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TFSL TFS Financial

Filed: 9 Feb 21, 3:32pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-Q
________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2020
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from              to             
Commission File Number 001-33390
________________________________________
TFS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
________________________________________
United States of America 52-2054948
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer
Identification No.)
7007 Broadway Avenue
Cleveland,Ohio 44105
(Address of Principal Executive Offices) (Zip Code)
(216) 441-6000
Registrant’s telephone number, including area code:
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
________________________________________
Securities registered pursuant to Section 12(b) of the Act
Title of each classTrading Symbol(s)Name of each exchange in which registered
Common Stock, par value $0.01 per shareTFSLThe NASDAQ Stock Market, LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x  Accelerated filer ¨
Non-accelerated filer o  Smaller Reporting Company 
Emerging Growth Company
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐      No  x
As of February 4, 2021, there were 280,579,029 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 80.9% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.


TFS Financial Corporation
INDEX

2

GLOSSARY OF TERMS
TFS Financial Corporation provides the following list of acronyms and defined terms as a tool for the reader. The acronyms and defined terms identified below are used throughout the document.
ACT: Tax Cuts and Jobs Act
FHFA: Federal Housing Finance Agency
AOCI: Accumulated Other Comprehensive Income
FHLB: Federal Home Loan Bank
ARM: Adjustable Rate Mortgage
FICO: Financing Corporation
ASC: Accounting Standards Codification
FRB-Cleveland: Federal Reserve Bank of Cleveland
ASU: Accounting Standards Update
Freddie Mac: Federal Home Loan Mortgage Corporation
Association: Third Federal Savings and Loan
FRS: Board of Governors of the Federal Reserve System
Association of Cleveland
GAAP: Generally Accepted Accounting Principles
BOLI: Bank Owned Life Insurance
Ginnie Mae: Government National Mortgage Association
CARES Act: Coronavirus Aid, Relief and Economic Security
GVA: General Valuation Allowances
Act
HPI: Home Price Index
CDs: Certificates of Deposit
IRR: Interest Rate Risk
CECL: Current Expected Credit Losses
IRS: Internal Revenue Service
CFPB: Consumer Financial Protection Bureau
IVA: Individual Valuation Allowance
CLTV: Combined Loan-to-Value
LIHTC: Low Income Housing Tax Credit
Company: TFS Financial Corporation and its
LIP: Loans-in-Process
subsidiaries
LTV: Loan-to-Value
DFA: Dodd-Frank Wall Street Reform and Consumer
MGIC: Mortgage Guaranty Insurance Corporation
Protection Act
OCC: Office of the Comptroller of the Currency
EaR: Earnings at Risk
OCI: Other Comprehensive Income
EPS: Earnings per Share
PMI: Private Mortgage Insurance
ESOP: Third Federal Employee (Associate) Stock
PMIC: PMI Mortgage Insurance Co.
Ownership Plan
REMICs: Real Estate Mortgage Investment Conduits
EVE: Economic Value of Equity
SEC: United States Securities and Exchange Commission
Fannie Mae: Federal National Mortgage Association
TDR: Troubled Debt Restructuring
FASB: Financial Accounting Standards Board
Third Federal Savings, MHC: Third Federal Savings
FDIC: Federal Deposit Insurance Corporation
and Loan Association of Cleveland, MHC



3

Item 1. Financial Statements
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
December 31,
2020
September 30,
2020
ASSETS
Cash and due from banks$29,512 $25,270 
Other interest-earning cash equivalents470,408 472,763 
Cash and cash equivalents499,920 498,033 
Investment securities available for sale (amortized cost $443,328 and $447,384, respectively)447,609 453,438 
Mortgage loans held for sale ($107,978 and $36,078 measured at fair value, respectively)111,288 36,871 
Loans held for investment, net:
Mortgage loans12,925,023 13,104,959 
Other loans2,637 2,581 
Deferred loan expenses, net42,138 42,459 
Allowance for credit losses on loans(70,290)(46,937)
Loans, net12,899,508 13,103,062 
Mortgage loan servicing rights, net8,230 7,860 
Federal Home Loan Bank stock, at cost136,793 136,793 
Real estate owned, net102 185 
Premises, equipment, and software, net40,770 41,594 
Accrued interest receivable34,840 36,634 
Bank owned life insurance contracts294,565 222,919 
Other assets99,208 104,832 
TOTAL ASSETS$14,572,833 $14,642,221 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits$9,190,600 $9,225,554 
Borrowed funds3,444,998 3,521,745 
Borrowers’ advances for insurance and taxes142,248 111,536 
Principal, interest, and related escrow owed on loans serviced50,866 45,895 
Accrued expenses and other liabilities86,289 65,638 
Total liabilities12,915,001 12,970,368 
Commitments and contingent liabilities00
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 280,564,920 and 280,150,006 outstanding at December 31, 2020 and September 30, 2020, respectively3,323 3,323 
Paid-in capital1,739,178 1,742,714 
Treasury stock, at cost; 51,753,830 and 52,168,744 shares at December 31, 2020 and September 30, 2020, respectively(764,774)(767,649)
Unallocated ESOP shares(39,000)(40,084)
Retained earnings—substantially restricted840,678 865,514 
Accumulated other comprehensive loss(121,573)(131,965)
Total shareholders’ equity1,657,832 1,671,853 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$14,572,833 $14,642,221 
See accompanying notes to unaudited interim consolidated financial statements.
4

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share and per share data)
 For the Three Months Ended
December 31,
 20202019
INTEREST AND DIVIDEND INCOME:
Loans, including fees$100,126 $115,225 
Investment securities available for sale987 2,864 
Other interest and dividend earning assets816 1,963 
Total interest and dividend income101,929 120,052 
INTEREST EXPENSE:
Deposits27,696 38,316 
Borrowed funds15,490 17,551 
Total interest expense43,186 55,867 
NET INTEREST INCOME58,743 64,185 
PROVISION (RELEASE) FOR CREDIT LOSSES(2,000)(3,000)
NET INTEREST INCOME AFTER PROVISION (RELEASE) FOR CREDIT LOSSES60,743 67,185 
NON-INTEREST INCOME:
Fees and service charges, net of amortization2,495 2,146 
Net gain on the sale of loans16,443 2,925 
Increase in and death benefits from bank owned life insurance contracts1,647 1,561 
Other876 5,298 
Total non-interest income21,461 11,930 
NON-INTEREST EXPENSE:
Salaries and employee benefits28,338 25,885 
Marketing services5,733 4,461 
Office property, equipment and software6,435 6,446 
Federal insurance premium and assessments2,390 2,619 
State franchise tax1,151 1,132 
Other expenses7,682 6,777 
Total non-interest expense51,729 47,320 
INCOME BEFORE INCOME TAXES30,475 31,795 
INCOME TAX EXPENSE5,473 6,153 
NET INCOME$25,002 $25,642 
Earnings per share—basic and diluted$0.09 $0.09 
Weighted average shares outstanding
Basic276,216,596 275,578,184 
Diluted278,028,072 277,888,588 

See accompanying notes to unaudited interim consolidated financial statements.
5

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
For the Three Months Ended
December 31,
20202019
Net income$25,002 $25,642 
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (losses) on securities available for sale(1,373)2,923 
Net change in cash flow hedges11,299 15,205 
Net change in defined benefit plan obligation466 452 
Total other comprehensive income10,392 18,580 
Total comprehensive income$35,394 $44,222 
See accompanying notes to unaudited interim consolidated financial statements.
6

