TFS Financial CORP

Previous wording

Capital ratios remain a source of financial strength for the Company and the Association as all capital ratios, including the Company's Common Equity Tier 1 Capital ratio of 19.05%, exceed the regulatory requirement to be considered "Well Capitalized". Additional details on our capital ratios are reported in the Liquidity and Capital Resources section of this Item 2.

Current wording

Capital ratios remain a source of financial strength for the Company and the Association as all capital ratios, including the Company's Common Equity Tier 1 Capital ratio of 18.82%, exceed the regulatory requirement to be considered "Well Capitalized". Additional details on our capital ratios are reported in the Liquidity and Capital Resources section of this Item 2.

Previous wording

The Company maintains high-quality core deposits characterized by a high level of FDIC insured deposit accounts distributed primarily across our Ohio and Florida branch network in products tailored toward consumers seeking non-transactional savings. As of March 31, 2024, 96.1% of our $8.68 billion retail deposit base consists of accounts structured under the FDIC insured limit of $250,000. The Company has the ability to fund 100% of all uninsured deposit balances through sources described later in this Item 2 under the heading Liquidity and Capital Resources.

Current wording

The Company maintains high-quality core deposits distributed primarily across our Ohio and Florida branch network in products tailored toward consumers seeking non-transactional savings. As of June 30, 2024, 96.2% of our $8.81 billion retail deposit base consists of accounts structured under the FDIC insured limit of $250,000. The Company has the ability to fund 100% of all uninsured deposit balances through sources described later in this Item 2 under the heading Liquidity and Capital Resources.

Previous wording

The Company retains ample and diverse sources of liquidity and funding, beyond deposits. At March 31, 2024, our combined additional borrowing capacity under the Association's blanket pledge arrangements with the FHLB of Cincinnati and the FRB Cleveland along with our ability to purchase Fed Funds through arrangements with other institutions exceeded $3.15 billion. We also hold marketable securities that could be sold and converted to cash. Further details about liquidity and funding are described in the section labelled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth of this Item 2.

Current wording

The Company retains ample and diverse sources of liquidity and funding, beyond deposits. At June 30, 2024, our combined additional borrowing capacity under the Association's blanket pledge arrangements with the FHLB of Cincinnati and the FRB Cleveland along with our ability to purchase Fed Funds through arrangements with other institutions totaled $3.77 billion. We also hold marketable securities that could be sold and converted to cash. Further details about liquidity and funding are described in the section labelled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growth of this Item 2.

Previous wording

We operate a multi-disciplined risk management program that emphasizes stress testing and scenario analysis in the realms of interest rate risk, credit risk, market risk and liquidity risk. Key risk indicators are proactively monitored and reported throughout the organization, up to and including the Board of Directors. The program is supported by a multi-line of defense approach in which internal oversight functions of risk management and internal audit grant their fully autonomous opinion of the process with an ability to issue findings for remediation if deemed necessary. The program is also regularly exposed to outside scrutiny in the form of regulatory oversight and from our outside audit firm. Management established the risk management framework with an appropriate level of sophistication such that it fully encapsulates all identified areas of risk, in conjunction with a necessary level of governance, to promote the program’s intention of properly identifying and managing our risk profile.

Current wording

We operate a multi-disciplined risk management program that emphasizes stress testing and scenario analysis in the realms of interest rate risk, credit risk, market risk and liquidity risk. Key risk indicators are proactively monitored and reported throughout the organization, up to and including the Board of Directors. The program is supported by a multi-line of defense approach in which internal oversight functions of risk management and internal audit grant their fully autonomous opinion of the process with an ability to issue findings for remediation if deemed necessary. The program is also regularly exposed to additional scrutiny in the form of regulatory oversight and from our external audit firm. Management established the risk management framework with an appropriate level of sophistication such that it fully encapsulates all identified areas of risk, in conjunction with a necessary level of governance, to promote the program’s intention of properly identifying and managing our risk profile.

Previous wording

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.

Current wording

Controlling Our Interest Rate Risk Exposure. Historically, our greatest risk has been our exposure to changes in market 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.

Previous wording

A challenge to our business model occurs when there is a rapid and substantial increase in short-term rates or there is an extended inverted yield curve, which have both occurred over recent periods. This economic environment has resulted in decreases in our net interest income and our net interest margin.

Current wording

A challenge to our business model occurs when there is a rapid and substantial increase in short-term rates or there is an extended inverted yield curve where short-term rates exceed long-term rates, both of which have occurred over recent periods. Conversely, rapid and substantial decreases in short-term rates can also pose a challenge when interest rates on our ELOC portfolio, indexed to the prime rate, reprice more quickly than interest rates on borrowings and certificate of deposit accounts which generally reprice at maturity. These economic environments may result in decreases in our net interest income and our net interest margin.

