TFS Financial CORP - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________

FORM 10-Q

________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 001-33390

________________________________________

TFS FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

________________________________________



United States of America		52-2054948
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

7007 Broadway Avenue Cleveland, Ohio		44105
(Address of Principal Executive Offices)		(Zip Code)

(216) 441-6000

Registrant’s telephone number, including area code:

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

________________________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x		Accelerated filer	¨

Non-accelerated filer	¨	(do not check if a smaller reporting company)	Smaller Reporting Company	¨

Emerging Growth Company	o

If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.

As of May 4, 2018, there were 280,545,644 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 81.0% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

Table of Contents

TFS Financial Corporation

INDEX



		Page

	Glossary of Terms	3

PART l – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Statements of Condition
	March 31, 2018 and September 30, 2017	4

	Consolidated Statements of Income
	Three and Six Months Ended March 31, 2018 and 2017	5

	Consolidated Statements of Comprehensive Income
	Three and Six Months Ended March 31, 2018 and 2017	6

	Consolidated Statements of Shareholders’ Equity
	Six Months Ended March 31, 2018 and 2017	7

	Consolidated Statements of Cash Flows
	Six Months Ended March 31, 2018 and 2017	8

	Notes to Unaudited Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	67

Item 4.	Controls and Procedures	70

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	71

Item 1A.	Risk Factors	71

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults Upon Senior Securities	72

Item 4.	Mine Safety Disclosures	72

Item 5.	Other Information	72

Item 6.	Exhibits	72

SIGNATURES		73

Table of Contents

GLOSSARY OF TERMS

TFS Financial Corporation provides the following list of acronyms and defined terms as a tool for the reader. The acronyms and defined terms identified below are used throughout the document.



ACT: Tax Cuts and Jobs Act	FRB-Cleveland: Federal Reserve Bank of Cleveland
AOCI: Accumulated Other Comprehensive Income	Freddie Mac: Federal Home Loan Mortgage Association
ARM: Adjustable Rate Mortgage	FRS: Board of Governors of the Federal Reserve System
ASC: Accounting Standards Codification	GAAP: Generally Accepted Accounting Principles
ASU: Accounting Standards Update	Ginnie Mae: Government National Mortgage Association
Association: Third Federal Savings and Loan	GVA: General Valuation Allowances
Association of Cleveland	HARP: Home Affordable Refinance Program
BOLI: Bank Owned Life Insurance	HPI: Home Price Index
CDs: Certificates of Deposit	IRR: Interest Rate Risk
CFPB: Consumer Financial Protection Bureau	IRS: Internal Revenue Service
CLTV: Combined Loan-to-Value	IVA: Individual Valuation Allowance
Company: TFS Financial Corporation and its	LIHTC: Low Income Housing Tax Credit
subsidiaries	LIP: Loans-in-Process
DFA: Dodd-Frank Wall Street Reform and Consumer	LTV: Loan-to-Value
Protection Act	MGIC: Mortgage Guaranty Insurance Corporation
EaR: Earnings at Risk	OCC: Office of the Comptroller of the Currency
EPS: Earnings per Share	OCI: Other Comprehensive Income
ESOP: Third Federal Employee (Associate) Stock	OTS: Office of Thrift Supervision
Ownership Plan	PMI: Private Mortgage Insurance
EVE: Economic Value of Equity	PMIC: PMI Mortgage Insurance Co.
Fannie Mae: Federal National Mortgage Association	QTL: Qualified Thrift Lender
FASB: Financial Accounting Standards Board	REMICs: Real Estate Mortgage Investment Conduits
FDIC: Federal Deposit Insurance Corporation	SEC: United States Securities and Exchange Commission
FHFA: Federal Housing Finance Agency	TDR: Troubled Debt Restructuring
FHLB: Federal Home Loan Bank	Third Federal Savings, MHC: Third Federal Savings
FICO: Financing Corporation	and Loan Association of Cleveland, MHC

Table of Contents

Item 1. Financial Statements

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except share data)



	March 31, 2018			September 30, 2017
ASSETS
Cash and due from banks	$	33,822		$	35,243
Interest-earning cash equivalents	237,267			232,975
Cash and cash equivalents	271,089			268,218
Investment securities available for sale (amortized cost $558,224 and $541,964, respectively)	545,001			537,479
Mortgage loans held for sale, at lower of cost or market ($469 and $0 measured at fair value, respectively)	469			351
Loans held for investment, net:
Mortgage loans	12,688,172			12,434,339
Other consumer loans	2,812			3,050
Deferred loan expenses, net	35,023			30,865
Allowance for loan losses	(43,106		)	(48,948		)
Loans, net	12,682,901			12,419,306
Mortgage loan servicing rights, net	8,034			8,375
Federal Home Loan Bank stock, at cost	93,544			89,990
Real estate owned	3,668			5,521
Premises, equipment, and software, net	63,651			60,875
Accrued interest receivable	36,439			35,479
Bank owned life insurance contracts	208,935			205,883
Other assets	42,297			61,086
TOTAL ASSETS	$	13,956,028		$	13,692,563
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,350,422		$	8,151,625
Borrowed funds	3,717,064			3,671,377
Borrowers’ advances for insurance and taxes	88,158			100,446
Principal, interest, and related escrow owed on loans serviced	31,922			35,766
Accrued expenses and other liabilities	38,667			43,390
Total liabilities	12,226,233			12,002,604
Commitments and contingent liabilities
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 280,644,630 and 281,291,750 outstanding at March 31, 2018 and September 30, 2017, respectively	3,323			3,323
Paid-in capital	1,723,254			1,722,672
Treasury stock, at cost; 51,674,120 and 51,027,000 shares at March 31, 2018 and September 30, 2017, respectively	(746,645		)	(735,530		)
Unallocated ESOP shares	(50,917		)	(53,084		)
Retained earnings—substantially restricted	786,167			760,070
Accumulated other comprehensive income (loss)	14,613			(7,492		)
Total shareholders’ equity	1,729,795			1,689,959
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	13,956,028		$	13,692,563

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except share and per share data)



	For the Three Months Ended						For the Six Months Ended
	March 31,						March 31,
	2018			2017			2018			2017
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	105,239		$	97,676		$	207,865		$	193,056
Investment securities available for sale	2,759			2,198			5,348			4,051
Other interest and dividend earning assets	2,182			1,209			4,196			2,190
Total interest and dividend income	110,180			101,083			217,409			199,297
INTEREST EXPENSE:
Deposits	23,630			21,320			46,624			43,377
Borrowed funds	14,852			9,477			29,099			17,404
Total interest expense	38,482			30,797			75,723			60,781
NET INTEREST INCOME	71,698			70,286			141,686			138,516
PROVISION (CREDIT) FOR LOAN LOSSES	(4,000		)	(6,000		)	(7,000		)	(6,000		)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES	75,698			76,286			148,686			144,516
NON-INTEREST INCOME:
Fees and service charges, net of amortization	1,799			1,673			3,559			3,449
Net gain on the sale of loans	65			330			543			1,213
Increase in and death benefits from bank owned life insurance contracts	1,509			1,559			3,063			3,163
Other	1,243			990			2,295			2,095
Total non-interest income	4,616			4,552			9,460			9,920
NON-INTEREST EXPENSE:
Salaries and employee benefits	26,057			23,945			49,310			47,700
Marketing services	6,016			4,791			11,054			9,326
Office property, equipment and software	6,728			6,111			13,379			11,984
Federal insurance premium and assessments	3,008			2,664			5,726			4,936
State franchise tax	1,284			1,317			2,410			2,671
Real estate owned expense, net	536			829			1,119			1,880
Other expenses	6,059			5,637			12,466			12,059
Total non-interest expense	49,688			45,294			95,464			90,556
INCOME BEFORE INCOME TAXES	30,626			35,544			62,682			63,880
INCOME TAX EXPENSE	7,312			12,083			19,755			20,809
NET INCOME	$	23,314		$	23,461		$	42,927		$	43,071
Earnings per share—basic and diluted	$	0.08		$	0.08		$	0.15		$	0.15
Weighted average shares outstanding
Basic	275,656,445			277,787,284			275,737,265			277,857,265
Diluted	277,256,178			279,911,556			277,434,648			280,091,879

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)



	For the Three Months Ended					For the Six Months Ended
	March 31,					March 31,
	2018			2017		2018			2017
Net income	$	23,314		$	23,461	$	42,927		$	43,071
Other comprehensive income (loss), net of tax:
Net change in unrealized loss on securities available for sale	(3,262		)	692		(6,259		)	(5,335		)
Net change in cash flow hedges	19,552			257		27,812			12,877
Change in pension obligation	317			346		594			691
Total other comprehensive income	16,607			1,295		22,147			8,233
Total comprehensive income	$	39,921		$	24,756	$	65,074		$	51,304

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

(In thousands, except share and per share data)



	Common stock		Paid-in capital			Treasury stock			Unallocated common stock held by ESOP			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders’ equity
Balance at September 30, 2016	$	3,323	$	1,716,818		$	(681,569	)	$	(57,418	)	$	698,930		$	(19,626	)	$	1,660,458
Net income	—		—			—			—			43,071			—			43,071
Other comprehensive income, net of tax	—		—			—			—			—			8,233			8,233
ESOP shares allocated or committed to be released	—		1,729			—			2,167			—			—			3,896
Compensation costs for stock-based plans	—		2,048			—			—			(29		)	—			2,019
Purchase of treasury stock (1,357,210 shares)	—		—			(23,954		)	—			—			—			(23,954		)
Treasury stock allocated to restricted stock plan	—		(877		)	(1,547		)	—			—			—			(2,424		)
Dividends paid to common shareholders ($0.25 per common share)	—		—			—			—			(12,909		)	—			(12,909		)
Balance at March 31, 2017	$	3,323	$	1,719,718		$	(707,070	)	$	(55,251	)	$	729,063		$	(11,393	)	$	1,678,390

Balance at September 30, 2017	$	3,323	$	1,722,672		$	(735,530	)	$	(53,084	)	$	760,070		$	(7,492	)	$	1,689,959
Net income	—		—			—			—			42,927			—			42,927
Other comprehensive income, net of tax	—		—			—			—			42			22,105			22,147
ESOP shares allocated or committed to be released	—		1,106			—			2,167			—			—			3,273
Compensation costs for stock-based plans	—		2,525			—			—			—			—			2,525
Purchase of treasury stock (858,000 shares)	—		—			(13,034		)	—			—			—			(13,034		)
Treasury stock allocated to restricted stock plan	—		(3,049		)	1,919			—			—			—			(1,130		)
Dividends paid to common shareholders ($0.34 per common share)	—		—			—			—			(16,872		)	—			(16,872		)
Balance at March 31, 2018	$	3,323	$	1,723,254		$	(746,645	)	$	(50,917	)	$	786,167		$	14,613		$	1,729,795

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)



	For the Six Months Ended
	March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	42,927		$	43,071
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	5,798			5,915
Depreciation and amortization	12,661			11,093
Deferred income taxes	4,604			(10		)
Provision (credit) for loan losses	(7,000		)	(6,000		)
Net gain on the sale of loans	(543		)	(1,213		)
Other net losses	409			425
Principal repayments on and proceeds from sales of loans held for sale	7,919			14,824
Loans originated for sale	(7,884		)	(14,623		)
Increase in bank owned life insurance contracts	(3,052		)	(3,166		)
Cash collateral received from derivative counterparties	41,280			17,844
Net decrease in interest receivable and other assets	698			691
Net decrease in accrued expenses and other liabilities	(2,699		)	(4,630		)
Net cash provided by operating activities	95,118			64,221
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated	(1,504,338		)	(1,813,251		)
Principal repayments on loans	1,177,999			1,223,532
Proceeds from principal repayments and maturities of:
Securities available for sale	67,588			82,458
Proceeds from sale of:
Loans	60,101			130,176
Real estate owned	4,520			4,722
Purchases of:
FHLB stock	(3,554		)	(13,024		)
Securities available for sale	(86,184		)	(112,084		)
Premises and equipment	(5,744		)	(663		)
Other	—			(24		)
Net cash used in investing activities	(289,612		)	(498,158		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits	198,797			(143,363		)
Net decrease in borrowers' advances for insurance and taxes	(12,288		)	(7,581		)
Net decrease in principal and interest owed on loans serviced	(3,844		)	(12,842		)
Net increase in short-term borrowed funds	159,833			697,482
Proceeds from long-term borrowed funds	88			—
Repayment of long-term borrowed funds	(114,234		)	(50,088		)
Purchase of treasury shares	(12,985		)	(24,813		)
Acquisition of treasury shares through net settlement of stock benefit plans compensation	(1,130		)	(2,424		)
Dividends paid to common shareholders	(16,872		)	(12,909		)
Net cash provided by financing activities	197,365			443,462
NET INCREASE IN CASH AND CASH EQUIVALENTS	2,871			9,525
CASH AND CASH EQUIVALENTS—Beginning of period	268,218			231,239
CASH AND CASH EQUIVALENTS—End of period	$	271,089		$	240,764
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	45,786		$	43,504
Cash paid for interest on borrowed funds	27,060			14,746
Cash paid for income taxes	14,827			19,982
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned	2,900			3,901
Transfer of loans from held for sale to held for investment	149			—
Transfer of loans from held for investment to held for sale	60,274			130,368
Treasury stock issued for stock benefit plans	3,049			877

See accompanying notes to unaudited interim consolidated financial statements.

Table of Contents

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands unless otherwise indicated)


1.	BASIS OF PRESENTATION

TFS Financial Corporation, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering, and, to a much lesser extent, other financial services. As of March 31, 2018, approximately 81% of the Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC. The thrift subsidiary of TFS Financial Corporation is Third Federal Savings and Loan Association of Cleveland.

The accounting and reporting policies followed by the Company conform in all material respects to U.S. GAAP and to general practices in the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the valuation of deferred tax assets, and the determination of pension obligations are particularly subject to change.

The unaudited interim consolidated financial statements were prepared without an audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at March 31, 2018, and its results of operations and cash flows for the periods presented. Such adjustments are the only adjustments reflected in the unaudited interim financial statements. In accordance with SEC Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 contains audited consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2018 or for any other period.


2.	EARNINGS PER SHARE

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a dilutive impact. Unvested shares awarded pursuant to the Company's restricted stock plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. At March 31, 2018 and 2017, respectively, the ESOP held 5,091,741 and 5,525,081 shares, respectively, that were neither allocated to participants nor committed to be released to participants.

Table of Contents

The following is a summary of the Company's earnings per share calculations.



	For the Three Months Ended March 31,
	2018					2017
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	23,314				$	23,461
Less: income allocated to restricted stock units	300					221
Basic earnings per share:
Income available to common shareholders	$	23,014	275,656,445	$	0.08	$	23,240	277,787,284	$	0.08
Diluted earnings per share:
Effect of dilutive potential common shares			1,599,733					2,124,272
Income available to common shareholders	$	23,014	277,256,178	$	0.08	$	23,240	279,911,556	$	0.08



	For the Six Months Ended March 31,
	2018					2017
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	42,927				$	43,071
Less: income allocated to restricted stock units	543					425
Basic earnings per share:
Income available to common shareholders	$	42,384	275,737,265	$	0.15	$	42,646	277,857,265	$	0.15
Diluted earnings per share:
Effect of dilutive potential common shares			1,697,383					2,234,614
Income available to common shareholders	$	42,384	277,434,648	$	0.15	$	42,646	280,091,879	$	0.15

The following is a summary of outstanding stock options and restricted stock units that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.



	For the Three Months Ended March 31,		For the Six Months Ended March 31,
	2018	2017	2018	2017
Options to purchase shares	2,571,240	693,900	2,149,740	693,900
Restricted stock units	15,501	16,500	11,001	16,500


3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:



	March 31, 2018
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	549,984	$	2	$	(13,442	)	$	536,544
Fannie Mae certificates	8,240		324		(107		)	8,457
Total	$	558,224	$	326	$	(13,549	)	$	545,001

Table of Contents



	September 30, 2017
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	533,427	$	52	$	(4,943	)	$	528,536
Fannie Mae certificates	8,537		419		(13		)	8,943
Total	$	541,964	$	471	$	(4,956	)	$	537,479

Gross unrealized losses on available for sale securities and the estimated fair value of the related securities, aggregated by the length of time the securities have been in a continuous loss position, at March 31, 2018 and September 30, 2017, were as follows:



	March 31, 2018
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Available for sale—
REMICs	$	246,728	$	4,941	$	288,785	$	8,501	$	535,513	$	13,442
Fannie Mae certificates	4,441		107		—		—		4,441		107
Total	$	251,169	$	5,048	$	288,785	$	8,501	$	539,954	$	13,549



	September 30, 2017
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Available for sale—
REMICs	$	246,113	$	1,508	$	260,837	$	3,435	$	506,950	$	4,943
Fannie Mae certificates	4,601		13		—		—		4,601		13
Total	$	250,714	$	1,521	$	260,837	$	3,435	$	511,551	$	4,956

The unrealized losses on investment securities were attributable to interest rate increases. The contractual terms of U.S. government and agency obligations do not permit the issuer to settle the security at a price less than the par value of the investment. The contractual cash flows of mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. REMICs are issued by or backed by securities issued by these governmental agencies. It is expected that the securities would not be settled at a price substantially less than the amortized cost of the investment. The U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.

Since the decline in value is attributable to changes in interest rates and not credit quality and because the Association has neither the intent to sell the securities nor is it more likely than not the Association will be required to sell the securities for the time periods necessary to recover the amortized cost, these investments are not considered other-than-temporarily impaired.

Table of Contents


4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:



	March 31, 2018			September 30, 2017
Real estate loans:
Residential Core	$	10,873,401		$	10,746,204
Residential Home Today	101,361			108,964
Home equity loans and lines of credit	1,690,708			1,552,315
Construction	54,524			60,956
Real estate loans	12,719,994			12,468,439
Other consumer loans	2,812			3,050
Add (deduct):
Deferred loan expenses, net	35,023			30,865
Loans in process ("LIP")	(31,822		)	(34,100		)
Allowance for loan losses	(43,106		)	(48,948		)
Loans held for investment, net	$	12,682,901		$	12,419,306

At March 31, 2018 and September 30, 2017, respectively, $469 and $351 of loans were classified as mortgage loans held for sale.

A large concentration of the Company’s lending is in Ohio and Florida. As of March 31, 2018 and September 30, 2017, the percentage of aggregate Residential Core, Home Today and Construction loans held in Ohio was 57% as of both dates and the percentage held in Florida was 16% as of both dates. As of March 31, 2018 and September 30, 2017, home equity loans and lines of credit were concentrated in Ohio (37% and 39%), Florida (21% and 22% ), and California (14% and 13%).

Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers and most loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after September 30, 2016. Through this program the Association provided the majority of loans to borrowers who would not otherwise qualify for the Association’s loan products, generally because of low credit scores. Although the credit profiles of borrowers in the Home Today program might be described as sub-prime, Home Today loans generally contained the same features as loans offered to our Residential Core borrowers. Borrowers with a Home Today loan completed financial management education and counseling and were referred to the Association by a sponsoring organization with which the Association partnered as part of the program. Because the Association 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. As of March 31, 2018 and September 30, 2017, the principal balance of Home Today loans originated prior to March 27, 2009 was $97,974 and $105,485, respectively. Since loans are no longer originated under the Home Today program, the Home Today portfolio will continue to decline in balance due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of customers and the communities served, during fiscal 2016 the Association began to offer Fannie Mae eligible, Home Ready loans. These loans are originated in accordance with Fannie Mae's underwriting standards. While the Association retains the servicing to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae. The Association 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, a loan-to-value ratio greater than 100%, or pay option adjustable-rate mortgages.

Table of Contents

An age analysis of the recorded investment in loan receivables that are past due at March 31, 2018 and September 30, 2017 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due. Balances are adjusted for deferred loan fees or expenses and any applicable loans-in-process.



