowers in Ohio and Florida. 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. Per the
Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus, the COVID-19
related forbearance plans will not generally affect the delinquency status of
the loan and therefore will not undergo a specific review unless extended
greater than 12 months. 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. Loans where at
least one borrower has been discharged of their obligation in Chapter 7
bankruptcy are classified as TDRs. At December 31, 2021, $13.6 million of loans
in Chapter 7 bankruptcy status with no other modification to terms were included
in total TDRs. At December 31, 2021, the amortized cost in non-accrual status
loans included $15.5 million of performing loans in Chapter 7 bankruptcy status,
of which $15.0 million were also reported as TDRs.
In an effort to limit our credit risk exposure and improve the credit
performance of new customers, since 2009, we continually evaluate our credit
eligibility criteria and revise the design of our loan products, such as
limiting the products available for condominiums and eliminating certain product
features (such as interest-only). We use stringent, conservative
                                       37

————————————————– ——————————

Contents

lending standards for underwriting to reduce our credit risk. For first mortgage
loans originated during the current fiscal year, the average credit score was
777, and the average LTV was 61%. The delinquency level related to loan
originations prior to 2009, compared to originations in 2009 and after, reflects
the higher credit standards to which we have subjected all new originations. As
of December 31, 2021, loans originated prior to 2009 had a balance of $413.5
million, of which $12.1 million, or 2.9%, were delinquent, while loans
originated in 2009 and after had a balance of $12.33 billion, of which $14.1
million, or 0.1%, were delinquent.
One aspect of our credit risk concern relates to high concentrations of our
loans that are secured by residential real estate in specific states,
particularly Ohio and Florida, in light of the difficulties that arose in
connection with the 2008 housing crisis with respect to the real estate markets
in those two states. At December 31, 2021, approximately 55.5% and 18.3% of the
combined total of our Residential Core and construction loans held for
investment and approximately 27.9% and 19.9% 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, particularly Ohio and Florida, we have utilized direct mail marketing,
our internet site and our customer service call center to extend our lending
activities to other attractive geographic locations. Currently, in addition to
Ohio and Florida, we are actively lending in 23 other states and the District of
Columbia, and as a result of that activity, the concentration ratios of the
combined total of our residential, Core and construction loans held for
investment in Ohio and Florida have trended downward from their September 30,
2010 levels when the concentrations were 79.1% in Ohio and 19.0% in Florida. Of
the total mortgage loans originated in the three months ended December 31, 2021,
21.0% are secured by properties in states other than Ohio or Florida.
Home equity loans and lines of credit generally have higher credit risk than
traditional residential mortgage loans. These loans and credit lines are usually
in a second lien position and when combined with the first mortgage, result in
generally higher overall loan-to-value ratios. In a stressed housing market with
high delinquencies and decreasing housing prices, these higher loan-to-value
ratios represent a greater risk of loss to the Company. A borrower with more
equity in the property has a vested interest in keeping the loan current when
compared to a borrower with little or no equity in the property. In light of the
past weakness in the housing market and uncertainty with respect to future
employment levels and economic prospects, we conduct an expanded loan level
evaluation of our home equity loans and lines of credit, including bridge loans
used to aid borrowers in buying a new home before selling their old one, which
are delinquent 90 days or more. This expanded evaluation is in addition to our
traditional evaluation procedures. Our home equity loans and lines of credit
portfolio continue to comprise a significant portion of our gross charge-offs.
At December 31, 2021, we had an amortized cost of $2.31 billion in home equity
loans and lines of credit outstanding, of which $2.9 million, or 0.1% were
delinquent 90 days or more.
Our residential Home Today loans are another area of credit risk concern.
Through the Home Today program, the Company provided the majority of loans to
borrowers who would not otherwise qualify for the Company's loan products,
generally because of low credit scores. Because the Company applied less
stringent underwriting and credit standards to the majority of Home Today loans,
loans originated under the program have greater credit risk than its traditional
residential real estate mortgage loans in the Residential Core portfolio.
Although we no longer originate loans under this program and the principal
balance in these loans had declined to $60.9 million at December 31, 2021, and
constituted only 0.5% of our total "held for investment" loan portfolio balance,
they comprised 13.6% and 16.9% of our 90 days or greater delinquencies and our
total delinquencies, respectively, at that date. At December 31, 2021,
approximately 95.6% and 4.2% of our residential Home Today loans were secured by
properties in Ohio and Florida, respectively. At December 31, 2021, the
percentages of those loans delinquent 30 days or more in Ohio and Florida were
7.0% and 5.5%, respectively. We attempted to manage our Home Today credit risk
by requiring private mortgage insurance for some loans. At December 31, 2021,
10.2% of Home Today loans included private mortgage insurance coverage. From a
peak amortized cost of $306.6 million at December 31, 2007, the total amortized
cost of the Home Today portfolio has declined to $60.5 million at December 31,
2021. Since the vast majority of Home Today loans were originated prior to March
2009 and we are no longer originating loans under our Home Today program, the
Home Today portfolio will continue to decline in balance, primarily due to
contractual amortization. Our allowance for credit losses for the Home Today
portfolio, which includes a lifetime view of expected losses, is reduced by
expected future recoveries of loan amounts previously charged off. To supplant
the Home Today product and to continue to meet the credit needs of our customers
and the communities that we serve, we have offered Fannie Mae eligible, Home
Ready loans since fiscal 2016. These loans are originated in accordance with
Fannie Mae's underwriting standards. While we retain the servicing rights
related to these loans, the loans, along with the credit risk associated
therewith, are securitized/sold to Fannie Mae. The Company does not offer, and
has not offered, loan products frequently considered to be designed to target
sub-prime borrowers containing features such as higher fees or higher rates,
negative amortization, an LTV ratio greater than 100%, or pay-option
adjustable-rate mortgages.
Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support
our Growth. For most insured depositories, customer and community confidence are
critical to their ability to maintain access to adequate liquidity and to
conduct business in an orderly manner. We believe that a well capitalized
institution is one of the most important factors in nurturing customer and
community confidence. Accordingly, we have managed the pace of our growth in a
manner that reflects
                                       38

————————————————– ——————————

Contents

our emphasis on high capital levels. At December 31, 2021, 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
10.93%. The Association's Tier 1 (leverage) capital ratio at December 31, 2021
included the negative impact of a $56 million cash dividend payment that the
Association made to the Company, its sole shareholder, in December 2021. 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.
In managing its level of liquidity, the Company monitors available funding
sources, which include attracting new deposits (including brokered CDs),
borrowings 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. At
December 31, 2021, deposits totaled $8.93 billion (including $496.9 million of
brokered CDs), while borrowings totaled $3.18 billion and borrowers' advances
and servicing escrows totaled $179.0 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.
To attract deposits, we offer our customers attractive rates of interest on our
deposit products. Our deposit products typically offer rates that are highly
competitive with the rates on similar products offered by other financial
institutions. We intend to continue this practice, subject to market conditions.
We preserve the availability of alternative funding sources through various
mechanisms. First, by maintaining high capital levels, we retain the flexibility
to increase our balance sheet size without jeopardizing our capital adequacy.
Effectively, this permits us to increase the rates that we offer on our deposit
products thereby attracting more potential customers. Second, we pledge
available real estate mortgage loans and investment securities with the FHLB of
Cincinnati and the FRB-Cleveland. At December 31, 2021, these collateral pledge
support arrangements provided the Association with the ability to borrow a
maximum of $7.49 billion from the FHLB of Cincinnati and $224.2 million from the
FRB-Cleveland Discount Window. From the perspective of collateral value securing
FHLB of Cincinnati advances, our capacity for additional borrowings at
December 31, 2021 was $4.31 billion. Third, we have the ability to purchase
overnight Fed Funds up to $380 million through various arrangements with other
institutions. Fourth, we invest in high quality marketable securities that
exhibit limited market price variability, and to the extent that they are not
needed as collateral for borrowings, can be sold in the institutional market and
converted to cash. At December 31, 2021, our investment securities portfolio
totaled $423.8 million. Finally, cash flows from operating activities have been
a regular source of funds. During the three months ended December 31, 2021 and
2020, cash flows from operations provided $7.7 million and $24.2 million,
respectively.
First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15
years or more, and Home Ready) originated under Fannie Mae compliant procedures
are eligible for sale to Fannie Mae either as whole loans or within
mortgage-backed securities. We expect that certain loan types (i.e. our Smart
Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year
fixed-rate loans) will continue to be originated under our legacy procedures,
which are not eligible for sale to Fannie Mae. For loans that are not originated
under Fannie Mae procedures, the Association's ability to reduce interest rate
risk via loan sales is limited to those loans that have established payment
histories, strong borrower credit profiles and are supported by adequate
collateral values that meet the requirements of the FHLB's Mortgage Purchase
Program or of private third-party investors. Refer to the Liquidity and Capital
Resources section of the Overview for information on loan sales.
Overall, while customer and community confidence can never be assured, the
Company believes that its liquidity is adequate and that it has access to
adequate alternative funding sources.
Monitoring and Controlling Our Operating Expenses. We continue to focus on
managing operating expenses. Our ratio of annualized non-interest expense to
average assets was 1.35% for the three months ended December 31, 2021 and 1.41%
for the three months ended December 31, 2020. As of December 31, 2021, our
average assets per full-time employee and our average deposits per full-time
employee were $14.1 million and $8.9 million, respectively. We believe that each
of these measures compares favorably with industry averages. Our relatively high
average of deposits (exclusive of brokered CDs) held at our branch offices
($228.0 million per branch office as of December 31, 2021) contributes to our
expense management efforts by limiting the overhead costs of serving our
customers. We will continue our efforts to control operating expenses as we grow
our business.


                                       39

————————————————– ——————————

Contents

Critical Accounting Policies
Critical accounting policies are defined as those that involve significant
judgments, estimates and uncertainties, and could potentially give rise to
materially different results under different assumptions and conditions. We
believe that the most critical accounting policies upon which our financial
condition and results of operations depend, and which involve the most complex
subjective decisions or assessments, are our policies with respect to our
allowance for credit losses, income taxes and pension benefits as described in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2021.
Lending Activities
Allowance for Credit Losses
We provide for credit losses based on a life of loan methodology. Accordingly,
all credit losses are charged to, and all recoveries are credited to, the
related allowance. Additions to the allowance for credit losses are provided by
charges to income based on various factors which, in our judgment, deserve
current recognition in estimating life of credit losses. We regularly review the
loan portfolio and off-balance sheet exposures and make provisions (or releases)
for losses in order to maintain the allowance for credit losses in accordance
with U.S. GAAP. Our allowance for credit losses consists of three components:
(1)individual valuation allowances (IVAs) established for any loans dependent on
cash flows, such as performing TDRs;
(2)general valuation allowances (GVAs) for loans, which are comprised of
quantitative GVAs, which are general allowances for credit losses for each loan
type based on historical loan loss experience and qualitative GVAs, which are
adjustments to the quantitative GVAs, maintained to cover uncertainties that
affect our estimate of expected credit losses for each loan type; and
(3)GVAs for off-balance sheet credit exposures, which are comprised of expected
lifetime losses on unfunded loan commitments to extend credit where the
obligations are not unconditionally cancellable.
The qualitative GVAs expand our ability to identify and estimate probable losses
and are based on our evaluation of the following factors, some of which are
consistent with factors that impact the determination of quantitative GVAs. For
example, delinquency statistics (both current and historical) are used in
developing the quantitative GVAs while the trending of the delinquency
statistics is considered and evaluated in the determination of the qualitative
GVAs. Factors impacting the determination of qualitative GVAs include:
•changes in lending policies and procedures including underwriting standards,
collection, charge-off or recovery practices;
•management's view of changes in national, regional, and local economic and
business conditions and trends including treasury yields, housing market factors
and trends, such as the status of loans in foreclosure, real estate in judgment
and real estate owned, and unemployment statistics and trends and how it aligns
with economic modeling forecasts;
•changes in the nature and volume of the portfolios including home equity lines
of credit nearing the end of the draw period and adjustable-rate mortgage loans
nearing a rate reset;
•changes in the experience, ability or depth of lending management;
•changes in the volume or severity of past due loans, volume of non-accrual
loans, or the volume and severity of adversely classified loans including the
trending of delinquency statistics (both current and historical), historical
loan loss experience and trends, the frequency and magnitude of multiple
restructurings of loans previously the subject of TDRs, and uncertainty
surrounding borrowers' ability to recover from temporary hardships for which
short-term loan restructurings are granted;
•changes in the quality of the loan review system;
•changes in the value of the underlying collateral including asset disposition
loss statistics (both current and historical) and the trending of those
statistics, and additional charge-offs and recoveries on individually reviewed
loans;
•existence of any concentrations of credit;
•effect of other external factors such as the COVID-19 pandemic, competition,
market interest rate changes or legal and regulatory requirements including
market conditions and regulatory directives that impact the entire financial
services industry; and
•limitations within our models to predict life of loan net losses.
When loan restructurings qualify as TDRs and the loans are performing according
to the terms of the restructuring, we record an IVA based on the present value
of expected future cash flows, which includes a factor for potential subsequent
                                       40