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(In thousands, except share and per share data)
For the Three Months Ended December 31, 2019
 Common
stock
Paid-in
capital
Treasury
stock
Unallocated
common stock
held by ESOP
Retained
earnings
Accumulated other
comprehensive
income (loss)
Total
shareholders’
equity
Balance at September 30, 2019$3,323 $1,734,154 $(764,589)$(44,417)$837,662 $(69,379)$1,696,754 
Net income— — — — 25,642 — 25,642 
Other comprehensive income (loss), net of tax— — — — 18,580 18,580 
ESOP shares allocated or committed to be released— 1,011 — 1,083 — — 2,094 
Compensation costs for equity incentive plans— 1,189 — — — 1,189 
Purchase of treasury stock (19,500 shares)— — (359)— — — (359)
Treasury stock allocated to equity incentive plan— (32)(1,544)— — (1,576)
Dividends paid to common shareholders ($0.27 per common share)— — — — (13,375)— (13,375)
Balance at December 31, 2019$3,323 $1,736,322 $(766,492)$(43,334)$849,929 $(50,799)$1,728,949 
For the Three Months Ended December 31, 2020
Common
stock
Paid-in
capital
Treasury
stock
Unallocated
common stock
held by ESOP
Retained
earnings
Accumulated other
comprehensive
income (loss)
Total
shareholders’
equity
Balance at September 30, 2020$3,323 $1,742,714 $(767,649)$(40,084)$865,514 $(131,965)$1,671,853 
Cumulative effect from changes in accounting principle1
— — — — (35,763)— (35,763)
Net income— — — — 25,002 — 25,002 
Other comprehensive income (loss), net of tax— — — — 10,392 10,392 
ESOP shares allocated or committed to be released— 718 — 1,084 — — 1,802 
Compensation costs for equity incentive plans— 1,566 — — — 1,566 
Treasury stock allocated to equity incentive plan— (5,820)2,875 — — (2,945)
Dividends paid to common shareholders ($0.28 per common share)— — — — (14,075)— (14,075)
Balance at December 31, 2020$3,323 $1,739,178 $(764,774)$(39,000)$840,678 $(121,573)$1,657,832 
1See Note 14. RECENT ACCOUNTING PRONOUNCEMENTS, ASU 2016-13 Adopted during 3 months ended December 31, 2020
See accompanying notes to unaudited interim consolidated financial statements.

7

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
 For the Three Months Ended December 31,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$25,002 $25,642 
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense3,368 3,283 
Depreciation and amortization9,831 7,794 
Deferred income taxes(237)(64)
Provision (release) for credit losses(2,000)(3,000)
Net gain on the sale of loans(16,443)(2,925)
Net gain on sale of commercial property(4,257)
Other net (gains) losses(13)
Proceeds from sales of loans held for sale11,569 9,753 
Loans originated for sale(16,079)(15,606)
Increase in bank owned life insurance contracts(1,662)(1,577)
Net decrease (increase) in interest receivable and other assets11,695 (5,705)
Net (decrease) increase in accrued expenses and other liabilities(871)16,066 
Net cash provided by operating activities24,178 29,391 
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated(1,471,386)(1,055,571)
Principal repayments on loans1,371,385 583,081 
Proceeds from principal repayments and maturities of:
Securities available for sale94,915 52,574 
Proceeds from sale of:
Loans221,277 200,923 
Real estate owned82 635 
Premises, equipment and other Assets23,512 
Purchases of:
Bank-owned life insurance(70,000)
Securities available for sale(92,964)(56,377)
Premises and equipment(518)(537)
Other29 16 
Net cash provided by (used in) investing activities52,820 (251,744)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits(34,954)234,536 
Net increase (decrease) in borrowers' advances for insurance and taxes30,712 (3,937)
Net increase (decrease) in principal and interest owed on loans serviced4,971 (1,406)
Net decrease in short-term borrowed funds(75,102)(51,093)
Proceeds from long-term borrowed funds150,000 
Repayment of long-term borrowed funds(1,645)(112,239)
Cash collateral/settlements received from derivative counterparties17,927 27,921 
Purchase of treasury shares(395)
Acquisition of treasury shares through net settlement of stock benefit plans compensation(2,945)(1,576)
Dividends paid to common shareholders(14,075)(13,375)
Net cash (used in) provided by financing activities(75,111)228,436 
NET INCREASE IN CASH AND CASH EQUIVALENTS1,887 6,083 
CASH AND CASH EQUIVALENTS—Beginning of period498,033 275,143 
CASH AND CASH EQUIVALENTS—End of period$499,920 $281,226 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits$28,011 $37,729 
Cash paid for interest on borrowed funds4,334 19,485 
Cash paid for income taxes27 21 
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned41 1,277 
Transfer of loans from held for investment to held for sale277,056 198,694 
Treasury stock issued for stock benefit plans5,895 32 
See accompanying notes to unaudited interim consolidated financial statements.
8

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands unless otherwise indicated)
1.BASIS OF PRESENTATION
TFS Financial Corporation, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering, and, to a much lesser extent, other financial services. As of December 31, 2020, approximately 81% of the Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC. The thrift subsidiary of TFS Financial Corporation is Third Federal Savings and Loan Association of Cleveland.
The accounting and reporting policies followed by the Company conform in all material respects to U.S. GAAP and to general practices in the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for credit losses, the valuation of deferred tax assets, and the determination of pension obligations are particularly subject to change.
The unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the CONSOLIDATED STATEMENTS OF CONDITION of the Company at December 31, 2020, and its results of operations and cash flows for the periods presented. Such adjustments are the only adjustments reflected in the unaudited interim financial statements.
In accordance with SEC Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020 contains audited consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2021 or for any other period.
Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology referred to as the CECL methodology. Refer to NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES and NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS for additional details related to the adoption.
Effective October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent amendments related to the ASU (collectively, “Topic 606”). The core principle of the guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. The adoption did not have a significant impact to the Company's consolidated financial statements, as such, a cumulative effect adjustment to the opening balance of retained earnings at adoption was not necessary. Neither the new standard, nor any of the related amendments, resulted in a material change from our current accounting for revenue because a significant amount of the Company’s revenue streams such as interest income, are not within the scope of Topic 606. Two of the Company's revenue streams within scope of Topic 606 are the sales of REO and deposit account and other transaction-based service fee income. Both streams are immaterial and therefore quantitative information regarding these streams is not disclosed.
2.EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing basic earnings per share, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, and the 227,119,132 shares held by Third Federal Savings, MHC. For purposes of computing dilutive earnings per share, stock options and restricted and performance share units with a dilutive impact are added to the outstanding shares used in the basic earnings per share calculation. Unvested shares awarded pursuant to the Company's restricted stock plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. Performance share units, determined
9

to be contingently issuable and not participating securities, are excluded from the calculation of basic EPS. At December 31, 2020 and 2019, respectively, the ESOP held 3,900,056 and 4,333,396 shares, respectively, that were neither allocated to participants nor committed to be released to participants.

