TFS FINANCIAL CORP Discussion and analysis by management of the financial position and operating results (Form 10-K)

Overview

Our business strategy is to operate as a well-capitalized and profitable
financial institution dedicated to providing exceptional personal service to our
customers.
Since being organized in 1938, we grew to become, at the time of our initial
public offering of stock in April 2007, the nation's largest mutually-owned
savings and loan association based on total assets. We credit our success to our
continued emphasis on our primary values: "Love, Trust, Respect, and a
Commitment to Excellence, along with Having Fun." Our values are reflected in
the design and pricing of our loan and deposit products, as described below. Our
values are further reflected in a long-term revitalization program encompassing
the three-mile corridor of the Broadway-Slavic Village neighborhood in
Cleveland, Ohio where our main office 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.
                                                                                       At September 30,
                                                 2021                  2020                  2019                  2018                  2017
                                                                                        (In thousands)
Selected Financial Condition Data:
Total assets                                $ 14,057,450          $

14 642 221 $ 14,542,356 $ 14,137,331 $ 13,692,563
Cash and cash equivalents

                        488,326               498,033               275,143               269,775               268,218
Investment securities - available for sale       421,783               453,438               547,864               531,965               537,479

Loans held for sale                                8,848                36,871                 3,666                   659                   351
Loans, net                                    12,509,035            13,103,062            13,195,745            12,871,294            12,419,306
Bank owned life insurance                        297,332               222,919               217,481               212,021               205,883
Prepaid expenses and other assets                 91,586               104,832                87,957                44,344                61,086
Deposits                                       8,993,605             9,225,554             8,766,384             8,491,583             8,151,625
Borrowed funds                                 3,091,815             3,521,745             3,902,981             3,721,699             3,671,377
Shareholders' equity                           1,732,280             1,671,853             1,696,754             1,758,404             1,689,959


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Contents

For the past years September 30,

                                                      2021               2020               2019               2018               2017
                                                                          (In thousands, except per share amounts)
Selected Operating Data:
Interest income                                   $ 389,351          $ 455,298          $ 482,087          $ 443,045          $ 408,995
Interest expense                                    157,721            213,030            216,666            162,104            130,099
Net interest income                                 231,630            242,268            265,421            280,941            278,896
Provision (release) for credit losses on loans       (9,000)             3,000            (10,000)           (11,000)           (17,000)
Net interest income after provision (release) for
credit losses on loans                              240,630            239,268            275,421            291,941            295,896
Non-interest income                                  55,299             53,251             20,464             21,536             19,849
Non-interest expenses                               195,835            192,274            193,673            192,313            182,404
Earnings before income tax                          100,094            100,245            102,212            121,164            133,341
Income tax expense                                   19,087             16,928             21,975             35,757             44,464
Net earnings after income tax expense             $  81,007          $

83,317 $ 80,237 $ 85,407 $ 88,877
Earnings per share Basic

                                             $    0.29          $

0.30 $ 0.29 $ 0.31 $ 0.32
Diluted

                                           $    0.29          $

0.29 $ 0.28 $ 0.30 $ 0.32
Cash dividends declared per share

                 $    1.12          $

1.11 $ 1.02 $ 0.76 $ 0.545

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Contents

In or for the completed years September 30,

                                                      2021                 2020                 2019                 2018                 2017
Selected Financial Ratios and Other Data:
Performance Ratios:
 Return on average assets                               0.56  %              0.56  %              0.56  %              0.62  %              0.67  %
 Return on average equity                               4.77  %              4.88  %              4.58  %              4.91  %              5.28  %
 Interest rate spread(1)                                1.52  %              1.52  %              1.73  %              1.93  %              2.02  %
 Net interest margin(2)                                 1.66  %              1.69  %              1.92  %              2.08  %              2.16  %
 Efficiency ratio(3)                                   68.25  %             65.06  %             67.75  %             63.58  %             61.06  %
 Non-interest expense to average total assets           1.35  %              1.29  %              1.36  %              1.39  %              1.37  %
 Average interest-earning assets to average
interest-bearing
 liabilities                                          111.92  %            111.41  %            112.28  %            112.96  %            113.29  %

Asset quality ratios:

 Non-performing assets as a percent of total
assets                                                  0.32  %              0.37  %              0.50  %              0.57  %              0.62  %
 Non-accruing loans as a percent of total loans         0.35  %              0.41  %              0.54  %              0.60  %              0.63  %
 Allowance for credit losses on loans as a
percent of
 non-accruing loans                                   145.96  %             87.95  %             54.60  %             54.56  %             61.89  %
 Allowance for credit losses on loans as a
percent of total loans                                  0.51  %              0.36  %              0.29  %              0.33  %              0.39  %
Capital Ratios:
Association

Total capital to risk-weighted assets(4)               21.00  %             19.96  %             19.56  %             20.47  %             21.37  %

Tier 1 (leverage) capital to net average
assets(4)                                              11.15  %             10.39  %             10.54  %             10.87  %             11.16  %

    Tier 1 capital to risk-weighted assets(4)          20.43  %             19.37  %             19.07  %             19.91  %             20.69  %
    Common equity tier 1 capital to
risk-weighted assets(4)                                20.43  %             19.37  %             19.07  %             19.91  %             20.69  %

TFS Financial Company


Total capital to risk-weighted assets(4)               23.75  %             22.71  %             22.22  %             22.94  %             23.63  %

Tier 1 (leverage) capital to net average
assets(4)                                              12.65  %             11.88  %             12.05  %             12.25  %             12.41  %

    Tier 1 capital to risk-weighted assets(4)          23.18  %             22.13  %             21.73  %             22.39  %             22.96  %
    Common equity tier 1 capital to
risk-weighted assets(4)                                23.18  %             22.13  %             21.73  %             22.39  %             22.96  %
Average equity to average total assets                 11.72  %             11.50  %             12.30  %             12.56  %             12.67  %
Other Data:
Association:
Number of full service offices                            37                   37                   37                   38                   38
Loan production offices                                    7                    7                    8                    8                    8


______________________
(1)Represents the difference between the weighted-average yield on
interest-earning assets and the weighted-average cost of interest-bearing
liabilities for the year.
(2)The net interest margin represents net interest income as a percent of
average interest-earning assets for the year.
(3)The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(4)In April 2020, the Simplifications to the Capital Rule ("Rule") was adopted,
which simplified certain aspects of the capital rule under Basel III. The impact
of the Rule was not material to the regulatory capital ratios.

