TFS FINANCIAL CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Forward-looking statements
This report contains forward-looking statements, which can be identified by the use of such
words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar
expressions. These forward-looking statements include, among other things:
? statements of our goals, intentions and expectations;
? statements regarding our business plans and prospects and
growth and exploitation
strategies;
? statements concerning trends in our provision for credit
losses and charges
on loans and off-balance sheet exposures;
? statements regarding the trends in factors affecting our
financial situation and
results of operations, including asset quality of our loan
and investment
portfolios; and
? estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors that could affect
the actual outcome of future events:
? significantly increased competition among depository and
other financier
institutions;
? inflation and changes in the interest rate environment that
reduce our interest
margins or reduce the fair value of financial instruments;
? general economic conditions, either globally, nationally or
in our market areas,
including employment prospects, real estate values and
worse conditions
than expected;
? the strength or weakness of the real estate markets and of
the consumer and
commercial credit sectors and its impact on the credit
quality of our loans and
other assets, and changes in estimates of the allowance for
credit losses;
? decreased demand for our products and services and lower
income and earnings
because of a recession or other events;
? changes in consumer spending, borrowing and savings habits;
? adverse changes and volatility in the securities markets,
credit or real markets
estate markets;
? our ability to manage market risk, credit risk, liquidity
risk, reputation
risk, and regulatory and compliance risk;
? our ability to access cost-effective funding;
? legislative or regulatory changes that adversely affect our
business, including
changes in regulatory costs and capital requirements and
changes related to our
ability to pay dividends and the ability of Third Federal
Savings, MHC to renounce
dividends;
? changes in accounting policies and practices, as may be
adopted by the bank
regulatory agencies, the Financial Accounting Standards Board
or the 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 the U.S. Treasury and the FRS and changes in the level of
government support
of housing finance;
? the continuing governmental efforts to restructure the U.S.
financial and
regulatory system;
? the ability of the U.S. Government to remain open, function
properly and manage
federal debt limits;
? changes in policy and/or assessment rates of taxing
authorities who harm
affect us or our customers;
? changes in accounting and tax estimates;
? changes in our organization, or compensation and benefit
plans and changes in
expense trends (including, but not limited to trends
affecting non-performers
assets, charge-offs and provisions for credit losses);
? the inability of third-party providers to perform their
obligations to us;
? civil unrest;
? cyber-attacks, computer viruses and other technological risks
who may violate the
security of our websites or other systems to obtain
unauthorized access to
confidential information, destroy data or disable our
systems; and
? the impact of wide-spread pandemic, including COVID-19, and
government bound
action, on our business and the economy.
Because of these and other uncertainties, our actual future results may be materially
different from the results indicated by any forward-looking statements. Any forward-looking
statement made by us in this report speaks only as of the date on which it is made. We
undertake no obligation to publicly update any forward-looking statements, whether as a result
of new information, future developments or otherwise, except as may be required by law. Please
see Part II Other Information Item 1A. Risk Factors for a discussion of certain risks related
to our business.
33
————————————————– ——————————
Contents
Overview
Our business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to our customers. Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in 2007, the nation's largest mutually-owned savings and loan association based on total assets. We credit our success to our continued emphasis on our primary values: "Love, Trust, Respect, and a Commitment to Excellence, along with Having Fun." Our values are reflected in the design and pricing of our loan and deposit products, as described below. Our values are further reflected in a long-term revitalization program encompassing the three-mile corridor of 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. Beyond working through the challenges COVID-19 presents to the organization and society, management believes that the following matters are those most critical to our success: (1) controlling our interest rate risk exposure; (2) monitoring and limiting our credit risk; (3) maintaining access to adequate liquidity and diverse funding sources to support our growth; and (4) monitoring and controlling our operating expenses. Controlling Our Interest Rate Risk Exposure. Historically, our greatest risk has been our exposure to changes in interest rates. When we hold longer-term, fixed-rate assets, funded by liabilities with shorter-term re-pricing characteristics, we are exposed to potentially adverse impacts from changing interest rates, and most notably rising interest rates. Generally, and particularly over extended periods of time that encompass full economic cycles, interest rates associated with longer-term assets, like fixed-rate mortgages, have been higher than interest rates associated with shorter-term funding sources, like deposits. This difference has been an important component of our net interest income and is fundamental to our operations. We manage the risk of holding longer-term, fixed-rate mortgage assets primarily by maintaining regulatory capital in excess of levels required to be well capitalized, by promoting adjustable-rate loans and shorter-term fixed-rate loans, by marketing home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate, by opportunistically extending the duration of our funding sources and selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. The decision to extend the duration of some of our funding sources through interest rate swap contracts over the past few years has also caused additional interest rate risk exposure, as the current low market interest rates are lower than the rates in effect when most of the swap contracts were executed. This rate difference is reflected in the level of cash flow hedges included in accumulated other comprehensive loss. Levels ofRegulatory Capital AtDecember 31, 2021 , the Company's Tier 1 (leverage) capital totaled$1.80 billion , or 12.72% of net average assets and 22.97% of risk-weighted assets, while the Association's Tier 1 (leverage) capital totaled$1.55 billion , or 10.93% of net average assets and 19.73% of risk-weighted assets. Each of these measures was more than twice the requirements currently in effect for the Association for designation as "well capitalized" under regulatory prompt corrective action provisions, which set minimum levels of 5.00% of net average assets and 8.00% of risk-weighted assets. Refer to the Liquidity and Capital Resources section of this Item 2 for additional discussion regarding regulatory capital requirements. Promotion of Adjustable-Rate Loans and Shorter-Term Fixed-Rate Loans We market an adjustable-rate mortgage loan that provides us with improved interest rate risk characteristics when compared to a 30-year, fixed-rate mortgage loan. Our "Smart Rate" adjustable-rate mortgage offers borrowers an interest rate lower than that of a 30-year, fixed-rate loan. The interest rate of the Smart Rate mortgage is locked for three or five years then resets annually. The Smart Rate mortgage contains a feature to re-lock the rate an unlimited number of times at our then-current interest rate and fee schedule, for another three or five years (which must be the same as the original lock period) without having to complete a full refinance transaction. Re-lock eligibility is subject to a satisfactory payment performance history by the borrower (current at the time of re-lock, and no foreclosures or bankruptcies since the Smart Rate application was taken). In addition to a satisfactory payment history, re-lock eligibility requires that the property continues to be the borrower's primary residence. The loan term cannot be extended in connection with a re-lock nor can new funds be advanced. All interest rate caps and floors remain as originated. We also offer a ten-year, fully amortizing fixed-rate, first mortgage loan. The ten-year, fixed-rate loan has a more desirable interest rate risk profile when compared to loans with fixed-rate terms of 15 to 30 years and can help to more effectively manage interest rate risk exposure, yet provides our borrowers with the certainty of a fixed interest rate throughout the life of the obligation. 34
————————————————– ——————————
Contents
The following tables set forth our first mortgage loan production and balances
segregated by loan structure at origination. Originations outpaced loan sales
and repayments resulting in an increase of residential mortgage loans held for
investment; the first balance increase in this population since the start of the
COVID-19 pandemic.
For the Three Months Ended December For the Three Months Ended December
31, 2021 31, 2020
Amount Percent Amount Percent
(Dollars in thousands)
First Mortgage Loan Originations:
ARM (all Smart Rate) production $ 211,892 24.2 % $ 368,034 32.8 %
Package production:
Terms less than or equal to 10 years 124,766 14.2 203,121 18.1
Terms greater than 10 years 540,430 61.6 550,697 49.1
Total fixed-rate production 665,196 75.8 753,818 67.2
Total First Mortgage Loan Originations $ 877,088 100.0 % $ 1,121,852 100.0 %
December 31, 2021 September 30, 2021
Amount Percent Amount Percent
(Dollars in thousands)
Balance of Residential Mortgage Loans Held For
Investment :
ARM (primarily Smart Rate) Loans $ 4,541,152 43.9 % $ 4,646,760 45.2 %
Fixed rate:
Terms less than or equal to 10 years 1,304,751 12.6 1,309,407 12.7
Terms greater than 10 years 4,502,717 43.5 4,322,931 42.1
Total fixed-rate 5,807,468 56.1 5,632,338 54.8
Total Residential Mortgage Loans Held For
Investment $ 10,348,620 100.0 % $ 10,279,098 100.0 %
The following table shows the balances at
Current Balance of ARM Loans
Provided for
Interest Rate Reset
During the Fiscal Years Ending
September 30, (In thousands)
2022 $ 169,908
2023 316,426
2024 427,953
2025 762,743
2026 1,827,194
2027 1,036,928
Total $ 4,541,152
At December 31, 2021 and September 30, 2021 , mortgage loans held for sale, all
of which were long-term, fixed-rate first mortgage loans and all of which were
held for sale to Fannie Mae, totaled $38.1 million and $8.8 million ,
respectively.