The following is a summary of the Company's earnings per share calculations.
 For the Three Months Ended December 31,
 20202019
 IncomeSharesPer share
amount
IncomeSharesPer share
amount
 (Dollars in thousands, except per share data)
Net income$25,002 $25,642 
Less: income allocated to restricted stock units409 417 
Basic earnings per share:
Income available to common shareholders$24,593 276,216,596 $0.09 $25,225 275,578,184 $0.09 
Diluted earnings per share:
Effect of dilutive potential common shares1,811,476 2,310,404 
Income available to common shareholders$24,593 278,028,072 $0.09 $25,225 277,888,588 $0.09 
    
    The following is a summary of outstanding stock options and restricted stock units and performance share units that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.
 For the Three Months Ended December 31,
 20202019
Options to purchase shares573,500 293,200 
Restricted and performance stock units471,810 136,945 

3.INVESTMENT SECURITIES
Investments available for sale are summarized in the tables below. Accrued interest in the periods presented is $1,048 and $1,121 as of December 31, 2020 and September 30, 2020, respectively, and is reported as accrued interest receivable on the unaudited CONSOLIDATED STATEMENTS OF CONDITION.
 December 31, 2020
 Amortized
Cost
Gross
Unrealized
Fair
Value
 GainsLosses
REMICs$437,470 $4,614 $(583)$441,501 
Fannie Mae certificates5,858 251 (1)6,108 
Total$443,328 $4,865 $(584)$447,609 

 September 30, 2020
 Amortized
Cost
Gross
Unrealized
Fair
Value
 GainsLosses
REMICs$441,419 $6,043 $(259)$447,203 
Fannie Mae certificates5,965 270 6,235 
Total$447,384 $6,313 $(259)$453,438 
10


Gross unrealized losses on available for sale securities and the estimated fair value of the related securities, aggregated by the length of time the securities have been in a continuous loss position, at December 31, 2020 and September 30, 2020, were as follows:
December 31, 2020
Less Than 12 Months12 Months or MoreTotal
Estimated Fair ValueUnrealized LossEstimated Fair ValueUnrealized LossEstimated Fair ValueUnrealized Loss
Available for sale—
  REMICs$153,747 $583 $$$153,747 $583 
Fannie Mae certificates356 356 
Total$154,103 $584 $$$154,103 $584 

September 30, 2020
Less Than 12 Months12 Months or MoreTotal
Estimated Fair ValueUnrealized LossEstimated Fair ValueUnrealized LossEstimated Fair ValueUnrealized Loss
Available for sale—
  REMICs$105,566 $259 $$$105,566 $259 
We believe the unrealized losses on investment securities were attributable to changes in market interest rates. The contractual terms of U.S. government and agency obligations do not permit the issuer to settle the security at a price less than the par value of the investment. The contractual cash flows of mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. REMICs are issued by or backed by securities issued by these governmental agencies. It is expected that the securities would not be settled at a price substantially less than the amortized cost of the investment. The U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.
Since the decline in value is attributable to changes in market interest rates and not credit quality and because the Company has neither the intent to sell the securities nor is it more likely than not the Company will be required to sell the securities for the time periods necessary to recover the amortized cost, the Company expects to receive all contractual cash flows from these investments. Therefore, no allowance for credit losses is recorded with respect to securities as of December 31, 2020.
4.LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans held for investment consist of the following:
December 31,
2020
September 30,
2020
Real estate loans:
Residential Core$10,658,160 $10,774,845 
Residential Home Today72,129 75,166 
Home equity loans and lines of credit2,170,596 2,232,236 
Construction53,829 47,985 
Real estate loans12,954,714 13,130,232 
Other loans2,637 2,581 
Add (deduct):
Deferred loan expenses, net42,138 42,459 
Loans in process(29,691)(25,273)
Allowance for credit losses on loans(70,290)(46,937)
Loans held for investment, net$12,899,508 $13,103,062 
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Loans are carried at amortized cost, which includes outstanding principal balance adjusted for any unamortized premiums or discounts, net of deferred fees and expenses. Accrued interest in the periods presented is $33,792 and $35,513 as of December 31, 2020 and September 30, 2020, respectively, and is reported as accrued interest receivable on the unaudited CONSOLIDATED STATEMENTS OF CONDITION.
A large concentration of the Company’s lending is in Ohio and Florida. As of December 31, 2020 and September 30, 2020, the percentage of aggregate Residential Core, Home Today and Construction loans held in Ohio was 55% and 56%, respectively, and the percentage held in Florida was 17% as of both dates. As of December 31, 2020 and September 30, 2020, home equity loans and lines of credit were concentrated in the states of Ohio (29% as of both dates), Florida (20% and 19%, respectively), and California (15% and 16%, respectively).
Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers and most loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after September 30, 2016.
    Regulatory agencies have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020). FASB confirmed the foregoing regulatory agencies' view, that such short-term modifications (e.g., six months) made on a good-faith basis to borrowers who were current as of the implementation date of a relief program in response to COVID-19 are not TDRs. The regulatory agencies stated that performing loans granted payment deferrals due to COVID-19 in accordance with this interagency statement are not generally considered past due or non-accrual. The revised statement provides that eligible loan modifications related to COVID-19 may also be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. The CARES Act offers temporary relief from TDRs on modifications made as a result of COVID-19 that were not more than 30 days past due as of December 31, 2019. The Company has elected to apply the temporary suspension of TDR requirements provided by the revised interagency statement for eligible loan modifications. For loan modifications that are not eligible for the suspension offered by the revised interagency statement, the Company considers the CARES Act to evaluate loan modifications within its scope, or existing TDR evaluation policies if the modification does not fall within the scope of these Acts.
As of December 31, 2020, some of our borrowers have experienced unemployment or reduced income as a result of the COVID-19 global pandemic and have requested some type of loan payment forbearance. At December 31, 2020 and September 30, 2020, respectively, short-term forbearance plans offered to borrowers affected by COVID-19 totaled $94,057 and $165,642, of which $10,120 and $15,623 are classified as troubled debt restructurings due to either their classification as a TDR prior to the COVID-19 forbearance or not meeting the criteria to be exempt from TDR classification. Forbearance plans allow borrowers experiencing temporary financial hardship to defer a limited number of payments to a later point in time and are initially offered for a three-month period, which may be extended for borrowers that continue to be affected by COVID-19. The majority of active COVID-19 forbearance plans have been extended to at least six months.
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The following table summarizes, as of December 31, 2020 and September 30, 2020, for each portfolio by geographic location, active forbearance plans by amortized cost and as a percent of total loans.
December 31,
2020
Forbearance plans as % of respective PortfolioSeptember 30,
2020
Forbearance plans as % of respective Portfolio
Real estate loans:
Residential Core
Ohio$27,559 $45,926 
Florida22,343 38,804 
Other26,758 56,107 
Total76,660 0.72 %140,837 1.31 %
Residential Home Today
Ohio3,511 5,012 
Florida170 379 
Total3,681 5.13 %5,391 7.21 %
Home equity loans and lines of credit
Ohio1,473 2,352 
Florida3,826 6,298 
California3,872 4,974 
Other4,545 5,790 
Total13,716 0.62 %19,414 0.86 %
Total real estate loans in active forbearance plans$94,057 0.73 %$165,642 1.26 %

The following table summarizes, as of December 31, 2020, the amortized cost of active forbearance plans according to the month during which the payment deferrals are currently scheduled to end. Forbearance plan term extensions are available, upon request, generally up to a total of 12 months of forbearance.
Month endingTotal
January 31, 2021$40,788 
February 28, 202116,806 
March 31, 202123,725 
April 30, 20216,483 
May 31, 20213,235 
June 30, 20213,020 
Total active forbearance plans$94,057 

A COVID-19 forbearance plan is generally resolved through payment in full at termination of the forbearance; through a non-TDR repayment plan, where a portion of the forbearance is paid in addition to the original contractual payment over 12 months or less; or through a non-TDR capitalization, where the total of forborne payments are added to the principal balance of the account, either with or without an extension of the maturity date. If additional concessions are required beyond resolving the short-term forbearance, the account will be considered for further modification in a troubled debt restructuring. At December 31, 2020 and September 30, 2020, there were $1,907 and $1,609 of residential mortgages and $268 and $116 equity loans and lines of credit, respectively, in short-term repayment plans and $67,467 and $31,467 of residential mortgages and $5,448 and $0 equity loans and lines of credit, respectively, whose forbearance amounts were capitalized, subsequent to COVID-19 forbearance plans, that did not require TDR classification. The amortized cost of loan modifications eligible for TDR relief, including non-TDR forbearance plans, subsequent non-TDR repayment plans and non-TDR modifications, including capitalization, was $166,563 and $194,601 at December 31, 2020 and September 30, 2020, respectively. At December 31, 2020 and September 30, 2020, forbearance plans that have subsequently required further modification in a troubled debt restructuring total $2,331 and $1,306, respectively.