Previous wording

At March 31, 2024, the Company’s Tier 1 (leverage) capital totaled $1.84 billion, or 10.72% of net average assets and 19.05% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.68 billion, or 9.79% of net average assets and 17.40% of risk-weighted assets. Each of these measures is in excess of the requirements in effect for the Association at March 31, 2024, for designation as “well capitalized” under regulatory prompt corrective action provisions. Beginning this fiscal year, the Company entered into the final two years of the five-year transitional period, as provided by a final rule, after CECL was adopted in fiscal year 2021. Refer to the Liquidity and Capital Resources section of this Item 2 for additional discussion regarding regulatory capital requirements.

Current wording

At June 30, 2024, the Company’s Tier 1 (leverage) capital totaled $1.85 billion, or 10.82%, of net average assets and 18.82% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.70 billion, or 9.96%, of net average assets and 17.33% of risk-weighted assets. Each of these measures is in excess of the requirements in effect for the Association at June 30, 2024, for designation as “well capitalized” under regulatory prompt corrective action provisions. Beginning this fiscal year, the Company entered into the final two years of the five-year transitional period, as provided by a final rule, after CECL was adopted in fiscal year 2021. Refer to the Liquidity and Capital Resources section of this Item 2 for additional discussion regarding regulatory capital requirements.

Previous wording

At March 31, 2024 and September 30, 2023, 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 $9.7 million and $3.3 million, respectively.

Current wording

At June 30, 2024 and September 30, 2023, 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 $30.4 million and $3.3 million, respectively.

Previous wording

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. Increasing our investments in loans with variable rates of interest help to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. We strive to grow the home equity line of credit portfolio through offering competitive rates, marketing efforts and by utilizing partners to attract more home equity line of credit customers. At March 31, 2024, the principal balance of home equity lines of credit (including those in repayment) that are structured to reset with each prime rate adjustment totaled $2.90 billion. Our home equity lending is discussed in the Lending Activities section of this Item 2.

Current wording

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. Increasing our investments in loans with variable rates of interest help to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. We strive to grow the home equity line of credit portfolio through offering competitive rates, marketing efforts and by utilizing partners to attract more home equity line of credit customers. At June 30, 2024, the principal balance of home equity lines of credit (including those in repayment) that are structured to reset with each prime rate adjustment totaled $3.11 billion. Our home equity lending is discussed in the Lending Activities section of this Item 2.

Previous wording

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 certificates of deposit, brokered certificates of deposit, and shorter-term (e.g. three months) funding, the durations of which are extended by correlated interest rate exchange contracts ("swap"). Funding sources are discussed in more detail within this Item 2 in the sections entitled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growthand Liquidity and Capital Resources. All of our swaps are subject to collateral pledges and require specific structural features to qualify for hedge accounting treatment. Hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive income (loss) in the equity section of the balance sheet, rather than being included in operating results of the income statement. The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment.

Current wording

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 certificates of deposit, 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. one or three months) funding, the durations of which are extended by correlated interest rate exchange contracts ("swap"). Funding sources are discussed in more detail within this Item 2 in the sections entitled Maintaining Access to Adequate Liquidity and Diverse Funding Sources to Support our Growthand Liquidity and Capital Resources. All of our swaps are subject to collateral pledges and require specific structural features to qualify for hedge accounting treatment. Hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive income (loss) in the equity section of the balance sheet, rather than being included in operating results of the income statement. The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment.

Previous wording

The Association uses swaps to extend the duration of its funding sources. Each of the Association's swap agreements is registered on the Chicago Mercantile Exchange and involves the exchange of interest payment amounts based on a notional principal balance. No exchange of principal amounts occur and the notional principal amount does not appear on our balance sheet. In each of the Association's agreements, interest paid is based on a fixed rate of interest throughout the term of each agreement while interest received is based on an interest rate that resets and compounds daily over a specified interval (generally three months) throughout the term of each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that point in time. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the conditions of the agreement. Concurrent with the execution of each swap, the Association enters into a short-term borrowing in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap. Each individual swap agreement has been designated as a cash flow hedge of interest rate risk associated with either the Company's variable rate borrowings from the FHLB of Cincinnati or brokered CDs. In these challenging economic times with an extended inverted yield curve, the Association has found it financially beneficial to use swaps to extend the duration of our liabilities with a relatively lower borrowing cost. For more details, refer to Notes 6. BORROWED FUNDSand 13. DERIVATIVE INSTRUMENTS of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

