Form 10-Q TFS Financial CORP For: Dec 31
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-Q
________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended December 31, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For transition period from to
Commission File Number 001-33390
________________________________________
(Exact Name of Registrant as Specified in its Charter)
________________________________________
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(216 ) 441-6000
Registrant’s telephone number, including area code:
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
________________________________________
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol(s) | Name of each exchange in which registered | ||||||||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | ¨ | |||||||||||||||||||||
| Non-accelerated filer | o | Smaller Reporting Company | |||||||||||||||||||||
| Emerging Growth Company | |||||||||||||||||||||||
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of February 6, 2023, there were 280,327,291 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 81.0% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.
TFS Financial Corporation
INDEX
| Page | ||||||||
| PART l – FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| December 31, 2022 and September 30, 2022 | ||||||||
| Three Months Ended December 31, 2022 and 2021 | ||||||||
| Three Months Ended December 31, 2022 and 2021 | ||||||||
| Three Months Ended December 31, 2022 and 2021 | ||||||||
| Three Months Ended December 31, 2022 and 2021 | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
GLOSSARY OF TERMS
TFS Financial Corporation provides the following list of acronyms and defined terms as a tool for the reader. The acronyms and defined terms identified below are used throughout the document.
ACL: Allowance for Credit Losses | FICO: Fair Isaac Corporation | ||||
ACT: Tax Cuts and Jobs Act | FRB-Cleveland: Federal Reserve Bank of Cleveland | ||||
AOCI: Accumulated Other Comprehensive Income | Freddie Mac: Federal Home Loan Mortgage Corporation | ||||
ARM: Adjustable Rate Mortgage | FRS: Board of Governors of the Federal Reserve System | ||||
ASC: Accounting Standards Codification | GAAP: Generally Accepted Accounting Principles | ||||
ASU: Accounting Standards Update | Ginnie Mae: Government National Mortgage Association | ||||
Association: Third Federal Savings and Loan | GVA: General Valuation Allowances | ||||
| Association of Cleveland | HARP: Home Affordable Refinance Program | ||||
BOLI: Bank Owned Life Insurance | HPI: Home Price Index | ||||
CARES Act: Coronavirus Aid, Relief and Economic Security | IRR: Interest Rate Risk | ||||
| Act | IRS: Internal Revenue Service | ||||
CDs: Certificates of Deposit | IVA: Individual Valuation Allowance | ||||
CECL: Current Expected Credit Losses | LIBOR: London Interbank Offer Rate | ||||
CET1: Common Equity Tier 1 | LIHTC: Low Income Housing Tax Credit | ||||
CFPB: Consumer Financial Protection Bureau | LIP: Loans-in-Process | ||||
CLTV: Combined Loan-to-Value | LTV: Loan-to-Value | ||||
Company: TFS Financial Corporation and its | MMK: Money Market Account | ||||
| subsidiaries | OCC: Office of the Comptroller of the Currency | ||||
DFA: Dodd-Frank Wall Street Reform and Consumer | OCI: Other Comprehensive Income | ||||
| Protection Act | OTS: Office of Thrift Supervision | ||||
EaR: Earnings at Risk | PMI: Private Mortgage Insurance | ||||
EPS: Earnings per Share | PMIC: PMI Mortgage Insurance Co. | ||||
ESOP: Third Federal Employee (Associate) Stock | QTL: Qualified Thrift Lender | ||||
| Ownership Plan | REMICs: Real Estate Mortgage Investment Conduits | ||||
EVE: Economic Value of Equity | REO: Real Estate Owned | ||||
Fannie Mae: Federal National Mortgage Association | SEC: United States Securities and Exchange Commission | ||||
FASB: Financial Accounting Standards Board | SOFR: Secured Overnight Financing Rate | ||||
FDIC: Federal Deposit Insurance Corporation | TDR: Troubled Debt Restructuring | ||||
FHFA: Federal Housing Finance Agency | Third Federal Savings, MHC: Third Federal Savings | ||||
FHLB: Federal Home Loan Bank | and Loan Association of Cleveland, MHC | ||||
3
Item 1. Financial Statements
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
| December 31, 2022 | September 30, 2022 | ||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Other interest-earning cash equivalents | |||||||||||
| Cash and cash equivalents | |||||||||||
Investment securities available for sale (amortized cost $ | |||||||||||
Mortgage loans held for sale ($ | |||||||||||
| Loans held for investment, net: | |||||||||||
| Mortgage loans | |||||||||||
| Other loans | |||||||||||
| Deferred loan expenses, net | |||||||||||
| Allowance for credit losses on loans | ( | ( | |||||||||
| Loans, net | |||||||||||
| Mortgage loan servicing rights, net | |||||||||||
| Federal Home Loan Bank stock, at cost | |||||||||||
| Real estate owned, net | |||||||||||
| Premises, equipment, and software, net | |||||||||||
| Accrued interest receivable | |||||||||||
| Bank owned life insurance contracts | |||||||||||
| Other assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Deposits | $ | $ | |||||||||
| Borrowed funds | |||||||||||
| Borrowers’ advances for insurance and taxes | |||||||||||
| Principal, interest, and related escrow owed on loans serviced | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingent liabilities | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Paid-in capital | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Unallocated ESOP shares | ( | ( | |||||||||
| Retained earnings—substantially restricted | |||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||
| Total shareholders’ equity | |||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | |||||||||
See accompanying notes to unaudited interim consolidated financial statements.
4
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share and per share data)
| For the Three Months Ended | |||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| INTEREST AND DIVIDEND INCOME: | |||||||||||
| Loans, including fees | $ | $ | |||||||||
| Investment securities available for sale | |||||||||||
| Other interest and dividend earning assets | |||||||||||
| Total interest and dividend income | |||||||||||
| INTEREST EXPENSE: | |||||||||||
| Deposits | |||||||||||
| Borrowed funds | |||||||||||
| Total interest expense | |||||||||||
| NET INTEREST INCOME | |||||||||||
| PROVISION (RELEASE) FOR CREDIT LOSSES | ( | ( | |||||||||
| NET INTEREST INCOME AFTER PROVISION (RELEASE) FOR CREDIT LOSSES | |||||||||||
| NON-INTEREST INCOME: | |||||||||||
| Fees and service charges, net of amortization | |||||||||||
| Net gain on the sale of loans | |||||||||||
| Increase in and death benefits from bank owned life insurance contracts | |||||||||||
| Other | |||||||||||
| Total non-interest income | |||||||||||
| NON-INTEREST EXPENSE: | |||||||||||
| Salaries and employee benefits | |||||||||||
| Marketing services | |||||||||||
| Office property, equipment and software | |||||||||||
| Federal insurance premium and assessments | |||||||||||
| State franchise tax | |||||||||||
| Other expenses | |||||||||||
| Total non-interest expense | |||||||||||
| INCOME BEFORE INCOME TAXES | |||||||||||
| INCOME TAX EXPENSE | |||||||||||
| NET INCOME | $ | $ | |||||||||
| Earnings per share—basic and diluted | $ | $ | |||||||||
| Weighted average shares outstanding | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
5
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
| For the Three Months Ended | |||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Net change in unrealized (loss) on securities available for sale | ( | ( | |||||||||
| Net change in cash flow hedges | |||||||||||
| Net change in defined benefit plan obligation | |||||||||||
| Total other comprehensive income (loss) | ( | ||||||||||
| Total comprehensive income | $ | $ | |||||||||
See accompanying notes to unaudited interim consolidated financial statements.
6
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(In thousands, except share and per share data)
| For the Three Months Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Paid-in capital | Treasury stock | Unallocated common stock held by ESOP | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| ESOP shares allocated or committed to be released | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Compensation costs for equity incentive plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock ( | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Treasury stock allocated to equity incentive plan | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Dividends declared to common shareholders ($ | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| For the Three Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | Paid-in capital | Treasury stock | Unallocated common stock held by ESOP | Retained earnings | Accumulated other comprehensive income (loss) | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| ESOP shares allocated or committed to be released | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Compensation costs for equity incentive plans | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock ( | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Treasury stock allocated to equity incentive plan | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
Dividends declared to common shareholders ($ | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||
7
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
| For the Three Months Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| ESOP and stock-based compensation expense | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Deferred income taxes | ( | |||||||||||||
| Provision (release) for credit losses | ( | ( | ||||||||||||
| Net gain on the sale of loans | ( | ( | ||||||||||||
| Other net (gains) losses | ( | |||||||||||||
| Proceeds from sales of loans held for sale | ||||||||||||||
| Loans originated and principal repayments on loans for sale | ( | ( | ||||||||||||
| Increase in bank owned life insurance contracts | ( | ( | ||||||||||||
| Net (increase) decrease in interest receivable and other assets | ( | |||||||||||||
| Net increase (decrease) in accrued expenses and other liabilities | ( | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
| Loans originated | ( | ( | ||||||||||||
| Principal repayments on loans | ||||||||||||||
| Proceeds from sales, principal repayments and maturities of: | ||||||||||||||
| Securities available for sale | ||||||||||||||
| Proceeds from sale of: | ||||||||||||||
| Loans | ||||||||||||||
| Real estate owned | ||||||||||||||
| Purchases of: | ||||||||||||||
| FHLB stock | ( | |||||||||||||
| Securities available for sale | ( | ( | ||||||||||||
| Premises and equipment | ( | ( | ||||||||||||
| Other | ||||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
| Net increase (decrease) in deposits | ( | |||||||||||||
| Net (decrease) increase in borrowers' advances for insurance and taxes | ( | |||||||||||||
| Net decrease in principal and interest owed on loans serviced | ( | ( | ||||||||||||
| Net increase (decrease) in short-term borrowed funds | ( | ( | ||||||||||||
| Net increase (decrease) in Fed Funds purchased | ( | |||||||||||||
| Proceeds from long-term borrowed funds | ||||||||||||||
| Repayment of long-term borrowed funds | ( | ( | ||||||||||||
| Cash collateral/settlements received from (provided to) derivative counterparties | ( | |||||||||||||
| Acquisition of treasury shares | ( | ( | ||||||||||||
| Dividends paid to common shareholders | ( | ( | ||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | |||||||||||||
| CASH AND CASH EQUIVALENTS—Beginning of period | ||||||||||||||
| CASH AND CASH EQUIVALENTS—End of period | $ | $ | ||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||
| Cash paid for interest on deposits | $ | $ | ||||||||||||
| Cash paid for interest on borrowed funds | ||||||||||||||
| Cash paid/(received) for interest on interest rate swaps | ( | |||||||||||||
| Cash paid for income taxes | ||||||||||||||
| SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||
| Transfer of loans to real estate owned | ||||||||||||||
| Transfer of loans from held for investment to held for sale | ||||||||||||||
| Treasury stock issued for stock benefit plans | ||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
8
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands unless otherwise indicated)
1.BASIS OF PRESENTATION
The accounting and financial reporting policies followed by the Company conform in all material respects to U.S. GAAP and to general practices in the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the valuation of deferred tax assets, and the determination of pension obligations are particularly subject to change.
The unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at December 31, 2022, and its consolidated results of operations and cash flows for the periods presented. Such adjustments are the only adjustments reflected in the unaudited interim financial statements.
In accordance with SEC Regulation S-X for interim financial information, these financial statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022 contains audited consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023 or for any other period.
Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology referred to as the CECL methodology. Refer to NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES for additional details.
2.EARNINGS PER SHARE
9
2022 and 2021, respectively, the ESOP held 3,033,376 and 3,466,716 shares, respectively, that were neither allocated to participants nor committed to be released to participants.
The following is a summary of the Company's earnings per share calculations.
| For the Three Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Income | Shares | Per share amount | Income | Shares | Per share amount | |||||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||||||||||||||||||||
| Less: income allocated to restricted stock units | ||||||||||||||||||||||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||||||||||||||||
| Income available to common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||||||||||||||
| Effect of dilutive potential common shares | ||||||||||||||||||||||||||||||||||||||
| Income available to common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
The following is a summary of outstanding stock options and restricted and performance share units that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.
| For the Three Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Options to purchase shares | |||||||||||
| Restricted and performance stock units | |||||||||||
3.INVESTMENT SECURITIES
Investments available for sale are summarized in the tables below. Accrued interest in the periods presented is $1,249 and $1,122 as of December 31, 2022 and September 30, 2022, respectively, and is reported in accrued interest receivable on the CONSOLIDATED STATEMENTS OF CONDITION.
| December 31, 2022 | ||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | ||||||||||||||||||||||||
| Gains | Losses | |||||||||||||||||||||||||
| REMICs | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Fannie Mae certificates | ( | |||||||||||||||||||||||||
| U.S. government and agency obligations | ( | |||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized | Fair Value | ||||||||||||||||||||||||
| Gains | Losses | |||||||||||||||||||||||||
| REMICs | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Fannie Mae certificates | ( | |||||||||||||||||||||||||
| U.S. government and agency obligations | ( | |||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||||||||||||||
10
or early redemptions that may occur. Weighted average yields are not presented on a tax-equivalent basis and are calculated by multiplying each carry value by its yield and dividing the sum of these results by the total carry values. We did not hold any tax-free securities.
| December 31, 2022 | September 30, 2022 | ||||||||||||||||||||||||||||||||||
| Amortized Cost | Fair Value | Weighted Average Yield | Amortized Cost | Fair Value | Weighted Average Yield | ||||||||||||||||||||||||||||||
| Less than one year | $ | $ | % | $ | $ | % | |||||||||||||||||||||||||||||
| One to five years | % | % | |||||||||||||||||||||||||||||||||
| Five to ten years | % | % | |||||||||||||||||||||||||||||||||
| Ten years or greater | % | % | |||||||||||||||||||||||||||||||||
| Total | $ | $ | % | $ | $ | % | |||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | ||||||||||||||||||||||||||||||
| Available for sale— | |||||||||||||||||||||||||||||||||||
| REMICs | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Fannie Mae certificates | |||||||||||||||||||||||||||||||||||
| U.S. government and agency obligations | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | ||||||||||||||||||||||||||||||
| Available for sale— | |||||||||||||||||||||||||||||||||||
| REMICs | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Fannie Mae certificates | |||||||||||||||||||||||||||||||||||
| U.S. government and agency obligations | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The unrealized losses on investment securities were attributable to changes in market interest rates. The contractual terms of U.S. government and agency obligations do not permit the issuer to settle the security at a price less than the par value of the investment. The contractual cash flows of mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. REMICs are issued by or backed by securities issued by these governmental agencies. It is expected that the securities would not be settled at a price substantially less than the amortized cost of the investment. The U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.
Since the decline in value is attributable to changes in market interest rates and not credit quality and because the Company has neither the intent to sell the securities nor is it more likely than not the Company will be required to sell the securities for the time periods necessary to recover the amortized cost, the Company expects to receive all contractual cash flows from these investments. Therefore, no allowance for credit losses is recorded with respect to securities as of December 31, 2022.
11
4.LOANS AND ALLOWANCE FOR CREDIT LOSSES
LOAN PORTFOLIOS
Loans held for investment consist of the following:
| December 31, 2022 | September 30, 2022 | |||||||||||||
| Real estate loans: | ||||||||||||||
| Residential Core | $ | $ | ||||||||||||
| Residential Home Today | ||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||
| Construction | ||||||||||||||
| Real estate loans | ||||||||||||||
| Other loans | ||||||||||||||
| Add (deduct): | ||||||||||||||
| Deferred loan expenses, net | ||||||||||||||
| Loans in process | ( | ( | ||||||||||||
| Allowance for credit losses on loans | ( | ( | ||||||||||||
| Loans held for investment, net | $ | $ | ||||||||||||
Loans are carried at amortized cost, which includes outstanding principal balance adjusted for any unamortized premiums or discounts, net of deferred fees and expenses. Accrued interest is $44,068 and $39,124 as of December 31, 2022 and September 30, 2022, respectively, and is reported in accrued interest receivable on the CONSOLIDATED STATEMENTS OF CONDITION.
A large concentration of the Company’s lending is in Ohio and Florida. As of December 31, 2022 and September 30, 2022, the percentage of aggregate Residential Core, Home Today and Construction loans secured by properties in Ohio was 57 % and 56 %, respectively, and the percentage of loans secured by properties in Florida was 18 26 % and 27 % respectively), Florida (21 % and 20 % respectively), and California (17 % and 16 % respectively).
Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay-option adjustable-rate mortgages). The portfolio contains "Smart Rate" adjustable-rate mortgage loans whereby the interest rate is locked initially for three or five years then resets annually, subject to periodic rate adjustments caps and various re-lock options available to the borrower. Although the borrower is qualified for its loan at a higher rate than the initial rate offered, the adjustable-rate feature may impact a borrower's ability to afford the higher payments upon rate reset during periods of rising interest rates while this repayment risk may be reduced in a declining or low rate environment. With limited historical loss experience compared to other types of loans in the portfolio, judgment is required by management in assessing the allowance required on adjustable-rate mortgage loans. The principal amount of adjustable-rate mortgage loans included in the Residential Core portfolio was $4,703,176 and $4,668,089 at December 31, 2022 and September 30, 2022, respectively.
Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers and most loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after September 30, 2016. Home Today loans have greater credit risk than traditional residential real estate mortgage loans.