13

Real estate loans in COVID-19 forbearance plans and those that are subsequently placed in non-TDR short-term repayment plans are reported as current and accruing when they are current in accordance with their revised contractual terms and were less than 30 days past due as of the implementation date of the relief program, March 13, 2020, per the revised interagency statement, or not more than 30 days past due as of December 31, 2019 per the CARES Act. Otherwise, the delinquency and resulting accrual status of these loans are determined by the lowest number of days the loan was past due on either the two aforementioned measurement dates (March 13, 2020 or December 31, 2019) or, considering the loan's revised contractual terms, the current reporting date. The uncertain and potentially tumultuous impact of COVID-19 on the economic and housing markets, as well as the risk profiles of accounts in COVID-19 forbearance plans granted by the Company, were considered in the determination of the allowance for credit losses as of December 31, 2020, as described later in this footnote.
An aging analysis of the amortized cost in loan receivables that are past due at December 31, 2020 and September 30, 2020 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due, regardless of the number of days in each month. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process.
30-59
Days
Past Due
60-89
Days
Past Due
90 Days or
More Past
Due
Total Past
Due
CurrentTotal
December 31, 2020
Real estate loans:
Residential Core$3,537 $2,629 $10,705 $16,871 $10,658,010 $10,674,881 
Residential Home Today1,100 833 2,284 4,217 67,550 71,767 
Home equity loans and lines of credit1,695 848 4,522 7,065 2,189,754 2,196,819 
Construction23,694 23,694 
Total real estate loans6,332 4,310 17,511 28,153 12,939,008 12,967,161 
Other loans2,637 2,637 
Total$6,332 $4,310 $17,511 $28,153 $12,941,645 $12,969,798 

30-59
Days
Past Due
60-89
Days
Past Due
90 Days or
More Past
Due
Total Past
Due
CurrentTotal
September 30, 2020
Real estate loans:
Residential Core$4,543 $2,344 $9,958 $16,845 $10,774,323 $10,791,168 
Residential Home Today1,406 651 2,480 4,537 70,277 74,814 
Home equity loans and lines of credit1,521 1,064 4,260 6,845 2,252,155 2,259,000 
Construction22,436 22,436 
Total real estate loans7,470 4,059 16,698 28,227 13,119,191 13,147,418 
Other loans2,581 2,581 
Total$7,470 $4,059 $16,698 $28,227 $13,121,772 $13,149,999 
    
At December 31, 2020, reported delinquencies above include $747, $357 and $885 of active COVID-19 forbearance plans and subsequent short-term repayment plans in 30-59 days past due, 60-89 days past due, and 90 days or more past due, respectively. At September 30, 2020, reported delinquencies above include $1,125, $353 and $1,361 of active COVID-19 forbearance plans and subsequent short-term repayment plans in 30-59 days past due, 60-89 days past due, and 90 days or more past due, respectively.The remaining balance of active COVID-19 forbearance and subsequent short-term repayment plans are reported as current.
At December 31, 2020 and September 30, 2020, real estate loans include $5,537 and $6,479, respectively, of loans that were in the process of foreclosure. Pursuant to the CARES Act and extensions by the Federal Housing Administration, most foreclosure proceedings are deferred until March 31, 2021 or later.
Loans are placed in non-accrual status when they are contractually 90 days or more past due. The number of days past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment. Loans with a partial charge-off are placed in non-accrual and will remain in non-accrual status until, at a minimum,
14

the loss is recovered. Loans restructured in TDRs that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. Loans restructured in TDRs with a high debt-to-income ratio at the time of modification are placed in non-accrual status for a minimum of 12 months. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status.
The amortized cost of loan receivables in non-accrual status is summarized in the following table. Non-accrual with no ACL describes non-accrual loans which have no quantitative or individual valuation allowance, primarily because they have already been collaterally reviewed and any required charge-offs have been taken, but may be included in consideration of qualitative allowance factors. Balances are adjusted for deferred loan fees and expenses. There are 0 loans 90 or more days past due and still accruing at December 31, 2020 or September 30, 2020.
December 31, 2020September 30, 2020
Non-accrual with No ACLTotal
Non-accrual
Total
Non-accrual
Real estate loans:
Residential Core$26,707 $29,492 $31,823 
Residential Home Today9,400 9,891 10,372 
Home equity loans and lines of credit10,354 11,223 11,174 
Total non-accrual loans$46,461 $50,606 $53,369 
At December 31, 2020 and September 30, 2020, respectively, the amortized cost in non-accrual loans includes $33,281 and $36,835 which are performing according to the terms of their agreement, of which $19,529 and $20,334 are loans in Chapter 7 bankruptcy status, primarily where all borrowers have filed, and have not reaffirmed or been dismissed.
Interest on loans in accrual status is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income no later than 90 days past due and income is subsequently recognized only to the extent cash payments are received. The Company has elected not to measure an allowance for credit losses on accrued interest receivable amounts since amounts are written off timely. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid payment first. The amount of interest income recognized on non-accrual loans was $220 and $287 for the three months ended December 31, 2020 and December 31, 2019, respectively. At December 31, 2020 and September 30, 2020, the balance of accrued interest receivable includes $1,987 and $2,540 of unpaid interest on active COVID-19 forbearance plans, respectively. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. A non-accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in non-accrual status when collectability is uncertain, such as a TDR that has not met minimum payment requirements, a loan with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days past due, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed.
Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. While the Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio, it could be affected by the duration and depth of the impact from COVID-19. The portfolio does not include loan types or structures that have experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay-option adjustable-rate mortgages). The portfolio contains "Smart Rate" adjustable-rate mortgage loans whereby the interest rate is locked initially for mainly three or five years then resets annually, subject to various re-lock options available to the borrower. Although the borrower is qualified for its loan at a higher rate than the initial one, the adjustable-rate feature may impact a borrower's ability to afford the higher payments upon rate reset during periods of rising interest rates while this repayment risk may be reduced in a declining or low rate environment. With limited historical loss experience compared to other types of loans in the portfolio, judgment is required by management in assessing the allowance required on adjustable-rate mortgage loans. The principal amount of adjustable-rate mortgage loans included in the Residential Core portfolio was $5,088,344 and $5,122,266 at December 31, 2020 and September 30, 2020, respectively.
Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At both December 31, 2020 and September 30, 2020, approximately 12% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co., which was seized by the Arizona
15