Current wording

The Association uses swaps to extend the duration of its funding sources. Each of the Association's swap agreements is registered on the Chicago Mercantile Exchange and involves the exchange of interest payment amounts based on a notional principal balance. No exchange of principal amounts occur and the notional principal amount does not appear on our balance sheet. In each of the Association's agreements, interest paid is based on a fixed rate of interest throughout the term of each agreement while interest received is based on an interest rate that resets and compounds daily over a specified interval (generally three months) throughout the term of each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that point in time. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the conditions of the agreement. Concurrent with the execution of each swap, the Association enters into a short-term borrowing in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap. Each individual swap agreement has been designated as a cash flow hedge of interest rate risk associated with either the Company's variable rate borrowings from the FHLB of Cincinnati or brokered CDs. In these challenging economic times with an extended inverted yield curve, the Association has found it financially beneficial to use swaps to extend the duration of our liabilities with a relatively lower borrowing cost. For more details, refer to Notes 6.

Previous wording

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. Refer to Notes 5. DEPOSITSand 6. BORROWED FUNDS for additional details on balances. 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, subject to a fee, are available to our retail CD customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB of Cincinnati; and we are not subject to early termination options with respect to our interest rate exchange contracts. Additionally, collateral pledges are not provided with respect to our retail CDs or our brokered CDs, but are required for our advances from the FHLB of Cincinnati as well as for our interest rate exchange contracts. We will continue to evaluate the structure of our funding sources based on current needs.

Current wording

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. Refer to Notes 5. DEPOSITSand 6. BORROWED FUNDS for additional details on balances. 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, subject to a fee, are available to our retail CD customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB of Cincinnati; and we are not subject to early termination options with respect to our interest rate exchange contracts. Additionally, collateral pledges are not provided with respect to our retail CDs or our brokered CDs, but are required for our advances from the FHLB of Cincinnati as well as for our interest rate exchange contracts. We will continue to evaluate the structure of our funding sources balancing the need to extend duration and manage cost.

Previous wording

We also manage interest rate risk by selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. First mortgage loans (primarily fixed-rate mortgages with terms of 15 years or more, Home Ready and some loans purchased through our correspondent lending partner) are originated under Fannie Mae procedures and are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. Currently, certain types of loans (i.e. our Smart Rate adjustable-rate loans, 10-year fixed-rate loans, and first mortgage loans secured by certain property types) are originated under our legacy procedures, which are not eligible for sale to Fannie Mae. We can also manage interest rate risk by selling non-Fannie Mae compliant mortgage loans to private investors, although those transactions may be limited to loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral. Additionally, sales to private investors are dependent upon favorable market conditions, including motivated buyers, and involve more complicated negotiations and longer settlement timelines.

Current wording

We also manage interest rate risk by selectively selling a portion of our long-term, fixed-rate mortgage loans in the secondary market. First mortgage loans (primarily fixed-rate mortgages with terms of 15 years or more, Home Ready and some loans purchased through our correspondent lending partner) are originated under Fannie Mae guidelines and are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. Currently, certain types of loans (i.e. our Smart Rate adjustable-rate loans, 10-year fixed-rate loans, and first mortgage loans secured by certain property types) are originated under our internally derived underwriting standards, which are not eligible for sale to Fannie Mae. We can also manage interest rate risk by selling non-Fannie Mae compliant mortgage loans to private investors, although those transactions may be limited to loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral. Additionally, sales to private investors are dependent upon favorable market conditions, including motivated buyers, and involve more complicated negotiations and longer settlement timelines.

Previous wording

During the six months ended March 31, 2024, $121.3 million of agency-compliant, long-term (15 to 30 years), fixed-rate mortgage loans were sold, or committed to be sold, to Fannie Mae on a servicing retained basis. Of these sold loans, $5.1 million were originated through our traditional mortgage banking brand, known as "Mortgage Passport", and $116.2 million were originated or purchased as other agency-compliant first mortgage loans. At March 31, 2024, loans classified as held for sale totaled $9.7 million. At March 31, 2024, we serviced $1.95 billion of loans we originated and later sold to investors.

Current wording

During the nine months ended June 30, 2024, $190.7 million of agency-compliant, long-term (15 to 30 years), fixed-rate mortgage loans were sold, or committed to be sold, to Fannie Mae on a servicing retained basis. Of these sold loans, $5.3 million were originated through our traditional mortgage banking brand, known as "Mortgage Passport", and $185.4 million were originated or purchased as other agency-compliant first mortgage loans. At June 30, 2024, loans classified as held for sale totaled $30.4 million. At June 30, 2024, we serviced $1.96 billion of loans we originated and later sold to investors.