Home equity loans and lines of credit, which are comprised primarily of home equity lines of credit, represent a significant portion of the residential real estate portfolio and include monthly principal and interest payments throughout the entire term. Once the draw period on lines of credit has expired, the accounts are included in the home equity loan balance. The full credit exposure on home equity lines of credit is secured by the value of the collateral real estate at the time of origination.
The Company originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Company’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction
12
phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Company offers construction/permanent loans with fixed or adjustable-rates, and a current maximum loan-to-completed-appraised value ratio of 85 %.
Other loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment, and forgivable down payment assistance loans, which are unsecured loans used as down payment assistance to borrowers qualified through partner housing agencies. The Company records a liability for the down payment assistance loans which are forgiven in equal increments over a pre-determined term, subject to residency requirements.
Loans held for sale include loans originated with the intent to sell which are generally priced in alignment with secondary market pricing and may be subject to loan level pricing adjustments. Additionally, loans originated for the held for investment portfolio may later be identified for sale and transferred to the held for sale portfolio, which may include loans originated within the parameters of programs established by Fannie Mae. During the three months ended December 31, 2022 and December 31, 2021, reclassifications to the held for sale portfolio included loans that were sold during the period, including those in contracts pending settlement at the end of the period, and loans originated for the held for investment portfolio that were later identified for sale. At December 31, 2022 and September 30, 2022, respectively, mortgage loans held for sale totaled $12,549 and $9,661 . During the three months ended December 31, 2022, the principal balance of loans sold was $19,182 (including no loans in contracts pending settlement) compared to $102,006 (including $32,968 in contracts pending settlement) during three months ended December 31, 2021. During both the three months ended December 31, 2022 and December 31, 2021, there were no transfers to the held for investment portfolio.
DELINQUENCY and NON-ACCRUAL
An aging analysis of the amortized cost in loan receivables that are past due at December 31, 2022 and September 30, 2022 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due, regardless of the number of days in each month. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process.
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current | Total | ||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||||||||
| Residential Core | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Residential Home Today | |||||||||||||||||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||||||||
| Total real estate loans | |||||||||||||||||||||||||||||||||||
| Other loans | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current | Total | ||||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||||||||
| Residential Core | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Residential Home Today | |||||||||||||||||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||||||||
| Total real estate loans | |||||||||||||||||||||||||||||||||||
| Other loans | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
13
The amortized cost of loan receivables in non-accrual status is summarized in the following table. Non-accrual with no ACL describes non-accrual loans which have no quantitative or individual valuation allowance, primarily because they have already been collaterally reviewed and any required charge-offs have been taken, but may be included in consideration of qualitative allowance factors. Balances are adjusted for deferred loan fees and expenses. There are no
| December 31, 2022 | September 30, 2022 | ||||||||||||||||||||||
| Non-accrual with No ACL | Total Non-accrual | Non-accrual with No ACL | Total Non-accrual | ||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||
| Residential Core | $ | $ | $ | $ | |||||||||||||||||||
| Residential Home Today | |||||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||
| Total non-accrual loans | $ | $ | $ | $ | |||||||||||||||||||
At December 31, 2022 and September 30, 2022, respectively, the amortized cost in non-accrual loans includes $22,484 and $23,159 which are performing according to the terms of their agreement, of which $12,752 and $13,526 are loans in Chapter 7 bankruptcy status, primarily where all borrowers have filed, and have not reaffirmed or been dismissed. At December 31, 2022 and September 30, 2022, real estate loans include $8,768 and $9,833 , respectively, of loans that were in the process of foreclosure.
ALLOWANCE FOR CREDIT LOSSES
Charge-offs on residential mortgage loans, home equity loans and lines of credit, and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the amortized cost in the loans.
Partial or full charge-offs are also recognized for the amount of credit losses on loans considered collateral-dependent when the borrower is experiencing financial difficulty as described by meeting the conditions below.
•For residential mortgage loans, payments are greater than 180 days delinquent;
14
•For home equity loans and lines of credit, and residential loans restructured in TDR, payments are greater than 90 days delinquent;
•For all classes of loans restructured in a TDR with a high debt-to-income ratio at time of modification;
•For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan;
•For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy;
•For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed;
•For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent; and
•For all classes of loans, it becomes evident that a loss is probable.
Collateral-dependent residential mortgage loans and construction loans are charged-off to the extent the amortized cost in the loan, net of anticipated mortgage insurance claims, exceeds the fair value, less estimated costs to dispose of the underlying property. Management can determine if the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged-off to the extent the amortized cost in the loan plus the balance of any senior liens exceeds the fair value, less estimated costs to dispose of the underlying property, or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio identified as collateral-dependent will continue to be reported as such until it is no longer considered collateral-dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off will continue to be individually evaluated for credit loss until, at a minimum, the loss has been recovered.
At December 31, 2022 and September 30, 2022, respectively, allowances on individually reviewed TDRs (IVAs), evaluated for credit losses based on the present value of cash flows, were $10,120 and $10,284 . All other individually evaluated loans received a charge-off, if applicable.
15
Activity in the allowance for credit losses by portfolio segment is summarized as follows. See Note 11. LOAN COMMITMENTS AND CONTINGENT LIABILITIES for further details on the allowance for unfunded commitments.
| For the Three Months Ended December 31, 2022 | |||||||||||||||||||||||||||||
| Beginning Balance | Provisions (Releases) | Charge-offs | Recoveries | Ending Balance | |||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||
| Residential Core | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
| Residential Home Today | ( | ( | ( | ( | |||||||||||||||||||||||||
| Home equity loans and lines of credit | ( | ( | |||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||
| Total real estate loans | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||
Total Unfunded Loan Commitments (1) | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||
| Total Allowance for Credit Losses | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||
(1) Total allowance for unfunded loan commitments is recorded in other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION and primarily relates to undrawn home equity lines of credit.
| For the Three Months Ended December 31, 2021 | |||||||||||||||||||||||||||||
| Beginning Balance | Provisions (Releases) | Charge-offs | Recoveries | Ending Balance | |||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||
| Residential Core | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||
| Residential Home Today | ( | ( | ( | ||||||||||||||||||||||||||
| Home equity loans and lines of credit | ( | ( | |||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||
| Total real estate loans | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||
Total Unfunded Loan Commitments (1) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total Allowance for Credit Losses | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||
(1) Total allowance for unfunded loan commitments is recorded in other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION and primarily relates to undrawn home equity lines of credit
16
CLASSIFIED LOANS
The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade as of the dates presented. Revolving loans reported at amortized cost include home equity lines of credit currently in their draw period. Revolving loans converted to term are home equity lines of credit that are in repayment. Home equity loans and bridge loans are segregated by origination year. Loans, or the portions of loans, classified as loss are fully charged-off in the period in which they are determined to be uncollectible; therefore they are not included in the following table. No no No construction loans are classified Special Mention at December 31, 2022. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process.
| Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| By fiscal year of origination | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||
| Residential Core | |||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total Residential Core | |||||||||||||||||||||||||||||
Residential Home Today (1) | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total Residential Home Today | |||||||||||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total Home equity loans and lines of credit | |||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Total Construction | |||||||||||||||||||||||||||||
| Total real estate loans | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total real estate loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
(1) No new originations of Home Today loans since fiscal 2016.
17
| Revolving Loans Amortized Cost Basis | Revolving Loans Converted To Term | ||||||||||||||||||||||||||||
| By fiscal year of origination | |||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | |||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||
| Residential Core | |||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total Residential Core | |||||||||||||||||||||||||||||
Residential Home Today (1) | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total Residential Home Today | |||||||||||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total Home equity loans and lines of credit | |||||||||||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Total Construction | |||||||||||||||||||||||||||||
| Total real estate loans | |||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||
| Special Mention | |||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||
| Total real estate loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
(1) No new originations of Home Today loans since fiscal 2016.
The home equity lines of credit converted from revolving to term loans during the three months ended December 31, 2022 and December 31, 2021, respectively, totaled $396 and $40 . The amount of conversions to term loans is expected to remain low for several years since the length of the draw period on new originations changed from five to ten years in 2016.
Residential loans are internally assigned a grade that complies with the guidelines outlined in the OCC’s Handbook for Rating Credit Risk. Pass loans are assets well protected by the current paying capacity of the borrower. Special Mention loans have a potential weakness, as evaluated based on delinquency status or nature of the product, that the Company deems to deserve management’s attention and may result in further deterioration in their repayment prospects and/or the Company’s credit position. Included in Special Mention loans are residential mortgage loans purchased which were current and performing at the time of purchase, but due to the absence of mortgage insurance coverage are potentially weaker repayment prospects when compared with the Company's originated residential Core portfolio. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Also included in Substandard are performing home equity loans and lines of credit where the customer has a severely delinquent first mortgage to which the performing home equity loan or line of credit is subordinate and all loans in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. Loss loans are considered uncollectible and are charged off when identified. Loss loans are of such little value that their continuance as bankable assets is not warranted even though partial recovery may be effected in the future.
At December 31, 2022 and September 30, 2022, respectively, $75,445 and $75,904 of TDRs individually evaluated for credit loss have adequately performed under the terms of the restructuring and are classified as Pass loans.
Other loans are internally assigned a grade of non-performing when they become 90 days or more past due. At December 31, 2022 and September 30, 2022, no
18
TROUBLED DEBT RESTRUCTURINGS
Initial concessions granted for loans restructured as TDRs may include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also may occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company. The amortized cost in TDRs by category as of December 31, 2022 and September 30, 2022 is shown in the tables below.
| December 31, 2022 | Initial Restructuring | Multiple Restructurings | Bankruptcy | Total | ||||||||||||||||||||||
| Residential Core | $ | $ | $ | $ | ||||||||||||||||||||||
| Residential Home Today | ||||||||||||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| September 30, 2022 | Initial Restructuring | Multiple Restructurings | Bankruptcy | Total | ||||||||||||||||||||||
| Residential Core | $ | $ | $ | $ | ||||||||||||||||||||||
| Residential Home Today | ||||||||||||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
For all TDRs restructured during the three months ended December 31, 2022 and December 31, 2021 (set forth in the tables below), the pre-restructured outstanding amortized cost was not materially different from the post-restructured outstanding amortized cost.
The following tables set forth the amortized cost in TDRs restructured during the periods presented.
| For the Three Months Ended December 31, 2022 | ||||||||||||||||||||||||||
| Initial Restructuring | Multiple Restructurings | Bankruptcy | Total | |||||||||||||||||||||||
| Residential Core | $ | $ | $ | $ | ||||||||||||||||||||||
| Residential Home Today | ||||||||||||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| For the Three Months Ended December 31, 2021 | ||||||||||||||||||||||||||
| Initial Restructuring | Multiple Restructurings | Bankruptcy | Total | |||||||||||||||||||||||
| Residential Core | $ | $ | $ | $ | ||||||||||||||||||||||
| Residential Home Today | ||||||||||||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
19
The tables below summarize information about TDRs restructured within 12 months of the period presented for which there was a subsequent payment default, at least 30 days past due on one scheduled payment, during the periods presented.
| For the Three Months Ended December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| TDRs That Subsequently Defaulted | Number of Contracts | Amortized Cost | Number of Contracts | Amortized Cost | ||||||||||||||||||||||
| Residential Core | $ | $ | ||||||||||||||||||||||||
| Residential Home Today | ||||||||||||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
5.DEPOSITS
Deposit account balances are summarized as follows:
| December 31, 2022 | September 30, 2022 | |||||||||||||
| Checking accounts | $ | $ | ||||||||||||
| Savings accounts, excluding money market accounts | ||||||||||||||
| Money market accounts | ||||||||||||||
| Certificates of deposit | ||||||||||||||
| Accrued interest | ||||||||||||||
| Total deposits | $ | $ | ||||||||||||
The aggregate amount of CD's in denominations of $250 or more was $815,108 and $733,301 at December 31, 2022 and September 30, 2022, respectively. In accordance with the DFA, the maximum amount of deposit insurance is $250 per depositor.
20
6. BORROWED FUNDS
At December 31, 2022, the Association had a maximum borrowing capacity of $9,396,564, of which $4,987,287 was outstanding. Borrowings from the FHLB of Cincinnati are secured by the Association’s investment in the common stock of the FHLB of Cincinnati as well as by a blanket pledge of its mortgage portfolio not otherwise pledged. The Association also has the ability to purchase Fed Funds through arrangements with other institutions. Finally, the ability to borrow from the FRB-Cleveland Discount Window is available to the Association and is secured by a pledge of specific loans in the Association’s mortgage portfolio.
Total borrowings at December 31, 2022 are summarized in the table below:
| Borrowing Capacity | Borrowings Available | Borrowings Outstanding | |||||||||||||||
| FHLB | $ | $ | $ | ||||||||||||||
| FRB Cleveland | |||||||||||||||||
| Fed Funds Purchased | |||||||||||||||||
| Subtotal | $ | $ | |||||||||||||||
| Accrued Interest | |||||||||||||||||
| Total Borrowings | $ | ||||||||||||||||
Maturities of borrowings at December 31, 2022 are summarized in the table below.
| Amount | Weighted Average Rate | ||||||||||
| Maturing in: | |||||||||||
| 12 months or less | $ | % | |||||||||
| 13 to 24 months | % | ||||||||||
| 25 to 36 months | % | ||||||||||
| 37 to 48 months | % | ||||||||||
49 to 60 months | % | ||||||||||
| Over 60 months | % | ||||||||||
| Total Advances | $ | % | |||||||||
| Accrued interest | |||||||||||
| Total | $ | ||||||||||
All borrowings have fixed rates during their term ranging up to 240 months. Interest is payable monthly for long-term advances and at maturity for FHLB swap based three-month and overnight advances. The table above reflects the effective maturities and fixed interest rates of the $1,950,000 of short-term FHLB advances that are tied to interest rate swaps discussed in Note 13. DERIVATIVE INSTRUMENTS.
21
7. OTHER COMPREHENSIVE INCOME (LOSS)
The change in accumulated other comprehensive income (loss) by component is as follows:
| For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized Gains (Losses) on Securities Available for Sale | Cash Flow Hedges | Defined Benefit Plan | Total | Unrealized Gains (Losses) on Securities Available for Sale | Cash Flow Hedges | Defined Benefit Plan | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance at beginning of period | $ | ( | $ | $ | ( | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $ | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Amounts reclassified, net of tax expense (benefit) of $( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | ( | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||
The following table presents the reclassification adjustment out of accumulated other comprehensive income (loss) included in net income and the corresponding line item on the CONSOLIDATED STATEMENTS OF INCOME for the periods indicated:
| Amounts Reclassified from Accumulated Other Comprehensive Income | |||||||||||||||||
| Details about Accumulated Other Comprehensive Income Components | For the Three Months Ended December 31, | Line Item in the Consolidated Statements of Income | |||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Cash flow hedges: | |||||||||||||||||
| Interest expense | $ | ( | $ | Interest expense | |||||||||||||
| Net income tax effect | ( | Income tax expense | |||||||||||||||
| Net of income tax expense | ( | ||||||||||||||||
| Amortization of defined benefit plan: | |||||||||||||||||
| Actuarial loss | (a) | ||||||||||||||||
| Net income tax effect | ( | ( | Income tax expense | ||||||||||||||
| Net of income tax expense | |||||||||||||||||
| Total reclassifications for the period | $ | ( | $ | ||||||||||||||
(a) This item is included in the computation of net periodic pension cost. See Note 9. DEFINED BENEFIT PLAN for additional disclosure.
8. INCOME TAXES
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various state and city jurisdictions. The Company’s combined federal and state effective income tax rate was 21.1 % and 20.6 % for the three months ended December 31, 2022 and December 31, 2021, respectively. The increase in the effective tax rate is primarily due to
excess tax deficiencies associated with equity compensation during the three months ended December 31, 2022 compared to
excess tax benefits in the three months ended December 31, 2021.
22
The Company is no longer subject to income tax examinations in its major jurisdictions for tax years prior to 2019. The Company recognizes interest and penalties on income tax assessments or income tax refunds, where applicable, in the financial statements as a component of its provision for income taxes.
The Company makes certain investments in limited partnerships which invest in affordable housing projects that qualify for the Low Income Housing Tax Credit. The Company acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnership. The Company accounts for its interests in LIHTCs using the proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income taxes was not material during the three months ended December 31, 2022 and December 31, 2021.
9. DEFINED BENEFIT PLAN
The Third Federal Savings Retirement Plan (the “Plan”) is a defined benefit pension plan. Effective December 31, 2002, the Plan was amended to limit participation to employees who met the Plan’s eligibility requirements on that date. Effective December 31, 2011, the Plan was amended to freeze future benefit accruals for participants in the Plan. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, and those eligible participants who no longer receive service credits under the Plan, participate in a separate tier of the Company’s defined contribution 401(k) Savings Plan. Benefits under the Plan are based on years of service and the employee’s average annual compensation (as defined in the Plan) through December 31, 2011. The funding policy of the Plan is consistent with the funding requirements of U.S. federal and other governmental laws and regulations.