Department of Insurance in 2011 and currently pays all claim payments at 76.5%. Appropriate adjustments have been made to the Company’s affected valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated collectively. The amount of loans in the Company's owned residential portfolio covered by mortgage insurance provided by PMIC as of December 31, 2020 and September 30, 2020, respectively, was $18,800 and $20,649, of which $16,951 and $19,681 was current. The amount of loans in the Company's owned residential portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of December 31, 2020 and September 30, 2020, respectively, was $11,286 and $12,381, of which $10,611 and $12,381 was current. As of December 31, 2020, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "high credit quality"; however, MGIC continues to make claim payments in accordance with its contractual obligations and the Company has not increased its estimated loss severity factors related to MGIC's claim paying ability. NaN other loans were covered by mortgage insurers that were deferring claim payments or which were assessed as being non-investment grade.
Loans held for sale include loans originated within the parameters of programs established by Fannie Mae, for sale to Fannie Mae, and loans originated for the held for investment portfolio that are later identified for sale. During the three months ended December 31, 2020 and December 31, 2019, reclassifications to the held for sale portfolio included only those loans that were either sold during the period or included in contracts pending settlement at the end of the period. At December 31, 2020 and September 30, 2020, respectively, mortgage loans held for sale totaled $111,288 and $36,871. During the three months ended December 31, 2020, the principal balance of loans sold was $293,497 (including $107,978 million in contracts pending settlement) compared to $208,517 of loans sold during the quarter ended December 31, 2019.
Home equity loans and lines of credit, which are comprised primarily of home equity lines of credit, represent a significant portion of the residential real estate portfolio and include monthly principal and interest payments throughout the entire term. Once the draw period on lines of credit has expired, the accounts are included in the home equity loan balance. The full credit exposure on home equity lines of credit is secured by the value of the collateral real estate at the time of origination.The impact of COVID-19 on employment, the general economy and, potentially, housing prices may adversely affect credit performance within the home equity loans and lines of credit portfolio.
The Company originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Company’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Company offers construction/permanent loans with fixed or adjustable-rates, and a current maximum loan-to-completed-appraised value ratio of 80%. The Company also has 1 loan outstanding to a non-profit organization for a multi-use building project.
Other loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment, and forgivable down payment assistance loans, which are unsecured loans used as down payment assistance to borrowers qualified through partner housing agencies. The Company records a liability for the loans which are forgiven in equal increments over a pre-determined term, subject to residency requirements.
For all classes of loans, a loan is considered collateral-dependent when, based on current information and events, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale of the collateral or foreclosure is probable. Factors considered in determining that a loan is collateral-dependent may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan.
Charge-offs on residential mortgage loans, home equity loans and lines of credit and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the amortized cost in the loans.
Partial or full charge-offs are also recognized for the amount of credit losses on loans considered collateral-dependent when the borrower is experiencing financial difficulty as described by meeting the conditions below.

For residential mortgage loans, payments are greater than 180 days delinquent;
For home equity lines of credit, equity loans, and residential loans restructured in a TDR, payments are greater than 90 days delinquent;
For all classes of loans restructured in a TDR with a high debt-to-income ratio at time of modification;
For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan;
For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy;
16

For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed;
For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent; and
For all classes of loans, it becomes evident that a loss is probable.
Collateral-dependent residential mortgage loans and construction loans are charged off to the extent the amortized cost in the loan, net of anticipated mortgage insurance claims, exceeds the fair value, less estimated costs to dispose of the underlying property. Management can determine if the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged off to the extent the amortized cost in the loan plus the balance of any senior liens exceeds the fair value, less estimated costs to dispose of the underlying property, or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio identified as collateral-dependent will continue to be reported as such until it is no longer considered collateral-dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off will continue to be individually evaluated for credit loss until, at a minimum, the loss has been recovered.
At December 31, 2020, individually evaluated loans that required an allowance were comprised only of loans evaluated for credit losses based on the present value of cash flows, such as performing TDRs, and, prior to October 1, 2020, loans with an indication of further deterioration in the fair value of the property not yet supported by a full review and collateral evaluation. All other individually evaluated loans received a charge-off, if applicable. At December 31, 2020 and September 30, 2020, respectively, allowances on individually reviewed loans evaluated for credit losses (IVAs) included those based on the present value of cash flows, such as performing TDRs, were $13,257 and $12,830, and allowances on loans with further deterioration in the fair value of the property not yet supported by a full review were $0 and $20.
Residential mortgage loans, home equity loans and lines of credit and construction loans restructured in TDRs that are not evaluated based on collateral are separately evaluated for credit losses on a loan by loan basis at the time of restructuring and at each subsequent reporting date for as long as they are reported as TDRs. The credit loss evaluation is based on the present value of expected future cash flows discounted at the effective interest rate of the original loan. Expected future cash flows include a discount factor representing a potential for default. Valuation allowances are recorded for the excess of the amortized costs over the result of the cash flow analysis. Loans discharged in Chapter 7 bankruptcy are reported as TDRs and also evaluated based on the present value of expected future cash flows unless evaluated based on collateral. We evaluate these loans using the expected future cash flows because we expect the borrower, not liquidation of the collateral, to be the source of repayment for the loan. Other loans are not considered for restructuring.
Initial concessions granted for loans restructured as TDRs may include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also may occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company. The amortized cost in TDRs by category as of December 31, 2020 and September 30, 2020 is shown in the tables below.    
December 31, 2020Initial RestructuringMultiple
Restructurings
BankruptcyTotal
Residential Core$31,378 $22,168 $14,967 $68,513 
Residential Home Today14,351 15,030 3,084 32,465 
Home equity loans and lines of credit30,148 3,059 2,204 35,411 
Total$75,877 $40,257 $20,255 $136,389 
September 30, 2020Initial RestructuringMultiple
Restructurings
BankruptcyTotal
Residential Core$32,095 $22,689 $16,021 $70,805 
Residential Home Today15,023 15,315 3,113 33,451 
Home equity loans and lines of credit31,679 2,954 2,411 37,044 
Total$78,797 $40,958 $21,545 $141,300 
TDRs may be restructured more than once. Among other requirements, a subsequent restructuring may be available for a borrower upon the expiration of temporary restructuring terms if the borrower is unable to resume contractually scheduled loan payments. If the borrower is experiencing an income curtailment that temporarily has reduced their capacity to repay, such as loss of employment, reduction of work hours, non-paid leave or short-term disability, a temporary restructuring is considered. If
17

the borrower lacks the capacity to repay the loan at the current terms due to a permanent condition, a permanent restructuring is considered. In evaluating the need for a subsequent restructuring, the borrower’s ability to repay is generally assessed utilizing a debt to income and cash flow analysis.
For all loans restructured during the three months ended December 31, 2020 and December 31, 2019 (set forth in the tables below), the pre-restructured outstanding amortized cost was not materially different from the post-restructured outstanding amortized cost.
The following tables set forth the amortized cost in TDRs restructured during the periods presented.
For the Three Months Ended December 31, 2020
 Initial RestructuringMultiple
Restructurings
BankruptcyTotal
Residential Core$2,100 $521 $234 $2,855 
Residential Home Today30 498 94 622 
Home equity loans and lines of credit145 266 50 461 
Total$2,275 $1,285 $378 $3,938 
For the Three Months Ended December 31, 2019
 Initial RestructuringMultiple
Restructurings
BankruptcyTotal
Residential Core$1,183 $1,771 $178 $3,132 
Residential Home Today306 765 38 1,109 
Home equity loans and lines of credit264 378 280 922 
Total$1,753 $2,914 $496 $5,163 

The tables below summarize information about TDRs restructured within 12 months of the period presented for which there was a subsequent payment default, at least 30 days past due on one scheduled payment, during the periods presented.
 For the Three Months Ended December 31,
20202019
TDRs That Subsequently DefaultedNumber of
Contracts
Amortized CostNumber of
Contracts
Amortized Cost
Residential Core$353 11 $1,561 
Residential Home Today203 15 577 
Home equity loans and lines of credit122 503 
Total11 $678 33 $2,641 