————————————————– ——————————

Contents

defaults, discounted at the effective interest rate of the original loan
contract. Potential defaults are distinguished from multiple restructurings as
borrowers who default are generally not eligible for subsequent restructurings.
At December 31, 2021, the balance of such individual valuation allowances were
$11.5 million. In instances when loans require multiple restructurings,
additional valuation allowances may be required. The new valuation allowance on
a loan that has multiple restructurings is calculated based on the present value
of the expected cash flows, discounted at the effective interest rate of the
original loan contract, considering the new terms of the restructured agreement.
Due to the immaterial amount of this exposure to date, we capture this exposure
as a component of our qualitative GVA evaluation as the estimated change in the
present value of cash flows on restructurings expected to subsequently
restructure based on historical activity.
We evaluate the allowance for credit losses based upon the combined total of the
quantitative and qualitative GVAs and IVAs. We periodically evaluate the
carrying value of loans and the allowance is adjusted accordingly. While we use
the best information available to make evaluations, future additions to the
allowance may be necessary based on unforeseen changes in loan quality and
economic conditions.
                                       41

————————————————– ——————————

Contents

The following table sets forth activity for credit losses segregated by
geographic location for the periods indicated. The majority of our Home Today
and construction loan portfolios are secured by properties located in Ohio and
the balances of other loans are considered immaterial, therefore neither was
segregated.
                                                                                  As of and For the
                                                                                 Three Months Ended
                                                                                    December 31,
                                                                                           2021                2020
                                                                                           (Dollars in thousands)

Balance of provisions for credit losses on loans (beginning of period)

           $    64,289           $ 46,937
Adoption of ASU 2016-13 for allowance for credit losses on loans                                -             24,095
Charge-offs on real estate loans:
Residential Core
Ohio                                                                                           25                 59
Florida                                                                                         -                  1
Other                                                                                           1                  1
Total Residential Core                                                                         26                 61

Total Residential Home Today                                                                   12                109
Home equity loans and lines of credit
Ohio                                                                                          144                314
Florida                                                                                         3                201
California                                                                                     14                108
Other                                                                                          76                 61
Total Home equity loans and lines of credit                                                   237                684

Total charge-offs                                                                             275                854
Recoveries on real estate loans:
Residential Core                                                                              481                460
Residential Home Today                                                                        588                423
Home equity loans and lines of credit                                                       1,164              1,229

Total recoveries                                                                            2,233              2,112
Net recoveries                                                                              1,958              1,258
Release of allowance for credit losses on loans                                            (2,671)            (2,000)
Allowance balance for loans (end of the period)                                       $    63,576           $ 70,290

Provision balance for credit losses on unfunded commitments (beginning of period)

                                                                           $    24,970           $      -

Adoption of ASU 2016-13 for Provision for Credit Losses on Unfunded Obligations

                                                                                     -             22,052
Provision for credit losses on unfunded loan commitments                                      671                  -

Provision balance for unfunded loan commitments (end of period)

                25,641             22,052
Allowance balance for all credit losses (end of the period)                           $    89,217           $ 92,342

Reports :

Net recoveries to average loans outstanding (annualized)                                     0.06   %           0.04  %

Allowance for credit losses on loans to outstanding loans at the end of the period

                                                                                     146.46   %         138.90  %

Allowance for loan losses on total amortized cost of loans at end of period

                                                                         0.50   %           0.54  %


Net recoveries continued, totaling $2.0 million during the three months ended
December 31, 2021 compared to $1.3 million during the three months ended
December 31, 2020. We reported net recoveries in each quarter for the last three
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.
                                       42

————————————————– ——————————

Contents

Gross charge-offs decreased and remained at relatively low levels, during the
three months ended December 31, 2021 when compared to the three months ended
December 31, 2020. We continue to evaluate loans becoming delinquent for
potential losses and record provisions for the estimate of potential losses of
those loans. Subject to changes in the economic environment, we expect a
moderate level of charge-offs as delinquent loans are resolved in the future and
uncollected balances are charged against the allowance.
During the three months ended December 31, 2021, the total allowance for credit
losses decreased $0.1 million, to $89.2 million from $89.3 million at
September 30, 2021, as we recorded a $2.0 million release of credit losses.
During the three months ended December 31, 2021, we recorded net recoveries of
$2.0 million. 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 UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS for more information.
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 during the three months
ended December 31, 2021 in the allowance for credit loss balances of loans are
described below. The allowance for credit losses on off-balance sheet increased
by $0.7 million primarily related to an increase in equity off-balance sheet
exposures. Other than the less significant construction and other loans
segments, the changes related to the significant loan segments are described as
follows:

•Residential Core - The amortized cost of this segment increased 0.6%, or $56.9
million, and its total allowance decreased 0.1% or $0.1 million as of
December 31, 2021 as compared to September 30, 2021. Total delinquencies
increased 4.9% to $16.0 million at December 31, 2021 from $15.3 million at
September 30, 2021. Delinquencies greater than 90 days increased by 28.2% to
$12.0 million at December 31, 2021 from $9.4 million at September 30, 2021. As
forbearance plans expire, those borrowers that do not enter subsequent workout
plans or repay the deferred amounts in full are reported as 90 days or more past
due. Net recoveries were $0.5 million for the quarter ended December 31, 2021
and there were net recoveries of $0.4 million for the quarter ended December 31,
2020. Economic forecasts continued to show improvements this quarter as the
allowance decreased.
•Residential Home Today - The amortized cost of this segment decreased 4.7%, or
$3.0 million, as we are no longer originating loans under the Home Today
program. The expected net recovery position for this segment was $0.1 million at
December 31, 2021 compared to a no allowance position last quarter. Total
delinquencies increased 6.0% to $4.2 million at December 31, 2021 from $4.0
million at September 30, 2021. Delinquencies greater than 90 days increased
13.7% to $2.4 million from $2.1 million at September 30, 2021. There were net
recoveries of $0.6 million recorded during the current quarter and net
recoveries of $0.3 million during the quarter ended December 31, 2020. This
allowance reflects not only the declining portfolio balance, but the lower
historical loss rates applied to the remaining balance and the higher expected
recoveries related to the loans as they age. 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 current
allowance balance for Home Today loans negative.
•Home Equity Loans and Lines of Credit - The amortized cost of this segment
increased 2.9%, or $64.3 million, to $2.31 billion at December 31, 2021 from
$2.24 billion at September 30, 2021. The total allowance for this segment
decreased by 3.1% to $18.9 million from $19.5 million at September 30, 2021.
Total delinquencies for this portfolio segment decreased 12.5% to $4.8 million
at December 31, 2021 as compared to $5.5 million at September 30, 2021.
Delinquencies greater than 90 days decreased 31.0% to $2.9 million at
December 31, 2021 from $4.2 million at September 30, 2021. Similar to the Core
segment above, as forbearance plans expire, those borrowers that do not enter
subsequent workout plans or repay the deferred amounts in full are reported as
90 days or more past due. Net recoveries for this loan segment during the
current quarter were slightly more at $0.9 million as compared to $0.5 million
for the quarter ended December 31, 2020. Economic forecasts continued to show
improvement this quarter that reduced forecasted losses, but they were low
compared to recent historical charge-offs so a qualitative adjustment was made
using recent gross charge-off experience.
                                       43

————————————————– ——————————

Contents

The following tables set forth the allowance for credit losses on loans
allocated by loan category, the percent of allowance in each category to the
total allowance on loans, and the percent of loans in each category to total
loans at the dates indicated. The allowance for credit losses allocated to each
category is not necessarily indicative of future losses in any particular
category and does not restrict the use of the allowance to absorb losses in
other categories. This table does not include allowances for credit losses on
unfunded loan commitments, which are primarily related to undrawn home equity
lines of credit.
                                                                                               December 31, 2021
                                                                                                  Percent of               Percent of
                                                                                                   Allowance                Loans in
                                                                                                   to Total            Category to Total
                                                                            Amount                 Allowance                 Loans
                                                                                             (Dollars in thousands)
Real estate loans:
Residential Core                                                       $       44,472                    70.0  %                  80.9  %
Residential Home Today                                                            (94)                   (0.2)                     0.5
Home equity loans and lines of credit                                          18,852                    29.7                     17.9
Construction                                                                      346                     0.5                      0.7

Allowance for credit losses on loans                                   $       63,576                   100.0  %                 100.0  %



                                                                   September 30, 2021                                                     December 31, 2020
                                                                    Percent of               Percent of                                      Percent of               Percent of
                                                                     Allowance                Loans in                                        Allowance                Loans in
                                                                     to Total            Category to Total                                    to Total            Category to Total
                                                 Amount              Allowance                 Loans                   Amount                 Allowance                 Loans
                                                                                                      (Dollars in thousands)
Real estate loans:
Residential Core                              $  44,523                    69.2  %                  81.2  %       $       46,351                    65.9  %                  82.2  %
Residential Home Today                               15                       -                      0.6                    (568)                   (0.8)                     0.6
Home equity loans and lines of credit            19,454                    30.3                     17.6                  23,752                    33.8                     16.8
Construction                                        297                     0.5                      0.6                     755                     1.1                      0.4

Allowance for credit losses on loans          $  64,289                   100.0  %                 100.0  %       $       70,290                   100.0  %                 100.0  %


                                       44

————————————————– ——————————

Contents

Loan Portfolio Composition
The following table sets forth the composition of the portfolio of loans held
for investment, by type of loan segregated by geographic location at the
indicated dates, excluding loans held for sale. The majority of our Home Today
loan portfolio is secured by properties located in Ohio and the balances of
other loans are immaterial. Therefore, neither was segregated by geographic
location.
                                                   December 31, 2021                             September 30, 2021                            December 31, 2020
                                               Amount                Percent                 Amount                 Percent                               Amount              Percent
                                                                                  (Dollars in thousands)
Real estate loans:
Residential Core
Ohio                                    $       5,680,033                             $        5,603,998                                              $  5,865,909
Florida                                         1,891,467                                      1,838,259                                                 1,849,997
Other                                           2,716,235                                      2,773,018                                                 2,942,254
Total Residential Core                         10,287,735               80.9  %               10,215,275               81.2  %                          10,658,160               82.2  %