35
————————————————– ——————————
Contents
Loan Portfolio Return
The following tables present the balance and interest yield at
December 31, 2021
Balance Percent Yield
(Dollars in thousands)
Total Loans:
Fixed Rate
Duration less than or equal to 10 years
Terms greater than 10 years 4,502,717 35.4 % 3.51 %
Total Fixed-Rate loans 5,807,468 45.7 % 3.32 %
ARMs 4,541,152 35.7 % 2.70 %
Home Equity Loans and Lines of Credit 2,277,761
17.9% 2.50%
Construction and Other Loans 93,401
0.7% 3.10%
Total Loans Receivable$ 12,719,782 100.0 % 2.95 % December 31, 2021 Fixed Rate Balance Balance Percent Yield (Dollars in thousands) Residential Mortgage Loans Ohio$ 5,738,255 $ 4,193,414 45.1 % 3.26 % Florida 1,894,052 833,970 14.9 % 2.96 % Other 2,716,313 780,084 21.4 % 2.67 % Total Residential Mortgage Loans 10,348,620 5,807,468 81.4 % 3.05 % Home Equity Loans and Lines of Credit Ohio 635,495 41,541 5.0 % 2.57 % Florida 454,210 29,141 3.6 % 2.51 % California 350,758 18,309 2.8 % 2.50 % Other 837,298 17,098 6.5 % 2.45 % Total Home Equity Loans and Lines of Credit 2,277,761 106,089 17.9 % 2.50 % Construction and Other Loans 93,401 93,401 0.7 % 3.10 % Total Loans Receivable$ 12,719,782 $ 6,006,958 100.0 % 2.95 % Marketing of Home Equity Lines of Credit We actively market home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate, which provides interest rate sensitivity to that portion of our assets and is a meaningful strategy to manage our interest rate risk profile. AtDecember 31, 2021 , the principal balance of home equity lines of credit totaled$2.05 billion . Our home equity lending is discussed in the Allowance for Credit Losses section of the Lending Activities. Extending the Duration of Funding Sources As a complement to our strategies to shorten the duration of our interest earning assets, as described above, we also seek to lengthen the duration of our interest bearing funding sources. These efforts include monitoring the relative costs of alternative funding sources such as retail deposits, brokered certificates of deposit, longer-term (e.g. four to six years) fixed-rate advances from the FHLB 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 36
————————————————– ——————————
Contents
market competitiveness/breadth of each funding source. Generally, early withdrawal options are available to our retail CD customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB 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 three months endedDecember 31, 2021 , the balance of deposits decreased$60.3 million , which included a$4.9 million increase in the balance of brokered CDs (which is inclusive of acquisition costs and subsequent amortization). Additionally, during the three months endedDecember 31, 2021 , we increased total FHLB ofCincinnati advances$88.8 million , by adding$150 million of new two-to-four year advances and$40 million in overnight borrowings, partially offset by a$100.0 million decrease in 90 day advances and their related swap contracts which matured and were paid off. The balance of our advances from the FHLB ofCincinnati atDecember 31, 2021 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. AtDecember 31, 2021 , we serviced$2.22 billion of loans for others. In deciding whether to sell loans to manage interest rate risk, we also consider the level of gains to be recognized in comparison to the impact to our net interest income. We are planning on expanding our ability to sell certain fixed rate loans to Fannie Mae in fiscal 2022 and beyond, through the use of more traditional mortgage banking activities, including risk-based pricing and loan-level pricing adjustments. This concept will be tested in markets outside 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, should a rapid and substantial increase occur in general market interest rates, or an extended period of a flat or inverted yield curve market persist, it is expected that, prospectively and particularly over a multi-year time horizon, the level of our net interest income would be adversely impacted. Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the memory of the 2008 housing market collapse and financial crisis is a constant reminder to focus on credit risk. In response to the evolving economic landscape, we continuously revise and update our quarterly analysis and evaluation procedures, as needed, for each category of our lending with the objective of identifying and recognizing all appropriate credit losses. Continuous analysis and evaluation updates will be important as we monitor the potential impacts of the economic environment. AtDecember 31, 2021 , 90% of our assets consisted of residential real estate loans (both "held for sale" and "held for investment") and home equity loans and lines of credit, which were originated predominantly to borrowers 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. Per the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, the COVID-19 related forbearance plans will not generally affect the delinquency status of the loan and therefore will not undergo a specific review unless extended greater than 12 months. We also charge-off performing loans to collateral value and classify those loans as non-accrual within 60 days of notification of all borrowers filing Chapter 7 bankruptcy, that have not reaffirmed or been dismissed, regardless of how long the loans have been performing. Loans where at least one borrower has been discharged of their obligation in Chapter 7 bankruptcy are classified as TDRs. AtDecember 31, 2021 ,$13.6 million of loans in Chapter 7 bankruptcy status with no other modification to terms were included in total TDRs. AtDecember 31, 2021 , the amortized cost in non-accrual status loans included$15.5 million of performing loans in Chapter 7 bankruptcy status, of which$15.0 million were also reported as TDRs. In an effort to limit our credit risk exposure and improve the credit performance of new customers, since 2009, we continually evaluate our credit eligibility criteria and revise the design of our loan products, such as limiting the products available for condominiums and eliminating certain product features (such as interest-only). We use stringent, conservative 37
————————————————– ——————————
Contents
lending standards for underwriting to reduce our credit risk. For first mortgage loans originated during the current fiscal year, the average credit score was 777, and the average LTV was 61%. The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflects the higher credit standards to which we have subjected all new originations. As ofDecember 31, 2021 , loans originated prior to 2009 had a balance of$413.5 million , of which$12.1 million , or 2.9%, were delinquent, while loans originated in 2009 and after had a balance of$12.33 billion , of which$14.1 million , or 0.1%, were delinquent. One aspect of our credit risk concern relates to high concentrations of our loans that are secured by residential real estate in specific states, 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. AtDecember 31, 2021 , approximately 55.5% and 18.3% of the combined total of our Residential Core and construction loans held for investment and approximately 27.9% and 19.9% of our home equity loans and lines of credit were secured by properties 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 , and as a result of that activity, 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 three months endedDecember 31, 2021 , 21.0% 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 loans and lines of credit portfolio continue to comprise a significant portion of our gross charge-offs. AtDecember 31, 2021 , we had an amortized cost of$2.31 billion in home equity loans and lines of credit outstanding, of which$2.9 million , or 0.1% were delinquent 90 days or more. Our residential Home Today loans are another area of credit risk concern. Through the Home Today program, the Company provided the majority of loans to borrowers who would not otherwise qualify for the Company's loan products, generally because of low credit scores. Because the Company applied less stringent underwriting and credit standards to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential real estate mortgage loans in the Residential Core portfolio. Although we no longer originate loans under this program and the principal balance in these loans had declined to$60.9 million atDecember 31, 2021 , and constituted only 0.5% of our total "held for investment" loan portfolio balance, they comprised 13.6% and 16.9% of our 90 days or greater delinquencies and our total delinquencies, respectively, at that date. AtDecember 31, 2021 , approximately 95.6% and 4.2% of our residential Home Today loans were secured by properties inOhio andFlorida , respectively. AtDecember 31, 2021 , the percentages of those loans delinquent 30 days or more inOhio andFlorida were 7.0% and 5.5%, respectively. We attempted to manage our Home Today credit risk by requiring private mortgage insurance for some loans. AtDecember 31, 2021 , 10.2% of Home Today loans included private mortgage insurance coverage. From a peak amortized cost of$306.6 million atDecember 31, 2007 , the total amortized cost of the Home Today portfolio has declined to$60.5 million atDecember 31, 2021 . 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. Our allowance for credit losses for the Home Today portfolio, which includes a lifetime view of expected losses, is reduced by expected future recoveries of loan amounts previously charged off. To supplant the Home Today product and to continue to meet the credit needs of our customers and the communities that we serve, we have offered Fannie Mae eligible, Home Ready loans since fiscal 2016. These loans are originated in accordance with Fannie Mae's underwriting standards. While we retain the servicing rights related to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae. The Company does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, an LTV ratio greater than 100%, or pay-option adjustable-rate mortgages. Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth. For most insured depositories, customer and community confidence are critical to their ability to maintain access to adequate liquidity and to conduct business in an orderly manner. We believe that a well capitalized institution is one of the most important factors in nurturing customer and community confidence. Accordingly, we have managed the pace of our growth in a manner that reflects 38
————————————————– ——————————
Contents
our emphasis on high capital levels. AtDecember 31, 2021 , the Association's ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a "well capitalized" status) was 10.93%. The Association's Tier 1 (leverage) capital ratio atDecember 31, 2021 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 payment did not impact the Company's consolidated capital ratios which are reported in the Liquidity and Capital Resources section of this Item 2. We expect to continue to remain a well capitalized institution. In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits (including brokered CDs), borrowings from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. AtDecember 31, 2021 , deposits totaled$8.93 billion (including$496.9 million of brokered CDs), while borrowings totaled$3.18 billion and borrowers' advances and servicing escrows totaled$179.0 million , combined. In evaluating funding sources, we consider many factors, including cost, collateral, duration and optionality, current availability, expected sustainability, impact on operations and capital levels. To attract deposits, we offer our customers attractive rates of interest on our deposit products. Our deposit products typically offer rates that are highly competitive with the rates on similar products offered by other financial institutions. We intend to continue this practice, subject to market conditions. We preserve the availability of alternative funding sources through various mechanisms. First, by maintaining high capital levels, we retain the flexibility to increase our balance sheet size without jeopardizing our capital adequacy. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. Second, we pledge available real estate mortgage loans and investment securities with the FHLB ofCincinnati and the FRB-Cleveland. AtDecember 31, 2021 , these collateral pledge support arrangements provided the Association with the ability to borrow a maximum of$7.49 billion from the FHLB ofCincinnati and$224.2 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB ofCincinnati advances, our capacity for additional borrowings atDecember 31, 2021 was$4.31 billion . Third, we have the ability to purchase overnight Fed Funds up to$380 million through various arrangements with other institutions. Fourth, we invest in high quality marketable securities that exhibit limited market price variability, and to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. AtDecember 31, 2021 , our investment securities portfolio totaled$423.8 million . Finally, cash flows from operating activities have been a regular source of funds. During the three months endedDecember 31, 2021 and 2020, cash flows from operations provided$7.7 million and$24.2 million , respectively. First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more, and Home Ready) originated under Fannie Mae compliant procedures are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures, which are not eligible for sale to Fannie Mae. For loans that are not originated under Fannie Mae procedures, the Association's ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors. Refer to the Liquidity and Capital Resources section of the Overview for information on loan sales. Overall, while customer and community confidence can never be assured, the Company believes that its liquidity is adequate and that it has access to adequate alternative funding sources. Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. Our ratio of annualized non-interest expense to average assets was 1.35% for the three months endedDecember 31, 2021 and 1.41% for the three months endedDecember 31, 2020 . As ofDecember 31, 2021 , our average assets per full-time employee and our average deposits per full-time employee were$14.1 million and$8.9 million , respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average of deposits (exclusive of brokered CDs) held at our branch offices ($228.0 million per branch office as ofDecember 31, 2021 ) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses as we grow our business. 39
————————————————– ——————————
Contents
