TFS FINANCIAL CORP Management’s Report on Financial Condition and Results of Operations (Form 10-Q)
Forward-looking statements
This report contains forward-looking statements, which can be identified by the use of such
words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar
expressions. These forward-looking statements include, among other things:
? statements of our goals, intentions and expectations;
? statements regarding our business plans and prospects and
growth and exploitation
strategies;
? statements concerning trends in our provision for credit
losses and charges
on loans and off-balance sheet exposures; ? statements regarding the trends in factors affecting our
financial situation and
results of operations, including credit quality of our loan
and investment
portfolios; and
? estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors that could affect
the actual outcome of future events:
? significantly increased competition among depository and
other financier
institutions;
? inflation and changes in the interest rate environment that
reduce our interest
margins or reduce the fair value of financial instruments;
? general economic conditions, either globally, nationally or
in our market areas,
including employment prospects, real estate values and
worse conditions
than expected;
? the strength or weakness of the real estate markets and of
the consumer and
commercial credit sectors and its impact on the credit
quality of our loans and
other assets, and changes in estimates of the allowance for
credit losses;
? decreased demand for our products and services and lower
income and earnings
because of a recession or other events;
? changes in consumer spending, borrowing and savings habits;
? adverse changes and volatility in the securities markets,
credit or real markets
estate markets;
? our ability to manage market risk, credit risk, liquidity
risk, reputation
risk, and regulatory and compliance risk;
? our ability to access cost-effective funding;
? legislative or regulatory changes that adversely affect our
business, including
changes in regulatory costs and capital requirements and
changes related to our
ability to pay dividends and the ability of Third Federal
Savings, MHC to renounce
dividends;
? changes in accounting policies and practices, as may be
adopted by the bank
regulatory agencies, theFinancial Accounting Standards Board
or the Audience
Company Accounting Oversight Board;
? the adoption of implementing regulations by a number of
different regulations
bodies, and uncertainty in the exact nature, extent and
moment of such
regulations and the impact they will have on us;
? our ability to enter new markets successfully and take
growth advantage
opportunities, and the possible short-term dilutive effect of potential
acquisitions or de novo branches, if any;
? our ability to retain key employees;
? future adverse developments concerning Fannie Mae or Freddie Mac;
? changes in monetary and fiscal policy of the U.S. Government ,
including policies
of theU.S. Treasury and the FRS and changes in the level of
government support
of housing finance;
? the continuing governmental efforts to restructure the U.S.
financial and
regulatory system;
? the ability of the U.S. Government to remain open, function
properly and manage
federal debt limits;
? changes in policy and/or assessment rates of taxing
authorities who harm
affect us or our customers;
? changes in accounting and tax estimates;
? changes in our organization, or compensation and benefit
plans and changes in
expense trends (including, but not limited to trends
affecting non-performers
assets, charge-offs and provisions for credit losses);
? the inability of third-party providers to perform their
obligations to us;
? the effects of global or national war, conflict or acts of
terrorism;
? civil unrest;
? cyber-attacks, computer viruses and other technological risks
who may violate the
security of our websites or other systems to obtain
unauthorized access to
confidential information, destroy data or disable our
systems; and
? the impact of wide-spread pandemic, including COVID-19, and
government bound
action, on our business and the economy.
Because of these and other uncertainties, our actual future results may be materially
different from the results indicated by any forward-looking statements. Any forward-looking
statement made by us in this report speaks only as of the date on which it is made. We
undertake no obligation to publicly update any forward-looking statements, whether as a result
of new information, future developments or otherwise, except as may be required by law. Please
see Part II Other Information Item 1A. Risk Factors for a discussion of certain risks related
to our business.
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Insight
Our business strategy is to operate as a well capitalized and profitable financial institution dedicated to providing exceptional personal service to our customers.
Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in 2007, the nation's largest mutually-owned savings and loan association based on total assets. We credit our success to our continued emphasis on our primary values: "Love, Trust, Respect, and a Commitment to Excellence, along with Having Fun." Our values are reflected in the design and pricing of our loan and deposit products, as described below. Our values are further reflected in a long-term revitalization program encompassing the three-mile corridor of theBroadway-Slavic Village neighborhood inCleveland, Ohio where our main office was established and continues to be located, and where the educational programs we have established and/or support are located. We intend to continue to adhere to our primary values and to support our customers and the communities in which we operate as we pursue our mission to help people achieve the dream of home ownership and financial security while creating value for our shareholders, our customers, our communities and our associates. Management believes that the following matters are those most critical to our success: (1) controlling our interest rate risk exposure; (2) monitoring and limiting our credit risk; (3) maintaining access to adequate liquidity and diverse funding sources to support our growth; and (4) monitoring and controlling our operating expenses. Controlling Our Interest Rate Risk Exposure. Historically, our greatest risk has been our exposure to changes in interest rates. When we hold longer-term, fixed-rate assets, funded by liabilities with shorter-term re-pricing characteristics, we are exposed to potentially adverse impacts from changing interest rates, and most notably rising interest rates. Generally, and particularly over extended periods of time that encompass full economic cycles, interest rates associated with longer-term assets, like fixed-rate mortgages, have been higher than interest rates associated with shorter-term funding sources, like deposits. This difference has been an important component of our net interest income and is fundamental to our operations. We manage the risk of holding longer-term, fixed-rate mortgage assets primarily by maintaining regulatory capital in excess of levels required to be well capitalized, by promoting adjustable-rate loans and shorter-term fixed-rate loans, by marketing home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate, by opportunistically extending the duration of our funding sources and selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. The decision to extend the duration of some of our funding sources through interest rate swap contracts in the past has also caused additional interest rate risk exposure, when market interest rates are lower than the rates in effect at the time the swap contracts were executed. Any rate difference is reflected in the level of cash flow hedges included in accumulated other comprehensive loss.
Levels of
AtMarch 31, 2022 , the Company's Tier 1 (leverage) capital totaled$1.81 billion , or 12.66% of net average assets and 22.24% of risk-weighted assets, while the Association's Tier 1 (leverage) capital totaled$1.57 billion , or 10.99% of net average assets and 19.30% 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.
Promoting adjustable-rate loans and shorter-term fixed-rate loans
We market an adjustable-rate mortgage loan that provides us with improved interest rate risk characteristics when compared to a 30-year, fixed-rate mortgage loan. Our "Smart Rate" adjustable-rate mortgage offers borrowers an interest rate lower than that of a 30-year, fixed-rate loan. The interest rate of the Smart Rate mortgage is locked for three or five years then resets annually. The Smart Rate mortgage contains a feature to re-lock the rate an unlimited number of times at our then-current interest rate and fee schedule, for another three or five years (which must be the same as the original lock period) without having to complete a full refinance transaction. Re-lock eligibility is subject to a satisfactory payment performance history by the borrower (current at the time of re-lock, and no foreclosures or bankruptcies since the Smart Rate application was taken). In addition to a satisfactory payment history, re-lock eligibility requires that the property continues to be the borrower's primary residence. The loan term cannot be extended in connection with a re-lock nor can new funds be advanced. All interest rate caps and floors remain as originated. We also offer a ten-year, fully amortizing fixed-rate, first mortgage loan. The ten-year, fixed-rate loan has a more desirable interest rate risk profile when compared to loans with fixed-rate terms of 15 to 30 years and can help to more effectively manage interest rate risk exposure, yet provides our borrowers with the certainty of a fixed interest rate throughout the life of the obligation. 38
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The following tables present our production and balances of first mortgage loans broken down by original loan structure.
For the Six Months Ended March 31, For the Six Months Ended March 31,
2022 2021
Amount Percent Amount Percent
(Dollars in thousands)
First Mortgage Loan Originations:
ARM (all Smart Rate) production $ 448,185 25.7 % $ 676,723 32.8 %
Package production:
Terms less than or equal to 10 years 299,689 17.2 366,776 17.8
Terms greater than 10 years 993,272 57.1 1,019,914 49.4
Total fixed-rate production 1,292,961 74.3 1,386,690 67.2
Total First Mortgage Loan Originations $ 1,741,146 100.0 % $ 2,063,413 100.0 %
March 31, 2022 September 30, 2021
Amount Percent Amount Percent
(Dollars in thousands)
Balance of Residential Mortgage Loans Held For
Investment :
ARM (primarily Smart Rate) Loans $ 4,538,544 42.2 % $ 4,646,760 45.2 %
Fixed rate:
Terms less than or equal to 10 years 1,367,504 12.8 1,309,407 12.7
Terms greater than 10 years 4,827,620 45.0 4,322,931 42.1
Total fixed-rate 6,195,124 57.8 5,632,338 54.8
Total Residential Mortgage Loans Held For
Investment $ 10,733,668 100.0 % $ 10,279,098 100.0 %
The following table shows the balances at
Current Balance of ARM Loans
Scheduled for
Interest Rate Reset During the Fiscal Years Ending September 30, (In thousands) 2022 $ 61,629 2023 309,221 2024 364,186 2025 738,389 2026 1,649,622 2027 1,415,497 Total $ 4,538,544 AtMarch 31, 2022 , there were no mortgage loans held for sale compared to$8.8 million atSeptember 30, 2021 , all of which were long-term, fixed-rate first mortgage loans and all of which were held for sale to Fannie Mae. 39
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Loan Portfolio Return
The following tables set forth the balance and interest yield as ofMarch 31, 2022 for the portfolio of loans held for investment, by type of loan, structure and geographic location. March 31, 2022 Balance Percent Yield (Dollars in thousands) Total Loans: Fixed Rate Terms less than or equal to 10 years$ 1,367,504
10.4% 2.62%
Terms greater than 10 years 4,827,620
36.5% 3.43%
Total Fixed-Rate loans 6,195,124
46.9% 3.25%
ARMs 4,538,544
34.3% 2.67%
Home Equity Loans and Lines of Credit 2,375,473
18.0% 2.73%
Construction and Other Loans 104,129
0.8% 2.74%
Total Loans Receivable$ 13,213,270 100.0 % 2.95 % March 31, 2022 Balance Percent Yield (Dollars in thousands) Residential Mortgage Loans Ohio$ 5,914,598 44.8 % 3.20 % Florida 1,986,997 15.0 % 2.91 % Other 2,832,073 21.4 % 2.63 % Total Residential Mortgage Loans 10,733,668 81.2 % 3.00 % Home Equity Loans and Lines of Credit Ohio 644,421 4.9 % 2.79 % Florida 473,009 3.6 % 2.73 % California 381,565 2.9 % 2.72 % Other 876,478 6.6 % 2.68 % Total Home Equity Loans and Lines of Credit 2,375,473 18.0 % 2.73 % Construction and Other Loans 104,129 0.8 % 2.74 % Total Loans Receivable$ 13,213,270 100.0 % 2.95 %
Marketing home equity lines of credit
We actively market home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate, that provides interest rate sensitivity to that portion of our assets and is a meaningful strategy to manage our interest rate risk profile. AtMarch 31, 2022 , the principal balance of home equity lines of credit totaled$2.14 billion . Our home equity lending is discussed in the Allowance for Credit Losses section of the Lending Activities.