Total Residential Home Today                       60,885              0.5                        63,823              0.6                                   72,129              0.6
Home equity loans and lines of credit
Ohio                                              635,495                                        630,815                                                   638,210
Florida                                           454,210                                        438,212                                                   428,972
California                                        350,758                                        335,240                                                   327,376
Other                                             837,298                                        809,985                                                   776,038
Total Home equity loans and lines of
credit                                          2,277,761              17.9                    2,214,252              17.6                               2,170,596              16.8
Construction loans
Ohio                                               81,505                                         71,651                                                    48,134
Florida                                             7,656                                          6,604                                                     5,695
Other                                               1,535                                          2,282                                                         -
Total Construction                                 90,696              0.7                        80,537              0.6                                   53,829              0.4
Other loans                                         2,705               -                          2,778               -                                     2,637               -
Total loans receivable                         12,719,782              100.0  %               12,576,665              100.0  %                          12,957,351              100.0  %
Deferred loan expenses, net                        45,954                                         44,859                                                    42,138
Loans in process                                  (57,120)                                       (48,200)                                                  (29,691)
Allowance for credit losses on loans              (63,576)                                       (64,289)                                               

(70,290)

Total loans receivable, net             $      12,645,040                             $       12,509,035                                              $ 12,899,508


                                       45

————————————————– ——————————

Contents

The following table provides an analysis of our residential mortgage loans
disaggregated by FICO score refreshed quarterly, year of origination and
portfolio as of the periods presented. The Company treats the FICO score
information as demonstrating that underwriting guidelines reduce risk rather
than as a credit quality indicator utilized in the evaluation of credit risk.
Balances are adjusted for deferred loan fees, expenses and any applicable
loans-in-process.
                                                                                                                                          Revolving
                                                                                                                      Revolving Loans       Loans
                                                   By fiscal year of origination                                         Amortized        Converted
                                    2022          2021           2020          2019         2018         Prior          Cost Basis         To Term         Total
December 31, 2021
Real estate loans:
Residential Core
     <680                       $   5,060    $    66,044    $    44,970    $  29,572    $  28,952    $   196,970    $              -    $        -    $    371,568
     680-740                      156,947        348,739        217,245      105,953      106,133        454,438                   -             -       1,389,455
     741+                         665,951      2,018,337      1,417,935      590,176      648,250      3,036,688                   -             -       8,377,337
     Unknown (1)                    1,135         31,715         16,974        5,473        9,377        103,464                   -             -         168,138

Total residential core 829,093 2,464,835 1,697,124

  731,174      792,712      3,791,560                   -             -      10,306,498
Residential Home Today (2)
     <680                               -              -              -            -            -         34,161                   -             -          34,161
     680-740                            -              -              -            -            -         11,733                   -             -          11,733
     741+                               -              -              -            -            -         11,275                   -             -          11,275
     Unknown (1)                        -              -              -            -            -          3,286                   -             -           3,286
   Total Residential Home Today         -              -              -            -            -         60,455                   -             -          60,455
Home equity loans and lines of
credit
     <680                               -            841            409          425          674          1,078              64,007        22,536          89,970
     680-740                        3,251          4,944          1,371        1,559        1,675          2,287             324,424        28,359         367,870
     741+                          13,647         32,615         10,777        8,976        7,910         11,101           1,668,018        68,799       1,821,843
     Unknown (1)                        -            161             49          110          110            679              17,060         8,354          26,523
    Total Home equity loans and
                lines of credit    16,898         38,561         12,606       11,070       10,369         15,145           2,073,509       128,048       2,306,206
Construction
     <680                               -          1,140              -            -            -              -                   -             -           1,140
     680-740                          364          3,180              -            -            -              -                   -             -           3,544
     741+                           1,769         25,447            479            -            -              -                   -             -          27,695
     Unknown (1)                        -            373              -            -            -              -                   -             -             373
             Total Construction     2,133         30,140            479            -            -              -                   -             -          32,752

Total net home loans $848,124 $2,533,536 $1,710,209 $742,244 $803,081 $3,867,160 $2,073,509 $128,048 $12,705,911

(1) Data needed for stratification are not readily available. (2) No new Home Today loan issuance since fiscal year 2016.







                                       46

————————————————– ——————————

Contents

The following table provides an analysis of our residential mortgage loans by
origination LTV, origination year and portfolio as of the periods presented.
LTVs are not updated subsequent to origination except as part of the charge-off
process. Balances are adjusted for deferred loan fees, expenses and any
applicable loans-in-process.
                                                                                                                                                      Revolving
                                                                                                                                  Revolving Loans       Loans
                                                               By fiscal year of origination                                         Amortized        Converted
                                                2022          2021           2020          2019         2018         Prior          Cost Basis         To Term         Total
December 31, 2021
Real estate loans:
     Residential Core
     <80%                                   $ 571,761    $ 1,741,677    $   945,502    $ 342,605    $ 422,777    $ 2,264,968    $              -    $        -    $  6,289,290
     80-89.9%                                 236,869        672,976        684,064      351,130      344,694      1,405,512                   -             -       3,695,245
     90-100%                                   20,463         49,898         67,558       37,439       25,121        117,496                   -             -         317,975
     >100%                                          -              -              -            -          120            685                   -             -             805
     Unknown (1)                                    -            284              -            -            -          2,899                   -             -           3,183
                     Total Residential Core   829,093      2,464,835      1,697,124      731,174      792,712      3,791,560                   -             -      10,306,498
Residential Home Today (2)
     <80%                                           -              -              -            -            -         11,924                   -             -          11,924
     80-89.9%                                       -              -              -            -            -         19,127                   -             -          19,127
     90-100%                                        -              -              -            -            -         29,404                   -             -          29,404

               Total Residential Home Today         -              -              -            -            -         60,455                   -             -          60,455
Home equity loans and lines of credit
<80%                                           14,774         37,412         12,429       10,706        9,534         10,636           1,927,828        83,753       2,107,072
80-89.9%                                        2,088          1,149            177          309          679          1,516             144,132        39,951         190,001
90-100%                                             -              -              -            -           56          1,056                 395           448           1,955
>100%                                              36              -              -           55          100          1,927                 640           704           3,462
     Unknown (1)                                    -              -              -            -            -             10                 514         3,192           3,716

Total home equity loans and lines of credit 16,898 38,561

 12,606       11,070       10,369         15,145           2,073,509       128,048       2,306,206
Construction
<80%                                              582         19,564            410            -            -              -                   -             -          20,556
80-89.9%                                        1,551         10,203             69            -            -              -                   -             -          11,823

     Unknown (1)                                    -            373              -            -            -              -                   -             -             373
                         Total Construction     2,133         30,140            479            -            -              -                   -             -          32,752
Total net real estate loans                 $ 848,124    $ 2,533,536    $ 

1,710,209 $742,244 $803,081 $3,867,160 $2,073,509 $

128,048 $12,705,911

(1) Market data needed for stratification is not readily available. (2) No new Home Today loan issuance since fiscal year 2016.


At December 31, 2021, the unpaid principal balance of our home equity loans and
lines of credit portfolio consisted of $231.8 million in home equity loans
(including $128.2 million of home equity lines of credit, which are in repayment
and no longer eligible to be drawn upon, and $6.5 million in bridge loans) and
$2.05 billion in home equity lines of credit.
                                       47

————————————————– ——————————

Contents

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 estimated current mean CLTV percent of our home equity loans, home equity
lines of credit and bridge loan portfolio as of December 31, 2021. Home equity
lines of credit in the draw period are reported according to geographic
distribution.
                                                                                                Percent                       Mean CLTV
                                                  Credit             Principal                 Delinquent                     Percent at                    Current Mean
                                                 Exposure             Balance               90 Days or More                Origination (2)       

CLTV Percentage (3)

                                                    (Dollars in thousands)
Home equity lines of credit in draw
period (by state)
Ohio                                          $ 1,751,106          $   552,990                           0.03  %                          60  %                           46  %
Florida                                           918,211              393,654                           0.04  %                          56  %                           44  %
California                                        807,074              310,862                           0.09  %                          60  %                           53  %
Other (1)                                       1,965,600              788,489                           0.04  %                          62  %                           53  %

Total home equity lines of credit in

              draw period                       5,441,991            2,045,995                           0.05  %                          60  %                           48  %
Home equity lines in repayment, home
equity loans and bridge loans                     231,766              231,766                           0.85  %                          62  %                           37  %
Total                                         $ 5,673,757          $ 2,277,761                           0.13  %                          60  %                           47  %


_________________
(1)No other individual state has a committed or drawn balance greater than 10%
of our total home equity lending portfolio and 5% of total loan balances.
(2)Mean CLTV percent at origination for all home equity lines of credit is based
on the committed amount.
(3)Current Mean CLTV is based on best available first mortgage and property
values as of December 31, 2021. Property values are estimated using HPI data
published by the FHFA. Current Mean CLTV percent for home equity lines of credit
in the draw period is calculated using the committed amount. Current Mean CLTV
on home equity lines of credit in the repayment period is calculated using the
principal balance.
At December 31, 2021, 39.8% of our home equity lending portfolio was either in a
first lien position (23.3%), in a subordinate (second) lien position behind a
first lien that we held (13.8%) or behind a first lien that was held by a loan
that we originated, sold and now service for others (2.7%). At December 31,
2021, 13.4% of our home equity line of credit portfolio in the draw period was
making only the minimum payment on the outstanding line balance.
                                       48

————————————————– ——————————

Contents

The following table sets forth by calendar year origination, the credit
exposure, principal balance, percent delinquent 90 days or more, the mean CLTV
percent at the time of origination and the estimated current mean CLTV percent
of our home equity loans, home equity lines of credit and bridge loan portfolio
as of December 31, 2021. Home equity lines of credit in the draw period are
included in the year originated:
                                                                                               Percent                       Mean CLTV                   Current Mean
                                                Credit             Principal                 Delinquent                      Percent at                      CLTV
                                               Exposure             Balance                90 Days or More                Origination (1)                 Percent (2)
                                                  (Dollars in thousands)
Home equity lines of credit in draw
period
2013 and Prior                              $       474          $        69                               -  %                          17  %                       45  %
2014                                             71,782               16,067                            0.43  %                          58  %                       33  %

2015                                            107,183               28,503                               -  %                          58  %                       34  %
2016                                            277,880               88,323                            0.07  %                          60  %                       38  %
2017                                            581,287              211,246                            0.12  %                          58  %                       40  %
2018                                            740,921              306,002                            0.05  %                          58  %                       44  %
2019                                            979,749              450,233                            0.07  %                          61  %                       48  %
2020                                            916,521              355,263                            0.03  %                          58  %                       49  %
2021                                          1,766,194              590,289                               -  %                          62  %                       60  %

Total home equity lines of credit in
draw period                                   5,441,991            2,045,995                            0.05  %                          60  %                       48  %
Home equity lines in repayment, home
equity loans and bridge loans                   231,766              231,766                            0.85  %                          62  %                       37  %
Total                                       $ 5,673,757          $ 2,277,761                            0.13  %                          60  %                       47  %


________________
(1)Mean CLTV percent at origination for all home equity lines of credit is based
on the committed amount.
(2)Current Mean CLTV is based on best available first mortgage and property
values as of December 31, 2021. Property values are estimated using HPI data
published by the FHFA. Current Mean CLTV percent for home equity lines of credit
in the draw period is calculated using the committed amount. Current Mean CLTV
on home equity lines of credit in the repayment period is calculated using the
principal balance.
The following table sets forth by fiscal year when the draw period expires, the
principal balance of home equity lines of credit in the draw period as of
December 31, 2021, segregated by the estimated current combined LTV range. Home
equity lines of credit with an end of draw date in the current fiscal year
include accounts with draw privileges that have been temporarily suspended.
                                                                          Estimated Current CLTV Category
Home equity lines of credit in
draw period (by end of draw
fiscal year):                       < 80%              80 - 89.9%           90 - 100%            >100%            Unknown (1)             Total
                                                                               (Dollars in thousands)
2022                            $    42,063          $       386          $        -          $     22          $          -          $    42,471
2023                                    215                   21                   5                 -                     -                  241
2024                                 10,110                    -                   -                 -                     -               10,110
2025                                 28,060                    -                   -                 -                    13               28,073
2026                                 49,002                    7                   -                 -                     -               49,009
2027                                177,623                    -                   -                 -                   126              177,749
Post 2027                         1,728,491                8,698                 189                60                   904            1,738,342
  Total                         $ 2,035,564          $     9,112          $      194          $     82          $      1,043          $ 2,045,995


_________________

(1) Market data needed for stratification is not readily available.