Previous wording

We continue to consider liquidity and balance sheet management, as well as secondary market pricing, in evaluating the opportunity to sell loans. Additionally, we've expanded our ability to sell certain fixed-rate loans to Fannie through the use of more traditional mortgage banking activities, including a proprietary approach to risk-based pricing and loan-level pricing adjustments in markets outside of Ohio and Florida. This approach is not expected to significantly impact our financial results in fiscal year 2024. Loan sales are discussed in more detail within the Liquidity and Capital Resources section of this Item 2.

Current wording

We continue to consider liquidity and balance sheet management, as well as secondary market pricing, in evaluating the opportunity to sell loans. Additionally, we've expanded our ability to sell certain fixed-rate loans to Fannie Mae through the use of more traditional mortgage banking activities, including a proprietary approach to risk-based pricing and loan-level pricing adjustments in markets outside of Ohio and Florida. This approach is not expected to significantly impact our financial results in fiscal year 2024. Loan sales are discussed in more detail within the Liquidity and Capital Resources section of this Item 2.

Previous wording

In an effort to limit our credit risk exposure consistent with the low risk appetite approved by the Board of Directors, the credit eligibility criteria is evaluated to ensure a successful homeowner has the primary source of repayment, followed by a collateral position that allows for a secondary source of repayment, if needed. Products that do not result in an effective mix of repayment ability are not offered. We use stringent, conservative lending standards for underwriting to reduce our credit risk. For first mortgage loans originated during the current quarter, the average credit score was 775 and the average LTV was 71% at origination. Our current delinquency levels reflect the higher credit standards to which we subject all new originations. As of March 31, 2024, loans originated or purchased had a balance of $15.23 billion, of which $28.3 million, or 0.2%, were delinquent.

Current wording

In an effort to limit our credit risk exposure consistent with the low risk appetite approved by the Board of Directors, the credit eligibility criteria is evaluated to ensure a successful homeowner has the primary source of repayment, followed by a collateral position that allows for a secondary source of repayment, if needed. Products that do not result in an effective mix of repayment ability are not offered. We use stringent, conservative lending standards for underwriting to reduce our credit risk. For first mortgage loans originated during the current quarter, the average credit score was 777 and the average LTV was 71% at origination. Our current delinquency levels reflect the higher credit standards to which we subject all new originations. As of June 30, 2024, loans originated or purchased had a balance of $15.29 billion, of which $28.5 million, or 0.2%, were delinquent.

Previous wording

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 March 31, 2024, approximately 57.6% and 17.6% of the combined total of our residential Core and construction loans held for investment and approximately 24.8% and 22.9% 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, 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 24 other states and the District of Columbia, and as a result of that activity, the concentration ratios of the combined total of our residential Core and construction loans held for investment in Ohio and Florida have trended downward from their September 30, 2010, levels when the concentrations were 79.1% in Ohio and 19.0% in Florida. Of the total mortgage loans originated in the six months ended March 31, 2024, 22.0% are secured by properties in states other than Ohio or Florida.

Current wording

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 June 30, 2024, approximately 57.9% and 17.4% of the combined total of our residential Core and construction loans held for investment and approximately 24.1% and 22.8% 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, 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 24 other states and the District of Columbia, and as a result of that activity, the concentration ratios of the combined total of our residential Core and construction loans held for investment in Ohio and Florida have trended downward from their September 30, 2010, levels when the concentrations were 79.1% in Ohio and 19.0% in Florida. Of the total mortgage loans originated in the nine months ended June 30, 2024, 20.4% are secured by properties in states other than Ohio or Florida.

Previous wording

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. At March 31, 2024, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a “well capitalized” status) was 9.79%. We expect to continue to remain a well capitalized institution.

Current wording

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. At June 30, 2024, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a “well capitalized” status) was 9.96%. We expect to continue to remain a well capitalized institution.

Previous wording

In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits (including brokered deposits), 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. To attract deposits, we typically offer rates that are competitive with the rates on similar products offered by other financial institutions. At March 31, 2024, deposits totaled $9.94 billion (including $1.26 billion of brokered CDs), while borrowings totaled $4.96 billion and borrowers’ advances and servicing escrows totaled $125.4 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.

Current wording

In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits (including brokered deposits), 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. To attract deposits, we typically offer rates that are competitive with the rates on similar products offered by other financial institutions. At June 30, 2024, deposits totaled $10.03 billion (including $1.22 billion of brokered CDs), while borrowings totaled $4.83 billion and borrowers’ advances and servicing escrows totaled $83.6 million, combined. In evaluating funding sources, we consider many factors, including cost, collateral, duration and optionality, current availability, expected sustainability, impact on operations and capital levels.