COVID-19 Pandemic. During the current and previous fiscal years, the COVID-19
pandemic had a significant impact on our customers, associates and communities,
which collectively impacts our shareholders. Our primary values and mission
mentioned above have driven our responses related to COVID-19 and are summarized
below.
Customers
•Branches are open and have returned to normal, operating business hours
•Through September 30, 2021, over 2,200 customers, representing over $250
million of loans, have been helped by COVID-19 related forbearance plans
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•As a result of payoffs and customer resolutions, there were 149 customers,
representing $21.8 million of loans, remaining in COVID-19 forbearance plans as
of September 30, 2021
•Customer relief provided in the form of: forbearance plans available with
multiple repayment options; waiving of late fees, overdraft fees and ATM fees
•Expanded technology platforms, including mobile banking features and mobile
deposit limits, as well as enhanced functionality for online deposit management
Associates
•Plans currently in place for associate hybrid (work from office/home options)
•Safety precautions implemented as needed, including masks, germ shields and
working distance requirements.
•Provided a one-time after tax bonus of $1,500 to each associate
•Medical benefit plan enhancements have been made to ensure COVID-19 coverage
•An additional 10 days provided to associates for COVID-19 related absences
•Over $100,000 added to Rhonda's Kiss Associate Fund for family hardships
Communities
•Third Federal Foundation made a commitment to provide a $1.1 million lead gift
to University Settlement to support a new $20 million development in the
neighborhood near our headquarters that will provide 80 new units of affordable
housing.
•Hosted MetroHealth drive-through vaccinations for public and associates.
•Leader in advocating for investment in Digital Equity by both investing to
deploy devices and hot spots to Slavic Village families and participating on the
Greater Cleveland Digital Equity Coalition.
Shareholders
•We are committed to paying an attractive dividend
•Continued serving and lending to our customers in a responsible way
•Strong credit quality and capital levels to support potential loan performance
issues
•Staying true to the Third Federal Values that have guided us throughout history
(love, trust, respect, commitment to excellence, and fun)
Beyond working through the challenges COVID-19 presents to the organization and
society, management believes that the following matters are those most critical
to our success: (1) controlling our interest rate risk exposure; (2) monitoring
and limiting our credit risk; (3) maintaining access to adequate liquidity and
diverse funding sources to support our growth; and (4) monitoring and
controlling our operating expenses.
Controlling Our Interest Rate Risk Exposure. Historically, our greatest risk has
been our exposure to changes in interest rates. When we hold longer-term,
fixed-rate assets, funded by liabilities with shorter-term re-pricing
characteristics, we are exposed to potentially adverse impacts from changing
interest rates, and most notably rising interest rates. Generally, and
particularly over extended periods of time that encompass full economic cycles,
interest rates associated with longer-term assets, like fixed-rate mortgages,
have been higher than interest rates associated with shorter-term funding
sources, like deposits. This difference has been an important component of our
net interest income and is fundamental to our operations. We manage the risk of
holding longer-term, fixed-rate mortgage assets primarily by maintaining
regulatory capital in excess of levels required to be well capitalized, by
promoting adjustable-rate loans and shorter-term fixed-rate loans, by marketing
home equity lines of credit, which carry an adjustable rate of interest indexed
to the prime rate, by opportunistically extending the duration of our funding
sources and selectively selling a portion of our long-term, fixed-rate mortgage
loans in the secondary market. The decision to extend the duration of some of
our funding sources through interest rate swap contracts over the past few years
has also caused additional interest rate risk exposure, as the current low
market interest rates are lower than the rates in effect when some of the swap
contracts were executed. This rate difference is reflected in the level of cash
flow hedges included in accumulated other comprehensive loss.
Levels of Regulatory Capital
At September 30, 2021, the Company's Tier 1 (leverage) capital totaled $1.80
billion, or 12.65% of net average assets and 23.18% of risk-weighted assets,
while the Association's Tier 1 (leverage) capital totaled $1.59 billion, or
11.15% of net average assets and 20.43% of risk-weighted assets. Each of these
measures was more than twice the requirements currently in effect for the
Association for designation as "well capitalized" under regulatory prompt
corrective action provisions, which set minimum levels of 5.00% of net average
assets and 8.00% of risk-weighted assets. Refer to the Liquidity and Capital
Resources section of this Item 7 for additional discussion regarding regulatory
capital requirements.
Promotion of Adjustable-Rate Loans and Shorter-Term, Fixed-Rate Loans
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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.
The following tables set forth our first mortgage loan production and balances
segregated by loan structure at origination.

For the past years September 30,

                                                                       2021                                        2020
                                                            Amount                 Percent              Amount              Percent
First Mortgage Loan Originations:                                                  (Dollars in thousands)
ARM (all Smart Rate) production                       $      1,089,410                30.0  %       $ 1,223,422                39.7  %

Flat-rate production:

  Terms less than or equal to 10 years                         540,723                14.9              295,434                 9.6
  Terms greater than 10 years                                1,997,694                55.1            1,558,942                50.7
    Total fixed-rate production                              2,538,417                70.0            1,854,376                60.3
Total First Mortgage Loan Originations:               $      3,627,827               100.0  %       $ 3,077,798               100.0  %


                                                               September 30, 2021                              September 30, 2020
                                                           Amount                  Percent                 Amount                  Percent
Balances of First Mortgage Loans Held For
Investment:                                                                          (Dollars in thousands)
ARM (primarily Smart Rate) Loans                    $        4,646,760                45.2  %       $        5,122,266                47.2  %

Fixed rate loans:

  Terms less than or equal to 10 years                       1,309,407                12.7                   1,284,605                11.8
  Terms greater than 10 years                                4,322,931                42.1                   4,443,140                41.0
    Total fixed-rate loans                                   5,632,338                54.8                   5,727,745                52.8

Total first mortgages held for investment: $ 10,279,098

          100.0  %       $       10,850,011               100.0  %

The following table shows the balances at September 30, 2021 for all ARM loans separated 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)
2022                                                                        $277,640
2023                                                         356,975
2024                                                         500,226
2025                                                         835,129
2026                                                       2,177,133
2027                                                         499,657
   Total                                                                  $4,646,760


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At September 30, 2021 and September 30, 2020, 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 $8.8 million and $36.9 million,
respectively.
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Loan Portfolio Yield

The following tables show the interest balance and yield at the
September 30, 2021 for the portfolio of loans held for investment purposes, by type of loan, structure and geographic location.

                                                               September 30, 2021
                                                        Balance           Percent      Yield
                                                             (Dollars in thousands)
     Total Loans:
     Fixed Rate

Terms less than or equal to 10 years $ 1,309,407 10.4% 2.85%

        Terms greater than 10 years                       4,322,931        34.4  %     3.56  %
     Total Fixed-Rate loans                               5,632,338        44.8  %     3.39  %

     ARMs                                                 4,646,760        36.9  %     2.79  %

     Home Equity Loans and Lines of Credit                2,214,252

17.6% 2.51%

     Construction and Other loans                            83,315

0.7% 3.18%

Total Loans Receivable, net $ 12,576,665 100.0 % 3.01 %

September 30, 2021
Fixed Rate
Balance Balance Percent Yield
(Dollars in thousands)
Residential Mortgage Loans
Ohio $ 5,664,887 $ 4,069,335 45.0 % 3.30 %
Florida 1,841,114 774,166 14.6 % 3.08 %
Other 2,773,097 788,837 22.1 % 2.76 %
Total Residential Mortgage Loans 10,279,098 5,632,338 81.7 % 3.12 %
Home Equity Loans and Lines of Credit
Ohio 630,815 42,162 5.0 % 2.58 %
Florida 438,212 28,998 3.5 % 2.52 %
California 335,240 18,197 2.7 % 2.52 %
Other 809,985 16,442 6.4 % 2.46 %
Total Home Equity Loans and Lines of
Credit 2,214,252 105,799 17.6 % 2.51 %
Construction and Other loans 83,315 83,315 0.7 % 3.18 %
Total Loans Receivable, net $ 12,576,665 $ 5,821,452 100.0 % 3.01 %

Marketing Home Equity Lines of Credit
We actively market home equity lines of credit, which carry an adjustable rate
of interest indexed to the prime rate which provides interest rate sensitivity
to that portion of our assets and is a meaningful strategy to manage our
interest rate risk profile. At September 30, 2021, the principal balance of home
equity lines of credit totaled $1.97 billion. Our home equity lending is
discussed in the preceding Lending Activities section of Item 1. Business in
Part I. THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND.