The components of net periodic cost recognized in other non-interest expense in the CONSOLIDATED STATEMENTS OF INCOME are as follows:
| Three Months Ended | |||||||||||||||||
| December 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Interest cost | $ | $ | |||||||||||||||
| Expected return on plan assets | ( | ( | |||||||||||||||
| Amortization of net loss | |||||||||||||||||
| Net periodic (benefit) cost | $ | $ | ( | ||||||||||||||
10. EQUITY INCENTIVE PLAN
In December 2022, 174,550 restricted stock units were granted to certain directors, officers and managers of the Company and 102,000 performance share units were granted to certain officers of the Company. During the three months ended December 31, 2022, there were 4,394 performance shares earned and added to those granted in December 2020, according to the targeted performance formula. The awards were made pursuant to the Amended and Restated 2008 Equity Incentive Plan, which was approved at the annual meeting of shareholders held on February 22, 2018.
The following table presents share-based compensation expense recognized during the periods presented. There was no stock option expense for either period presented.
| Three Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Restricted stock units expense | |||||||||||
| Performance share units expense | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
At December 31, 2022, 2,358,775 shares were subject to vested options, with a weighted average exercise price of $15.14 per share and a weighted average grant date fair value of $2.55 per share. At December 31, 2022, 576,020 restricted stock units and 218,071 performance share units with a weighted average grant date fair value of $16.50 and $15.87 per unit, respectively, are unvested. Expected future compensation expense relating to the 1,341,768 restricted stock units and 218,071 performance
23
11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to originate loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire from to 10 years following the date that the line of credit was established, subject to various conditions, including compliance with payment obligations, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in assets on the CONSOLIDATED STATEMENTS OF CONDITION. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Company generally uses the same credit policies in making commitments as it does for on-balance sheet instruments. The allowance related to off-balance sheet commitments is recorded in other liabilities in the CONSOLIDATED STATEMENTS OF CONDITION. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES for discussion on credit loss methodology. Interest rate risk on commitments to extend credit results from the possibility that interest rates may move unfavorably from the position of the Company since the time the commitment was made.
At December 31, 2022, the Company had commitments to originate loans and related allowances as follows:
| Commitment | Allowance | ||||||||||
| Fixed-rate mortgage loans | $ | $ | |||||||||
| Adjustable-rate mortgage loans | |||||||||||
| Home equity loans and lines of credit | |||||||||||
| Total | $ | $ | |||||||||
At December 31, 2022, the Company had unfunded commitments outstanding and related allowances as follows:
| Commitment | Allowance | ||||||||||
| Home equity lines of credit | $ | $ | |||||||||
| Construction loans | |||||||||||
| Total | $ | $ | |||||||||
At December 31, 2022, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity, was $4,253,178 .
At December 31, 2022 and September 30, 2022, the Company had $4,397 and $0 , respectively, in commitments to sell mortgage loans.
The above commitments are expected to be funded through normal operations.
The Company is undergoing an escheat audit covering Ohio, Kentucky and Florida. Any potential loss that may result from this matter is not reasonably estimable at December 31, 2022.
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operation, or statements of cash flows.
24
12. FAIR VALUE
As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At December 31, 2022 and September 30, 2022, respectively, there were no pending agency contracts held for sale. Included in the net loss on the sale of loans is $0 for the three months ending December 31, 2022, and a net loss of $22 for the three months ending December 31, 2021, respectively, related to the changes in fair value of loans held for sale during the period in which loans were subject to pending agency contracts.
Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value.
Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. At December 31, 2022 and September 30, 2022, respectively, this includes $473,131 and $457,908 of investments in U.S. government and agency obligations including U.S. Treasury notes and investments in highly liquid collateralized mortgage obligations, that can include items issued by Fannie Mae, Freddie Mac and Ginnie Mae, measured using the market approach. The fair values of investment securities represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities.
Mortgage Loans Held for Sale—The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At December 31, 2022 and September 30, 2022, there were $12,549 and $9,661 , respectively of loans held for sale measured at fair value. At December 31, 2022 and September 30, 2022 there were no
Collateral-dependent Loans—Collateral-dependent loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated using a fair value measurement, such as the fair value of the underlying collateral. Credit loss is measured using a market approach based on the fair value of the collateral, less estimated costs to dispose, for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES. To calculate the credit loss of collateral-dependent loans, the fair market values of the collateral, estimated using third-party appraisals in the majority of instances, are reduced by calculated estimated costs to dispose, derived from historical experience and recent market conditions. Any indicated credit loss is recognized by a charge to the allowance for credit losses. Subsequent increases in collateral values or principal pay downs on loans with recognized credit loss could result in a collateral-dependent loan being carried below its fair value. When no credit loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum recovery the Company can expect. The amortized cost of loans individually evaluated for credit loss based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of estimated costs to dispose on fair values is determined at the time of credit loss or when additional credit loss is recognized and is included in quantitative information about significant unobservable inputs later in this note.
Loans held for investment that have been restructured in TDRs, are performing according to the restructured terms of the loan agreement and not evaluated based on collateral are individually evaluated for credit loss using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At December 31, 2022 and September 30, 2022, respectively, this included $76,579 and $76,692 in amortized cost of TDRs with related allowances for loss of $10,120 and $10,284 .
Real Estate Owned—Real estate owned includes real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of the cost basis or fair value, less estimated costs to dispose. The carrying amounts of
25
real estate owned at December 31, 2022 and September 30, 2022 were $1,378 and $1,191 , respectively. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At December 31, 2022 and September 30, 2022, these adjustments were not significant to reported fair values. At December 31, 2022 and September 30, 2022, respectively, $1,432 and $1,192 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis, where the cost basis equals or exceeds the estimated fair values less costs to dispose of $186 and $156 , respectively. Real estate owned includes $132 and $155 of properties carried at their original or adjusted cost basis at December 31, 2022 and September 30, 2022, respectively.
Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio, forward commitments on contracts to deliver mortgage loans and interest rate swaps designated as cash flow hedges. Derivatives not designated as cash flow hedges are reported at fair value in Other assets or Other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION with changes in value recorded in current earnings. Derivatives qualifying as cash flow hedges are settled daily, bringing the fair value to $0 . Refer to Note 13. DERIVATIVE INSTRUMENTS for additional information on cash flow hedges and other derivative instruments. The fair value of interest rate lock commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy.
Assets and liabilities carried at fair value on a recurring basis in the CONSOLIDATED STATEMENTS OF CONDITION at December 31, 2022 and September 30, 2022 are summarized below.
| Recurring Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| December 31, 2022 | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investment securities available for sale: | |||||||||||||||||||||||
| REMICs | $ | $ | $ | $ | |||||||||||||||||||
| Fannie Mae certificates | |||||||||||||||||||||||
| U.S. government and agency obligations | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||
| Interest rate lock commitments | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
26
| Recurring Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| September 30, 2022 | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investment securities available for sale: | |||||||||||||||||||||||
| REMIC's | $ | $ | $ | $ | |||||||||||||||||||
| Fannie Mae certificates | |||||||||||||||||||||||
| U.S. government and agency obligations | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||
| Interest rate lock commitments | $ | $ | $ | $ | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The table below presents a reconciliation of the beginning and ending balances and the location within the CONSOLIDATED STATEMENTS OF INCOME where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
| Three Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Beginning balance | $ | ( | $ | ||||||||
| (Loss)/Gain during the period due to changes in fair value: | |||||||||||
| Included in other non-interest income | |||||||||||
| Ending balance | $ | ( | $ | ||||||||
| Change in unrealized gains for the period included in earnings for assets held at end of the reporting date | $ | $ | |||||||||
Summarized in the tables below are those assets measured at fair value on a nonrecurring basis.
| Nonrecurring Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| December 31, 2022 | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||
| Collateral-dependent loans, net of allowance | $ | $ | $ | $ | |||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||
Real estate owned(1) | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Nonrecurring Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| September 30, 2022 | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||||
| Collateral-dependent loans, net of allowance | $ | $ | $ | $ | |||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||
Real estate owned(1) | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1)Amounts represent fair value measurements of properties before deducting estimated costs to dispose.
27
The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy. The interest rate lock commitments include both mortgage origination applications and preapprovals. Preapprovals generally have a much lower closure rate than origination applications which is reflected in the aggregate weighted average closure rates shown below.
| Fair Value | ||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | Valuation Technique(s) | Unobservable Input | Range | Weighted Average | ||||||||||||||||||||||||||||||||||
| Collateral-dependent loans, net of allowance | $ | Market comparables of collateral discounted to estimated net proceeds | Discount appraised value to estimated net proceeds based on historical experience: | |||||||||||||||||||||||||||||||||||
| • Residential Properties | - | |||||||||||||||||||||||||||||||||||||
| Interest rate lock commitments | $( | Quoted Secondary Market pricing | Closure rate | - | ||||||||||||||||||||||||||||||||||
| Fair Value | ||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | Valuation Technique(s) | Unobservable Input | Range | Weighted Average | ||||||||||||||||||||||||||||||||||
| Collateral-dependent loans, net of allowance | $ | Market comparables of collateral discounted to estimated net proceeds | Discount appraised value to estimated net proceeds based on historical experience: | |||||||||||||||||||||||||||||||||||
| • Residential Properties | - | |||||||||||||||||||||||||||||||||||||
| Interest rate lock commitments | $( | Quoted Secondary Market pricing | Closure rate | - | ||||||||||||||||||||||||||||||||||
28
The following tables present the estimated fair value of the Company’s financial instruments and their carrying amounts as reported in the CONSOLIDATED STATEMENTS OF CONDITION.
| December 31, 2022 | |||||||||||||||||||||||||||||
| Carrying | Fair | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Amount | Value | ||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Interest earning cash equivalents | |||||||||||||||||||||||||||||
| Investment securities available for sale | |||||||||||||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||||||||
| Loans, net: | |||||||||||||||||||||||||||||
| Mortgage loans held for investment | |||||||||||||||||||||||||||||
| Other loans | |||||||||||||||||||||||||||||
| Federal Home Loan Bank stock | N/A | ||||||||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||||||||
| Cash collateral received from or held by counterparty | |||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Checking and passbook accounts | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||||||||
| Borrowed funds | |||||||||||||||||||||||||||||
| Borrowers’ advances for insurance and taxes | |||||||||||||||||||||||||||||
| Principal, interest and escrow owed on loans serviced | |||||||||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||
| Carrying | Fair | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Amount | Value | ||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Interest earning cash equivalents | |||||||||||||||||||||||||||||
| Investment securities available for sale | |||||||||||||||||||||||||||||
| Mortgage loans held for sale | |||||||||||||||||||||||||||||
| Loans, net: | |||||||||||||||||||||||||||||
| Mortgage loans held for investment | |||||||||||||||||||||||||||||
| Other loans | |||||||||||||||||||||||||||||
| Federal Home Loan Bank stock | N/A | ||||||||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||||||||
| Cash collateral received from or held by counterparty | |||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Checking and passbook accounts | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||||||||
| Borrowed funds | |||||||||||||||||||||||||||||
| Borrowers’ advances for insurance and taxes | |||||||||||||||||||||||||||||
| Principal, interest and escrow owed on loans serviced | |||||||||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||||||||
29
Presented below is a discussion of the valuation techniques and inputs used by the Company to estimate fair value.
Cash and Due from Banks, Interest Earning Cash Equivalents, Cash Collateral Received from or Held by Counterparty— The carrying amount is a reasonable estimate of fair value.
Investment Securities Available for Sale— Estimated fair value for investment and mortgage-backed securities is based on quoted market prices, when available. If quoted prices are not available, management will use as part of their estimation process fair values which are obtained from third party independent nationally recognized pricing services using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Mortgage Loans Held for Sale— Fair value of mortgage loans held for sale is based on quoted secondary market pricing for loan portfolios with similar characteristics.
Loans— For mortgage loans held for investment, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. For other loans, the fair value is the principal outstanding at the reporting date. Collateral-dependent loans are measured at the lower of cost or fair value as described earlier in this footnote.
Federal Home Loan Bank Stock— It is not practical to estimate the fair value of FHLB stock due to restrictions on its transferability. The fair value is estimated to be the carrying value, which is par. All transactions in capital stock of the FHLB Cincinnati are executed at par.
Deposits— The fair value of demand deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities.
Borrowed Funds— Estimated fair value for borrowed funds is estimated using discounted cash flows and rates currently charged for borrowings of similar remaining maturities.
Accrued Interest Receivable, Borrowers’ Advances for Insurance and Taxes, and Principal, Interest and Related Escrow Owed on Loans Serviced— The carrying amount is a reasonable estimate of fair value.
13. DERIVATIVE INSTRUMENTS
The Company enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy. For hedges of the Company's borrowing program, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the Company's FHLB borrowings.
Cash flow hedges are initially assessed for effectiveness using regression analysis. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in OCI and are subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Quarterly, a qualitative analysis is performed to monitor the ongoing effectiveness of the hedging instrument. All derivative positions were initially and continue to be highly effective at December 31, 2022.
The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of lost revenue from adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME.
In addition, the Company is party to derivative instruments when it enters into interest rate lock commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME.
30
The following tables provide the notional values and fair values, and the locations of the fair values within the CONSOLIDATED STATEMENTS OF CONDITION, at the reporting dates, for all derivative instruments.
| December 31, 2022 | ||||||||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||||||||
| Notional Value | Fair Value | Term (years) | Fixed-Rate Payments | |||||||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||||||||
| Cash flow hedges: Interest rate swaps | ||||||||||||||||||||||||||
| Other Assets | ||||||||||||||||||||||||||
LIBOR swaps (1) | $ | $ | % | |||||||||||||||||||||||
SOFR swaps (2) | % | |||||||||||||||||||||||||
| Other Liabilities | ||||||||||||||||||||||||||
SOFR swaps (2) | $ | % | ||||||||||||||||||||||||
| Total cash flow hedges: Interest rate swaps | $ | $ | % | |||||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||||||||
| Notional Value | Fair Value | Term (years) | Fixed-Rate Payments | |||||||||||||||||||||||
| Cash flow hedges: Interest rate swaps | ||||||||||||||||||||||||||
| Other Assets | ||||||||||||||||||||||||||
LIBOR swaps (1) | $ | $ | % | |||||||||||||||||||||||
| Total cash flow hedges: Interest rate swaps | $ | $ | % | |||||||||||||||||||||||
(1) LIBOR swap contracts that remain outstanding at July 2023 will transition to a SOFR-based rate.
(2) All swap contracts entered into after October 1st, 2022 are based on a SOFR-based rate.
| December 31, 2022 | September 30, 2022 | |||||||||||||||||||||||||
| Notional Value | Fair Value | Notional Value | Fair Value | |||||||||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||
| Interest rate lock commitments | ||||||||||||||||||||||||||
| Other Liabilities | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Forward Commitments for the sale of mortgage loans | ||||||||||||||||||||||||||
| Other Assets | ||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
The following tables present the net gains and losses recorded within the CONSOLIDATED STATEMENTS OF INCOME and the CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME relating to derivative instruments.
| Three Months Ended | |||||||||||||||||
| Location of Gain or (Loss) | December 31, | ||||||||||||||||
| Recognized in Income | 2022 | 2021 | |||||||||||||||
| Cash flow hedges | |||||||||||||||||
| Amount of gain/(loss) recognized | Other comprehensive income | $ | $ | ||||||||||||||
| Amount of gain/(loss) reclassified from AOCI | Interest expense: Borrowed funds | ||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||
| Interest rate lock commitments | Other non-interest income | $ | $ | ||||||||||||||
| Forward commitments for the sale of mortgage loans | Net gain/(loss) on the sale of loans | ||||||||||||||||
The Company estimates that $50,035 of the amounts reported in AOCI will be reclassified as a reduction to interest expense during the twelve months ending December 31, 2023.
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14. RECENT ACCOUNTING PRONOUNCEMENTS
Adopted during the three months ended December 31, 2022
In December of 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This ASU deferred the period of time entities can utilize the reference rate reform relief guidance from ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effect of Reference Rate Reform on Financial Reporting to December 31, 2024 instead of the original December 31, 2022. This amendment is a result of the expectation that the London Interbank Offered Rate (LIBOR) will cease to be published as of June 30, 2023. The FASB Board decided that this amendment would be effective for all entities upon issuance of ASU 2022-06. This update did not have a material impact on the Company's consolidated financial condition or results of operation.
Issued but not yet adopted as of December 31, 2022
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326). The amendments in this Update eliminate the accounting guidance for TDR by creditors in Subtopic 310-40, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when the borrower is experiencing financial difficulty. This will be done by applying the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, this amendment requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. This update is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact that this accounting guidance may have on its consolidated financial condition or results of operations. The Company plans to adopt this guidance as of October 1, 2023.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| Forward Looking Statements | |||||
| This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include, among other things: | |||||
| ● | statements of our goals, intentions and expectations; | ||||
| ● | statements regarding our business plans and prospects and growth and operating strategies; | ||||
| ● | statements concerning trends in our provision for credit losses and charge-offs on loans and off-balance sheet exposures; | ||||
| ● | statements regarding the trends in factors affecting our financial condition and results of operations, including credit quality of our loan and investment portfolios; and | ||||
| ● | estimates of our risks and future costs and benefits. | ||||
| These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events: | |||||
| ● | significantly increased competition among depository and other financial institutions, including with respect to our ability to charge overdraft fees; | ||||
| ● | inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments, or our ability to originate loans; | ||||
| ● | general economic conditions, either globally, nationally or in our market areas, including employment prospects, real estate values and conditions that are worse 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 revenue 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 markets or real estate markets; | ||||
| ● | our ability to manage market risk, credit risk, liquidity risk, reputational 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 waive dividends; | ||||
| ● | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board; | ||||
| ● | the adoption of implementing regulations by a number of different regulatory bodies, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us; | ||||
| ● | our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any; | ||||
| ● | 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 that adversely 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-performing assets, charge-offs and provisions for credit losses); | ||||
| ● | the inability of third-party providers to perform their obligations to us; | ||||
| ● | the effects of global or national war, conflict or acts of terrorism; | ||||
| ● | civil unrest; | ||||
| ● | cyber-attacks, computer viruses and other technological risks that may breach 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 related government action, on our business and the economy. | ||||
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Please see Part II Other Information Item 1A. Risk Factors for a discussion of certain risks related to our business. | |||||
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Overview
The business strategy of TFS Financial Corporation ("we," "us," or "our") is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to our customers.
Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in 2007, the nation’s largest mutually-owned savings and loan association based on total assets. We credit our success to our continued emphasis on our primary values: “Love, Trust, Respect, and a Commitment to Excellence, along with Having Fun.” Our values are reflected in the design and pricing of our loan and deposit products, as described below. Our values are further reflected in a long-term revitalization program encompassing the three-mile corridor of the Broadway-Slavic Village neighborhood in Cleveland, Ohio where our main office was established and continues to be located, and where the educational programs we have established and/or support are located. We intend to continue to adhere to our primary values and to support our customers and the communities in which we operate as we pursue our mission to help people achieve the dream of home ownership and financial security while creating value for our shareholders, our customers, our communities and our associates.
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. In an effort to manage the impact of higher interest rates on our funding costs, we seek to convert our shorter term funding to longer term through interest rate swap contracts, which provides a cost effective way of managing interest rate risk by both extending the duration of our liabilities and lowering funding costs. By replacing short-term FHLB borrowings with hedged FHLB borrowings and swapping three month tenor borrowings to a longer term pay-fixed interest rate swap rate, we can use the proceeds to pay down overnight borrowings. 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.
Levels of Regulatory Capital
At December 31, 2022, the Company’s Tier 1 (leverage) capital totaled $1.82 billion, or 11.38% of net average assets and 20.15% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.59 billion, or 9.95% of net average assets and 17.61% of risk-weighted assets. Each of these measures is in excess of 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. This quarter the companies entered into the final three years of the five-year transitional period, as provided by a final rule, after CECL was adopted in fiscal year 2021. 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.
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The following tables set forth our first mortgage loan production and balances segregated by loan structure at origination.
| For the Three Months Ended December 31, 2022 | For the Three Months Ended December 31, 2021 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| First Mortgage Loan Originations: | |||||||||||||||||||||||
| ARM (all Smart Rate) production | $ | 162,715 | 33.5 | % | $ | 211,892 | 24.2 | % | |||||||||||||||
| Fixed-rate production: | |||||||||||||||||||||||
| Terms less than or equal to 10 years | 11,499 | 2.4 | % | 124,766 | 14.2 | % | |||||||||||||||||
| Terms greater than 10 years | 311,255 | 64.1 | % | 540,430 | 61.6 | % | |||||||||||||||||
| Total fixed-rate production | 322,754 | 66.5 | % | 665,196 | 75.8 | % | |||||||||||||||||
| Total First Mortgage Loan Originations | $ | 485,469 | 100.0 | % | $ | 877,088 | 100.0 | % | |||||||||||||||
| December 31, 2022 | September 30, 2022 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Balance of First Mortgage Loans Held For Investment: | |||||||||||||||||||||||
| ARM (primarily Smart Rate) Loans | $ | 4,703,176 | 40.0 | % | $ | 4,668,089 | 40.3 | % | |||||||||||||||
| Fixed-rate Loans: | |||||||||||||||||||||||
| Terms less than or equal to 10 years | 1,284,000 | 11.0 | % | 1,350,436 | 11.6 | % | |||||||||||||||||
| Terms greater than 10 years | 5,751,968 | 49.0 | % | 5,574,589 | 48.1 | % | |||||||||||||||||
| Total fixed-rate loans | 7,035,968 | 60.0 | % | 6,925,025 | 59.7 | % | |||||||||||||||||
| Total First Mortgage Loans Held For Investment | $ | 11,739,144 | 100.0 | % | $ | 11,593,114 | 100.0 | % | |||||||||||||||
The following table sets forth the balances as of December 31, 2022 for all ARM loans segregated by the next scheduled interest rate reset date.
| Current Balance of ARM Loans Scheduled for Interest Rate Reset | |||||
| During the Fiscal Years Ending September 30, | (In thousands) | ||||
| 2023 | $ | 146,060 | |||
| 2024 | 388,638 | ||||
| 2025 | 687,064 | ||||
| 2026 | 1,502,974 | ||||
| 2027 | 1,737,800 | ||||
| 2028 | 240,640 | ||||
| Total | $ | 4,703,176 | |||
At December 31, 2022 and September 30, 2022, 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 $12.5 million and $9.7 million, respectively.
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Loan Portfolio Yield
The following tables set forth the balance and interest yield as of December 31, 2022 for the portfolio of loans held for investment, by type of loan, structure and geographic location.
| December 31, 2022 | ||||||||||||||||||||
| Balance | Percent | Yield | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Total Loans: | ||||||||||||||||||||
| Fixed Rate | ||||||||||||||||||||
| Terms less than or equal to 10 years | $ | 1,284,000 | 8.8 | % | 2.63 | % | ||||||||||||||
| Terms greater than 10 years | 5,751,968 | 39.5 | % | 3.57 | % | |||||||||||||||
| Total Fixed-Rate loans | 7,035,968 | 48.3 | % | 3.40 | % | |||||||||||||||
| ARMs | 4,703,176 | 32.3 | % | 2.83 | % | |||||||||||||||
| Home Equity Loans and Lines of Credit | 2,699,513 | 18.6 | % | 6.48 | % | |||||||||||||||
| Construction and Other Loans | 117,296 | 0.8 | % | 3.64 | % | |||||||||||||||
| Total Loans Receivable | $ | 14,555,953 | 100.0 | % | 3.79 | % | ||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Balance | Percent | Yield | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Residential Mortgage Loans | ||||||||||||||||||||
| Ohio | $ | 6,607,083 | 45.4 | % | 3.37 | % | ||||||||||||||
| Florida | 2,142,059 | 14.7 | % | 3.06 | % | |||||||||||||||
| Other | 2,990,002 | 20.5 | % | 2.81 | % | |||||||||||||||
| Total Residential Mortgage Loans | 11,739,144 | 80.6 | % | 3.17 | % | |||||||||||||||
| Home Equity Loans and Lines of Credit | ||||||||||||||||||||
| Ohio | 713,668 | 5.0 | % | 6.47 | % | |||||||||||||||
| Florida | 570,863 | 3.9 | % | 6.39 | % | |||||||||||||||
| California | 450,964 | 3.1 | % | 6.41 | % | |||||||||||||||
| Other | 964,018 | 6.6 | % | 6.57 | % | |||||||||||||||
| Total Home Equity Loans and Lines of Credit | 2,699,513 | 18.6 | % | 6.48 | % | |||||||||||||||
| Construction and Other Loans | 117,296 | 0.8 | % | 3.64 | % | |||||||||||||||
| Total Loans Receivable | $ | 14,555,953 | 100.0 | % | 3.79 | % | ||||||||||||||
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. We plan to enhance our ability to grow the home equity line of credit portfolio by utilizing partners to attract more home equity line of credit customers. At December 31, 2022, the principal balance of home equity lines of credit totaled $2.42 billion. Our home equity lending is discussed in the Allowance for Credit Losses section of the Lending Activities.
Extending the Duration of Funding Sources
As a complement to our strategies to shorten the duration of our interest earning assets, as described above, we also seek to lengthen the duration of our interest bearing funding sources. These efforts include monitoring the relative costs of alternative funding sources such as retail deposits, brokered certificates of deposit, longer-term (e.g. four to six years) fixed-rate advances from the FHLB of Cincinnati, and shorter-term (e.g. three months) advances from the FHLB of Cincinnati, the durations of which are extended by correlated interest rate exchange contracts. Each funding alternative is monitored and evaluated based on its effective interest payment rate, options exercisable by the creditor (early withdrawal, right to call, etc.),
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and collateral requirements. The interest payment rate is a function of market influences that are specific to the nuances and market competitiveness/breadth of each funding source. Generally, early withdrawal options are available to our retail CD customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB of Cincinnati; and we are not subject to early termination options with respect to our interest rate exchange contracts. Additionally, collateral pledges are not provided with respect to our retail CDs or our brokered CDs, but are required for our advances from the FHLB of Cincinnati as well as for our interest rate exchange contracts. We will continue to evaluate the structure of our funding sources based on current needs.
During the three months ended December 31, 2022, the balance of deposits increased $93.3 million, which included a $74.9 million increase in the balance of brokered CDs (which is inclusive of acquisition costs and subsequent amortization). Additionally, during the three months ended December 31, 2022, we increased total FHLB of Cincinnati advances $194.1 million, by adding $350.0 million of new two-to-five year advances and $400.0 million in 90 day advances, partially offset by a $485.0 million decrease in overnight borrowings. The balance of our advances from the FHLB of Cincinnati at December 31, 2022 consist of both overnight and term advances from the FHLB of Cincinnati; as well as shorter-term advances from the FHLB of Cincinnati that were matched/correlated to interest rate exchange contracts that extended the effective durations of those shorter-term advances. Interest rate swaps are discussed later in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Other Interest Rate Risk Management Tools
We also manage interest rate risk by selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. At December 31, 2022, we serviced $2.02 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 continue to expand our ability to sell certain fixed rate loans to Fannie Mae in fiscal 2023 and beyond, through the use of more traditional mortgage banking activities, including risk-based pricing and loan-level pricing adjustments. This approach will be tested in markets outside of Ohio and Florida, and some additional startup and marketing costs will be incurred, but is not expected to significantly impact our financial results in fiscal 2023. We can also manage interest rate risk by selling non-Fannie Mae compliant mortgage loans to private investors, although those transactions are dependent upon favorable market conditions, including motivated private investors, and involve more complicated negotiations and longer settlement timelines. Loan sales are discussed later in this Part I, Item 2. under the heading Liquidity and Capital Resources, and in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Notwithstanding our efforts to manage interest rate risk, a rapid and substantial increase in general market interest rates or an extended period of a flat or inverted yield curve market, could adversely impact the level of our net interest income, prospectively and particularly over a multi-year time horizon.
Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the memory of the 2008 housing market collapse and financial crisis is a constant reminder to focus on credit risk. In response to the evolving economic landscape, we continuously revise and update our quarterly analysis and evaluation procedures, as needed, for each category of our lending with the objective of identifying and recognizing all appropriate credit losses. At December 31, 2022, 90% of our assets consisted of residential real estate loans (both “held for sale” and “held for investment”) and home equity loans and lines of credit. Our analytic procedures and evaluations include specific reviews of all home equity loans and lines of credit that become 90 or more days past due, as well as specific reviews of all first mortgage loans that become 180 or more days past due. We transfer performing home equity lines of credit subordinate to first mortgages delinquent greater than 90 days to non-accrual status. We also charge-off performing loans to collateral value and classify those loans as non-accrual within 60 days of notification of all borrowers filing Chapter 7 bankruptcy, that have not reaffirmed or been dismissed, regardless of how long the loans have been performing.
In an effort to limit our credit risk exposure with the low risk appetite approved by the Board of Directors, the credit eligibility criteria is evaluated to ensure a successful homeowner has the primary source of repayment, followed by a collateral position that allows for a secondary source of repayment, if needed. Products that do not result in an effective mix of repayment ability are not offered. We use stringent, conservative lending standards for underwriting to reduce our credit risk. For first mortgage loans originated during the current quarter, the average credit score was 774, and the average LTV was 72%. The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflect the higher credit standards to which we have subjected all new originations. As of December 31, 2022, loans originated prior to 2009 had a balance of $320.7 million, of which $9.4 million, or 2.9%, were delinquent, while loans originated in 2009 and after had a balance of $14.24 billion, of which $16.5 million, or 0.1%, were delinquent.
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One aspect of our credit risk concern relates to high concentrations of our loans that are secured by residential real estate in specific states, particularly Ohio and Florida, where a large portion of our historical lending has occurred. At December 31, 2022, approximately 56.4% and 18.2% of the combined total of our residential Core and construction loans held for investment and approximately 26.4% and 21.1% of our home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively. In an effort to moderate the concentration of our credit risk exposure in individual states, particularly Ohio and Florida, we have utilized direct mail marketing, our internet site and our customer service call center to extend our lending activities to other attractive geographic locations. Currently, in addition to Ohio and Florida, we are actively lending in 23 other states and the District of Columbia, and as a result of that activity, the concentration ratios of the combined total of our residential Core and construction loans held for investment in Ohio and Florida have trended downward from their September 30, 2010 levels when the concentrations were 79.1% in Ohio and 19.0% in Florida. Of the total mortgage loans originated in the three months ended December 31, 2022, 23.2% are secured by properties in states other than Ohio or Florida.
Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth. For most insured depositories, customer and community confidence are critical to their ability to maintain access to adequate liquidity and to conduct business in an orderly manner. We believe that a well capitalized institution is one of the most important factors in nurturing customer and community confidence. Accordingly, we have managed the pace of our growth in a manner that reflects our emphasis on high capital levels. At December 31, 2022, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a “well capitalized” status) was 9.95%. The Association's Tier 1 (leverage) capital ratio at December 31, 2022 included the negative impact of a $40 million cash dividend payment that the Association made to the Company, its sole shareholder, in December 2022. 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 and brokered checking accounts), borrowings from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. At December 31, 2022, deposits totaled $9.01 billion (including $650.1 million of brokered CDs), while borrowings totaled $4.99 billion and borrowers’ advances and servicing escrows totaled $137.6 million, combined. In evaluating funding sources, we consider many factors, including cost, collateral, duration and optionality, current availability, expected sustainability, impact on operations and capital levels.
To attract deposits, we offer our customers attractive rates of interest on our deposit products. Our deposit products typically offer rates that are highly competitive with the rates on similar products offered by other financial institutions. We intend to continue this practice, subject to market conditions.
We preserve the availability of alternative funding sources through various mechanisms. First, by maintaining high capital levels, we retain the flexibility to increase our balance sheet size without jeopardizing our capital adequacy. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. Second, we pledge available real estate mortgage loans and investment securities with the FHLB of Cincinnati and the FRB-Cleveland. At December 31, 2022, these collateral pledge support arrangements provided the Association with the ability to borrow a maximum of $8.61 billion from the FHLB of Cincinnati and $156.3 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity for additional borrowings at December 31, 2022 was $3.78 billion. Third, we have the ability to purchase overnight Fed Funds up to $680 million through various arrangements with other institutions. Fourth, we invest in high quality marketable securities that exhibit limited market price variability, and to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At December 31, 2022, our investment securities portfolio totaled $473.1 million. Finally, cash flows from operating activities have been a regular source of funds. During the three months ended December 31, 2022 and 2021, cash flows from operations provided $78.8 million and $7.7 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.
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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 1.34% for the three months ended December 31, 2022 and 1.35% for the three months ended December 31, 2021. As of December 31, 2022, our average assets per full-time employee and our average deposits per full-time employee were $15.7 million and $8.8 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 ($226.1 million per branch office as of December 31, 2022) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses as we grow our business.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are defined as those made in accordance with U.S. GAAP 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 and estimates upon which our financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are those with respect to our allowance for credit losses, income taxes and pension benefits as described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Lending Activities
Allowance for Credit Losses
We provide for credit losses based on a life of loan methodology. Accordingly, all credit losses are charged to, and all recoveries are credited to, the related allowance. Additions to the allowance for credit losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating life of credit losses. We regularly review the loan portfolio and off-balance sheet exposures and make provisions (or releases) for losses in order to maintain the allowance for credit losses in accordance with U.S. GAAP. Our allowance for credit losses consists of three components:
(1)individual valuation allowances (IVAs) established for any loans dependent on cash flows, such as performing TDRs;
(2)general valuation allowances (GVAs) for loans, which are comprised of quantitative GVAs, general allowances for credit losses for each loan type based on historical loan loss experience, and qualitative GVAs, which are adjustments to the quantitative GVAs, maintained to cover uncertainties that affect the estimate of expected credit losses for each loan type; and
(3)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;
39
•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 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 defaults, discounted at the effective interest rate of the original loan contract. Potential defaults are distinguished from multiple restructurings as borrowers who default are generally not eligible for subsequent restructurings. At December 31, 2022, the balance of such individual valuation allowances were $10.1 million. In instances when loans require multiple restructurings, additional valuation allowances may be required. The new valuation allowance on a loan that has multiple restructurings is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the restructured agreement. The estimated exposure for additional loss related to multiple loan restructurings is included as a component of our qualitative GVA.
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. We have established an allowance for our unfunded commitments on this portfolio, which is recorded in other liabilities. Our home equity loans and lines of credit portfolio continues to comprise a significant portion of our gross charge-offs. At December 31, 2022, we had an amortized cost of $2.73 billion in home equity loans and home equity lines of credit outstanding, of which $3.0 million, or 0.1% were delinquent 90 days or more.
The allowance for credit losses is evaluated based upon the combined total of the quantitative and qualitative GVAs and IVAs. Periodically, the carrying value of loans and factors impacting our credit loss analysis are evaluated and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions.