Extend 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 ofCincinnati , and shorter-term (e.g. three months) advances from the FHLB ofCincinnati , 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 40
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market competitiveness/breadth of each funding source. Generally, early withdrawal options are available to our retail CD customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB ofCincinnati ; 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 ofCincinnati as well as for our interest rate exchange contracts. We will continue to evaluate the structure of our funding sources based on current needs. During the six months endedMarch 31, 2022 , the balance of deposits increased$14.7 million , which included a$38.1 million decrease in the balance of brokered CDs (which is inclusive of acquisition costs and subsequent amortization). Additionally, during the six months endedMarch 31, 2022 , we increased total FHLB ofCincinnati advances$463.5 million , by adding$250.0 million of new two-to-four year advances and$590.0 million in overnight borrowings, partially offset by a$375.0 million decrease in 90 day advances and their related swap contracts which matured and were paid off. The balance of our advances from the FHLB ofCincinnati atMarch 31, 2022 consist of both overnight and term advances from the FHLB ofCincinnati ; as well as shorter-term advances from the FHLB ofCincinnati that were matched/correlated to interest rate exchange contracts that extended the effective durations of those shorter-term advances. Interest rate swaps are discussed later in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Other interest rate risk management tools
We also manage interest rate risk by selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. The sales of first mortgage loans increased significantly during fiscal 2020 and fiscal 2021 due to an increase in the number of fixed-rate refinances. AtMarch 31, 2022 , we serviced$2.16 billion of loans for others. In deciding whether to sell loans to manage interest rate risk, we also consider the level of gains to be recognized in comparison to the impact to our net interest income. We are planning on expanding our ability to sell certain fixed rate loans to Fannie Mae in fiscal 2022 and beyond, through the use of more traditional mortgage banking activities, including risk-based pricing and loan-level pricing adjustments. This concept will be tested in markets outside ofOhio andFlorida , and some additional startup and marketing costs will be incurred, but is not expected to significantly impact our financial results in fiscal 2022. We can also manage interest rate risk by selling non-Fannie Mae compliant mortgage loans to private investors, although those transactions are dependent upon favorable market conditions, including motivated private investors, and involve more complicated negotiations and longer settlement timelines. Loan sales are discussed later in this Part I, Item 2. under the heading Liquidity and Capital Resources, and in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk. Notwithstanding our efforts to manage interest rate risk, a rapid and substantial increase in general market interest rates or an extended period of a flat or inverted yield curve market, could adversely impact the level of our net interest income, prospectively and particularly over a multi-year time horizon. Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the memory of the 2008 housing market collapse and financial crisis is a constant reminder to focus on credit risk. In response to the evolving economic landscape, we continuously revise and update our quarterly analysis and evaluation procedures, as needed, for each category of our lending with the objective of identifying and recognizing all appropriate credit losses. Continuous analysis and evaluation updates will be important as we monitor the potential impacts of the economic environment. AtMarch 31, 2022 , 90% of our assets consisted of residential real estate loans (both "held for sale" and "held for investment") and home equity loans and lines of credit, which were originated predominantly to borrowers inOhio andFlorida . 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. AtMarch 31, 2022 ,$12.9 million of loans in Chapter 7 bankruptcy status with no other modification to terms were included in total TDRs. AtMarch 31, 2022 , the amortized cost in non-accrual status loans included$14.8 million of performing loans in Chapter 7 bankruptcy status, of which$14.6 million were also reported as TDRs. In an effort to limit our credit risk exposure and improve the credit performance of new customers, since 2009, we continually evaluate our credit eligibility criteria and revise the design of our loan products, such as limiting the products available for condominiums and eliminating certain product features (such as interest-only). We use stringent, conservative lending standards for underwriting to reduce our credit risk. For first mortgage loans originated during the current fiscal year, the average credit score was 777, and the average LTV was 59%. The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflects the higher credit standards to which we have subjected all new 41
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originations. As ofMarch 31, 2022 , loans originated prior to 2009 had a balance of$382.0 million , of which$10.5 million , or 2.8%, were delinquent, while loans originated in 2009 and after had a balance of$12.82 billion , of which$12.3 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, particularlyOhio andFlorida , 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. AtMarch 31, 2022 , approximately 55.2% and 18.5% of the combined total of our Residential Core and construction loans held for investment and approximately 27.1% and 19.9% of our home equity loans and lines of credit were secured by properties inOhio andFlorida , respectively. In an effort to moderate the concentration of our credit risk exposure in individual states, particularlyOhio andFlorida , 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 toOhio andFlorida , we are actively lending in 23 other states and theDistrict of Columbia . As a result of that geographic expansion, the concentration ratios of the combined total of our residential, Core and construction loans held for investment inOhio andFlorida have trended downward from theirSeptember 30, 2010 levels when the concentrations were 79.1% inOhio and 19.0% inFlorida . Of the total mortgage loans originated in the six months endedMarch 31, 2022 , 24.4% are secured by properties in states other thanOhio orFlorida . Home equity loans and lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and credit lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and decreasing housing prices, these higher loan-to-value ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has a vested interest in keeping the loan current when compared to a borrower with little or no equity in the property. In light of the past weakness in the housing market and uncertainty with respect to future employment levels and economic prospects, we conduct an expanded loan level evaluation of our home equity loans and lines of credit, including bridge loans used to aid borrowers in buying a new home before selling their old one, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. Our home equity loan and line of credit portfolios continue to comprise a significant portion of our gross charge-offs. AtMarch 31, 2022 , we had an amortized cost of$2.41 billion in home equity loans and lines of credit outstanding, of which$2.6 million , or 0.1% were delinquent 90 days or more. Our residential Home Today loans are another area of credit risk concern. Through the Home Today program, the Company provided the majority of loans to borrowers who would not otherwise qualify for the Company's loan products, generally because of low credit scores. Because the Company applied less stringent underwriting and credit standards to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential real estate mortgage loans in the Residential Core portfolio. Since the vast majority of Home Today loans were originated prior toMarch 2009 and we are no longer originating loans under our Home Today program, the Home Today portfolio will continue to decline in balance, primarily due to contractual amortization. Although the amortized cost in these loans has declined to$57.6 million atMarch 31, 2022 , from a peak of$306.6 million atDecember 31, 2007 , and constitutes only 0.4% of our total "held for investment" loan portfolio balance, they comprised 15.6% and 14.9% of our 90 days or greater delinquencies and our total delinquencies, respectively, at that date. AtMarch 31, 2022 , approximately 95.5% and 4.4% of our residential Home Today loans were secured by properties inOhio andFlorida , respectively. AtMarch 31, 2022 , the percentages of those loans delinquent 30 days or more inOhio andFlorida were 6.2% and 0%, respectively. We attempted to manage our Home Today credit risk by requiring private mortgage insurance for some loans. AtMarch 31, 2022 , 9.7% of Home Today loans included private mortgage insurance coverage. Our allowance for credit losses for the Home Today portfolio, which includes a lifetime view of expected losses, is reduced by expected future recoveries of loan amounts previously charged off. To supplant the Home Today product and to continue to meet the credit needs of our customers and the communities that we serve, we have offered Fannie Mae eligible, Home Ready loans since fiscal 2016. These loans are originated in accordance with Fannie Mae's underwriting standards. While we retain the servicing rights related to these loans, the loans, along with the credit risk associated therewith, are generally securitized/sold to Fannie Mae. The Company does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, an LTV ratio greater than 100%, or pay-option adjustable-rate mortgages. Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth. For most insured depositories, customer and community confidence are critical to their ability to maintain access to adequate liquidity and to conduct business in an orderly manner. We believe that a well capitalized institution is one of the most important factors in nurturing customer and community confidence. Accordingly, we have managed the pace of our growth in a manner that reflects our emphasis on high capital levels. AtMarch 31, 2022 , 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 10.99%. The Association's Tier 1 (leverage) capital ratio atMarch 31, 2022 included the negative impact of a$56 million cash dividend payment that the Association made to the Company, its sole shareholder, inDecember 2021 . Because of its intercompany nature, this dividend 42
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The payment had no impact on the Company’s consolidated capital ratios which are disclosed in the Liquidity and Capital Resources section of this Section 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 and brokered checking accounts), borrowings from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. AtMarch 31, 2022 , deposits totaled$9.01 billion (including$453.9 million of brokered CDs and$200.0 million of brokered checking accounts), while borrowings totaled$3.56 billion and borrowers' advances and servicing escrows totaled$128.2 million , combined. In evaluating funding sources, we consider many factors, including cost, collateral, duration and optionality, current availability, expected sustainability, impact on operations and capital levels. 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 ofCincinnati and the FRB-Cleveland. AtMarch 31, 2022 , these collateral pledge support arrangements provided the Association with the ability to borrow a maximum of$7.69 billion from the FHLB ofCincinnati and$208.4 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB ofCincinnati advances, our capacity for additional borrowings atMarch 31, 2022 was$4.14 billion . Third, we have the ability to purchase overnight Fed Funds up to$630 million through various arrangements with other institutions. Fourth, we invest in high quality marketable securities that exhibit limited market price variability, and to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. AtMarch 31, 2022 , our investment securities portfolio totaled$443.2 million . Finally, cash flows from operating activities have been a regular source of funds. During the six months endedMarch 31, 2022 and 2021, cash flows from operations provided$40.7 million and$43.9 million , respectively. First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more, and Home Ready) originated under Fannie Mae compliant procedures are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures, which are not eligible for sale to Fannie Mae. For loans that are not originated under Fannie Mae procedures, the Association's ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors. Refer to the Liquidity and Capital Resources section of the Overview for information on loan sales.
Overall, although the confidence of customers and the community can never be assured, the Company believes that its liquidity is adequate and that it has access to adequate alternative sources of funding.
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 1.37% for the six months endedMarch 31, 2022 and 1.38% for the six months endedMarch 31, 2021 . As ofMarch 31, 2022 , our average assets per full-time employee and our average deposits per full-time employee were$14.8 million and$9.2 million , respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average of deposits (exclusive of brokered CDs and brokered checking accounts) held at our branch offices ($225.8 million per branch office as ofMarch 31, 2022 ) 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. 43
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Critical accounting policies
Critical accounting policies are defined as those that involve significant judgments, estimates and uncertainties, and could potentially give rise to materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are our policies with respect to our allowance for credit losses, income taxes and pension benefits as described in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . Lending Activities
Provision for credit losses
We provide for credit losses based on a life of loan methodology. Accordingly, all credit losses are charged to, and all recoveries are credited to, the related allowance. Additions to the allowance for credit losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating life of credit losses. We regularly review the loan portfolio and off-balance sheet exposures and make provisions (or releases) for losses in order to maintain the allowance for credit losses in accordance withU.S. GAAP. Our allowance for credit losses consists of three components:
(1) individual impairment provisions (IVA) established for any cash flow dependent loan, such as performing TDRs;
(2)general valuation allowances (GVAs) for loans, which are comprised of quantitative GVAs, general allowances for credit losses for each loan type based on historical loan loss experience, and qualitative GVAs, which are adjustments to the quantitative GVAs, maintained to cover uncertainties that affect the estimate of expected credit losses for each loan type; and
(3) GVA for off-balance sheet credit exposures, which include expected lifetime losses on unfunded loan commitments to extend credit where the obligations are not unconditionally cancellable.