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
March 31, 2018
Real estate loans:
Residential Core	$	7,863	$	2,948	$	11,050	$	21,861	$	10,866,832	$	10,888,693
Residential Home Today	2,485		894		5,913		9,292		91,977		101,269
Home equity loans and lines of credit	3,986		1,427		5,883		11,296		1,699,534		1,710,830
Construction	—		—		—		—		22,403		22,403
Total real estate loans	14,334		5,269		22,846		42,449		12,680,746		12,723,195
Other consumer loans	—		—		—		—		2,812		2,812
Total	$	14,334	$	5,269	$	22,846	$	42,449	$	12,683,558	$	12,726,007



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2017
Real estate loans:
Residential Core	$	6,077	$	2,593	$	11,975	$	20,645	$	10,740,398	$	10,761,043
Residential Home Today	4,067		1,496		6,851		12,414		95,269		107,683
Home equity loans and lines of credit	4,418		1,952		5,408		11,778		1,558,273		1,570,051
Construction	—		—		—		—		26,427		26,427
Total real estate loans	14,562		6,041		24,234		44,837		12,420,367		12,465,204
Other consumer loans	—		—		—		—		3,050		3,050
Total	$	14,562	$	6,041	$	24,234	$	44,837	$	12,423,417	$	12,468,254

At March 31, 2018 and September 30, 2017, real estate loans include $12,380 and $14,736, respectively, of loans that were in the process of foreclosure.

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans restructured in TDRs that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. Loans where the borrowers' sustained ability to repay is not reasonably assured at the time of modification are placed in non-accrual status for a minimum of twelve months. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status.

The recorded investment of loans in non-accrual status is summarized in the following table. Balances are adjusted for deferred loan fees or expenses.



	March 31, 2018		September 30, 2017
Real estate loans:
Residential Core	$	41,223	$	43,797
Residential Home Today	16,248		18,109
Home equity loans and lines of credit	20,777		17,185
Total non-accrual loans	$	78,248	$	79,091

Table of Contents

At March 31, 2018 and September 30, 2017, respectively, the recorded investment in non-accrual loans includes $55,402 and $54,858, which are performing according to the terms of their agreement, of which $31,971 and $34,142 are loans in Chapter 7 bankruptcy status primarily where all borrowers have filed, and have not reaffirmed or been dismissed.

Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are first applied to the oldest scheduled, unpaid payment. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. A non-accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in non-accrual status when collectability is uncertain, such as a TDR that has not met minimum payment requirements, a loan with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days past due, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. The number of days past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment.

The recorded investment in loan receivables at March 31, 2018 and September 30, 2017 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans not individually evaluated. Balances of recorded investments are adjusted for deferred loan fees or expenses and any applicable loans-in-process.



	March 31, 2018						September 30, 2017
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	92,297	$	10,796,396	$	10,888,693	$	94,747	$	10,666,296	$	10,761,043
Residential Home Today	44,373		56,896		101,269		46,641		61,042		107,683
Home equity loans and lines of credit	43,603		1,667,227		1,710,830		39,172		1,530,879		1,570,051
Construction	—		22,403		22,403		—		26,427		26,427
Total real estate loans	180,273		12,542,922		12,723,195		180,560		12,284,644		12,465,204
Other consumer loans	—		2,812		2,812		—		3,050		3,050
Total	$	180,273	$	12,545,734	$	12,726,007	$	180,560	$	12,287,694	$	12,468,254

An analysis of the allowance for loan losses at March 31, 2018 and September 30, 2017 is summarized in the following table. The analysis provides details of the allowance for loan losses according to the method of evaluation, distinguishing between allowances for loan losses determined by evaluating individual loans and allowances for loan losses determined by evaluating groups of loans collectively.



	March 31, 2018						September 30, 2017
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	7,140	$	6,940	$	14,080	$	7,336	$	6,850	$	14,186
Residential Home Today	2,116		1,624		3,740		2,250		2,258		4,508
Home equity loans and lines of credit	2,046		23,236		25,282		1,475		28,774		30,249
Construction	—		4		4		—		5		5
Total	$	11,302	$	31,804	$	43,106	$	11,061	$	37,887	$	48,948

At March 31, 2018 and September 30, 2017, individually evaluated loans that required an allowance were comprised only of loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, and loans with a further deterioration in the fair value of collateral not yet identified as uncollectible. All other individually evaluated loans received a charge-off, if applicable.

Table of Contents

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. At March 31, 2018 and September 30, 2017, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $11,249 and $11,061; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $53 and $0.

Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have historically experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable rate mortgages).

As described earlier in this footnote, Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At March 31, 2018 and September 30, 2017, respectively, approximately 20% and 22% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co., which was seized by the Arizona Department of Insurance in 2011 and currently pays all claim payments at 71.5%. Appropriate adjustments have been made to the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated collectively. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided by PMIC as of March 31, 2018 and September 30, 2017, respectively, was $48,444 and $61,470, of which $44,694 and $56,511 was current. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of March 31, 2018 and September 30, 2017, respectively, was $24,906 and $28,946 of which $24,787 and $28,870 was current. As of March 31, 2018, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "high credit quality" however, MGIC continues to make claims payments in accordance with its contractual obligations and the Association has not increased its estimated loss severity factors related to MGIC's claim paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which were assessed as being non-investment grade.

Home equity loans and lines of credit, which are comprised primarily of home equity lines of credit, represent a significant portion of the residential real estate portfolio. Post-origination deterioration in economic and housing market conditions may impact a borrower's ability to afford the higher payments required during the end of draw repayment period that follows the period of interest only payments on home equity lines of credit originated prior to 2012 or the ability to secure alternative financing. Beginning in February 2013, the terms on new home equity lines of credit included monthly principal and interest payments throughout the entire term to minimize the potential payment differential between the draw and after draw periods.

The Association originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Association’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Association offers construction/permanent loans with fixed or adjustable rates, and a current maximum loan-to-completed-appraised value ratio of 85%.

Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment.

For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Association will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered in determining that a loan is impaired may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan.

Table of Contents

The recorded investment and the unpaid principal balance of impaired loans, including those reported as TDRs, as of March 31, 2018 and September 30, 2017 are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees or expenses.



	March 31, 2018						September 30, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related IVA recorded:
Residential Core	$	53,929	$	70,129	$	—	$	47,507	$	65,132	$	—
Residential Home Today	17,467		37,076		—		18,780		41,064		—
Home equity loans and lines of credit	21,324		27,759		—		18,793		25,991		—
Total	$	92,720	$	134,964	$	—	$	85,080	$	132,187	$	—
With an IVA recorded:
Residential Core	$	38,368	$	38,446	$	7,140	$	47,240	$	47,747	$	7,336
Residential Home Today	26,906		26,891		2,116		27,861		28,210		2,250
Home equity loans and lines of credit	22,279		22,317		2,046		20,379		20,389		1,475
Total	$	87,553	$	87,654	$	11,302	$	95,480	$	96,346	$	11,061
Total impaired loans:
Residential Core	$	92,297	$	108,575	$	7,140	$	94,747	$	112,879	$	7,336
Residential Home Today	44,373		63,967		2,116		46,641		69,274		2,250
Home equity loans and lines of credit	43,603		50,076		2,046		39,172		46,380		1,475
Total	$	180,273	$	222,618	$	11,302	$	180,560	$	228,533	$	11,061

At March 31, 2018 and September 30, 2017, respectively, the recorded investment in impaired loans includes $161,676 and $162,020 of loans restructured in TDRs of which $10,408 and $11,884 were 90 days or more past due.

The average recorded investment in impaired loans and the amount of interest income recognized during the period that the loans were impaired are summarized below.



	For the Three Months Ended March 31,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	50,403	$	1,374	$	51,256	$	431
Residential Home Today	17,454		856		19,601		42
Home equity loans and lines of credit	20,071		99		19,622		82
Total	$	87,928	$	2,329	$	90,479	$	555
With an IVA recorded:
Residential Core	$	42,180	$	535	$	51,075	$	468
Residential Home Today	27,211		620		29,785		361
Home equity loans and lines of credit	21,633		144		18,095		120
Total	$	91,024	$	1,299	$	98,955	$	949
Total impaired loans:
Residential Core	$	92,583	$	1,909	$	102,331	$	899
Residential Home Today	44,665		1,476		49,386		403
Home equity loans and lines of credit	41,704		243		37,717		202
Total	$	178,952	$	3,628	$	189,434	$	1,504

Table of Contents



	For the Six Months Ended March 31,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	50,718	$	1,760	$	52,216	$	742
Residential Home Today	18,124		972		19,782		149
Home equity loans and lines of credit	20,059		173		19,957		149
Total	$	88,901	$	2,905	$	91,955	$	1,040
With an IVA recorded:
Residential Core	$	42,804	$	955	$	51,912	$	978
Residential Home Today	27,384		956		30,282		738
Home equity loans and lines of credit	21,329		275		17,354		598
Total	$	91,517	$	2,186	$	99,548	$	2,314
Total impaired loans:
Residential Core	$	93,522	$	2,715	$	104,128	$	1,720
Residential Home Today	45,508		1,928		50,064		887
Home equity loans and lines of credit	41,388		448		37,311		747
Total	$	180,418	$	5,091	$	191,503	$	3,354

Interest on loans in non-accrual status is recognized on a cash basis. The amount of interest income on impaired loans recognized using a cash basis method was $795 and $1,208 for the three and six months ended March 31, 2018 and $414 and $770 for the three and six months ended March 31, 2017. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. Interest income on the remaining impaired loans is recognized on an accrual basis.

Charge-offs on residential mortgage loans, home equity loans and lines of credit, and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the recorded investment in the loans.

Partial or full charge-offs are also recognized for the amount of impairment on loans considered collateral dependent that meet the conditions described below.


•	For residential mortgage loans, payments are 180 days delinquent;


•	For home equity lines of credit, equity loans, and residential loans restructured in a TDR, payments are greater than 90 days delinquent;


•	For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan;


•	For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy;


•	For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed;


•	For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent; and


•	For all classes of loans, it becomes evident that a loss is probable.

Collateral dependent residential mortgage loans and construction loans are charged off to the extent the recorded investment in a loan, net of anticipated mortgage insurance claims, exceeds the fair value less costs to dispose of the underlying property. Management can determine the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged off to the extent the recorded investment in the loan plus the balance of any senior liens exceeds the fair value less costs to dispose of the underlying property or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio that is identified as collateral dependent will continue to be reported as impaired until it is no longer considered collateral dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off consequent to

Table of Contents

impairment evaluation will continue to be individually evaluated for impairment until, at a minimum, the impairment has been recovered.

The following is a summary of any charge-off policy that was changed or first implemented during the current and previous four fiscal years, the effective date and the portfolios to which the policy applies.



Effective Date	Policy	Portfolio(s) Affected
6/30/2014	A loan is considered collateral dependent and any collateral shortfall is charged off when, within 60 days of notification, all borrowers obligated on a loan filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed (1)	All

____________________________

(1) Prior to 6/30/2014, collateral shortfalls on loans in Chapter 7 bankruptcy were charged off when all borrowers were discharged of the obligation or when the loan was 30 days or more past due.

Loans restructured in TDRs that are not evaluated based on collateral are separately evaluated for impairment on a loan by loan basis at the time of restructuring and at each subsequent reporting date for as long as they are reported as TDRs. The impairment evaluation is based on the present value of expected future cash flows discounted at the effective interest rate of the original loan. Expected future cash flows include a discount factor representing a potential for default. Valuation allowances are recorded for the excess of the recorded investments over the result of the cash flow analysis. Loans discharged in Chapter 7 bankruptcy are reported as TDRs and also evaluated based on the present value of expected future cash flows unless evaluated based on collateral. We evaluate these loans using the expected future cash flows because we expect the borrower, not liquidation of the collateral, to be the source of repayment for the loan. Other consumer loans are not considered for restructuring. A loan restructured in a TDR is classified as an impaired loan for a minimum of one year. After one year, that loan may be reclassified out of the balance of impaired loans if the loan was restructured to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is not impaired based on the terms of the restructuring agreement. No loans whose terms were restructured in TDRs were reclassified from impaired loans during the six months ended March 31, 2018 and March 31, 2017.

The recorded investment in TDRs by type of concession as of March 31, 2018 and September 30, 2017 is shown in the tables below.



March 31, 2018	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	10,699	$	403	$	9,590	$	19,222	$	20,383	$	22,868	$	83,165
Residential Home Today	4,638		—		4,984		10,180		18,589		4,114		42,505
Home equity loans and lines of credit	99		5,561		2,059		19,266		2,026		6,995		36,006
Total	$	15,436	$	5,964	$	16,633	$	48,668	$	40,998	$	33,977	$	161,676



September 30, 2017	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	12,485	$	521	$	8,176	$	21,278	$	20,459	$	23,670	$	86,589
Residential Home Today	5,441		—		4,811		10,538		18,877		4,337		44,004
Home equity loans and lines of credit	106		6,033		373		14,661		1,471		8,783		31,427
Total	$	18,032	$	6,554	$	13,360	$	46,477	$	40,807	$	36,790	$	162,020

TDRs may be restructured more than once. Among other requirements, a subsequent restructuring may be available for a borrower upon the expiration of temporary restructuring terms if the borrower cannot return to regular loan payments. If the borrower is experiencing an income curtailment that temporarily has reduced his/her capacity to repay, such as loss of employment, reduction of hours, non-paid leave or short term disability, a temporary restructuring is considered. If the borrower lacks the capacity to repay the loan at the current terms due to a permanent condition, a permanent restructuring is considered. In evaluating the need for a subsequent restructuring, the borrower’s ability to repay is generally assessed utilizing a debt to income and cash flow analysis. As the economy has improved, the need for multiple restructurings has begun to abate.

Table of Contents

Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Association.

For all loans restructured during the three and six months ended March 31, 2018 and March 31, 2017 (set forth in the tables below), the pre-restructured outstanding recorded investment was not materially different from the post-restructured outstanding recorded investment.

The following tables set forth the recorded investment in TDRs restructured during the periods presented, according to the types of concessions granted.



	For the Three Months Ended March 31, 2018
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	—	$	—	$	285	$	89	$	1,035	$	1,242	$	2,651
Residential Home Today	—		—		17		216		509		90		832
Home equity loans and lines of credit	—		326		—		4,882		426		225		5,859
Total	$	—	$	326	$	302	$	5,187	$	1,970	$	1,557	$	9,342



	For the Three Months Ended March 31, 2017
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	521	$	—	$	274	$	107	$	156	$	611	$	1,669
Residential Home Today	12		—		189		78		963		119		1,361
Home equity loans and lines of credit	—		773		—		1,838		89		460		3,160
Total	$	533	$	773	$	463	$	2,023	$	1,208	$	1,190	$	6,190



	For the Six Months Ended March 31, 2018
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	162	$	—	$	570	$	639	$	2,111	$	1,807	$	5,289
Residential Home Today	—		—		134		308		1,264		382		2,088
Home equity loans and lines of credit	—		565		—		6,291		609		312		7,777
Total	$	162	$	565	$	704	$	7,238	$	3,984	$	2,501	$	15,154



	For the Six Months Ended March 31, 2017
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	521	$	—	$	475	$	924	$	879	$	1,111	$	3,910
Residential Home Today	81		—		258		311		1,471		311		2,432
Home equity loans and lines of credit	—		1,000		—		4,094		275		989		6,358
Total	$	602	$	1,000	$	733	$	5,329	$	2,625	$	2,411	$	12,700

Table of Contents

Below summarizes the information on TDRs restructured within the previous 12 months of the period presented for which there was a subsequent payment default, at least 30 days past due on one scheduled payment, during the period presented.



	For the Three Months Ended March 31,
	2018			2017
TDRs Within the Previous 12 Months That Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Residential Core	9	$	853	13	$	1,031
Residential Home Today	19	805		20	951
Home equity loans and lines of credit	7	557		13	636
Total	35	$	2,215	46	$	2,618



	For the Six Months Ended March 31,
	2018			2017
TDRs Within the Previous 12 Months That Subsequently Defaulted	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Residential Core	12	$	1,488	17	$	1,472
Residential Home Today	19	805		20	951
Home equity loans and lines of credit	8	557		18	676
Total	39	$	2,850	55	$	3,099

Residential loans are internally assigned a grade that complies with the guidelines outlined in the OCC’s Handbook for Rating Credit Risk. Pass loans are assets well protected by the current paying capacity of the borrower. Special Mention loans have a potential weakness, as evaluated based on delinquency status, that the Association feels deserve management’s attention and may result in further deterioration in their repayment prospects and/or the Association’s credit position. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Also included in Substandard are performing home equity loans and lines of credit where the customer has a severely delinquent first mortgage to which the performing home equity loan or line of credit is subordinate and loans in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. Loss loans are considered uncollectible and are charged off when identified.

The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade. Balances are adjusted for deferred loan fees or expenses and any applicable LIP.



	Pass		Special Mention		Substandard		Loss		Total
March 31, 2018
Real estate loans:
Residential Core	$	10,840,156	$	—	$	48,537	$	—	$	10,888,693
Residential Home Today	82,805		—		18,464		—		101,269
Home equity loans and lines of credit	1,683,474		3,181		24,175		—		1,710,830
Construction	22,403		—		—		—		22,403
Total	$	12,628,838	$	3,181	$	91,176	$	—	$	12,723,195



	Pass		Special Mention		Substandard		Loss		Total
September 30, 2017
Real estate loans:
Residential Core	$	10,709,739	$	—	$	51,304	$	—	$	10,761,043
Residential Home Today	88,247		—		19,436		—		107,683
Home equity loans and lines of credit	1,545,658		3,837		20,556		—		1,570,051
Construction	26,427		—		—		—		26,427
Total	$	12,370,071	$	3,837	$	91,296	$	—	$	12,465,204

Table of Contents

At March 31, 2018 and September 30, 2017, respectively, the recorded investment of impaired loans includes $94,626 and $94,104 of TDRs that are individually evaluated for impairment, but have adequately performed under the terms of the restructuring and are classified as Pass loans. At March 31, 2018 and September 30, 2017, respectively, there were $5,529 and $4,840 of loans classified Substandard and $3,181 and $3,837 of loans designated Special Mention that are not included in the recorded investment of impaired loans; rather, they are included in loans collectively evaluated for impairment.

Other consumer loans are internally assigned a grade of nonperforming when they become 90 days or more past due. At March 31, 2018 and September 30, 2017, no consumer loans were graded as nonperforming.

Activity in the allowance for loan losses is summarized as follows:



	For the Three Months Ended March 31, 2018
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential Core	$	13,546	$	(58	)	$	(195	)	$	787	$	14,080
Residential Home Today	4,134		(705		)	(288		)	599		3,740
Home equity loans and lines of credit	28,245		(3,237		)	(1,619		)	1,893		25,282
Construction	4		—			—			—		4
Total	$	45,929	$	(4,000	)	$	(2,102	)	$	3,279	$	43,106



	For the Three Months Ended March 31, 2017
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential Core	$	14,807	$	(3,292	)	$	(727	)	$	2,148	$	12,936
Residential Home Today	5,955		(1,176		)	(396		)	317		4,700
Home equity loans and lines of credit	39,680		(1,530		)	(1,108		)	2,160		39,202
Construction	5		(2		)	—			—		3
Total	$	60,447	$	(6,000	)	$	(2,231	)	$	4,625	$	56,841



	For the Six Months Ended March 31, 2018
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential Core	$	14,186	$	(899	)	$	(587	)	$	1,380	$	14,080
Residential Home Today	4,508		(806		)	(963		)	1,001		3,740
Home equity loans and lines of credit	30,249		(5,294		)	(3,155		)	3,482		25,282
Construction	5		(1		)	—			—		4
Total	$	48,948	$	(7,000	)	$	(4,705	)	$	5,863	$	43,106



	For the Six Months Ended March 31, 2017
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential Core	$	15,068	$	(3,062	)	$	(1,899	)	$	2,829	$	12,936
Residential Home Today	7,416		(2,126		)	(1,198		)	608		4,700
Home equity loans and lines of credit	39,304		(808		)	(3,157		)	3,863		39,202
Construction	7		(4		)	—			—		3
Total	$	61,795	$	(6,000	)	$	(6,254	)	$	7,300	$	56,841

Table of Contents


5.	DEPOSITS

Deposit account balances are summarized as follows:



	March 31, 2018		September 30, 2017
Checking accounts	$	977,606	$	987,001
Savings accounts	1,381,322		1,473,415
Certificates of deposit	5,988,682		5,689,236
	8,347,610		8,149,652
Accrued interest	2,812		1,973
Total deposits	$	8,350,422	$	8,151,625

Brokered certificates of deposit (exclusive of acquisition costs and subsequent amortization), which are used as a cost effective funding alternative, totaled $686,705 at March 31, 2018 and $620,705 at September 30, 2017. The FDIC places restrictions on banks with regard to issuing brokered deposits based on the bank's capital classification. As a well-capitalized institution at March 31, 2018 and September 30, 2017, the Association may accept brokered deposits without FDIC restrictions.