40
The following table sets forth activity for credit losses segregated by geographic location for the periods indicated. The majority of our Home Today loan portfolio is secured by properties located in Ohio, and therefore was not segregated by state.
| For the Three Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Allowance balance for credit losses on loans (beginning of the period) | $ | 72,895 | $ | 64,289 | |||||||
| Charge-offs on real estate loans: | |||||||||||
| Residential Core | |||||||||||
| Ohio | 114 | 25 | |||||||||
| Other | — | 1 | |||||||||
| Total Residential Core | 114 | 26 | |||||||||
| Total Residential Home Today | 173 | 12 | |||||||||
| Home equity loans and lines of credit | |||||||||||
| Ohio | 62 | 144 | |||||||||
| Florida | 32 | 3 | |||||||||
| California | 13 | 14 | |||||||||
| Other | 20 | 76 | |||||||||
| Total Home equity loans and lines of credit | 127 | 237 | |||||||||
| Total charge-offs | 414 | 275 | |||||||||
| Recoveries on real estate loans: | |||||||||||
| Residential Core | 314 | 481 | |||||||||
| Residential Home Today | 691 | 588 | |||||||||
| Home equity loans and lines of credit | 1,080 | 1,164 | |||||||||
| Total recoveries | 2,085 | 2,233 | |||||||||
| Net recoveries | 1,671 | 1,958 | |||||||||
| Release of allowance for credit losses on loans | (88) | (2,671) | |||||||||
| Allowance balance for loans (end of the period) | $ | 74,477 | $ | 63,576 | |||||||
| Allowance balance for credit losses on unfunded commitments (beginning of the period) | $ | 27,021 | $ | 24,970 | |||||||
| Provision (release) for credit losses on unfunded loan commitments | (912) | 671 | |||||||||
| Allowance balance for unfunded loan commitments (end of the period) | 26,110 | 25,641 | |||||||||
| Allowance balance for all credit losses (end of the period) | $ | 100,587 | $ | 89,217 | |||||||
| Ratios: | |||||||||||
| Allowance for credit losses on loans to non-accrual loans at end of the period | 218.22 | % | 146.46 | % | |||||||
| Allowance for credit losses on loans to the total amortized cost in loans at end of the period | 0.51 | % | 0.50 | % | |||||||
The following table sets forth additional information with respect to net recoveries (charge-offs) by category for the periods indicated.
41
| For the Three Months Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Net recoveries (charge-off) to average loans outstanding (annualized) | |||||||||||
| Real estate loans: | |||||||||||
| Residential Core | 0.01 | % | 0.01 | % | |||||||
| Residential Home Today | 0.01 | % | 0.02 | % | |||||||
| Home Equity loans and lines of credit | 0.03 | % | 0.03 | % | |||||||
| Total net recoveries (charge-off) to average loans outstanding (annualized) | 0.05 | % | 0.06 | % | |||||||
Net recoveries continued, totaling $1.7 million during the three months ended December 31, 2022 compared to $2.0 million during the three months ended December 31, 2021. We reported net recoveries in each quarter for the last four years, primarily due to improvements in the values of collateral 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.
Gross charge-offs remained at relatively low levels, during the three months ended December 31, 2022 and the three months ended December 31, 2021. Delinquent loans continue to be evaluated for potential losses, and provisions are recorded for the estimate of potential losses of those loans. Subject to changes in the economic environment, we expect a moderate level of charge-offs as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.
During the three months ended December 31, 2022, the total allowance for credit losses increased $0.7 million, to $100.6 million from $99.9 million at September 30, 2022, as we recorded a $1.0 million release for the allowance for credit losses and net recoveries of $1.7 million. Refer to the "Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for more information.
Changes during the three months ended December 31, 2022 in the allowance for credit loss balances of loans are described below. The allowance for credit losses on off-balance sheet exposures decreased by $0.9 million primarily related to a decrease commitments to originate, partially offset by a slight increase in undrawn equity 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 1.3%, or $148.7 million, and its total allowance increased 1.9% or $1.0 million as of December 31, 2022 as compared to September 30, 2022. Total delinquencies increased 19.5% to $16.1 million at December 31, 2022 from $13.5 million at September 30, 2022. Delinquencies greater than 90 days decreased by 18.9% to $7.5 million at December 31, 2022 from $9.3 million at September 30, 2022. Net recoveries were $0.2 million for the quarter ended December 31, 2022 and there were net recoveries of $0.5 million for the quarter ended December 31, 2021. With some deterioration in the economic forecasts and new growth in the portfolio this quarter, the allowance increased.
•Residential Home Today – The amortized cost of this segment decreased 3.5%, or $1.9 million, as we are no longer originating loans under the Home Today program. The expected net recovery position for this segment was $1.0 million at December 31, 2022 and at September 30, 2022. Total delinquencies decreased 0.1% to $3.0 million at December 31, 2022 from $3.0 million at September 30, 2022. Delinquencies greater than 90 days increased 36.9% to $1.2 million from $0.9 million at September 30, 2022. There were net recoveries of $0.5 million recorded during the current quarter and net recoveries of $0.6 million during the quarter ended December 31, 2021. 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 2.5%, or $66.3 million, to $2.73 billion at December 31, 2022 from $2.67 billion at September 30, 2022. The total allowance for this segment increased by 2.8% to $20.6 million from $20.0 million at September 30, 2022. Total delinquencies for this portfolio segment increased 42.6% to $6.7 million at December 31, 2022 as compared to $4.7 million at September 30, 2022. Delinquencies greater than 90 days increased 27.1% to $3.0 million at December 31, 2022 from $2.3 million at September 30, 2022. Net recoveries for this loan segment during the current quarter were $1.0 million and $0.9 million
42
during the quarter ended December 31, 2021. The increase in allowance this quarter is primarily due to new portfolio growth, deteriorating economic forecasts, and an increase in early stage delinquencies.
The following tables set forth the allowance for credit losses 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, 2022 | ||||||||||||||||||||
| Amount | Percent of Allowance to Total Allowance | Percent of Loans in Category to Total Loans | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Residential Core | $ | 54,498 | 73.2% | 80.3% | ||||||||||||||||
| Residential Home Today | (985) | (1.3) | 0.4 | |||||||||||||||||
| Home equity loans and lines of credit | 20,583 | 27.6 | 18.5 | |||||||||||||||||
| Construction | 381 | 0.5 | 0.8 | |||||||||||||||||
| Allowance for credit losses on loans | $ | 74,477 | 100.0% | 100.0% | ||||||||||||||||
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Amount | Percent of Allowance to Total Allowance | Percent of Loans in Category to Total Loans | Amount | Percent of Allowance to Total Allowance | Percent of Loans in Category to Total Loans | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||||||||||||||||||||
| Residential Core | $ | 53,506 | 73.4% | 80.4% | $ | 44,472 | 70.0% | 80.9% | ||||||||||||||||||||||||||||||
| Residential Home Today | (997) | (1.4) | 0.4 | (94) | (0.2) | 0.5 | ||||||||||||||||||||||||||||||||
| Home equity loans and lines of credit | 20,032 | 27.5 | 18.4 | 18,852 | 29.7 | 17.9 | ||||||||||||||||||||||||||||||||
| Construction | 354 | 0.5 | 0.8 | 346 | 0.5 | 0.7 | ||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans | $ | 72,895 | 100.0% | 100.0% | $ | 63,576 | 100.0% | 99.9% | ||||||||||||||||||||||||||||||
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Loan Portfolio Composition
The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location, at the indicated dates, excluding loans held for sale. The majority of our Home Today loan portfolio is secured by properties located in Ohio and the balances of other loans are immaterial. Therefore, neither was segregated by geographic location.
| December 31, 2022 | September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||||||||
| Residential Core | |||||||||||||||||||||||||||||||||||
| Ohio | $ | 6,557,940 | $ | 6,432,780 | $ | 5,680,033 | |||||||||||||||||||||||||||||
| Florida | 2,139,870 | 2,120,892 | 1,891,467 | ||||||||||||||||||||||||||||||||
| Other | 2,989,930 | 2,986,187 | 2,716,235 | ||||||||||||||||||||||||||||||||
| Total Residential Core | 11,687,740 | 80.3 | % | 11,539,859 | 80.4 | % | 10,287,735 | 80.9 | % | ||||||||||||||||||||||||||
| Total Residential Home Today | 51,404 | 0.4 | 53,255 | 0.4 | 60,885 | 0.5 | |||||||||||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||||||||||||||
| Ohio | 713,668 | 706,641 | 635,495 | ||||||||||||||||||||||||||||||||
| Florida | 570,863 | 537,724 | 454,210 | ||||||||||||||||||||||||||||||||
| California | 450,964 | 432,540 | 350,758 | ||||||||||||||||||||||||||||||||
| Other | 964,018 | 956,973 | 837,298 | ||||||||||||||||||||||||||||||||
| Total Home equity loans and lines of credit | 2,699,513 | 18.5 | 2,633,878 | 18.4 | 2,277,761 | 17.9 | |||||||||||||||||||||||||||||
| Construction loans | |||||||||||||||||||||||||||||||||||
| Ohio | 102,230 | 111,098 | 81,505 | ||||||||||||||||||||||||||||||||
| Florida | 11,585 | 10,661 | 7,656 | ||||||||||||||||||||||||||||||||
| Other | — | — | 1,535 | ||||||||||||||||||||||||||||||||
| Total Construction | 113,815 | 0.8 | 121,759 | 0.8 | 90,696 | 0.7 | |||||||||||||||||||||||||||||
| Other loans | 3,481 | — | 3,263 | — | 2,705 | — | |||||||||||||||||||||||||||||
| Total loans receivable | 14,555,953 | 100.0 | % | 14,352,014 | 100.0 | % | 12,719,782 | 100.0 | % | ||||||||||||||||||||||||||
| Deferred loan expenses, net | 51,768 | 50,221 | 45,954 | ||||||||||||||||||||||||||||||||
| Loans in process | (59,749) | (72,273) | (57,120) | ||||||||||||||||||||||||||||||||
| Allowance for credit losses on loans | (74,477) | (72,895) | (63,576) | ||||||||||||||||||||||||||||||||
| Total loans receivable, net | $ | 14,473,495 | $ | 14,257,067 | $ | 12,645,040 | |||||||||||||||||||||||||||||
44
The following table provides an analysis of our residential mortgage loans disaggregated by refreshed FICO score, year of origination and portfolio at December 31, 2022. 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 Loans Amortized Cost Basis | Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| By fiscal year of origination | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | |||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||
| Residential Core | |||||||||||||||||||||||||||||
| <680 | $ | 4,416 | $ | 99,371 | $ | 65,622 | $ | 45,926 | $ | 24,890 | $ | 181,165 | $ | — | $ | — | $ | 421,390 | |||||||||||
| 680-740 | 100,994 | 552,046 | 263,213 | 178,005 | 79,862 | 442,414 | — | — | 1,616,534 | ||||||||||||||||||||
| 741+ | 357,986 | 2,601,984 | 1,840,568 | 1,210,525 | 501,361 | 2,970,791 | — | — | 9,483,215 | ||||||||||||||||||||
Unknown (1) | — | 21,713 | 35,816 | 19,845 | 5,846 | 103,659 | — | — | 186,879 | ||||||||||||||||||||
| Total Residential Core | 463,396 | 3,275,114 | 2,205,219 | 1,454,301 | 611,959 | 3,698,029 | — | — | 11,708,018 | ||||||||||||||||||||
Residential Home Today (2) | |||||||||||||||||||||||||||||
| <680 | — | — | — | — | — | 27,584 | — | — | 27,584 | ||||||||||||||||||||
| 680-740 | — | — | — | — | — | 10,370 | — | — | 10,370 | ||||||||||||||||||||
| 741+ | — | — | — | — | — | 9,966 | — | — | 9,966 | ||||||||||||||||||||
Unknown (1) | — | — | — | — | — | 3,029 | — | — | 3,029 | ||||||||||||||||||||
| Total Residential Home Today | — | — | — | — | — | 50,949 | — | — | 50,949 | ||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||||||||
| <680 | 331 | 2,237 | 929 | 390 | 560 | 1,149 | 88,672 | 14,344 | 108,612 | ||||||||||||||||||||
| 680-740 | 11,939 | 11,068 | 4,048 | 943 | 1,003 | 2,774 | 419,843 | 20,802 | 472,420 | ||||||||||||||||||||
| 741+ | 29,135 | 71,837 | 23,910 | 7,408 | 5,793 | 12,647 | 1,926,527 | 46,647 | 2,123,904 | ||||||||||||||||||||
Unknown (1) | 71 | 209 | 73 | 63 | 58 | 806 | 19,129 | 7,096 | 27,505 | ||||||||||||||||||||
| Total Home equity loans and lines of credit | 41,476 | 85,351 | 28,960 | 8,804 | 7,414 | 17,376 | 2,454,171 | 88,889 | 2,732,441 | ||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||
| <680 | — | 1,421 | — | — | — | — | — | — | 1,421 | ||||||||||||||||||||
| 680-740 | 1,697 | 6,012 | — | — | — | — | — | — | 7,709 | ||||||||||||||||||||
| 741+ | 2,911 | 37,018 | 4,024 | — | — | — | — | — | 43,953 | ||||||||||||||||||||
| Total Construction | 4,608 | 44,451 | 4,024 | — | — | — | — | — | 53,083 | ||||||||||||||||||||
| Total net real estate loans | $ | 509,480 | $ | 3,404,916 | $ | 2,238,203 | $ | 1,463,105 | $ | 619,373 | $ | 3,766,354 | $ | 2,454,171 | $ | 88,889 | $ | 14,544,491 | |||||||||||
| (1) Data necessary for stratification is not readily available. | |||||||||||||||||||||||||||||
| (2) No new originations of Home Today loans since fiscal 2016. | |||||||||||||||||||||||||||||
45
The following table provides an analysis of our residential mortgage loans by origination LTV, origination year and portfolio at December 31, 2022. 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 Loans Amortized Cost Basis | Revolving Loans Converted to Term | ||||||||||||||||||||||||||||
| By fiscal year of origination | |||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | |||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||
| Residential Core | |||||||||||||||||||||||||||||
| <80% | $ | 188,424 | $ | 1,961,299 | $ | 1,529,146 | $ | 785,149 | $ | 280,113 | $ | 2,117,275 | $ | — | $ | — | $ | 6,861,406 | |||||||||||
| 80-89.9% | 223,801 | 1,079,199 | 626,708 | 608,719 | 299,544 | 1,460,213 | — | — | 4,298,184 | ||||||||||||||||||||
| 90-100% | 42,088 | 220,081 | 47,993 | 60,230 | 32,039 | 118,138 | — | — | 520,569 | ||||||||||||||||||||
| >100% | — | — | — | — | — | 767 | — | — | 767 | ||||||||||||||||||||
Unknown (1) | 9,083 | 14,535 | 1,372 | 203 | 263 | 1,636 | — | — | 27,092 | ||||||||||||||||||||
| Total Residential Core | 463,396 | 3,275,114 | 2,205,219 | 1,454,301 | 611,959 | 3,698,029 | — | — | 11,708,018 | ||||||||||||||||||||
Residential Home Today (2) | |||||||||||||||||||||||||||||
| <80% | — | — | — | — | — | 10,259 | — | — | 10,259 | ||||||||||||||||||||
| 80-89.9% | — | — | — | — | — | 16,388 | — | — | 16,388 | ||||||||||||||||||||
| 90-100% | — | — | — | — | — | 24,302 | — | — | 24,302 | ||||||||||||||||||||
| Total Residential Home Today | — | — | — | — | — | 50,949 | — | — | 50,949 | ||||||||||||||||||||
| Home equity loans and lines of credit | |||||||||||||||||||||||||||||
| <80% | 40,425 | 82,088 | 28,140 | 8,764 | 7,090 | 13,464 | 2,281,019 | 58,310 | 2,519,300 | ||||||||||||||||||||
| 80-89.9% | 751 | 3,229 | 820 | 40 | 270 | 1,535 | 172,023 | 27,831 | 206,499 | ||||||||||||||||||||
| 90-100% | — | — | — | — | — | 896 | 489 | 331 | 1,716 | ||||||||||||||||||||
| >100% | — | 34 | — | — | 54 | 1,474 | 415 | 418 | 2,395 | ||||||||||||||||||||
Unknown (1) | 300 | — | — | — | — | 7 | 225 | 1,999 | 2,531 | ||||||||||||||||||||
| Total Home equity loans and lines of credit | 41,476 | 85,351 | 28,960 | 8,804 | 7,414 | 17,376 | 2,454,171 | 88,889 | 2,732,441 | ||||||||||||||||||||
| Construction | |||||||||||||||||||||||||||||
| <80% | 3,086 | 14,484 | 3,033 | — | — | — | — | — | 20,603 | ||||||||||||||||||||
| 80-89.9% | 1,522 | 29,967 | 991 | — | — | — | — | — | 32,480 | ||||||||||||||||||||
| Total Construction | 4,608 | 44,451 | 4,024 | — | — | — | — | — | 53,083 | ||||||||||||||||||||
| Total net real estate loans | $ | 509,480 | $ | 3,404,916 | $ | 2,238,203 | $ | 1,463,105 | $ | 619,373 | $ | 3,766,354 | $ | 2,454,171 | $ | 88,889 | $ | 14,544,491 | |||||||||||
| (1) Market data necessary for stratification is not readily available. | |||||||||||||||||||||||||||||
| (2) No new originations of Home Today loans since fiscal 2016. | |||||||||||||||||||||||||||||
At December 31, 2022, the unpaid principal balance of the home equity loans and lines of credit portfolio consisted of $276.6 million in home equity loans (including $89.1 million of home equity lines of credit, which are in repayment and no longer eligible to be drawn upon, and $5.2 million in bridge loans) and $2.42 billion in home equity lines of credit.