Previous wording

We preserve the availability of alternative funding sources through various mechanisms. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. First, we pledge available real estate mortgage loans with the FHLB of Cincinnati and the FRB-Cleveland. At March 31, 2024, the Association had the ability to borrow a maximum of $6.82 billion from the FHLB of Cincinnati and $693.2 million from the FRB-Cleveland Discount Window. As of March 31, 2024, our capacity for additional borrowing from the FHLB of Cincinnati was $1.88 billion. Second, we have the ability to purchase overnight Fed Funds up to $575.0 million through various arrangements with other institutions. Third, we invest in high quality marketable securities that exhibit limited market price variability and, to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At March 31, 2024, our investment securities portfolio totaled $520.2 million. Finally, cash flows from operating activities have been a regular source of funds. During the six months ended March 31, 2024 and 2023, cash flows from operations provided $50.5 million and $43.1 million, respectively.

Current wording

While our retail deposit customers provide our primary source of funding, we maintain many alternative funding sources. First, we pledge available real estate mortgage loans with the FHLB of Cincinnati and the FRB-Cleveland. At June 30, 2024, the Association had the ability to borrow a maximum of $7.48 billion from the FHLB of Cincinnati and $646.0 million from the FRB-Cleveland Discount Window. As of June 30, 2024, our capacity for additional borrowing from the FHLB of Cincinnati was $2.68 billion. Second, we have the ability to purchase overnight Fed Funds up to $445.0 million through various arrangements with other institutions. Third, we invest in high quality marketable securities that exhibit limited market price variability and, to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At June 30, 2024, our investment securities portfolio totaled $523.0 million. Finally, cash flows from operating activities have been a regular source of funds. During the nine months ended June 30, 2024 and 2023, cash flows from operations provided $147.3 million and $76.9 million, respectively.

Previous wording

Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. We've successfully been able to reduce our operating expenses to offset the pressure of margin compression resulting from the extended inverted yield curve. Our ratio of annualized non-interest expense to average assets was 1.20% for the six months ended March 31, 2024, and 1.36% for the six months ended March 31, 2023. As of March 31, 2024, our average assets per full-time employee and our average deposits per full-time employee were $18.1 million and $10.6 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 ($234.4 million per branch office as of March 31, 2024) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses to help safeguard against margin compression.

Current wording

Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. We have successfully been able to reduce our operating expenses to offset the pressure of margin compression resulting from the extended inverted yield curve. Our ratio of annualized non-interest expense to average assets was 1.20% for the nine months ended June 30, 2024, and 1.34% for the nine months ended June 30, 2023. As of June 30, 2024, our average assets per full-time employee and our average deposits per full-time employee were $18.5 million and $10.9 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 ($238.1 million per branch office as of June 30, 2024) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses to help safeguard against margin compression.

Previous wording

On October 1, 2023, the Individual Valuation Allowance (IVA) established for any loans dependent on cash flows, such as performing TDRs, was eliminated with the adoption of ASU 2022-02. Subsequently, all non-collaterally dependent modifications have an allowance estimated through the lifetime loss model. The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include:

Current wording

On October 1, 2023, the Individual Valuation Allowance (IVA) established for any loans dependent on cash flows, such as performing TDRs, was eliminated with the adoption of ASU 2022-02. Subsequently, all non-collaterally dependent modifications have an allowance estimated through the lifetime loss model. The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include, among other:

Previous wording

Home equity loans and lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and credit lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and decreasing housing prices, these higher loan-to-value ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has a vested interest in keeping the loan current when compared to a borrower with little or no equity in the property. We conduct an expanded loan level evaluation of our home equity loans and lines of credit, including bridge loans used to aid borrowers in buying a new home before selling their old one, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. We have established an allowance for our unfunded commitments on this portfolio, which is recorded in other liabilities. In general, a considerable portion of our gross charge-offs originate from our home equity loans and lines of credit portfolios. At March 31, 2024, we had an amortized cost of $3.36 billion in home equity loans and home equity lines of credit outstanding, of which $4.5 million, or 0.13% were delinquent 90 days or more.

Current wording

Home equity loans and lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and credit lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and decreasing housing prices, these higher loan-to-value ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has a vested interest in keeping the loan current when compared to a borrower with little or no equity in the property. We conduct an expanded loan level evaluation of our home equity loans and lines of credit, including bridge loans used to aid borrowers in buying a new home before selling their old one, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. We have established an allowance for our unfunded commitments on this portfolio, which is recorded in other liabilities. In general, a considerable portion of our gross charge-offs originate from our home equity loans and lines of credit portfolios. At June 30, 2024, we had an amortized cost of $3.63 billion in home equity loans and home equity lines of credit outstanding, of which $4.4 million, or 0.12%, were delinquent 90 days or more.