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Extending the Duration of Funding Sources
As a complement to our strategies to shorten the duration of our interest
earning assets, as described above, we also seek to lengthen the duration of our
interest bearing funding sources. These efforts include monitoring the relative
costs of alternative funding sources such as retail deposits, brokered
certificates of deposit, longer-term (e.g. four to six years) fixed rate
advances from the FHLB of Cincinnati, and shorter-term (e.g. three months)
advances from the FHLB of Cincinnati, the durations of which are extended by
correlated interest rate exchange contracts. Each funding alternative is
monitored and evaluated based on its effective interest payment rate, options
exercisable by the creditor (early withdrawal, right to call, etc.), and
collateral requirements. The interest payment rate is a function of market
influences that are specific to the nuances and market competitiveness/breadth
of each funding source. Generally, early withdrawal options are available to our
retail CD 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. As a result
of increased available cash from loan sales beginning in fiscal 2020, as
discussed below, we have also effectively extended the duration of funding
sources by reducing the levels of our short-term and total funding. We will
continue to evaluate the structure of our funding sources based on current
needs.
During the year ended September 30, 2021, the balance of deposits decreased
$231.9 million, which was comprised of a $170.0 million decrease in the balance
of customer retail deposits and a $61.9 million decrease in the balance of
brokered CDs (which is inclusive of acquisition costs and subsequent
amortization). During the year, we added $188.5 million of new brokered CDs with
a weighted average interest rate of 0.37%, while brokered CDs of $250.4 million,
with a weighted average interest rate of 1.98%, matured during the year.
Additionally, during the year ended September 30, 2021, we decreased the balance
of our total advances from the FHLB of Cincinnati by $429.9 million. We added
$100.0 million of new, four- to five-year advances from the FHLB of Cincinnati
with a weighted average interest rate of 0.90%; and we paid off at maturity,
$525.0 million of advances with related interest rate swap contracts that had a
weighted average interest rate of 1.19%.
Other Interest Rate Risk Management Tools
We also manage interest rate risk by selectively selling a portion of our
long-term, fixed-rate mortgage loans in the secondary market. The sales of first
mortgage loans have increased significantly during fiscal 2020 and fiscal 2021,
due to an increase in the number of fixed-rate refinances. At September 30,
2021, we serviced $2.26 billion of loans for others. In deciding whether to sell
loans to manage interest rate risk, we also consider the level of gains to be
recognized in comparison to the impact to our net interest income. We are
planning on expanding our ability to sell certain fixed rate loans to Fannie Mae
in fiscal 2022 and beyond, through the use of more traditional mortgage banking
activities, including risk-based pricing and loan-level pricing adjustments.
This concept will be tested in markets outside of Ohio and Florida, and some
additional startup and marketing costs will be incurred, but is not expected to
significantly impact our financial results in fiscal 2022. We can also manage
interest rate risk by selling non-Fannie Mae compliant mortgage loans to private
investors, although those transactions are dependent upon favorable market
conditions, including motivated private investors, and involve more complicated
negotiations and longer settlement timelines. Loan sales are discussed later in
this Part II, Item 7. under the heading Liquidity and Capital Resources, and in
Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Notwithstanding our efforts to manage interest rate risk, should a rapid and
substantial increase occur in general market interest rates, or an extended
period of a flat or inverted yield curve market persists, it is expected that,
prospectively and particularly over a multi-year time horizon, the level of our
net interest income would be adversely impacted.
Monitoring and Limiting Our Credit Risk. While, historically, we had been
successful in limiting our credit risk exposure by generally imposing high
credit standards with respect to lending, the memory of the 2008 housing market
collapse and financial crisis is a constant reminder to focus on credit risk. In
response to the evolving economic landscape, we continuously revise and update
our quarterly analysis and evaluation procedures, as needed, for each category
of our lending with the objective of identifying and recognizing all appropriate
credit losses. Continuous analysis and evaluation updates will be important as
we monitor the impact to our borrowers as a result of the COVID-19 global
pandemic. At September 30, 2021, 89% of our assets consisted of residential real
estate loans (both "held for sale" and "held for investment") and home equity
loans and lines of credit, which were originated predominantly to borrowers in
Ohio and Florida. Our analytic procedures and evaluations include specific
reviews of all home equity loans and lines of credit that become 90 or more days
past due, as well as specific reviews of all first mortgage loans that become
180 or more days past due. We transfer performing home equity lines of credit
subordinate to first mortgages delinquent greater than 90 days to non-accrual
status. Per the Interagency Statement on Loan Modifications and Reporting for
Financial Institutions Working with Customers Affected by the Coronavirus, the
COVID-19 related forbearance plans will not generally affect the delinquency
status of the loan and therefore will not undergo a specific review unless
extended greater than 12 months. We also charge-off performing loans to
collateral value and classify
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those loans as non-accrual within 60 days of notification of all borrowers
filing Chapter 7 bankruptcy, that have not reaffirmed or been dismissed,
regardless of how long the loans have been performing. Loans where at least one
borrower has been discharged of their obligation in Chapter 7 bankruptcy are
classified as TDRs. At September 30, 2021, $14.7 million of loans in Chapter 7
bankruptcy status with no other modification to terms were included in total
TDRs. At September 30, 2021, the amortized cost in non-accrual status loans
included $16.5 million of performing loans in Chapter 7 bankruptcy status, of
which $16.1 million were also reported as TDRs.
In an effort to limit our credit risk exposure and improve the credit
performance of new customers, since 2009, we have tightened our credit
eligibility criteria in evaluating a borrower's ability to successfully fulfill
its repayment obligation, revised the design of many of our loan products to
require higher borrower down-payments, limited the products available for
condominiums and eliminated certain product features (such as interest-only and
loans above certain LTV ratios). We use stringent, conservative lending
standards for underwriting to reduce our credit risk. For first mortgage loans
originated during the current fiscal year, the average credit score was 780, and
the average LTV was 61%. 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
September 30, 2021, loans originated prior to 2009 had a balance of $445.8
million, of which $12.7 million, or 2.8%, were delinquent, while loans
originated in 2009 and after had a balance of $12.1 billion, of which $13.2
million, or 0.1%, were delinquent.
One aspect of our credit risk concern relates to high concentrations of our
loans that are secured by residential real estate in specific states,
particularly Ohio and Florida, where a large portion of our historical lending
has occurred. At September 30, 2021, approximately 55.1% and 17.9% of the
combined total of our residential Core and construction loans held for
investment and approximately 28.6% and 19.8% 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 loan originations for the year ended September 30, 2021,
26.7% are secured by properties in states other than Ohio or Florida.
Our residential Home Today loans are another area of credit risk concern as the
majority of these loans were originated under less stringent underwriting and
credit standards than our Residential Core portfolio. Although we no longer
originate loans under this program and the principal balance in these loans had
declined to $63.8 million at September 30, 2021, and constituted only 0.6% of
our total "held for investment" loan portfolio balance, they comprised 13.2% and
16.1% of our 90 days or greater delinquencies and our total delinquencies,
respectively, at that date. At September 30, 2021, approximately 95.4% and 4.5%
of our residential Home Today loans were secured by properties in Ohio and
Florida, respectively. At September 30, 2021, the percentages of those loans
delinquent 30 days or more in Ohio and Florida were 6.3% and 6.1%, respectively.
We attempted to manage our Home Today credit risk by requiring private mortgage
insurance for some loans. At September 30, 2021, 10.5% of Home Today loans
included private mortgage insurance coverage. From a peak amortized cost of
$306.6 million at December 31, 2007, the total amortized cost of the Home Today
portfolio has declined to $63.4 million at September 30, 2021. Since the vast
majority of Home Today loans were originated prior to March 2009 and we are no
longer originating loans under our Home Today program, the Home Today portfolio
will continue to decline in balance, primarily due to contractual amortization.
As part of our adoption of CECL on October 1, 2020, which includes a lifetime
view of expected losses, our allowance for credit losses for the Home Today
portfolio is reduced by expected future recoveries of loan amounts previously
charged off. To supplant the Home Today product and to continue to meet the
credit needs of our customers and the communities that we serve, we have offered
Fannie Mae eligible, Home Ready loans since fiscal 2016. These loans are
originated in accordance with Fannie Mae's underwriting standards. While we
retain the servicing rights related to these loans, the loans, along with the
credit risk associated therewith, are securitized and/or sold to Fannie Mae.
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 September 30, 2021,
the Association's ratio of Tier 1 (leverage) capital to net average assets (a
basic industry measure that deems 5.00% or above to represent a "well
capitalized" status) was 11.15%. The Association's Tier 1 (leverage) capital
ratio is higher at September 30, 2021 than its ratio at September 30, 2020,
which was 10.39%, due primarily to the combination of a reduction in total
assets, plus net income at the Association offsetting the impact from a $55
million cash dividend payment that the Association made to the Company, its sole
shareholder, in December 2020 that reduced the Association's Tier 1 (leverage)
capital ratio by an estimated 36 basis points. Because of its intercompany
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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 7. 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),
borrowing 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
September 30, 2021, deposits totaled $8.99 billion (including $492.0 million of
brokered CDs), while borrowings totaled $3.09 billion and borrowers' advances
and servicing escrows totaled $151.1 million, combined. In evaluating funding
sources, we consider many factors, including cost, collateral, duration and
optionality, current availability, expected sustainability, impact on operations
and capital levels.
To attract deposits, we offer our customers attractive rates of return 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 September 30, 2021, these collateral pledge
support arrangements provided the Association with the ability to borrow a
maximum of $7.43 billion from the FHLB of Cincinnati and $245.7 million from the
FRB-Cleveland Discount Window. Third, we have the ability to purchase overnight
Fed Funds up to $360 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 September 30, 2021, our investment securities portfolio
totaled $421.8 million. Finally, cash flows from operating activities have been
a regular source of funds. During the fiscal years ended September 30, 2021 and
2020, cash flows from operations totaled $83.2 million and $121.8 million,
respectively.
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. At September 30, 2021, $8.8 million of agency eligible,
long-term, fixed-rate first mortgage loans were classified as "held for sale."
During the fiscal year ended September 30, 2021, $58.1 million of
agency-compliant Home Ready loans and $704.2 million of long-term, fixed-rate,
agency-compliant, non-Home Ready first mortgage loans were sold to Fannie Mae.
Overall, while customer and community confidence can never be assured, the
Company believes that our liquidity is adequate and that we have adequate access
to alternative funding sources.
Monitoring and Controlling Operating Expenses. We continue to focus on managing
operating expenses. Our ratio of non-interest expense to average assets was
1.35% for the fiscal year ended September 30, 2021 and 1.29% for the fiscal year
ended September 30, 2020. The decrease in average assets during the current
fiscal year contributed to the increase in the ratio. As of September 30, 2021,
our average assets per full-time associate and our average deposits per
full-time associate were $14.1 million and $9.0 million, respectively. We
believe that each of these measures compares favorably with industry averages.
Our relatively high average deposits (exclusive of brokered CDs) held at our
branch offices ($229.8 million per branch office as of September 30, 2021)
contributes to our expense management efforts by limiting the overhead costs of
serving our customers. We will continue our efforts to control operating
expenses as we grow our business.
Critical Accounting Policies
Critical accounting policies are defined as those that involve significant
judgments and uncertainties, and could potentially give rise to materially
different results under different assumptions and conditions. We believe that
the most critical accounting policies upon which our financial condition and
results of operations depend, and which involve the most complex subjective
decisions or assessments, are our policies with respect to our allowance for
credit losses, income taxes and pension benefits.
Allowance for Credit Losses. The allowance for credit losses is the amount
estimated by management as necessary to absorb credit losses related to both the
loan portfolio and off-balance sheet commitments based on a life of loan
methodology.
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The amount of the allowance is based on significant estimates and the ultimate
losses may vary from such estimates as more information becomes available or
conditions change. The methodology for determining the allowance for credit
losses is considered a critical accounting policy by management due to the high
degree of judgment involved, the subjectivity of the assumptions used and the
potential for changes in the economic environment that could result in changes
to the amount of the recorded allowance for credit losses. At September 30,
2021, the allowance for credit losses was $89.3 million or 0.71% of total loans.
An increase or decrease of 10% in the allowance at September 30, 2021 would
result in a $8.9 million charge or release, respectively, to income before
income taxes.
As a substantial percentage of our loan portfolio is collateralized by real
estate, appraisals of the underlying value of property securing loans are
critical in determining the charge-offs for specific loans. Assumptions are
instrumental in determining the value of properties. Overly optimistic
assumptions or negative changes to assumptions could significantly affect the
valuation of a property securing a loan and the related allowance determined.
Management carefully reviews the assumptions supporting such appraisals to
determine that the resulting values reasonably reflect amounts realizable on the
related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for
credit losses. We consider a variety of factors in establishing this estimate
including, but not limited to, current economic conditions, including the
effects of the COVID-19 pandemic, delinquency statistics, geographic
concentrations, economic forecasts and how they correlate to management's view
of the future, the adequacy of the underlying collateral, the financial strength
of the borrower, results of internal loan reviews and other relevant factors.
This evaluation is inherently subjective as it requires material estimates by
management that may be susceptible to significant change based on changes in
economic and real estate market conditions.
The evaluation is comprised of a specific component and a general component. The
specific component relates to loans that are delinquent or otherwise identified
as a problem loan through the application of our loan review process and our
loan grading system. All such loans are evaluated individually, with principal
consideration given to the value of the collateral securing the loan or cash
flow analysis. The general component of the evaluation is determined by applying
economic forecasts and historical averages to the remaining loans and
off-balance sheet commitments analyzed by portfolio and risk characteristics.
Quantitative estimated losses are supplemented by more qualitative factors that
impact potential losses. Qualitative factors include economic forecasts, various
market conditions, such as collateral values and unemployment rates and future
recoveries not estimated in the models. We analyze historical loss experience,
delinquency trends, general economic conditions and geographic concentrations.
These analyses establish credit loss estimates to determine the amount of the
general component of the allowance. Refer to the Lending Activities section of
Item 1. Business in Part I. for further discussion.
Actual loan losses may be significantly more than the allowances we have
established, which would have a materially adverse effect on our financial
results.
Income Taxes. We consider accounting for income taxes a critical accounting
policy due to the subjective nature of certain estimates that are involved in
the calculation. We use the asset/liability method of accounting for income
taxes in which deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax basis of
our assets and liabilities. We must assess the realization of the deferred tax
asset and, to the extent that we believe that recovery is not likely, a
valuation allowance is established. Adjustments to increase or decrease existing
valuation allowances, if any, are charged or credited, respectively, to income
tax expense. At September 30, 2021, no valuation allowances were outstanding.
Even though we have determined a valuation allowance is not required for
deferred tax assets at September 30, 2021, there is no guarantee that those
assets will be recognizable in the future.
Pension Benefits. The determination of our obligations and expense for pension
benefits is dependent upon certain assumptions used in calculating such amounts.
Key assumptions used in the actuarial valuations include the discount rate and
expected long-term rate of return on plan assets. Actual results could differ
from the assumptions and market driven rates may fluctuate. Significant
differences in actual experience or significant changes in the assumptions could
materially affect future pension obligations and expense.
Comparison of Financial Condition at September 30, 2021 and September 30, 2020
Total assets decreased $584.8 million, or 4%, to $14.06 billion at September 30,
2021 from $14.64 billion at September 30, 2020. This decrease was mainly due to
the combination of loan sales and principal repayments on loans exceeding the
total of new loan originations and the impact of adopting CECL, partially offset
by an increase in bank owned life insurance contracts.
Cash and cash equivalents decreased $9.7 million, or 2%, to $488.3 million at
September 30, 2021 from $498.0 million at September 30, 2020. This decrease was
the result of cash flows from maturing investment securities and loan sales in
the secondary market, which were used to retire maturing liabilities or
reinvested in investment securities and/or loan products that
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provide market yields. We manage cash to maintain the level of liquidity
described later in the Liquidity and Capital Resources section of the Overview.
Investment securities, all of which are classified as available for sale,
decreased $31.6 million, or 7%, to $421.8 million at September 30, 2021 from
$453.4 million at September 30, 2020. Investment securities decreased as the
combined effect of $317.1 million in principal paydowns and $7.2 million of net
acquisition premium amortization that occurred in the mortgage-backed securities
portfolio exceeded the combined effect of $297.5 million in purchases and an
$4.8 million reduction of unrealized losses during the year ended September 30,
2021. There were no sales of investment securities during the year ended
September 30, 2021.