6. BORROWED FUNDS

Federal Home Loan Bank borrowings at March 31, 2018 are summarized in the table below. The amount and weighted average rates of certain FHLB Advances maturing in 36 months or less reflect the net impact of deferred penalties discussed below:



	Amount		Weighted Average Rate
Maturing in:
12 months or less	$	3,113,478	1.76	%
13 to 24 months	464,779		1.78	%
25 to 36 months	99,917		1.90	%
37 to 48 months	1,014		1.47	%
49 to 60 months	3,656		0.93	%
Over 60 months	29,620		1.67	%
Total FHLB Advances	3,712,464		1.76	%
Accrued interest	4,600
Total	$	3,717,064

Through the use of interest rate swaps discussed in Note 13. Derivative Instruments, $1,600,000 of FHLB advances included in the table above as maturing in 12 months or less, have effective maturities, assuming no early terminations of the swap contracts, as shown below:



	Amount		Swap Adjusted Weighted Average Rate
Effective maturity:
13 to 24 months	$	50,000	1.23	%
25 to 36 months	225,000		1.28	%
37 to 48 months	675,000		1.58	%
49 to 60 months	650,000		1.92	%
Total FHLB Advances under swap contracts	$	1,600,000	1.66	%

During fiscal year 2016, $150,000 fixed-rate FHLB advances with remaining terms of approximately four years were prepaid and replaced with new four- and five-year interest rate swap arrangements. The deferred repayment penalties of $2,408 related to the $150,000 of restructuring are being recognized in interest expense over the remaining term of the swap contracts.

Table of Contents

7. OTHER COMPREHENSIVE INCOME (LOSS)

The change in accumulated other comprehensive income (loss) by component is as follows:



	For the Three Months Ended												For the Three Months Ended
	March 31, 2018												March 31, 2017
	Unrealized Gains (Losses) on Securities Available for Sale			Cash flow hedges			Defined Benefit Plan			Total			Unrealized Gains (Losses) on Securities Available for Sale			Cash flow hedges			Defined Benefit Plan			Total
Balance at beginning of period	$	(7,185	)	$	22,834		$	(17,643	)	$	(1,994	)	$	(5,611	)	$	11,249		$	(18,326	)	$	(12,688	)
Other comprehensive income (loss) before reclassifications, net of tax expense of $4,357 and $234	(3,262		)	19,634			—			16,372			692			(258		)	—			434
Amounts reclassified from accumulated other comprehensive income (loss), net of tax expense of $75 and $464	—			(82		)	317			235			—			515			346			861
Other comprehensive income (loss)	(3,262		)	19,552			317			16,607			692			257			346			1,295
Balance at end of period	$	(10,447	)	$	42,386		$	(17,326	)	$	14,613		$	(4,919	)	$	11,506		$	(17,980	)	$	(11,393	)



	For the Six Months Ended											For the Six Months Ended
	March 31, 2018											March 31, 2017
	Unrealized Gains (Losses) on Securities Available for Sale			Cash flow hedges		Defined Benefit Plan			Total			Unrealized Gains (Losses) on Securities Available for Sale			Cash flow hedges			Defined Benefit Plan			Total
Balance at beginning of period	$	(2,915	)	$	10,249	$	(14,826	)	$	(7,492	)	$	416		$	(1,371	)	$	(18,671	)	$	(19,626	)
Other comprehensive income (loss) before reclassifications, net of tax expense of $7,361 and $3,571	(6,259		)	27,099		—			20,840			(5,335		)	11,966			—			6,631
Amounts reclassified from accumulated other comprehensive income (loss), net of tax expense of $476 and $863	—			713		594			1,307			—			911			691			1,602
Other comprehensive income (loss)	(6,259		)	27,812		594			22,147			(5,335		)	12,877			691			8,233
Adoption of ASU 2018-02	(1,273		)	4,325		(3,094		)	(42		)	—			—			—			—
Balance at end of period	$	(10,447	)	$	42,386	$	(17,326	)	$	14,613		$	(4,919	)	$	11,506		$	(17,980	)	$	(11,393	)

Table of Contents

The following table presents the reclassification adjustment out of accumulated other comprehensive income included in net income and the corresponding line item on the consolidated statements of income for the periods indicated:



	Amounts Reclassified from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive Income Components	For the Three Months Ended March 31,						For the Six Months Ended March 31,						Line Item in the Statement of Income
	2018			2017			2018			2017			Line Item in the Statement of Income
Cash flow hedges:
Interest (income)expense, effective portion	$	(109	)	$	793		$	944		$	1,402		Interest expense
Net income tax effect	27			(278		)	(231		)	(491		)	Income tax expense
Net of income tax expense (benefit)	(82		)	515			713			911

Amortization of pension plan:
Actuarial loss	419			532			839			1,063			(a)
Net income tax effect	(102		)	(186		)	(245		)	(372		)	Income tax expense
Net of income tax expense (benefit)	317			346			594			691

Adoption of ASU 2018-02	—			—			(42		)	—			(b)
Total reclassifications for the period	$	235		$	861		$	1,265		$	1,602

(a) This item is included in the computation of net periodic pension cost. See Note 9. Defined Benefit Plan for additional disclosure.

(b) This item is a reclassification between Accumulated Other Comprehensive Income and Retained Earnings due to the adoption of ASU 2018-02. See Note 14. Recent Accounting Pronouncements for additional disclosure.

8. INCOME TAXES

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various state and city jurisdictions. The Company is no longer subject to income tax examinations in its major jurisdictions for tax years prior to 2014. During the quarter ending March 31, 2018, the State of Ohio Department of Taxation initiated and completed, with no adjustments, an audit of the Association’s Financial Institutions Tax Returns based on calendar year filings for 2014, 2015, and 2016

The Company recognizes interest and penalties on income tax assessments or income tax refunds, where applicable, in the financial statements as a component of its provision for income taxes.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”). Among its numerous changes to the Internal Revenue Code, the Act reduced the federal corporate tax rate to 21% from 35% effective January 1, 2018. Under Section 15 of the Internal Revenue Code, the Company is required to apply a blended federal tax rate for the period that includes the enactment date. The blended rate for the annual period is based on the applicable tax rates before and after the change and the number of days in the year. The Company's blended statutory federal rate for the fiscal year ending September 30, 2018 is 24.53%.

As a result of the rate reduction, the Company revalued its net deferred tax assets as of December 22, 2017, resulting in a reduction in the value of its net deferred tax asset and the recording of approximately $4,644 of additional income tax expense in the Company's Consolidated Statements of Income for the six months ended March 31, 2018. The Company’s revaluation of its deferred tax assets is subject to further clarification of the Act and refinement to its estimates in future periods. In accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), future adjustments will be recorded as discrete items to income tax expense in the period in which those adjustments become estimable and finalized.

The Company’s effective income tax rate was 31.5% and 32.6% for the six months ended March 31, 2018 and March 31, 2017, respectively. The decrease in the effective tax rate for the six months ended March 31, 2018 compared to the same period during fiscal 2017 is primarily due to the impact of the Act as discussed above.

The Company makes certain investments in limited partnerships which invest in affordable housing projects that qualify for the Low Income Housing Tax Credit. The Company acts as a limited partner in these investments and does not exert control

Table of Contents

over the operating or financial policies of the partnership. The Company accounts for its interests in LIHTCs using the proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income taxes was not material during the three and six months ended March 31, 2018 and March 31, 2017.

9. DEFINED BENEFIT PLAN

The Third Federal Savings Retirement Plan (the “Plan”) is a defined benefit pension plan. Effective December 31, 2002, the Plan was amended to limit participation to employees who met the Plan’s eligibility requirements on that date. Effective December 31, 2011, the Plan was amended to freeze future benefit accruals for participants in the Plan. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, and those eligible participants who no longer receive service credits under the Plan, participate in a separate tier of the Company’s defined contribution 401(k) Savings Plan. Benefits under the Plan are based on years of service and the employee’s average annual compensation (as defined in the Plan) through December 31, 2011. The funding policy of the Plan is consistent with the funding requirements of U.S. federal and other governmental laws and regulations.

The components of net periodic cost recognized in the Consolidated Statements of Income are as follows:



	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2018			2017			2018			2017
Interest cost	$	774		$	767		$	1,548		$	1,534
Expected return on plan assets	(1,035		)	(1,034		)	(2,071		)	(2,067		)
Amortization of net loss	419			532			839			1,063
Net periodic cost	$	158		$	265		$	316		$	530

There were no required minimum employer contributions during the six months ended March 31, 2018. No minimum employer contributions are expected during the remainder of the fiscal year.

10. EQUITY INCENTIVE PLAN

In December 2017, 25,200 restricted stock units were granted to certain directors of the Company. In January 2018, 1,045,100 options to purchase common stock and 422,900 restricted stock units were granted, to certain officers or employees of the company. The awards were made pursuant to the shareholder-approved 2008 Equity Incentive Plan.

At the annual meeting of shareholders held on February 22, 2018, shareholders of the Company approved the TFS Financial Corporation Amended and Restated 2008 Equity Incentive Plan. The Amended and Restated 2008 Equity Incentive Plan is substantially similar to the previous plan, except that the number of future shares eligible to be granted has been reduced to 8,450,000 shares and the term to grant shares has been extended to February 21, 2028. No awards have been granted under the Amended and Restated 2008 Equity Incentive Plan as of March 31, 2018.

During the six months ended March 31, 2018 and 2017, the Company recorded $2,525 and $2,005, respectively, of stock-based compensation expense, comprised of stock option expense of $657 and $805, respectively, and restricted stock units expense of $1,868 and $1,200, respectively.

At March 31, 2018, 5,500,982 shares were subject to options, with a weighted average exercise price of $13.56 per share and a weighted average grant date fair value of $2.64 per share. Expected future expense related to the 1,630,755 non-vested options outstanding as of March 31, 2018 is $2,198 over a weighted average period of 2.1 years. At March 31, 2018, 761,055 restricted stock units, with a weighted average grant date fair value of $14.15 per unit, are unvested. Expected future compensation expense relating to the 1,347,138 restricted stock units outstanding as of March 31, 2018 is $6,106 over a weighted average period of 2.3 years. Each unit is equivalent to one share of common stock.

11. COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, the Company enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to originate loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire from five to 10 years following the date that the line of credit was established, subject to various

Table of Contents

conditions, including compliance with payment obligations, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated statements of condition. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The

Company generally uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made.

At March 31, 2018, the Company had commitments to originate loans as follows:



Fixed-rate mortgage loans	$	217,636
Adjustable-rate mortgage loans	278,995
Equity loans and lines of credit	119,271
Total	$	615,902

At March 31, 2018, the Company had unfunded commitments outstanding as follows:



Equity lines of credit	$	1,657,027
Construction loans	31,822
Limited partner investments	11,541
Total	$	1,700,390

At March 31, 2018, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity, is $1,711,186.

The above commitments are expected to be funded through normal operations.

On May 4, 2018, the Association entered into an agreement to sell approximately $276 million of long-term fixed rate mortgage loans from its Residential Core portfolio to a private investor. The transaction is expected to close in May 2018. The Association will retain the servicing rights on these loans.

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operation, or statements of cash flows.

12. FAIR VALUE

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. A fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. The Company’s policy is to recognize transfers between levels of the hierarchy as of the end of the reporting period in which the transfer occurs. The three levels of inputs are defined as follows:



Level 1 –		quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 –		quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with few transactions, or model-based valuation techniques using assumptions that are observable in the market.
Level 3 –		a company’s own assumptions about how market participants would price an asset or liability.

As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At March 31, 2018 and September 30, 2017, there were no loans held for sale subject to pending agency contracts for which the fair value option was elected.

Table of Contents

Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value.

Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. At March 31, 2018 and September 30, 2017, respectively, this includes $545,001 and $537,479 of investments in highly liquid collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae. Both are measured using the market approach. The fair values of collateralized mortgage obligations represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities.

Mortgage Loans Held for Sale—The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At March 31, 2018 and September 30, 2017, there were $469 and $351, respectively, of loans held for sale carried at fair value and at cost, respectively.

Impaired Loans—Impaired loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated for impairment and that impairment is measured using a fair value measurement, such as the fair value of the underlying collateral. Impairment is measured using a market approach based on the fair value of the collateral less estimated costs to dispose for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 4. Loans and Allowance for Loan Losses. To calculate impairment of collateral-dependent loans, the fair market values of the collateral, estimated using exterior appraisals in the majority of instances, are reduced by calculated costs to dispose, derived from historical experience and recent market conditions. Any indicated impairment is recognized by a charge to the allowance for loan losses. Subsequent increases in collateral values or principal pay downs on loans with recognized impairment could result in an impaired loan being carried below its fair value. When no impairment loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum recovery the Company can expect. The recorded investment of loans individually evaluated for impairment based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of costs to dispose on fair values is determined at the time of impairment or when additional impairment is recognized and is included in quantitative information about significant unobservable inputs later in this note.

Loans held for investment that have been restructured in TDRs and are performing according to the restructured terms of the loan agreement are individually evaluated for impairment using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At March 31, 2018 and September 30, 2017, respectively, this included $97,786 and $95,480 in recorded investment of TDRs with related allowances for loss of $11,249 and $11,061.

Real Estate Owned—Real estate owned includes real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of the cost basis or fair value less estimated costs to dispose. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At March 31, 2018 and September 30, 2017, these adjustments were not significant to reported fair values. At March 31, 2018 and September 30, 2017, respectively, $2,372 and $3,479 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis where the cost basis equals or exceeds the estimate of fair values less costs to dispose of these properties. Real estate owned, as reported in the Consolidated Statements of Condition, includes estimated costs to dispose of $271 and $401 related to properties measured at fair value and $1,567 and $2,443 of properties carried at their original or adjusted cost basis at March 31, 2018 and September 30, 2017, respectively.

Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio, forward commitments on contracts to deliver mortgage loans, and interest rate swaps designated as cash flow hedges. Derivatives not designated as cash flow hedges are reported at fair value in other assets or other liabilities on the Consolidated Statement of Condition with changes in value recorded in current earnings. Derivatives qualifying as cash flow hedges, when highly effective, are reported in other assets or other liabilities on the Consolidated Statement of Condition with changes in value recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in fair value is recorded directly in earnings in the period in which the change occurs. See Note 13. Derivative Instruments for additional details. Fair value of forward commitments is estimated using a market approach based on quoted secondary market pricing for loan portfolios with characteristics similar to loans underlying the derivative contracts. The fair value of interest rate lock

Table of Contents

commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy.

Assets and liabilities carried at fair value on a recurring basis in the Consolidated Statements of Condition at March 31, 2018 and September 30, 2017 are summarized below.



			Recurring Fair Value Measurements at Reporting Date Using
	March 31, 2018		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	March 31, 2018		(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available for sale:
REMICs	$	536,544	$	—	$	536,544	$	—
Fannie Mae certificates	8,457		—		8,457		—
Total	$	545,001	$	—	$	545,001	$	—

Liabilities
Derivatives:
Interest rate lock commitments	$	2	$	—	$	—	$	2
Total	$	2	$	—	$	—	$	2



			Recurring Fair Value Measurements at Reporting Date Using
	September 30, 2017		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available for sale:
REMICs	$	528,536	$	—	$	528,536	$	—
Fannie Mae certificates	8,943		—		8,943		—
Derivatives:
Interest rate lock commitments	58		—		—		58
Interest rate swaps	17,001		—		$	17,001	—
Total	$	554,538	$	—	$	554,480	$	58

Liabilities
Derivatives:
Interest rate swaps	$	1,233	$	—	$	1,233	$	—
Total	$	1,233	$	—	$	1,233	$	—

Table of Contents

The table below presents a reconciliation of the beginning and ending balances and the location within the Consolidated Statements of Income where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).



	Three Months Ended March 31,						Six Months Ended March 31,
	2018			2017			2018			2017
Beginning balance	$	28		$	47		$	58		$	99
Gain (loss) during the period due to changes in fair value:
Included in other non-interest income	(30		)	(5		)	(60		)	(57		)
Ending balance	$	(2	)	$	42		$	(2	)	$	42
Change in unrealized gains for the period included in earnings for assets held at end of the reporting date	$	(2	)	$	42		$	(2	)	$	42

Summarized in the tables below are those assets measured at fair value on a nonrecurring basis.



			Nonrecurring Fair Value Measurements at Reporting Date Using
	March 31, 2018		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	March 31, 2018		(Level 1)		(Level 2)		(Level 3)
Impaired loans, net of allowance	$	82,434	$	—	$	—	$	82,434
Mortgage loans held for sale	469		—		469		—
Real estate owned⁽¹⁾	2,372		—		—		2,372
Total	$	85,275	$	—	$	469	$	84,806


⁽¹⁾	Amounts represent fair value measurements of properties before deducting estimated costs to dispose.



			Nonrecurring Fair Value Measurements at Reporting Date Using
	September 30, 2017		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Impaired loans, net of allowance	$	85,080	$	—	$	—	$	85,080
Real estate owned⁽¹⁾	3,479		—		—		3,479
Total	$	88,559	$	—	$	—	$	88,559


⁽¹⁾	Amounts represent fair value measurements of properties before deducting estimated costs to dispose.

The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy.



	Fair Value						Weighted
	3/31/2018	Valuation Technique(s)	Unobservable Input	Range			Average
Impaired loans, net of allowance	$82,434	Market comparables of collateral discounted to estimated net proceeds	Discount appraised value to estimated net proceeds based on historical experience:
Impaired loans, net of allowance	$82,434		• Residential Properties	0	-	28%	7.0%

Interest rate lock commitments	$(2)	Quoted Secondary Market pricing	Closure rate	0	-	100%	73.0%

Table of Contents



	Fair Value						Weighted
	9/30/2017	Valuation Technique(s)	Unobservable Input	Range			Average
Impaired loans, net of allowance	$85,080	Market comparables of collateral discounted to estimated net proceeds	Discount appraised value to estimated net proceeds based on historical experience:
Impaired loans, net of allowance	$85,080		• Residential Properties	0	-	28%	7.6%

Interest rate lock commitments	$58	Quoted Secondary Market pricing	Closure rate	0	-	100%	93.0%

The following tables present the estimated fair value of the Company’s financial instruments and their carrying amounts as reported in the Statement of Condition.



	March 31, 2018
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and due from banks	$	33,822	$	33,822	$	33,822	$	—	$	—
Interest earning cash equivalents	237,267		237,267		237,267		—		—
Investment securities available for sale	545,001		545,001		—		545,001		—
Mortgage loans held for sale	469		469		—		469		—
Loans, net:
Mortgage loans held for investment	12,680,089		12,813,479		—		—		12,813,479
Other loans	2,812		2,854		—		—		2,854
Federal Home Loan Bank stock	93,544		93,544		N/A		—		—
Accrued interest receivable	36,439		36,439		—		36,439		—
Cash collateral held by counterparty	15,328		15,328		15,328		—		—
Liabilities:
Checking and passbook accounts	$	2,358,928	$	2,358,928	$	—	$	2,358,928	$	—
Certificates of deposit	5,991,494		5,745,844		—		5,745,844		—
Borrowed funds	3,717,064		3,715,978		—		3,715,978		—
Borrowers’ advances for insurance and taxes	88,158		88,158		—		88,158		—
Principal, interest and escrow owed on loans serviced	31,922		31,922		—		31,922		—
Derivatives	2		2		—		—		2

Table of Contents



	September 30, 2017
	Carrying		Estimated Fair Value
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and due from banks	$	35,243	$	35,243	$	35,243	$	—	$	—
Interest earning cash equivalents	232,975		232,975		232,975		—		—
Investment securities available for sale	537,479		537,479		—		537,479		—
Mortgage loans held for sale	351		355		—		355		—
Loans, net:
Mortgage loans held for investment	12,416,256		12,758,951		—		—		12,758,951
Other loans	3,050		3,143		—		—		3,143
Federal Home Loan Bank stock	89,990		89,990		N/A		—		—
Accrued interest receivable	35,479		35,479		—		35,479		—
Cash collateral held by counterparty	2,955		2,955		2,955		—		—
Derivatives	17,059		17,059		—		17,001		58
Liabilities:
Checking and passbook accounts	$	2,460,416	$	2,460,416	$	—	$	2,460,416	$	—
Certificates of deposit	5,691,209		5,550,162		—		5,550,162		—
Borrowed funds	3,671,377		3,677,256		—		3,677,256		—
Borrowers’ advances for insurance and taxes	100,446		100,446		—		100,446		—
Principal, interest and escrow owed on loans serviced	35,766		35,766		—		35,766		—
Derivatives	1,233		1,233		—		1,233		—

Presented below is a discussion of the valuation techniques and inputs used by the Company to estimate fair value.