Critical Accounting Policies Critical accounting policies are defined as those that involve significant judgments, estimates and uncertainties, and could potentially give rise to materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are our policies with respect to our allowance for credit losses, income taxes and pension benefits as described in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . Lending Activities Allowance for Credit Losses We provide for credit losses based on a life of loan methodology. Accordingly, all credit losses are charged to, and all recoveries are credited to, the related allowance. Additions to the allowance for credit losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating life of credit losses. We regularly review the loan portfolio and off-balance sheet exposures and make provisions (or releases) for losses in order to maintain the allowance for credit losses in accordance withU.S. GAAP. Our allowance for credit losses consists of three components: (1)individual valuation allowances (IVAs) established for any loans dependent on cash flows, such as performing TDRs; (2)general valuation allowances (GVAs) for loans, which are comprised of quantitative GVAs, which are general allowances for credit losses for each loan type based on historical loan loss experience and qualitative GVAs, which are adjustments to the quantitative GVAs, maintained to cover uncertainties that affect our estimate of expected credit losses for each loan type; and (3)GVAs for off-balance sheet credit exposures, which are comprised of expected lifetime losses on unfunded loan commitments to extend credit where the obligations are not unconditionally cancellable. The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include: •changes in lending policies and procedures including underwriting standards, collection, charge-off or recovery practices; •management's view of changes in national, regional, and local economic and business conditions and trends including treasury yields, housing market factors and trends, such as the status of loans in foreclosure, real estate in judgment and real estate owned, and unemployment statistics and trends and how it aligns with economic modeling forecasts; •changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw period and adjustable-rate mortgage loans nearing a rate reset; •changes in the experience, ability or depth of lending management; •changes in the volume or severity of past due loans, volume of non-accrual loans, or the volume and severity of adversely classified loans including the trending of delinquency statistics (both current and historical), historical loan loss experience and trends, the frequency and magnitude of multiple restructurings of loans previously the subject of TDRs, and uncertainty surrounding borrowers' ability to recover from temporary hardships for which short-term loan restructurings are granted; •changes in the quality of the loan review system; •changes in the value of the underlying collateral including asset disposition loss statistics (both current and historical) and the trending of those statistics, and additional charge-offs and recoveries on individually reviewed loans; •existence of any concentrations of credit; •effect of other external factors such as the COVID-19 pandemic, competition, market interest rate changes or legal and regulatory requirements including market conditions and regulatory directives that impact the entire financial services industry; and •limitations within our models to predict life of loan net losses. When loan restructurings qualify as TDRs and the loans are performing according to the terms of the restructuring, we record an IVA based on the present value of expected future cash flows, which includes a factor for potential subsequent 40
————————————————– ——————————
Contents
defaults, discounted at the effective interest rate of the original loan contract. Potential defaults are distinguished from multiple restructurings as borrowers who default are generally not eligible for subsequent restructurings. AtDecember 31, 2021 , the balance of such individual valuation allowances were$11.5 million . In instances when loans require multiple restructurings, additional valuation allowances may be required. The new valuation allowance on a loan that has multiple restructurings is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the restructured agreement. Due to the immaterial amount of this exposure to date, we capture this exposure as a component of our qualitative GVA evaluation as the estimated change in the present value of cash flows on restructurings expected to subsequently restructure based on historical activity. We evaluate the allowance for credit losses based upon the combined total of the quantitative and qualitative GVAs and IVAs. We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions. 41
————————————————– ——————————
Contents
The following table sets forth activity for credit losses segregated by geographic location for the periods indicated. The majority of our Home Today and construction loan portfolios are secured by properties located inOhio and the balances of other loans are considered immaterial, therefore neither was segregated. As of and For the Three Months EndedDecember 31, 2021 2020 (Dollars in thousands)
Balance of provisions for credit losses on loans (beginning of period)
$ 64,289 $ 46,937 Adoption of ASU 2016-13 for allowance for credit losses on loans - 24,095 Charge-offs on real estate loans: Residential Core Ohio 25 59 Florida - 1 Other 1 1 Total Residential Core 26 61 Total Residential Home Today 12 109 Home equity loans and lines of credit Ohio 144 314 Florida 3 201 California 14 108 Other 76 61 Total Home equity loans and lines of credit 237 684 Total charge-offs 275 854 Recoveries on real estate loans: Residential Core 481 460 Residential Home Today 588 423 Home equity loans and lines of credit 1,164 1,229 Total recoveries 2,233 2,112 Net recoveries 1,958 1,258 Release of allowance for credit losses on loans (2,671) (2,000) Allowance balance for loans (end of the period)$ 63,576 $ 70,290
Provision balance for credit losses on unfunded commitments (beginning of period)
$ 24,970 $ -
Adoption of ASU 2016-13 for Provision for Credit Losses on Unfunded Obligations
- 22,052 Provision for credit losses on unfunded loan commitments 671 -
Provision balance for unfunded loan commitments (end of period)
25,641 22,052 Allowance balance for all credit losses (end of the period)$ 89,217 $ 92,342
Reports :
Net recoveries to average loans outstanding (annualized) 0.06 % 0.04 %
Allowance for credit losses on loans to outstanding loans at the end of the period
146.46 % 138.90 %
Allowance for loan losses on total amortized cost of loans at end of period
0.50 % 0.54 % Net recoveries continued, totaling$2.0 million during the three months endedDecember 31, 2021 compared to$1.3 million during the three months endedDecember 31, 2020 . We reported net recoveries in each quarter for the last three years, primarily due to improvements in the values of properties used to secure loans that were fully or partially charged off after the 2008 collapse of the housing market. Charge-offs are recognized on loans identified as collateral-dependent and subject to individual review when the collateral value does not sufficiently support full repayment of the obligation. Recoveries are recognized on previously charged-off loans as borrowers perform their repayment obligations or as loans with improved collateral positions reach final resolution. 42
————————————————– ——————————
Contents
Gross charge-offs decreased and remained at relatively low levels, during the three months endedDecember 31, 2021 when compared to the three months endedDecember 31, 2020 . We continue to evaluate loans becoming delinquent for potential losses and record provisions for the estimate of potential losses of those loans. Subject to changes in the economic environment, we expect a moderate level of charge-offs as delinquent loans are resolved in the future and uncollected balances are charged against the allowance. During the three months endedDecember 31, 2021 , the total allowance for credit losses decreased$0.1 million , to$89.2 million from$89.3 million atSeptember 30, 2021 , as we recorded a$2.0 million release of credit losses. During the three months endedDecember 31, 2021 , we recorded net recoveries of$2.0 million . Refer to the "Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for more information. Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. Changes during the three months endedDecember 31, 2021 in the allowance for credit loss balances of loans are described below. The allowance for credit losses on off-balance sheet increased by$0.7 million primarily related to an increase in equity off-balance sheet exposures. Other than the less significant construction and other loans segments, the changes related to the significant loan segments are described as follows: •Residential Core - The amortized cost of this segment increased 0.6%, or$56.9 million , and its total allowance decreased 0.1% or$0.1 million as ofDecember 31, 2021 as compared toSeptember 30, 2021 . Total delinquencies increased 4.9% to$16.0 million atDecember 31, 2021 from$15.3 million atSeptember 30, 2021 . Delinquencies greater than 90 days increased by 28.2% to$12.0 million atDecember 31, 2021 from$9.4 million atSeptember 30, 2021 . As forbearance plans expire, those borrowers that do not enter subsequent workout plans or repay the deferred amounts in full are reported as 90 days or more past due. Net recoveries were$0.5 million for the quarter endedDecember 31, 2021 and there were net recoveries of$0.4 million for the quarter endedDecember 31, 2020 . Economic forecasts continued to show improvements this quarter as the allowance decreased. •Residential Home Today - The amortized cost of this segment decreased 4.7%, or$3.0 million , as we are no longer originating loans under the Home Today program. The expected net recovery position for this segment was$0.1 million atDecember 31, 2021 compared to a no allowance position last quarter. Total delinquencies increased 6.0% to$4.2 million atDecember 31, 2021 from$4.0 million atSeptember 30, 2021 . Delinquencies greater than 90 days increased 13.7% to$2.4 million from$2.1 million atSeptember 30, 2021 . There were net recoveries of$0.6 million recorded during the current quarter and net recoveries of$0.3 million during the quarter endedDecember 31, 2020 . This allowance reflects not only the declining portfolio balance, but the lower historical loss rates applied to the remaining balance and the higher expected recoveries related to the loans as they age. Under the CECL methodology, the life of loan concept allows for qualitative adjustments for the expected future recoveries of previously charged-off loans which is driving the current allowance balance for Home Today loans negative. •Home Equity Loans and Lines of Credit - The amortized cost of this segment increased 2.9%, or$64.3 million , to$2.31 billion atDecember 31, 2021 from$2.24 billion atSeptember 30, 2021 . The total allowance for this segment decreased by 3.1% to$18.9 million from$19.5 million atSeptember 30, 2021 . Total delinquencies for this portfolio segment decreased 12.5% to$4.8 million atDecember 31, 2021 as compared to$5.5 million atSeptember 30, 2021 . Delinquencies greater than 90 days decreased 31.0% to$2.9 million atDecember 31, 2021 from$4.2 million atSeptember 30, 2021 . Similar to the Core segment above, as forbearance plans expire, those borrowers that do not enter subsequent workout plans or repay the deferred amounts in full are reported as 90 days or more past due. Net recoveries for this loan segment during the current quarter were slightly more at$0.9 million as compared to$0.5 million for the quarter endedDecember 31, 2020 . Economic forecasts continued to show improvement this quarter that reduced forecasted losses, but they were low compared to recent historical charge-offs so a qualitative adjustment was made using recent gross charge-off experience. 43
————————————————– ——————————
Contents
The following tables set forth the allowance for credit losses on loans
allocated by loan category, the percent of allowance in each category to the
total allowance on loans, and the percent of loans in each category to total
loans at the dates indicated. The allowance for credit losses allocated to each
category is not necessarily indicative of future losses in any particular
category and does not restrict the use of the allowance to absorb losses in
other categories. This table does not include allowances for credit losses on
unfunded loan commitments, which are primarily related to undrawn home equity
lines of credit.
December 31, 2021
Percent of Percent of
Allowance Loans in
to Total Category to Total
Amount Allowance Loans
(Dollars in thousands)
Real estate loans: Residential Core$ 44,472 70.0 % 80.9 % Residential Home Today (94) (0.2) 0.5 Home equity loans and lines of credit 18,852 29.7 17.9 Construction 346 0.5 0.7 Allowance for credit losses on loans$ 63,576 100.0 % 100.0 % September 30, 2021 December 31, 2020 Percent of Percent of Percent of Percent of Allowance Loans in Allowance Loans in to Total Category to Total to Total Category to Total Amount Allowance Loans Amount Allowance Loans (Dollars in thousands) Real estate loans: Residential Core$ 44,523 69.2 % 81.2 %$ 46,351 65.9 % 82.2 % Residential Home Today 15 - 0.6 (568) (0.8) 0.6 Home equity loans and lines of credit 19,454 30.3 17.6 23,752 33.8 16.8 Construction 297 0.5 0.6 755 1.1 0.4 Allowance for credit losses on loans$ 64,289 100.0 % 100.0 %$ 70,290 100.0 % 100.0 % 44
————————————————– ——————————
Contents
Loan Portfolio Composition The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location at the indicated dates, excluding loans held for sale. The majority of our Home Today loan portfolio is secured by properties located inOhio and the balances of other loans are immaterial. Therefore, neither was segregated by geographic location. December 31, 2021 September 30, 2021 December 31, 2020 Amount Percent Amount Percent Amount Percent (Dollars in thousands) Real estate loans: Residential Core Ohio$ 5,680,033 $ 5,603,998 $ 5,865,909 Florida 1,891,467 1,838,259 1,849,997 Other 2,716,235 2,773,018 2,942,254 Total Residential Core 10,287,735 80.9 % 10,215,275 81.2 % 10,658,160 82.2 % Total Residential Home Today 60,885 0.5 63,823 0.6 72,129 0.6 Home equity loans and lines of credit Ohio 635,495 630,815 638,210 Florida 454,210 438,212 428,972 California 350,758 335,240 327,376 Other 837,298 809,985 776,038 Total Home equity loans and lines of credit 2,277,761 17.9 2,214,252 17.6 2,170,596 16.8 Construction loans Ohio 81,505 71,651 48,134 Florida 7,656 6,604 5,695 Other 1,535 2,282 -Total Construction 90,696 0.7 80,537 0.6 53,829 0.4 Other loans 2,705 - 2,778 - 2,637 - Total loans receivable 12,719,782 100.0 % 12,576,665 100.0 % 12,957,351 100.0 % Deferred loan expenses, net 45,954 44,859 42,138 Loans in process (57,120) (48,200) (29,691) Allowance for credit losses on loans (63,576) (64,289)
(70,290)
Total loans receivable, net$ 12,645,040 $ 12,509,035 $ 12,899,508 45
————————————————– ——————————
Contents
The following table provides an analysis of our residential mortgage loans
disaggregated by FICO score refreshed quarterly, year of origination and
portfolio as of the periods presented. The Company treats the FICO score
information as demonstrating that underwriting guidelines reduce risk rather
than as a credit quality indicator utilized in the evaluation of credit risk.
Balances are adjusted for deferred loan fees, expenses and any applicable
loans-in-process.