Loans held for investment, net, decreased $594.0 million, or 5%, to $12.51
billion at September 30, 2021 from $13.10 billion at September 30, 2020.
Residential mortgage loans decreased $570.9 million, or 5%, to $10.28 billion at
September 30, 2021. In addition, there was an $18.0 million decrease in the
balance of home equity loans and lines of credit during the year ended
September 30, 2021, as repayments exceeded new originations and additional draws
on existing accounts. Also contributing to the contraction in loans held for
investment during the fiscal year ended September 30, 2021 were profitable loan
sales of $762.3 million, which effectively reduced asset growth during the
fiscal year. During the year ended September 30, 2021, $1.09 billion of three-
and five-year "SmartRate" loans were originated while $2.54 billion of 10-, 15-,
and 30-year fixed-rate first mortgage loans were originated. Between
September 30, 2020 and September 30, 2021, the total fixed-rate portion of the
first mortgage loan portfolio decreased $95.4 million, or 2%, and was comprised
of a decrease of $120.2 million in the balance of fixed-rate loans with original
terms greater than 10 years, partially offset by an increase of $24.8 million in
the balance of fixed-rate loans with original terms of 10 years or less. Of the
total $3.63 billion in first mortgage loan originations for the fiscal year
ended September 30, 2021, 73% were refinance transactions and 27% were
purchases, 30% were adjustable-rate mortgages and 70% were fixed-rate mortgages.
Fixed rate mortgages with terms of 10 years or less accounted for 15% of total
first mortgage loan originations. During the year ended September 30, 2021, we
completed $762.3 million in loan sales, which included $58.1 million of
agency-compliant Home Ready loans and $704.2 million of other long-term,
fixed-rate, agency-compliant, first mortgage loans that were sold to Fannie Mae.
Also, during the year ended September 30, 2021, we purchased long-term,
fixed-rate first mortgage loans that had a remaining balance of $43.0 million at
September 30, 2021.