Cash and Due from Banks, Interest Earning Cash Equivalents, Cash Collateral Held by Counterparty— The carrying amount is a reasonable estimate of fair value.

Investment and Mortgage-Backed Securities— Estimated fair value for investment and mortgage-backed securities is based on quoted market prices, when available. If quoted prices are not available, management will use as part of their estimation process fair values which are obtained from third party independent nationally recognized pricing services using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.

Mortgage Loans Held for Sale— Fair value of mortgage loans held for sale is based on quoted secondary market pricing for loan portfolios with similar characteristics.

Loans— For mortgage loans held for investment and other loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. The use of current rates to discount cash flows reflects current market expectations with respect to credit exposure. Impaired loans are measured at the lower of cost or fair value as described earlier in this footnote.

Federal Home Loan Bank Stock— It is not practical to estimate the fair value of FHLB stock due to restrictions on its transferability. The fair value is estimated to be the carrying value, which is par. All transactions in capital stock of the FHLB Cincinnati are executed at par.

Deposits— The fair value of demand deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities.

Borrowed Funds— Estimated fair value for borrowed funds is estimated using discounted cash flows and rates currently charged for borrowings of similar remaining maturities.

Table of Contents

Accrued Interest Receivable, Borrowers’ Advances for Insurance and Taxes, and Principal, Interest and Related Escrow Owed on Loans Serviced— The carrying amount is a reasonable estimate of fair value.

Derivatives— Fair value is estimated based on the valuation techniques and inputs described earlier in this footnote.

13. DERIVATIVE INSTRUMENTS

The Company enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy. For hedges of the Company's borrowing program, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the Company's FHLB borrowings. At March 31, 2018 and September 30, 2017, the interest rate swaps used in the Company's asset/liability management strategy have weighted average terms of 3.7 years and 4.1 years and weighted average fixed-rate interest payments of 1.66% and 1.62%, respectively.

Cash flow hedges are assessed for effectiveness using regression analysis. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Ineffectiveness is generally measured as the amount by which the change in the fair value of the hedging instrument exceeds or is substantially less than the present value of the cumulative change in the hedged item's expected cash flows attributable to the risk being hedged over the same period. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings for the period in which it occurs.

The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income. There were no forward commitments for the sale of mortgage loans at March 31, 2018 or September 30, 2017.

In addition, the Company is party to derivative instruments when it enters into commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income.

The following tables provide the locations within the Consolidated Statements of Condition, notional values and fair values, at the reporting dates, for all derivative instruments.



	March 31, 2018					September 30, 2017
	Notional Value		Fair Value			Notional Value		Fair Value
Derivatives designated as hedging instruments
Cash flow hedges: Interest rate swaps ⁽¹⁾
Other Assets	$	1,600,000	$	—		$	1,175,000	$	17,001
Other Liabilities	$	—	$	—		$	325,000	$	1,233
Total cash flow hedges: Interest rate swaps	$	1,600,000	$	—		$	1,500,000	$	15,768

Derivatives not designated as hedging instruments
Interest rate lock commitments
Other Assets	$	—	$	—		$	2,952	$	58
Other Liabilities	$	2,972	$	2		$	—	$	—
Total interest rate lock commitments	$	2,972	$	(2	)	$	2,952	$	58

⁽¹⁾ At March 31, 2018, variation margin pledged to or received from a Central Counterparty Clearing House to cover the prior day's fair value of open positions is considered settlement of the derivative position for accounting purposes. At September 30, 2017, variation margin was not recognized as settlement.

Table of Contents

The following tables present the net gains and losses recorded within the Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income relating to derivative instruments.



		Three Months Ended						Six Months Ended
	Location of Gain or (Loss)	March 31,						March 31,
	Recognized in Income	2018			2017			2018			2017
Cash flow hedges
Amount of gain/(loss) recognized, effective portion	Other comprehensive income	$	24,858		$	(397	)	$	36,941		$	18,409
Amount of gain/(loss) reclassified from AOCI	Interest income/(expense)	109			(793		)	(944		)	(1,402		)
Amount of ineffectiveness recognized	Other non-interest income	—			—			—			—

Derivatives not designated as hedging instruments
Interest rate lock commitments	Other non-interest income	$	(30	)	$	(5	)	$	(60	)	$	(57	)

The Company estimates that $11,135 of the amounts reported in AOCI will be reclassified to interest expense during the twelve months ending March 31, 2019.

Derivatives contain an element of credit risk which arises from the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. The Company's exposure is limited to the replacement value of the contracts rather than the notional or principal amounts. Credit risk is minimized through counterparty margin payments, transaction limits and monitoring procedures. Swap transactions that are handled by a registered clearing broker are cleared though the broker to a registered clearing organization. The clearing organization establishes daily cash and upfront cash or securities margin requirements to cover potential exposure in the event of default. This process shifts the risk away from the counterparty, since the clearing organization acts as the middleman on each cleared transaction. All of the Company's swap transactions are cleared through a registered clearing broker to a central clearing organization. For derivative transactions cleared through certain clearing parties, variation margin payments are recognized as settlements. At March 31, 2018, the Company's variation margin payments are recognized as settlements, resetting the fair values of interest rate swaps to zero. At September 30, 2017, the Company posted cash collateral of $2,955 related to the initial and daily margin requirements of interest rate swaps. The fair values of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements.

14. RECENT ACCOUNTING PRONOUNCEMENTS

Adopted in quarter ended March 31, 2018

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This guidance permits an entity to elect to reclassify the tax effects that were stranded in other comprehensive income, resulting from the Tax Cuts and Jobs Act, to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. This guidance may be early adopted in any interim or annual period for which financial statements have not yet been issued and applied either in the period of adoption or retrospectively to each period in which the effect of the change in the corporate tax rate in the Act is recognized. The Company elected to early adopt this guidance and reclassify $42 thousand from accumulated other comprehensive income to retained earnings for the six months ended March 31, 2018. The adoption did not have a material impact on the Company's consolidated financial condition or results of operations. Notwithstanding the election made pursuant to this ASU, the Company's policy is to release income tax effects from accumulated other comprehensive income only when the entire portfolio to which the underlying transactions relate is liquidated, sold or extinguished.

Pending as of March 31, 2018

In August 2017, the FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This Update is intended to more closely align financial reporting of hedging relationships with risk management activities. This amendment expands hedge accounting for both nonfinancial and financial risk components, modifies the presentation of certain hedging relationships in the financial statements and eases hedge effectiveness

Table of Contents

testing requirements. The amendments are effective for fiscal years beginning after December 15, 2018. Early adoption is permissible in any interim period after the issuance of this update and is being considered by the Company. The update is not expected to have a material impact on the Company's consolidated financial condition or results of operations.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. This Update clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value (or calculated intrinsic value, if those amounts are being used to measure the award under ASC 718), the vesting conditions, or the classification of the award (as equity or liability) change as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company intends to adopt the guidance on the effective date and does not expect adoption will have a material impact on its consolidated financial condition or results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update address eight specific cash flow issues with the objective of reducing the existing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and Other Topics. Current guidance is either unclear or does not include specific guidance on these issues. Additionally, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, which requires restricted cash or restricted cash equivalents be included in beginning-of-period and end-of-period cash totals and changes in this classification be explained separately. The amendments in both these Updates are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied using a retrospective transition method. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The Company is reviewing the amendments and currently does not expect to early adopt. Adoption of this accounting guidance may affect the presentation in the Company's Consolidated Statements of Cash Flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update replace the existing incurred loss impairment methodology with a methodology that reflects the expected credit losses for the remaining life of the asset. This will require consideration of a broader range of information, including reasonably supportable forecasts, in the measurement of expected credit losses. The amendments expand disclosures of credit quality indicators, requiring disaggregation by year of origination (vintage). Additionally, credit losses on available for sale debt securities will be recognized as an allowance rather than a write-down, with reversals permitted as credit loss estimates decline. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). For public business entities that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Management has formed a working group comprised of teams from across the association including accounting, risk management, and finance. This group has begun assessing the required changes to our credit loss estimation methodologies and systems, as well as additional data and resources that may be required to comply with this standard. The Company is currently evaluating the impact that this accounting guidance may have on its consolidated financial condition or results of operations. The actual effect on our allowance for loan losses at the adoption date will be dependent upon the nature of the characteristics of the portfolio as well as the macroeconomic conditions and forecasts at that date.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance changes the accounting treatment of leases by requiring lessees to recognize operating leases on the balance sheet as lease assets (a right-to-use asset) and lease liabilities (a liability to make lease payments), measured on a discounted basis and will require both quantitative and qualitative disclosure regarding key information about the leasing arrangements. An accounting policy election to not recognize operating leases with terms of 12 months or less as assets and liabilities is permitted. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. A modified retrospective approach is required that includes a number of optional practical expedients to address leases that commenced before the effective date. An implementation team has been created to identify all leases involved, determine which, if any, practical expedients to utilize, and gather data required to comply. All leases have been identified. The Company expects to recognize a right-to-use asset and a lease liability for its operating lease commitments on the Consolidated Statements of Condition and is assessing the impact this new standard will have on its consolidated financial condition and results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU changes the accounting for certain equity investments, financial liabilities under the fair value option and presentation and disclosure requirements for financial instruments. Equity investments not accounted for under the equity method of accounting will be measured at fair value with changes recognized in net income. If there are no readily determinable fair values, the guidance allows entities to measure investments at cost less

Table of Contents

impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value of financial instruments measured at amortized cost. If an entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in fair value of a liability resulting from credit risk to be presented in OCI. ASU 2018-03 was issued in February 2018 as technical guidance to ASU 2016-01 to aid in clarification and presentation requirements . Both of these accounting and disclosure guidance are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years on a prospective basis, with a cumulative-effect adjustment to the balance sheet at the beginning of the fiscal year adopted. Early adoption is not permitted. The Company intends to adopt this guidance on October 1, 2018 and does not expect adoption will have a material impact on its consolidated financial condition and results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 to annual reporting periods and interim period within those annual periods beginning after December 15, 2017. Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. During 2016 and 2017, the FASB also issued five separate ASUs which amend the original guidance regarding principal versus agent considerations, identify performance obligations and licensing, address the presentation of sales tax, noncash consideration, contract modifications at transition, and assessing collectability, gains and losses from derecognition of nonfinancial assets and other minor technical corrections and improvements. The requirements within 2014-09 and its subsequent amendments should be applied retrospectively or modified retrospectively with a cumulative-effect adjustment. The Company's analysis suggests that the adoption of this accounting guidance is not expected to have a material effect on its consolidated financial condition and results of operations.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company's consolidated financial statements or do not apply to its operations.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include, among other things:


•	statements of our goals, intentions and expectations;


•	statements regarding our business plans and prospects and growth and operating strategies;


•	statements concerning trends in our provision for loan losses and charge-offs;


•	statements regarding the trends in factors affecting our financial condition 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 financial 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 conditions that are worse than expected;


•	decreased demand for our products and services and lower revenue and earnings because of a recession or other events;


•	adverse changes and volatility in the securities markets, credit markets or real estate markets;


•	legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements and changes related to our ability to pay dividends and the ability of Third Federal Savings, MHC to waive dividends;


•	our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;


•	changes in consumer spending, borrowing and savings habits;


•	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;


•	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;


•	changes in policy and/or assessment rates of taxing authorities that adversely affect us or our customer;


•	changes in our organization, or compensation and benefit plans and changes in expense trends (including, but not limited to trends affecting non-performing assets, charge-offs and provisions for loan losses);


•	the continuing governmental efforts to restructure the U.S. financial and regulatory system;


•	the inability of third-party providers to perform their obligations to us;


•	a slowing or failure of the moderate economic recovery;


•	the adoption of implementing regulations by a number of different regulatory bodies under the DFA, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us;


•	changes in accounting and tax estimates;


•	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


•	the ability of the U.S. Government to manage federal debt limits.

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.

Table of 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 April 2007, the nation’s largest mutually-owned savings and loan association based on total assets. We credit our success to our continued emphasis on our primary values: “Love, Trust, Respect, and a Commitment to Excellence, along with Having Fun.” Our values are reflected in the design and pricing of our loan and deposit products, as described below. Our values are further reflected in a long-term revitalization program encompassing the three-mile corridor of the Broadway-Slavic Village neighborhood in Cleveland, Ohio where our main office is located and the educational programs we have established and/or supported are located. We intend to continue to adhere to our primary values and to support our customers and the communities in which we operate.

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; and (4) monitoring and controlling our operating expenses.

Controlling Our Interest Rate Risk Exposure. Although the significant housing and credit quality issues that arose in connection with the 2008 financial crisis had a distinctly negative effect on our operating results and, as described below, that experience enhanced our risk awareness, 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 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 the levels of regulatory capital in excess of those required to be well capitalized, by promoting adjustable-rate loans and shorter-term, fixed-rate loans, and by opportunistically extending the duration of our funding sources.

Levels of Regulatory Capital

At March 31, 2018, the Company’s Tier 1 (leverage) capital totaled $1.69 billion, or 12.24% of net average assets and 22.57% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.47 billion, or 10.63% of net average assets and 19.65% 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

In July 2010, we began marketing 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.

Beginning in the latter portion of fiscal 2012, we began to feature a ten-year, fully amortizing fixed-rate, first mortgage loan in our product promotions. The ten-year, fixed-rate loan has a less severe interest rate risk profile when compared to loans with fixed-rate terms of 15 to 30 years and helps us to more effectively manage our interest rate risk exposure, yet provides our borrowers with the certainty of a fixed interest rate throughout the life of the obligation.

Table of Contents

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



	For the Six Months Ended March 31, 2018				For the Six Months Ended March 31, 2017
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
First Mortgage Loan Originations:
ARM (all Smart Rate) production	$	476,758	47.6	%	$	760,737	51.1	%
Fixed-rate production:
Terms less than or equal to 10 years	141,550		14.1		294,632		19.8
Terms greater than 10 years	383,075		38.3		433,295		29.1
Total fixed-rate production	524,625		52.4		727,927		48.9
Total First Mortgage Loan Originations:	$	1,001,383	100.0	%	$	1,488,664	100.0	%



	March 31, 2018				March 31, 2017
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Balance of Residential Mortgage Loans Held For Investment:
ARMs	$	4,938,144	45.0	%	$	4,662,351	43.7	%
Fixed-rate:
Terms less than or equal to 10 years	1,964,125		17.9		2,159,715		20.3
Terms greater than 10 years	4,072,493		37.1		3,839,199		36.0
Total fixed-rate	6,036,618		55.0		5,998,914		56.3
Total Residential Mortgage Loans Held For Investment:	$	10,974,762	100.0	%	$	10,661,265	100.0	%

The following table sets forth the balances as of March 31, 2018 for all ARM loans segregated by the next scheduled interest rate reset date.



	Current Balance of ARM Loans Scheduled for Interest Rate Reset
During the Fiscal Years Ending September 30,	(In thousands)
2018	$	103,803
2019	539,264
2020	737,713
2021	1,270,793
2022	1,548,166
2023	738,405
Total	$	4,938,144

At March 31, 2018 and September 30, 2017, mortgage loans held for sale, all of which were long-term, fixed-rate first mortgage loans and all of which were held for sale to Fannie Mae, totaled $0.5 million and $0.4 million, respectively.

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 market competitiveness/breadth of each funding source. Generally, early withdrawal options are available to our retail CD

Table of Contents

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.

During the six months ended March 31, 2018, the composition of our duration-extending funding sources changed as follows: the balance of retail CDs increased $233.8 million while the balance of brokered CDs (which is inclusive of acquisition costs and subsequent amortization) increased $65.7 million. Additionally during the six months ended March 31, 2018, we increased the balance of our short-term advances from the FHLB of Cincinnati by $59.0 million; and we added $100.0 million of new, 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 to approximately five years at inception. These funding source modifications facilitated asset growth of $263.5 million and funded stock repurchases of $13.0 million, dividends of $16.9 million and scheduled repayments of long-term borrowed funds of $114.2 million.

Other Interest Rate Risk Management Tools

In addition to maintaining the levels of regulatory capital required to be well capitalized, since 2016, we have actively marketed 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. Prior to 2010, home equity lending also represented a meaningful strategy to manage our interest rate risk profile. Between 2010 and 2015, the Association, in various steps, restricted and modified its home equity lending products and the markets they were offered in response to the 2008 financial crisis and the resulting regulatory environments that existed during that time. Through redesigned home equity products, we hope to have re-established home equity line of credit lending as a meaningful strategy to manage our interest rate risk profile. At March 31, 2018, the principal balance of home equity lines of credit totaled $1.34 billion. Our home equity lending is discussed in the Allowance for Loan Losses section of the Critical Accounting Policies that follows this Overview.

We also manage interest rate risk by selectively selling a small portion of our long-term, fixed-rate mortgage loans in the secondary market. In years 2010 and prior, this strategy was used to a greater extent to manage our interest rate risk. At March 31, 2018, we serviced $1.78 billion of loans for others, of which $1.07 billion were sold in the secondary market in 2010 and prior. Loan sales are discussed later in this Part 1, Item 2. under the heading Liquidity and Capital Resources, and in Part 1, 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, 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 confluence of unfavorable regional and macro-economic events that culminated in the 2008 housing market collapse and financial crisis, coupled with our pre-2010 expanded participation in the second lien mortgage lending markets, significantly refocused our attention with respect to 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 impairments. At March 31, 2018, 91% 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. 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 March 31, 2018, $30.5 million of loans in Chapter 7 bankruptcy status were included in total TDRs. At March 31, 2018, the recorded investment in non-accrual status loans included $32.0 million of performing loans in Chapter 7 bankruptcy status, of which $30.8 million were also reported as TDRs.

In response to the unfavorable regional and macro-economic environment that arose beginning in 2008, and in an effort to limit our credit risk exposure and improve the credit performance of new customers, we tightened our credit eligibility criteria in evaluating a borrower’s ability to successfully fulfill his or her repayment obligation and we revised the design of many of our loan products to require higher borrower down-payments, limited the products available for condominiums, eliminated certain product features (such as interest-only adjustable-rate loans and loans above certain LTV ratios with PMI), and we previously suspended home equity lending products with the exception of bridge loans between June 2010 and March 2012.

Table of Contents

The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflect the higher credit standards to which we have subjected all new originations. As of March 31, 2018, loans originated prior to 2009 had a balance of $1.26 billion, of which $32.5 million, or 2.6%, were delinquent, while loans originated in 2009 and after had a balance of $11.46 billion, of which $9.9 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 March 31, 2018, approximately 56.3% and 15.9% of the combined total of our residential Core and construction loans held for investment and approximately 36.9% and 21.3% of our home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively. In an effort to moderate the concentration of our credit risk exposure in individual states, 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 19 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 for Ohio and Florida, as disclosed earlier in this paragraph, 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 and equity loan originations for the six months ended March 31, 2018, 29.9% are secured by properties in states other than Ohio or Florida.

Our residential Home Today loans are another area of credit risk concern. Although the principal balance in these loans had declined to $101.4 million at March 31, 2018, and constituted only 0.8% of our total “held for investment” loan portfolio balance, these loans comprised 25.9% and 21.9% of our 90 days or greater delinquencies and our total delinquencies, respectively, at that date. At March 31, 2018, approximately 95.2% and 4.5% of our residential Home Today loans were secured by properties in Ohio and Florida, respectively. At March 31, 2018, the percentages of those loans delinquent 30 days or more in Ohio and Florida were 9.4% and 4.5%, respectively. The disparity between the portfolio composition ratio and delinquency composition ratio reflects the nature of the Home Today loans. We do not offer, and have 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, or low initial payment features with adjustable interest rates. Our Home Today loans, the majority of which were entered into with borrowers that had credit profiles that would not have otherwise qualified for our loan products due to deficient credit scores, generally contained the same features as loans offered to our Core borrowers. The overriding objective of our Home Today lending, just as it is with our Core lending, was the creation of successful homeowners. We attempted to manage our Home Today credit risk by requiring that borrowers attend pre- and post-borrowing financial management education and counseling and that the borrowers be referred to us by a sponsoring organization with which we have partnered. Further, to manage the credit aspect of these loans, inasmuch as the majority of these buyers did not have sufficient funds for required down payments, many loans included private mortgage insurance. At March 31, 2018, 20.0% of Home Today loans included private mortgage insurance coverage. From a peak recorded investment of $306.6 million at December 31, 2007, the total recorded investment of the Home Today portfolio has declined to $101.3 million at March 31, 2018. This trend generally reflects the evolving conditions in the mortgage real estate market and the tightening of standards imposed by issuers of private mortgage insurance. As part of our effort to manage credit risk, effective March 27, 2009, the Home Today underwriting guidelines were revised to be substantially the same as our traditional mortgage product. At March 31, 2018, the recorded investment in Home Today loans originated subsequent to March 27, 2009 was $3.2 million. Since we are no longer originating loans under our Home Today program, the Home Today portfolio will continue to decline in balance due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of our customers and the communities that we serve, during fiscal 2016 we began to offer Fannie Mae eligible, Home Ready loans. 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.