The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include:
•changes in lending policies and procedures, including underwriting standards, collection, charging or collection practices;
•management's view of changes in national, regional, and local economic and business conditions and trends including treasury yields, housing market factors and trends, such as the status of loans in foreclosure, real estate in judgment and real estate owned, and unemployment statistics and trends and how it aligns with economic modeling forecasts; •changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw period and adjustable-rate mortgage loans nearing a rate reset;
•changes in experience, capacity or depth of loan management;
•changes in the volume or severity of past due loans, volume of non-accrual loans, or the volume and severity of adversely classified loans including the trending of delinquency statistics (both current and historical), historical loan loss experience and trends, the frequency and magnitude of multiple restructurings of loans previously the subject of TDRs, and uncertainty surrounding borrowers' ability to recover from temporary hardships for which short-term loan restructurings are granted;
•changes in the quality of the credit review system;
•changes in the value of the underlying collateral including asset disposition loss statistics (both current and historical) and the trending of those statistics, and additional charge-offs and recoveries on individually reviewed loans;
• existence of any credit concentrations;
•effect of other external factors such as competition, market interest rate changes or legal and regulatory requirements including market conditions and regulatory directives that impact the entire financial services industry; and
•the limitations of our models for predicting the lifetime of net loan losses.
When loan restructurings qualify as TDRs and the loans are performing according
to the terms of the restructuring, we record an IVA based on the present value
of expected future cash flows, which includes a factor for potential subsequent
defaults, discounted at the effective interest rate of the original loan
contract. Potential defaults are distinguished from multiple
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restructurings as borrowers who default are generally not eligible for subsequent restructurings. AtMarch 31, 2022 , the balance of such individual valuation allowances were$11.1 million . In instances when loans require multiple restructurings, additional valuation allowances may be required. The new valuation allowance on a loan that has multiple restructurings is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the restructured agreement. The estimated exposure for additional loss related to multiple loan restructurings is included as a component of our qualitative GVA. We evaluate the allowance for credit losses based upon the combined total of the quantitative and qualitative GVAs and IVAs. Periodically, the carrying value of loans and factors impacting our credit loss analysis are evaluated and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions. 45
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The following table sets forth activity for credit losses segregated by geographic location for the periods indicated. The majority of our Home Today and construction loan portfolios are secured by properties located inOhio and the balances of other loans are considered immaterial, therefore neither was segregated. For the Three Months Ended For the Six Months Ended March March 31, 31, 2022 2021 2022 2021 (Dollars in thousands) Allowance balance for credit losses on loans (beginning of the period)$ 63,575 $ 70,290 $ 64,288 $ 46,937 Adoption of ASU 2016-13 for allowance for credit losses on loans - - - 24,095 Charge-offs on real estate loans: Residential Core Ohio 132 408 157 467 Florida - - - 1 Other - - 1 1 Total Residential Core 132 408 158 469 Total Residential Home Today 94 199 106 308 Home equity loans and lines of credit Ohio 273 290 417 604 Florida 67 259 70 460 California - 30 14 138 Other 34 185 110 246 Total Home equity loans and lines of credit 374 764 611 1,448 Total charge-offs 600 1,371 875 2,225 Recoveries on real estate loans: Residential Core 1,149 515 1,630 975 Residential Home Today 899 551 1,487 974 Home equity loans and lines of credit 1,260 1,665 2,424 2,894 Total recoveries 3,308 2,731 5,541 4,843 Net recoveries 2,708 1,360 4,666 2,618 Release of allowance for credit losses on loans (1,960) (3,901) (4,631) (5,901) Allowance balance for loans (end of the period)$ 64,323 $ 67,749 $ 64,323 $ 67,749 Allowance balance for credit losses on unfunded commitments (beginning of the period)$ 25,641 $ 22,052 $ 24,970 $ - Adoption of ASU 2016-13 for allowance for credit losses on unfunded commitments - - - 22,052 Provision for credit losses on unfunded loan commitments 960 (99) 1,631 (99)
Provision balance for unfunded loan commitments (end of period)
26,601 21,953 26,601 21,953
Allowance balance for all credit losses (end of period)
$ 90,924 $ 89,702 $ 90,924 $ 89,702
Reports :
Net recoveries to average loans outstanding (annualized) 0.04 % 0.02 % 0.07 % 0.04 %
Allowance for credit losses on loans to outstanding loans at the end of the period
163.78 % 128.82 % 163.78 % 128.82 % Allowance for credit losses on loans to the total amortized cost in loans at end of the period 0.49 % 0.53 % 0.49 % 0.53 % Net recoveries continued, totaling$4.7 million during the six months endedMarch 31, 2022 compared to$2.6 million during the six months endedMarch 31, 2021 . We reported net recoveries in each quarter for the last four years, primarily due to improvements in the values of properties used to secure loans that were fully or partially charged off after the 2008 collapse of the housing market. Charge-offs are recognized on loans identified as collateral-dependent and subject to individual review 46
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when the value of the collateral is not sufficient to justify full repayment of the obligation. Recoveries are recognized on previously written-off loans as borrowers meet their repayment obligations or when loans with enhanced collateral positions reach final resolution.
Gross charge-offs decreased and remained at relatively low levels, during the six months endedMarch 31, 2022 when compared to the six months endedMarch 31, 2021 . Delinquent loans continue to be evaluated for potential losses, and provisions are recorded for the estimate of potential losses of those loans. Subject to changes in the economic environment, a moderate level of charge-offs are expected as delinquent loans are resolved in the future and uncollected balances are charged against the allowance. During the three months endedMarch 31, 2022 , the total allowance for credit losses increased$1.7 million , to$90.9 million from$89.2 million atDecember 31, 2021 , as we recorded a$1.0 million release of credit losses. During the three months endedMarch 31, 2022 , we recorded net recoveries of$2.7 million . Refer to the "Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for more information. Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. Changes during the three months endedMarch 31, 2022 in the allowance for credit loss balances of loans are described below. The allowance for credit losses on off-balance sheet exposures increased by$1.0 million primarily related to an increase in undrawn equity line of credit exposures. Other than the less significant construction and other loans segments, the changes related to the significant loan segments are described as follows: •Residential Core - The amortized cost of this segment increased 3.6%, or$373.0 million , and its total allowance increased 4.5% or$2.0 million as ofMarch 31, 2022 as compared toDecember 31, 2021 . Total delinquencies decreased 5.8% to$15.1 million atMarch 31, 2022 from$16.0 million atDecember 31, 2021 . Delinquencies greater than 90 days decreased by 26.4% to$8.8 million atMarch 31, 2022 from$12.0 million atDecember 31, 2021 . Net recoveries were$1.0 million for the quarter endedMarch 31, 2022 and there were net recoveries of$0.1 million for the quarter endedMarch 31, 2021 . Economic forecasts continued to show improvements this quarter, but with the new portfolio growth the allowance increased. •Residential Home Today - The amortized cost of this segment decreased 4.8%, or$2.9 million , as we are no longer originating loans under the Home Today program. The expected net recovery position for this segment was$0.9 million atMarch 31, 2022 compared to$0.1 million atDecember 31, 2021 . Total delinquencies decreased 19.2% to$3.4 million atMarch 31, 2022 from$4.2 million atDecember 31, 2021 . Delinquencies greater than 90 days decreased 9.5% to$2.1 million from$2.4 million atDecember 31, 2021 . There were net recoveries of$0.8 million recorded during the current quarter and net recoveries of$0.4 million during the quarter endedMarch 31, 2021 . This allowance reflects not only the declining portfolio balance, but the lower historical loss rates applied to the remaining balance and the higher expected recoveries related to the loans as they age. Under the CECL methodology, the life of loan concept allows for qualitative adjustments for the expected future recoveries of previously charged-off loans which is driving the current allowance balance for Home Today loans negative. •Home Equity Loans and Lines of Credit - The amortized cost of this segment increased 4.3%, or$99.0 million , to$2.41 billion atMarch 31, 2022 from$2.31 billion atDecember 31, 2021 . The total allowance for this segment decreased by 2.3% to$18.4 million from$18.9 million atDecember 31, 2021 . Total delinquencies for this portfolio segment decreased 8.5% to$4.4 million atMarch 31, 2022 as compared to$4.8 million atDecember 31, 2021 . Delinquencies greater than 90 days decreased 9.5% to$2.6 million atMarch 31, 2022 from$2.9 million atDecember 31, 2021 . Net recoveries for this loan segment during the current quarter were$0.9 million , the same as the quarter endedMarch 31, 2021 . Economic forecasts caused a slight increase in forecasted losses, offset by a reduction in qualitative adjustments due to recent historical net charge-offs being more comparable to current economic forecasts than in the prior periods. 47
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The following tables set forth the allowance for credit losses on loans
allocated by loan category, the percent of allowance in each category to the
total allowance on loans, and the percent of loans in each category to total
loans at the dates indicated. The allowance for credit losses allocated to each
category is not necessarily indicative of future losses in any particular
category and does not restrict the use of the allowance to absorb losses in
other categories. This table does not include allowances for credit losses on
unfunded loan commitments, which are primarily related to undrawn home equity
lines of credit.
March 31, 2022 December 31, 2021
Percent of Percent of Percent of Percent of
Allowance Loans in Allowance Loans in
to Total Category to Total to Total Category to Total
Amount Allowance Loans Amount Allowance Loans
(Dollars in thousands)
Real estate loans:
Residential Core $ 46,469 72.2 % 80.8 % $ 44,472 70.0 % 80.9 %
Residential Home Today (850) (1.3) 0.4 (94) (0.2) 0.5
Home equity loans and lines of credit 18,425 28.7 18.0 18,852 29.7 17.9
Construction 280 0.4 0.8 346 0.5 0.7
Allowance for credit losses on loans $ 64,324 100.0 % 100.0 % $ 63,576 100.0 % 100.0 %
September 30, 2021 March 31, 2021
Percent of Percent of Percent of Percent of
Allowance Loans in Allowance Loans in
to Total Category to Total to Total Category to Total
Amount Allowance Loans Amount Allowance Loans
(Dollars in thousands)
Real estate loans:
Residential Core $ 44,523 69.2 % 81.2 % $ 46,546 68.7 % 82.2 %
Residential Home Today 15 - 0.6 (705) (1.0) 0.6
Home equity loans and lines of credit 19,454 30.3 17.6 21,236 31.3 16.8
Construction 297 0.5 0.6 672 1.0 0.4
Allowance for credit losses on loans $ 64,289 100.0 % 100.0 % $ 67,749 100.0 % 100.0 %
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Composition of loan portfolio
The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location at the indicated dates, excluding loans held for sale. The majority of our Home Today loan portfolio is secured by properties located inOhio and the balances of other loans are immaterial. Therefore, neither was segregated by geographic location. March 31, 2022 December 31, 2021 September 30, 2021 March 31, 2021 Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands) Real estate loans: Residential Core Ohio$ 5,859,198 $ 5,680,033 $ 5,603,998 $ 5,659,112 Florida 1,984,467 1,891,467 1,838,259 1,856,019 Other 2,831,997 2,716,235 2,773,018 2,953,845 Total Residential Core 10,675,662 80.8 % 10,287,735 80.9 % 10,215,275 81.2 % 10,468,976 82.2 % Total Residential Home Today 58,006 0.4 60,885 0.5 63,823 0.6 69,845 0.6 Home equity loans and lines of credit Ohio 644,421 635,495 630,815 622,855 Florida 473,009 454,210 438,212 425,938 California 381,565 350,758 335,240 317,067 Other 876,478 837,298 809,985 775,308 Total Home equity loans and lines of credit 2,375,473 18.0 2,277,761 17.9 2,214,252 17.6 2,141,168 16.8 Construction loans Ohio 90,888 81,505 71,651 48,895 Florida 8,366 7,656 6,604 6,622 Other 2,286 1,535 2,282 1,496Total Construction 101,540 0.8 90,696 0.7 80,537 0.6 57,013 0.4 Other loans 2,589 - 2,705 - 2,778 - 2,482 - Total loans receivable 13,213,270 100.0 % 12,719,782 100.0 % 12,576,665 100.0 % 12,739,484 100.0 % Deferred loan expenses, net 47,372 45,954 44,859 44,422 Loans in process (60,343) (57,120) (48,200) (34,529) Allowance for credit losses on loans (64,324) (63,576) (64,289) (67,749) Total loans receivable, net$ 13,135,975 $ 12,645,040 $ 12,509,035 $ 12,681,628 49
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The following table provides an analysis of our residential mortgage loans
disaggregated by FICO score refreshed quarterly, year of origination and
portfolio as of the periods presented. The Company treats the FICO score
information as demonstrating that underwriting guidelines reduce risk rather
than as a credit quality indicator utilized in the evaluation of credit risk.