Revolving
Revolving Loans Loans
By fiscal year of origination Amortized Converted
2022 2021 2020 2019 2018 Prior Cost Basis To Term Total
December 31, 2021
Real estate loans:
Residential Core
<680 $ 5,060 $ 66,044 $ 44,970 $ 29,572 $ 28,952 $ 196,970 $ - $ - $ 371,568
680-740 156,947 348,739 217,245 105,953 106,133 454,438 - - 1,389,455
741+ 665,951 2,018,337 1,417,935 590,176 648,250 3,036,688 - - 8,377,337
Unknown (1) 1,135 31,715 16,974 5,473 9,377 103,464 - - 168,138
Total residential core 829,093 2,464,835 1,697,124
731,174 792,712 3,791,560 - - 10,306,498
Residential Home Today (2)
<680 - - - - - 34,161 - - 34,161
680-740 - - - - - 11,733 - - 11,733
741+ - - - - - 11,275 - - 11,275
Unknown (1) - - - - - 3,286 - - 3,286
Total Residential Home Today - - - - - 60,455 - - 60,455
Home equity loans and lines of
credit
<680 - 841 409 425 674 1,078 64,007 22,536 89,970
680-740 3,251 4,944 1,371 1,559 1,675 2,287 324,424 28,359 367,870
741+ 13,647 32,615 10,777 8,976 7,910 11,101 1,668,018 68,799 1,821,843
Unknown (1) - 161 49 110 110 679 17,060 8,354 26,523
Total Home equity loans and
lines of credit 16,898 38,561 12,606 11,070 10,369 15,145 2,073,509 128,048 2,306,206
Construction
<680 - 1,140 - - - - - - 1,140
680-740 364 3,180 - - - - - - 3,544
741+ 1,769 25,447 479 - - - - - 27,695
Unknown (1) - 373 - - - - - - 373
Total Construction 2,133 30,140 479 - - - - - 32,752
Total net home loans
(1) Data needed for stratification are not readily available. (2) No new Home Today loan issuance since fiscal year 2016.
46
————————————————– ——————————
Contents
The following table provides an analysis of our residential mortgage loans by
origination LTV, origination year and portfolio as of the periods presented.
LTVs are not updated subsequent to origination except as part of the charge-off
process. Balances are adjusted for deferred loan fees, expenses and any
applicable loans-in-process.
Revolving
Revolving Loans Loans
By fiscal year of origination Amortized Converted
2022 2021 2020 2019 2018 Prior Cost Basis To Term Total
December 31, 2021
Real estate loans:
Residential Core
<80% $ 571,761 $ 1,741,677 $ 945,502 $ 342,605 $ 422,777 $ 2,264,968 $ - $ - $ 6,289,290
80-89.9% 236,869 672,976 684,064 351,130 344,694 1,405,512 - - 3,695,245
90-100% 20,463 49,898 67,558 37,439 25,121 117,496 - - 317,975
>100% - - - - 120 685 - - 805
Unknown (1) - 284 - - - 2,899 - - 3,183
Total Residential Core 829,093 2,464,835 1,697,124 731,174 792,712 3,791,560 - - 10,306,498
Residential Home Today (2)
<80% - - - - - 11,924 - - 11,924
80-89.9% - - - - - 19,127 - - 19,127
90-100% - - - - - 29,404 - - 29,404
Total Residential Home Today - - - - - 60,455 - - 60,455
Home equity loans and lines of credit
<80% 14,774 37,412 12,429 10,706 9,534 10,636 1,927,828 83,753 2,107,072
80-89.9% 2,088 1,149 177 309 679 1,516 144,132 39,951 190,001
90-100% - - - - 56 1,056 395 448 1,955
>100% 36 - - 55 100 1,927 640 704 3,462
Unknown (1) - - - - - 10 514 3,192 3,716
Total home equity loans and lines of credit 16,898 38,561
12,606 11,070 10,369 15,145 2,073,509 128,048 2,306,206
Construction
<80% 582 19,564 410 - - - - - 20,556
80-89.9% 1,551 10,203 69 - - - - - 11,823
Unknown (1) - 373 - - - - - - 373
Total Construction 2,133 30,140 479 - - - - - 32,752
Total net real estate loans $ 848,124 $ 2,533,536 $
1,710,209
128,048
(1) Market data needed for stratification is not readily available. (2) No new Home Today loan issuance since fiscal year 2016.
AtDecember 31, 2021 , the unpaid principal balance of our home equity loans and lines of credit portfolio consisted of$231.8 million in home equity loans (including$128.2 million of home equity lines of credit, which are in repayment and no longer eligible to be drawn upon, and$6.5 million in bridge loans) and$2.05 billion in home equity lines of credit. 47
————————————————– ——————————
Contents
The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the estimated current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as ofDecember 31, 2021 . Home equity lines of credit in the draw period are reported according to geographic distribution. Percent Mean CLTV Credit Principal Delinquent Percent at Current Mean Exposure Balance 90 Days or More Origination (2)
CLTV Percentage (3)
(Dollars in thousands)
Home equity lines of credit in draw
period (by state)
Ohio $ 1,751,106 $ 552,990 0.03 % 60 % 46 %
Florida 918,211 393,654 0.04 % 56 % 44 %
California 807,074 310,862 0.09 % 60 % 53 %
Other (1) 1,965,600 788,489 0.04 % 62 % 53 %
Total home equity lines of credit in
draw period 5,441,991 2,045,995 0.05 % 60 % 48 %
Home equity lines in repayment, home
equity loans and bridge loans 231,766 231,766 0.85 % 62 % 37 %
Total $ 5,673,757 $ 2,277,761 0.13 % 60 % 47 %
_________________
(1)No other individual state has a committed or drawn balance greater than 10%
of our total home equity lending portfolio and 5% of total loan balances.
(2)Mean CLTV percent at origination for all home equity lines of credit is based
on the committed amount.
(3)Current Mean CLTV is based on best available first mortgage and property
values as of December 31, 2021 . Property values are estimated using HPI data
published by the FHFA. Current Mean CLTV percent for home equity lines of credit
in the draw period is calculated using the committed amount. Current Mean CLTV
on home equity lines of credit in the repayment period is calculated using the
principal balance.
At December 31, 2021 , 39.8% of our home equity lending portfolio was either in a
first lien position (23.3%), in a subordinate (second) lien position behind a
first lien that we held (13.8%) or behind a first lien that was held by a loan
that we originated, sold and now service for others (2.7%). At December 31,
2021 , 13.4% of our home equity line of credit portfolio in the draw period was
making only the minimum payment on the outstanding line balance.
48
————————————————– ——————————
Contents
The following table sets forth by calendar year origination, the credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the estimated current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as ofDecember 31, 2021 . Home equity lines of credit in the draw period are included in the year originated: Percent Mean CLTV Current Mean Credit Principal Delinquent Percent at CLTV Exposure Balance 90 Days or More Origination (1) Percent (2) (Dollars in thousands) Home equity lines of credit in draw period 2013 and Prior$ 474 $ 69 - % 17 % 45 % 2014 71,782 16,067 0.43 % 58 % 33 % 2015 107,183 28,503 - % 58 % 34 % 2016 277,880 88,323 0.07 % 60 % 38 % 2017 581,287 211,246 0.12 % 58 % 40 % 2018 740,921 306,002 0.05 % 58 % 44 % 2019 979,749 450,233 0.07 % 61 % 48 % 2020 916,521 355,263 0.03 % 58 % 49 % 2021 1,766,194 590,289 - % 62 % 60 % Total home equity lines of credit in draw period 5,441,991 2,045,995 0.05 % 60 % 48 % Home equity lines in repayment, home equity loans and bridge loans 231,766 231,766 0.85 % 62 % 37 % Total$ 5,673,757 $ 2,277,761 0.13 % 60 % 47 % ________________ (1)Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount. (2)Current Mean CLTV is based on best available first mortgage and property values as ofDecember 31, 2021 . Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance. The following table sets forth by fiscal year when the draw period expires, the principal balance of home equity lines of credit in the draw period as ofDecember 31, 2021 , segregated by the estimated current combined LTV range. Home equity lines of credit with an end of draw date in the current fiscal year include accounts with draw privileges that have been temporarily suspended. Estimated Current CLTV Category Home equity lines of credit in draw period (by end of draw fiscal year): < 80% 80 - 89.9% 90 - 100% >100% Unknown (1) Total (Dollars in thousands) 2022$ 42,063 $ 386 $ -$ 22 $ -$ 42,471 2023 215 21 5 - - 241 2024 10,110 - - - - 10,110 2025 28,060 - - - 13 28,073 2026 49,002 7 - - - 49,009 2027 177,623 - - - 126 177,749 Post 2027 1,728,491 8,698 189 60 904 1,738,342 Total$ 2,035,564 $ 9,112 $ 194 $ 82 $ 1,043 $ 2,045,995 _________________
(1) Market data needed for stratification is not readily available.
49
————————————————– ——————————
Contents
The following table sets forth the breakdown of estimated current mean CLTV percentages for our home equity lines of credit in the draw period as ofDecember 31, 2021 . Percent Percent Current of Total Delinquent Mean CLTV Mean Credit Principal Principal 90 Days or Percent at CLTV Exposure Balance Balance More Origination (2) Percent (3) (Dollars in thousands) Home equity lines of credit in draw period (by estimated current mean CLTV) < 80%$ 5,402,931 $ 2,035,564 99.5 % 0.05 % 60 % 48 % 80 - 89.9% 34,708 9,112 0.4 % - % 79 % 80 % 90 - 100% 929 194 - % - % 69 % 94 % > 100% 612 82 - % 26.8 % 59 % 116 % Unknown (1) 2,811 1,043 0.1 % - % 52 % (1)$ 5,441,991 $ 2,045,995 100.0 % 0.05 % 60 % 48 % _________________ (1)Market data necessary for stratification is not readily available. (2)Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount. (3)Current Mean CLTV is based on best available first mortgage and property values as ofDecember 31, 2021 . Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance. Delinquent Loans The following tables set forth the amortized cost in loan delinquencies by type, segregated by geographic location and severity of delinquency as of the dates indicated. The majority of our Home Today loan portfolio is secured by properties located inOhio , and therefore was not segregated by geographic location, and there are no construction or other loans with delinquent balances. Loans Delinquent for 30-89 Days 90 Days or More Total (Dollars in thousands) December 31, 2021 Real estate loans: Residential Core Ohio$ 1,790 $ 7,609$ 9,399 Florida 1,263 1,002 2,265 Other 954 3,399 4,353 Total Residential Core 4,007 12,010 16,017 Residential Home Today 1,866 2,351 4,217 Home equity loans and lines of credit Ohio 679 1,157 1,836 Florida 543 544 1,087 California 95 658 753 Other 550 561 1,111 Total Home equity loans and lines of credit 1,867 2,920 4,787 Total$ 7,740 $ 17,281$ 25,021 50
————————————————– ——————————
Table of Contents
Loans Delinquent for
30-89 Days 90 Days or More Total
(Dollars in thousands)
September 30, 2021
Real estate loans:
Residential Core
Ohio $ 3,217 $ 5,729 $ 8,946
Florida 874 1,093 1,967
Other 1,814 2,548 4,362
Total Residential Core 5,905 9,370 15,275
Residential Home Today 1,909 2,068 3,977
Home equity loans and lines of credit
Ohio 333 1,348 1,681
Florida 432 787 1,219
California 278 1,074 1,352
Other 195 1,022 1,217
Total Home equity loans and lines of credit 1,238 4,231 5,469
Total $ 9,052 $ 15,669 $ 24,721
Loans Delinquent for
30-89 Days 90 Days or More Total
(Dollars in thousands)
December 31, 2020
Real estate loans:
Residential Core
Ohio $ 4,875 $ 7,113 $ 11,988
Florida 751 2,887 3,638
Other 540 705 1,245
Total Residential Core 6,166 10,705 16,871
Residential Home Today 1,933 2,284 4,217
Home equity loans and lines of credit
Ohio 535 1,840 2,375
Florida 714 883 1,597
California 399 653 1,052
Other 895 1,146 2,041
Total Home equity loans and lines of credit 2,543 4,522 7,065
Total $ 10,642 $ 17,511 $ 28,153
Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.14% of
total net loans at December 31, 2021 , 0.12% at September 30, 2021 , and 0.14% at
December 31, 2020 . Total loans delinquent (i.e. delinquent 30 days or more) were
0.20% of total net loans at both December 31, 2021 and at September 30, 2021 ,
and 0.22% at December 31, 2020 .