Maintaining Access to Adequate Liquidity and Diverse Funding Sources. 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 our emphasis on high capital levels. At March 31, 2018, 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 10.63%. The Association's Tier 1 (leverage) capital ratio is lower at March 31, 2018 than its ratio at September 30, 2017, which was 11.16%, due primarily to an $85 million cash dividend payment that the Association made to the Company, its sole shareholder, in December 2017 that reduced the Association's Tier 1 (leverage) capital ratio by an estimated 62 basis points. 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

Table of Contents

profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. At March 31, 2018, deposits totaled $8.35 billion (including $686.7 million of brokered CDs), while borrowings totaled $3.72 billion and borrowers’ advances and servicing escrows totaled $120.1 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 March 31, 2018, these collateral pledge support arrangements provided the Association with the ability to immediately borrow an additional $132.1 million from the FHLB of Cincinnati and $63.5 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the balance outstanding at March 31, 2018 was $4.56 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement for the maximum limit of borrowing, we would need to increase our ownership of FHLB of Cincinnati common stock by an additional $91.2 million. Third, we invest in high quality marketable securities that exhibit limited market price variability, and to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At March 31, 2018, our investment securities portfolio totaled $545.0 million. Finally, cash flows from operating activities have been a regular source of funds. During the six months ended March 31, 2018 and 2017, cash flows from operations totaled $95.1 million and $64.2 million, respectively.

Historically, a portion of the residential first mortgage loans that we originated were considered to be highly liquid as they were eligible for delivery/sale to Fannie Mae. However, due to delivery requirement changes imposed by Fannie Mae as a result of the 2008 financial crisis, effective July 1, 2010, that was no longer an available source of liquidity for the Company. We have since implemented certain loan origination changes for a portion of our loan production, which resulted in our November 15, 2013 reinstatement as an approved seller to Fannie Mae, which elevates the level of liquidity available for those loans. In addition, we have completed non-agency eligible, whole loan sales, all on a servicing retained basis, of both fixed-rate and Smart Rate loans, demonstrating that with adequate lead time, the majority of our residential first mortgage loan portfolio could be available for liquidity management purposes. At March 31, 2018, $0.5 million of agency eligible, long-term, fixed-rate first mortgage loans were classified as “held for sale.” During the six months ended March 31, 2018, $7.8 million of agency-compliant HARP II and Home Ready loans and $60.7 million of long-term, fixed-rate, agency-compliant, non-HARP II, non-Home Ready first mortgage loans were sold to Fannie Mae.

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 1.38% for the six months ended March 31, 2018 and March 31, 2017. As of March 31, 2018, our average assets per full-time employee and our average deposits per full-time employee were $13.7 million and $8.2 million, respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average balance of deposits (exclusive of brokered CDs) held at our branch offices ($201.7 million per branch office as of March 31, 2018) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses as we grow our business.

Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially give rise to materially different results under different assumptions and conditions. We believe that the most critical accounting policies 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 loan losses, income taxes and pension benefits.

Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to, and all recoveries are credited to, the related allowance. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses.

Table of Contents

We regularly review the loan portfolio and make provisions (or recapture credits) for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. Our allowance for loan losses consists of two components:


(1)	individual valuation allowances established for any impaired loans dependent on cash flows, such as performing TDRs, and IVAs related to a portion of the allowance on loans individually reviewed that represents further deterioration in the fair value of the collateral not yet identified as uncollectible; and


(2)	general valuation allowances, which are comprised of quantitative GVAs, which are general allowances for loan 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 incurred probable losses for each loan type.

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;


•	changes in national, regional, and local economic and business conditions and trends including 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;


•	changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw period;


•	changes in the experience, ability or depth of lending management;

•

changes in the volume or severity of past due loans, volume of nonaccrual 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 on individually reviewed loans;


•	existence of any concentrations of credit; and


•	effect of other external factors such as competition, or legal and regulatory requirements including market conditions and regulatory directives that impact the entire financial services industry.

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 subsequent potential 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 March 31, 2018, the balance of such individual valuation allowances was $11.2 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 continue to capture this exposure as a component of our qualitative GVA evaluation. The significance of this exposure will be monitored and, if warranted, we will enhance our loan loss methodology to include a new default factor (developed to reflect the estimated impact to the balance of the allowance for loan losses that will occur as a result of subsequent future restructurings) that will be assessed against all loans reviewed collectively. If new default factors are implemented, the qualitative GVA methodology will be adjusted to preclude duplicative loss consideration.

We evaluate the allowance for loan losses based upon the combined total of the quantitative and qualitative GVAs and IVAs. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

Table of Contents

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, as arose beginning in 2008, 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, 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 continues to comprise a significant portion of our gross charge-offs. At March 31, 2018, we had a recorded investment of $1.71 billion in home equity loans and equity lines of credit outstanding, $5.9 million, or 0.3%, of which were 90 days or more past due.

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.

The following tables set forth the allowance for loan losses allocated by loan category, the percent of allowance in each category to the total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan 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.



	March 31, 2018						December 31, 2017
	Amount		Percent of Allowance to Total Allowance		Percent of Loans in Category to Total Loans		Amount		Percent of Allowance to Total Allowance		Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
Residential Core	$	14,080	32.7	%	85.5	%	$	13,546	29.5	%	85.8	%
Residential Home Today	3,740		8.7		0.8		4,134		9.0		0.8
Home equity loans and lines of credit	25,282		58.6		13.3		28,245		61.5		12.9
Construction	4		—		0.4		4		—		0.5
Total allowance	$	43,106	100.0	%	100.0	%	$	45,929	100.0	%	100.0	%



	September 30, 2017						March 31, 2017
	Amount		Percent of Allowance to Total Allowance		Percent of Loans in Category to Total Loans		Amount		Percent of Allowance to Total Allowance		Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
Residential Core	$	14,186	29.0	%	86.2	%	$	12,936	22.8	%	86.3	%
Residential Home Today	4,508		9.2		0.9		4,700		8.2		0.9
Home equity loans and lines of credit	30,249		61.8		12.4		39,202		69.0		12.3
Construction	5		—		0.5		3		—		0.5
Total allowance	$	48,948	100.0	%	100.0	%	$	56,841	100.0	%	100.0	%

Table of Contents

The following table sets forth activity in our allowance for loan losses segregated by geographic location for the periods indicated. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of other consumer loans are considered immaterial, therefore neither is segregated by geography.



	As of and For the Three Months Ended March 31,						As of and For the Six Months Ended March 31,
	2018			2017			2018			2017
	(Dollars in thousands)
Allowance balance (beginning of the period)	$	45,929		$	60,447		$	48,948		$	61,795
Charge-offs:
Real estate loans:
Residential Core
Ohio	183			494			531			882
Florida	12			233			29			998
Other	—			—			27			19
Total Residential Core	195			727			587			1,899
Residential Home Today
Ohio	288			391			906			1,094
Florida	—			5			57			83
Other	—			—			—			21
Total Residential Home Today	288			396			963			1,198
Home equity loans and lines of credit
Ohio	725			681			1,593			1,386
Florida	712			298			1,099			1,196
California	—			—			—			83
Other	182			129			463			492
Total Home equity loans and lines of credit	1,619			1,108			3,155			3,157
Total charge-offs	2,102			2,231			4,705			6,254
Recoveries:
Real estate loans:
Residential Core	787			2,148			1,380			2,829
Residential Home Today	599			317			1,001			608
Home equity loans and lines of credit	1,893			2,160			3,482			3,863
Total recoveries	3,279			4,625			5,863			7,300
Net recoveries	1,177			2,394			1,158			1,046
Provision (Credit) for loan losses	(4,000		)	(6,000		)	(7,000		)	(6,000		)
Allowance balance (end of the period)	$	43,106		$	56,841		$	43,106		$	56,841
Ratios:
Net recoveries to average loans outstanding (annualized)	0.04		%	0.08		%	0.01		%	0.01		%
Allowance for loan losses to non-accrual loans at end of the period	55.09		%	67.97		%	55.09		%	67.97		%
Allowance for loan losses to the total recorded investment in loans at end of the period	0.34		%	0.47		%	0.34		%	0.47		%

The net recoveries of $1.2 million during the six months ended March 31, 2018 increased from $1.0 million for the six months ended March 31, 2017, as credit quality continued to improve during the current fiscal year.

We continue to evaluate loans becoming delinquent for potential losses and record provisions for our estimate of those losses. We expect a moderate level of charge-offs to continue as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.

Table of Contents

During the three months ended March 31, 2018, the total allowance for loan losses decreased $2.8 million, to $43.1 million from $45.9 million at December 31, 2017, as we recorded a $4.0 million credit for loan losses, while recoveries exceeded loan charge-offs by $1.2 million. The allowance for loan losses related to loans evaluated collectively decreased by $2.7 million during the three months ended March 31, 2018, and the allowance for loan losses related to loans evaluated individually decreased by approximately $0.1 million. Refer to the "analysis of the allowance for loan losses" and "activity in the allowance for loan losses" tables in Note 4 of the Notes to the Unaudited Interim Consolidated Financial Statements for more information. Other than the less significant construction and other consumer loans segments, changes during the three months ended March 31, 2018 in the balances of the GVAs, excluding changes in IVAs, related to the significant loan segments are described as follows:

•

Residential Core – The recorded investment of this segment of the loan portfolio increased 0.5%, or $49.5 million, during the quarter, while the total allowance for loan losses for this segment increased 3.4% or $0.5 million. The portion of this loan segment’s allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated), increased 12.1%, or $0.7 million, to $6.9 million at March 31, 2018 from $6.1 million at December 31, 2017. The ratio of this portion of the allowance for loan losses to the total balance of loans in this loan segment that were evaluated collectively was 0.06% at March 31, 2018 and December 31, 2017. Total delinquencies decreased 28.3% to $21.9 million at March 31, 2018 from $30.5 million at December 31, 2017. While loans 90 or more days delinquent decreased 7.7% to $11.1 million at March 31, 2018 from $12.0 million at December 31, 2017, loans 30 to 89 days delinquent decreased by 41.7%. Net recoveries of $0.6 million for the quarter ended March 31, 2018 were less than net recoveries of $1.4 million during the quarter ended March 31, 2017. The credit profile of this portfolio segment remained strong during the quarter due to the addition of high credit quality, residential first mortgage loans. Loan performance has been strong in this portfolio, but as a result of the overall increase in this loan portfolio, a slight increase in the allowance was warranted. Delinquencies decreased during the quarter, particularly in the 30 to 89 days delinquent category, correlated to Florida borrowers impacted by Hurricane Irma in September 2017 that at December 31, 2017, elections to defer three months of mortgage payments through repayment plans, term extensions or other loan modifications were still outstanding. Deferrals remaining from the prior quarter were resolved at March 31, 2018 with no material increase in loan losses.

•

Residential Home Today – The recorded investment of this segment of the loan portfolio decreased 2.5%, or $2.5 million, as we are no longer originating loans under the Home Today program. The total allowance for loan losses for this segment decreased from $4.1 million at the prior quarter to $3.7 million at March 31, 2018. The portion of this loan segment’s allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated), decreased by 10.2% to $1.6 million at March 31, 2018 from $1.8 million at December 31, 2017. The ratio of this portion of the allowance to the total balance of loans in this loan segment that were evaluated collectively decreased approximately 0.2% to 2.9% at March 31, 2018 from 3.1% at December 31, 2017. Total delinquencies decreased to $9.3 million at March 31, 2018 from $11.6 million at December 31, 2017. Delinquencies greater than 90 days decreased to $5.9 million from $6.6 million at December 31, 2017 and loans 30 to 89 days delinquent decreased by 31.8%, or $1.6 million. There were net recoveries of $0.3 million during the quarter ending March 31, 2018 compared to net charge-offs of $0.1 million during the quarter ending March 31, 2017. The allowance for this portfolio fluctuates based on not only the generally declining portfolio balance, but also on the credit profile trends in this portfolio. This portfolio's allowance decreased this quarter based on the decrease in the Home Today balance yet risk remains based on the generally less stringent credit requirements that were in place at the time that these borrowers qualified for their loans and the continued depressed home values that remain in this portfolio.

•

Home Equity Loans and Lines of Credit – The recorded investment of this segment of the loan portfolio increased 3.9%, or $65.0 million, to $1.71 billion at March 31, 2018 from $1.65 billion at December 31, 2017. The total allowance for loan losses for this segment decreased approximately $2.9 million to $25.3 million from $28.2 million at December 31, 2017. During the quarter ended March 31, 2018, the portion of this loan segment's allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated) decreased by $3.4 million, or 12.6%, to $23.2 million from $26.6 million at December 31, 2017. The ratio of this portion of the allowance to the total balance of loans in this loan segment that were evaluated collectively decreased to 1.4% for March 31, 2018 as compared to 1.7% for December 31, 2017. Total delinquencies for this portfolio segment decreased 31.3% to $11.3 million at March 31, 2018 as compared to $16.4 million at December 31, 2017. Delinquencies greater than 90 days decreased 16.1% to $5.9 million at March 31, 2018 from $7.0 million at December 31, 2017, while 30 to 89 days delinquent loans decreased 42.6% to $5.4 million at March 31, 2018 from $9.4 million at the prior quarter end. The decrease in delinquencies during the quarter ended March 31, 2018, primarily relates to Florida borrowers impacted by Hurricane Irma, who elected deferrals of three months of mortgage payments during the quarter ended December 31, 2017 and those deferrals were reflected as delinquencies at December 31, 2017. Deferrals remaining from the prior quarter were resolved at March 31, 2018 with no material

Table of Contents

increase in loan losses. Net recoveries for this loan segment during the current quarter were less at $0.3 million, as compared to $1.1 million of net recoveries for the quarter ended March 31, 2017. The principal balance of home equity lines of credit originated without amortizing payments during the draw period that are coming to the end of its draw period through fiscal 2020 is $306.5 million at March 31, 2018 as compared to $396.3 million at December 31, 2017. Since these are customers whose lines of credit were originated without amortizing payments during the draw period, they are most at risk for exposure to increased payment shock at the end of the draw period. This decrease in balances helps support the overall reduction of the allowance this quarter. The allowance reflects our consideration of the potentially adverse impact that required payment increases that occur as home equity lines of credit near the end of their draw periods may have on our borrowers ability to meet their debt service obligations, and as a result, the allowance for this loan segment remains elevated.

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 construction loan portfolio is secured by properties located in Ohio and the balances of other consumer loans are considered immaterial. Therefore, neither is segregated by geographic location.



	March 31, 2018					December 31, 2017					September 30, 2017					March 31, 2017
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)
Real estate loans:
Residential Core
Ohio	$	6,100,300				$	6,093,219				$	6,061,515				$	5,969,438
Florida	1,739,286					1,734,724					1,739,098					1,729,858
Other	3,033,815					2,996,824					2,945,591					2,847,248
Total Residential Core	10,873,401			85.5	%	10,824,767			85.8	%	10,746,204			86.2	%	10,546,544			86.3	%
Residential Home Today
Ohio	96,541					99,992					103,803					109,441
Florida	4,589					4,794					4,924					5,038
Other	231					234					237					242
Total Residential Home Today	101,361			0.8		105,020			0.8		108,964			0.9		114,721			0.9
Home equity loans and lines of credit
Ohio	624,015					620,042					606,301					590,139
Florida	359,258					350,433					340,530					351,157
California	236,353					219,231					205,157					204,346
Other	471,082					436,024					400,327					358,817
Total Home equity loans and lines of credit	1,690,708			13.3		1,625,730			12.9		1,552,315			12.4		1,504,459			12.3
Total Construction	54,524			0.4		58,837			0.5		60,956			0.5		63,880			0.5
Other consumer loans	2,812			—		2,886			—		3,050			—		3,012			—
Total loans receivable	12,722,806			100.0	%	12,617,240			100.0	%	12,471,489			100.0	%	12,232,616			100.0	%
Deferred loan expenses, net	35,023					33,251					30,865					26,089
Loans in process	(31,822		)			(35,160		)			(34,100		)			(35,086		)
Allowance for loan losses	(43,106		)			(45,929		)			(48,948		)			(56,841		)
Total loans receivable, net	$	12,682,901				$	12,569,402				$	12,419,306				$	12,166,778

Table of Contents

On March 31, 2018, the unpaid principal balance of our home equity loans and lines of credit portfolio consisted of $354.2 million in home equity loans (which included $249.8 million of home equity lines of credit, which are in the amortization period and no longer eligible to be drawn upon, and $18.8 million in bridge loans) and $1.34 billion in home equity lines of credit. The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of March 31, 2018. Home equity lines of credit in the draw period are reported according to geographic distribution.



	Credit Exposure		Principal Balance		Percent Delinquent 90 Days or More		Mean CLTV Percent at Origination (2)		Current Mean CLTV Percent (3)
	(Dollars in thousands)
Home equity lines of credit in draw period (by state)
Ohio	$	1,253,589	$	486,408	0.05	%	60	%	53	%
Florida	458,520		230,681		0.07	%	58	%	52	%
California	387,005		193,019		—	%	64	%	57	%
Other (1)	894,394		426,373		0.08	%	64	%	61	%
Total home equity lines of credit in draw period	2,993,508		1,336,481		0.05	%	61	%	55	%
Home equity lines in repayment, home equity loans and bridge loans	354,227		354,227		1.46	%	67	%	75	%
Total	$	3,347,735	$	1,690,708	0.35	%	62	%	59	%

_________________


(1)	No other individual state has a committed or drawn balance greater than 10% of our total equity lending portfolio nor 5% of total loans.


(2)	Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.

(3)

Current Mean CLTV is based on best available first mortgage and property values as of March 31, 2018. 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 March 31, 2018, 43.1% of our home equity lending portfolio was either in a first lien position (25.0%), in a subordinate (second) lien position behind a first lien that we held (13.7%) or in a subordinate (second) lien position behind a first lien that was held by a loan that we serviced for others (4.4%). In addition, at March 31, 2018, 15.2% of our home equity line of credit portfolio in the draw period was making only the required minimum payment on the outstanding line balance.

Table of 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 current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of March 31, 2018. Home equity lines of credit in the draw period are stratified by the calendar year in which originated:



	Credit Exposure		Principal Balance		Percent Delinquent 90 Days or More		Mean CLTV Percent at Origination (1)		Current Mean CLTV Percent (2)
	(Dollars in thousands)
Home equity lines of credit in draw period
2008 and Prior	$	478,274	$	236,189	0.23	%	64	%	54	%
2009	166,729		65,085		0.22	%	55	%	50	%
2010	14,964		5,341		—	%	58	%	45	%
2011	—		—		—	%	—	%	—	%
2012	155		51		—	%	44	%	66	%
2013	36,422		11,608		—	%	60	%	43	%
2014	182,277		68,722		—	%	60	%	46	%
2015	266,118		115,289		0.01	%	60	%	49	%
2016	478,565		218,294		—	%	62	%	55	%
2017	1,011,271		470,152		—	%	61	%	59	%
2018	358,733		145,750		—	%	61	%	61	%
Total home equity lines of credit in draw period	2,993,508		1,336,481		0.05	%	61	%	55	%
Home equity lines in repayment, home equity loans and bridge loans	354,227		354,227		1.46	%	67	%	75	%
Total	$	3,347,735	$	1,690,708	0.35	%	62	%	59	%

________________


(1)	Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.