Balances are adjusted for deferred loan fees, expenses and any applicable
loans-in-process.
Revolving
Revolving Loans Loans
By fiscal year of origination Amortized Converted
2022 2021 2020 2019 2018 Prior Cost Basis To Term Total
(Dollars in thousands)
March 31, 2022 Real estate loans: Residential Core <680$ 33,022 $ 66,660 $ 46,920 $ 26,919 $ 27,204 $ 184,919 $ - $ -$ 385,644 680-740 309,372 331,079 215,111 96,386 98,022 433,200 - - 1,483,170 741+ 1,373,611 1,956,188 1,332,692 558,261 607,738 2,821,830 - - 8,650,320 Unknown (1) 4,801 34,396 18,983 6,698 10,348 100,200 - - 175,426
Total residential core 1,720,806 2,388,323 1,613,706
688,264 743,312 3,540,149 - - 10,694,560
Residential Home Today (2)
<680 - - - - - 32,514 - - 32,514
680-740 - - - - - 10,532 - - 10,532
741+ - - - - - 11,448 - - 11,448
Unknown (1) - - - - - 3,076 - - 3,076
Total Residential Home Today - - - - - 57,570 - - 57,570
Home equity loans and lines of
credit
<680 504 951 407 455 582 922 72,610 19,869 96,300
680-740 6,426 4,024 1,411 977 2,074 2,405 347,278 28,053 392,648
741+ 30,461 30,086 9,053 8,029 6,317 9,061 1,733,412 61,102 1,887,521
Unknown (1) - 74 48 108 122 666 19,814 7,936 28,768
Total Home equity loans and
lines of credit 37,391 35,135 10,919 9,569 9,095 13,054 2,173,114 116,960 2,405,237
Construction
<680 - 687 - - - - - - 687
680-740 718 3,525 - - - - - - 4,243
741+ 9,504 25,691 218 - - - - - 35,413
Total Construction 10,222 29,903 218 - - - - - 40,343
Total net home loans
(1) Data needed for stratification are not readily available. (2) No new Home Today loan issuance since fiscal year 2016.
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The following table provides an analysis of our residential mortgage loans by
origination LTV, origination year and portfolio as of the periods presented.
LTVs are not updated subsequent to origination except as part of the charge-off
process. Balances are adjusted for deferred loan fees, expenses and any
applicable loans-in-process.
Revolving
Revolving Loans Loans
By fiscal year of origination Amortized Converted
2022 2021 2020 2019 2018 Prior Cost Basis To Term Total
(Dollars in thousands)
March 31, 2022
Real estate loans:
Residential Core
<80% $ 1,261,030 $ 1,679,997 $ 888,072 $ 321,608 $ 395,582 $ 2,100,842 $ - $ - $ 6,647,131
80-89.9% 417,968 657,427 659,629 331,804 323,104 1,326,894 - - 3,716,826
90-100% 40,073 49,406 65,798 34,586 24,507 110,053 - - 324,423
>100% - - - - 119 678 - - 797
Unknown (1) 1,735 1,493 207 266 - 1,682 - - 5,383
Total Residential Core 1,720,806 2,388,323 1,613,706 688,264 743,312 3,540,149 - - 10,694,560
Residential Home Today (2)
<80% - - - - - 11,419 - - 11,419
80-89.9% - - - - - 18,338 - - 18,338
90-100% - - - - - 27,813 - - 27,813
Total Residential Home Today - - - - - 57,570 - - 57,570
Home equity loans and lines of credit
<80% 33,752 34,015 10,839 9,214 8,389 9,172 2,019,177 76,553 2,201,111
80-89.9% 3,603 1,120 80 301 551 1,451 152,508 36,583 196,197
90-100% - - - - 56 862 534 434 1,886
>100% 36 - - 54 99 1,560 593 637 2,979
Unknown (1) - - - - - 9 302 2,753 3,064
Total home equity loans and lines of credit 37,391 35,135
10,919 9,569 9,095 13,054 2,173,114 116,960 2,405,237
Construction
<80% 4,611 19,308 - - - - - - 23,919
80-89.9% 5,611 10,595 218 - - - - - 16,424
Unknown (1) - - - - - - - - -
Total Construction 10,222 29,903 218 - - - - - 40,343
Total net real estate loans $ 1,768,419 $ 2,453,361
(1) Market data needed for stratification is not readily available. (2) No new Home Today loan issuance since fiscal year 2016.
AtMarch 31, 2022 , the unpaid principal balance of the home equity loans and lines of credit portfolio consisted of$231.2 million in home equity loans (including$117.1 million of home equity lines of credit, which are in repayment and no longer eligible to be drawn upon, and$7.1 million in bridge loans) and$2.14 billion in home equity lines of credit. 51
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The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the estimated current mean CLTV percent of home equity loans, home equity lines of credit and bridge loans as ofMarch 31, 2022 . Home equity lines of credit in the draw period are reported according to geographic distribution. Percent Mean CLTV Credit Principal Delinquent Percent at Current Mean Exposure Balance 90 Days or More Origination (2)
CLTV Percentage (3)
(Dollars in thousands) Home equity lines of credit in draw period (by state) Ohio$ 1,839,142 $ 563,486 0.03 % 60 % 46 % Florida 990,361 413,367 0.04 % 56 % 43 % California 888,307 338,681 0.04 % 60 % 52 % Other (1) 2,108,432 828,751 0.07 % 63 % 52 %
Total home equity lines of credit in
draw period 5,826,242 2,144,285 0.05 % 60 % 48 % Home equity lines in repayment, home equity loans and bridge loans 231,188 231,188 0.72 % 61 % 37 % Total$ 6,057,430 $ 2,375,473 0.11 % 60 % 47 % _________________
(1) No other individual state has a committed or drawn balance greater than 10% of our total home equity loan portfolio and 5% of total loan balance.
(2) The average CLTV percentage at origin 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 ofMarch 31, 2022 . 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. AtMarch 31, 2022 , 39.1% of the home equity lending portfolio was either in a first lien position (22.9%), in a subordinate (second) lien position behind a first lien that we held (13.6%) or behind a first lien that was held by a loan that we originated, sold and now serviced for others (2.6%). AtMarch 31, 2022 , 13.1% of the home equity line of credit portfolio in the draw period was making only the minimum payment on the outstanding line balance. 52
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The following table sets forth by calendar year of origination the credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the estimated current mean CLTV percent of the home equity loans, home equity lines of credit and bridge loan portfolio as ofMarch 31, 2022 . Home equity lines of credit in the draw period are included in the year originated: Percent Mean CLTV Current Mean Credit Principal Delinquent Percent at CLTV Exposure Balance 90 Days or More Origination (1) Percent (2) (Dollars in thousands) Home equity lines of credit in draw period 2014 and Prior$ 70,773 $ 15,310 - % 58 % 32 % 2015 104,596 27,413 - % 58 % 33 % 2016 270,215 83,552 0.11 % 59 % 37 % 2017 562,885 199,688 0.13 % 58 % 39 % 2018 710,693 286,536 0.10 % 58 % 42 % 2019 944,639 424,945 0.09 % 61 % 47 % 2020 882,973 340,341 - % 58 % 47 % 2021 1,725,551 638,817 - % 62 % 58 % 2022 553,917 127,683 - % 62 % 62 % Total home equity lines of credit in draw period 5,826,242 2,144,285 0.05 % 60 % 48 % Home equity lines in repayment, home equity loans and bridge loans 231,188 231,188 0.72 % 61 % 37 % Total$ 6,057,430 $ 2,375,473 0.11 % 60 % 47 % ________________
(1) The average CLTV percentage at origin for all home equity lines of credit is based on the committed amount.
(2)Current Mean CLTV is based on best available first mortgage and property values as ofMarch 31, 2022 . Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance. The following table sets forth, by fiscal year of the draw period expiration, the principal balance of home equity lines of credit in the draw period as ofMarch 31, 2022 , segregated by the estimated current combined LTV range. Home equity lines of credit with an end of draw date in the current fiscal year include accounts with draw privileges that have been temporarily suspended. Estimated Current CLTV Category Home equity lines of credit in draw period (by end of draw fiscal year): < 80% 80 - 89.9% 90 - 100% >100% Unknown (1) Total (Dollars in thousands) 2022$ 41,842 $ 174 $ - $ - $ -$ 42,016 2023 520 38 7 - - 565 2024 9,498 - - - - 9,498 2025 26,979 - - - 13 26,992 2026 46,024 16 - - - 46,040 2027 168,811 10 - - 125 168,946 Post 2027 1,841,769 6,859 341 90 1,169 1,850,228 Total$ 2,135,443 $ 7,097 $ 348 $ 90 $ 1,307 $ 2,144,285 _________________
(1) Market data needed for stratification is not readily available.
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The following table sets forth the breakdown of estimated current mean CLTV percentages for home equity lines of credit in the draw period as ofMarch 31, 2022 . Percent Percent Current of Total Delinquent Mean CLTV Mean Credit Principal Principal 90 Days or Percent at CLTV Exposure Balance Balance More Origination (2) Percent (3) (Dollars in thousands) Home equity lines of credit in draw period (by estimated current mean CLTV) < 80%$ 5,782,745 $ 2,135,443 99.6 % 0.04 % 60 % 48 % 80 - 89.9% 37,785 7,097 0.3 % 2.45 % 78 % 80 % 90 - 100% 1,196 348 - % - % 77 % 93 % > 100% 732 90 - % - % 55 % 117 % Unknown (1) 3,784 1,307 0.1 % - % 51 % (1)$ 5,826,242 $ 2,144,285 100.0 % 0.05 % 60 % 48 % _________________
(1) Market data needed for stratification is not readily available.