Commitments originated for home equity lines of credit and equity and bridge
loans were $1.74 billion for the year ended September 30, 2021 compared to $1.32
billion for the year ended September 30, 2020. At September 30, 2021, pending
commitments to originate new home equity lines of credit were $301.4 million and
equity and bridge loans were $168.9 million . Refer to the Controlling Our
Interest Rate Risk Exposure section of the Overview for additional information.
The total allowance for credit losses was $89.3 million, or 0.71% of total loans
receivable, at September 30, 2021, and included a $25.0 million liability for
unfunded commitments. At September 30, 2020, the allowance for credit losses was
$46.9 million, or 0.36% of total loans receivable and there was no liability for
unfunded commitments. On October 1, 2020, the Company adopted the Current
Expected Credit Loss methodology and recognized a $46.2 million increase to the
allowance for credit losses and a related $35.8 million reduction to retained
earnings, net of tax. During the fiscal year ended September 30, 2021, a $9.0
million release of provision from the allowance for credit losses was recognized
compared to a provision of $3.0 million for the prior fiscal year. Releases from
the allowance for credit losses during the recent fiscal year were primarily due
to recoveries exceeding charge-offs and improvements in the economic trends and
forecasts used to estimate credit losses for the reasonable and supportable
period under CECL. As a result of loan recoveries exceeding charge-offs, the
Company recorded $5.2 million of net loan recoveries for the fiscal year ended
September 30, 2021, compared to $5.0 million of net loan recoveries for the
fiscal year ended September 30, 2020. While actual loan charge-offs and
delinquencies remained low at September 30, 2021, some borrowers have
experienced unemployment or reduced income as a result of the COVID-19 pandemic.
We continue to monitor the performance of forbearance plans offered to our
customer as a result of the pandemic; however, most borrowers have since exited
their plan or reached a resolution. Through September 30, 2021, there were 2,204
customers, representing over $250 million of loans, who were helped by a
COVID-19 forbearance plan. As a result of payoffs and customer resolutions,
there were 149 customers, representing $21.8 million of loans, or 0.17 % of
total loans, remaining in COVID-19 forbearance plans as of September 30, 2021.
Refer to Note 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES of the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS for additional discussion.
The amount of FHLB stock owned increased $26.0 million, or 19.01%, to $162.8
million at September 30, 2021 from $136.8 million at September 30, 2020. FHLB
stock ownership requirements dictate the amount of stock owned at any given
time.
Total bank owned life insurance contracts increased $74.4 million, to $297.3
million at September 30, 2021, from $222.9 million at September 30, 2020,
primarily due to $70 million of additional premiums placed during the current
fiscal year.
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Deposits decreased $231.9 million, or 3%, to $8.99 billion at September 30, 2021
from $9.23 billion at September 30, 2020. The decrease in deposits resulted
primarily from a $567.5 million decrease in CDs, partially offset by a $196.7
million increase in our savings accounts (consisting of a $43.5 million increase
in money market accounts in the state of Florida and a $157.1 million increase
in our higher yield savings accounts), and a $136.2 million increase in our
interest-bearing checking accounts. While the current interest rate environment
is extremely low, we believe that our savings and checking accounts provide a
stable source of funds. In addition, our savings accounts are expected to
reprice in a manner similar to our home equity lending products, and, therefore,
assist us in managing interest rate risk. The balance of brokered CDs at
September 30, 2021 was $492.0 million, a decrease of $61.9 million, from the
balance of $553.9 million at September 30, 2020.
Borrowed funds, all from the FHLB of Cincinnati, decreased $429.9 million, or
12%, to $3.09 billion at September 30, 2021 from $3.52 billion at September 30,
2020. Included in the decrease were $525.0 million of 90 day advances that were
utilized for longer term interest rate swap contracts that matured during the
year and were paid off from available cash, partially offset by a $95.1 million
net increase in long term advances. There were no overnight or other short-term
advances at September 30, 2021 or at September 30, 2020. The total balance of
borrowed funds of $3.09 billion at September 30, 2021 consisted of long-term
advances of $640.4 million with a remaining weighted average maturity of
approximately 3.0 years and short-term advances of $2.45 billion aligned with
interest rate swap contracts with a remaining weighted average effective
maturity of 2.1 years. Interest rate swaps have been used to extend the duration
of short-term borrowings to approximately four to seven years at inception, by
paying a fixed rate of interest and receiving the variable rate. Refer to the
Extending the Duration of Funding Sources section of the Overview and Part II,
Item 7A. Quantitative and Qualitative Disclosures About Market Risk for
additional discussion regarding short-term borrowings and interest-rate swaps.
Accrued expenses and other liabilities increased $23.0 million to $88.6 million
at September 30, 2021, from $65.6 million at September 30, 2020. The increase is
primarily due to a $25.0 million liability for unfunded commitments, created as
a result of the implementation of CECL during the current year.
Total shareholders' equity increased $60.4 million, or 4%, to $1.73 billion at
September 30, 2021 from $1.67 billion at September 30, 2020. Activity reflects
the positive impacts from $81.0 million of net income, a $64.2 million decrease
in accumulated other comprehensive loss and $8.1 million of positive adjustments
related to our stock compensation and employee stock ownership plans, reduced by
$57.1 million of quarterly dividend payments and a $35.8 million, net of tax
reduction related to the increase to the allowance for credit losses with the
adoption of CECL. The decrease in accumulated other comprehensive loss is
primarily a result of changes in market interest rates related to our interest
rate swap contracts, and from actuarial improvements related to our defined
benefit plan. No shares of our common stock were repurchased during the fiscal
year ended September 30, 2021. As a result of the July 13, 2021 and July 14,
2020 mutual member votes, Third Federal Savings, MHC, the mutual holding company
that owns approximately 81% of the outstanding stock of the Company, was able to
waive receipt of its share of each dividend paid. Refer to Item 5. Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities for additional details regarding the repurchase of shares of
common stock and the payment of dividends.

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Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on our
interest-earning assets and the expense we pay on our interest-bearing
liabilities. Net interest income depends on the volume of interest-earning
assets and interest-bearing liabilities and the rates earned on such assets and
the rates paid on such liabilities.

Average balances and yields. The following table sets forth average balances,
average yields and costs, and certain other information at and for the fiscal
years indicated. No tax-equivalent yield adjustments were made, as the effect
thereof were not material. Average balances are derived from daily average
balances. Non-accrual loans are included in the computation of 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.
For the Fiscal Years Ended September 30,
2021 2020 2019
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
(Dollars in thousands)

Interest-bearing assets:


 Interest-earning cash equivalents           $    567,035          $     673          0.12%             $    307,902          $   1,909              0.62  %       $    220,458          $   4,998              2.27  %
 Investment securities                                  -                  -          -%                           -                  -                 -  %              3,308                 79              2.39  %
 Mortgage-backed securities                       428,590              3,822          0.89%                  527,195              9,707              1.84  %            555,076             13,021              2.35  %
 Loans(1)                                      12,800,542            381,887          2.98%               13,366,447            440,697              3.30  %         12,938,824            458,779              3.55  %
 Federal Home Loan Bank stock                     155,322              2,969          1.91%                  120,011              2,985              2.49  %             96,712              5,210              5.39  %
Total interest-earning assets                  13,951,489            389,351          2.79%               14,321,555            455,298              3.18  %         13,814,378            482,087              3.49  %
Non-interest-earning assets                       532,786                                                    540,421                                                    422,738
Total assets                                 $ 14,484,275                                               $ 14,861,976                                               $ 14,237,116

Interest-bearing debts:

 Checking accounts                           $  1,079,699              1,140          0.11%             $    917,552              1,477              0.16  %       $    881,233              3,188              0.36  %
 Savings accounts                               1,742,042              2,992          0.17%                1,530,977              7,775              0.51  %          1,381,646             11,676              0.85  %
 Certificates of deposit                        6,339,412             93,187          1.47%                6,621,289            130,990              1.98  %          6,388,905            128,489              2.01  %
 Borrowed funds                                 3,303,925             60,402          1.83%                3,785,026             72,788              1.92  %          3,651,273             73,313              2.01  %
Total interest-bearing liabilities             12,465,078            157,721          1.27%               12,854,844            213,030              1.66  %         12,303,057            216,666              1.76  %
Non-interest-bearing liabilities                  321,958                                                    298,520                                                    182,598
Total liabilities                              12,787,036                                                 13,153,364                                                 12,485,655
Shareholders' equity                            1,697,239                                                  1,708,612                                                  1,751,461
Total liabilities and
   shareholders' equity                      $ 14,484,275                                               $ 14,861,976                                               $ 14,237,116
Net interest income                                                $ 231,630                                                  $ 242,268                                                  $ 265,421
Interest rate spread(2)                                                                   1.52  %                                                    1.52  %                                                    1.73  %
Net interest-earning assets(3)               $  1,486,411                                               $  1,466,711                                               $  1,511,321
Net interest margin(4)                                                  1.66  %                                                    1.69  %                                                    1.92  %

Average interest-bearing assets at

average interest-bearing liabilities 111.92 % 111.41 % 112.28 %

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

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Rate/Volume Analysis. The following table presents the effects of changing rates
(yields) and volumes (average balances) on our net interest income for the
fiscal years indicated. The rate column shows the effects attributable to
changes in rate (changes in rate multiplied by prior volume). The volume column
shows the effects attributable to changes in volume (changes in volume
multiplied by prior rate). The net column represents the sum of the prior
columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately, based
on the changes due to rate and the changes due to volume.
For the Fiscal Years Ended September 30, 2021 vs. For the Fiscal Years Ended September 30, 2020 vs.
2020 2019
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
(In thousands)

Interest-bearing assets:

 Interest-earning cash equivalents                 $      944          $ (2,180)         $  (1,236)         $    3,714          $  (6,803)         $  (3,089)
 Investment securities                                      -                 -                  -                 (79)                 -                (79)
 Mortgage-backed securities                            (1,566)           (4,319)            (5,885)               (627)            (2,687)            (3,314)
 Loans                                                (18,112)          (40,698)           (58,810)             16,110            (34,192)           (18,082)
 Federal Home Loan Bank stock                             764              (780)               (16)              1,802             (4,027)            (2,225)
Total interest-earning assets                         (17,970)          (47,977)           (65,947)             20,920            (47,709)           (26,789)
Interest-bearing liabilities:
 Checking accounts                                        356              (693)              (337)                137             (1,848)            (1,711)
 Savings accounts                                       1,259            (6,042)            (4,783)              1,449             (5,350)            (3,901)
 Certificates of deposit                               (5,373)          (32,430)           (37,803)              4,535             (2,034)             2,501
 Borrowed funds                                        (8,923)           (3,463)           (12,386)              3,426             (3,951)              (525)
Total interest-bearing liabilities                    (12,681)          (42,628)           (55,309)              9,547            (13,183)

(3,636)

Net change in net interest income                  $   (5,289)         $

(5.349) $ (10,638) $ 11,373 $ (34,526) $ (23 153)