(2)

As shown in the origination by year table above, the percent of loans delinquent 90 days or more (seriously delinquent) for loans originated during the years preceding the 2008 financial and housing crisis are, on a relative basis, higher than for the years following 2008. The years preceding 2008 saw rapidly increasing housing prices, especially in our Florida market. As the housing prices declined along with the general economic downturn and higher levels of unemployment that accompanied the 2008 financial crisis, we see that reflected in delinquencies for those years. Home equity lines of credit originated during those years also saw higher loan amounts, higher permitted loan-to-value ratios, and lower credit scores.

In general, the home equity line of credit product originated prior to June 2010 (when new home equity lending was temporarily suspended) was characterized by a ten-year draw period followed by a ten-year repayment period; however, there were two types of transactions that could result in a draw period that extended beyond ten years. The first transaction involved customer requests for increases in the amount of their home equity line of credit. When the customer’s credit performance and profile supported the increase, the draw period term was reset for the ten-year period following the date of the increase in the home equity line of credit amount. A second transaction that impacted the draw period involved extensions. For a period of time prior to June 2008, the Association had a program that evaluated home equity lines of credit that were nearing the end of their draw period and made a determination as to whether or not the customer should be offered an additional ten-year draw period. If the account and customer met certain pre-established criteria, an offer was made to extend the otherwise expiring draw period by ten years from the date of the offer. If the customer chose to accept the extension, the origination date of the account remained unchanged but the account would have a revised draw period that was extended by ten years. As a result of these two programs, the reported draw periods for certain home equity line of credit accounts exceed ten years.

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 equity lines of credit which are delinquent 90 days or more. In addition, as customers approach the end of the draw period and face the likelihood of an increased monthly payment

Table of Contents

during the amortization period, we continue to work with them to manage their loan payments, including the possibility of restructuring loans, in an attempt to help families keep their home.

The following table sets forth, as of March 31, 2018, the principal balance of home equity lines of credit in the draw period segregated by the current combined LTV range and by fiscal year in which the draw period expires.



	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 (2)	Total
	(Dollars in thousands)
2018 (1)	$148,174	$12,546	$3,648	$5,807	$2,486	$172,661
2019 (1)	178,500	4,867	999	974	3,719	189,059
2020 (1)	125,638	121	20	64	1,439	127,282
2021 (1)	43,774	14	—	—	157	43,945
2022	49	34	—	—	—	83
2023 (1)	21	—	—	—	—	21
Post 2023	787,617	9,426	143	86	6,158	803,430
Total	$1,283,773	$27,008	$4,810	$6,931	$13,959	$1,336,481

_________________


(1)	Home equity lines of credit whose draw period ends in fiscal years 2018, 2019, 2020, 2021 and 2023 include $18.8 million, $50.8 million, $112.8 million, $43.9 million and $0.02 million respectively, of lines where the customer has an amortizing payment during the draw period.


(2)	Market data necessary for stratification is not readily available.

The following table sets forth the breakdown of current mean CLTV percentages for our home equity lines of credit in the draw period as of March 31, 2018.



	Credit Exposure		Principal Balance		Percent of Total Principal Balance		Percent Delinquent 90 Days or More		Mean CLTV Percent at Origination (2)		Current Mean CLTV Percent (3)
	(Dollars in thousands)
Home equity lines of credit in draw period (by current mean CLTV)
< 80%	$	2,900,291	$	1,283,674	96.0	%	0.05	%	61	%	54	%
80 - 89.9%	47,961		27,008		2.0	%	0.55	%	79	%	82	%
90 - 100%	5,605		4,810		0.4	%	—	%	79	%	95	%
> 100%	7,546		6,931		0.5	%	—	%	78	%	135	%
Unknown (1)	32,105		14,058		1.1	%	—	%	58	%	(1	)
	$	2,993,508	$	1,336,481	100.0	%	0.05	%	61	%	55	%

_________________


(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)

Table of Contents

Delinquent Loans

The following tables set forth the number and recorded investment in loan delinquencies by type, segregated by geographic location and severity of delinquency at the dates indicated. The majority of our construction loan portfolio is secured by properties located in Ohio; therefore, it was not segregated by geography. There were no delinquencies in the construction loan portfolio for the quarters ended March 31, 2018, September 30, 2017 and March 31, 2017.



	Loans Delinquent for						Total
	30-89 Days			90 Days or More			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
March 31, 2018
Real estate loans:
Residential Core
Ohio	79	$	7,329	98	$	8,294	177	$	15,623
Florida	7	933		18	2,291		25	3,224
Other	7	2,549		4	465		11	3,014
Total Residential Core	93	10,811		120	11,050		213	21,861
Residential Home Today
Ohio	87	3,309		179	5,779		266	9,088
Florida	1	70		5	134		6	204
Other	—	—		—	—		—	—
Total Residential Home Today	88	3,379		184	5,913		272	9,292
Home equity loans and lines of credit
Ohio	90	2,191		139	2,621		229	4,812
Florida	33	1,841		82	2,133		115	3,974
California	7	353		3	200		10	553
Other	26	1,028		47	929		73	1,957
Total Home equity loans and lines of credit	156	5,413		271	5,883		427	11,296
Total	337	$	19,603	575	$	22,846	912	$	42,449



	Loans Delinquent for						Total
	30-89 Days			90 Days or More			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
December 31, 2017
Real estate loans:
Residential Core
Ohio	92	$	8,600	105	$	8,448	197	$	17,048
Florida	40	8,318		25	3,053		65	11,371
Other	4	1,626		4	465		8	2,091
Total Residential Core	136	18,544		134	11,966		270	30,510
Residential Home Today
Ohio	127	4,617		199	6,434		326	11,051
Florida	4	335		5	201		9	536
Other	1	—		—	—		1	—
Total Residential Home Today	132	4,952		204	6,635		336	11,587
Home equity loans and lines of credit
Ohio	118	3,254		133	1,949		251	5,203
Florida	61	4,091		120	3,916		181	8,007
California	9	681		7	491		16	1,172
Other	33	1,411		46	652		79	2,063
Total Home equity loans and lines of credit	221	9,437		306	7,008		527	16,445
Construction	1	294		—	—		1	294
Total	490	$	33,227	644	$	25,609	1,134	$	58,836

Table of Contents



	Loans Delinquent for						Total
	30-89 Days			90 Days or More			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
September 30, 2017
Real estate loans:
Residential Core
Ohio	82	$	6,850	114	$	8,756	196	$	15,606
Florida	12	1,671		26	2,507		38	4,178
Other	1	149		4	712		5	861
Total Residential Core	95	8,670		144	11,975		239	20,645
Residential Home Today
Ohio	123	5,244		193	6,678		316	11,922
Florida	4	319		5	173		9	492
Total Residential Home Today	127	5,563		198	6,851		325	12,414
Home equity loans and lines of credit
Ohio	117	3,037		133	2,134		250	5,171
Florida	48	1,884		99	2,345		147	4,229
California	7	590		9	354		16	944
Other	22	859		44	575		66	1,434
Total Home equity loans and lines of credit	194	6,370		285	5,408		479	11,778
Total	416	$	20,603	627	$	24,234	1,043	$	44,837



	Loans Delinquent for						Total
	30-89 Days			90 Days or More			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
March 31, 2017
Real estate loans:
Residential Core
Ohio	77	$	7,313	125	$	9,328	202	$	16,641
Florida	8	1,015		28	2,258		36	3,273
Other	1	—		3	505		4	505
Total Residential Core	86	8,328		156	12,091		242	20,419
Residential Home Today
Ohio	104	4,586		207	7,629		311	12,215
Florida	2	129		7	287		9	416
Other	—	—		—	—		—	—
Total Residential Home Today	106	4,715		214	7,916		320	12,631
Home equity loans and lines of credit
Ohio	87	1,983		161	2,283		248	4,266
Florida	35	1,421		116	2,528		151	3,949
California	6	309		5	98		11	407
Other	23	1,092		40	400		63	1,492
Total Home equity loans and lines of credit	151	4,805		322	5,309		473	10,114
Total	343	$	17,848	692	$	25,316	1,035	$	43,164

Loans delinquent 90 days or more were 0.2% of total net loans at March 31, 2018, December 31, 2017, September 30, 2017 and March 31, 2017. Loans delinquent 30 to 89 days were 0.2% of total net loans at March 31, 2018 compared to 0.3% at December 31, 2017 and 0.2% at September 30, 2017 and March 31, 2017.

Table of Contents

Non-Performing Assets and Troubled Debt Restructurings

The following table sets forth the recorded investments and categories of our non-performing assets and TDRs at the dates indicated.



	March 31, 2018			December 31, 2017			September 30, 2017			March 31, 2017
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential Core	$	41,223		$	42,343		$	43,797		$	46,893
Residential Home Today	16,248			16,773			18,109			19,856
Home equity loans and lines of credit	20,777			19,491			17,185			16,877
Total non-accrual loans (1)(2)	78,248			78,607			79,091			83,626
Real estate owned	3,668			4,290			5,521			5,617
Total non-performing assets	$	81,916		$	82,897		$	84,612		$	89,243
Ratios:
Total non-accrual loans to total loans	0.61		%	0.62		%	0.63		%	0.68		%
Total non-accrual loans to total assets	0.56		%	0.57		%	0.58		%	0.62		%
Total non-performing assets to total assets	0.59		%	0.60		%	0.62		%	0.67		%
TDRs: (not included in non-accrual loans above)
Real estate loans:
Residential Core	$	51,188		$	50,935		$	53,511		$	54,509
Residential Home Today	28,769			28,824			28,751			29,933
Home equity loans and lines of credit	22,147			21,122			20,864			20,391
Total	$	102,104		$	100,881		$	103,126		$	104,833

_________________

(1)

Totals at March 31, 2018, December 31, 2017, September 30, 2017, and March 31, 2017, include $49.2 million, $45.6 million, $47.0 million, and $50.2 million, respectively, in TDRs that are less than 90 days past due but included with nonaccrual loans for a minimum period of six months from the restructuring date due to their non-accrual status prior to restructuring, because they have been partially charged off, or because all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy.


(2)	Includes $10.4 million, $11.8 million, $11.9 million, and $11.9 million in TDRs that are 90 days or more past due at March 31, 2018, December 31, 2017, September 30, 2017, and March 31, 2017, respectively.

The gross interest income that would have been recorded during the six months ended March 31, 2018 and March 31, 2017 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 $4.7 million and $5.2 million, respectively. The interest income recognized on those loans included in net income for the six months ended March 31, 2018 and March 31, 2017 was $5.3 million and $3.3 million, respectfully.

At March 31, 2018, December 31, 2017, September 30, 2017, and March 31, 2017, the recorded investment of impaired 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 for impairment until, at a minimum, contractual payments are less than 30 days past due. Also, the recorded investment of non-accrual loans includes loans that are not included in the recorded investment of impaired loans because they are included in loans collectively evaluated for impairment.

Table of Contents

The table below sets forth the recorded investments and categories of loans representing the difference between non-accrual loans and impaired loans at the dates indicated.



	March 31, 2018			December 31, 2017			September 30, 2017			March 31, 2017
	(Dollars in thousands)
Non-Accrual Loans	$	78,248		$	78,607		$	79,091		$	83,626
Accruing TDRs	102,104			100,881			103,126			104,833
Performing Impaired	5,130			5,038			3,607			4,161
Collectively Evaluated	(5,209		)	(6,900		)	(5,264		)	(4,466		)
Total Impaired loans	$	180,273		$	177,626		$	180,560		$	188,154

In response to the economic challenges facing many borrowers, the Association continues to restructure loans, resulting in $161.7 million of TDRs (accrual and non-accrual) recorded at March 31, 2018. An increase of $3.4 million in the recorded investment of TDRs from December 31, 2017 is partially attributed to equity lines of credit originated without amortizing payments during the draw period that are coming to the end of the draw period. Borrowers whose lines of credit originated without amortizing payments are most at risk for exposure to increased payment shock at the end of the draw period. There was a $0.3 million decrease in the recorded investment of TDRs from September 30, 2017 and a $5.3 million decrease from March 31, 2017.

Loan restructuring is a method used to help families keep their homes and preserve our 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 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 issued in July 2012. For discussion on impairment measurement, see Note 4 to the Unaudited Interim Consolidated Financial Statements: LOANS AND ALLOWANCE FOR LOAN LOSSES.

Table of Contents

The following table sets forth the recorded investment in accrual and non-accrual TDRs, by the types of concessions granted, as of March 31, 2018.



	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
	(In thousands)
Accrual
Residential Core	$	9,746	$	403	$	6,539	$	16,492	$	10,738	$	7,270	$	51,188
Residential Home Today	3,858		—		3,537		9,425		11,090		859		28,769
Home equity loans and lines of credit	99		5,086		1,197		13,726		163		1,876		22,147
Total	$	13,703	$	5,489	$	11,273	$	39,643	$	21,991	$	10,005	$	102,104
Non-Accrual, Performing
Residential Core	$	746	$	—	$	1,414	$	2,168	$	8,792	$	14,187	$	27,307
Residential Home Today	664		—		705		537		5,109		2,421		9,436
Home equity loans and lines of credit	—		236		521		5,423		1,682		4,559		12,421
Total	$	1,410	$	236	$	2,640	$	8,128	$	15,583	$	21,167	$	49,164
Non-Accrual, Non-Performing
Residential Core	$	207	$	—	$	1,637	$	562	$	853	$	1,411	$	4,670
Residential Home Today	116		—		742		218		2,390		834		4,300
Home equity loans and lines of credit	—		239		341		117		181		560		1,438
Total	$	323	$	239	$	2,720	$	897	$	3,424	$	2,805	$	10,408
Total TDRs
Residential Core	$	10,699	$	403	$	9,590	$	19,222	$	20,383	$	22,868	$	83,165
Residential Home Today	4,638		—		4,984		10,180		18,589		4,114		42,505
Home equity loans and lines of credit	99		5,561		2,059		19,266		2,026		6,995		36,006
Total	$	15,436	$	5,964	$	16,633	$	48,668	$	40,998	$	33,977	$	161,676

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 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.

Income Taxes. We consider accounting for income taxes a critical accounting policy due to the subjective nature of certain estimates, including the impact of tax rate changes, such as those implemented by the Tax Cuts and Jobs Act signed into law in December 2017, that are involved in the calculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We must assess the realization of the deferred tax asset and, to the extent that we believe that recovery is not likely, a valuation allowance is established. Adjustments to increase or decrease existing valuation allowances, if any, are charged or credited, respectively, to income tax expense. At March 31, 2018, no valuation allowances were outstanding. Even though we have determined a valuation allowance is not required for deferred tax assets at March 31, 2018, there is no guarantee that those assets, if any, will be recognizable in the future.

Pension Benefits. The determination of our obligations and expense for pension benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate and expected long-term rate of return on plan assets. Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions could materially affect future pension obligations and expense.

Table of Contents

Comparison of Financial Condition at March 31, 2018 and September 30, 2017

Total assets increased $263.5 million, or 2%, to $13.96 billion at March 31, 2018 from $13.69 billion at September 30, 2017. This increase was primarily the result of an increase in the balance of loans held for investment.

Cash and cash equivalents increased $2.9 million, or 1%, to $271.1 million at March 31, 2018 from $268.2 million at September 30, 2017 as we hold cash to maintain the level of liquidity described later in the Liquidity and Capital Resources section.

Investment securities increased $7.5 million, or 1.4%, to $545.0 million at March 31, 2018 from $537.5 million at September 30, 2017. Investment securities increased as $86.2 million in purchases exceeded the combined effect of $67.6 million in principal paydowns, $8.7 million in net unrealized losses and $2.3 million of net acquisition premium amortization that occurred in the mortgage-backed securities portfolio during the six months ended March 31, 2018. There were no sales of investment securities during the six months ended March 31, 2018.

Loans held for investment, net, increased $263.6 million, or 2%, to $12.68 billion at March 31, 2018 from $12.42 billion at September 30, 2017. Residential mortgage loans increased $119.6 million, or 1%, to $10.97 billion at March 31, 2018. The increase in residential mortgage loans was combined with $0.8 million in net recoveries during the six months ended March 31, 2018. During the six months ended March 31, 2018, $476.8 million of three- and five-year “SmartRate” loans were originated while $524.6 million of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated. These fixed-rate originations were partially offset by paydowns and fixed-rate loan sales. Between September 30, 2017 and March 31, 2018, the total fixed-rate portion of the first mortgage loan portfolio decreased $2.0 million and was comprised of a decrease of $89.2 million in the balance of fixed-rate loans with original terms of 10 years or less, along with an increase of $87.2 million in the balance of fixed-rate loans with original terms greater than 10 years. During the six months ended March 31, 2018, we completed $68.5 million in loan sales, which included $7.8 million of agency-compliant HARP II and Home Ready loans and $60.7 million of long-term, fixed-rate, agency-compliant, non-HARP II and non-Home Ready first mortgage loans to Fannie Mae.

Augmenting the increase in residential mortgage loans was a $138.4 million increase in the balance of home equity loans and lines of credit during the six months ended March 31, 2018 as new originations and additional draws on existing accounts exceeded repayments. The increases reflected since September 30, 2017 reverses the downward trend over the past few years and reflects a renewed focus on the origination of home equity loans and lines of credit. Commitments originated for home equity loans and lines of credit and bridge loans were $773.3 million for the six months ended March 31, 2018 and $464.1 million for the six months ended March 31, 2017. At March 31, 2018, pending commitments to originate new home equity lines of credit and bridge loans totaled $91.3 million and $28.0 million, respectively. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.

The total allowance for loan losses decreased $5.8 million, or 12%, to $43.1 million at March 31, 2018 from $48.9 million at September 30, 2017, primarily reflecting improved credit metrics, including continued strong recoveries of loan amounts previously charged off, low levels of current loan charge-offs and reduced exposure from home equity lines of credit coming to the end of the draw period. Refer to Note 4. Loans and Allowance for Loan Losses for additional discussion.

Federal Home Loan Bank stock increased $3.5 million, or 4% to $93.5 million at March 31, 2018 from $90.0 million at September 30, 2017. The increase was necessary to satisfy common stock ownership requirements related to the increase in the balance of FHLB advances, discussed later.

Deposits increased $198.8 million, or 2%, to $8.35 billion at March 31, 2018 from $8.15 billion at September 30, 2017. The increase in deposits resulted primarily from a $299.4 million increase in CDs partially offset by a $10.2 million decrease in our high-yield checking accounts (a subcategory of our checking accounts) and an $89.9 million decrease in high-yield savings accounts (a subcategory of savings accounts). We believe that our high-yield savings accounts as well as our high-yield checking accounts provide a stable source of funds. In addition, our high-yield savings accounts are expected to reprice in a manner similar to our home equity lending products, and, therefore, assist us in managing interest rate risk. The balance of brokered CDs at March 31, 2018 was $686.7 million.

Borrowed funds, all from the FHLB of Cincinnati, increased $45.7 million, or 1%, to $3.72 billion at March 31, 2018 from $3.67 billion at September 30, 2017. This increase primarily reflects a $59.0 million increase in the balance of short-term advances and an additional $100.0 million of new 90 day advances that are hedged by equal notional amounts of new interest rate swaps with initial fixed-pay terms of five-years, partially offset by principal repayments, as a combination of loan growth, share repurchases and dividend payments resulted in increased cash demands. The total balance of borrowed funds of $3.72 billion at March 31, 2018 consisted of an overnight advance of $1.17 billion, long-term advances of $945 million with a

Table of Contents

remaining weighted average maturity of approximately 0.5 years and term advances of $1.60 billion aligned with interest rate swap contracts with a remaining weighted average effective maturity of approximately 3.7 years. Interest rate swaps have been used to extend the duration of short-term borrowings to approximately five years 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 for additional discussion regarding short-term borrowings and interest-rate swaps.

Servicing escrows decreased $3.8 million, or 11%, to $31.9 million at March 31, 2018 from $35.8 million at September 30, 2017. Principal and interest collected decreased $1.1 million combined with a $2.7 million decrease in retained tax payments collected from borrowers during the current period. Principal and interest will fluctuate based on normal curtailments and paydowns which are influenced by the relative level of market interest rates.