18

The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade. Revolving loans reported at amortized cost include equity lines of credit currently in their draw period. Revolving loans converted to term are equity lines of credit that are in repayment. Equity loans and bridge loans are segregated by origination year. Loans, or the portions of loans, classified as loss are fully charged off in the period in which they are determined to be uncollectible; therefore they are not included in the following table. No Home Today loans are classified Special Mention. No construction loans are classified Substandard. Balances are adjusted for deferred loan fees and expenses and any applicable loans-in-process.
Revolving LoansRevolving Loans
By fiscal year of originationAmortizedConverted
20212020201920182017PriorCost BasisTo TermTotal
December 31, 2020
Real estate loans:
Residential Core
Pass$854,787 $2,165,577 $1,071,620 $1,177,397 $1,345,360 $4,016,240 $$$10,630,981 
Special Mention381 1,012 336 1,310 3,039 
Substandard1,050 1,333 2,394 2,177 33,907 40,861 
Total Residential Core854,787 2,166,627 1,073,334 1,180,803 1,347,873 4,051,457 10,674,881 
Residential Home Today (1)
Pass59,937 59,937 
Substandard11,830 11,830 
Total Residential Home Today71,767 71,767 
Home equity loans and lines of credit
Pass13,620 21,955 21,729 19,378 16,053 $9,112 1,876,247 202,696 2,180,790 
Special Mention509 358 30 676 740 2,313 
Substandard130 30 140 55 531 12,830 13,716 
Total Home equity loans and lines of credit13,620 21,955 22,368 19,766 16,193 9,197 1,877,454 216,266 2,196,819 
Construction
Pass941 21,624 129 22,694 
Special Mention1,000 1,000 
Total Construction1,941 21,624 129 23,694 
Total real estate loans
Pass869,348 2,209,156 1,093,478 1,196,775 1,361,413 4,085,289 1,876,247 202,696 12,894,402 
Special Mention1,000 890 1,370 336 1,340 676 740 6,352 
Substandard$1,050 $1,463 $2,424 $2,317 $45,792 $531 $12,830 $66,407 
Total real estate loans$870,348 $2,210,206 $1,095,831 $1,200,569 $1,364,066 $4,132,421 $1,877,454 $216,266 $12,967,161 
(1) No new originations of Home Today loans since fiscal 2016.
The following tables provides the credit risk rating by portfolio as of the date presented.
PassSpecial
Mention
SubstandardLossTotal
September 30, 2020
Real estate loans:
Residential Core$10,748,284 $3,535 $39,349 $$10,791,168 
Residential Home Today62,462 12,352 74,814 
Home equity loans and lines of credit2,241,434 3,057 14,509 2,259,000 
Construction22,436 22,436 
Total real estate loans$13,074,616 $6,592 $66,210 $$13,147,418 
19

The home equity lines of credit converted from revolving to term loans during the three months ended December 31, 2020 totaled $8,068.
Residential loans are internally assigned a grade that complies with the guidelines outlined in the OCC’s Handbook for Rating Credit Risk. Pass loans are assets well protected by the current paying capacity of the borrower. Special Mention loans have a potential weakness, as evaluated based on delinquency status or nature of the product, that the Company feels deserve management’s attention and may result in further deterioration in their repayment prospects and/or the Company’s credit position. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Also included in Substandard are performing home equity loans and lines of credit where the customer has a severely delinquent first mortgage to which the performing home equity loan or line of credit is subordinate and all loans in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. Loss loans are considered uncollectible and are charged off when identified. Loss loans are of such little value that their continuance as bankable assets is not warranted even though partial recovery may be effected in the future.
At December 31, 2020 and September 30, 2020, respectively, $89,249 and $92,439 of TDRs individually evaluated for credit loss have adequately performed under the terms of the restructuring and are classified as Pass loans. At December 31, 2020 and September 30, 2020, respectively, $3,039 and $3,535 of loans classified Special Mention are residential mortgage loans purchased which were current and performing at the time of purchase. These loans are designated Special Mention due to the absence of mortgage insurance coverage and potentially weaker repayment prospects when compared with the Company's originated residential Core portfolio.

Other loans are internally assigned a grade of non-performing when they become 90 days or more past due. At December 31, 2020 and September 30, 2020, 0 other loans were graded as non-performing.

The Company adopted the CECL allowance methodology as of October 1, 2020 using the modified retrospective approach, replacing the previous incurred loss methodology. The allowance for credit losses now represents the estimate of lifetime loss in our loan portfolio and unfunded loan commitments. An allowance is established using relevant available information, relating to past events, current conditions and supportable forecasts. The Company utilizes loan level regression models with forecasted economic data to derive the probability of default and loss given default factors. These factors are used to calculate the loan level credit loss over a 24-month period with an immediate reversion to historical mean loss rates for the remaining estimated life of the loans.

Historical credit loss experience provides the basis for the estimation of expected credit losses. Qualitative adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency status or likely recovery of previous loan charge-offs. Qualitative adjustments for expected changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors are recognized when forecasted economic data used in the model differs from management's view or contains significant unobservable changes within a short period, particularly when those changes are directionally positive. Identifiable model limitations may also lead to qualitative adjustments. For the three months ended December 31, 2020, a qualitative adjustment was made to the allowance for credit losses to align forecasted model results with management's view of the future. The published economic forecasts were more optimistic than management felt was appropriate due to the continued uncertainty in the economy related to the COVID-19 pandemic. A qualitative adjustment was also made to reflect the expected recovery of loan amounts previously charged off, beyond what the model is able to project, This adjustment resulted in a negative ending balance on the allowance for credit losses for the Home Today portfolio, where recoveries are expected to exceed charge-offs over the remaining life of that portfolio. Adjustments are evaluated quarterly based on current facts and circumstances.
20

Activity in the allowance for credit losses by portfolio segment is summarized as follows. See Note 11. LOAN COMMITMENTS AND CONTINGENT LIABILITIES for further details on the allowance for unfunded commitments.
 For the Three Months Ended December 31, 2020
 Beginning
Balance
Adoption
of
ASU 2016-13
ProvisionsCharge-offsRecoveriesEnding
Balance
Real estate loans:
Residential Core$22,381 $23,927 $(356)$(61)$460 $46,351 
Residential Home Today5,654 (5,217)(1,319)(109)423 (568)
Home equity loans and lines of credit18,898 5,258 (949)(684)1,229 23,752 
Construction127 624 755 
Total real estate loans$46,937 $24,095 $(2,000)$(854)$2,112 $70,290 
Total Unfunded Loan Commitments (1)
$$22,052 $$$$22,052 
Total Allowance for Credit Losses$46,937 $46,147 $(2,000)$(854)$2,112 $92,342 
(1) Total allowance for unfunded loan commitments is recorded in other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION (unaudited) and primarily relates to undrawn home equity lines of credit.
 For the Three Months Ended December 31, 2019
 Beginning
Balance
ProvisionsCharge-offsRecoveriesEnding
Balance
Real estate loans:
Residential Core$19,753 $(1,766)$(485)$810 $18,312 
Residential Home Today4,209 (145)(359)527 4,232 
Home equity loans and lines of credit14,946 (1,088)(745)1,631 14,744 
Construction(1)
Total real estate loans$38,913 $(3,000)$(1,589)$2,968 $37,292 
The recorded investment in total real estate loans and an analysis of the allowance for loan losses at September 30, 2020 is summarized in the following table, under previously applicable GAAP. The table provides details of the recorded balances and the allowance for loan losses according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans collectively. Balances of recorded investments are adjusted for deferred loan fees and expenses and any applicable loans-in-process. Other loans are all collectively reviewed and do not require an allowance.
September 30, 2020Recorded InvestmentAllowance for Loan Loss
 IndividuallyCollectivelyTotalIndividuallyCollectivelyTotal
Real estate loans:
Residential Core$79,200 $10,711,968 $10,791,168 $6,963 $15,418 $22,381 
Residential Home Today34,261 40,553 74,814 2,085 3,569 5,654 
Home equity loans and lines of credit41,756 2,217,244 2,259,000 3,802 15,096 18,898 
Construction22,436 22,436 
Total real estate loans$155,217 $12,992,201 $13,147,418 $12,850 $34,087 $46,937 
21