                                       49

————————————————– ——————————

Contents

The following table sets forth the breakdown of estimated current mean CLTV
percentages for our home equity lines of credit in the draw period as of
December 31, 2021.
                                                                                         Percent                Percent                                              Current
                                                                                        of Total              Delinquent                 Mean CLTV                     Mean
                                               Credit             Principal             Principal             90 Days or                 Percent at                    CLTV
                                              Exposure             Balance               Balance                 More                 Origination (2)              Percent (3)
                                                 (Dollars in thousands)
Home equity lines of credit in draw
period (by estimated current mean
CLTV)
< 80%                                      $ 5,402,931          $ 2,035,564                  99.5  %                 0.05  %                        60  %                    48  %
80 - 89.9%                                      34,708                9,112                   0.4  %                    -  %                        79  %                    80  %
90 - 100%                                          929                  194                     -  %                    -  %                        69  %                    94  %
> 100%                                             612                   82                     -  %                 26.8  %                        59  %                   116  %
Unknown (1)                                      2,811                1,043                   0.1  %                    -  %                        52  %                    (1)
                                           $ 5,441,991          $ 2,045,995                 100.0  %                 0.05  %                        60  %                    48  %


_________________
(1)Market data necessary for stratification is not readily available.
(2)Mean CLTV percent at origination for all home equity lines of credit is based
on the committed amount.
(3)Current Mean CLTV is based on best available first mortgage and property
values as of December 31, 2021. Property values are estimated using HPI data
published by the FHFA. Current Mean CLTV percent for home equity lines of credit
in the draw period is calculated using the committed amount. Current Mean CLTV
on home equity lines of credit in the repayment period is calculated using the
principal balance.
Delinquent Loans
The following tables set forth the amortized cost in loan delinquencies by type,
segregated by geographic location and severity of delinquency as of the dates
indicated. The majority of our Home Today loan portfolio is secured by
properties located in Ohio, and therefore was not segregated by geographic
location, and there are no construction or other loans with delinquent balances.
                                                                       Loans Delinquent for
                                                               30-89 Days             90 Days or More             Total
                                                                                (Dollars in thousands)
December 31, 2021
Real estate loans:
Residential Core
Ohio                                                       $     1,790              $          7,609          $    9,399
Florida                                                          1,263                         1,002               2,265
Other                                                              954                         3,399               4,353
Total Residential Core                                           4,007                        12,010              16,017

Residential Home Today                                           1,866                         2,351               4,217
Home equity loans and lines of credit
Ohio                                                               679                         1,157               1,836
Florida                                                            543                           544               1,087
California                                                          95                           658                 753
Other                                                              550                           561               1,111
Total Home equity loans and lines of credit                      1,867                         2,920               4,787

Total                                                      $     7,740              $         17,281          $   25,021


                                       50

————————————————– ——————————

  Table of Contents

                                                                       Loans Delinquent for
                                                               30-89 Days             90 Days or More             Total
                                                                                (Dollars in thousands)
September 30, 2021
Real estate loans:
Residential Core
Ohio                                                       $     3,217              $          5,729          $    8,946
Florida                                                            874                         1,093               1,967
Other                                                            1,814                         2,548               4,362
Total Residential Core                                           5,905                         9,370              15,275

Residential Home Today                                           1,909                         2,068               3,977
Home equity loans and lines of credit
Ohio                                                               333                         1,348               1,681
Florida                                                            432                           787               1,219
California                                                         278                         1,074               1,352
Other                                                              195                         1,022               1,217
Total Home equity loans and lines of credit                      1,238                         4,231               5,469

Total                                                      $     9,052              $         15,669          $   24,721




                                                                      Loans Delinquent for
                                                              30-89 Days             90 Days or More             Total
                                                                               (Dollars in thousands)
December 31, 2020
Real estate loans:
Residential Core
Ohio                                                       $     4,875             $          7,113          $   11,988
Florida                                                            751                        2,887               3,638
Other                                                              540                          705               1,245
Total Residential Core                                           6,166                       10,705              16,871

Residential Home Today                                           1,933                        2,284               4,217
Home equity loans and lines of credit
Ohio                                                               535                        1,840               2,375
Florida                                                            714                          883               1,597
California                                                         399                          653               1,052
Other                                                              895                        1,146               2,041
Total Home equity loans and lines of credit                      2,543                        4,522               7,065

Total                                                      $    10,642             $         17,511          $   28,153


Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.14% of
total net loans at December 31, 2021, 0.12% at September 30, 2021, and 0.14% at
December 31, 2020. Total loans delinquent (i.e. delinquent 30 days or more) were
0.20% of total net loans at both December 31, 2021 and at September 30, 2021,
and 0.22% at December 31, 2020.
As of December 31, 2021, some of our borrowers have experienced unemployment or
reduced income as a result of the COVID-19 global pandemic and have requested
some type of loan payment forbearance. We began offering forbearance plans to
borrowers affected by COVID-19 on March 13, 2020. Through December 31, 2021,
over 2,200 customers, representing over $250 million of loans, have been helped
by COVID-19 related forbearance plans. These forbearance plans that remain
active total $12.0 million, or 0.1% of total loans receivable, at December 31,
2021; of which $11.3 million were related to first mortgage loans and $0.7
million were related to home equity loans and lines of credit. Although we are
not currently receiving payments on loans in active COVID-19 forbearance plans,
the majority of these accounts are reported as current and accruing and are not
currently included in the amortized cost of TDRs as the Company has elected to
apply the temporary suspension of TDR requirements provided by regulatory
guidance and the CARES Act for eligible loan modifications. Further details
about active COVID-19 forbearance plans and post-forbearance loan workouts can
be found in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
                                       51

————————————————– ——————————

Contents

Non-Performing Assets and Distressed Debt Restructurings The following table shows the amortized costs and categories of our non-performing assets and TDRs as of the dates indicated.

                                                                December 31,          September 30,                December 31,
                                                                    2021                   2021                        2020
                                                                           (Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential Core                                               $     26,348          $      24,892                $     29,492
Residential Home Today                                                8,049                  8,043                       9,891
Home equity loans and lines of credit                                 9,010                 11,110                      11,223

Total non-accrual loans (1)(2)                                       43,407                 44,045                      50,606
Real estate owned                                                       131                    289                         102

Total non-performing assets                                    $     43,538          $      44,334                $     50,708
Ratios:
Total non-accrual loans to total loans                                 0.34  %                0.35  %                     0.39  %
Total non-accrual loans to total assets                                0.31  %                0.31  %                     0.35  %
Total non-performing assets to total assets                            0.31  %                0.32  %                     0.35  %
TDRs: (not included in non-accrual loans above)
Real estate loans:
Residential Core                                               $     45,493          $      48,300                $     45,844
Residential Home Today                                               20,079                 21,307                      23,272
Home equity loans and lines of credit                                24,243                 24,941                      28,289

Total                                                          $     89,815          $      94,548                $     97,405


_________________
(1)At December 31, 2021, September 30, 2021, and December 31, 2020, the totals
include $24.2 million, $25.7 million, and $31.3 million, respectively, in TDRs,
which are less than 90 days past due but included with non-accrual loans for a
minimum period of six months from the restructuring date due to their
non-accrual status or forbearance plan prior to restructuring, because of a
prior partial charge off, or because all borrowers have filed Chapter 7
bankruptcy, and not reaffirmed or been dismissed.
(2)At December 31, 2021, September 30, 2021, and December 31, 2020, the totals
include $7.1 million, $6.9 million and $7.6 million in TDRs that are 90 days or
more past due, respectively.
The gross interest income that would have been recorded during the three months
ended December 31, 2021 and December 31, 2020 on non-accrual loans, if they had
been accruing during the entire period, and TDRs, if they had been current and
performing in accordance with their original terms during the entire period, was
$1.6 million and $1.8 million, respectively. The interest income recognized on
those loans included in net income for the three months ended December 31, 2021
and December 31, 2020 was $1.0 million and $1.1 million, respectively.
The amortized cost of collateral-dependent loans includes accruing TDRs and
loans that are returned to accrual status when contractual payments are less
than 90 days past due. These loans continue to be individually evaluated based
on collateral until, at a minimum, contractual payments are less than 30 days
past due. Also, the amortized cost of non-accrual loans includes loans that are
not included in the amortized cost of collateral-dependent loans because they
are included in loans collectively evaluated for credit losses.
                                       52

————————————————– ——————————

Contents

The table below sets forth a reconciliation of the amortized costs and
categories between non-accrual loans and collateral-dependent loans at the dates
indicated. The increase in other accruing collateral-dependent loans between
December 31, 2020 and December 31, 2021, was primarily related to forbearance
plans being extended past 12 months.
                                                  December 31,            September 30,           December 31,
                                                      2021                    2021                    2020
                                                                     (Dollars in thousands)
Non-Accrual Loans                               $       43,407          $       44,045                  50,606
Accruing Collateral-Dependent TDRs                       8,628                  10,428                   8,157
Other Accruing Collateral-Dependent Loans               32,269                  31,956                   7,313
Less: Loans Collectively Evaluated                      (4,099)                 (2,575)                 (4,146)
Total Collateral-Dependent loans                $       80,205          $       83,854          $       61,930




In response to the economic challenges facing many borrowers, we continue to
restructure loans. Loan restructuring is a method used to help families keep
their homes and to preserve neighborhoods. This involves making changes to the
borrowers' loan terms through interest rate reductions, either for a specific
period or for the remaining term of the loan; term extensions including those
beyond that provided in the original agreement; principal forgiveness;
capitalization of delinquent payments in special situations; or some combination
of the above. Loans discharged through Chapter 7 bankruptcy are also reported as
TDRs per OCC interpretive guidance. For discussion on TDR measurement, see Note
4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS. We had $121.1 million of TDRs (accrual and
non-accrual) recorded at December 31, 2021. This was a decrease in the amortized
cost of TDRs of $6.0 million and $15.3 million from September 30, 2021 and
December 31, 2020, respectively.
The following table sets forth the amortized cost in accrual and non-accrual
TDRs, by the types of concessions granted, as of December 31, 2021. Initial
concessions granted by loans restructured as TDRs can include reduction of
interest rate, extension of amortization period, forbearance or other actions.
Some TDRs have experienced a combination of concessions. TDRs also can occur as
a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are
classified as multiple restructurings if the loan's original terms had also been
restructured by the Company.
                                                            Multiple
                             Initial Restructurings      Restructurings       Bankruptcy         Total
                                                            (In thousands)
Accrual
Residential Core             $              28,412      $        12,275      $     4,806      $  45,493
Residential Home Today                      11,136                7,887            1,056         20,079
Home equity loans and
lines of credit                             22,894                  841              508         24,243

Total                        $              62,442      $        21,003      $     6,370      $  89,815
Non-Accrual, Performing
Residential Core             $               1,844      $         5,008      $     6,634      $  13,486
Residential Home Today                         560                3,630            1,275          5,465
Home equity loans and
lines of credit                              2,240                1,956            1,023          5,219

Total                        $               4,644      $        10,594      $     8,932      $  24,170
Non-Accrual,
Non-Performing
Residential Core             $               1,944      $         2,043      $       554      $   4,541
Residential Home Today                         541                1,116              127          1,784
Home equity loans and
lines of credit                                589                  202                -            791

Total                        $               3,074      $         3,361      $       681      $   7,116
Total TDRs
Residential Core             $              32,200      $        19,326      $    11,994      $  63,520
Residential Home Today                      12,237               12,633            2,458         27,328
Home equity loans and
lines of credit                             25,723                2,999            1,531         30,253

Total                        $              70,160      $        34,958      $    15,983      $ 121,101


                                       53

————————————————– ——————————

Contents

TDRs in accrual status are loans accruing interest and performing according to
the terms of the restructuring. To be performing, a loan must be less than 90
days past due as of the report date. Non-accrual, performing status indicates
that a loan was not accruing interest or in a forbearance plan at the time of
restructuring, continues to not accrue interest and is performing according to
the terms of the restructuring but has not been current for at least six
consecutive months since its restructuring, has a partial charge-off, or is
being classified as non-accrual per the OCC guidance on loans in Chapter 7
bankruptcy status where all borrowers have filed and have not reaffirmed or been
dismissed. Non-accrual, non-performing status includes loans that are not
accruing interest because they are greater than 90 days past due and therefore
not performing according to the terms of the restructuring.