(2) The average CLTV percentage at origin 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 ofMarch 31, 2022 . Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance. Delinquent Loans The following tables set forth the amortized cost in loan delinquencies by type, segregated by geographic location and severity of delinquency as of the dates indicated. The majority of the Home Today loan portfolio is secured by properties located inOhio , and therefore was not segregated by geographic location. There are no construction or other loans with delinquent balances. Loans Delinquent for 30-89 Days 90 Days or More Total (Dollars in thousands)March 31, 2022 Real estate loans: Residential Core Ohio$ 4,427 $ 4,879$ 9,306 Florida 1,108 894 2,002 Other 712 3,068 3,780 Total Residential Core 6,247 8,841 15,088 Residential Home Today 1,279 2,128 3,407 Home equity loans and lines of credit Ohio 721 771 1,492 Florida 242 768 1,010 California 407 425 832 Other 365 680 1,045 Total Home equity loans and lines of credit 1,735 2,644 4,379 Total$ 9,261 $ 13,613$ 22,874 54
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Loans Delinquent for
30-89 Days 90 Days or More Total
(Dollars in thousands)
December 31, 2021
Real estate loans:
Residential Core
Ohio $ 1,790 $ 7,609 $ 9,399
Florida 1,263 1,002 2,265
Other 954 3,399 4,353
Total Residential Core 4,007 12,010 16,017
Residential Home Today 1,866 2,351 4,217
Home equity loans and lines of credit
Ohio 679 1,157 1,836
Florida 543 544 1,087
California 95 658 753
Other 550 561 1,111
Total Home equity loans and lines of credit 1,867 2,920 4,787
Total $ 7,740 $ 17,281 $ 25,021
Loans Delinquent for
30-89 Days 90 Days or More Total
(Dollars in thousands)
September 30, 2021
Real estate loans:
Residential Core
Ohio $ 3,217 $ 5,729 $ 8,946
Florida 874 1,093 1,967
Other 1,814 2,548 4,362
Total Residential Core 5,905 9,370 15,275
Residential Home Today 1,909 2,068 3,977
Home equity loans and lines of credit
Ohio 333 1,348 1,681
Florida 432 787 1,219
California 278 1,074 1,352
Other 195 1,022 1,217
Total Home equity loans and lines of credit 1,238 4,231 5,469
Total $ 9,052 $ 15,669 $ 24,721
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Loans Delinquent for
30-89 Days 90 Days or More Total
(Dollars in thousands)
March 31, 2021
Real estate loans:
Residential Core
Ohio $ 3,559 $ 7,044 $ 10,603
Florida 1,103 2,943 4,046
Other 258 1,438 1,696
Total Residential Core 4,920 11,425 16,345
Residential Home Today 1,791 1,914 3,705
Home equity loans and lines of credit
Ohio 357 1,994 2,351
Florida 345 837 1,182
California 713 899 1,612
Other 475 1,375 1,850
Total Home equity loans and lines of credit 1,890 5,105 6,995
Total $ 8,601 $ 18,444 $ 27,045
Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.10% of
total net loans at March 31, 2022 , 0.14% at December 31, 2021 , 0.12% at
September 30, 2021 and 0.14% at March 31, 2021 . Total loans delinquent (i.e.
delinquent 30 days or more) were 0.17% of total net loans at March 31, 2022 ,
0.20% at both December 31, 2021 and September 30, 2021 , and 0.21% at March 31,
2021 .
Non-performing assets and distressed debt restructurings
The following table shows the amortized costs and categories of non-performing and TDR assets as of the dates indicated.
March 31, December 31, September 30, March 31,
2022 2021 2021 2021
(Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential Core $ 23,109 $ 26,348 $ 24,892 $ 31,066
Residential Home Today 7,661 8,049 8,043 9,292
Home equity loans and lines of credit 8,504 9,010 11,110 12,234
Total non-accrual loans (1)(2) 39,274 43,407 44,045 52,592
Real estate owned 131 131 289 -
Total non-performing assets $ 39,405 $
43,538
Ratios: total unrecognized loans to total loans
0.30 % 0.34 % 0.35 % 0.41 % Total non-accrual loans to total assets 0.27 % 0.31 % 0.31 % 0.36 % Total non-performing assets to total assets 0.27 % 0.31 % 0.32 % 0.36 % TDRs: (not included in non-accrual loans above) Real estate loans: Residential Core$ 45,151 $
45,493
The residential house today
19,473 20,079 21,307 22,683 Home equity loans and lines of credit 23,184 24,243 24,941 26,748 Total$ 87,808 $ 89,815 $ 94,548 $ 95,192 _________________
(1)To
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with non-accrual loans for a minimum period of six months from the restructuring date due to their non-accrual status or forbearance plan prior to restructuring, because of a prior partial charge off or because all borrowers have filed Chapter 7 bankruptcy and have not been reaffirmed or dismissed. (2)AtMarch 31, 2022 ,December 31, 2021 ,September 30, 2021 , andMarch 31, 2021 , the totals include$5.6 million ,$7.1 million ,$6.9 million and$7.8 million in TDRs that are 90 days or more past due, respectively. The gross interest income that would have been recorded during the six months endedMarch 31, 2022 andMarch 31, 2021 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$3.1 million and$3.6 million , respectively. The interest income recognized on those loans included in net income for the six months endedMarch 31, 2022 andMarch 31, 2021 was$2.2 million for both periods. The amortized cost of collateral-dependent loans includes accruing TDRs and loans that are returned to accrual status when contractual payments are less than 90 days past due. These loans continue to be individually evaluated based on collateral until, at a minimum, contractual payments are less than 30 days past due. Also, the amortized cost of non-accrual loans includes loans that are not included in the amortized cost of collateral-dependent loans because they are included in loans collectively evaluated for credit losses. The table below sets forth a reconciliation of the amortized costs and categories between non-accrual loans and collateral-dependent loans at the dates indicated. The increase in other accruing collateral-dependent loans betweenMarch 31, 2021 andSeptember 30, 2021 was primarily related to forbearance plans being extended past 12 months. March 31, December 31, September 30, March 31, 2022 2021 2021 2021 (Dollars in thousands) Non-Accrual Loans$ 39,274 $ 43,407 $ 44,045 52,592 Accruing Collateral-Dependent TDRs 8,653 8,628 10,428 7,828 Other Accruing Collateral-Dependent Loans 27,208 32,269 31,956 10,165 Less: Loans Collectively Evaluated (3,335) (4,099) (2,575) (4,540) Total Collateral-Dependent loans$ 71,800 $ 80,205 $ 83,854 $ 66,045 In response to the economic challenges facing many borrowers, we continue to restructure loans. Loan restructuring is a method used to help families keep their homes and to preserve neighborhoods. This involves making changes to the borrowers' loan terms through interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions including those beyond that provided in the original agreement; principal forgiveness; capitalization of delinquent payments in special situations; or some combination of the above. Loans discharged through Chapter 7 bankruptcy are also reported as TDRs per OCC interpretive guidance. For discussion on TDR measurement, see Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS. We had$117.5 million of TDRs (accrual and non-accrual) recorded atMarch 31, 2022 . This was a decrease in the amortized cost of TDRs of$3.6 million ,$9.6 million and$17.2 million fromDecember 31, 2021 ,September 30, 2021 andMarch 31, 2021 , respectively. 57
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The following table sets forth the amortized cost in accrual and non-accrual TDRs, by the types of concessions granted, as ofMarch 31, 2022 . Initial concessions granted by loans restructured as TDRs can include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also can occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company. Multiple Initial Restructurings Restructurings Bankruptcy Total (In thousands) Accrual Residential Core $ 28,316$ 12,537 $ 4,298 $ 45,151 Residential Home Today 10,731 7,740 1,002 19,473 Home equity loans and lines of credit 21,811 896 477 23,184 Total $ 60,858$ 21,173 $ 5,777 $ 87,808 Non-Accrual, Performing Residential Core $ 2,224 $ 4,959$ 6,402 $ 13,585 Residential Home Today 580 3,385 1,289 5,254 Home equity loans and lines of credit 2,299 1,915 1,025 5,239 Total $ 5,103$ 10,259 $ 8,716 $ 24,078 Non-Accrual, Non-Performing Residential Core $ 2,015 $ 1,052$ 412 $ 3,479 Residential Home Today 608 1,107 28 1,743 Home equity loans and lines of credit 350 55 - 405 Total $ 2,973 $ 2,214$ 440 $ 5,627 Total TDRs Residential Core $ 32,555$ 18,548 $ 11,112 $ 62,215 Residential Home Today 11,919 12,232 2,319 26,470 Home equity loans and lines of credit 24,460 2,866 1,502 28,828 Total $ 68,934$ 33,646 $ 14,933 $ 117,513 TDRs in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan was not accruing interest or in a forbearance plan at the time of restructuring, continues to not accrue interest and is performing according to the terms of the restructuring but has not been current for at least six consecutive months since its restructuring, has a partial charge-off, or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status where all borrowers have filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring.
Comparison of the financial situation at
Total assets increased$523.4 million , or 4%, to$14.58 billion atMarch 31, 2022 from$14.06 billion atSeptember 30, 2021 . This increase was mainly the result of new loan origination levels exceeding the total of loan sales and principal repayments, partially offset by a decrease in cash and cash equivalents. Cash and cash equivalents decreased$117.6 million , or 24%, to$370.7 million atMarch 31, 2022 from$488.3 million atSeptember 30, 2021 . Cash is managed to maintain the level of liquidity described later in the Liquidity and Capital Resources section. Balances decreased as proceeds from loan sales and principal repayments decreased for the quarter endedMarch 31, 2022 . Investment securities, all of which are classified as available for sale, increased$21.4 million to$443.2 million atMarch 31, 2022 from$421.8 million atSeptember 30, 2021 . Investment securities increased as$145.5 million in purchases exceeded$99.3 million in principal paydowns, a$22.1 million decrease in unrealized gains to an unrealized loss position during the current year, and$2.7 million of net acquisition premium amortization that occurred in the mortgage-backed 58
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securities portfolio during the half-year ended
Loans held for investment, net of deferred loan fees and allowance for credit losses, increased$626.9 million , or 5%, to$13.14 billion atMarch 31, 2022 from$12.51 billion atSeptember 30, 2021 . This increase was based on a combination of a$454.6 million , or 4%, increase in residential mortgage loans to$10.73 billion atMarch 31, 2022 from$10.28 billion atSeptember 30, 2021 and a$161.2 million increase in the balance of home equity loans and lines of credit during the six months endedMarch 31, 2022 , as new originations and additional draws on existing accounts exceeded loan sales and repayments. Of the total$1.74 billion first mortgage loan originations for the six months endedMarch 31, 2022 , 66% were refinance transactions and 34% were purchases, 26% were adjustable-rate mortgages and 17% were fixed-rate mortgages with terms of 10 years or less. During the six months endedMarch 31, 2022 ,$448.2 million of three- and five-year "Smart Rate" loans were originated while$1.29 billion of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated. BetweenSeptember 30, 2021 andMarch 31, 2022 , the total fixed-rate portion of the first mortgage loan portfolio increased$562.8 million and was comprised of an increase of$504.7 million in the balance of fixed-rate loans with original terms greater than 10 years, as well as an increase of$58.1 million in the balance of fixed-rate loans with original terms of 10 years or less. During the six months endedMarch 31, 2022 ,$101.7 million were sold or committed to sell, which consisted of$25.8 million of agency-compliant Home Ready loans and$75.9 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans sold to Fannie Mae. Commitments originated for home equity loans and lines of credit, and bridge loans were$1.08 billion for the six months endedMarch 31, 2022 compared to$823.7 million for the six months endedMarch 31, 2021 . AtMarch 31, 2022 , pending commitments to originate new home equity loans and lines of credit were$220.9 million . Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information. The allowance for credit losses was$90.9 million , or 0.69% of total loans receivable, atMarch 31, 2022 , including a$26.6 million liability for unfunded commitments. The allowance for credit losses was$89.3 million , or 0.71% of total loans receivable, atSeptember 30, 2021 , including a$25.0 million liability for unfunded commitments. The allowance for credit losses was$89.7 million , or 0.71% of total loans receivable, atMarch 31, 2021 and included a$22.0 million liability for unfunded commitments. The increase in the allowance for credit losses was primarily attributable to loan growth in both the mortgage loan and home equity line of credit and loan portfolios. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for additional discussion. The amount of FHLB stock owned was$162.8 million atMarch 31, 2022 , unchanged from the prior year endedSeptember 30, 2021 . FHLB stock ownership requirements dictate the amount of stock owned at any given time.