The recorded investment, unpaid principal balance, related allowance, average recorded investment over the fiscal year and income recognized over the fiscal year for impaired loans, including those reported as TDRs, as of September 30, 2020, are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees and expenses.
September 30, 2020Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment (YTD)
Interest Income
Recognized (YTD)
With no related IVA recorded:
Residential Core$41,164 $53,957 $— $42,643 $1,405 
Residential Home Today11,963 30,603 — 12,364 204 
Home equity loans and lines of credit13,989 18,617 — 16,259 321 
Total$67,116 $103,177 $— $71,266 $1,930 
With an IVA recorded:
Residential Core$38,036 $38,103 $6,963 $40,492 $1,172 
Residential Home Today22,298 22,272 2,085 23,247 1,086 
Home equity loans and lines of credit27,767 27,809 3,802 27,842 663 
Total$88,101 $88,184 $12,850 $91,581 $2,921 
Total impaired loans:
Residential Core$79,200 $92,060 $6,963 $83,135 $2,577 
Residential Home Today34,261 52,875 2,085 35,611 1,290 
Home equity loans and lines of credit41,756 46,426 3,802 44,101 984 
Total$155,217 $191,361 $12,850 $162,847 $4,851 

5.DEPOSITS
Deposit account balances are summarized as follows:
December 31,
2020
September 30,
2020
Checking accounts$1,060,858 $996,682 
Savings accounts, excluding money market accounts1,146,035 1,106,243 
Money market accounts555,681 520,422 
Certificates of deposit6,425,273 6,599,139 
9,187,847 9,222,486 
Accrued interest2,753 3,068 
Total deposits$9,190,600 $9,225,554 
Brokered certificates of deposit (exclusive of acquisition costs and subsequent amortization), which are used as a cost effective funding alternative, totaled $530,431 at December 31, 2020 and $553,860 at September 30, 2020. The FDIC places restrictions on banks with regard to issuing brokered deposits based on the bank's capital classification. As a well-capitalized institution at December 31, 2020 and September 30, 2020, the Association may accept brokered deposits without FDIC restrictions.
22

6.    BORROWED FUNDS
Federal Home Loan Bank borrowings at December 31, 2020 are summarized in the table below. The amount and weighted average rates of certain FHLB Advances maturing in 12 months or less reflect the net impact of deferred penalties discussed below: 
AmountWeighted
Average
Rate
Maturing in:
12 months or less$2,900,395 0.25 %
13 to 24 months1,081 0.99 %
25 to 36 months150,000 1.79 %
37 to 48 months325,000 1.66 %
49 to 60 months50,000 1.66 %
Over 60 months16,950 1.68 %
Total FHLB Advances3,443,426 0.48 %
Accrued interest1,572 
     Total$3,444,998 
For the three month periods ending December 31, 2020 and December 31, 2019 net interest expense related to Federal Home Loan Bank short-term borrowings was $13,124 and $14,295, respectively.
Through the use of interest rate swaps discussed in Note 13. DERIVATIVE INSTRUMENTS, $2,900,000 of FHLB advances included in the table above as maturing in 12 months or less, have effective maturities, assuming no early terminations of the swap contracts, as shown below:
AmountSwap Adjusted Weighted
Average
Rate
Effective maturity:
12 months or less$550,000 1.27 %
13 to 24 months875,000 1.94 %
25 to 36 months75,000 2.33 %
37 to 48 months350,000 1.43 %
49 to 60 months550,000 1.84 %
Over 60 months500,000 2.13 %
Total FHLB Advances under swap contracts$2,900,000 1.77 %
During fiscal year 2020, $115,000 of FHLB advances and $100,000 of swap contracts related to those advances, with original maturity dates in fiscal 2023, were terminated, resulting in the immediate recognition of $8,905 of interest expense and prepayment related fees. The weighted average interest rate, including the impact of the swap contracts, on those advances repaid was 2.92%.
23

7.    OTHER COMPREHENSIVE INCOME (LOSS)
The change in accumulated other comprehensive income (loss) by component is as follows:
For the Three Months EndedFor the Three Months Ended
December 31, 2020December 31, 2019
Unrealized Gains (Losses) on Securities Available for SaleCash Flow HedgesDefined Benefit PlanTotalUnrealized Gains (Losses) on Securities Available for SaleCash Flow HedgesDefined Benefit PlanTotal
Balance at beginning of period$4,694 $(114,306)$(22,353)$(131,965)$(2,165)$(44,915)$(22,299)$(69,379)
Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $526 and $5,022(1,373)2,445 1,072 2,923 15,972 18,895 
Amounts reclassified, net of tax expense (benefit) of $2,493 and $(84)8,854 466 9,320 (767)452 (315)
Other comprehensive income (loss)(1,373)11,299 466 10,392 2,923 15,205 452 18,580 
Balance at end of period$3,321 $(103,007)$(21,887)$(121,573)$758 $(29,710)$(21,847)$(50,799)
The following table presents the reclassification adjustment out of accumulated other comprehensive income (loss) included in net income and the corresponding line item on the CONSOLIDATED STATEMENTS OF INCOME for the periods indicated:
 Amounts Reclassified from Accumulated
Other Comprehensive Income
Details about Accumulated Other Comprehensive Income ComponentsFor the Three Months Ended December 31,Line Item in the Consolidated Statements of Income
20202019
Cash flow hedges:
Interest (income) expense$11,208 $(971) Interest expense
Net income tax effect(2,354)204  Income tax expense
Net of income tax expense (benefit)8,854 (767)
Amortization of defined benefit plan:
Actuarial loss605 572  (a)
Net income tax effect(139)(120) Income tax expense
Net of income tax expense (benefit)466 452 
Total reclassifications for the period$9,320 $(315)
(a) This item is included in the computation of net periodic pension cost. See Note 9. DEFINED BENEFIT PLAN for additional disclosure.