Comparison of Financial Condition at December 31, 2021 and September 30, 2021
Total assets increased $75.1 million, or 1%, to $14.13 billion at December 31,
2021 from $14.06 billion at September 30, 2021. This increase was mainly the
result of new loan origination levels exceeding the total of loan sales and
principal repayments, partially offset by a decrease in cash and cash
equivalents.
Cash and cash equivalents decreased $80.3 million, or 16%, to $408.0 million at
December 31, 2021 from $488.3 million at September 30, 2021. Cash is managed to
maintain the level of liquidity described later in the Liquidity and Capital
Resources section. Balances decreased as proceeds from loan sales and principal
repayments decreased for the quarter ended December 31, 2021.
Investment securities, all of which are classified as available for sale,
increased $2.0 million to $423.8 million at December 31, 2021 from $421.8
million at September 30, 2021. This increase is a result of cash flows from
security purchases exceeding repayments and maturities during the fiscal year.
Pay downs on mortgage-backed securities decreased due to the increase in
interest rates. Investment securities increased as $65.2 million in purchases
exceeded $57.7 million in principal paydowns, a $4.0 million decrease in
unrealized gains and $1.5 million of net acquisition premium amortization that
occurred in the mortgage-backed securities portfolio during the three months
ended December 31, 2021. There were no sales of investment securities during the
three months ended December 31, 2021.
Loans held for investment, net of deferred loan fees and allowance for credit
losses, increased $136.0 million, or 1%, to $12.65 billion at December 31, 2021
from $12.51 billion at September 30, 2021. This increase was based on a
combination of a $69.5 million, or 1%, increase in residential mortgage loans to
$10.35 billion at December 31, 2021 from $10.28 billion at September 30, 2021
and a $63.5 million increase in the balance of home equity loans and lines of
credit during the three months ended December 31, 2021, as new originations and
additional draws on existing accounts exceeded loan sales and repayments. Of the
total $877.1 million first mortgage loan originations for the three months ended
December 31, 2021, 61% were refinance transactions and 39% were purchases, 24%
were adjustable-rate mortgages and 14% were fixed-rate mortgages with terms of
10 years or less. Total first mortgage loans originations were $719.6 million
for the quarter ended September 30, 2021. During the three months ended
December 31, 2021, $211.9 million of three- and five-year "Smart Rate" loans
were originated while $665.2 million of 10-, 15-, and 30-year fixed-rate first
mortgage loans were originated. Between September 30, 2021 and December 31,
2021, the total fixed-rate portion of the first mortgage loan portfolio
increased $175.2 million and was comprised of an increase of $179.8 million in
the balance of fixed-rate loans with original terms greater than 10 years
partially offset by a decrease of $4.6 million in the balance of fixed-rate
loans with original terms of 10 years or less. During the three months ended
December 31, 2021, $102.0 million were sold or committed to sell, which
consisted of $27.0 million of agency-compliant Home Ready loans and $75.0
million of long-term, fixed-rate, agency-compliant, non-Home Ready first
mortgage loans sold to Fannie Mae.
Commitments originated for home equity loans and lines of credit, and bridge
loans were $499.7 million for the three months ended December 31, 2021 compared
to $306.1 million for the three months ended December 31, 2020. At December 31,
2021, pending commitments to originate new home equity loans and lines of credit
were $329.4 million. Refer to the Controlling Our Interest Rate Risk Exposure
section of the Overview for additional information.
There was a release of the allowance for credit losses of $2.0 million for both
the three months ended December 31, 2021 and the three months ended December 31,
2020. Releases from the allowance for credit losses during the current year
reflected improvements in the economic trends and forecasts used to estimate
losses for the reasonable and supportable period and decreases in pandemic
forbearance balances, as well as adjusting for the level of net loan recoveries
recorded during the period. The Company recorded $2.0 million of net loan
recoveries for the three months ended December 31, 2021 compared to $1.3 million
of net loan recoveries for the three months ended December 31, 2020. The
allowance for credit losses was $89.2 million, or 0.70% of total loans
receivable, at December 31, 2021, including a $25.6 million liability for
unfunded commitments. The allowance for credit losses was $89.3 million, or
0.71% of total loans receivable, at September 30, 2021, including a $25.0
million liability for unfunded commitments. The allowance for credit losses was
$92.3 million, or 0.71% of
                                       54

————————————————– ——————————

Contents

total loans receivable, at December 31, 2020 and included a $22.1 million
liability for unfunded commitments. Refer to Note 4. LOANS AND ALLOWANCES FOR
CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS for additional discussion.
The amount of FHLB stock owned was $162.8 million at December 31, 2021,
unchanged from the prior quarter ended September 30, 2021. FHLB stock ownership
requirements dictate the amount of stock owned at any given time.
Total bank owned life insurance contracts increased $1.1 million, to
$298.4 million at December 31, 2021, from $297.3 million at September 30, 2021.
Other assets, including prepaid expenses, decreased $10.8 million to $80.8
million at December 31, 2021 from $91.6 million at September 30, 2021. This
decrease was driven by a reduction of $5.2 million in net deferred taxes, a $3.3
million decrease in the receivable due to the ESOP, a $1.2 million decrease in
prepaid franchise taxes, and a $2.6 million decrease in margin requirements on
matured and terminated swaps, partially offset by a $0.8 million increase in the
right of use asset.
Deposits decreased $60.3 million, or 1%, to $8.93 billion at December 31, 2021
from $8.99 billion at September 30, 2021. The decrease in deposits resulted
primarily from a $137.9 million decrease in CDs, inclusive of brokered CDs, as
the low current market interest rates have reduced customers' desires to
maintain longer-term CDs. However, the balance of brokered CDs included in total
deposits at December 31, 2021 increased by $4.9 million to $496.9 million,
during the three months ended December 31, 2021, compared to a balance of $492.0
million at September 30, 2021. Partially offsetting the decrease was a $48.8
million increase in checking accounts and a $32.5 million increase in savings
accounts. There was a $3.4 million decrease in money market accounts and accrued
interest decreased $0.3 million during the current three month period to $1.5
million.
Borrowed funds, all from the FHLB of Cincinnati, increased $88.8 million, or 3%,
to $3.18 billion at December 31, 2021 from $3.09 billion at September 30, 2021.
The increase was primarily used to fund loan growth. During the quarter ended
December 31, 2021, additions included $40.0 million of overnight advances and
$150.0 million of long-term advances, with terms from 21 to 48 months, partially
offset by other principal repayments. Also, during the quarter, $100.0 million
of 90-day advances and their related swap contracts matured and were paid off.
The total balance of borrowed funds at December 31, 2021 consisted of $40.0
million of overnight advances, $790.6 million of term advances with a weighted
average maturity of approximately 2.7 years and shorter-term advances of $2.4
billion, aligned with interest rate swap contracts, with a remaining weighted
average effective maturity of approximately 2.4 years. Interest rate swaps have
been used to extend the duration of short-term borrowings, at inception, by
paying a fixed rate of interest and receiving the variable rate. Refer to the
Extending the Duration of Funding Sources section of the Overview and Part I,
Item 3. Quantitative and Qualitative Disclosures About Market Risk for
additional discussion regarding short-term borrowings and interest-rate swaps.
Borrowers' advances for insurance and taxes increased by $33.7 million to $143.3
million at December 31, 2021 from $109.6 million at September 30, 2021. This
change primarily reflects the cyclical nature of real estate tax payments that
have been collected from borrowers and are in the process of being remitted to
various taxing agencies.
Total shareholders' equity increased $21.1 million, or 1%, to $1.75 billion at
December 31, 2021 from $1.73 billion at September 30, 2021. Activity reflects
$16.1 million of net income in the current quarter reduced by a quarterly
dividend of $14.5 million and $0.3 million of repurchases of outstanding common
stock. Other changes include $17.7 million of unrealized net gain recognized in
accumulated other comprehensive income, primarily related to changes in market
values and maturities of swap contracts, and a $2.1 million net positive impact
related to activity in the Company's stock compensation and employee stock
ownership plans. The Company's eighth stock repurchase program allows for a
total of 10,000,000 shares to be repurchased, with 5,875,079 shares remaining to
be repurchased at December 31, 2021. During the quarter ended December 31, 2021,
16,000 shares of the Company's outstanding stock were repurchased at an average
cost of $17,80 per share. The Company declared and paid a quarterly dividend of
$0.2825 per share during the quarter ended December 31, 2021. As a result of a
mutual member vote, Third Federal Savings and Loan Association of Cleveland, MHC
(the "MHC"), the mutual holding company that owns approximately 81% of the
outstanding stock of the Company, was able to waive its receipt of its share of
the dividend paid. Refer to Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds for additional details regarding the repurchase of shares of
common stock and the dividend waiver.

                                       55

————————————————– ——————————

Contents

Comparison of Operating Results for the Three Months Ended December 31, 2021 and
2020
Average balances and yields. The following table sets forth average balances,
average yields and costs, and certain other information for the periods
indicated. No tax-equivalent yield adjustments were made, as the effects thereof
were not material. Average balances are derived from daily average balances.
Non-accrual loans are included in the computation of loan average balances, but
only cash payments received on those loans during the period presented are
reflected in the yield. The yields set forth below include the effect of
deferred fees, deferred expenses, discounts and premiums that are amortized or
accreted to interest income or interest expense.
                                                                  Three Months Ended                                           Three Months Ended
                                                                  December 31, 2021                                            December 31, 2020
                                                                       Interest                                                     Interest
                                                    Average             Income/             Yield/               Average             Income/             Yield/
                                                    Balance             Expense            Cost (1)              Balance             Expense            Cost (1)
                                                                                              (Dollars in thousands)

Interest-bearing assets:

 Interest-earning cash equivalents              $    494,186          $    190                 0.15  %       $    476,589          $    128                 0.11  %
 Investment securities                                 2,932                 9                 1.23  %                  -                 -                    -  %
Mortgage-backed securities                           421,358               951                 0.90  %            447,544               987                 0.88  %
 Loans (2)                                        12,582,758            90,119                 2.86  %         13,090,927           100,126                 3.06  %
 Federal Home Loan Bank stock                        162,783               821                 2.02  %            136,793               688                 2.01  %
Total interest-earning assets                     13,664,017            92,090                 2.70  %         14,151,853           101,929                 2.88  %
Noninterest-earning assets                           512,102                                                      525,312
Total assets                                    $ 14,176,119                                                 $ 14,677,165

Interest-bearing debts:

 Checking accounts                              $  1,151,600               265                 0.09  %       $  1,017,811               321                 0.13  %
 Savings accounts                                  1,835,361               557                 0.12  %          1,662,095               914                 0.22  %
 Certificates of deposit                           5,944,470            18,429                 1.24  %          6,493,523            26,461                 1.63  %
 Borrowed funds                                    3,175,158            14,995                 1.89  %          3,471,593            15,490                 1.78  %
Total interest-bearing liabilities                12,106,589            34,246                 1.13  %         12,645,022            43,186                 1.37  %
Noninterest-bearing liabilities                      312,104                                                      376,897
Total liabilities                                 12,418,693                                                   13,021,919
Shareholders' equity                               1,757,426                                                    1,655,246
Total liabilities and shareholders'
equity                                          $ 14,176,119                                                 $ 14,677,165
Net interest income                                                   $ 57,844                                                     $ 58,743
Interest rate spread (1)(3)                                                                    1.57  %                                                      1.51  %
Net interest-earning assets (4)                 $  1,557,428                                                 $  1,506,831
Net interest margin (1)(5)                                                1.69  %                                                      1.66  %
Average interest-earning assets to
average interest-bearing liabilities                  112.86  %                                                    111.92  %
Selected performance ratios:
Return on average assets (1)                                              0.46  %                                                      0.68  %
Return on average equity (1)                                              3.67  %                                                      6.04  %
Average equity to average assets                                         12.40  %                                                     11.28  %


_________________
(1)Annualized.
(2)Loans include both mortgage loans held for sale and loans held for
investment.
(3)Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing liabilities.
(4)Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(5)Net interest margin represents net interest income divided by total
interest-earning assets.
                                       56

————————————————– ——————————

Contents

General. Net income decreased $8.9 million to $16.1 million for the three months
ended December 31, 2021 compared to $25.0 million for the three months ended
December 31, 2020. The decrease in net income was primarily driven from a
decline in other income as a result of a decline in loan sale activity,
partially offset by a decrease in non-interest expense.
Interest and Dividend Income. Interest and dividend income decreased $9.8
million, or 10%, to $92.1 million during the three months ended December 31,
2021 compared to $101.9 million during the same three months in the prior year.
The decrease in interest and dividend income resulted mainly from a decrease in
interest income on loans, and to a lesser extent mortgage-backed securities,
partially offset by increases in income earned on FHLB stock and other
interest-bearing cash equivalents.
Interest income on loans decreased $10.0 million, or 10%, to $90.1 million for
the three months ended December 31, 2021 compared to $100.1 million for the
three months ended December 31, 2020. This decrease was attributed mainly to a
20 basis point decrease in the average yield on loans to 2.86% for the three
months ended December 31, 2021 from 3.06% for the same three months in the prior
fiscal year, as well as a $508.2 million decrease in the average balance of
loans to $12.58 billion for the current three months compared to $13.09 billion
for the prior fiscal year period as repayments and loan sales exceeded new loan
production. Overall, market interest rate increases during the past fiscal year
reduced the number of loan refinances. Although interest rates increased in
general, the average loan yield decreased during the quarter as higher yielding
loans from payoffs and refinances are replaced with loans yielding current
market interest rates. The yields on our home equity lending products and
adjustable rate mortgages feature interest rates that reset based on the prime
rate, which decreased 150 basis points in March 2020 and hasn't changed since.
Interest Expense. Interest expense decreased $9.0 million, or 21%, to $34.2
million during the current three months compared to $43.2 million during the
three months ended December 31, 2020. This decrease resulted from decreases in
interest expense on both deposits and borrowed funds.
Interest expense on CDs decreased $8.1 million, or 31%, to $18.4 million during
the three months ended December 31, 2021 compared to $26.5 million during the
three months ended December 31, 2020. The decrease was attributed primarily to a
39 basis point decrease in the average rate we paid on CDs to 1.24% during the
current three months from 1.63% during the same three months last fiscal year.
In addition, there was a $549.1 million, or 8%, decrease in the average balance
of CDs to $5.94 billion from $6.49 billion during the same three months of the
prior fiscal year. While interest expense on checking accounts remained
relatively unchanged, interest expense on savings accounts decreased $0.3
million to $0.6 million during the three months ended December 31, 2021,
compared to interest expense of $0.9 million for the same three-month period
during the prior fiscal year. Rates were adjusted downward for deposits in
response to changes in market interest rates as well as to changes in the rates
paid by our competitors.
Interest expense on borrowed funds, all from the FHLB of Cincinnati, as impacted
by related interest rate swap contracts, decreased $0.5 million, or 3%, to $15.0
million during the three months ended December 31, 2021 from $15.5 million
during the three months ended December 31, 2020. The decrease was primarily the
result of lower average balances of borrowed funds for the three months ended
December 31, 2021. The average balance of borrowed funds decreased $296.4
million, or 9%, to $3.18 billion during the current three months from $3.47
billion during the same three months of the prior fiscal year. Partially
offsetting the lower average balance was an 11 basis point increase in the
average rate paid for these funds to 1.89% from 1.78% for the three months ended
December 31, 2021 and December 31, 2020, respectively. Funding costs were
lowered through a reduction in the average balance of borrowed funds, including
the maturity of $100.0 million of 90-day advances and their related swap
contracts. During the quarter ended December 31, 2021, additional borrowings
included $40.0 million of overnight advances and $150.0 million of long term
advances, partially offset by other principal repayments. Refer to the Extending
the Duration of Funding Sources section of the Overview and Comparison of
Financial Condition for further discussion.
Net Interest Income. Net interest income decreased $0.9 million, or 2%, to $57.8
million during the three months ended December 31, 2021 from $58.7 million
during the three months ended December 31, 2020. Average interest-earning assets
decreased during the current three months by $487.8 million, or 3%, to $13.66
billion when compared to the three months ended December 31, 2020. The decrease
in average assets was attributed primarily to a $508.2 million decrease in the
average balance of our loans as well as a $26.1 million decrease in the average
balance of mortgage-backed security investments. The yield on average interest
earning assets decreased 18 basis points to 2.70% for the three months ended
December 31, 2021 from 2.88% for the three months ended December 31, 2020.
Average interest-bearing liabilities decreased $538.4 million to $12.11 billion
for the three months ended December 31, 2021 compared to $12.65 billion for the
three months ended December 31, 2020. Average interest-bearing liabilities
experienced a 24 basis point decrease in cost, which more than offset the 18
basis point decrease in our asset yield, as our interest rate spread increased 6
basis points to 1.57% compared to 1.51% during the same three months last fiscal
year. Our net interest margin was 1.69% for the current three months and 1.66%
for the same three months in the prior fiscal year period.
                                       57

————————————————– ——————————

Contents

Provision (Release) for Credit Losses. We recorded a release of the allowance
for credit losses on loans and off-balance sheet exposures of $2.0 million
during the three months ended December 31, 2021 and December 31, 2020. In the
current three months, we recorded net recoveries of $2.0 million, as compared to
net recoveries of $1.3 million for the three months ended December 31, 2020.
Releases from the allowance for credit losses during the current and prior year
reflected improvements in the economic metrics used to forecast losses for the
reasonable and supportable period and decreases in pandemic forbearance
balances, as well as adjusting for the level of net loan recoveries recorded
during the period. Gross loan charge-offs were $0.2 million for the three months
ended December 31, 2021 and $0.8 million for the three months ended December 31,
2020, while loan recoveries were $2.2 million in the current three months and
$2.1 million in the prior fiscal year period. As delinquencies in the portfolio
have been resolved through pay-off, short sale or foreclosure, or management
determines the collateral is not sufficient to satisfy the loan balance,
uncollected balances have been charged against the allowance for credit losses
previously provided. Refer to the Lending Activities section of the Overview and
Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS for further discussion.
Non-Interest Income. Non-interest income decreased $13.3 million, or 62%, to
$8.2 million during the three months ended December 31, 2021 compared to $21.5
million during the three months ended December 31, 2020. The decrease in
non-interest income was primarily due to a $14.2 million decrease in the net
gain on sale of loans, partially offset by a $1.3 million increase in income
from bank owned life insurance contracts during the most recent three months.
The decrease in net gain on the sale of loans was generally attributable to both
lower volumes of sales as well as less favorable market pricing on loan delivery
contracts settled during the current fiscal year. There were loan sales of
$102.0 million, including commitments to sell, during the three months ended
December 31, 2021, compared to loan sales of $293.5 million during the three
months ended December 31, 2020. The cash surrender value and death benefits from
bank owned life insurance increased $1.3 million to $2.9 million during the
three months ended December 31, 2021, from $1.6 million during the three months
ended December 31, 2020. The cash surrender value benefited from $70.0 million
of additional premiums placed during the quarter ended December 31, 2020.
Non-Interest Expense. Non-interest expense decreased $4.0 million, or 8%, to
$47.7 million during the three months ended December 31, 2021 compared to $51.7
million during the three months ended December 31, 2020. This decrease was the
combination of a $2.0 million decrease in other operating expenses, mainly
attributable to cost reductions related to appraisal expenses and third party
fees associated with home equity lines and loans, a $1.8 million decrease in
salaries and employee benefits, and to a lesser extent a decrease of $0.4
million in federal insurance premiums and assessments. The December 31, 2020
period included a one-time $1,500 after-tax bonus paid to each associate during
the first quarter of the fiscal year 2021 in recognition of special efforts made
during the pandemic crisis.
Income Tax Expense. The provision for income taxes decreased $1.3 million to
$4.2 million during the three months ended December 31, 2021 from $5.5 million
for the three months ended December 31, 2020. The provision for the current
three months included $3.7 million of federal income tax provision and $0.5
million of state income tax provision. The provision for the three months ended
December 31, 2020 included $5.3 million of federal income tax provision and $0.2
million of state income tax provision. Our effective federal tax rate was 18.7%
during the three months ended December 31, 2021 and 17.4% during the three
months ended December 31, 2020.

Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a
short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, advances from the FHLB of Cincinnati, borrowings from the
FRB-Cleveland Discount Window, overnight Fed Funds through various arrangements
with other institutions, proceeds from brokered CDs transactions, principal
repayments and maturities of securities, and sales of loans.
In addition to the primary sources of funds described above, we have the ability
to obtain funds through the use of collateralized borrowings in the wholesale
markets and from sales of securities. Also, debt issuance by the Company and
access to the equity capital markets via a supplemental minority stock offering
or a full conversion (second-step) transaction remain as other potential sources
of liquidity, although these channels generally require up to nine months of
lead time.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by interest rates, economic conditions and competition. The
Association's Asset/Liability Management Committee is responsible for
establishing and monitoring our liquidity targets and strategies in order to
ensure that sufficient liquidity exists for meeting the borrowing needs and
deposit withdrawals of our customers as well as unanticipated contingencies. We
generally seek to maintain a minimum liquidity ratio of 5% (which we compute as
the sum of cash and cash equivalents plus unencumbered investment securities for
which ready markets exist, divided by total assets). For the three months ended
December 31, 2021, our liquidity ratio averaged 6.24%. We believe that we had
sufficient sources of liquidity to satisfy our short- and long-term liquidity
needs as of December 31, 2021.
                                       58