Increase in the total number of life insurance contracts held by banks
Other assets, including prepaid expenses, increased$1.5 million to$93.1 million atMarch 31, 2022 from$91.6 million atSeptember 30, 2021 . The increase included a$4.8 million increase in the margin requirement on active swap contracts, a$3.7 million increase in the federal tax asset and a$1.9 million increase in the investment in low income housing, partially offset by an$8.7 million decrease in net deferred taxes, which is a net liability atMarch 31, 2022 , and a$2.3 million decrease in funds accrued for the ESOP. Deposits increased$14.7 million , or less than 1%, to$9.01 billion atMarch 31, 2022 from$8.99 billion atSeptember 30, 2021 . The increase in deposits resulted primarily from a$271.8 million increase in our checking accounts, inclusive of$200.0 million of new brokered checking accounts and a$61.1 million increase in savings accounts, partially offset by a$317.4 million decrease in CDs, inclusive of brokered CDs, as the low current market interest rates have reduced customers' desires to maintain longer-term CDs. The balance of brokered CDs included in total deposits atMarch 31, 2022 decreased by$38.1 million to$453.9 million , during the six months endedMarch 31, 2022 , compared to a balance of$492.0 million atSeptember 30, 2021 . During the six months endedMarch 31, 2022 ,$200.0 million of brokered checking accounts wee added as an alternative source of funding. Borrowed funds, all from the FHLB ofCincinnati , increased$463.5 million , or 15%, to$3.56 billion atMarch 31, 2022 from$3.09 billion atSeptember 30, 2021 . The increase was primarily used to fund loan growth. Activity included the addition of$590.0 million of overnight advances and$250.0 million of long-term advances, partially offset by principal repayments and$375.0 million of shorter-term advances and their related swap contracts that matured and were paid off. The total balance of borrowed funds atMarch 31, 2022 consisted of$590.0 million of overnight advances,$888.3 million of term advances with a weighted average maturity of approximately 2.5 years and shorter-term advances of$2.1 billion , aligned with interest rate swap contracts, with a remaining weighted average effective maturity of approximately 2.4 years. Interest rate swaps have been used 59
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to extend the duration of short-term borrowings, at inception, by paying a fixed rate of interest and receiving the variable rate. Refer to the Extending the Duration of Funding Sources section of the Overview and Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional discussion regarding short-term borrowings and interest-rate swaps. Borrowers' advances for insurance and taxes decreased by$14.4 million to$95.2 million atMarch 31, 2022 from$109.6 million atSeptember 30, 2021 . This change primarily reflects the cyclical nature of real estate tax payments that have been collected from borrowers and are in the process of being remitted to various taxing agencies. Total shareholders' equity increased$63.5 million , or 4%, to$1.80 billion atMarch 31, 2022 from$1.73 billion atSeptember 30, 2021 . Activity reflects$32.0 million of net income in the current year reduced by quarterly dividends of$29.1 million and$1.2 million of repurchases of outstanding common stock. Other changes include$57.0 million of unrealized net gain recognized in accumulated other comprehensive income, primarily related to changes in market values and maturities of swap contracts, and a$4.8 million net positive impact related to activity in the Company's stock compensation and employee stock ownership plans. The Company declared and paid a quarterly dividend of$0.2825 per share during each of the quarters endedDecember 31, 2021 andMarch 31, 2022 . As a result of a mutual member vote,Third Federal Savings and Loan Association of Cleveland, MHC (the "MHC"), the mutual holding company that owns approximately 81% of the outstanding stock of the Company, was able to waive its receipt of its share of the dividend paid. Refer to Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds for additional details regarding the repurchase of shares of common stock and the dividend waiver. 60
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Comparison of operating results for the three months ended
Average balances and yields. The following table sets forth average balances,
average yields and costs, and certain other information for the periods
indicated. No tax-equivalent yield adjustments were made, as the effects thereof
were not material. Average balances are derived from daily average balances.
Non-accrual loans are included in the computation of loan average balances, but
only cash payments received on those loans during the period presented are
reflected in the yield. The yields set forth below include the effect of
deferred fees, deferred expenses, discounts and premiums that are amortized or
accreted to interest income or interest expense.
Three Months Ended Three Months Ended
March 31, 2022 March 31, 2021
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost (1) Balance Expense Cost (1)
(Dollars in thousands)
Interest-bearing assets:
Interest-earning cash equivalents$ 337,915 $ 161 0.19 %$ 494,161 $ 127
0.10%
Investment securities 4,044 11 1.09 % - -
– %
Mortgage-backed securities 432,012 1,344 1.24 % 435,847 966 0.89 % Loans (2) 12,845,756 91,125 2.84 % 12,892,195 96,175 2.98 % Federal Home Loan Bank stock 162,783 820 2.01 % 158,930 687 1.73 % Total interest-earning assets 13,782,510 93,461 2.71 % 13,981,133 97,955 2.80 % Noninterest-earning assets 475,938 548,229 Total assets$ 14,258,448 $ 14,529,362
Interest-bearing debts:
Checking accounts$ 1,292,977 293 0.09 %$ 1,062,894 296 0.11 % Savings accounts 1,869,103 485 0.10 % 1,724,978 760 0.18 % Certificates of deposit 5,788,249 16,118 1.11 % 6,394,643 23,489 1.47 % Borrowed funds 3,282,890 13,824 1.68 % 3,352,317 14,999 1.79 % Total interest-bearing liabilities 12,233,219 30,720 1.00 % 12,534,832 39,544 1.26 % Noninterest-bearing liabilities 238,884 306,556 Total liabilities 12,472,103 12,841,388 Shareholders' equity 1,786,345 1,687,974 Total liabilities and shareholders' equity$ 14,258,448 $ 14,529,362 Net interest income$ 62,741 $ 58,411 Interest rate spread (1)(3) 1.71 % 1.54 % Net interest-earning assets (4)$ 1,549,291 $ 1,446,301 Net interest margin (1)(5) 1.82 % 1.67 % Average interest-earning assets to average interest-bearing liabilities 112.66 % 111.54 % Selected performance ratios: Return on average assets (1) 0.44 % 0.63 % Return on average equity (1) 3.55 % 5.45 % Average equity to average assets 12.53 % 11.62 % _________________ (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. 61
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General. Net income decreased$7.2 million , or 31%, to$15.8 million for the quarter endedMarch 31, 2022 from$23.0 million for the quarter endedMarch 31, 2021 . The decrease in net income was attributable primarily to lower net gain on the sale of loans and a decline in the release of the credit for loan losses, partially offset by an increase in net interest income and a decline in income tax expense. Interest and Dividend Income. Interest and dividend income decreased$4.5 million , or 5%, to$93.5 million during the current quarter compared to$98.0 million during the same quarter in the prior year. The decrease in interest and dividend income was primarily the result of decreases in interest income on loans partially offset by increases in income from mortgage-backed securities and FHLB stock. Interest income on loans decreased$5.1 million , or 5%, to$91.1 million during the current quarter compared to$96.2 million during the same quarter in the prior year. This change was attributed to a 14 basis point decrease in the average yield to 2.84% for the current quarter from 2.98% for the same quarter last year as we continued to close the pipeline of loans originated for borrowers refinancing to lower rates of interest. Adding to the decline in the average yield was a$46.4 million , or less than 1%, decrease in the average balance of loans to$12.85 billion for the quarter endedMarch 31, 2022 compared to$12.89 billion during the same quarter last year as principal repayments and loan sales exceeded new loan production during periods leading up to the current quarter. Interest Expense. Interest expense decreased$8.8 million , or 22%, to$30.7 million during the current quarter compared to$39.5 million during the quarter endedMarch 31, 2021 . The decrease resulted from a decline in interest expense on deposits as well as borrowed funds. Interest expense on CDs decreased$7.4 million , or 32%, to$16.1 million during the current quarter compared to$23.5 million during the quarter endedMarch 31, 2021 . The decrease was attributed to a 36 basis point decrease in the average rate paid on CDs to 1.11% for the current quarter from 1.47% for the same quarter last year. There was a$606.4 million , or 9%, decrease in the average balance of CDs to$5.79 billion during the current quarter from$6.39 billion during the same quarter of the prior year. Interest expense on savings accounts decreased$0.3 million , or 39%, to$0.5 million during the current quarter from$0.8 million during the quarter endedMarch 31, 2021 . This decline was attributable to an eight basis point decrease in the average rate paid on savings accounts to 0.10% during the current quarter from 0.18% from the same quarter last year. Partially offsetting this decrease was a$144.1 million , or 8%, increase in the average balance of savings accounts to$1.87 billion during the current quarter compared to$1.72 billion during the same quarter of the prior year. Rates were adjusted on deposits in response to changes in market interest rates as well as the rates paid by our competition. Interest expense on borrowed funds decreased$1.2 million , or 8%, to$13.8 million during the current quarter compared to$15.0 million during the quarter endedMarch 31, 2021 . This decrease was mainly attributed to an 11 basis point decrease in the average rate paid on these funds, to 1.68% for the current quarter from 1.79% for the same quarter last year, and a$69.4 million , or 2%, decrease in the average balance of borrowed funds to$3.28 billion during the current quarter from an average balance of$3.35 billion during the same quarter of the prior year. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion. Net Interest Income. Net interest income increased$4.3 million to$62.7 million during the current quarter when compared to$58.4 million for the three months endedMarch 31, 2021 . Both the average balance and the yield of interest earning assets decreased when compared to the same period last year, which partially offset the decrease in the average balance and cost of interest-bearing liabilities when compared to the same period last year. Average interest earning assets during the current quarter decreased$198.6 million , or 1%, when compared to the quarter endedMarch 31, 2021 . The decrease in average interest-earning assets was attributed primarily to a decline in the average balances of cash equivalents and loans. In addition to the decrease in average interest earning assets was a nine basis point decrease in the yield on those assets to 2.71% from 2.80%, as a result of market rate changes. The interest rate spread increased 17 basis points to 1.71% compared to 1.54% during the same quarter last year. The net interest margin increased 15 basis points to 1.82% in the current quarter compared to 1.67% for the same quarter last year. Provision (Release) for Credit Losses. We recorded a release of the allowance for credit losses on loans and off-balance sheet exposures of$1.0 million during the quarter endedMarch 31, 2022 , compared to a$4.0 million release of credit losses during the quarter endedMarch 31, 2021 . As delinquencies in the portfolio have been resolved through pay-offs, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan balance, uncollected balances have been charged against the allowance for credit losses previously provided. Recoveries of amounts charged against the allowance for credit losses occur when collateral values increase and homes are sold or when borrowers repay the amounts previously charged-off. In the current quarter, we recorded net recoveries of$2.7 million compared to net recoveries of$1.4 million in the quarter endedMarch 31, 2021 . Credit loss provisions (releases) are recorded with the objective of aligning our allowance for credit loss balances with our current estimates of loss in the portfolio. The allowance for credit losses on loans was$64.3 62
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million, or 0.49% of total amortized cost in loans receivable, atMarch 31, 2022 , compared to$67.8 million or 0.53% of total amortized cost in loans receivable atMarch 31, 2021 . The total allowance for credit losses was$90.9 million atMarch 31, 2022 , compared to$89.7 million atMarch 31, 2021 . Under the CECL methodology, the allowance for credits losses atMarch 31, 2022 included a$26.6 million liability for unfunded commitments compared to$22.0 million atMarch 31, 2021 , primarily undrawn home equity lines of credit commitments. Refer to the Lending Activities section of Item 2. and Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for further discussion. Non-Interest Income. Non-interest income decreased$10.1 million , or 64%, to$5.6 million during the current quarter compared to$15.7 million during the quarter endedMarch 31, 2021 mainly as a result of a decrease in the net gain on sale of loans and a decrease in income on bank owned life insurance contracts. Gains on the sale of loans decreased$8.8 million to$0.1 million compared to$8.9 million for the same quarter in the prior year as there were no loan sales during the current quarter compared to$224.0 million of loan sales during the quarter endedMarch 31, 2021 . Loan sale gains have decreased from the prior year, as the rise in longer term market interest rates, as compared to last year, has impacted our interest rate risk management decision on whether to sell future loans or hold them in portfolio to improve net interest income. The cash surrender value and death benefits from bank owned life insurance decreased$1.6 million to$2.2 million during the quarter endedMarch 31, 2022 from$3.8 million during the quarter endedMarch 31, 2021 . Non-Interest Expense. Non-interest expense increased$1.2 million , or 2%, to$50.0 million during the current quarter compared to$48.8 million during the quarter endedMarch 31, 2021 . The increase primarily consisted of a$1.3 million increase in marketing expense due to the timing of media campaigns supporting our lending activities. Additionally, there was a$0.4 million increase in office property and equipment. Other operating expenses decreased by$0.8 million and were mainly due to positive actuarial adjustments to the defined benefit plan recorded during the current fiscal year. Income Tax Expense. The provision for income taxes decreased$2.8 million to$3.5 million during the current quarter compared to$6.3 million during the quarter endedMarch 31, 2021 reflecting the lower level of pre-tax income during the more recent period. The provision for the current quarter included$3.4 million of federal income tax provision and$0.1 million of state income tax expense. The provision for the quarter endedMarch 31, 2021 included$5.1 million of federal income tax provision and$1.2 million of state income tax provision. Our effective federal tax rate was 17.9% during the current quarter and 18.3% during the quarter endedMarch 31, 2021 . 63
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Comparison of operating results for the six months ended
Average balances and yields. The following table sets forth average balances,
average yields and costs, and certain other information for the periods
indicated. No tax-equivalent yield adjustments were made, as the effects thereof
were not material. Average balances are derived from daily average balances.