Total shareholders’ equity increased $39.8 million, or 2%, to $1.73 billion at March 31, 2018 from $1.69 billion at September 30, 2017. This net increase primarily reflected the effect of $42.9 million of net income and the positive impact related to awards under the stock-based compensation plan, the allocation of shares held by the ESOP and the increase in other comprehensive income, which were partially offset by $13.0 million of repurchases of outstanding common stock and $16.9 million of cash dividend payments. As a result of a July 19, 2017 mutual member vote, Third Federal Savings, MHC, the mutual holding company that owns 81% of the outstanding stock of the Company, waived the receipt of its share of the dividends 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.

Table of Contents

Comparison of Operating Results for the Three Months Ended March 31, 2018 and 2017

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 were included in the computation of average balances, but have been reflected in the table as loans carrying a zero 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
	March 31, 2018								March 31, 2017
	Average Balance			Interest Income/ Expense			Yield/ Cost (2)		Average Balance			Interest Income/ Expense			Yield/ Cost (2)
	(Dollars in thousands)
Interest-earning assets:
Interest-earning cash equivalents	$	231,728		$	872		1.51	%	$	208,429		$	399		0.77	%
Mortgage-backed securities	542,114			2,759			2.04	%	526,454			2,198			1.67	%
Loans (1)	12,615,707			105,239			3.34	%	12,064,232			97,676			3.24	%
Federal Home Loan Bank stock	92,643			1,310			5.66	%	79,797			810			4.06	%
Total interest-earning assets	13,482,192			110,180			3.27	%	12,878,912			101,083			3.14	%
Noninterest-earning assets	367,342								352,712
Total assets	$	13,849,534							$	13,231,624
Interest-bearing liabilities:
Checking accounts	$	957,316		224			0.09	%	$	998,593		228			0.09	%
Savings accounts	1,404,328			492			0.14	%	1,527,595			521			0.14	%
Certificates of deposit	5,876,746			22,914			1.56	%	5,646,584			20,571			1.46	%
Borrowed funds	3,722,445			14,852			1.60	%	3,202,585			9,477			1.18	%
Total interest-bearing liabilities	11,960,835			38,482			1.29	%	11,375,357			30,797			1.08	%
Noninterest-bearing liabilities	158,421								173,126
Total liabilities	12,119,256								11,548,483
Shareholders’ equity	1,730,278								1,683,141
Total liabilities and shareholders’ equity	$	13,849,534							$	13,231,624
Net interest income				$	71,698							$	70,286
Interest rate spread (2)(3)							1.98	%							2.06	%
Net interest-earning assets (4)	$	1,521,357							$	1,503,555
Net interest margin (2)(5)				2.13		%						2.18		%
Average interest-earning assets to average interest-bearing liabilities	112.72		%						113.22		%
Selected performance ratios:
Return on average assets (2)				0.67		%						0.71		%
Return on average equity (2)				5.39		%						5.58		%
Average equity to average assets				12.49		%						12.72		%

_________________


(1)	Loans include both mortgage loans held for sale and loans held for investment.


(2)	Annualized.


(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.

Table of Contents

General. Net income decreased $0.2 million, or 1%, to $23.3 million for the quarter ended March 31, 2018 from $23.5 million for the quarter ended March 31, 2017. The slight decrease in net income was attributable primarily to a combination of a decrease in the credit for loan losses and increases in compensation and marketing expenses, partially offset by an increase in net interest income and a lower effective tax rate.

Interest and Dividend Income. Interest and dividend income increased $9.1 million, or 9% to $110.2 million during the current quarter compared to $101.1 million during the same quarter in the prior year. The increase in interest and dividend income resulted primarily from an increase in interest income from loans and to a lesser extent, interest earning cash equivalents and Federal Home Loan Bank stock.

Interest income on loans increased $7.5 million, or 8%, to $105.2 million during the current quarter compared to $97.7 million during the same quarter in the prior year. This change was attributed to a $551.5 million, or a 5%, increase in the average balance of loans to $12.62 billion for the quarter ended March 31, 2018 compared to $12.06 billion during the same quarter last year as new loan production exceeded repayments and loan sales. In addition to the increase in the average balance was a ten basis point increase in the average yield on loans to 3.34% for the current quarter from 3.24% for the same quarter last year as recent market rate increases have impacted loan yields, particularly home equity lending products that feature interest rates that reset based on the prime rate.

Interest Expense. Interest expense increased $7.7 million, or 25%, to $38.5 million during the current quarter compared to $30.8 million during the quarter ended March 31, 2017. The increase resulted primarily from an increase in interest expense on borrowed funds, and to a lesser extent, an increase in interest expense on deposit accounts.

Interest expense on borrowed funds, all from the FHLB of Cincinnati, increased $5.4 million, or 57%, to $14.9 million during the current quarter compared to $9.5 million during the quarter ended March 31, 2017. The change was attributed to a $519.9 million, or 16%, increase in the average balance of borrowed funds to $3.72 billion during the current quarter from an average balance of $3.20 billion during the same quarter of the prior year. Combined with the impact of the increase in average balance of borrowed funds was a 42 basis point increase in the average rate paid on borrowed funds to 1.60% for the current quarter from 1.18% for the same quarter last year. The increase in the average balance of borrowed funds was used, along with an increase in deposits, to fund our balance sheet growth and our capital management activities, including share repurchases and dividend payments. The increases in borrowed funds took the form of short-term advances and longer-term advances with initial effective durations of approximately five years as hedged by interest rate swaps. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion.

Interest expense on CDs increased $2.3 million, or 11%, to $22.9 million during the current quarter compared to $20.6 million during the quarter ended March 31, 2017. The increase was attributed to a $230.1 million, or 4%, increase in the average balance of CDs to $5.88 billion during the current quarter from $5.65 billion during the same quarter of the prior year combined with a ten basis point increase in the average rate paid on CDs to 1.56% for the current quarter from 1.46% for the same quarter last year. Rates were adjusted on deposits in response to changes in general market rates as well as to changes in the rates paid by our competition.

Net Interest Income. Net interest income increased $1.4 million, or 2%, to $71.7 million during the current quarter from $70.3 million during the quarter ended March 31, 2017, as the increase in interest income was greater than the increase in interest expense. Our average interest earning assets during the current quarter increased $603.3 million, or 5%, when compared to the quarter ended March 31, 2017. The increase in average interest-earning assets was attributed primarily to the growth of the loan portfolio and to a lesser extent other interest-earning cash equivalents, mortgage-backed securities and Federal Home Loan Bank stock. In addition to the increase in average interest earning assets was a thirteen basis point increase in the yield on those assets to 3.27% from 3.14%. Our interest rate spread decreased eight basis points to 1.98% compared to 2.06% during the same quarter last year. Our net interest margin decreased five basis points to 2.13% in the current quarter compared to 2.18% the same quarter last year.

Provision for Loan Losses. We establish provisions (or recapture credits) for loan losses, which are charged (or applied) to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the adequacy of the allowance as described in the next paragraph. Recently, improving regional employment levels, stabilization in residential real estate values in many markets, recovering capital and credit markets, and upturns in consumer confidence have resulted in better credit metrics for us.

Table of Contents

Nevertheless, the depth of the decline in housing values that accompanied the 2008 financial crisis still presents significant challenges for many of our borrowers who may attempt to sell their homes or refinance their loans as a means to self-cure a delinquency. Refer to Critical Accounting Policies - Allowance for Loan Losses section of the Overview for further discussion.

Based on our evaluation of the above factors, we recorded a credit for loan losses of $4.0 million during the quarter ended March 31, 2018 and recorded a credit for loan losses of $6.0 million during the quarter ended March 31, 2017. The credits for loan losses reflected reduced levels of loans delinquent 90 days or more and charge-offs, and continued elevated levels of recoveries of previously charged-off loans. Nevertheless, we continue our awareness of the relative values of residential properties in comparison to their cyclical peaks as well as the uncertainty that persists in the current economic environment, which continues to challenge many of our loan customers. 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, uncollected balances have been charged against the allowance for loan losses previously provided. In the current quarter we recorded net recoveries of $1.2 million. In the quarter ended March 31, 2017 we recorded net recoveries of $2.4 million. Loan loss provisions (credits) are recorded with the objective of aligning our overall allowance for loan losses with our current estimates of loss in the portfolio. The allowance for loan losses was $43.1 million, or 0.34% of total recorded investment in loans receivable, at March 31, 2018, compared to $56.8 million or 0.47% of total recorded investment in loans receivable at March 31, 2017. Balances of recorded investments are net of deferred fees or expenses and any applicable loans-in-process.

The total recorded investment in non-accrual loans decreased $0.4 million during the quarter ended March 31, 2018. Since March 31, 2017, the total recorded investment in non-accrual loans decreased $5.4 million. The recorded investment in non-accrual loans in our residential Core portfolio decreased $1.1 million, or 3%, during the current quarter, to $41.2 million at March 31, 2018, and decreased $5.7 million, or 12%, since March 31, 2017. At March 31, 2018, the recorded investment in our Core portfolio was $10.89 billion, compared to $10.84 billion at December 31, 2017 and $10.56 billion at March 31, 2017. During the current quarter, the residential Core portfolio produced net recoveries that totaled $0.6 million, as compared to net recoveries of $0.2 million during the quarter ended December 31, 2017 and net recoveries of $1.4 million during the quarter ended March 31, 2017.

The recorded investment in non-accrual loans in our residential Home Today portfolio decreased $0.5 million, or 3%, during the current quarter, to $16.2 million at March 31, 2018, and decreased $3.6 million, or 18%, since March 31, 2017. At March 31, 2018, the recorded investment in our Home Today portfolio was $101.3 million, compared to $103.8 million at December 31, 2017 and $113.4 million at March 31, 2017. Residential Home Today net recoveries were $0.3 million during the current quarter while there were net charge-offs of $0.3 million and $0.1 million for the quarters ended December 31, 2017 and March 31, 2017, respectively.

The recorded investment in non-accrual home equity loans and lines of credit increased $1.3 million, or 7%, during the current quarter, to $20.8 million at March 31, 2018, and increased $3.9 million, or 23%, since March 31, 2017. The recorded investment in our home equity loans and lines of credit portfolio at March 31, 2018 was $1.71 billion, compared to $1.65 billion at December 31, 2017 and $1.52 billion at March 31, 2017. During the current quarter, the home equity loans and lines of credit portfolio had net recoveries of $0.3 million, as compared to net recoveries of $0.1 million during the quarter ended December 31, 2017 and net recoveries of $1.1 million during the quarter ended March 31, 2017. We believe that non-performing home equity loans and lines of credit, on a relative basis, represent a higher level of credit risk than residential Core loans as these home equity loans and lines of credit generally hold subordinated positions.

Non-Interest Income. Non-interest income remained relatively flat at $4.6 million for the quarters ended March 31, 2018 and 2017. Gains on the sales of loans decreased $0.3 million between the current quarter and the same quarter of the prior year as market interest rate movements contributed to lower percentage gains on $38.6 million of loan sales as compared to $73.6 million of loan sales during the quarter ended March 31, 2017.

Non-Interest Expense. Non-interest expense increased $4.4 million, or 10%, to $49.7 million during the current quarter compared to $45.3 million during the quarter ended March 31, 2017. The increase was driven primarily by a $2.1 million increase in salaries and employee benefits during the current quarter, mainly as a result of equity incentive plan stock awards made in January, 2018, as well as an increase of $1.2 million in marketing expenditures and to a lesser extent, increases in office property and equipment and FDIC premium and assessments. These increases were partially offset by a $0.3 million decrease in real estate owned expenses (which includes associated legal and maintenance expenses as well as gains (losses) on the disposal of properties) driven in part by the decrease in real estate owned assets since September 30, 2017.

Income Tax Expense. The provision for income taxes was $7.3 million during the current quarter compared to $12.1 million during the quarter ended March 31, 2017. The provision for the current quarter included $7.0 million of federal income tax provision and $0.3 million of state income tax provision. The provision for the quarter ended March 31, 2017 included $11.8 million of federal income tax provision and $0.3 million of state income tax provision. Our effective federal tax rate was

Table of Contents

23.1% during the current quarter and 33.5% during the quarter ended March 31, 2017. As a result of the passing of the Tax Cuts and Jobs Act on December 22, 2017, the federal income tax rate and structure changed. The Act includes a number of changes in existing tax law impacting businesses including a permanent reduction in the maximum corporate tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018; however, as a September 30 fiscal year end entity, the Company is required to use a blended maximum rate for its entire September 30, 2018 fiscal year, which would be approximately 24.5%. Our expected effective income tax rates are below the federal statutory rate because of our ownership of bank-owned life insurance (current and prior quarters), partially offset by additional income tax expense from revalued deferred tax assets due to the passage of the Tax Cuts and Jobs Act discussed above.

Table of Contents

Comparison of Operating Results for the Six Months Ended March 31, 2018 and 2017

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 were included in the computation of loan average balances, but have been reflected in the table as carrying a zero 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.



	Six Months Ended								Six Months Ended
	March 31, 2018								March 31, 2017
	Average Balance			Interest Income/ Expense			Yield/ Cost (1)		Average Balance			Interest Income/ Expense			Yield/ Cost (1)
	(Dollars in thousands)
Interest-earning assets:
Interest-earning cash equivalents	$	235,462		$	1,655		1.41	%	$	205,332		$	678		0.66	%
Mortgage-backed securities	540,309			5,348			1.98	%	524,696			4,051			1.54	%
Loans (2)	12,551,282			207,865			3.31	%	11,940,505			193,056			3.23	%
Federal Home Loan Bank stock	91,523			2,541			5.55	%	75,726			1,512			3.99	%
Total interest-earning assets	13,418,576			217,409			3.24	%	12,746,259			199,297			3.13	%
Noninterest-earning assets	372,640								347,888
Total assets	$	13,791,216							$	13,094,147
Interest-bearing liabilities:
Checking accounts	$	963,537		450			0.09	%	$	993,922		458			0.09	%
Savings accounts	1,426,300			995			0.14	%	1,523,995			1,050			0.14	%
Certificates of deposit	5,814,134			45,179			1.55	%	5,699,677			41,869			1.47	%
Borrowed funds	3,682,829			29,099			1.58	%	3,002,292			17,404			1.16	%
Total interest-bearing liabilities	11,886,800			75,723			1.27	%	11,219,886			60,781			1.08	%
Noninterest-bearing liabilities	186,052								198,992
Total liabilities	12,072,852								11,418,878
Shareholders’ equity	1,718,364								1,675,269
Total liabilities and shareholders’ equity	$	13,791,216							$	13,094,147
Net interest income				$	141,686							$	138,516
Interest rate spread (1)(3)							1.97	%							2.05	%
Net interest-earning assets (4)	$	1,531,776							$	1,526,373
Net interest margin (1)(5)				2.11		%						2.17		%
Average interest-earning assets to average interest-bearing liabilities	112.89		%						113.60		%
Selected performance ratios:
Return on average assets (1)				0.62		%						0.66		%
Return on average equity (1)				5.00		%						5.14		%
Average equity to average assets				12.46		%						12.79		%

_________________


(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.

Table of Contents

General. Net income decreased $0.2 million to $42.9 million for the six months ended March 31, 2018 compared to $43.1 million for the six months ended March 31, 2017. An increase in non-interest expense and a decrease in non-interest income offset an increase in net interest income and an increase in the credit for loan losses.

Interest and Dividend Income. Total interest income increased $18.1 million, or 9%, to $217.4 million during the six months ended March 31, 2018 compared to $199.3 million during the same six months in the prior year. The increase in interest income resulted primarily from an increase in interest income from loans, and to a lesser extent, interest income on mortgage-backed securities, Federal Home Loan Bank stock and interest earning cash equivalents.

Interest income on loans increased $14.8 million, or 8%, to $207.9 million for the six months ended March 31, 2018 compared to $193.1 million for the six months ended March 31, 2017. This increase was attributed primarily to a $610.8 million increase in the average balance of loans to $12.55 billion in the current six-month period compared to $11.94 billion during the same six months in the prior year as new loan production exceeded repayments and loan sales. The impact from the increase in the average balance of loans was combined with an eight basis point increase in the average yield on loans to 3.31% for the six months ended March 31, 2018 from 3.23% for the same six months in the prior year. Increases in the prime rate between the two periods benefited the yield on home equity lines of credit for the six months ended March 31, 2018, and contributed to the higher overall average yield. There were loan sales of $68.5 million during the six months ended March 31, 2018, compared to loan sales of $146.1 million during the six months ended March 31, 2017.

Interest income on mortgage-backed securities increased $1.2 million, or 29%, to $5.3 million during the current six months compared to $4.1 million during the six months ended March 31, 2017. The increase was attributed primarily to a $15.6 million, or 3%, increase in the average balance of mortgage-backed securities to $540.3 million in the current six-month period compared to $524.7 million during the same six months in the prior year resulting from purchases exceeding principal paydowns and maturities. Combined with the impact of the increase in the average balance of mortgage-backed securities was a 44 basis point increase in the average yield on mortgage-backed securities to 1.98% during the six months ended March 31, 2018 from 1.54% during the six months ended March 31, 2017.

Interest Expense. Interest expense increased $14.9 million, or 25%, to $75.7 million during the current six months compared to $60.8 million during the six months ended March 31, 2017. The increase resulted primarily from an increase in interest expense on borrowed funds, and to a lesser extent, an increase in interest expense on certificates of deposit.

Interest expense on borrowed funds, all from the FHLB of Cincinnati, increased $11.7 million, or 67%, to $29.1 million during the six months ended March 31, 2018 from $17.4 million during the six months ended March 31, 2017. The increase was attributed to a $680.5 million, or 23%, increase in the average balance of borrowed funds to $3.68 billion during the current six months from $3.00 billion during the same six months of the prior year. The average rate paid for these funds was 1.58%, during the six months ended March 31, 2018 and 1.16% for the six months ended March 31, 2017, as market rates have increased between the two periods and longer duration funding sources were utilized that carried higher interest rates. The increase in borrowed funds, along with an increase in deposits, was used to fund our balance sheet growth and our capital management activities, including share repurchases and dividend payments. The increases in borrowed funds were mainly a combination of overnight and short-term advances with initial effective durations of approximately five years as hedged by interest rate swaps. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion.

Interest expense on CDs increased $3.3 million, or 8%, to $45.2 million during the six months ended March 31, 2018 compared to $41.9 million during the six months ended March 31, 2017. The increase was attributed primarily to an eight basis point increase in the average rate we paid on CDs to 1.55% during the current six months from 1.47% during the same six months last year. In addition, there was a $114.5 million, or 2%, increase in the average balance of CDs to $5.81 billion from $5.70 billion during the same six months of the prior year. Rates were adjusted on deposits in response to changes in general market rates as well as to changes in the rates paid by our competition.

Net Interest Income. Net interest income increased $3.2 million, or 2%, to $141.7 million during the six months ended March 31, 2018 from $138.5 million during the six months ended March 31, 2017. Average interest-earning assets increased during the current six-month period by $672.3 million, or 5%, when compared to the six months ended March 31, 2017. The increase in average assets was attributed primarily to the growth of our loan portfolio and to a lesser extent other interest-earning cash equivalents. In addition to the increase in average interest earning assets was an 11 basis point increase in the yield on those assets to 3.24% from 3.13%. Our interest rate spread decreased eight basis points to 1.97% compared to 2.05% during the same six months last year. Our net interest margin was 2.11% for the current six-month period and 2.17% for the same six months in the prior period. Our interest rate spread and net interest margin narrowed as our overall funding costs increased more than our asset yields increased.

Table of Contents

Provision for Loan Losses. Based on our evaluation of the factors described earlier, we recorded a credit for loan losses of $7.0 million during the six months ended March 31, 2018 and we recorded a $6.0 million credit for loan losses during the six months ended March 31, 2017. Continued strong recoveries of loan amounts previously charged off, low levels of current loan charge-offs and reduced exposure from home equity lines of credit coming to the end of the draw period resulted in the loan provision credit during the current period. Nevertheless, we continue our awareness of the relative values of residential properties in comparison to their cyclical peaks as well as the uncertainty that persists in the current economic environment, which continues to challenge many of our loan customers. 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, uncollected balances have been charged against the allowance for loan losses previously provided. In the current six months, we recorded a net recovery of $1.2 million, as compared to a net recovery of $1.0 million during the six months ended March 31, 2017. Net recoveries and the credit for loan losses recorded for the current six months resulted in a decrease in the balance of the allowance for loan losses. The allowance for loan losses was $43.1 million, or 0.34% of the total recorded investment in loans receivable, at March 31, 2018, compared to $56.8 million, or 0.47% of the total recorded investment in loans receivable, at March 31, 2017. Balances of recorded investments are net of deferred fees or expenses and any applicable loans-in-process.