————————————————– ——————————

Contents

We regularly adjust our investments in liquid assets based upon our assessment
of expected loan demand, expected deposit flows, yields available on
interest-earning deposits and securities, scheduled liability maturities and the
objectives of our asset/liability management program. Excess liquid assets are
generally invested in interest-earning deposits and short- and intermediate-term
securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets
are dependent on our operating, financing, lending and investing activities
during any given period. At December 31, 2021, cash and cash equivalents totaled
$408.0 million, which represented a decrease of 16.4% from $488.3 million at
September 30, 2021.
Investment securities classified as available-for-sale, which provide additional
sources of liquidity, totaled $423.8 million at December 31, 2021.
During the three-month period ended December 31, 2021, loan sales totaled $102.0
million, which includes sales to Fannie Mae, consisting of $75.0 million of
long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans and
$27.0 million of loans that qualified under Fannie Mae's Home Ready initiative.
Loans originated under the Home Ready initiative are classified as "held for
sale" at origination. Loans originated under non-Home Ready, Fannie Mae
compliant procedures are classified as "held for investment" until they are
specifically identified for sale. At December 31, 2021, $38.1 million of
long-term, fixed-rate residential first mortgage loans were classified as "held
for sale".
Our cash flows are derived from operating activities, investing activities and
financing activities as reported in our CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) included in the UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
At December 31, 2021, we had $879.4 million in outstanding commitments to
originate loans. In addition to commitments to originate loans, we had $3.40
billion in unfunded home equity lines of credit to borrowers. CDs due within one
year of December 31, 2021 totaled $3.46 billion, or 38.8% of total deposits. If
these deposits do not remain with us, we will be required to seek other sources
of funds, including loan sales, sales of investment securities, other deposit
products, including new CDs, brokered CDs, FHLB advances, borrowings from the
FRB-Cleveland Discount Window or other collateralized borrowings. Depending on
market conditions, we may be required to pay higher rates on such deposits or
other borrowings than we currently pay on the CDs due on or before December 31,
2022. We believe, however, based on past experience, that a significant portion
of such deposits will remain with us. Generally, we have the ability to attract
and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating residential mortgage loans,
home equity loans and lines of credit and purchasing investments. During the
three months ended December 31, 2021, we originated $877.1 million of
residential mortgage loans, and $499.7 million of commitments for home equity
loans and lines of credit, while during the three months ended December 31,
2020, we originated $1.12 billion of residential mortgage loans and $306.1
million of commitments for home equity loans and lines of credit. We purchased
$65.3 million of securities during the three months ended December 31, 2021, and
$93.0 million during the three months ended December 31, 2020.
Financing activities consist primarily of changes in deposit accounts, changes
in the balances of principal and interest owed on loans serviced for others,
FHLB advances, including any collateral requirements related to interest rate
swap agreements and borrowings from the FRB-Cleveland Discount Window. We
experienced a net decrease in total deposits of $60.3 million during the three
months ended December 31, 2021, which reflected the active management of the
offered rates on maturing CDs, compared to a net decrease of $35.0 million
during the three months ended December 31, 2020. Deposit flows are affected by
the overall level of interest rates, the interest rates and products offered by
us and our local competitors, and by other factors. During the three months
ended December 31, 2021, there was a $4.9 million increase in the balance of
brokered CDs (exclusive of acquisition costs and subsequent amortization), which
had a balance of $496.9 million at December 31, 2021. At December 31, 2020 the
balance of brokered CDs was $530.4 million. Principal and interest owed on loans
serviced for others experienced a net decrease of $5.8 million to $35.7 million
during the three months ended December 31, 2021 compared to a net increase of
$5.0 million to $50.9 million during the three months ended December 31, 2020.
During the three months ended December 31, 2021 we increased our advances from
the FHLB of Cincinnati by $88.8 million as we funded: new loan originations, our
capital initiatives, and actively managed our liquidity ratio. During the three
months ended December 31, 2020, our advances from the FHLB of Cincinnati
decreased by $76.7 million.
Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the FHLB of Cincinnati and the FRB-Cleveland
Discount Window, each of which provides an additional source of funds. Also, in
evaluating funding alternatives, we may participate in the brokered CD market.
At December 31, 2021 we had $3.18 billion of FHLB of Cincinnati advances and no
outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at
December 31, 2021, we had $496.9 million of brokered CDs. During the three
months ended December 31, 2021, we had average outstanding advances from the
FHLB of
                                       59

————————————————– ——————————

Contents

Cincinnati of $3.18 billion as compared to average outstanding advances of $3.47
billion during the three months ended December 31, 2020. Refer to the Extending
the Duration of Funding Sources section of the Overview and the General section
of Item 3. Quantitative and Qualitative Disclosures About Market Risk for
further discussion. At December 31, 2021, we had the ability to borrow a maximum
of $7.49 billion from the FHLB of Cincinnati and $224.2 million from the
FRB-Cleveland Discount Window. From the perspective of collateral value securing
FHLB of Cincinnati advances, our capacity limit for collateral based additional
borrowings beyond the outstanding balance at December 31, 2021 was $4.31
billion, subject to satisfaction of the FHLB of Cincinnati common stock
ownership requirement.

The Association and the Company are subject to various regulatory capital
requirements, including a risk-based capital measure. The Basel III capital
framework for U.S. banking organizations ("Basel III Rules") includes both a
revised definition of capital and guidelines for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad
risk categories.

In 2019, a final rule adopted by the federal banking agencies provided banking
organizations with the option to phase in, over a three-year period, the adverse
day-one regulatory capital effects of the adoption of the CECL accounting
standard. In 2020, as part of its response to the impact of COVID-19, U.S.
federal banking regulatory agencies issued a final rule which provides banking
organizations that implement CECL during the 2020 calendar year the option to
delay for two years an estimate of CECL's effect on regulatory capital, relative
to the incurred loss methodology's effect on regulatory capital, followed by a
three-year transition period, which the Association and Company have adopted.
During the two-year delay, the Association and Company will add back to common
equity tier 1 capital ("CET1") 100% of the initial adoption impact of CECL plus
25% of the cumulative quarterly changes in the allowance for credit losses.
After two years the quarterly transitional amounts along with the initial
adoption impact of CECL will be phased out of CET1 capital over the three-year
period.

The Association is subject to the "capital conservation buffer" requirement
level of 2.5%. The requirement limits capital distributions and certain
discretionary bonus payments to management if the institution does not hold a
"capital conservation buffer" in addition to the minimum capital requirements.
At December 31, 2021, the Association exceeded the regulatory requirement for
the "capital conservation buffer".
As of December 31, 2021, the Association exceeded all regulatory requirements to
be considered "Well Capitalized" as presented in the table below (dollar amounts
in thousands).
                                                                          Actual                             Well Capitalized Levels
                                                                Amount                Ratio                Amount                Ratio
Total Capital to Risk-Weighted Assets                       $ 1,591,967                20.29  %        $   784,616                10.00  %
Tier 1 (Leverage) Capital to Net Average Assets               1,547,930                10.93  %            708,267                 5.00  %
Tier 1 Capital to Risk-Weighted Assets                        1,547,930                19.73  %            627,693                 8.00  %

Common Equity Tier 1 capital to risk-weighted assets 1,547,930

            19.73  %            510,000                 6.50  %


The Company’s capital ratios at December 31, 2021 are presented in the table below (amounts in thousands of dollars).

Real

                                                                  Amount          Ratio
     Total Capital to Risk-Weighted Assets                     $ 1,846,867       23.53  %
     Tier 1 (Leverage) Capital to Net Average Assets             1,802,830       12.72  %
     Tier 1 Capital to Risk-Weighted Assets                      1,802,830       22.97  %
     Common Equity Tier 1 Capital to Risk-Weighted Assets        1,802,830       22.97  %


In addition to the operational liquidity considerations described above, which
are primarily those of the Association, the Company, as a separate legal entity,
also monitors and manages its own, parent company-only liquidity, which provides
the source of funds necessary to support all of the parent company's stand-alone
operations, including its capital distribution strategies which encompass its
share repurchase and dividend payment programs. The Company's primary source of
liquidity is dividends received from the Association. The amount of dividends
that the Association may declare and pay to the Company in any calendar year,
without the receipt of prior approval from the OCC but with prior notice to the
FRB-Cleveland, cannot exceed net income for the current calendar year-to-date
period plus retained net income (as defined) for the preceding two calendar
years, reduced by prior dividend payments made during those periods. In December
2021, the Company received a $56.0 million cash dividend from the Association.
Because of its intercompany nature, this dividend payment had no impact on the
Company's capital ratios or its CONSOLIDATED STATEMENTS OF CONDITION but reduced
the Association's reported
                                       60

————————————————– ——————————

Contents

capital ratios. At December 31, 2021, the Company had, in the form of cash and a
demand loan from the Association, $233.6 million of funds readily available to
support its stand-alone operations.
The Company's eighth stock repurchase program, which authorized the repurchase
of up to 10,000,000 shares of the Company's outstanding common stock was
approved by the Board of Directors on October 27, 2016 and repurchases began on
January 6, 2017. There were 4,124,921 shares repurchased under that program
between its start date and December 31, 2021. During the three months ended
December 31, 2021, the Company repurchased $0.3 million of its common stock. The
share repurchase plan was suspended during the fiscal year ended September 30,
2020 as part of the response to COVID-19, but was reinstated in February 2021.
On July 13, 2021, Third Federal Savings, MHC received the approval of its
members with respect to the waiver of dividends on the Company's common stock
the MHC owns, up to a total of $1.13 per share, to be declared on the Company's
common stock during the 12 months subsequent to the members' approval (i.e.,
through July 13, 2022). The members approved the waiver by casting 60% of the
eligible votes, with 97% of the votes cast, or 59% of the total eligible votes,
voting in favor of the waiver. Third Federal Savings, MHC is the 81% majority
shareholder of the Company. Following the receipt of the members' approval at
the July 13, 2021 meeting, Third Federal Savings, MHC filed a notice with, and
received the non-objection from the FRB-Cleveland for the proposed dividend
waivers. Third Federal Savings, MHC waived its right to receive $0.2825 per
share dividend payments on September 21, 2021 and December 14, 2021.
The payment of dividends, support of asset growth and strategic stock
repurchases are planned to continue in the future as the focus for future
capital deployment activities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General. The majority of our assets and liabilities are monetary in nature.
Consequently, our most significant form of market risk has historically been
interest rate risk. In general, our assets, consisting primarily of mortgage
loans, have longer maturities than our liabilities, consisting primarily of
deposits and advances from the FHLB of Cincinnati. As a result, a fundamental
component of our business strategy is to manage interest rate risk and limit the
exposure of our net interest income to changes in market interest rates.
Accordingly, our Board of Directors has established risk parameter limits deemed
appropriate given our business strategy, operating environment, capital,
liquidity and performance objectives. Additionally, our Board of Directors has
authorized the formation of an Asset/Liability Management Committee comprised of
key operating personnel, which is responsible for managing this risk in a matter
that is consistent with the guidelines and risk limits approved by the Board of
Directors. Further, the Board has established the Directors Risk Committee,
which, among other responsibilities, conducts regular oversight and review of
the guidelines, policies and deliberations of the Asset/Liability Management
Committee. We have sought to manage our interest rate risk in order to control
the exposure of our earnings and capital to changes in interest rates. As part
of our ongoing asset-liability management, we use the following strategies to
manage our interest rate risk:
(i)marketing adjustable-rate and shorter-maturity (10-year, fixed-rate mortgage)
loan products;
(ii)lengthening the weighted average remaining term of major funding sources,
primarily by offering attractive interest rates on deposit products,
particularly longer-term certificates of deposit, and through the use of
longer-term advances from the FHLB of Cincinnati (or shorter-term advances
converted to longer-term durations via the use of interest rate exchange
contracts that qualify as cash flow hedges) and longer-term brokered
certificates of deposit;
(iii)investing in shorter- to medium-term investments and mortgage-backed
securities;
(iv)maintaining the levels of capital required for "well capitalized"
designation; and
(v)securitizing and/or selling long-term, fixed-rate residential real estate
mortgage loans.
During the three months ended December 31, 2021, $102.0 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. At
December 31, 2021, $38.1 million of agency-compliant, long-term, fixed-rate
residential first mortgage loans were classified as "held for sale." Of the
agency-compliant loan sales during the three months ended December 31, 2021,
$27.0 million were sold under Fannie Mae's Home Ready program, and $75.0 million
were sold to Fannie Mae, as described in the next paragraph.
First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15
years or more, and Home Ready) are originated under Fannie Mae procedures and
are eligible for sale to Fannie Mae either as whole loans or within
mortgage-backed securities. We expect that certain loan types (i.e. our Smart
Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year
fixed-rate loans) will continue to be originated under our legacy procedures,
which are not eligible for sale to Fannie Mae. For loans that are not originated
under Fannie Mae procedures, the Association's ability to reduce interest rate
risk via loan sales is limited to those loans that have established payment
histories, strong borrower credit profiles and are supported
                                       61