As of December 31, 2021 , some of our borrowers have experienced unemployment or
reduced income as a result of the COVID-19 global pandemic and have requested
some type of loan payment forbearance. We began offering forbearance plans to
borrowers affected by COVID-19 on March 13, 2020 . Through December 31, 2021 ,
over 2,200 customers, representing over $250 million of loans, have been helped
by COVID-19 related forbearance plans. These forbearance plans that remain
active total $12.0 million , or 0.1% of total loans receivable, at December 31,
2021 ; of which $11.3 million were related to first mortgage loans and $0.7
million were related to home equity loans and lines of credit. Although we are
not currently receiving payments on loans in active COVID-19 forbearance plans,
the majority of these accounts are reported as current and accruing and are not
currently included in the amortized cost of TDRs as the Company has elected to
apply the temporary suspension of TDR requirements provided by regulatory
guidance and the CARES Act for eligible loan modifications. Further details
about active COVID-19 forbearance plans and post-forbearance loan workouts can
be found in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
51
————————————————– ——————————
Contents
Non-Performing Assets and Distressed Debt Restructurings The following table shows the amortized costs and categories of our non-performing assets and TDRs as of the dates indicated.
December 31, September 30, December 31,
2021 2021 2020
(Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential Core $ 26,348 $ 24,892 $ 29,492
Residential Home Today 8,049 8,043 9,891
Home equity loans and lines of credit 9,010 11,110 11,223
Total non-accrual loans (1)(2) 43,407 44,045 50,606
Real estate owned 131 289 102
Total non-performing assets $ 43,538 $ 44,334 $ 50,708
Ratios:
Total non-accrual loans to total loans 0.34 % 0.35 % 0.39 %
Total non-accrual loans to total assets 0.31 % 0.31 % 0.35 %
Total non-performing assets to total assets 0.31 % 0.32 % 0.35 %
TDRs: (not included in non-accrual loans above)
Real estate loans:
Residential Core $ 45,493 $ 48,300 $ 45,844
Residential Home Today 20,079 21,307 23,272
Home equity loans and lines of credit 24,243 24,941 28,289
Total $ 89,815 $ 94,548 $ 97,405
_________________
(1)At December 31, 2021 , September 30, 2021 , and December 31, 2020 , the totals
include $24.2 million , $25.7 million , and $31.3 million , respectively, in TDRs,
which are less than 90 days past due but included with non-accrual loans for a
minimum period of six months from the restructuring date due to their
non-accrual status or forbearance plan prior to restructuring, because of a
prior partial charge off, or because all borrowers have filed Chapter 7
bankruptcy, and not reaffirmed or been dismissed.
(2)At December 31, 2021 , September 30, 2021 , and December 31, 2020 , the totals
include $7.1 million , $6.9 million and $7.6 million in TDRs that are 90 days or
more past due, respectively.
The gross interest income that would have been recorded during the three months
ended December 31, 2021 and December 31, 2020 on non-accrual loans, if they had
been accruing during the entire period, and TDRs, if they had been current and
performing in accordance with their original terms during the entire period, was
$1.6 million and $1.8 million , respectively. The interest income recognized on
those loans included in net income for the three months ended December 31, 2021
and December 31, 2020 was $1.0 million and $1.1 million , respectively.
The amortized cost of collateral-dependent loans includes accruing TDRs and
loans that are returned to accrual status when contractual payments are less
than 90 days past due. These loans continue to be individually evaluated based
on collateral until, at a minimum, contractual payments are less than 30 days
past due. Also, the amortized cost of non-accrual loans includes loans that are
not included in the amortized cost of collateral-dependent loans because they
are included in loans collectively evaluated for credit losses.
52
————————————————– ——————————
Contents
The table below sets forth a reconciliation of the amortized costs and categories between non-accrual loans and collateral-dependent loans at the dates indicated. The increase in other accruing collateral-dependent loans betweenDecember 31, 2020 andDecember 31, 2021 , was primarily related to forbearance plans being extended past 12 months. December 31, September 30, December 31, 2021 2021 2020 (Dollars in thousands) Non-Accrual Loans$ 43,407 $ 44,045 50,606 Accruing Collateral-Dependent TDRs 8,628 10,428 8,157 Other Accruing Collateral-Dependent Loans 32,269 31,956 7,313 Less: Loans Collectively Evaluated (4,099) (2,575) (4,146) Total Collateral-Dependent loans$ 80,205 $ 83,854 $ 61,930 In response to the economic challenges facing many borrowers, we continue to restructure loans. Loan restructuring is a method used to help families keep their homes and to preserve neighborhoods. This involves making changes to the borrowers' loan terms through interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions including those beyond that provided in the original agreement; principal forgiveness; capitalization of delinquent payments in special situations; or some combination of the above. Loans discharged through Chapter 7 bankruptcy are also reported as TDRs per OCC interpretive guidance. For discussion on TDR measurement, see Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS. We had$121.1 million of TDRs (accrual and non-accrual) recorded atDecember 31, 2021 . This was a decrease in the amortized cost of TDRs of$6.0 million and$15.3 million fromSeptember 30, 2021 andDecember 31, 2020 , respectively. The following table sets forth the amortized cost in accrual and non-accrual TDRs, by the types of concessions granted, as ofDecember 31, 2021 . Initial concessions granted by loans restructured as TDRs can include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also can occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company. Multiple Initial Restructurings Restructurings Bankruptcy Total (In thousands) Accrual Residential Core $ 28,412$ 12,275 $ 4,806 $ 45,493 Residential Home Today 11,136 7,887 1,056 20,079 Home equity loans and lines of credit 22,894 841 508 24,243 Total $ 62,442$ 21,003 $ 6,370 $ 89,815 Non-Accrual, Performing Residential Core $ 1,844 $ 5,008$ 6,634 $ 13,486 Residential Home Today 560 3,630 1,275 5,465 Home equity loans and lines of credit 2,240 1,956 1,023 5,219 Total $ 4,644$ 10,594 $ 8,932 $ 24,170 Non-Accrual, Non-Performing Residential Core $ 1,944 $ 2,043$ 554 $ 4,541 Residential Home Today 541 1,116 127 1,784 Home equity loans and lines of credit 589 202 - 791 Total $ 3,074 $ 3,361$ 681 $ 7,116 Total TDRs Residential Core $ 32,200$ 19,326 $ 11,994 $ 63,520 Residential Home Today 12,237 12,633 2,458 27,328 Home equity loans and lines of credit 25,723 2,999 1,531 30,253 Total $ 70,160$ 34,958 $ 15,983 $ 121,101 53
————————————————– ——————————
Contents
TDRs in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan was not accruing interest or in a forbearance plan at the time of restructuring, continues to not accrue interest and is performing according to the terms of the restructuring but has not been current for at least six consecutive months since its restructuring, has a partial charge-off, or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status where all borrowers have filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring. Comparison of Financial Condition atDecember 31, 2021 andSeptember 30, 2021 Total assets increased$75.1 million , or 1%, to$14.13 billion atDecember 31, 2021 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$80.3 million , or 16%, to$408.0 million atDecember 31, 2021 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 endedDecember 31, 2021 . Investment securities, all of which are classified as available for sale, increased$2.0 million to$423.8 million atDecember 31, 2021 from$421.8 million atSeptember 30, 2021 . This increase is a result of cash flows from security purchases exceeding repayments and maturities during the fiscal year. Pay downs on mortgage-backed securities decreased due to the increase in interest rates. Investment securities increased as$65.2 million in purchases exceeded$57.7 million in principal paydowns, a$4.0 million decrease in unrealized gains and$1.5 million of net acquisition premium amortization that occurred in the mortgage-backed securities portfolio during the three months endedDecember 31, 2021 . There were no sales of investment securities during the three months endedDecember 31, 2021 . Loans held for investment, net of deferred loan fees and allowance for credit losses, increased$136.0 million , or 1%, to$12.65 billion atDecember 31, 2021 from$12.51 billion atSeptember 30, 2021 . This increase was based on a combination of a$69.5 million , or 1%, increase in residential mortgage loans to$10.35 billion atDecember 31, 2021 from$10.28 billion atSeptember 30, 2021 and a$63.5 million increase in the balance of home equity loans and lines of credit during the three months endedDecember 31, 2021 , as new originations and additional draws on existing accounts exceeded loan sales and repayments. Of the total$877.1 million first mortgage loan originations for the three months endedDecember 31, 2021 , 61% were refinance transactions and 39% were purchases, 24% were adjustable-rate mortgages and 14% were fixed-rate mortgages with terms of 10 years or less. Total first mortgage loans originations were$719.6 million for the quarter endedSeptember 30, 2021 . During the three months endedDecember 31, 2021 ,$211.9 million of three- and five-year "Smart Rate" loans were originated while$665.2 million of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated. BetweenSeptember 30, 2021 andDecember 31, 2021 , the total fixed-rate portion of the first mortgage loan portfolio increased$175.2 million and was comprised of an increase of$179.8 million in the balance of fixed-rate loans with original terms greater than 10 years partially offset by a decrease of$4.6 million in the balance of fixed-rate loans with original terms of 10 years or less. During the three months endedDecember 31, 2021 ,$102.0 million were sold or committed to sell, which consisted of$27.0 million of agency-compliant Home Ready loans and$75.0 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans sold to Fannie Mae. Commitments originated for home equity loans and lines of credit, and bridge loans were$499.7 million for the three months endedDecember 31, 2021 compared to$306.1 million for the three months endedDecember 31, 2020 . AtDecember 31, 2021 , pending commitments to originate new home equity loans and lines of credit were$329.4 million . Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information. There was a release of the allowance for credit losses of$2.0 million for both the three months endedDecember 31, 2021 and the three months endedDecember 31, 2020 . Releases from the allowance for credit losses during the current year reflected improvements in the economic trends and forecasts used to estimate losses for the reasonable and supportable period and decreases in pandemic forbearance balances, as well as adjusting for the level of net loan recoveries recorded during the period. The Company recorded$2.0 million of net loan recoveries for the three months endedDecember 31, 2021 compared to$1.3 million of net loan recoveries for the three months endedDecember 31, 2020 . The allowance for credit losses was$89.2 million , or 0.70% of total loans receivable, atDecember 31, 2021 , including a$25.6 million liability for unfunded commitments. The allowance for credit losses was$89.3 million , or 0.71% of total loans receivable, atSeptember 30, 2021 , including a$25.0 million liability for unfunded commitments. The allowance for credit losses was$92.3 million , or 0.71% of 54
————————————————– ——————————
Contents