46
The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of home equity loans, home equity lines of credit and bridge loans as of December 31, 2022. Home equity lines of credit in the draw period are reported according to geographic distribution.
| Credit Exposure | Principal Balance | Percent Delinquent 90 Days or More | Mean CLTV Percent at Origination (2) | Current Mean CLTV Percent (3) | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Home equity lines of credit in draw period (by state) | ||||||||||||||||||||||||||||||||
| Ohio | $ | 2,042,155 | $ | 619,449 | 0.03 | % | 60 | % | 43 | % | ||||||||||||||||||||||
| Florida | 1,200,378 | 493,714 | 0.03 | % | 55 | % | 40 | % | ||||||||||||||||||||||||
| California | 1,046,911 | 397,684 | 0.02 | % | 60 | % | 49 | % | ||||||||||||||||||||||||
| Other (1) | 2,361,745 | 912,077 | 0.08 | % | 63 | % | 49 | % | ||||||||||||||||||||||||
| Total home equity lines of credit in draw period | 6,651,189 | 2,422,924 | 0.05 | % | 60 | % | 45 | % | ||||||||||||||||||||||||
| Home equity lines in repayment, home equity loans and bridge loans | 276,589 | 276,589 | 0.67 | % | 59 | % | 38 | % | ||||||||||||||||||||||||
| Total | $ | 6,927,778 | $ | 2,699,513 | 0.11 | % | 60 | % | 45 | % | ||||||||||||||||||||||
_________________
(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, 2022. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
At December 31, 2022, 35.7% of the home equity lending portfolio was either in a first lien position (19.4%), in a subordinate (second) lien position behind a first lien that we held (13.7%) or behind a first lien that was held by a loan that we originated, sold and now serviced for others (2.6%). At December 31, 2022, 13.7% of the home equity line of credit portfolio in the draw period were making only the minimum payment on the outstanding line balance. Minimum payments include both a principal and interest component.
47
The following table sets forth by calendar year of origination the credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the estimated current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of December 31, 2022. Home equity lines of credit in the draw period are included in the year originated:
| Credit Exposure | Principal Balance | Percent Delinquent 90 Days or More | Mean CLTV Percent at Origination (1) | Current Mean CLTV Percent (2) | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Home equity lines of credit in draw period | ||||||||||||||||||||||||||||||||
| 2014 and Prior | $ | 66,819 | $ | 13,271 | — | % | 58 | % | 29 | % | ||||||||||||||||||||||
| 2015 | 96,218 | 22,607 | — | % | 57 | % | 30 | % | ||||||||||||||||||||||||
| 2016 | 251,805 | 72,031 | — | % | 59 | % | 33 | % | ||||||||||||||||||||||||
| 2017 | 522,704 | 171,704 | 0.16 | % | 58 | % | 34 | % | ||||||||||||||||||||||||
| 2018 | 652,914 | 245,844 | 0.20 | % | 58 | % | 37 | % | ||||||||||||||||||||||||
| 2019 | 866,849 | 369,624 | 0.05 | % | 61 | % | 41 | % | ||||||||||||||||||||||||
| 2020 | 806,237 | 288,943 | 0.05 | % | 58 | % | 41 | % | ||||||||||||||||||||||||
| 2021 | 1,590,622 | 627,388 | — | % | 62 | % | 51 | % | ||||||||||||||||||||||||
| 2022 | 1,797,021 | 611,512 | — | % | 61 | % | 59 | % | ||||||||||||||||||||||||
| Total home equity lines of credit in draw period | 6,651,189 | 2,422,924 | 0.05 | % | 60 | % | 45 | % | ||||||||||||||||||||||||
| Home equity lines in repayment, home equity loans and bridge loans | 276,589 | 276,589 | 0.67 | % | 59 | % | 38 | % | ||||||||||||||||||||||||
| Total | $ | 6,927,778 | $ | 2,699,513 | 0.11 | % | 60 | % | 45 | % | ||||||||||||||||||||||
________________
(1)Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(2)Current Mean CLTV is based on best available first mortgage and property values as of December 31, 2022. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
The following table sets forth, by fiscal year of the draw period expiration, the principal balance of home equity lines of credit in the draw period as of December 31, 2022, segregated by the estimated current combined LTV range. Home equity lines of credit with an end of draw date in the current fiscal year include accounts with draw privileges that have been temporarily suspended.
| Estimated Current CLTV Category | |||||||||||||||||||||||||||||||||||
| Home equity lines of credit in draw period (by end of draw fiscal year): | < 80% | 80 - 89.9% | 90 - 100% | >100% | Unknown (1) | Total | |||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| 2023 | $ | 49,327 | $ | 128 | $ | — | $ | — | $ | — | $ | 49,455 | |||||||||||||||||||||||
| 2024 | 9,112 | 18 | — | — | — | 9,130 | |||||||||||||||||||||||||||||
| 2025 | 22,576 | — | — | — | 12 | 22,588 | |||||||||||||||||||||||||||||
| 2026 | 38,485 | — | — | — | — | 38,485 | |||||||||||||||||||||||||||||
| 2027 | 144,341 | — | — | — | 121 | 144,462 | |||||||||||||||||||||||||||||
| 2028 | 237,452 | — | — | — | — | 237,452 | |||||||||||||||||||||||||||||
| Post 2028 | 1,910,916 | 8,943 | 19 | 113 | 1,361 | 1,921,352 | |||||||||||||||||||||||||||||
| Total | $ | 2,412,209 | $ | 9,089 | $ | 19 | $ | 113 | $ | 1,494 | $ | 2,422,924 | |||||||||||||||||||||||
_________________
(1)Market data necessary for stratification is not readily available.
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Delinquent Loans
The following tables set forth the amortized cost in loan delinquencies by type, segregated by geographic location and duration of delinquency as of the dates indicated. The majority of our Home Today loan portfolio is secured by properties located in Ohio and there are no other loans with delinquent balances. There were no delinquencies in the construction loan portfolio for the dates presented.
| Loans Delinquent for | ||||||||||||||||||||
| 30-89 Days | 90 Days or More | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Residential Core | ||||||||||||||||||||
| Ohio | $ | 3,353 | $ | 3,798 | $ | 7,151 | ||||||||||||||
| Florida | 4,297 | 727 | 5,024 | |||||||||||||||||
| Other | 950 | 3,000 | 3,950 | |||||||||||||||||
| Total Residential Core | 8,600 | 7,525 | 16,125 | |||||||||||||||||
| Residential Home Today | 1,790 | 1,179 | 2,969 | |||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||
| Ohio | 943 | 698 | 1,641 | |||||||||||||||||
| Florida | 796 | 844 | 1,640 | |||||||||||||||||
| California | 1,052 | 589 | 1,641 | |||||||||||||||||
| Other | 984 | 820 | 1,804 | |||||||||||||||||
| Total Home equity loans and lines of credit | 3,775 | 2,951 | 6,726 | |||||||||||||||||
| Total | $ | 14,165 | $ | 11,655 | $ | 25,820 | ||||||||||||||
| Loans Delinquent for | ||||||||||||||||||||
| 30-89 Days | 90 Days or More | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| September 30, 2022 | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Residential Core | ||||||||||||||||||||
| Ohio | $ | 2,862 | $ | 4,332 | $ | 7,194 | ||||||||||||||
| Florida | 1,009 | 1,066 | 2,075 | |||||||||||||||||
| Other | 345 | 3,883 | 4,228 | |||||||||||||||||
| Total Residential Core | 4,216 | 9,281 | 13,497 | |||||||||||||||||
| Residential Home Today | 2,111 | 861 | 2,972 | |||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||
| Ohio | 630 | 679 | 1,309 | |||||||||||||||||
| Florida | 438 | 694 | 1,132 | |||||||||||||||||
| California | 427 | 444 | 871 | |||||||||||||||||
| Other | 900 | 504 | 1,404 | |||||||||||||||||
| Total Home equity loans and lines of credit | 2,395 | 2,321 | 4,716 | |||||||||||||||||
| Total | $ | 8,722 | $ | 12,463 | $ | 21,185 | ||||||||||||||
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| Loans Delinquent for | ||||||||||||||||||||
| 30-89 Days | 90 Days or More | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Residential Core | ||||||||||||||||||||
| Ohio | $ | 1,790 | $ | 7,609 | $ | 9,399 | ||||||||||||||
| Florida | 1,263 | 1,002 | 2,265 | |||||||||||||||||
| Other | 954 | 3,399 | 4,353 | |||||||||||||||||
| Total Residential Core | 4,007 | 12,010 | 16,017 | |||||||||||||||||
| Residential Home Today | 1,866 | 2,351 | 4,217 | |||||||||||||||||
| Home equity loans and lines of credit | ||||||||||||||||||||
| Ohio | 679 | 1,157 | 1,836 | |||||||||||||||||
| Florida | 543 | 544 | 1,087 | |||||||||||||||||
| California | 95 | 658 | 753 | |||||||||||||||||
| Other | 550 | 561 | 1,111 | |||||||||||||||||
| Total Home equity loans and lines of credit | 1,867 | 2,920 | 4,787 | |||||||||||||||||
| Total | $ | 7,740 | $ | 17,281 | $ | 25,021 | ||||||||||||||
Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.08% of total net loans at December 31, 2022, 0.09% at September 30, 2022, and 0.14% at December 31, 2021. Total loans delinquent (i.e. delinquent 30 days or more) were 0.18% of total net loans at December 31, 2022, 0.15% at September 30, 2022 and 0.20% at December 31, 2021.
Although delinquencies remain at or near historic lows, recent economic trends have led to increased early stage delinquencies in the residential core and home equity loans and lines of credit portfolios. The result of Hurricane Ian on borrowers in Florida is a contributing factor to the increase in the residential core portfolio. Through disaster forbearance plans, we expect the early stage delinquency trend will be resolved by borrowers paying in full, extending their term, or through another loan restructuring. Recent increases in interest rates have led to increased delinquencies in the home equity loans and lines of credit portfolio. Interest rates on home equity lines of credit are tied to the prime rate of interest which has increased in recent months, resulting in higher and less affordable monthly payments for some borrowers.
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Non-Performing Assets and Troubled Debt Restructurings
The following table sets forth the amortized costs and categories of our non-performing assets and TDRs as of the dates indicated. There were no construction loans reported as non-accrual for the dates presented.
| December 31, 2022 | September 30, 2022 | December 31, 2021 | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Non-accrual loans: | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Residential Core | $ | 21,058 | $ | 22,644 | $ | 26,348 | ||||||||||||||
| Residential Home Today | 5,783 | 6,037 | 8,049 | |||||||||||||||||
| Home equity loans and lines of credit | 7,289 | 6,925 | 9,010 | |||||||||||||||||
| Total non-accrual loans (1)(2) | 34,130 | 35,606 | 43,407 | |||||||||||||||||
| Real estate owned | 1,378 | 1,191 | 131 | |||||||||||||||||
| Total non-performing assets | $ | 35,508 | $ | 36,797 | $ | 43,538 | ||||||||||||||
| Ratios: | ||||||||||||||||||||
| Total non-accrual loans to total loans | 0.23 | % | 0.25 | % | 0.34 | % | ||||||||||||||
| Total non-accrual loans to total assets | 0.21 | % | 0.23 | % | 0.31 | % | ||||||||||||||
| Total non-performing assets to total assets | 0.22 | % | 0.23 | % | 0.31 | % | ||||||||||||||
| TDRs: (not included in non-accrual loans above) | ||||||||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Residential Core | $ | 43,001 | $ | 43,101 | $ | 45,493 | ||||||||||||||
| Residential Home Today | 18,080 | 18,380 | 20,079 | |||||||||||||||||
| Home equity loans and lines of credit | 21,785 | 22,060 | 24,243 | |||||||||||||||||
| Total | $ | 82,866 | $ | 83,541 | $ | 89,815 | ||||||||||||||
_________________
(1)At December 31, 2022, September 30, 2022, and December 31, 2021, the totals include $21.3 million, $21.9 million, and $24.2 million, respectively, in TDRs that 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 have not been reaffirmed or dismissed.
(2)At December 31, 2022, September 30, 2022, and December 31, 2021, the totals include $3.7 million, $3.6 million and $7.1 million in TDRs that are 90 days or more past due, respectively.
Non-accrual loans continue to decline primarily due to a decrease in the population of TDRs, in general, and those moved to accruing after a sufficient period of demonstrated payment performance and, to a lesser extent, a decrease in loans 90 days or more past due. Since many of the accounts exiting the non-accrual population are TDRs paying as agreed or paid in full and closed, we do not expect any material impact to interest income or the allowance once the non-accrual population stabilizes.
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.
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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 decrease in other accruing collateral-dependent loans at December 31, 2022 from December 31, 2021 was primarily related to forbearance plans that had been extended past 12 months that are now performing with no charge-off and are no longer collateral-dependent.
| December 31, 2022 | September 30, 2022 | December 31, 2021 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Non-Accrual Loans | $ | 34,130 | $ | 35,606 | 43,407 | ||||||||||||
| Accruing Collateral-Dependent TDRs | 7,134 | 7,279 | 8,628 | ||||||||||||||
| Other Accruing Collateral-Dependent Loans | 6,478 | 6,426 | 32,269 | ||||||||||||||
| Less: Loans Collectively Evaluated | (2,286) | (2,190) | (4,099) | ||||||||||||||
| Total Collateral-Dependent loans | $ | 45,456 | $ | 47,121 | $ | 80,205 | |||||||||||
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 the original agreement; principal forgiveness; capitalization of delinquent payments in special situations; or some combination of the aforementioned. 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 CONSOLIDATED FINANCIAL STATEMENTS. We had $107.9 million of TDRs (accrual and non-accrual) recorded at December 31, 2022. This was a decrease in the amortized cost of TDRs of $1.1 million and $13.2 million from September 30, 2022, and December 31, 2021, respectively.
52
The following table sets forth the amortized cost in accrual and non-accrual TDRs, by the types of concessions granted, as of December 31, 2022. Initial concessions granted by loans restructured as TDRs can include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also can occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company.
| Initial Restructurings | Multiple Restructurings | Bankruptcy | Total | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Accrual | ||||||||||||||||||||||||||
| Residential Core | $ | 26,770 | $ | 11,756 | $ | 4,475 | $ | 43,001 | ||||||||||||||||||
| Residential Home Today | 9,329 | 7,896 | 855 | 18,080 | ||||||||||||||||||||||
| Home equity loans and lines of credit | 20,508 | 897 | 380 | 21,785 | ||||||||||||||||||||||
| Total | $ | 56,607 | $ | 20,549 | $ | 5,710 | $ | 82,866 | ||||||||||||||||||
| Non-Accrual, Performing | ||||||||||||||||||||||||||
| Residential Core | $ | 2,652 | $ | 4,831 | $ | 5,521 | $ | 13,004 | ||||||||||||||||||
| Residential Home Today | 437 | 2,894 | 1,016 | 4,347 | ||||||||||||||||||||||
| Home equity loans and lines of credit | 1,576 | 1,578 | 782 | 3,936 | ||||||||||||||||||||||
| Total | $ | 4,665 | $ | 9,303 | $ | 7,319 | $ | 21,287 | ||||||||||||||||||
| Non-Accrual, Non-Performing | ||||||||||||||||||||||||||
| Residential Core | $ | 735 | $ | 798 | $ | 877 | $ | 2,410 | ||||||||||||||||||
| Residential Home Today | 294 | 387 | 13 | 694 | ||||||||||||||||||||||
| Home equity loans and lines of credit | 406 | 201 | — | 607 | ||||||||||||||||||||||
| Total | $ | 1,435 | $ | 1,386 | $ | 890 | $ | 3,711 | ||||||||||||||||||
| Total TDRs | ||||||||||||||||||||||||||
| Residential Core | $ | 30,157 | $ | 17,385 | $ | 10,873 | $ | 58,415 | ||||||||||||||||||
| Residential Home Today | 10,060 | 11,177 | 1,884 | 23,121 | ||||||||||||||||||||||
| Home equity loans and lines of credit | 22,490 | 2,676 | 1,162 | 26,328 | ||||||||||||||||||||||
| Total | $ | 62,707 | $ | 31,238 | $ | 13,919 | $ | 107,864 | ||||||||||||||||||
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 it has not been current for at least six consecutive months since its restructuring, has a partial charge-off, or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status, where all borrowers have filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring.
Comparison of Financial Condition at December 31, 2022 and September 30, 2022
Total assets increased $339.1 million, or 2.1%, to $16.13 billion at December 31, 2022 from $15.79 billion at September 30, 2022. This increase was mainly the result of new loan origination levels exceeding the total of loan sales and principal repayments.