————————————————– ——————————

Contents

by adequate collateral values that meet the requirements of the FHLB's Mortgage
Purchase Program or of private third-party investors.
The Association actively markets home equity lines of credit, an adjustable-rate
mortgage loan product and a 10-year fixed-rate mortgage loan product. Each of
these products provides us with improved interest rate risk characteristics when
compared to longer-term, fixed-rate mortgage loans. Shortening the average
maturity of our interest-earning assets by increasing our investments in
shorter-term loans and investments, as well as loans and investments with
variable rates of interest, helps 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.
The Association evaluates funding source alternatives as it seeks to extend its
liability duration. Extended duration funding sources that are currently
considered include: retail certificates of deposit (which, subject to a fee,
generally provide depositors with an early withdrawal option, but do not require
pledged collateral); brokered certificates of deposit (which generally do not
provide an early withdrawal option and do not require collateral pledges);
collateralized borrowings which are not subject to creditor call options
(generally advances from the FHLB of Cincinnati); and interest rate exchange
contracts ("swaps") which are subject to collateral pledges and which require
specific structural features to qualify for hedge accounting treatment (hedge
accounting treatment directs that periodic mark-to-market adjustments be
recorded in other comprehensive income (loss) in the equity section of the
balance sheet rather than being included in operating results of the income
statement). The Association's intent is that any swap to which it may be a party
will qualify for hedge accounting treatment. The Association attempts to be
opportunistic in the timing of its funding duration deliberations and when
evaluating alternative funding sources, compares effective interest rates, early
withdrawal/call options and collateral requirements.
The Association is a party to interest rate swap agreements. Each of the
Association's swap agreements is registered on the Chicago Mercantile Exchange
and involves the exchange of interest payment amounts based on a notional
principal balance. No exchange of principal amounts occur and the notional
principal amount does not appear on our balance sheet. The Association uses
swaps to extend the duration of its funding sources. In each of the
Association's agreements, interest paid is based on a fixed rate of interest
throughout the term of each agreement while interest received is based on an
interest rate that resets at 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. The
notional amount of the Association's swap portfolio at December 31, 2021 was
$2.35 billion. The swap portfolio's weighted average fixed pay rate was 1.89%
and the weighted average remaining term was 2.4 years. Concurrent with the
execution of each swap, the Association entered into a short-term borrowing from
the FHLB of Cincinnati 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 the Company's variable rate borrowings from the FHLB
of Cincinnati.
Economic Value of Equity. Using customized modeling software, the Association
prepares periodic estimates of the amounts by which the net present value of its
cash flows from assets, liabilities and off-balance sheet items (the
institution's economic value of equity or EVE) would change in the event of a
range of assumed changes in market interest rates. The simulation model uses a
discounted cash flow analysis and an option-based pricing approach in measuring
the interest rate sensitivity of EVE. The model estimates the economic value of
each type of asset, liability and off-balance sheet contract under the
assumption that instantaneous changes (measured in basis points) occur at all
maturities along the United States Treasury yield curve and other relevant
market interest rates. A basis point equals one, one-hundredth of one percent,
and 100 basis points equals one percent. An increase in interest rates from 2%
to 3% would mean, for example, a 100 basis point increase in the "Change in
Interest Rates" column below. The model is tailored specifically to our
organization, which, we believe, improves its predictive accuracy. The following
table presents the estimated changes in the Association's EVE at December 31,
2021 that would result from the indicated instantaneous changes in the United
States Treasury yield curve and other relevant market interest rates.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results.
                                       62

————————————————– ——————————

  Table of Contents

                                                                                                                                                                                            EVE as a Percentage  of
                                                                                                                                                                                          Present Value of Assets (3)
                                                                                                                                                                                                                           Increase
Change in                                                                                            Estimated Increase (Decrease) in                                                                                     (Decrease)
Interest Rates                                            Estimated                                                 EVE                                                                EVE                                  (basis
(basis points) (1)                                         EVE (2)                                  Amount                                      Percent                             Ratio  (4)                             points)
                                                                                 (Dollars in thousands)
+300                                                   $  1,400,642          $                     (371,079)                                         (20.94) %                                       10.58  %                   (181)
+200                                                      1,590,418                                (181,303)                                         (10.23) %                                       11.67  %                    (72)
+100                                                      1,721,429                                 (50,292)                                          (2.84) %                                       12.31  %                     (8)
 0                                                        1,771,721                                       -                                               -  %                                       12.39  %                      -
-100                                                      1,747,318                                 (24,403)                                          (1.38) %                                       12.05  %                    (34)


_________________
(1)Assumes an instantaneous uniform change in interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming
cash flows on interest-earning assets.
(4)EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at December 31, 2021, in the event of an increase
of 200 basis points in all interest rates, the Association would experience a
10.23% decrease in EVE. In the event of a 100 basis point decrease in interest
rates, the Association would experience a 1.38% decrease in EVE.
The following table is based on the calculations contained in the previous
table, and sets forth the change in the EVE at a +200 basis point rate of shock
at December 31, 2021, with comparative information as of September 30, 2021. By
regulation, the Association must measure and manage its interest rate risk for
interest rate shocks relative to established risk tolerances in EVE.
                                                                      At December 31,          At September 30,
Risk Measure (+200 Basis Points Rate Shock)                                 2021                     2021
Pre-Shock EVE Ratio                                                            12.39  %                  12.97  %
Post-Shock EVE Ratio                                                           11.67  %                  12.46  %
Sensitivity Measure in basis points                                              (72)                      (51)
Percentage Change in EVE                                                      (10.23) %                  (8.21) %


Certain shortcomings are inherent in the methodologies used in measuring
interest rate risk through changes in EVE. Modeling changes in EVE require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the EVE tables presented above assume:
•no new growth or business volumes;
•that the composition of our interest-sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured,
except for reductions to reflect mortgage loan principal repayments along with
modeled prepayments and defaults; and
•that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration or repricing of specific assets and
liabilities.
Accordingly, although the EVE tables provide an indication of our interest rate
risk exposure as of the indicated dates, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on our EVE and will differ from actual results. In addition to
our core business activities, which sought to originate Smart Rate (adjustable)
loans, home equity lines of credit (adjustable) and 10-year fixed-rate loans
funded by borrowings from the FHLB and intermediate term CDs (including brokered
CDs), and which are intended to have a favorable impact on our IRR profile, the
impact of several other items and events resulted in the 2.02% deterioration in
the Percentage Change in EVE measure at December 31, 2021 when compared to the
measure at September 30, 2021. Factors contributing to this deterioration
included changes in market rates, capital actions by the Association and changes
due to business activity. Movement in market interest rates included an increase
of 46 basis points for the two-year term, an increase of 30 basis points for the
five-year term and an increase of two basis points for the ten-year term.
Negatively impacting the Percentage Change in EVE was a $56.0 million cash
dividend that the Association paid to the Company. Because of its intercompany
nature, this payment had no impact on the Company's capital position, or the
Company's overall IRR profile, but reduced the Association's regulatory capital
and regulatory capital ratios and negatively impacted the Association's
Percentage Change in EVE by approximately 0.30%. While our core business
activities, as described at the beginning of this paragraph, are generally
intended to have a positive impact on
                                       63

————————————————– ——————————

Contents

our IRR profile, the actual impact is determined by a number of factors,
including the pace of mortgage asset additions to our balance sheet (including
consideration of outstanding commitments to originate those assets) in
comparison to the pace of the addition of duration extending funding sources.
The IRR simulation results presented above were in line with management's
expectations and were within the risk limits established by our Board of
Directors.
Our simulation model possesses random patterning capabilities and accommodates
extensive regression analytics applicable to the prepayment and decay profiles
of our borrower and depositor portfolios. The model facilitates the generation
of alternative modeling scenarios and provides us with timely decision making
data that is integral to our IRR management processes. Modeling our IRR profile
and measuring our IRR exposure are processes that are subject to continuous
revision, refinement, modification, enhancement, back testing and validation. We
continually evaluate, challenge and update the methodology and assumptions used
in our IRR model, including behavioral equations that have been derived based on
third-party studies of our customer historical performance patterns. Changes to
the methodology and/or assumptions used in the model will result in reported IRR
profiles and reported IRR exposures that will be different, and perhaps
significantly, from the results reported above.
Earnings at Risk. In addition to EVE calculations, we use our simulation model
to analyze the sensitivity of our net interest income to changes in interest
rates (the institution's EaR). Net interest income is the difference between the
interest income that we earn on our interest-earning assets, such as loans and
securities, and the interest that we pay on our interest-bearing liabilities,
such as deposits and borrowings. In our model, we estimate what our net interest
income would be for prospective 12 and 24 month periods using customized (based
on our portfolio characteristics) assumptions with respect to loan prepayment
rates, default rates and deposit decay rates, and the implied forward yield
curve as of the market date for assumptions as to projected interest rates. We
then calculate what the estimated net interest income would be for the same
period under numerous interest rate scenarios. The simulation process is subject
to continual enhancement, modification, refinement and adaptation, in order that
it might most accurately reflect our current circumstances, factors and
expectations. As of December 31, 2021, we estimated that our EaR for the 12
months ending December 31, 2022 would increase by 3.04% in the event that market
interest rates used in the simulation were adjusted in equal monthly amounts
(termed a "ramped" format) during the 12 month measurement period to an
aggregate increase in 200 basis points. The Association uses the "ramped"
assumption in preparing the EaR simulation estimates for use in its public
disclosures. In addition to conforming to predominate industry practice, the
Association also believes that the ramped assumption provides a more
probable/plausible scenario for net interest income simulations than
instantaneous shocks which provide a theoretical analysis but a much less
credible economic scenario. The Association continues to calculate instantaneous
scenarios, and as of December 31, 2021, we estimated that our EaR for the 12
months ending December 31, 2022, would increase by 1.47% in the event of an
instantaneous 200 basis point increase in market interest rates.
Certain shortcomings are also inherent in the methodologies used in determining
interest rate risk through changes in EaR. Modeling changes in EaR require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the interest rate risk information presented above assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although interest rate risk calculations provide an
indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on our net interest income and
will differ from actual results. In addition to the preparation of computations
as described above, we also formulate simulations based on a variety of
non-linear changes in interest rates and a variety of non-constant balance sheet
composition scenarios.
Other Considerations. The EVE and EaR analyses are similar in that they both
start with the same month end balance sheet amounts, weighted average coupon and
maturity. The underlying prepayment, decay and default assumptions are also the
same and they both start with the same month end "markets" (Treasury and FHLB
yield curves, etc.). From that similar starting point, the models follow
divergent paths. EVE is a stochastic model using 150 different interest rate
paths to compute market value at the account level for each of the categories on
the balance sheet whereas EaR uses the implied forward curve to compute interest
income/expense at the account level for each of the categories on the balance
sheet.
EVE is considered as a point in time calculation with a "liquidation" view of
the Association where all the cash flows (including interest, principal and
prepayments) are modeled and discounted using discount factors derived from the
current market yield curves. It provides a long term view and helps to define
changes in equity and duration as a result of changes in interest rates. On the
other hand, EaR is based on balance sheet projections going one year and two
years forward and assumes new business volume and pricing to calculate net
interest income under different interest rate environments. EaR is calculated to
determine the sensitivity of net interest income under different interest rate
scenarios. With each of these models, specific policy limits have been
established that are compared with the actual month end results. These limits
have been approved by the Association's Board of Directors and are used as
benchmarks to evaluate and moderate interest rate risk. In the event that there
is a breach of policy limits that extends beyond two consecutive quarter end
measurement periods, management is responsible
                                       64

————————————————– ——————————

Contents

for taking such action, similar to those described under the preceding heading
of General, as may be necessary in order to return the Association's interest
rate risk profile to a position that is in compliance with the policy. At
December 31, 2021, the IRR profile as disclosed above was within our internal
limits.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of the Company's management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Act is accumulated
and communicated to the issuer's management, including its principal executive
and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based upon
that evaluation, our principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms.

Changes in internal control over financial reporting

No changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

© Edgar Online, source Previews

Comments are closed.