The total recorded investment in non-accrual loans decreased $0.9 million during the six-month period ended March 31, 2018 compared to a $6.4 million decrease during the six-month period ended March 31, 2017. The recorded investment in non-accrual loans in our residential Core portfolio decreased $2.6 million, or 6%, during the current six-month period, to $41.2 million at March 31, 2018. During the six-month period ended March 31, 2017, the recorded investment in non-accrual loans in our residential Core portfolio experienced a $4.4 million decrease to $46.9 million. At March 31, 2018, the recorded investment in our residential Core portfolio was $10.89 billion, compared to $10.76 billion at September 30, 2017. During the current six-month period, residential Core portfolio net recoveries were $0.8 million, as compared to net recoveries of $0.9 million during the six months ended March 31, 2017.

The recorded investment in non-accrual loans in our residential Home Today portfolio decreased $1.9 million, or 10%, during the current six-month period to $16.2 million at March 31, 2018 compared to a $0.4 million increase during the six-month period ended March 31, 2017. At March 31, 2018, the recorded investment in our residential Home Today portfolio was $101.3 million, compared to $107.7 million at September 30, 2017. During the current six-month period, residential Home Today net recoveries were relatively flat, as compared to net charge-offs of $0.6 million during the six months ended March 31, 2017.

The recorded investment in non-accrual home equity loans and lines of credit increased $3.6 million, or 21%, during the current six-month period, to $20.8 million at March 31, 2018 compared to a $2.3 million decrease during the six-month period ended March 31, 2017. The recorded investment in our home equity loans and lines of credit portfolio at March 31, 2018 and September 30, 2017 was $1.71 billion and $1.57 billion, respectively. During the current six-month period, home equity loans and lines of credit net recoveries were $0.3 million as compared to net recoveries of $0.7 million during the six months ended March 31, 2017. We believe that non-performing home equity loans and lines of credit, on a relative basis, represent a higher level of credit risk than residential Core loans as these home equity loans and lines of credit generally hold subordinated positions.

Non-Interest Income. Non-interest income decreased $0.4 million, or 4%, to $9.5 million during the six months ended March 31, 2018 when compared to $9.9 million during the six months ended March 31, 2017, mainly as a result of lower gains on sale of loans during the current six months. Gains on the sales of loans decreased $0.7 million between the current six months and the same six months of the prior year mainly as a result of the lower level of loan sales of $68.5 million during the current six months, as compared to loan sales of $146.1 million during the six months ended March 31, 2017.

Non-Interest Expense. Non-interest expense increased $4.9 million, or 5%, to $95.5 million during the six months ended March 31, 2018 when compared to $90.6 million during the six months ended March 31, 2017. This increase resulted primarily from a combination of elevated office property and equipment expense, marketing expense and compensation expense, partially offset by reductions in state franchise tax and real estate owned expenses. The $1.8 million increase in marketing expense can be attributed to the timing of media campaigns supporting our lending activities. The $0.8 million decrease in real estate owned expenses (which includes associated legal and maintenance expenses as well as gains (losses) on the disposal of properties) was driven in part by the decrease in real estate owned assets since September 30, 2017.

Income Tax Expense. The provision for income taxes was $19.8 million during the six months ended March 31, 2018 compared to $20.8 million during the six months ended March 31, 2017. The provision for the current six-month period included $18.8 million of federal income tax provision and $0.9 million of state income tax provision. The provision for the six months ended March 31, 2017 included $20.3 million of federal income tax provision and $0.5 million of state income tax provision. As a result of the passing of the Tax Cuts and Jobs Act on December 22, 2017, the federal income tax rate and structure changed. The Act includes a number of changes in existing tax law impacting businesses including a permanent

Table of Contents

reduction in the maximum corporate income tax rate from 35% to 21%. The rate reduction took effect on January 1, 2018, however, as a September 30 fiscal year end entity, the Company is required to use a blended maximum rate of approximately 24.5% for its entire September 30, 2018 fiscal year. In addition, due to the tax rate reduction, net deferred tax assets as of December 31, 2017 were revalued, resulting in a reduction in the value of the net deferred tax asset and the recording of approximately $4.6 million of additional income tax expense through the six months ended March 31, 2018. The reduction is subject to adjustment in future periods.Our effective federal tax rate was 30.5% during the six months ended March 31, 2018 and 32.0% during the six months ended March 31, 2017. Our expected effective income tax rates are higher than the federal statutory rate because the additional income tax expense from revalued deferred tax assets due to the passage of the Tax Cuts and Jobs Act discussed above, partially offset by our ownership of bank-owned life insurance (current and prior quarters).

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, 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 general 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 March 31, 2018, our liquidity ratio averaged 5.66%. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2018.

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 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 March 31, 2018, cash and cash equivalents totaled $271.1 million, which represented an increase of 1% from September 30, 2017.

Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $545.0 million at March 31, 2018.

During the six-month period ended March 31, 2018, loan sales to Fannie Mae totaled $68.5 million, which included $0.9 million of loans that qualified under Fannie Mae's HARP II initiative and $6.9 million of loans that qualified under Fannie Mae's Home Ready initiative. Loans originated under the HARP II and Home Ready initiatives are classified as “held for sale” at origination. Loans originated under non-HARP II or non-Home Ready, Fannie Mae compliant procedures are classified as “held for investment” until they are specifically identified for sale.

At March 31, 2018, $0.5 million of long-term, fixed-rate residential first mortgage loans were classified as “held for sale,” all of which qualified under either Fannie Mae's HARP II or Home Ready initiatives. There were no loan sale commitments outstanding at March 31, 2018.

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 March 31, 2018, we had $615.9 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had $1.66 billion in unfunded home equity lines of credit to borrowers. CDs due within one year of March 31, 2018 totaled $2.30 billion, or 27.5% 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

Table of Contents

currently pay on the CDs due on or before March 31, 2019. 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 six months ended March 31, 2018, we originated $1.0 billion of residential mortgage loans, and $773.3 million of home equity loans and lines of credit, while during the six months ended March 31, 2017, we originated $1.5 billion of residential mortgage loans and $464.1 million of home equity loans and lines of credit. We purchased $86.2 million of securities during the six months ended March 31, 2018, and $112.1 million during the six months ended March 31, 2017.

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 and borrowings from the FRB-Cleveland Discount Window. We experienced a net increase in total deposits of $198.8 million during the six months ended March 31, 2018, which reflected the active management of the offered rates on maturing CDs, compared to a net decrease of $143.4 million during the six months ended March 31, 2017. 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 six months ended March 31, 2018, there was a $66 million increase in the balance of brokered CDs (exclusive of acquisition costs and subsequent amortization), which had a balance of $686.7 million at March 31, 2018. At March 31, 2017 the balance of brokered CDs was $539.8 million. Principal and interest owed on loans serviced for others experienced a net decrease of $3.8 million to $31.9 million during the six months ended March 31, 2018 compared to a net decrease of $12.8 million to $36.6 million during the six months ended March 31, 2017. During the six months ended March 31, 2018, we increased our advances from the FHLB of Cincinnati by $45.7 million, as we funded: new loan originations; our capital initiatives; and actively managed our liquidity ratio. During the six months ended March 31, 2017, our advances from the FHLB of Cincinnati increased by $647.4 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 CDs market. At March 31, 2018 we had $3.72 billion of FHLB of Cincinnati advances and no outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at March 31, 2018, we had $686.7 million of brokered CDs. During the six months ended March 31, 2018, we had average outstanding advances from the FHLB of Cincinnati of $3.68 billion as compared to average outstanding advances of $3.00 billion during the six months ended March 31, 2017. The increase in net average balance in the current year reflects an increase in FHLB of Cincinnati borrowings as part of our efforts to lengthen the duration of our interest bearing funding sources as well as increases in the balance of our short-term borrowings used to fund: balance sheet growth; our capital initiatives; and to manage our on-balance sheet liquidity. 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 March 31, 2018, we had the ability to immediately borrow an additional $132.1 million from the FHLB of Cincinnati and $63.5 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the outstanding balance at March 31, 2018 was $4.56 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement for the maximum limit of borrowing, we would have to increase our ownership of FHLB of Cincinnati common stock by an additional $91.2 million.

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. Effective January 1, 2015, the OCC and the other federal bank regulatory agencies revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the DFA and revised the definition of assets used in the Tier 1 (leverage) capital ratio from adjusted tangible assets (a measurement computed based on quarter-end asset balances) to net average assets (a measurement computed based on the average of daily asset balances during the quarter). Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). The rule also requires unrealized gains and losses on certain "available-for-sale" security holdings and change in defined benefit plan obligations to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The Association exercised its one time opt-out election with the filing of its March 31, 2015 regulatory call report. Effective January 1, 2015, the Association implemented the new capital requirements for the standardized approach to the Basel III Rules, subject to transitional provisions extending through the end of 2018. The final rule also implemented consolidated capital requirements for savings and loan holding companies effective January 1, 2015.

Table of Contents

On January 1, 2016, the Association became subject to the "capital conservation buffer" requirement, which is being phased in over three years, increasing each year until fully implemented at 2.5% on January 1, 2019. The requirement would limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% in addition to the minimum capital requirements. At March 31, 2018, the Association exceeded the fully phased in regulatory requirement for the "capital conservation buffer".

As of March 31, 2018, 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	$	1,512,492	20.23	%	$	747,725	10.00	%
Tier 1 (Leverage) Capital to Net Average Assets	1,469,383		10.63	%	690,876		5.00	%
Tier 1 Capital to Risk-Weighted Assets	1,469,383		19.65	%	598,180		8.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets	1,469,369		19.65	%	486,021		6.50	%

The capital ratios of the Company as of March 31, 2018 are presented in the table below (dollar amounts in thousands).



	Actual
	Amount		Ratio
Total Capital to Risk-Weighted Assets	$	1,737,413	23.14	%
Tier 1 (Leverage) Capital to Net Average Assets	1,694,307		12.24	%
Tier 1 Capital to Risk-Weighted Assets	1,694,307		22.57	%
Common Equity Tier 1 Capital to Risk-Weighted Assets	1,694,307		22.57	%

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 our capital distribution strategies, which encompass our 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 2017, the Company received an $85.0 million cash dividend from the Association. Because of its intercompany nature, this dividend payment had no impact on the Company's capital ratios or its consolidated statement of condition but reduced the Association's reported capital ratios.

On October 27, 2016, the Company announced that the Board of Directors approved 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. Repurchases under the eighth stock repurchase authorization began on January 6, 2017. There were 3,107,110 shares repurchased under that program between its start date and March 31, 2018. During the six months ended March 31, 2018, the Company repurchased $13.0 million of its common stock.

On July 19, 2017, at a special meeting of members of Third Federal Savings, MHC, the members (depositors and certain loan customers of the Association) of Third Federal Savings, MHC voted to approve Third Federal Savings, MHC's proposed waiver of dividends, aggregating up to $0.68 per share, to be declared on the Company’s common stock during the twelve months subsequent to the members’ approval (i.e., through July 19, 2018). The members approved the waiver by casting 64% of the eligible votes in favor of the waiver. Of the votes cast, 97% were in favor of the proposal. Third Federal Savings, MHC is the 81% majority shareholder of the Company. Following the receipt of the members’ approval at the July 19, 2017 special meeting, Third Federal Savings, MHC filed a notice with, and subsequently received the non-objection of the FRB-Cleveland for the proposed dividend waivers.

While stock repurchases are planned to continue in the future, the payment of dividends will likely represent a larger focus for future capital deployment activities.

At March 31, 2018, the Company had, in the form of cash and a demand loan from the Association, $154.6 million of funds readily available to support its stand-alone operations.

Table of Contents

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 manner that is consistent with the guidelines and risk limits approved by the Board of Directors. Further, the Board has established the Directors Risk Committee, which, among other responsibilities, conducts regular oversight and review of the guidelines, policies and deliberations of the Asset/Liability Management Committee. We 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 six months ended March 31, 2018, $68.5 million of agency-compliant, long-term, fixed-rate mortgage loans were sold to Fannie Mae on a servicing retained basis. At March 31, 2018, $0.5 million of agency-compliant, long-term, fixed-rate residential first mortgage loans that qualified under Fannie Mae's HARP II or Home Ready programs, were classified as “held for sale.” Of the agency-compliant loan sales during the six months ended March 31, 2018, $7.8 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage loans which were sold under Fannie Mae's HARP II or Home Ready programs, and $60.7 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage loans which had been originated under our revised procedures and were sold to Fannie Mae under our reinstated seller contract, as described in the next paragraph. At March 31, 2018, we did not have any outstanding loan sales commitments.

Fannie Mae, historically the Association’s primary loan investor, implemented, effective July 1, 2010, certain loan origination requirement changes affecting loan eligibility that we chose not to adopt until May 2013. Subsequent to the May 2013 implementation date of our revised procedures, and, upon review and validation by Fannie Mae which was received on November 15, 2013, fixed-rate, first mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more and HARP II, and more recently Home Ready, loans) that are originated under the revised 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, purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures. For loans originated prior to May 2013 and for those loans originated subsequent to April 2013 that are not originated under the revised (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.

In response to the impact that the 2008 financial crisis had on housing and more particularly on the operation of the secondary mortgage market, we have actively marketed an adjustable-rate mortgage loan product since 2010 and a 10-year fixed-rate mortgage loan product since 2012. 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. By following these strategies, we believe that we are better positioned to react to increases 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

Table of Contents

("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 occurs 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 March 31, 2018 was $1.60 billion. The swap portfolio's weighted average fixed pay rate was 1.66% and the weighted average remaining term was 3.7 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 association’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 March 31, 2018 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.



								EVE as a Percentage of Present Value of Assets (3)
Change in Interest Rates (basis points) (1)	Estimated EVE (2)		Estimated Increase (Decrease) in EVE					EVE Ratio (4)		Increase (Decrease) (basis points)
Change in Interest Rates (basis points) (1)	Estimated EVE (2)		Amount			Percent		EVE Ratio (4)		Increase (Decrease) (basis points)
	(Dollars in thousands)
+300	$	1,421,195	$	(740,331	)	(34.25	)%	11.26	%	(411	)
+200	1,700,435		(461,091		)	(21.33	)%	12.97	%	(240	)
+100	1,958,751		(202,775		)	(9.38	)%	14.40	%	(97	)
0	2,161,526		—			—		15.37	%	—
-100	2,261,100		99,574			4.61	%	15.62	%	25

_________________


(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 March 31, 2018, in the event of an increase of 200 basis points in all interest rates, the Association would experience a 21.33% decrease in EVE. In the event of a 100 basis point decrease in interest rates, the Association would experience a 4.61% increase in EVE.

Table of Contents

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 March 31, 2018, with comparative information as of September 30, 2017. By regulation, the Association must measure and manage its interest rate risk for interest rate shocks relative to established risk tolerances in EVE.

Risk Measure (+200 bps Rate Shock)



	At March 31, 2018		At September 30, 2017
Pre-Shock EVE Ratio	15.37	%	15.05	%
Post-Shock EVE Ratio	12.97	%	13.13	%
Sensitivity Measure in basis points	(240	)	(192	)
Percentage Change in EVE	(21.33	)%	(18.33	)%

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 primarily sought to originate Smart Rate (adjustable), 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 3.00% deterioration in the Percentage Change in EVE measure at March 31, 2018 when compared to the measure at September 30, 2017. The most significant factor contributing to the overall deterioration was the change in market interest rates, which included an increase of 79 basis points for the two-year term, an increase of 62 basis points for the five-year term and an increase of 41 basis points for the ten-year term, and which resulted in a decrease of 3.73% in the Percentage Change in EVE. Combined with this deterioration was the impact of $85.0 million in cash dividends 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 0.76%. Partially offsetting the unfavorable impact of the two preceding factors, numerous modifications and enhancements to our modeling assumptions and methodologies, which are continually challenged and evaluated, on a net basis, positively impacted the Association's Percentage Change in EVE by 0.66%. Finally, while our core business activities, as described at the beginning of this paragraph, are generally intended to have a favorable impact on our IRR profile, the actual impact is determined by a number of factors, including the pace of mortgage asset additions to our balance sheet (including consideration of outstanding commitments to originate those assets), in comparison to the pace of the addition of duration extending funding sources. During the current fiscal year-to-date period, the net affect of mortgage asset accumulation and funding source extension resulted in 0.83% of improvement to our Percentage Change in EVE. 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

Table of Contents

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 our 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 March 31, 2018, we estimated that our EaR for the 12 months ending March 31, 2019 would decrease by 2.56% 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 of 200 basis points. This assumption differs from the assumption used to report our EaR estimates in reporting periods prior to March 31, 2017, when our EaR disclosures were determined under assumed instantaneous changes in market interest rates. During the March 31, 2017 quarter, based on a review of the predominate practices disclosed by other similarly profiled financial institutions, the Association adopted 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 Directors Risk Committee has ratified the use of the updated limit structure. At March 31, 2018, the IRR simulation results were in line with management's expectations and were within the risk limits established by our Board of Directors. The Association continues to calculate instantaneous scenarios, and as of March 31, 2018, we estimated that our EaR for the 12 months ending March 31, 2019 would decrease by 6.21% 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 Libor yield curves, etc.). From that similar starting point, the models follow divergent paths. EVE is a stochastic model using 100 different interest rate paths to compute market value at the cohorted transaction level for each of the categories on the balance sheet whereas EaR uses the implied forward curve to compute interest income/expense at the cohorted transaction 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 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 March 31, 2018, the IRR profile as disclosed above was within our internal limits.

Item 4. 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

Table of Contents

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.

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

Part II — Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors

Except as described in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, there have been no material changes in the "Risk Factors" previously disclosed in our Annual Report on Form 10-K, filed with the SEC on November 22, 2017 (File No. 001-33390).

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


(a)	Not applicable


(b)	Not applicable


(c)	The following table summarizes our stock repurchase activity during the quarter ended March 31, 2018.



		Average		Total Number of	Maximum Number
	Total Number	Price		Shares Purchased	of Shares that May
	of Shares	Paid per		as Part of Publicly	Yet be Purchased
Period	Purchased	Share		Announced Plans (1)	Under the Plans
January 1, 2018 through January 31, 2018	126,000	$	14.85	126,000	7,132,890
February 1, 2018 through February 28, 2018	114,000	14.99		114,000	7,018,890
March 1, 2018 through March 31, 2018	126,000	15.18		126,000	6,892,890
	366,000	15.01		366,000

(1)

On October 27, 2016, the Company announced that the Board of Directors approved 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. Purchases under the program will be on an ongoing basis and subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses of capital, and our financial performance. Repurchased shares will be held as treasury stock and be available for general corporate use. The repurchase program commenced on January 6, 2017.

Following the receipt of the members’ approval at the July 19, 2017 special meeting, Third Federal Savings, MHC filed a notice with, and subsequently received the non-objection of the FRB-Cleveland for the proposed dividend waivers.

Table of Contents

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6.

(a) Exhibits



10.1		TFS Financial Corporation Management Incentive Compensation Plan (incorporated by reference to Appendix A to the definitive proxy statement for the 2018 Annual Meeting of Stockholders (file no. 001-33390), as filed with the Securities and Exchange Commission on January 9, 2018).

10.2		TFS Financial Corporation Amended and Restated 2008 Equity Incentive Plan (incorporated by reference to Appendix B to the definitive proxy statement for the 2018 Annual Meeting of Stockholders (file no. 001-33390), as filed with the Securities and Exchange Commission on January 9, 2018).

31.1		Certification of chief executive officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2		Certification of chief financial officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32		Certification of chief executive officer and chief financial officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350

		The following unaudited financial statements from TFS Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, filed on May 8, 2018, formatted in XBRL: (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Unaudited Interim Consolidated Financial Statements.



101.INS		Interactive datafile XBRL Instance Document

101.SCH		Interactive datafile XBRL Taxonomy Extension Schema Document

101.CAL		Interactive datafile XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Interactive datafile XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Interactive datafile XBRL Taxonomy Extension Label Linkbase

101.PRE		Interactive datafile XBRL Taxonomy Extension Presentation Linkbase Document

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		TFS Financial Corporation

Dated:	May 8, 2018	/s/ Marc A. Stefanski
		Marc A. Stefanski
		Chairman of the Board, President and Chief Executive Officer

Dated:	May 8, 2018	/s/ David S. Huffman
		David S. Huffman
		Chief Financial Officer and Secretary