Cash and cash equivalents increased $74.0 million, or 20%, to $443.6 million at December 31, 2022 from $369.6 million at September 30, 2022. Cash is managed to maintain the level of liquidity described later in the Liquidity and Capital Resources section. This increase is the result of net cash inflows from successful deposit gathering that is retained for subsequent investment in loan products and investment securities.
Investment securities, all of which are classified as available for sale, increased $15.2 million to $473.1 million at December 31, 2022 from $457.9 million at September 30, 2022. Investment securities increased as $40.3 million in purchases exceeded the combined effect of $22.0 million in principal repayments, a $2.7 million increase in unrealized losses and $0.4 million of premium amortization that occurred in the mortgage-backed securities portfolio during the three months ended December 31, 2022. There were no sales of investment securities during the three months ended December 31, 2022.
53
Loans held for investment, net of deferred loan fees and allowance for credit losses, increased $216.4 million, or 1.5%, to $14.47 billion at December 31, 2022 from $14.26 billion at September 30, 2022. This increase was based on a combination of a $146.0 million, or 1.3%, increase in residential mortgage loans to $11.74 billion at December 31, 2022 from $11.59 billion at September 30, 2022. In addition there was a $65.6 million increase in the balance of home equity loans and lines of credit during the three months ended December 31, 2022, as new originations and additional draws on existing accounts exceeded loan sales and repayments. During the three months ended December 31, 2022, $162.7 million of three- and five-year “Smart Rate” loans were originated while $322.8 million of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated. Between September 30, 2022 and December 31, 2022, the total fixed-rate portion of the first mortgage loan portfolio increased $111.0 million and was comprised of an increase of $177.4 million in the balance of fixed-rate loans with original terms greater than 10 years, as well as a decrease of $66.4 million in the balance of fixed-rate loans with original terms of 10 years or less. During the three months ended December 31, 2022, $19.2 million were sold or committed to sell, which consisted of $4.5 million of agency-compliant Home Ready loans and $14.7 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 $362.6 million for the three months ended December 31, 2022 compared to $499.7 million for the three months ended December 31, 2021. At December 31, 2022, pending commitments to originate new home equity lines of credit were $62.5 million and equity loans and bridge loans were $50.2 million. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.
The allowance for credit losses was $100.6 million, or 0.69% of total loans receivable, at December 31, 2022, including a $26.1 million liability for unfunded commitments. The allowance for credit losses was $99.9 million, or 0.70% of total loans receivable, at September 30, 2022, including a $27.0 million liability for unfunded commitments. During the three months ended December 31, 2022, a $1.0 million release to the allowance for credit losses was recognized. As a result of loan recoveries exceeding charge-offs, the Company recorded $1.7 million of net loan recoveries for the three months ended December 31, 2022, compared to $2.0 million of net loan recoveries for the three months ended December 31, 2021. Actual loan charge-offs and delinquencies remained low at December 31, 2022. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for additional discussion.
The amount of FHLB stock owned increased $10.1 million or 4.8% to $222.4 million at December 31, 2022 from $212.3 million at September 30, 2022. FHLB stock ownership requirements dictate the amount of stock owned at any given time.
Total bank owned life insurance contracts increased $2.2 million, to $306.2 million at December 31, 2022, from $304.0 million at September 30, 2022, primarily due to changes in cash surrender value.
Other assets, including prepaid expenses, increased $12.4 million to $107.8 million at December 31, 2022 from $95.4 million at September 30, 2022. The increase included a $13.1 million increase in the margin requirement on active swap contracts, a $3.7 million increase in interest receivable from swaps, offset by a $2.9 million decrease in the receivable due from the ESOP and a $1.2 million decrease in prepaid taxes.
Deposits increased $93.3 million, or 1.0%, to $9.01 billion at December 31, 2022 from $8.92 billion at September 30, 2022. The increase in deposits resulted primarily from a $301.8 million increase in CDs, inclusive of brokered CDs, as the current market rates have increased customers' desires to maintain longer-term CDs, offset by a $62.7 million decrease in savings accounts, a $118.2 million decrease in money market accounts, and a $28.7 million decrease in checking accounts. The balance of brokered CDs included in total deposits at December 31, 2022 increased by $74.9 million to $650.1 million, during the three months ended December 31, 2022, compared to a balance of $575.2 million at September 30, 2022.
Borrowed funds increased $194.1 million, or 4.0%, to $4.99 billion at December 31, 2022 from $4.79 billion at September 30, 2022. The increase was primarily used to fund loan growth. The total balance of borrowed funds at September 30, 2022, mainly from the FHLB, included $1.29 billion of overnight advances, $1.59 billion of term advances with a weighted average maturity of approximately 2.8 years, $1.95 billion of short-term advances, aligned with interest rate swap contracts, with a remaining weighted average effective maturity of approximately 3.5 years, and $150.0 million in fed fund purchases. 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 decreased by $8.2 million to $109.1 million at December 31, 2022 from $117.3 million at September 30, 2022. 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.
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Accrued expenses and other liabilities increased by $56.1 million to $140.2 million at December 31, 2022 from $84.1 million at September 30, 2022. The increase is primarily due to a $44.3 million increase in a real estate tax liability which is driven by the timing of the payment.
Total shareholders’ equity increased $5.3 million, or less than 1%, to $1.85 billion at December 31, 2022 from $1.84 billion at September 30, 2022. Activity reflects $22.2 million of net income in the current year reduced by quarterly dividends of $14.5 million, and $4.3 million of repurchases of outstanding common stock. Other changes include $0.1 million of negative change in accumulated other comprehensive income, primarily related to changes in market values and maturities of swap contracts, and a $2.0 million net positive impact related to activity in the Company's stock compensation and employee stock ownership plans. During the three months ended December 31, 2022, a total of 315,000 shares of our common stock were repurchased at an average cost of $13.70 per share. The Company's eighth stock repurchase program allows for a total of 10,000,000 shares to be repurchased, with 5,238,820 shares remaining to be repurchased at December 31, 2022. As a result of a mutual member vote, Third Federal Savings and Loan Association of Cleveland, MHC (the "MHC"), the mutual holding company that owns approximately 81% of the outstanding stock of the Company, was able to waive its receipt of its share of the dividend paid. Refer to Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional details regarding the repurchase of shares of common stock and the dividend waiver.
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Comparison of Operating Results for the Three Months Ended December 31, 2022 and 2021
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, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Average Balance | Interest Income/ Expense | Yield/ Cost (1) | Average Balance | Interest Income/ Expense | Yield/ Cost (1) | |||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||
| Interest-earning cash equivalents | $ | 354,214 | $ | 3,249 | 3.67 | % | $ | 494,186 | $ | 190 | 0.15 | % | ||||||||||||||||||||||||||
| Investment securities | 3,618 | 11 | 1.22 | % | 2,932 | 9 | 1.23 | % | ||||||||||||||||||||||||||||||
| Mortgage-backed securities | 463,964 | 3,051 | 2.63 | % | 421,358 | 951 | 0.90 | % | ||||||||||||||||||||||||||||||
| Loans (2) | 14,396,685 | 129,665 | 3.60 | % | 12,582,758 | 90,119 | 2.86 | % | ||||||||||||||||||||||||||||||
| Federal Home Loan Bank stock | 219,282 | 2,994 | 5.46 | % | 162,783 | 821 | 2.02 | % | ||||||||||||||||||||||||||||||
| Total interest-earning assets | 15,437,763 | 138,970 | 3.60 | % | 13,664,017 | 92,090 | 2.70 | % | ||||||||||||||||||||||||||||||
| Noninterest-earning assets | 485,380 | 512,102 | ||||||||||||||||||||||||||||||||||||
| Total assets | $ | 15,923,143 | $ | 14,176,119 | ||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||
| Checking accounts | $ | 1,184,896 | 2,410 | 0.81 | % | $ | 1,151,600 | 265 | 0.09 | % | ||||||||||||||||||||||||||||
| Savings accounts | 1,766,354 | 3,707 | 0.84 | % | 1,835,361 | 557 | 0.12 | % | ||||||||||||||||||||||||||||||
| Certificates of deposit | 5,972,924 | 23,738 | 1.59 | % | 5,944,470 | 18,429 | 1.24 | % | ||||||||||||||||||||||||||||||
| Borrowed funds | 4,873,145 | 33,958 | 2.79 | % | 3,175,158 | 14,995 | 1.89 | % | ||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 13,797,319 | 63,813 | 1.85 | % | 12,106,589 | 34,246 | 1.13 | % | ||||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | 257,353 | 312,104 | ||||||||||||||||||||||||||||||||||||
| Total liabilities | 14,054,672 | 12,418,693 | ||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 1,868,471 | 1,757,426 | ||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 15,923,143 | $ | 14,176,119 | ||||||||||||||||||||||||||||||||||
| Net interest income | $ | 75,157 | $ | 57,844 | ||||||||||||||||||||||||||||||||||
| Interest rate spread (1)(3) | 1.75 | % | 1.57 | % | ||||||||||||||||||||||||||||||||||
| Net interest-earning assets (4) | $ | 1,640,444 | $ | 1,557,428 | ||||||||||||||||||||||||||||||||||
| Net interest margin (1)(5) | 1.95 | % | 1.69 | % | ||||||||||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 111.89 | % | 112.86 | % | ||||||||||||||||||||||||||||||||||
| Selected performance ratios: | ||||||||||||||||||||||||||||||||||||||
| Return on average assets (1) | 0.56 | % | 0.46 | % | ||||||||||||||||||||||||||||||||||
| Return on average equity (1) | 4.75 | % | 3.67 | % | ||||||||||||||||||||||||||||||||||
| Average equity to average assets | 11.73 | % | 12.40 | % | ||||||||||||||||||||||||||||||||||
_________________
(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.
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General. Net income increased $6.1 million, or 38%, to $22.2 million for the quarter ended December 31, 2022 from $16.1 million for the quarter ended December 31, 2021. The increase in net income was attributable primarily to an increase in net interest income, partially offset by an increase in non-interest expense.
Interest and Dividend Income. Interest and dividend income increased $46.9 million, or 51%, to $139.0 million during the current quarter compared to $92.1 million during the same quarter in the prior year. The increase in interest and dividend income was primarily the result of an increase in interest income on loans, as well as increases to income earned on mortgage-backed securities, FHLB stock, and other interest-bearing cash equivalents.
Interest income on loans increased $39.6 million, or 44%, to $129.7 million during the current quarter compared to $90.1 million during the same quarter in the prior year. This change was attributed to a 14%, or $1.81 billion, increase in the average balance of loans to $14.40 billion for the quarter ended December 31, 2022 compared to $12.58 billion during the same quarter last year as new loan production exceeded principal repayments and loan sales during the current quarter.
Interest Expense. Interest expense increased $29.6 million, or 86%, to $63.8 million during the current quarter compared to $34.2 million during the quarter ended December 31, 2021. The increase resulted from higher yields on certificates of deposits and borrowed funds.
Interest expense on CDs increased $5.3 million, or 29%, to $23.7 million during the current quarter compared to $18.4 million during the quarter ended December 31, 2021. The increase was attributed to a 35 basis point increase in the average rate paid on CDs to 1.59% for the current quarter from 1.24% for the same quarter last year. Additionally, there was a $28.4 million, or 0.5%, increase in the average balance of CDs to $5.97 billion during the current quarter from $5.94 billion during the same quarter of the prior year. Interest rates were adjusted on deposits in response to changes in market interest rates as well as the rates paid by our competition.
Interest expense on borrowed funds increased $19.0 million, or 127%, to $34.0 million during the current quarter compared to $15.0 million during the quarter ended December 31, 2021. This increase was mainly attributed to a 90 basis point increase in the average rate paid on these funds, to 2.79% for the current quarter from 1.89% for the same quarter last year. In addition, the average balance of borrowed funds increased $1.70 billion, or 53%, to $4.87 billion during the current quarter from an average balance of $3.18 billion during the same quarter of the prior year. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion.
Net Interest Income. Net interest income increased $17.4 million to $75.2 million during the current quarter when compared to $57.8 million for the three months ended December 31, 2021. Both the average balance and the yield of interest earning assets increased when compared to the same period last year, which was in addition to an increase in the cost of interest-bearing liabilities when compared to the same period last year. Average interest earning assets during the current quarter increased $1.77 billion, or 13%, when compared to the quarter ended December 31, 2021. The increase in average interest-earning assets was attributed primarily to an increase in the average balances of loans. In addition to the increase in average interest earning assets, the yield on those assets increased 90 basis point to 3.60% from 2.70%, as a result of market interest rate increases. The interest rate spread increased 18 basis points to 1.75% compared to 1.57% during the same quarter last year. The net interest margin increased 26 basis points to 1.95% in the current quarter compared to 1.69% for the same quarter last year.
Provision (Release) for Credit Losses. We recorded a release of the allowance for credit losses on loans and off-balance sheet exposures of $1.0 million during the quarter ended December 31, 2022, compared to a $2.0 million release of allowance for credit losses during the quarter ended December 31, 2021. As delinquencies in the portfolio have been resolved through pay-offs, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan balance, uncollected balances have been charged against the allowance for credit losses previously provided. Recoveries of amounts charged against the allowance for credit losses occur when collateral values increase and homes are sold or when borrowers repay the amounts previously charged-off. In the current quarter, we recorded net recoveries of $1.7 million compared to net recoveries of $2.0 million in the quarter ended December 31, 2021. Credit loss provisions (releases) are recorded with the objective of aligning our allowance for credit loss balances with our current estimates of loss in the portfolio. The allowance for credit losses on loans was $74.5 million, or 0.51% of total amortized cost in loans receivable, at December 31, 2022, compared to $63.6 million or 0.50% of total amortized cost in loans receivable at December 31, 2021. The total allowance for credit losses was $100.6 million at December 31, 2022, compared to $89.2 million at December 31, 2021. Under the CECL methodology, the allowance for credits losses at December 31, 2022 included a $26.1 million liability for unfunded commitments compared to $25.6 million at December 31, 2021. Refer to the Lending Activities section of Item 2. and Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for further discussion.
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Non-Interest Income. Non-interest income decreased $3.0 million, or 37%, to $5.2 million during the current quarter compared to $8.2 million during the quarter ended December 31, 2021 mainly as a result of a decrease in the net gain on sale of loans. Activity from the sale of loans decreased $2.2 million to a negligible gain for the current quarter compared to a $2.2 million gain for the same quarter in the prior year. Further, $19.2 million of loan sales during the current quarter compared to $102.0 million of loan sales during the quarter ended December 31, 2021. Loan sale gains have decreased from the prior year, as the rise in longer term market interest rates has impacted our interest rate risk management decision on whether to sell future loans or hold them in portfolio to improve net interest income. The cash surrender value and death benefits from bank owned life insurance decreased $0.7 million to $2.2 million during the quarter ended December 31, 2022 from $2.9 million during the quarter ended December 31, 2021.
Non-Interest Expense. Non-interest expense increased $5.5 million, or 12%, to $53.2 million during the current quarter compared to $47.7 million during the quarter ended December 31, 2021. The increase primarily consisted of a $1.9 million increase in salaries and employee benefits and a $2.1 million increase in marketing expenses.
Income Tax Expense. The provision for income taxes increased $1.7 million to $5.9 million during the current quarter compared to $4.2 million during the quarter ended December 31, 2021 reflecting the higher level of pre-tax income during the more recent period. The provision for the current quarter included $5.3 million of federal income tax provision and $0.6 million of state income tax expense. The provision for the quarter ended December 31, 2021 included $3.7 million of federal income tax provision and $0.5 million of state income tax release. Our effective federal tax rate was 19.3% during the current quarter and 18.7% during the quarter ended December 31, 2021.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB of Cincinnati, borrowings from the FRB-Cleveland Discount Window, overnight Fed Funds through various arrangements with other institutions, proceeds from brokered CD transactions, principal repayments and maturities of securities, and sales of loans.
In addition to the primary sources of funds described above, we have the ability to obtain funds through the use of collateralized borrowings in the wholesale markets, and from sales of securities. Also, debt issuance by the Company and access to the equity capital markets via a supplemental minority stock offering or a full conversion (second-step) transaction remain as other potential sources of liquidity, although these channels generally require up to nine months of lead time.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Association’s Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the sum of cash and cash equivalents plus unencumbered investment securities for which ready markets exist, divided by total assets). For the three months ended December 31, 2022, our liquidity ratio averaged 5.51%. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2022.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, scheduled liability maturities and the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2022, cash and cash equivalents totaled $443.6 million, which represented an increase of 20% from $369.6 million at September 30, 2022.
Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $473.1 million at December 31, 2022.
During the three-month period ended December 31, 2022, loan sales, including commitments to sell, totaled $19.2 million, which included sales to Fannie Mae, consisting of $14.7 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans and $4.5 million of loans that qualified under Fannie Mae's Home Ready initiative. At December 31, 2022, $12.5 million of long-term, fixed-rate residential first mortgage loans are classified as “held for sale".
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Our cash flows are derived from operating activities, investing activities and financing activities as reported in our CONSOLIDATED STATEMENTS OF CASH FLOWS.