Comparison of operating results for the years ended September 30, 2021
and 2020

  General. Net income decreased $2.3 million to $81.0 million for the year ended
September 30, 2021 compared to $83.3 million for the year ended September 30,
2020. A decline in net interest income and an increase in non-interest expense
for the current fiscal year offset the benefit of an increase in non-interest
income and releases from the credit loss provision.
Interest and Dividend Income. Interest and dividend income decreased $65.9
million, or 14%, to $389.4 million during the year ended September 30, 2021
compared to $455.3 million during the prior year. The decrease in interest and
dividend income resulted primarily from a decrease in interest income from
loans, and to a lesser extent, interest income on mortgage-backed securities and
interest earning cash equivalents. Lower market interest rates impacted each
category, as well as lower average balances for loans and mortgage backed
securities.
Interest income on loans decreased $58.8 million, or 13%, to $381.9 million for
the year ended September 30, 2021 compared to $440.7 million for the year ended
September 30, 2020. This decrease was attributed to a 32 basis point decrease in
the average yield on loans to 2.98% for the year ended September 30, 2021 from
3.30% for the prior year. Also contributing to the decline in average yield was
a $565.9 million decrease in the average balance of loans to $12.80 billion for
the current year compared to $13.37 billion during the prior year. The decrease
in interest income between fiscal periods is due to lower yields on loans as
many borrowers refinanced to take advantage of the lower rate environment and a
decrease in the average balance of loans due to loan sales and payoffs.
Interest income on mortgage-backed securities decreased $5.9 million, or 61%, to
$3.8 million during the current year compared to $9.7 million during the year
ended September 30, 2020. This decrease was attributed to a 95 basis point
decrease in the average yield on mortgage-backed securities, combined with a
$98.6 million decrease in the average balance of mortgage-backed securities to
$428.6 million for the current year compared to $527.2 million during the prior
year due to prepayments. During the fiscal year ended September 30, 2021
prepayment speeds of mortgage-backed securities were elevated due to the low
interest rate environment, which reduced the principal balance of loans included
in some of the mortgage-backed securities pools and hence the interest income
generated from those bonds. Generally low interest rates also contributed to the
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challenging investment environment as bond purchases during the fiscal year had
lower coupon yields compared to the bonds that matured during the fiscal year
ended September 30, 2021.
Interest Expense. Interest expense decreased $55.3 million, or 26%, to $157.7
million during the current year compared to $213.0 million during the year ended
September 30, 2020. The decrease resulted from decreases in interest expense on
both deposits and borrowed funds. Lower market interest rates impacted each
category, as well as lower average balances for total interest-bearing
liabilities.
Interest expense on CDs decreased $37.8 million, or 29%, to $93.2 million during
the year ended September 30, 2021 compared to $131.0 million during the year
ended September 30, 2020. The decrease was attributed primarily to a 51 basis
point decrease in the average rate we paid on CDs to 1.47% during the current
year from 1.98% during the prior year. Additionally, there was a $281.9 million,
or 4%, decrease in the average balance of CDs to $6.34 billion from $6.62
billion during the prior year. Interest expense on savings and checking accounts
decreased $4.8 million and $0.4 million, respectively, to $3.0 million and $1.1
million during the year ended September 30, 2021, compared to the prior year due
to a decrease in the average rates we paid on the deposits. Rates were adjusted
on deposits in response to changes in general market rates as well as to changes
in the rates paid by our competition.
Interest expense on borrowed funds, all from the FHLB of Cincinnati, as impacted
by related interest rate swap contracts, decreased $12.4 million, or 17%, to
$60.4 million during the year ended September 30, 2021 from $72.8 million during
the year ended September 30, 2020. The decrease was attributed to a combination
of a $481.1 million, or 13%, decrease in the average balance of borrowed funds
to $3.30 billion during the current year from $3.78 billion during the prior
year, as well as a nine basis point decrease in the average rate paid for these
funds to 1.83% during the year ended September 30, 2021 from 1.92% for the year
ended September 30, 2020. The balance decrease during the year resulted from
available cash used to pay-off advances related to longer term interest rate
swap contracts that matured during the year. Also impacting the prior year
comparison was $7.8 million of additional interest expense that was recognized
during the year ended September 30, 2020, as a result of the early termination
in September 2020 of $100 million of interest rate swap contracts related to the
prepayment of FHLB of Cincinnati advances. Refer to the Extending the Duration
of Funding Sources section of the Overview and Comparison of Financial Condition
for further discussion.
Net Interest Income. Net interest income decreased $10.7 million, or 4%, to
$231.6 million during the year ended September 30, 2021 from $242.3 million
during the year ended September 30, 2020. The decrease between fiscal years was
primarily due to the lower average interest-earning asset balances, as while our
percentage yield declined, our interest rate spread remained the same between
the two years. We experienced lower yields on loans as many borrowers refinanced
to take advantage of the lower rate environment and a decrease in the average
balances of loans due to loan sales and payoffs. In addition, the increase in
lower yielding cash equivalent investments was a detriment to the overall yield
on assets. Funding costs also declined, partially offsetting the decrease in
interest income, but slower repricing of longer term CDs and interest rate swap
contracts, slowed the decline. Funding cost decreased through a reduction in the
average balance of borrowed funds, including maturities and prior year
terminations of FHLB advances and their related swap contracts; the repricing of
certificates of deposit as they mature, to market rates of interest; and a
heightened migration to lower-priced non-maturity deposit accounts from
certificates of deposit due to historically low yield differentials. Average
interest-earning assets decreased during the current year by $370.1 million, or
3%, when compared to the year ended September 30, 2020. The decrease in average
interest-earning assets was attributed primarily due to the reduction in the
average balance of our loan portfolio and to a lesser extent the mortgage back
securities portfolio. Average interest-bearing liabilities decreased by $389.7
million. The average yield on interest earning assets decreased 39 basis points
to 2.79% from 3.18%, compared to a 39 basis point decrease in the average rate
paid on interest-bearing liabilities to 1.27% in the current period from 1.66%
in the prior period. The interest rate spread was 1.52% for both the fiscal
years ended September 30, 2021 and September 30, 2020. The net interest margin
was 1.66% for the fiscal year ended September 30, 2021 and 1.69% for the fiscal
year ended September 30, 2020.
Provision (Release) for Credit Losses. We recorded a release from the allowance
for credit losses of $9.0 million during the year ended September 30, 2021 and a
$3.0 million provision for loan losses during the year ended September 30, 2020.
Releases from the allowance for credit losses during the recent fiscal year were
primarily due to recoveries exceeding charge-offs and improvements in the
economic trends and forecasts used to estimate credit losses for the reasonable
and supportable period, under the CECL methodology adopted effective October 1,
2020. As delinquencies in the portfolio are resolved through pay-off, short sale
or foreclosure, or management determines the collateral is not sufficient to
satisfy the loan, uncollected balances have been charged against the allowance
for credit losses previously provided. When amounts previously charged off are
subsequently collected, the recoveries are added to the allowance. Future
recoveries may continue if housing market conditions stay strong and payment
performance on previously charged-off loans continues. For the fiscal year ended
September 30, 2021, we recorded net recoveries of $5.2 million, as compared to
net recoveries of $5.0 million for the year ended September 30, 2020. The
allowance for credit losses, including a $25.0 million liability for unfunded
commitments under
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CECL, was $89.3 million, or 0.71% of the total amortized cost in loans
receivable, at September 30, 2021. At September 30, 2020, the allowance was
$46.9 million, or 0.36% of the total amortized cost in loans receivable and
there was no liability for unfunded commitments. Balances of amortized costs are
net of deferred fees, expenses and any applicable loans-in-process.
At September 30, 2021 and 2020, we believe we had recorded an allowance for
credit losses that provides for all losses that are both probable and reasonable
to estimate at September 30, 2021 and 2020, respectively; this includes
consideration for the difference in methodology to record provisions for credit
losses for each of the respective time periods. During and for the fiscal year
ended September 30, 2021 the CECL methodology was followed to determine the
appropriate balance for the allowance for credit losses while the incurred loss
methodology was followed in the prior and previous fiscal years.
Refer to the Lending Activities section of the Overview and Note 5. LOANS AND
ALLOWANCE FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for further discussion.
Non-Interest Income. Non-interest income increased $2.0 million, or 4%, to $55.3
million during the year ended September 30, 2021 compared to $53.3 million
during the year ended September 30, 2020. The increase in non-interest income
was primarily due to an increase in the net gain on sale of loans, which was
$33.1 million during the year ended September 30, 2021, compared to $28.4
million during the year ended September 30, 2020. There were loan sales,
including commitments to sell, of $762.3 million during the year ended
September 30, 2021, compared to loan sales of $844.3 million during the year
ended September 30, 2020. In addition to the increase in the net gain on the
sale of loans, there was also an increase in the cash surrender value and death
benefits on bank owned life insurance contracts. For the fiscal year ended
September 30, 2021, bank owned life insurance contracts increased by $74.4
million to $297.3 million, primarily due to $70 million of additional premiums
placed during the fiscal year. These increases were offset by a decrease in
other non-interest income which, in the previous fiscal year, included $4.7
million of net gain on the sale of commercial property.
Non-Interest Expense. Non-interest expense increased $3.5 million, or 2%, to
$195.8 million during the year ended September 30, 2021 compared to $192.3
million during the year ended September 30, 2020. This increase resulted
primarily from increases in salary and employee benefits as well as marketing
expenses, partially offset by a decrease in other expenses. The increase in
salary and employee benefits was spread between associate compensation, group
health insurance, stock benefit plan expense, and a one-time $1,500 after-tax
bonus paid to each associate during the first quarter of fiscal year 2021 in
recognition of special efforts made during the pandemic crisis. The increase in
marketing expense was timing related, as some marketing efforts were delayed
during the previous fiscal year, in response to COVID-19. Other expenses
decreased as a result of the non recurrence of $1.1 million of early termination
fees incurred last year related to the prepayment of FHLB of Cincinnati advances
and a $1.8 million reduction in pension related expenses this year due to
actuarial valuation improvements.
Income Tax Expense. The provision for income taxes was $19.1 million during the
year ended September 30, 2021 compared to $16.9 million during the year ended
September 30, 2020. The change was a result of a lower prior year provision,
which included a carry back of net tax operating losses to years taxed at higher
rates, resulting in a prior fiscal year tax benefit of $3.6 million. The
provision for the current year included $17.5 million of federal income tax
provision and $1.6 million of state income tax provision. The provision for the
year ended September 30, 2020 included $15.2 million of federal income tax
provision and $1.7 million of state income tax provision. Our effective federal
tax rate was 17.8% during the year ended September 30, 2021 and 15.5% during the
year ended September 30, 2020.
For a comparison of operating results for the fiscal years ended September 30,