Non-accrual loans are included in the computation of loan average balances, but
only cash payments received on those loans during the period presented are
reflected in the yield. The yields set forth below include the effect of
deferred fees, deferred expenses, discounts and premiums that are amortized or
accreted to interest income or interest expense.
Six Months Ended Six Months Ended
March 31, 2022 March 31, 2021
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost (1) Balance Expense Cost (1)
(Dollars in thousands)
Interest-bearing assets:
Interest-earning cash equivalents$ 416,050 $ 351 0.17 %$ 485,375 $ 255
0.11%
Investment securities 3,488 20 1.15 % - - - % Mortgage-backed securities 426,685 2,295 1.08 % 441,696 1,953 0.88 % Loans (2) 12,714,257 181,244 2.85 % 12,991,561 196,301 3.02 % Federal Home Loan Bank stock 162,783 1,641 2.02 % 147,861 1,375 1.86 % Total interest-earning assets 13,723,263 185,551 2.70 % 14,066,493 199,884 2.84 % Noninterest-earning assets 494,020 536,771 Total assets$ 14,217,283 $ 14,603,264
Interest-bearing debts:
Checking accounts$ 1,222,288 558 0.09 %$ 1,040,353 617 0.12 % Savings accounts 1,852,232 1,042 0.11 % 1,693,536 1,674 0.20 % Certificates of deposit 5,866,360 34,547 1.18 % 6,444,083 49,950 1.55 % Borrowed funds 3,229,024 28,819 1.78 % 3,411,955 30,489 1.79 % Total interest-bearing liabilities 12,169,904 64,966 1.07 % 12,589,927 82,730 1.31 % Noninterest-bearing liabilities 275,494 341,727 Total liabilities 12,445,398 12,931,654 Shareholders' equity 1,771,885 1,671,610 Total liabilities and shareholders' equity$ 14,217,283 $ 14,603,264 Net interest income$ 120,585 $ 117,154 Interest rate spread (1)(3) 1.63 % 1.53 % Net interest-earning assets (4)$ 1,553,359 $ 1,476,566 Net interest margin (1)(5) 1.76 % 1.67 % Average interest-earning assets to average interest-bearing liabilities 112.76 % 111.73 % Selected performance ratios: Return on average assets (1) 0.45 % 0.66 % Return on average equity (1) 3.61 % 5.74 % Average equity to average assets 12.46 % 11.45 % _________________ (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. 64
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General. Net income decreased$16.0 million to$32.0 million for the six months endedMarch 31, 2022 compared to$48.0 million for the six months endedMarch 31, 2021 . The decrease in net income was primarily driven from a lower net gain on the sale of loans and a decline in the release of the credit for loan losses, partially offset by an increase in net interest income, a decline in operating expenses and income tax expense. Interest and Dividend Income. Interest and dividend income decreased$14.3 million , or 7%, to$185.6 million during the six months endedMarch 31, 2022 compared to$199.9 million during the same six months in the prior year. The decrease in interest and dividend income resulted mainly from a decrease in interest income on loans, partially offset by increases in income earned on mortgage backed securities and FHLB stock. Interest income on loans decreased$15.1 million , or 8%, to$181.2 million for the six months endedMarch 31, 2022 compared to$196.3 million for the six months endedMarch 31, 2021 . This decrease was attributed mainly to a 17 basis point decrease in the average yield on loans to 2.85% for the six months endedMarch 31, 2022 from 3.02% for the same six months in the prior fiscal year, as well as a$277.3 million decrease in the average balance of loans to$12.71 billion for the current six months compared to$12.99 billion for the prior fiscal year period as repayments and loan sales exceeded new loan production during months leading up to the current fiscal year. Although interest rates increased in general, the average loan yield decreased during the year as higher yielding loans from payoffs and refinances were replaced with loans yielding lower market interest rates. Interest Expense. Interest expense decreased$17.7 million , or 21%, to$65.0 million during the current six months compared to$82.7 million during the six months endedMarch 31, 2021 . This decrease resulted from decreases in interest expense on both deposits and borrowed funds. Interest expense on CDs decreased$15.5 million , or 31%, to$34.5 million during the six months endedMarch 31, 2022 compared to$50.0 million during the six months endedMarch 31, 2021 . The decrease was attributed primarily to a 37 basis point decrease in the average rate we paid on CDs to 1.18% during the current six months from 1.55% during the same six months last fiscal year. In addition, there was a$577.7 million , or 9%, decrease in the average balance of CDs to$5.87 billion from$6.44 billion during the same six months of the prior fiscal year. While interest expense on checking accounts remained relatively unchanged, interest expense on savings accounts decreased$0.7 million to$1.0 million during the six months endedMarch 31, 2022 , compared to interest expense of$1.7 million for the same six-month period during the prior fiscal year. Rates were adjusted for deposits in response to changes in market interest rates as well as to changes in the rates paid by our competitors. Interest expense on borrowed funds, as impacted by related interest rate swap contracts, decreased$1.7 million , or 6%, to$28.8 million during the six months endedMarch 31, 2022 from$30.5 million during the six months endedMarch 31, 2021 . The decrease was primarily the result of lower average balances of borrowed funds for the six months endedMarch 31, 2022 . The average balance of borrowed funds decreased$182.9 million , or 5%, to$3.23 billion during the current six months from$3.41 billion during the same six months of the prior fiscal year. Additionally, there was a one basis point decrease in the average rate paid for these funds to 1.78% from 1.79% for the six months endedMarch 31, 2022 andMarch 31, 2021 , respectively. During the six months endedMarch 31, 2022 , additional borrowings included$590.0 million of overnight advances and$250.0 million of long term advances, partially offset by$375.0 million of maturing short-term advances and their related swap contracts and other principal repayments. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion. Net Interest Income. Net interest income increased$3.4 million , or 3%, to$120.6 million during the six months endedMarch 31, 2022 from$117.2 million during the six months endedMarch 31, 2021 . Average interest-earning assets decreased during the current six months by$343.2 million , or 2%, to$13.72 billion when compared to the six months endedMarch 31, 2021 . The decrease in average assets was attributed primarily to a$277.3 million decrease in the average balance of our loans, a$69.3 million decrease in cash and cash equivalents, as well as a$15.0 million decrease in the average balance of mortgage-backed security investments. The yield on average interest earning assets decreased 14 basis points to 2.70% for the six months endedMarch 31, 2022 from 2.84% for the six months endedMarch 31, 2021 . Average interest-bearing liabilities decreased$420.0 million to$12.17 billion for the six months endedMarch 31, 2022 compared to$12.59 billion for the six months endedMarch 31, 2021 . Average interest-bearing liabilities experienced a 24 basis point decrease in cost as our interest rate spread increased 10 basis points to 1.63% compared to 1.53% during the same six months last fiscal year. The net interest margin was 1.76% for the current six months and 1.67% for the same six months in the prior fiscal year period. Provision (Release) for Credit Losses. We recorded a release of the allowance for credit losses on loans and off-balance sheet exposures of$3.0 million during the six months endedMarch 31, 2022 and a release of$6.0 million for the six months endedMarch 31, 2021 . In the current six months, we recorded net recoveries of$4.7 million , as compared to net recoveries of$2.6 million for the six months endedMarch 31, 2021 . Releases from the allowance for credit losses during the current and 65
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prior year reflected improvements in the economic metrics used to forecast losses for the reasonable and supportable period and decreases in pandemic forbearance balances, as well as adjusting for the level of net loan recoveries recorded during the period. Credit loss provisions (releases) are recorded with the objective of aligning our allowance for credit loss balances with our current estimates of loss in the portfolio. The allowance for credit losses on loans was$64.3 million , or 0.49% of total amortized cost in loans receivable, atMarch 31, 2022 , compared to$67.8 million or 0.53% of total amortized cost in loans receivable atMarch 31, 2021 . The total allowance for credit losses was$90.9 million atMarch 31, 2022 , compared to$89.7 million atMarch 31, 2021 . Under the CECL methodology, the allowance for credits losses atMarch 31, 2022 included a$26.6 million liability for unfunded commitments compared to$22.0 million atMarch 31, 2021 , primarily undrawn home equity lines of credit commitments. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan balance, uncollected balances have been charged against the allowance for credit losses previously provided. Refer to the Lending Activities section of the Overview and Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for further discussion. Non-Interest Income. Non-interest income decreased$23.5 million , or 63%, to$13.7 million during the six months endedMarch 31, 2022 compared to$37.2 million during the six months endedMarch 31, 2021 . The decrease in non-interest income was primarily due to a$23.1 million decrease in the net gain on sale of loans as well as a$0.4 million decrease in income from bank owned life insurance contracts during the most recent six months. The decrease in net gain on the sale of loans was generally attributable to both lower volumes of sales as well as less favorable market pricing on loan delivery contracts settled during the current fiscal year. There were loan sales of$101.7 million , including commitments to sell, during the six months endedMarch 31, 2022 , compared to loan sales of$517.5 million during the six months endedMarch 31, 2021 . Non-Interest Expense. Non-interest expense decreased$2.9 million , or 3%, to$97.6 million during the six months endedMarch 31, 2022 compared to$100.5 million during the six months endedMarch 31, 2021 . This decrease was the combination of a$2.7 million decrease in other operating expenses and a$1.6 million decrease in salaries and employee benefits, partially offset by a$1.1 million increase in marketing expense due to the timing of media campaigns supporting our lending activities. The decrease in other operating expenses was mainly attributable to a benefit from actuarial calculations related to the defined benefit plan and a decrease in appraisal expenses and third party fees associated with home equity lines of credit and loans. The decrease in salaries and employee benefits was primarily due to a one-time special bonus being paid to associates during the first quarter of the previous fiscal year. Income Tax Expense. The provision for income taxes decreased$4.1 million to$7.7 million during the six months endedMarch 31, 2022 from$11.8 million for the six months endedMarch 31, 2021 reflecting the lower level of pre-tax income during the more recent period. The provision for the current six months included$7.2 million of federal income tax provision and$0.5 million of state income tax provision. The provision for the six months endedMarch 31, 2021 included$10.4 million of federal income tax provision and$1.4 million of state income tax provision. Our effective federal tax rate was 18.3% during the six months endedMarch 31, 2022 and 17.8% during the six months endedMarch 31, 2021 .