total loans receivable, atDecember 31, 2020 and included a$22.1 million liability for unfunded commitments. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for additional discussion. The amount of FHLB stock owned was$162.8 million atDecember 31, 2021 , unchanged from the prior quarter endedSeptember 30, 2021 . FHLB stock ownership requirements dictate the amount of stock owned at any given time. Total bank owned life insurance contracts increased$1.1 million , to$298.4 million atDecember 31, 2021 , from$297.3 million atSeptember 30, 2021 . Other assets, including prepaid expenses, decreased$10.8 million to$80.8 million atDecember 31, 2021 from$91.6 million atSeptember 30, 2021 . This decrease was driven by a reduction of$5.2 million in net deferred taxes, a$3.3 million decrease in the receivable due to the ESOP, a$1.2 million decrease in prepaid franchise taxes, and a$2.6 million decrease in margin requirements on matured and terminated swaps, partially offset by a$0.8 million increase in the right of use asset. Deposits decreased$60.3 million , or 1%, to$8.93 billion atDecember 31, 2021 from$8.99 billion atSeptember 30, 2021 . The decrease in deposits resulted primarily from a$137.9 million decrease in CDs, inclusive of brokered CDs, as the low current market interest rates have reduced customers' desires to maintain longer-term CDs. However, the balance of brokered CDs included in total deposits atDecember 31, 2021 increased by$4.9 million to$496.9 million , during the three months endedDecember 31, 2021 , compared to a balance of$492.0 million atSeptember 30, 2021 . Partially offsetting the decrease was a$48.8 million increase in checking accounts and a$32.5 million increase in savings accounts. There was a$3.4 million decrease in money market accounts and accrued interest decreased$0.3 million during the current three month period to$1.5 million . Borrowed funds, all from the FHLB ofCincinnati , increased$88.8 million , or 3%, to$3.18 billion atDecember 31, 2021 from$3.09 billion atSeptember 30, 2021 . The increase was primarily used to fund loan growth. During the quarter endedDecember 31, 2021 , additions included$40.0 million of overnight advances and$150.0 million of long-term advances, with terms from 21 to 48 months, partially offset by other principal repayments. Also, during the quarter,$100.0 million of 90-day advances and their related swap contracts matured and were paid off. The total balance of borrowed funds atDecember 31, 2021 consisted of$40.0 million of overnight advances,$790.6 million of term advances with a weighted average maturity of approximately 2.7 years and shorter-term advances of$2.4 billion , aligned with interest rate swap contracts, with a remaining weighted average effective maturity of approximately 2.4 years. Interest rate swaps have been used to extend the duration of short-term borrowings, at inception, by paying a fixed rate of interest and receiving the variable rate. Refer to the Extending the Duration of Funding Sources section of the Overview and Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional discussion regarding short-term borrowings and interest-rate swaps. Borrowers' advances for insurance and taxes increased by$33.7 million to$143.3 million atDecember 31, 2021 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$21.1 million , or 1%, to$1.75 billion atDecember 31, 2021 from$1.73 billion atSeptember 30, 2021 . Activity reflects$16.1 million of net income in the current quarter reduced by a quarterly dividend of$14.5 million and$0.3 million of repurchases of outstanding common stock. Other changes include$17.7 million of unrealized net gain recognized in accumulated other comprehensive income, primarily related to changes in market values and maturities of swap contracts, and a$2.1 million net positive impact related to activity in the Company's stock compensation and employee stock ownership plans. The Company's eighth stock repurchase program allows for a total of 10,000,000 shares to be repurchased, with 5,875,079 shares remaining to be repurchased atDecember 31, 2021 . During the quarter endedDecember 31, 2021 , 16,000 shares of the Company's outstanding stock were repurchased at an average cost of$17,80 per share. The Company declared and paid a quarterly dividend of$0.2825 per share during the quarter endedDecember 31, 2021 . As a result of a mutual member vote,Third Federal Savings and Loan Association of Cleveland, MHC (the "MHC"), the mutual holding company that owns approximately 81% of the outstanding stock of the Company, was able to waive its receipt of its share of the dividend paid. Refer to Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds for additional details regarding the repurchase of shares of common stock and the dividend waiver. 55
————————————————– ——————————
Contents
Comparison of Operating Results for the Three Months EndedDecember 31, 2021 and 2020 Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effects thereof were not material. Average balances are derived from daily average balances. Non-accrual loans are included in the computation of loan average balances, but only cash payments received on those loans during the period presented are reflected in the yield. The yields set forth below include the effect of deferred fees, deferred expenses, discounts and premiums that are amortized or accreted to interest income or interest expense. Three Months Ended Three Months Ended December 31, 2021 December 31, 2020 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Cost (1) Balance Expense Cost (1) (Dollars in thousands)
Interest-bearing assets:
Interest-earning cash equivalents$ 494,186 $ 190 0.15 %$ 476,589 $ 128 0.11 % Investment securities 2,932 9 1.23 % - - - % Mortgage-backed securities 421,358 951 0.90 % 447,544 987 0.88 % Loans (2) 12,582,758 90,119 2.86 % 13,090,927 100,126 3.06 % Federal Home Loan Bank stock 162,783 821 2.02 % 136,793 688 2.01 % Total interest-earning assets 13,664,017 92,090 2.70 % 14,151,853 101,929 2.88 % Noninterest-earning assets 512,102 525,312 Total assets$ 14,176,119 $ 14,677,165
Interest-bearing debts:
Checking accounts$ 1,151,600 265 0.09 %$ 1,017,811 321 0.13 % Savings accounts 1,835,361 557 0.12 % 1,662,095 914 0.22 % Certificates of deposit 5,944,470 18,429 1.24 % 6,493,523 26,461 1.63 % Borrowed funds 3,175,158 14,995 1.89 % 3,471,593 15,490 1.78 % Total interest-bearing liabilities 12,106,589 34,246 1.13 % 12,645,022 43,186 1.37 % Noninterest-bearing liabilities 312,104 376,897 Total liabilities 12,418,693 13,021,919 Shareholders' equity 1,757,426 1,655,246 Total liabilities and shareholders' equity$ 14,176,119 $ 14,677,165 Net interest income$ 57,844 $ 58,743 Interest rate spread (1)(3) 1.57 % 1.51 % Net interest-earning assets (4)$ 1,557,428 $ 1,506,831 Net interest margin (1)(5) 1.69 % 1.66 % Average interest-earning assets to average interest-bearing liabilities 112.86 % 111.92 % Selected performance ratios: Return on average assets (1) 0.46 % 0.68 % Return on average equity (1) 3.67 % 6.04 % Average equity to average assets 12.40 % 11.28 % _________________ (1)Annualized. (2)Loans include both mortgage loans held for sale and loans held for investment. (3)Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (5)Net interest margin represents net interest income divided by total interest-earning assets. 56
————————————————– ——————————
Contents
General. Net income decreased$8.9 million to$16.1 million for the three months endedDecember 31, 2021 compared to$25.0 million for the three months endedDecember 31, 2020 . The decrease in net income was primarily driven from a decline in other income as a result of a decline in loan sale activity, partially offset by a decrease in non-interest expense. Interest and Dividend Income. Interest and dividend income decreased$9.8 million , or 10%, to$92.1 million during the three months endedDecember 31, 2021 compared to$101.9 million during the same three months in the prior year. The decrease in interest and dividend income resulted mainly from a decrease in interest income on loans, and to a lesser extent mortgage-backed securities, partially offset by increases in income earned on FHLB stock and other interest-bearing cash equivalents. Interest income on loans decreased$10.0 million , or 10%, to$90.1 million for the three months endedDecember 31, 2021 compared to$100.1 million for the three months endedDecember 31, 2020 . This decrease was attributed mainly to a 20 basis point decrease in the average yield on loans to 2.86% for the three months endedDecember 31, 2021 from 3.06% for the same three months in the prior fiscal year, as well as a$508.2 million decrease in the average balance of loans to$12.58 billion for the current three months compared to$13.09 billion for the prior fiscal year period as repayments and loan sales exceeded new loan production. Overall, market interest rate increases during the past fiscal year reduced the number of loan refinances. Although interest rates increased in general, the average loan yield decreased during the quarter as higher yielding loans from payoffs and refinances are replaced with loans yielding current market interest rates. The yields on our home equity lending products and adjustable rate mortgages feature interest rates that reset based on the prime rate, which decreased 150 basis points inMarch 2020 and hasn't changed since. Interest Expense. Interest expense decreased$9.0 million , or 21%, to$34.2 million during the current three months compared to$43.2 million during the three months endedDecember 31, 2020 . This decrease resulted from decreases in interest expense on both deposits and borrowed funds. Interest expense on CDs decreased$8.1 million , or 31%, to$18.4 million during the three months endedDecember 31, 2021 compared to$26.5 million during the three months endedDecember 31, 2020 . The decrease was attributed primarily to a 39 basis point decrease in the average rate we paid on CDs to 1.24% during the current three months from 1.63% during the same three months last fiscal year. In addition, there was a$549.1 million , or 8%, decrease in the average balance of CDs to$5.94 billion from$6.49 billion during the same three months of the prior fiscal year. While interest expense on checking accounts remained relatively unchanged, interest expense on savings accounts decreased$0.3 million to$0.6 million during the three months endedDecember 31, 2021 , compared to interest expense of$0.9 million for the same three-month period during the prior fiscal year. Rates were adjusted downward for deposits in response to changes in market interest rates as well as to changes in the rates paid by our competitors. Interest expense on borrowed funds, all from the FHLB ofCincinnati , as impacted by related interest rate swap contracts, decreased$0.5 million , or 3%, to$15.0 million during the three months endedDecember 31, 2021 from$15.5 million during the three months endedDecember 31, 2020 . The decrease was primarily the result of lower average balances of borrowed funds for the three months endedDecember 31, 2021 . The average balance of borrowed funds decreased$296.4 million , or 9%, to$3.18 billion during the current three months from$3.47 billion during the same three months of the prior fiscal year. Partially offsetting the lower average balance was an 11 basis point increase in the average rate paid for these funds to 1.89% from 1.78% for the three months endedDecember 31, 2021 andDecember 31, 2020 , respectively. Funding costs were lowered through a reduction in the average balance of borrowed funds, including the maturity of$100.0 million of 90-day advances and their related swap contracts. During the quarter endedDecember 31, 2021 , additional borrowings included$40.0 million of overnight advances and$150.0 million of long term advances, partially offset by other principal repayments. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion. Net Interest Income. Net interest income decreased$0.9 million , or 2%, to$57.8 million during the three months endedDecember 31, 2021 from$58.7 million during the three months endedDecember 31, 2020 . Average interest-earning assets decreased during the current three months by$487.8 million , or 3%, to$13.66 billion when compared to the three months endedDecember 31, 2020 . The decrease in average assets was attributed primarily to a$508.2 million decrease in the average balance of our loans as well as a$26.1 million decrease in the average balance of mortgage-backed security investments. The yield on average interest earning assets decreased 18 basis points to 2.70% for the three months endedDecember 31, 2021 from 2.88% for the three months endedDecember 31, 2020 . Average interest-bearing liabilities decreased$538.4 million to$12.11 billion for the three months endedDecember 31, 2021 compared to$12.65 billion for the three months endedDecember 31, 2020 . Average interest-bearing liabilities experienced a 24 basis point decrease in cost, which more than offset the 18 basis point decrease in our asset yield, as our interest rate spread increased 6 basis points to 1.57% compared to 1.51% during the same three months last fiscal year. Our net interest margin was 1.69% for the current three months and 1.66% for the same three months in the prior fiscal year period. 57