2020 and 2019, see the Company's Form 10-K for the fiscal year ended September
30, 2020.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a
short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, advances from the FHLB of Cincinnati, borrowings from the
FRB-Cleveland Discount Window, overnight Fed Funds through various arrangements
with other institutions, proceeds from brokered CDs transactions, principal
repayments and maturities of securities, and sales of loans.
In addition to the primary sources of funds described above, we have the ability
to obtain funds through the use of collateralized borrowings in the wholesale
markets, and from sales of securities. Also, debt issuance by the Company and
access to the equity capital markets via a supplemental minority stock offering
or a full conversion (second-step) transaction remain as other potential sources
of liquidity, although these channels generally require up to nine months of
lead time.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by interest rates, economic conditions and competition. The
Association's Asset/Liability Management Committee is responsible for
establishing and monitoring our liquidity targets and strategies in order to
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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 year ended
September 30, 2021, our liquidity ratio averaged 6.66%. We believe that we had
sufficient sources of liquidity to satisfy our short- and long-term liquidity
needs as of September 30, 2021.
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 September 30, 2021, cash and cash equivalents
totaled $488.3 million which represented a decrease of 2% from September 30,
2020.
Investment securities classified as available for sale, which provide additional
sources of liquidity, totaled $421.8 million at September 30, 2021.
During the year ended September 30, 2021, loan sales, including commitments to
sell, totaled $762.3 million, which included sales to Fannie Mae consisting of
$704.2 million of long-term, fixed-rate, agency-compliant, non-Home Ready first
mortgage loans and $58.1 million of loans that qualified under Fannie Mae's Home
Ready initiative. Loans originated under Home Ready initiatives are classified
as "held for sale" at origination. Loans originated under non-Home Ready, Fannie
Mae compliant procedures are classified as "held for investment" until they are
specifically identified for sale.
At September 30, 2021, $8.8 million of long-term, fixed-rate residential first
mortgage loans were classified as "held for sale," under Fannie Mae's Home Ready
initiative.
Our cash flows are derived from operating activities, investing activities and
financing activities as reported in our CONSOLIDATED STATEMENTS OF CASH FLOWS
included in the CONSOLIDATED FINANCIAL STATEMENTS.
At September 30, 2021, we had $949.9 million in outstanding commitments to
originate loans. In addition to commitments to originate loans, we had $3.20
billion in unfunded home equity lines of credit to borrowers. CDs due within one
year of September 30, 2021 totaled $3.51 billion, or 39.1% 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 September 30,
2022. We believe, however, based on past experience, that a significant portion
of such deposits will remain with us. Generally, we have the ability to attract
and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating residential mortgage loans,
home equity loans and lines of credit and purchasing investments. During the
year ended September 30, 2021, we originated $3.63 billion of residential
mortgage loans, and $1.74 billion of commitments for home equity loans and lines
of credit, while during the year ended September 30, 2020, we originated $3.08
billion of residential mortgage loans and $1.32 billion of commitments for home
equity loans and lines of credit. We purchased $297.5 million of securities
during the year ended September 30, 2021, and $171.5 million during the year
ended September 30, 2020. Also, during the year ended September 30, 2021, we
purchased long-term, fixed-rate first mortgage loans that had a remaining
balance of $43.0 million at September 30, 2021.
Financing activities consist primarily of changes in deposit accounts, changes
in the balances of principal and interest owed on loans serviced for others,
FHLB advances, including any collateral requirements related to interest rate
swap agreements and borrowings from the FRB-Cleveland Discount Window. We
experienced a net decrease in total deposits of $231.9 million during the year
ended September 30, 2021, which reflected the active management of the offered
rates on maturing CDs compared to a net increase of $459.2 million during the
year ended September 30, 2020. Deposit flows are affected by the overall level
of interest rates, the interest rates and products offered by us and our local
competitors, and by other factors. During the year ended September 30, 2021,
there was a $61.9 million decrease in the balance of brokered CDs (exclusive of
acquisition costs and subsequent amortization), which had a balance of $492.0
million at September 30, 2021. At September 30, 2020 the balance of brokered CDs
was $553.9 million. Principal and interest owed on loans serviced for others
experienced a net decrease of $4.4 million to $41.5 million during the year
ended September 30, 2021 compared to a net increase of $13.0 million to $45.9
million during the year ended September 30, 2020. During the year ended
September 30, 2021 we decreased our advances from the FHLB of Cincinnati by
$429.9 million to utilize proceeds from loans sales, while managing future
interest costs and the funding of new loan originations and our capital
initiatives, and actively manage our
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liquidity ratio. During the year ended September 30, 2020, our advances from the
FHLB of Cincinnati decreased by $381.2 million.
In March 2021, we received a second consecutive "Needs to Improve" rating on our
Community Reinvestment Act (CRA) examination covering the period ending December
31, 2019. The FHFA practice is to place member institutions in this situation on
restriction. When this restriction is established, we will not have access to
FHLB long-term advances (maturities greater than one year) until our rating
improves. However, we have not received notice of this restriction as of
November 24, 2021. Existing advances and future advances with less than a one
year term, including 90 day advances used to facilitate longer term interest
rate swap agreements, will not be affected. We expect no impact to our ability
to access funding.
Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the FHLB of Cincinnati and the FRB-Cleveland
Discount Window, each of which provides an additional source of funds. Also, in
evaluating funding alternatives, we may participate in the brokered CD market.
At September 30, 2021 we had $3.09 billion of FHLB of Cincinnati advances and no
outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at
September 30, 2021, we had $492.0 million of brokered CDs. During the year ended
September 30, 2021, we had average outstanding advances from the FHLB of
Cincinnati of $3.30 billion as compared to average outstanding advances of $3.79
billion during the year ended September 30, 2020. Refer to the Extending the
Duration of Funding Sources section of the Overview and the General section of
Item 7A. Quantitative and Qualitative Disclosures About Market Risk for further
discussion. At September 30, 2021, we had the ability to borrow a maximum of
$7.43 billion from the FHLB of Cincinnati and $245.7 million from the
FRB-Cleveland Discount Window. From the perspective of collateral value securing
FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond
the outstanding balance at September 30, 2021 was $4.34 billion, subject to
satisfaction of the FHLB of Cincinnati common stock ownership requirement.
The Association and the Company are subject to various regulatory capital
requirements, including a risk-based capital measure. The Basel III capital
framework for U.S. banking organizations ("Basel III Rules") includes both a
revised definition of capital and guidelines for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad
risk categories. In April 2020, the Association adopted the Simplifications to
the Capital Rule ("Rule") which simplified certain aspects of the capital rule
under Basel III. The impact of the Rule was not material to the Association's
regulatory ratios.
In 2019, a final rule adopted by the federal banking agencies provided banking
organizations with the option to phase in, over a three-year period, the adverse
day-one regulatory capital effects of the adoption of the CECL accounting
standard. In 2020, as part of its response to the impact of COVID-19, U.S.
federal banking regulatory agencies issued a final rule which provides banking
organizations that implement CECL during the 2020 calendar year the option to
delay for two years an estimate of CECL's effect on regulatory capital, relative
to the incurred loss methodology's effect on regulatory capital, followed by a
three-year transition period, which the Association and Company have adopted.
During the two-year delay, the Association and Company will add back to common
equity tier 1 capital ("CET1"), 100% of the initial adoption impact of CECL plus
25% of the cumulative quarterly changes in the allowance for credit losses.
After two years the quarterly transitional amounts along with the initial
adoption impact of CECL will be phased out of CET1 capital over the three-year
period.
The Association is subject to the "capital conservation buffer" requirement
level of 2.5%. The requirement limits capital distributions and certain
discretionary bonus payments to management if the institution does not hold a
"capital conservation buffer" in addition to the minimum capital requirements.
At September 30, 2021, the Association exceeded the regulatory requirement for
the "capital conservation buffer".
As of September 30, 2021, the Association exceeded all regulatory capital
requirements to be considered "Well Capitalized".
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
2020, the Company received a $55.0 million cash dividend from the Association.
Because of its intercompany nature, this dividend payment had no impact on the
Company's capital ratios or its consolidated statement of condition but reduced
the Association's reported capital ratios. At September 30, 2021, the Company
had, in the form of cash and a demand loan from the Association, $190.4 million
of funds readily available to support its stand-alone operations.
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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 4,108,921 shares repurchased under that program
between its start date and September 30, 2021. During the year ended
September 30, 2021, the Company did not repurchase any of its common stock. The
share repurchase plan had been suspended as part of the response to COVID-19,
but was reinstated in February 2021. However, the Company continues to place
more emphasis on dividends in its evaluation of capital deployment.
On July 13, 2021, Third Federal Savings, MHC received the approval of its
members with respect to the waiver of dividends, and subsequently received the
non-objection of the FRB-Cleveland, to waive receipt of dividends on the
Company's common stock the MHC owns up to a total of $1.13 per share, to be
declared on the Company's common stock during the 12 months subsequent to the
members' approval (i.e., through July 13, 2022). The members approved the waiver
by casting 60% of the eligible votes, with 97% of the votes cast, or 59% of the
total eligible votes, voting in favor of the waiver. Third Federal Savings, MHC
is the 81% majority shareholder of the Company and waived its right to receive a
$0.2825 per share dividend payment on September 21, 2021.
On July 14, 2020, Third Federal Savings, MHC received the approval of its
members with respect to the waiver of dividends, and subsequently received the
non-objection of the FRB-Cleveland, to waive receipt of dividends on the
Company's common stock the MHC owns up to a total of $1.12 per share, to be
declared on the Company's common stock during the 12 months subsequent to the
members' approval (i.e., through July 14, 2021). The members approved the waiver
by casting 63% of the eligible votes, with 97% of the votes cast, or 61% of the
total eligible votes, voting in favor of the waiver. Third Federal Savings, MHC
waived its right to receive a $0.28 per share dividend payment on September 23,
2020, December 15, 2020, March 23, 2021 and June 22, 2021.
The payment of dividends, support of asset growth and strategic stock
repurchases are planned to continue in the future as the focus for future
capital deployment activities.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in
accordance with GAAP. GAAP generally requires the measurement of financial
position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than the effects of inflation.
Recent Accounting Pronouncements
Refer to Note 20. RECENT ACCOUNTING PRONOUNCEMENTS of the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS for pending and adopted accounting guidance.

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