Previous wording

The following table sets forth additional information with respect to net recoveries by category for the periods indicated.

Current wording

The following table sets forth additional information with respect to net recoveries by category for the periods indicated. Net recoveries on Construction loans were immaterial and therefore were not included in the table below.

Previous wording

We continue to evaluate loans becoming delinquent for potential losses and record provisions for the estimate of those losses. We reported net recoveries in each quarter for the past five years, primarily due to improvements in the values of collateral properties used to secure loans that were fully or partially charged off after the 2008 collapse of the housing market. Charge-offs are recognized on loans identified as collateral-dependent and subject to individual review when the collateral value does not sufficiently support full repayment of the obligation. Recoveries are recognized on previously charged-off loans as borrowers perform their repayment obligations or as loans with improved collateral positions reach final resolution. During the six months ended March 31, 2024 and March 31, 2023, recoveries exceeded loan charge-offs by $2.3 million and $2.9 million, respectively.

Current wording

We continue to evaluate loans becoming delinquent for potential losses and record provisions for the estimate of those losses. We reported net recoveries in each quarter for the past five years, primarily due to improvements in the values of collateral properties used to secure loans that were fully or partially charged off after the 2008 collapse of the housing market. Charge-offs are recognized on loans identified as collateral-dependent and subject to individual review when the collateral value does not sufficiently support full repayment of the obligation. Recoveries are recognized on previously charged-off loans as borrowers perform their repayment obligations or as loans with improved collateral positions reach final resolution. During the nine months ended June 30, 2024 and June 30, 2023, recoveries exceeded loan charge-offs by $3.6 million and $4.6 million, respectively.

Previous wording

During the six months ended March 31, 2024, total gross charge-offs decreased slightly compared to the six months ended March 31, 2023. Delinquent loans continue to be evaluated for potential losses and provisions are recorded for the estimate of potential losses of those loans. Subject to changes in the economic environment, a moderate level of charge-offs are expected as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.

Current wording

During the nine months ended June 30, 2024, total gross charge-offs decreased slightly compared to the nine months ended June 30, 2023. Delinquent loans continue to be evaluated for potential losses and provisions are recorded for the estimate of potential losses of those loans. Subject to changes in the economic environment, a moderate level of charge-offs are expected as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.

Previous wording

During the three months ended March 31, 2024, the total allowance for credit losses increased to $94.8 million, from $94.6 million at December 31, 2023. The total allowance for credit losses is comprised of the asset portion, which is applied to the loan portfolio and the liability portion, which is applied to off-balance sheet exposures, primarily related to undrawn equity exposures. During the three months ended March 31, 2024, the asset portion of the total allowance decreased to $68.2 million from $69.1 million, and the liability portion of the total allowance increased to $26.7 million from $25.5 million. We recorded a $1.0 million net release of allowance for credit losses for the period, consisting of a $2.2 million release of provision on loans and a $1.2 million provision for unfunded commitments.

Current wording

During the three months ended June 30, 2024, the total allowance for credit losses increased to $95.7 million, from $94.8 million at March 31, 2024. The total allowance for credit losses is comprised of the asset portion, which is applied to the loan portfolio and the liability portion, which is applied to off-balance sheet exposures, primarily related to undrawn equity exposures. During the three months ended June 30, 2024, the asset portion of the total allowance decreased to $67.5 million from $68.2 million, and the liability portion of the total allowance increased to $28.2 million from $26.7 million. We recorded a $0.5 million net release of allowance for credit losses for the period, consisting of a $2.0 million release of provision on loans and a $1.5 million provision for unfunded commitments.

Previous wording

Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. Changes in the allowance for credit losses on loan balances during the three months ended March 31, 2024, were primarily related to new growth in the home equity loans and lines of credit portfolio, partially offset by a decrease in the residential Core portfolio balance primarily due to aging.

Current wording

Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. Changes in the allowance for credit losses on loan balances during the three months ended June 30, 2024, were related to a decrease in the residential Core portfolio balance primarily due to aging and decreases in qualitative factors, partially offset by new growth in the home equity loans and lines of credit portfolio.

Previous wording

The amortized cost of the residential Core portfolio decreased 1.5%, or $179.4 million, and its total allowance decreased 3.4% or $1.7 million as of March 31, 2024, compared to December 31, 2023. The amortized cost of the home equity loans and lines of credit portfolio increased 3.8%, or $122.6 million, and its total allowance increased 2.5% to $23.0 million from $22.4 million at December 31, 2023. As we are no longer originating loans under our Home Today program, there is an expected net recovery position for this portfolio which was $2.6 million at March 31, 2024, and $2.8 million at December 31, 2023. Under the CECL methodology, the life of loan concept allows for qualitative adjustments for the expected future recoveries of previously charged-off loans, which is driving the allowance balance for the Home Today loans to be negative. Refer to the"Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for more information.