At December 31, 2022, we had $330.9 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had $4.23 billion in unfunded home equity lines of credit to borrowers. CDs due within one year of December 31, 2022 totaled $3.23 billion, or 35.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, sales of investment securities, other deposit products, including new CDs, brokered CDs, FHLB advances, borrowings from the FRB-Cleveland Discount Window or other collateralized borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the CDs due on or before December 31, 2023. We believe, however, based on past experience, that a significant portion of such deposits will remain with us. Generally, we have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating residential mortgage loans, home equity loans and lines of credit and purchasing investments. During the three months ended December 31, 2022, we originated $485.5 million of residential mortgage loans, and $112.8 million of commitments for home equity loans and lines of credit, while during the three months ended December 31, 2021, we originated $877.1 million of residential mortgage loans and $499.7 million of commitments for home equity loans and lines of credit. We purchased $40.3 million of securities during the three months ended December 31, 2022, and $65.3 million during the three months ended December 31, 2021. Also during the three months ended December 31, 2022, we purchased $35.3 million of long-term, fixed-rate first mortgage loans.
Financing activities consist primarily of changes in deposit accounts, changes in the balances of principal and interest owed on loans serviced for others, FHLB advances, including any collateral requirements related to interest rate swap agreements and borrowings from the FRB-Cleveland Discount Window. We experienced a net increase in total deposits of $92.0 million during the three months ended December 31, 2022, which reflected the active management of the offered rates on maturing CDs, compared to a net decrease of $60.0 million during the three months ended December 31, 2021. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. During the three months ended December 31, 2022, there was a $74.9 million increase in the balance of brokered CDs (exclusive of acquisition costs and subsequent amortization), which had a balance of $650.1 million at December 31, 2022. At December 31, 2021 the balance of brokered CDs was $496.9 million. Principal and interest owed on loans serviced for others experienced a net decrease of $1.4 million to $28.5 million during the three months ended December 31, 2022 compared to a net decrease of $5.8 million to $35.7 million during the three months ended December 31, 2021. During the three months ended December 31, 2022 we increased our advances from the FHLB of Cincinnati by $194.1 million as we funded: new loan originations, our capital initiatives, and actively managed our liquidity ratio. During the three months ended December 31, 2021, our advances from the FHLB of Cincinnati increased by $88.7 million.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Cincinnati and the FRB-Cleveland Discount Window, and arrangements with other institutions to purchase overnight Fed Funds, each of which provides an additional source of funds. Also, in evaluating funding alternatives, we may participate in the brokered deposit market. At December 31, 2022 we had $4.84 billion of FHLB of Cincinnati advances, no outstanding borrowings from the FRB-Cleveland Discount Window and $150 million in Fed Funds. During the three months ended December 31, 2022, we had average outstanding advances from the FHLB of Cincinnati of $4.87 billion, as compared to average outstanding advances of $3.18 billion during the three months ended December 31, 2021. Refer to the Extending the Duration of Funding Sources section of the Overview and the General section of Item 3. Quantitative and Qualitative Disclosures About Market Risk for further discussion.
The Association and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The Basel III capital framework ("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 added 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. Beginning this quarter the cumulative transitional amounts became fixed and will be phased out of CET1 capital over the subsequent three-year period.
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The Association is subject to the "capital conservation buffer" requirement level of 2.5%. The requirement limits capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" in addition to the minimum capital requirements. At December 31, 2022, the Association exceeded the regulatory requirement for the "capital conservation buffer".
As of December 31, 2022, the Association exceeded all regulatory requirements to be considered “Well Capitalized” as presented in the table below (dollar amounts in thousands).
| Actual | Well Capitalized Levels | |||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||
| Total Capital to Risk-Weighted Assets | $ | 1,651,735 | 18.33 | % | $ | 901,019 | 10.00 | % | ||||||||||||||||||
| Tier 1 (Leverage) Capital to Net Average Assets | 1,587,039 | 9.95 | % | 797,148 | 5.00 | % | ||||||||||||||||||||
| Tier 1 Capital to Risk-Weighted Assets | 1,587,039 | 17.61 | % | 720,815 | 8.00 | % | ||||||||||||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | 1,587,039 | 17.61 | % | 585,662 | 6.50 | % | ||||||||||||||||||||
The capital ratios of the Company as of December 31, 2022 are presented in the table below (dollar amounts in thousands).
| Actual | ||||||||||||||
| Amount | Ratio | |||||||||||||
| Total Capital to Risk-Weighted Assets | $ | 1,880,963 | 20.87 | % | ||||||||||
| Tier 1 (Leverage) Capital to Net Average Assets | 1,816,267 | 11.38 | % | |||||||||||
| Tier 1 Capital to Risk-Weighted Assets | 1,816,267 | 20.15 | % | |||||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | 1,816,267 | 20.15 | % | |||||||||||
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 2022, the Company received a $40 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 capital ratios. At December 31, 2022, the Company had, in the form of cash and a demand loan from the Association, $215.6 million of funds readily available to support its stand-alone operations.
The Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock was approved by the Board of Directors on October 27, 2016 and repurchases began on January 6, 2017. There were 4,761,180 shares repurchased under that program between its start date and December 31, 2022. During the three months ended December 31, 2022, the Company repurchased $4.3 million of its common stock.
On July 12, 2022, Third Federal Savings, MHC received the approval of its members with respect to the waiver of dividends on the Company’s common stock the MHC owns, up to a total of $1.13 per share, to be declared on the Company’s common stock during the 12 months subsequent to the members’ approval (i.e., through July 12, 2023). The members approved the waiver by casting 61% of the eligible votes, with 97% of the votes cast, voting in favor of the waiver. Third Federal Savings, MHC is the 81% majority shareholder of the Company.
Following the receipt of the members' approval at the July 12, 2022 meeting, Third Federal Savings, MHC filed a notice with, and received the non-objection from the FRB-Cleveland for the proposed dividend waivers. Third Federal Savings, MHC waived its right to receive $0.2825 per share dividend payments on September 20, 2022 and December 13, 2022.
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
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maturities than our liabilities, consisting primarily of deposits and advances from the FHLB of Cincinnati. As a result, a fundamental component of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established risk parameter limits deemed appropriate given our business strategy, operating environment, capital, liquidity and performance objectives. Additionally, our Board of Directors has authorized the formation of an Asset/Liability Management Committee comprised of key operating personnel, which is responsible for managing this risk in a matter that is consistent with the guidelines and risk limits approved by the Board of Directors. Further, the Board has established the Directors Risk Committee, which, among other responsibilities, conducts regular oversight and review of the guidelines, policies and deliberations of the Asset/Liability Management Committee. We have sought to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:
(i)marketing adjustable-rate and shorter-maturity (10-year, fixed-rate mortgage) loan products;
(ii)lengthening the weighted average remaining term of major funding sources, primarily by offering attractive interest rates on deposit products, particularly longer-term certificates of deposit, and through the use of longer-term advances from the FHLB of Cincinnati (or shorter-term advances converted to longer-term durations via the use of interest rate exchange contracts that qualify as cash flow hedges) and longer-term brokered certificates of deposit;
(iii)investing in shorter- to medium-term investments and mortgage-backed securities;
(iv)maintaining the levels of capital required for "well capitalized" designation; and
(v)securitizing and/or selling long-term, fixed-rate residential real estate mortgage loans.
During the three months ended December 31, 2022, $19.2 million of agency-compliant, long-term (15 to 30 years), fixed-rate mortgage loans were sold, or committed to be sold, to Fannie Mae on a servicing retained basis. At December 31, 2022, $12.5 million of agency-compliant, long term, fixed-rate residential first mortgage loans were classified as "held for sale". Of the agency-compliant loan sales during the three months ended December 31, 2022, $4.5 million were sold under Fannie Mae's Home Ready program, and $14.7 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 by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors.
The Association actively markets home equity lines of credit, an adjustable-rate mortgage loan product, and a 10-year fixed-rate mortgage loan product. Each of these products provides us with improved interest rate risk characteristics when compared to longer-term, fixed-rate mortgage loans. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and investments, as well as loans and investments with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates.
The Association evaluates funding source alternatives as it seeks to extend its liability duration. Extended duration funding sources that are currently considered include: retail certificates of deposit (which, subject to a fee, generally provide depositors with an early withdrawal option, but do not require pledged collateral); brokered certificates of deposit (which generally do not provide an early withdrawal option and do not require collateral pledges); collateralized borrowings which are not subject to creditor call options (generally advances from the FHLB of Cincinnati); and interest rate exchange contracts ("swaps") which are subject to collateral pledges and which require specific structural features to qualify for hedge accounting treatment. Hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive income (loss) in the equity section of the balance sheet rather than being included in operating results of the income statement. The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment. The Association attempts to be opportunistic in the timing of its funding duration deliberations and when evaluating alternative funding sources, compares effective interest rates, early withdrawal/call options and collateral requirements.
The Association is a party to interest rate swap agreements. Each of the Association's swap agreements is registered on the Chicago Mercantile Exchange and involves the exchange of interest payment amounts based on a notional principal balance. No exchange of principal amounts occur and the notional principal amount does not appear on our balance sheet. The Association uses swaps to extend the duration of its funding sources. In each of the Association's agreements, interest paid is
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based on a fixed rate of interest throughout the term of each agreement while interest received is based on an interest rate that resets at a specified interval (generally three months) throughout the term of each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that point in time. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the conditions of the agreement. The notional amount of the Association's swap portfolio at December 31, 2022 was $1.95 billion. The swap portfolio's weighted average fixed pay rate was 2.25% and the weighted average remaining term was 3.5 years. Concurrent with the execution of each swap, the Association entered into a short-term borrowing from the FHLB of Cincinnati in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap. Each individual swap agreement has been designated as a cash flow hedge of interest rate risk associated with the Company's variable rate borrowings from the FHLB of Cincinnati.
Economic Value of Equity. Using customized modeling software, the Association prepares periodic estimates of the amounts by which the net present value of its cash flows from assets, liabilities and off-balance sheet items (the institution's economic value of equity or EVE) would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach in measuring the interest rate sensitivity of EVE. The model estimates the economic value of each type of asset, liability, and off-balance sheet contract under the assumption that instantaneous changes (measured in basis points) occur at all maturities along the United States Treasury yield curve and other relevant market interest rates. A basis point equals one, one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is tailored specifically to our organization, which, we believe, improves its predictive accuracy. The following table presents the estimated changes in the Association’s EVE at December 31, 2022 that would result from the indicated instantaneous changes in the United States Treasury yield curve and other relevant market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
| EVE as a Percentage of Present Value of Assets (3) | ||||||||||||||||||||||||||||||||
Change in Interest Rates (basis points) (1) | Estimated EVE (2) | Estimated Increase (Decrease) in EVE | EVE Ratio (4) | Increase (Decrease) (basis points) | ||||||||||||||||||||||||||||
| Amount | Percent | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| +300 | $ | 819,253 | $ | (557,884) | (40.51) | % | 5.91 | % | (325) | |||||||||||||||||||||||
| +200 | 1,027,657 | (349,480) | (25.38) | % | 7.21 | % | (195) | |||||||||||||||||||||||||
| +100 | 1,216,418 | (160,719) | (11.67) | % | 8.30 | % | (86) | |||||||||||||||||||||||||
| 0 | 1,377,137 | — | — | % | 9.16 | % | — | |||||||||||||||||||||||||
| -100 | 1,490,258 | 113,121 | 8.21 | % | 9.66 | % | 50 | |||||||||||||||||||||||||
_________________
(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, 2022, in the event of an increase of 200 basis points in all interest rates, the Association would experience a 25.38% decrease in EVE. In the event of a 100 basis point decrease in interest rates, the Association would experience a 8.21% increase in EVE.
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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, 2022, with comparative information as of September 30, 2022. By regulation, the Association must measure and manage its interest rate risk for interest rate shocks relative to established risk tolerances in EVE.
| Risk Measure (+200 Basis Points Rate Shock) | At December 31, 2022 | At September 30, 2022 | ||||||||||||
| Pre-Shock EVE Ratio | 9.16 | % | 9.08 | % | ||||||||||
| Post-Shock EVE Ratio | 7.21 | % | 6.71 | % | ||||||||||
| Sensitivity Measure in basis points | (195) | (237) | ||||||||||||
| Percentage Change in EVE | (25.38) | % | (29.92) | % | ||||||||||
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 seek 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 0.08% improvement in the Pre-Shock EVE Ratio (base valuation) measure at December 31, 2022 when compared to the measure at September 30, 2022. Factors contributing to this improvement 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 15 basis points for the two-year term, a decrease of 9 basis points for the five-year term and an increase of 5 basis points for the ten-year term. Negatively impacting the Percentage Change in EVE was a $40.0 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. While our core business activities, as described at the beginning of this paragraph, are generally intended to have a positive impact on our IRR profile, the actual impact is determined by a number of factors, including the pace of mortgage asset additions to our balance sheet (including consideration of outstanding commitments to originate those assets) in comparison to the pace of the addition of duration extending funding sources. 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, backtesting, 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 related 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,
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refinement and adaptation, in order that it might most accurately reflect our current circumstances, factors and expectations. As of December 31, 2022, we estimated that our EaR for the 12 months ending December 31, 2023 would increase by 3.07% in the event that market interest rates used in the simulation were adjusted in incremental amounts (termed a "ramped" format) during the 12 month measurement period to an aggregate increase in 200 basis points. The Association uses the "ramped" assumption in preparing the EaR simulation estimates for use in its public disclosures. In addition to conforming to predominate industry practice, the Association also believes that the ramped assumption provides a more probable/plausible scenario for net interest income simulations than instantaneous shocks which provide a theoretical analysis but a much less credible economic scenario. The Association continues to calculate instantaneous scenarios, and as of December 31, 2022, we estimated that our EaR for the 12 months ending December 31, 2023, would decrease by 9.34% 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 quarter-end results. These limits have been approved by the Association's Board of Directors and are used as benchmarks to evaluate and moderate interest rate risk. In the event that there is a breach of policy limits that extends beyond two consecutive quarter-end measurement periods, management is responsible for taking such action, similar to those described under the preceding heading of General, as may be necessary in order to return the Association's interest rate risk profile to a position that is in compliance with the policy. At December 31, 2022, the IRR profile as disclosed above was within our internal limits.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
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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.
Part II — Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management as of December 31, 2022, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in the "Risk Factors" previously disclosed in our Annual Report on Form 10-K, filed with the SEC on November 22, 2022 (File No. 001-33390).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)Not applicable
(b)Not applicable
(c)The following table summarizes our stock repurchase activity during the quarter ended December 31, 2022.
| Average | Total Number of | Maximum Number | |||||||||||||||||||||
| Total Number | Price | Shares Purchased | of Shares that May | ||||||||||||||||||||
| of Shares | Paid per | as Part of Publicly | Yet be Purchased | ||||||||||||||||||||
| Period | Purchased | Share | Announced Plans (1) | Under the Plans | |||||||||||||||||||
| October 1, 2022 through October 31, 2022 | 105,000 | $ | 13.18 | 105,000 | 5,448,820 | ||||||||||||||||||
| November 1, 2022 through November 30, 2022 | 105,000 | 13.90 | 105,000 | 5,343,820 | |||||||||||||||||||
| December 1, 2022 through December 31, 2022 | 105,000 | 14.02 | 105,000 | 5,238,820 | |||||||||||||||||||
| 315,000 | $ | 13.70 | 315,000 | ||||||||||||||||||||
(1)On October 27, 2016, the Company announced that the Board of Directors approved the Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock. Purchases under the program will be on an ongoing basis and subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses of capital, and our financial performance. Repurchased shares will be held as treasury stock and be available for general corporate use. This program has no expiration date.
At the July 12, 2022 special meeting of members of Third Federal Savings and Loan Association of Cleveland, MHC (the “MHC”), the mutual holding company of TFS Financial Corporation (the “Company”), the members of the MHC (depositors and certain loan customers of Third Federal Savings and Loan Association of Cleveland) voted to approve the MHC’s proposed waiver of dividends, aggregating up to $1.13 per share, to be declared on the Company’s common stock during the twelve months subsequent to the members’ approval (i.e., through July 12, 2023). The members approved the waiver by casting 61% of the total eligible votes. Of the votes cast, 97% were in favor of the proposal. The waiver subsequently received a non-objection by the Federal Reserve Bank of Cleveland. The MHC is the 81% majority shareholder of the Company.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
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Item 5. Other Information
Not applicable
Item 6.
(a) Exhibits
| 101 | The following unaudited financial statements from TFS Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, filed on February 8, 2023, formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Unaudited Interim Consolidated Financial Statements. | |||||||
| 101.INS | Interactive datafile | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||
| 101.SCH | Interactive datafile | Inline XBRL Taxonomy Extension Schema Document | |||||||||
| 101.CAL | Interactive datafile | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||
| 101.DEF | Interactive datafile | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||
| 101.LAB | Interactive datafile | Inline XBRL Taxonomy Extension Label Linkbase | |||||||||
| 101.PRE | Interactive datafile | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||
| 104 | Interactive datafile | Cover Page Interactive Datafile (embedded within the Inline XBRL document and included in Exhibit 101) | |||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TFS Financial Corporation | |||||||||||
| Dated: | February 8, 2023 | /s/ Marc A. Stefanski | |||||||||
| Marc A. Stefanski | |||||||||||
| Chairman of the Board, President and Chief Executive Officer | |||||||||||
| Dated: | February 8, 2023 | /s/ Timothy W. Mulhern | |||||||||
| Timothy W. Mulhern | |||||||||||
| Chief Financial Officer | |||||||||||
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ATTACHMENTS / EXHIBITS
XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
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