————————————————– ——————————
Contents
Provision (Release) for Credit Losses. We recorded a release of the allowance for credit losses on loans and off-balance sheet exposures of$2.0 million during the three months endedDecember 31, 2021 andDecember 31, 2020 . In the current three months, we recorded net recoveries of$2.0 million , as compared to net recoveries of$1.3 million for the three months endedDecember 31, 2020 . Releases from the allowance for credit losses during the current and prior year reflected improvements in the economic metrics used to forecast losses for the reasonable and supportable period and decreases in pandemic forbearance balances, as well as adjusting for the level of net loan recoveries recorded during the period. Gross loan charge-offs were$0.2 million for the three months endedDecember 31, 2021 and$0.8 million for the three months endedDecember 31, 2020 , while loan recoveries were$2.2 million in the current three months and$2.1 million in the prior fiscal year period. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan balance, uncollected balances have been charged against the allowance for credit losses previously provided. Refer to the Lending Activities section of the Overview and Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for further discussion. Non-Interest Income. Non-interest income decreased$13.3 million , or 62%, to$8.2 million during the three months endedDecember 31, 2021 compared to$21.5 million during the three months endedDecember 31, 2020 . The decrease in non-interest income was primarily due to a$14.2 million decrease in the net gain on sale of loans, partially offset by a$1.3 million increase in income from bank owned life insurance contracts during the most recent three months. The decrease in net gain on the sale of loans was generally attributable to both lower volumes of sales as well as less favorable market pricing on loan delivery contracts settled during the current fiscal year. There were loan sales of$102.0 million , including commitments to sell, during the three months endedDecember 31, 2021 , compared to loan sales of$293.5 million during the three months endedDecember 31, 2020 . The cash surrender value and death benefits from bank owned life insurance increased$1.3 million to$2.9 million during the three months endedDecember 31, 2021 , from$1.6 million during the three months endedDecember 31, 2020 . The cash surrender value benefited from$70.0 million of additional premiums placed during the quarter endedDecember 31, 2020 . Non-Interest Expense. Non-interest expense decreased$4.0 million , or 8%, to$47.7 million during the three months endedDecember 31, 2021 compared to$51.7 million during the three months endedDecember 31, 2020 . This decrease was the combination of a$2.0 million decrease in other operating expenses, mainly attributable to cost reductions related to appraisal expenses and third party fees associated with home equity lines and loans, a$1.8 million decrease in salaries and employee benefits, and to a lesser extent a decrease of$0.4 million in federal insurance premiums and assessments. TheDecember 31, 2020 period included a one-time$1,500 after-tax bonus paid to each associate during the first quarter of the fiscal year 2021 in recognition of special efforts made during the pandemic crisis. Income Tax Expense. The provision for income taxes decreased$1.3 million to$4.2 million during the three months endedDecember 31, 2021 from$5.5 million for the three months endedDecember 31, 2020 . The provision for the current three months included$3.7 million of federal income tax provision and$0.5 million of state income tax provision. The provision for the three months endedDecember 31, 2020 included$5.3 million of federal income tax provision and$0.2 million of state income tax provision. Our effective federal tax rate was 18.7% during the three months endedDecember 31, 2021 and 17.4% during the three months endedDecember 31, 2020 . Liquidity and Capital Resources Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB ofCincinnati , borrowings from the FRB-Cleveland Discount Window, overnight Fed Funds through various arrangements with other institutions, proceeds from brokered CDs transactions, principal repayments and maturities of securities, and sales of loans. In addition to the primary sources of funds described above, we have the ability to obtain funds through the use of collateralized borrowings in the wholesale markets and from sales of securities. Also, debt issuance by the Company and access to the equity capital markets via a supplemental minority stock offering or a full conversion (second-step) transaction remain as other potential sources of liquidity, although these channels generally require up to nine months of lead time. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Association's Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the sum of cash and cash equivalents plus unencumbered investment securities for which ready markets exist, divided by total assets). For the three months endedDecember 31, 2021 , our liquidity ratio averaged 6.24%. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as ofDecember 31, 2021 . 58
————————————————– ——————————
Contents
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, scheduled liability maturities and the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. AtDecember 31, 2021 , cash and cash equivalents totaled$408.0 million , which represented a decrease of 16.4% from$488.3 million atSeptember 30, 2021 . Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled$423.8 million atDecember 31, 2021 . During the three-month period endedDecember 31, 2021 , loan sales totaled$102.0 million , which includes sales to Fannie Mae, consisting of$75.0 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans and$27.0 million of loans that qualified under Fannie Mae's Home Ready initiative. Loans originated under the Home Ready initiative are classified as "held for sale" at origination. Loans originated under non-Home Ready, Fannie Mae compliant procedures are classified as "held for investment" until they are specifically identified for sale. AtDecember 31, 2021 ,$38.1 million of long-term, fixed-rate residential first mortgage loans were classified as "held for sale". Our cash flows are derived from operating activities, investing activities and financing activities as reported in our CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) included in the UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS. AtDecember 31, 2021 , we had$879.4 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had$3.40 billion in unfunded home equity lines of credit to borrowers. CDs due within one year ofDecember 31, 2021 totaled$3.46 billion , or 38.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, sales of investment securities, other deposit products, including new CDs, brokered CDs, FHLB advances, borrowings from the FRB-Cleveland Discount Window or other collateralized borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the CDs due on or beforeDecember 31, 2022 . We believe, however, based on past experience, that a significant portion of such deposits will remain with us. Generally, we have the ability to attract and retain deposits by adjusting the interest rates offered. Our primary investing activities are originating residential mortgage loans, home equity loans and lines of credit and purchasing investments. During the three months endedDecember 31, 2021 , we originated$877.1 million of residential mortgage loans, and$499.7 million of commitments for home equity loans and lines of credit, while during the three months endedDecember 31, 2020 , we originated$1.12 billion of residential mortgage loans and$306.1 million of commitments for home equity loans and lines of credit. We purchased$65.3 million of securities during the three months endedDecember 31, 2021 , and$93.0 million during the three months endedDecember 31, 2020 . Financing activities consist primarily of changes in deposit accounts, changes in the balances of principal and interest owed on loans serviced for others, FHLB advances, including any collateral requirements related to interest rate swap agreements and borrowings from the FRB-Cleveland Discount Window. We experienced a net decrease in total deposits of$60.3 million during the three months endedDecember 31, 2021 , which reflected the active management of the offered rates on maturing CDs, compared to a net decrease of$35.0 million during the three months endedDecember 31, 2020 . Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. During the three months endedDecember 31, 2021 , there was a$4.9 million increase in the balance of brokered CDs (exclusive of acquisition costs and subsequent amortization), which had a balance of$496.9 million atDecember 31, 2021 . AtDecember 31, 2020 the balance of brokered CDs was$530.4 million . Principal and interest owed on loans serviced for others experienced a net decrease of$5.8 million to$35.7 million during the three months endedDecember 31, 2021 compared to a net increase of$5.0 million to$50.9 million during the three months endedDecember 31, 2020 . During the three months endedDecember 31, 2021 we increased our advances from the FHLB ofCincinnati by$88.8 million as we funded: new loan originations, our capital initiatives, and actively managed our liquidity ratio. During the three months endedDecember 31, 2020 , our advances from the FHLB ofCincinnati decreased by$76.7 million . Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB 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 CD market. AtDecember 31, 2021 we had$3.18 billion of FHLB ofCincinnati advances and no outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, atDecember 31, 2021 , we had$496.9 million of brokered CDs. During the three months endedDecember 31, 2021 , we had average outstanding advances from the FHLB of 59
————————————————– ——————————
Contents
Cincinnati of$3.18 billion as compared to average outstanding advances of$3.47 billion during the three months endedDecember 31, 2020 . Refer to the Extending the Duration of Funding Sources section of the Overview and the General section of Item 3. Quantitative and Qualitative Disclosures About Market Risk for further discussion. AtDecember 31, 2021 , we had the ability to borrow a maximum of$7.49 billion from the FHLB ofCincinnati and$224.2 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 atDecember 31, 2021 was$4.31 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. AtDecember 31, 2021 , the Association exceeded the regulatory requirement for the "capital conservation buffer". As ofDecember 31, 2021 , the Association exceeded all regulatory requirements to be considered "Well Capitalized" as presented in the table below (dollar amounts in thousands). Actual Well Capitalized Levels Amount Ratio Amount Ratio Total Capital to Risk-Weighted Assets$ 1,591,967 20.29 %$ 784,616 10.00 % Tier 1 (Leverage) Capital to Net Average Assets 1,547,930 10.93 % 708,267 5.00 % Tier 1 Capital to Risk-Weighted Assets 1,547,930 19.73 % 627,693 8.00 %
Common Equity Tier 1 capital to risk-weighted assets 1,547,930
19.73 % 510,000 6.50 %
The Company’s capital ratios at
Real
Amount Ratio
Total Capital to Risk-Weighted Assets $ 1,846,867 23.53 %
Tier 1 (Leverage) Capital to Net Average Assets 1,802,830 12.72 %
Tier 1 Capital to Risk-Weighted Assets 1,802,830 22.97 %
Common Equity Tier 1 Capital to Risk-Weighted Assets 1,802,830 22.97 %
In addition to the operational liquidity considerations described above, which
are primarily those of the Association, the Company, as a separate legal entity,
also monitors and manages its own, parent company-only liquidity, which provides
the source of funds necessary to support all of the parent company's stand-alone
operations, including its capital distribution strategies which encompass its
share repurchase and dividend payment programs. The Company's primary source of
liquidity is dividends received from the Association. The amount of dividends
that the Association may declare and pay to the Company in any calendar year,
without the receipt of prior approval from the OCC but with prior notice to the
FRB-Cleveland, cannot exceed net income for the current calendar year-to-date
period plus retained net income (as defined) for the preceding two calendar
years, reduced by prior dividend payments made during those periods. In December
2021 , the Company received a $56.0 million cash dividend from the Association.