Current wording

The amortized cost of the residential Core portfolio decreased 1.9%, or $225.8 million, and its total allowance decreased 5.2%, or $2.5 million, as of June 30, 2024, compared to March 31, 2024. The amortized cost of the home equity loans and lines of credit portfolio increased 8.1%, or $271.2 million, and its total allowance increased 10.3% to $25.4 million, from $23.0 million at March 31, 2024. As we are no longer originating loans under our Home Today program, there is an expected net recovery position for this portfolio which was $3.1 million at June 30, 2024, and $2.6 million at March 31, 2024. Under the CECL methodology, the life of loan concept allows for qualitative adjustments for the expected future recoveries of previously charged-off loans, which is driving the allowance balance for the Home Today loans to be negative. Refer to the"Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for more information.

Previous wording

The following table provides amortized cost and an analysis of our residential mortgage loans by origination LTV, origination year and portfolio at March 31, 2024. LTVs are not updated subsequent to origination except as part of the charge-off process.

Current wording

The following table provides amortized cost and an analysis of our residential mortgage loans by origination LTV, origination year and portfolio at June 30, 2024. Subsequent to origination, LTVs are only updated for our home equity loans and lines of credit and for residential mortgage loans collaterally reviewed.

Previous wording

At March 31, 2024, the unpaid principal balance of the home equity loans and lines of credit portfolio consisted of $478.6 million in home equity loans (including $60.8 million of home equity lines of credit, which are in repayment and no longer eligible to be drawn upon, and $12.4 million in bridge loans) and $2.84 billion in home equity lines of credit.

Current wording

At June 30, 2024, the unpaid principal balance of the home equity loans and lines of credit portfolio consisted of $537.5 million in home equity loans (including $59.9 million of home equity lines of credit, which are in repayment and no longer eligible to be drawn upon, and $11.3 million in bridge loans) and $3.05 billion in home equity lines of credit.

Previous wording

The principal balance of home equity lines of credit in the draw period that have a current mean CLTV over 80% or unknown is $25.4 million, or 0.9% at March 31, 2024. In recognition of the previous past weakness in the housing market, we continue to conduct an expanded loan level evaluation of our home equity lines of credit which are delinquent 90 days or more.

Current wording

The principal balance of home equity lines of credit in the draw period that have a current mean CLTV over 80% or unknown is $16.4 million, or 0.5%, at June 30, 2024. In recognition of the previous past weakness in the housing market, we continue to conduct an expanded loan level evaluation of our home equity lines of credit which are delinquent 90 days or more.

Previous wording

At March 31, 2024, 28.5% of the home equity lending portfolio was either in a first lien position (14.7%), in a subordinate (second) lien position behind a first lien that we held (11.5%) or behind a first lien that was held by a loan that we originated, sold and now serviced for others (2.3%). At March 31, 2024, 12.6% of the home equity line of credit portfolio in the draw period were making only the minimum payment on the outstanding line balance. Minimum payments include both a principal and interest component.

Current wording

At June 30, 2024, 26.8% of the home equity lending portfolio was either in a first lien position (13.8%), in a subordinate (second) lien position behind a first lien that we held (10.8%) or behind a first lien that was held by a loan that we originated, sold and now serviced for others (2.2%). At June 30, 2024, 12.5% of the home equity line of credit portfolio in the draw period were making only the minimum payment on the outstanding line balance. Minimum payments include both a principal and interest component.

Previous wording

Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.09% of total net loans at March 31, 2024 and at September 30, 2023. The percentage of loans seriously delinquent to total net loans increased in the residential Core portfolio to 0.06% at March 31, 2024, from 0.05% at September 30, 2023. Such loans in the residential Home Today portfolio remained at 0.01% for both periods. Serious delinquencies in the home equity loans and lines of credit portfolio remained at 0.03% at March 31, 2024 from September 30, 2023.

Current wording

Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.10% of total net loans at June 30, 2024, and 0.09% at September 30, 2023. The percentage of loans seriously delinquent to total net loans increased in the residential Core portfolio to 0.06% at June 30, 2024, from 0.05% at September 30, 2023. Such loans in the residential Home Today portfolio remained at 0.01% for both periods. Serious delinquencies in the home equity loans and lines of credit portfolio remained at 0.03% for both periods.

Previous wording

The following table sets forth the amortized costs and categories of our non-performing assets at the dates indicated. There were no construction loans reported as non-accrual for the dates presented.