Cash 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 ofCincinnati , borrowings from the FRB-Cleveland Discount Window, overnight Fed Funds through various arrangements with other institutions, proceeds from brokered CD and checking account transactions, principal repayments and maturities of securities, and sales of loans. In addition to the primary sources of funds described above, we have the ability to obtain funds through the use of collateralized borrowings in the wholesale markets and from sales of securities. Also, debt issuance by the Company and access to the equity capital markets via a supplemental minority stock offering or a full conversion (second-step) transaction remain as other potential sources of liquidity, although these channels generally require up to nine months of lead time. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Association's Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the sum of cash and cash equivalents plus unencumbered investment securities for which ready markets exist, divided by total assets). For the three months endedMarch 31, 2022 , our liquidity ratio averaged 5.47%. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as ofMarch 31, 2022 . 66
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We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, scheduled liability maturities and the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. AtMarch 31, 2022 , cash and cash equivalents totaled$370.7 million , which represented a decrease of 24.1% from$488.3 million atSeptember 30, 2021 .
Marketable securities classified as available for sale, which provide additional sources of liquidity, total
During the six-month period endedMarch 31, 2022 , loan sales totaled$101.7 million , which includes sales to Fannie Mae, consisting of$75.9 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans and$25.8 million of loans that qualified under Fannie Mae's Home Ready initiative. Loans originated under the Home Ready initiative for sale to Fannie Mae are classified as "held for sale" at origination. Loans originated under Fannie Mae compliant procedures, including Home Ready loans that management intends to retain until maturity or for the foreseeable future, are classified as "held for investment" until they are specifically identified for sale. AtMarch 31, 2022 , there were no long-term, fixed-rate residential first mortgage loans classified as "held for sale". Our cash flows are derived from operating activities, investing activities and financing activities as reported in our CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) included in the UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS. AtMarch 31, 2022 , we had$870.1 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had$3.68 billion in unfunded home equity lines of credit to borrowers. CDs due within one year ofMarch 31, 2022 totaled$3.35 billion , or 37.2% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, sales of investment securities, other deposit products, including new CDs, brokered CDs, brokered checking, FHLB advances, borrowings from the FRB-Cleveland Discount Window or other collateralized borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the CDs due on or beforeMarch 31, 2023 . 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 endedMarch 31, 2022 , we originated$1.74 billion of residential mortgage loans, and$1.08 billion of commitments for home equity loans and lines of credit, while during the six months endedMarch 31, 2021 , we originated$2.06 billion of residential mortgage loans and$823.7 million of commitments for home equity loans and lines of credit. We purchased$145.5 million of securities during the six months endedMarch 31, 2022 , and$150.3 million during the six months endedMarch 31, 2021 . Financing activities consist primarily of changes in deposit accounts, changes in the balances of principal and interest owed on loans serviced for others, FHLB advances, including any collateral requirements related to interest rate swap agreements and borrowings from the FRB-Cleveland Discount Window. We experienced a net increase in total deposits of$14.7 million during the six months endedMarch 31, 2022 , which reflected the active management of the offered rates on maturing CDs, compared to a net increase of$12.9 million during the six months endedMarch 31, 2021 . 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 endedMarch 31, 2022 , there was a$38.1 million decrease in the balance of brokered CDs (exclusive of acquisition costs and subsequent amortization), which had a balance of$453.9 million atMarch 31, 2022 . AtMarch 31, 2021 the balance of brokered CDs was$572.4 million . During the six months endedMarch 31, 2022 checking accounts increased$271.8 million , which included$200.0 million in brokered checking accounts. Principal and interest owed on loans serviced for others experienced a net decrease of$8.4 million to$33.0 million during the six months endedMarch 31, 2022 compared to a net increase of$0.2 million to$46.1 million during the six months endedMarch 31, 2021 . During the six months endedMarch 31, 2022 we increased our advances from the FHLB ofCincinnati by$463.5 million as we funded: new loan originations, our capital initiatives, and actively managed our liquidity ratio. During the six months endedMarch 31, 2021 , our advances from the FHLB ofCincinnati decreased by$228.0 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 ofCincinnati 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 deposit market. AtMarch 31, 2022 we had$3.56 billion of FHLB ofCincinnati advances and no outstanding 67
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borrowings from the FRB-Cleveland Discount Window. During the six months endedMarch 31, 2022 , we had average outstanding advances from the FHLB ofCincinnati of$3.23 billion as compared to average outstanding advances of$3.41 billion during the six months endedMarch 31, 2021 . 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. AtMarch 31, 2022 , we had the ability to borrow a maximum of$7.69 billion from the FHLB ofCincinnati and$208.4 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB ofCincinnati advances, our capacity limit for collateral based additional borrowings beyond the outstanding balance atMarch 31, 2022 was$4.14 billion , subject to satisfaction of the FHLB ofCincinnati common stock ownership requirement. The Association and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The Basel III capital framework forU.S. banking organizations ("Basel III Rules") includes both a revised definition of capital and guidelines for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. In 2019, a final rule adopted by the federal banking agencies provided banking organizations with the option to phase in, over a three-year period, the adverse day-one regulatory capital effects of the adoption of the CECL accounting standard. In 2020, as part of its response to the impact of COVID-19,U.S. federal banking regulatory agencies issued a final rule which provides banking organizations that implement CECL during the 2020 calendar year the option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period, which the Association and Company have adopted. During the two-year delay, the Association and Company will add back to common equity tier 1 capital ("CET1") 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses. After two years the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period. The Association is subject to the "capital conservation buffer" requirement level of 2.5%. The requirement limits capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" in addition to the minimum capital requirements. AtMarch 31, 2022 , the Association exceeded the regulatory requirement for the "capital conservation buffer". As ofMarch 31, 2022 , 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$ 1,611,763 19.85 %$ 811,806 10.00 % Tier 1 (Leverage) Capital to Net Average Assets 1,566,444 10.99 % 712,609 5.00 % Tier 1 Capital to Risk-Weighted Assets 1,566,444 19.30 % 649,444 8.00 %
Common Equity Tier 1 capital to risk-weighted assets 1,566,444
19.30 % 527,674 6.50 %
The Company’s capital ratios at
Real
Amount Ratio
Total Capital to Risk-Weighted Assets $ 1,851,507 22.79 %
Tier 1 (Leverage) Capital to Net Average Assets 1,806,188 12.66 %
Tier 1 Capital to Risk-Weighted Assets 1,806,188 22.24 %
Common Equity Tier 1 Capital to Risk-Weighted Assets 1,806,188 22.24 %
In addition to the operational liquidity considerations described above, which
are primarily those of the Association, the Company, as a separate legal entity,
also monitors and manages its own, parent company-only liquidity, which provides
the source of funds necessary to support all of the parent company's stand-alone
operations, including its capital distribution strategies which encompass its
share repurchase and dividend payment programs. The Company's primary source of
liquidity is dividends received from the Association. The amount of dividends
that the Association may declare and pay to the Company in any calendar year,
without the receipt of prior approval from the OCC but with prior notice to the
FRB-Cleveland, cannot exceed net income for the current calendar year-to-date
period plus retained net income (as defined) for the preceding two calendar
years, reduced by prior dividend payments made during those periods. In December
2021 , the Company received a $56.0 million cash dividend from the Association.
Because of its intercompany nature, this dividend payment had no impact on the
Company's capital ratios or its CONSOLIDATED STATEMENTS OF CONDITION but reduced
the Association's reported
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capital ratios. AtMarch 31, 2022 , the Company had, in the form of cash and a demand loan from the Association,$218.1 million of funds readily available to support its stand-alone operations. The Company's eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company's outstanding common stock was approved by the Board of Directors onOctober 27, 2016 and repurchases began onJanuary 6, 2017 . There were 4,177,980 shares repurchased under that program between its start date andMarch 31, 2022 . During the six months endedMarch 31, 2022 , the Company repurchased$2.3 million of its common stock. The share repurchase plan was suspended during the fiscal year endedSeptember 30, 2020 as part of the response to COVID-19, but was reinstated inFebruary 2021 . OnJuly 13, 2021 , Third Federal Savings, MHC received the approval of its members with respect to the waiver of dividends on the Company's common stock the MHC owns, up to a total of$1.13 per share, to be declared on the Company's common stock during the 12 months subsequent to the members' approval (i.e., throughJuly 13, 2022 ). The members approved the waiver by casting 60% of the eligible votes, with 97% of the votes cast, or 59% of the total eligible votes, voting in favor of the waiver. Third Federal Savings, MHC is the 81% majority shareholder of the Company. Following the receipt of the members' approval at theJuly 13, 2021 meeting, Third Federal Savings, MHC filed a notice with, and received the non-objection from the FRB-Cleveland for the proposed dividend waivers. Third Federal Savings, MHC waived its right to receive$0.2825 per share dividend payments onSeptember 21, 2021 ,December 14, 2021 andMarch 22, 2022 .
The payment of dividends, support for asset growth and strategic share buybacks are expected to continue going forward as a focus for future capital deployment activities.
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