Because of its intercompany nature, this dividend payment had no impact on the
Company's capital ratios or its CONSOLIDATED STATEMENTS OF CONDITION but reduced
the Association's reported
60
————————————————– ——————————
Contents
capital ratios. AtDecember 31, 2021 , the Company had, in the form of cash and a demand loan from the Association,$233.6 million of funds readily available to support its stand-alone operations. The Company's eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company's outstanding common stock was approved by the Board of Directors onOctober 27, 2016 and repurchases began onJanuary 6, 2017 . There were 4,124,921 shares repurchased under that program between its start date andDecember 31, 2021 . During the three months endedDecember 31, 2021 , the Company repurchased$0.3 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 andDecember 14, 2021 . The payment of dividends, support of asset growth and strategic stock repurchases are planned to continue in the future as the focus for future capital deployment activities. Item 3. Quantitative and Qualitative Disclosures About Market Risk General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk has historically been interest rate risk. In general, our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and advances from the FHLB ofCincinnati . As a result, a fundamental component of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established risk parameter limits deemed appropriate given our business strategy, operating environment, capital, liquidity and performance objectives. Additionally, our Board of Directors has authorized the formation of an Asset/Liability Management Committee comprised of key operating personnel, which is responsible for managing this risk in a matter that is consistent with the guidelines and risk limits approved by the Board of Directors. Further, the Board has established the Directors Risk Committee, which, among other responsibilities, conducts regular oversight and review of the guidelines, policies and deliberations of the Asset/Liability Management Committee. We have sought to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk: (i)marketing adjustable-rate and shorter-maturity (10-year, fixed-rate mortgage) loan products; (ii)lengthening the weighted average remaining term of major funding sources, primarily by offering attractive interest rates on deposit products, particularly longer-term certificates of deposit, and through the use of longer-term advances from the FHLB ofCincinnati (or shorter-term advances converted to longer-term durations via the use of interest rate exchange contracts that qualify as cash flow hedges) and longer-term brokered certificates of deposit; (iii)investing in shorter- to medium-term investments and mortgage-backed securities; (iv)maintaining the levels of capital required for "well capitalized" designation; and (v)securitizing and/or selling long-term, fixed-rate residential real estate mortgage loans. During the three months endedDecember 31, 2021 ,$102.0 million of agency-compliant, long-term (15 to 30 years), fixed-rate mortgage loans were sold, or committed to be sold, to Fannie Mae on a servicing retained basis. AtDecember 31, 2021 ,$38.1 million of agency-compliant, long-term, fixed-rate residential first mortgage loans were classified as "held for sale." Of the agency-compliant loan sales during the three months endedDecember 31, 2021 ,$27.0 million were sold under Fannie Mae's Home Ready program, and$75.0 million were sold to Fannie Mae, as described in the next paragraph. First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more, and Home Ready) are originated under Fannie Mae procedures and are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures, which are not eligible for sale to Fannie Mae. For loans that are not originated under Fannie Mae procedures, the Association's ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported 61
————————————————– ——————————
Contents
by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors. The Association actively markets home equity lines of credit, an adjustable-rate mortgage loan product and a 10-year fixed-rate mortgage loan product. Each of these products provides us with improved interest rate risk characteristics when compared to longer-term, fixed-rate mortgage loans. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and investments, as well as loans and investments with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. The Association evaluates funding source alternatives as it seeks to extend its liability duration. Extended duration funding sources that are currently considered include: retail certificates of deposit (which, subject to a fee, generally provide depositors with an early withdrawal option, but do not require pledged collateral); brokered certificates of deposit (which generally do not provide an early withdrawal option and do not require collateral pledges); collateralized borrowings which are not subject to creditor call options (generally advances from the FHLB ofCincinnati ); and interest rate exchange contracts ("swaps") which are subject to collateral pledges and which require specific structural features to qualify for hedge accounting treatment (hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive income (loss) in the equity section of the balance sheet rather than being included in operating results of the income statement). The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment. The Association attempts to be opportunistic in the timing of its funding duration deliberations and when evaluating alternative funding sources, compares effective interest rates, early withdrawal/call options and collateral requirements. The Association is a party to interest rate swap agreements. Each of the Association's swap agreements is registered on theChicago Mercantile Exchange and involves the exchange of interest payment amounts based on a notional principal balance. No exchange of principal amounts occur and the notional principal amount does not appear on our balance sheet. The Association uses swaps to extend the duration of its funding sources. In each of the Association's agreements, interest paid is based on a fixed rate of interest throughout the term of each agreement while interest received is based on an interest rate that resets at a specified interval (generally three months) throughout the term of each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that point in time. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the conditions of the agreement. The notional amount of the Association's swap portfolio atDecember 31, 2021 was$2.35 billion . The swap portfolio's weighted average fixed pay rate was 1.89% and the weighted average remaining term was 2.4 years. Concurrent with the execution of each swap, the Association entered into a short-term borrowing from the FHLB ofCincinnati in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap. Each individual swap agreement has been designated as a cash flow hedge of interest rate risk associated with the Company's variable rate borrowings from the FHLB ofCincinnati . Economic Value of Equity. Using customized modeling software, the Association prepares periodic estimates of the amounts by which the net present value of its cash flows from assets, liabilities and off-balance sheet items (the institution's economic value of equity or EVE) would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach in measuring the interest rate sensitivity of EVE. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumption that instantaneous changes (measured in basis points) occur at all maturities along the United States Treasury yield curve and other relevant market interest rates. A basis point equals one, one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the "Change in Interest Rates" column below. The model is tailored specifically to our organization, which, we believe, improves its predictive accuracy. The following table presents the estimated changes in the Association's EVE atDecember 31, 2021 that would result from the indicated instantaneous changes inthe United States Treasury yield curve and other relevant market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. 62
————————————————– ——————————
Table of Contents
EVE as a Percentage of
Present Value of Assets (3)
Increase
Change in Estimated Increase (Decrease) in (Decrease)
Interest Rates Estimated EVE EVE (basis
(basis points) (1) EVE (2) Amount Percent Ratio (4) points)
(Dollars in thousands)
+300 $ 1,400,642 $ (371,079) (20.94) % 10.58 % (181)
+200 1,590,418 (181,303) (10.23) % 11.67 % (72)
+100 1,721,429 (50,292) (2.84) % 12.31 % (8)
0 1,771,721 - - % 12.39 % -
-100 1,747,318 (24,403) (1.38) % 12.05 % (34)
_________________
(1)Assumes an instantaneous uniform change in interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming
cash flows on interest-earning assets.
(4)EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at December 31, 2021 , in the event of an increase
of 200 basis points in all interest rates, the Association would experience a
10.23% decrease in EVE. In the event of a 100 basis point decrease in interest
rates, the Association would experience a 1.38% decrease in EVE.
The following table is based on the calculations contained in the previous
table, and sets forth the change in the EVE at a +200 basis point rate of shock
at December 31, 2021 , with comparative information as of September 30, 2021 . By
regulation, the Association must measure and manage its interest rate risk for
interest rate shocks relative to established risk tolerances in EVE.
At December 31, At September 30,
Risk Measure (+200 Basis Points Rate Shock) 2021 2021
Pre-Shock EVE Ratio 12.39 % 12.97 %
Post-Shock EVE Ratio 11.67 % 12.46 %
Sensitivity Measure in basis points (72) (51)
Percentage Change in EVE (10.23) % (8.21) %
Certain shortcomings are inherent in the methodologies used in measuring
interest rate risk through changes in EVE. Modeling changes in EVE require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the EVE tables presented above assume:
•no new growth or business volumes;
•that the composition of our interest-sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured,
except for reductions to reflect mortgage loan principal repayments along with
modeled prepayments and defaults; and
•that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration or repricing of specific assets and
liabilities.
Accordingly, although the EVE tables provide an indication of our interest rate
risk exposure as of the indicated dates, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on our EVE and will differ from actual results. In addition to
our core business activities, which sought to originate Smart Rate (adjustable)
loans, home equity lines of credit (adjustable) and 10-year fixed-rate loans
funded by borrowings from the FHLB and intermediate term CDs (including brokered
CDs), and which are intended to have a favorable impact on our IRR profile, the
impact of several other items and events resulted in the 2.02% deterioration in
the Percentage Change in EVE measure at December 31, 2021 when compared to the
measure at September 30, 2021 . Factors contributing to this deterioration
included changes in market rates, capital actions by the Association and changes
due to business activity. Movement in market interest rates included an increase
of 46 basis points for the two-year term, an increase of 30 basis points for the
five-year term and an increase of two basis points for the ten-year term.
Negatively impacting the Percentage Change in EVE was a $56.0 million cash
dividend that the Association paid to the Company. Because of its intercompany
nature, this payment had no impact on the Company's capital position, or the
Company's overall IRR profile, but reduced the Association's regulatory capital
and regulatory capital ratios and negatively impacted the Association's
Percentage Change in EVE by approximately 0.30%. While our core business
activities, as described at the beginning of this paragraph, are generally
intended to have a positive impact on
63
————————————————– ——————————
Contents
our IRR profile, the actual impact is determined by a number of factors, including the pace of mortgage asset additions to our balance sheet (including consideration of outstanding commitments to originate those assets) in comparison to the pace of the addition of duration extending funding sources. The IRR simulation results presented above were in line with management's expectations and were within the risk limits established by our Board of Directors. Our simulation model possesses random patterning capabilities and accommodates extensive regression analytics applicable to the prepayment and decay profiles of our borrower and depositor portfolios. The model facilitates the generation of alternative modeling scenarios and provides us with timely decision making data that is integral to our IRR management processes. Modeling our IRR profile and measuring our IRR exposure are processes that are subject to continuous revision, refinement, modification, enhancement, back testing and validation. We continually evaluate, challenge and update the methodology and assumptions used in our IRR model, including behavioral equations that have been derived based on third-party studies of our customer historical performance patterns. Changes to the methodology and/or assumptions used in the model will result in reported IRR profiles and reported IRR exposures that will be different, and perhaps significantly, from the results reported above. Earnings at Risk. In addition to EVE calculations, we use our simulation model to analyze the sensitivity of our net interest income to changes in interest rates (the institution's EaR). Net interest income is the difference between the interest income that we earn on our interest-earning assets, such as loans and securities, and the interest that we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for prospective 12 and 24 month periods using customized (based on our portfolio characteristics) assumptions with respect to loan prepayment rates, default rates and deposit decay rates, and the implied forward yield curve as of the market date for assumptions as to projected interest rates. We then calculate what the estimated net interest income would be for the same period under numerous interest rate scenarios. The simulation process is subject to continual enhancement, modification, refinement and adaptation, in order that it might most accurately reflect our current circumstances, factors and expectations. As ofDecember 31, 2021 , we estimated that our EaR for the 12 months endingDecember 31, 2022 would increase by 3.04% in the event that market interest rates used in the simulation were adjusted in equal monthly amounts (termed a "ramped" format) during the 12 month measurement period to an aggregate increase in 200 basis points. The Association uses the "ramped" assumption in preparing the EaR simulation estimates for use in its public disclosures. In addition to conforming to predominate industry practice, the Association also believes that the ramped assumption provides a more probable/plausible scenario for net interest income simulations than instantaneous shocks which provide a theoretical analysis but a much less credible economic scenario. The Association continues to calculate instantaneous scenarios, and as ofDecember 31, 2021 , we estimated that our EaR for the 12 months endingDecember 31, 2022 , would increase by 1.47% in the event of an instantaneous 200 basis point increase in market interest rates. Certain shortcomings are also inherent in the methodologies used in determining interest rate risk through changes in EaR. Modeling changes in EaR require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the interest rate risk information presented above assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. In addition to the preparation of computations as described above, we also formulate simulations based on a variety of non-linear changes in interest rates and a variety of non-constant balance sheet composition scenarios. Other Considerations. The EVE and EaR analyses are similar in that they both start with the same month end balance sheet amounts, weighted average coupon and maturity. The underlying prepayment, decay and default assumptions are also the same and they both start with the same month end "markets" (Treasury and FHLB yield curves, etc.). From that similar starting point, the models follow divergent paths. EVE is a stochastic model using 150 different interest rate paths to compute market value at the account level for each of the categories on the balance sheet whereas EaR uses the implied forward curve to compute interest income/expense at the account level for each of the categories on the balance sheet. EVE is considered as a point in time calculation with a "liquidation" view of the Association where all the cash flows (including interest, principal and prepayments) are modeled and discounted using discount factors derived from the current market yield curves. It provides a long term view and helps to define changes in equity and duration as a result of changes in interest rates. On the other hand, EaR is based on balance sheet projections going one year and two years forward and assumes new business volume and pricing to calculate net interest income under different interest rate environments. EaR is calculated to determine the sensitivity of net interest income under different interest rate scenarios. With each of these models, specific policy limits have been established that are compared with the actual month end results. These limits have been approved by the Association's Board of Directors and are used as benchmarks to evaluate and moderate interest rate risk. In the event that there is a breach of policy limits that extends beyond two consecutive quarter end measurement periods, management is responsible 64
————————————————– ——————————
Contents
for taking such action, similar to those described under the preceding heading of General, as may be necessary in order to return the Association's interest rate risk profile to a position that is in compliance with the policy. AtDecember 31, 2021 , the IRR profile as disclosed above was within our internal limits. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision of and with the participation of the Company's management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC's rules and forms.
Changes in internal control over financial reporting
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
© Edgar Online, source