Current wording

The following table sets forth the amortized costs and categories of our non-performing assets at the dates indicated. There were no construction loans reported as non-accrual at the dates presented.

Previous wording

Total assets increased $99.2 million, or 0.6%, to $17.02 billion at March 31, 2024, from $16.92 billion at September 30, 2023. This increase was mainly the result of an increase in cash and cash equivalents, partially offset by a decreases in loans held for investment, and prepaid expenses and other assets.

Current wording

Total assets increased $117.0 million, or 0.7%, to $17.03 billion at June 30, 2024, from $16.92 billion at September 30, 2023. This increase was mainly the result of an increase in cash and cash equivalents and mortgage loans, partially offset by decreases in prepaid expenses and other assets.

Previous wording

Cash and cash equivalents increased $127.6 million, or 27.3%, to $594.3 million at March 31, 2024, from $466.7 million at September 30, 2023. Cash is managed to maintain the level of liquidity described later in the Liquidity and Capital Resources section.

Current wording

Cash and cash equivalents increased $93.7 million, or 20.1%, to $560.4 million at June 30, 2024, from $466.7 million at September 30, 2023. Cash is managed to maintain the level of liquidity described later in the Liquidity and Capital Resources section.

Previous wording

Investment securities, all of which are classified as available for sale, increased $11.9 million to $520.2 million at March 31, 2024, from $508.3 million at September 30, 2023. The increase was the result of a $3.2 million increase in the mortgage-backed securities portfolio, and an $8.6 million increase in the balance of U.S. government and agency obligations during the six months ended March 31, 2024. There were no sales of investment securities during the six months ended March 31, 2024.

Current wording

Investment securities, all of which are classified as available for sale, increased $14.7 million to $523.0 million at June 30, 2024, from $508.3 million at September 30, 2023. The increase was the result of a $5.8 million increase in the mortgage-backed securities portfolio, and an $8.9 million increase in the balance of U.S. government and agency obligations during the nine months ended June 30, 2024. There were no sales of investment securities during the nine months ended June 30, 2024.

Previous wording

Loans held for investment, net of deferred loan fees and allowance for credit losses, decreased $16.1 million, or less than 1%, to $15.15 billion at March 31, 2024, from $15.17 billion at September 30, 2023, as repayments and sales of mortgage loans held for investment outpaced originations and additional draws on existing accounts. This decrease included a $310.2 million, or 2.6%, decrease in residential mortgage loans to $11.81 billion at March 31, 2024, from $12.12 billion at September 30, 2023. In addition, there was a $289.1 million increase in the balance of home equity loans and lines of credit during the six months ended March 31, 2024. During the six months ended March 31, 2024, $99.8 million of three- and five-year “Smart Rate” loans were originated while $309.1 million of fixed-rate first mortgage loans were originated. Between September 30, 2023 and March 31, 2024, the total fixed-rate portion of the first mortgage loan portfolio decreased $170.5 million. During the six months ended March 31, 2024, $121.3 million of first mortgage loans were sold or committed to sell to Fannie Mae.

Current wording

Loans held for investment, net of deferred loan fees and allowance for credit losses, increased $24.2 million, or less than 1%, to $15.19 billion at June 30, 2024, from $15.17 billion at September 30, 2023, as loans originated and purchased and additional draws on existing home equity lines of credit accounts outpaced repayments and sales of mortgage loans held for investment. There was a $558.3 million increase in home equity loans and lines of credit during the nine months ended June 30, 2024. In addition, there was a $536.8 million, or 4.4%, decrease in residential mortgage loans to $11.59 billion at June 30, 2024, from $12.12 billion at September 30, 2023. During the nine months ended June 30, 2024, $128.8 million of three- and five-year “Smart Rate” loans were originated, while $470.0 million of fixed-rate first mortgage loans were originated. Between September 30, 2023 and June 30, 2024, the total fixed-rate portion of the first mortgage loan portfolio decreased $273.6 million. During the nine months ended June 30, 2024, the principal balance of first mortgage loans sold or committed for sale to Fannie Mae was $190.7 million.

Previous wording

Commitments originated for home equity loans, lines of credit, and bridge loans were $915.4 million for the six months ended March 31, 2024, compared to $720.0 million for the six months months ended March 31, 2023. At March 31, 2024, pending commitments to originate new equity loans and lines of credit were $202.9 million. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.

Current wording

Commitments originated for home equity loans, lines of credit, and bridge loans were $1.62 billion for the nine months ended June 30, 2024, compared to $1.24 billion for the nine months ended June 30, 2023. At June 30, 2024, pending commitments to originate new home equity loans and lines of credit were $207.4 million. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.