24

8.    INCOME TAXES
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various state and city jurisdictions. The Company is no longer subject to income tax examinations in its major jurisdictions for tax years prior to 2017.
The Company recognizes interest and penalties on income tax assessments or income tax refunds, where applicable, in the financial statements as a component of its provision for income taxes.
The Company’s combined federal and state effective income tax rate was 18.0% and 19.4% for the three months ended December 31, 2020 and December 31, 2019, respectively. The decrease in the effective tax rate is primarily due to an increase in permanent tax benefits from BOLI contracts, as $70,000 of additional premiums were placed during the three months ended December 31, 2020. Additionally, there was an increase in excess tax benefits associated with equity compensation during the three months ended December 31, 2020 compared to the three months ended December 31, 2019.
The Company makes certain investments in limited partnerships which invest in affordable housing projects that qualify for the Low Income Housing Tax Credit (LIHTC). The Company acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnership. The Company accounts for its interests in LIHTCs using the proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income taxes was not material during the three months ended December 31, 2020 and December 31, 2019.
9.    DEFINED BENEFIT PLAN
The Third Federal Savings Retirement Plan (the “Plan”) is a defined benefit pension plan. Effective December 31, 2002, the Plan was amended to limit participation to employees who met the Plan’s eligibility requirements on that date. Effective December 31, 2011, the Plan was amended to freeze future benefit accruals for participants in the Plan. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, and those eligible participants who no longer receive service credits under the Plan, participate in a separate tier of the Company’s defined contribution 401(k) Savings Plan. Benefits under the Plan are based on years of service and the employee’s average annual compensation (as defined in the Plan) through December 31, 2011. The funding policy of the Plan is consistent with the funding requirements of U.S. federal and other governmental laws and regulations.
The components of net periodic cost recognized in other non-interest expense in the UNAUDITED CONSOLIDATED STATEMENTS OF INCOME are as follows:
 Three Months Ended
December 31,
 20202019
Interest cost$609 $699 
Expected return on plan assets(1,176)(1,163)
Amortization of net loss605 572 
     Net periodic cost$38 $108 
There were 0 required minimum employer contributions during the three months ended December 31, 2020. There are 0 required minimum employer contributions expected during the remainder of the fiscal year ending September 30, 2021.
10.    EQUITY INCENTIVE PLAN
In December 2020, 433,850 restricted stock units were granted to certain directors, officers and managers of the Company and 59,900 performance share units were granted to certain officers of the Company. During the three months ended December 31, 2020, there were 8,064 performance shares earned and added to those granted in December 2018, according to the targeted performance formula.The awards were made pursuant to the Amended and Restated 2008 Equity Incentive Plan, which was approved at the annual meeting of shareholders held on February 22, 2018.




25

The following table presents share-based compensation expense recognized during the periods presented.
Three Months Ended December 31,
20202019
Stock option expense$68 $188 
Restricted stock units expense1,230 860 
Performance share units expense268 $141 
Total stock-based compensation expense$1,566 $1,189 
At December 31, 2020, 3,290,100 shares were subject to options, with a weighted average exercise price of $14.35 per share and a weighted average grant date fair value of $2.60 per share. At December 31, 2020, 538,550 restricted stock units and 184,264 performance share units with a weighted average grant date fair value of $17.59 and $17.45 per unit, respectively, are unvested. Expected future compensation expense relating to the 1,304,298 restricted stock units and 184,264 performance share units outstanding as of December 31, 2020 is $7,975 over a weighted average period of 2.5 years and $1,617 over a weighted average period of 1.9 years, respectively. Each unit is equivalent to one share of common stock.
11.    COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to originate loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire from five to 10 years following the date that the line of credit was established, subject to various conditions, including compliance with payment obligations, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the CONSOLIDATED STATEMENTS OF CONDITION. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Company generally uses the same credit policies in making commitments as it does for on-balance-sheet instruments. The allowance related to off-balance sheet commitments is recorded in other liabilities in the CONSOLIDATED STATEMENTS OF CONDITION. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES for discussion on credit loss methodology. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made.
At December 31, 2020, the Company had commitments to originate loans and related allowances as follows:
CommitmentAllowance
Fixed-rate mortgage loans$471,354 $1,800 
Adjustable-rate mortgage loans275,119 1,074 
Equity loans and lines of credit249,660 2,545 
Total$996,133 $5,419 
At December 31, 2020, the Company had unfunded commitments outstanding and related allowances as follows:
CommitmentAllowance
Equity lines of credit$2,632,033 $16,234 
Construction loans29,691 399 
Total$2,661,724 $16,633 
At December 31, 2020, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity, was $2,648,208.
At December 31, 2020 and September 30, 2020, the Company had $107,978 and $36,078, respectively, in commitments to securitize and sell mortgage loans.

The above commitments are expected to be funded through normal operations.
26

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operation, or statements of cash flows.
12.    FAIR VALUE
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. A fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. The three levels of inputs are defined as follows:
Level 1 –  quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2
  quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with few transactions, or model-based valuation techniques using assumptions that are observable in the market.
Level 3 –  a company’s own assumptions about how market participants would price an asset or liability.

As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At December 31, 2020 and September 30, 2020, respectively, there were $107,978 and $36,078 of loans held for sale, all of which were current, with unpaid principal balances of $102,817 and $34,179, subject to pending agency contracts for which the fair value option was elected. Included in the net gain on the sale of loans is $6,647 and $0 for the three months ending December 31, 2020 and December 31, 2019, respectively, related to the changes during the period in fair value of loans held for sale subject to pending agency contracts.
Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value.
Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. At December 31, 2020 and September 30, 2020, respectively, this includes $447,609 and $453,438 of investments in U.S. government obligations including highly liquid collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae, measured using the market approach. The fair values of investment securities represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities.
Mortgage Loans Held for Sale—The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At December 31, 2020 and September 30, 2020, there were $107,978 and $36,078, respectively, of loans held for sale measured at fair value and $3,310 and $793, respectively, of loans held for sale carried at cost. Interest income on mortgage loans held for sale is recorded in interest income on loans.
Collateral-dependent LoansCollateral-dependent loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated using a fair value measurement, such as the fair value of the underlying collateral. Credit loss is measured using a market approach based on the fair value of the collateral, less estimated costs to dispose, for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES. To calculate the credit loss of collateral-dependent loans, the fair market values of the collateral, estimated using exterior appraisals in the majority of instances, are reduced by calculated estimated costs to dispose, derived from historical experience and recent market conditions. Any indicated credit loss is recognized by a charge to the allowance for credit losses. Subsequent increases in collateral values or principal pay downs on loans with recognized credit loss could result in an collateral-dependent loan being carried below its fair value. When no credit loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum recovery the Company can expect. The amortized cost of loans individually evaluated for credit loss based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of estimated costs
27

to dispose on fair values is determined at the time of credit loss or when additional credit loss is recognized and is included in quantitative information about significant unobservable inputs later in this note.
Loans held for investment that have been restructured in TDRs, are performing according to the restructured terms of the loan agreement and not evaluated based on collateral are individually evaluated for credit loss using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At December 31, 2020 and September 30, 2020, respectively, this included $90,790 and $94,495 in amortized cost of TDRs with related allowances for loss of $13,257 and $12,830.
Real Estate Owned—Real estate owned includes real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of the cost basis or fair value, less estimated costs to dispose. The carrying amounts of real estate owned at December 31, 2020 and September 30, 2020 were $102 and $185, respectively. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At December 31, 2020 and September 30, 2020, these adjustments were not significant to reported fair values. At December 31, 2020 and September 30, 2020, respectively, $116 and $213 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis where the cost basis equals or exceeds the estimate of fair values, less estimated costs to dispose of these properties. Real estate owned, included in Other assets in the CONSOLIDATED STATEMENTS OF CONDITION, includes estimated costs to dispose of $14 and $28 related to properties measured at fair value and 0 properties carried at their original or adjusted cost basis at December 31, 2020 and September 30, 2020.
Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio, forward commitments on contracts to deliver mortgage loans and interest rate swaps designated as cash flow hedges. Derivatives not designated as cash flow hedges are reported at fair value in Other assets or Other liabilities on the CONSOLIDATED STATEMENTS OF CONDITION with changes in value recorded in current earnings. Derivatives qualifying as cash flow hedges are settled daily, bringing the fair value to $0. Refer to Note 13. DERIVATIVE INSTRUMENTS for additional information on cash flow hedges. The fair value of interest rate lock commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy.
Assets and liabilities carried at fair value on a recurring basis in the CONSOLIDATED STATEMENTS OF CONDITION at December 31, 2020 and September 30, 2020 are summarized below.
  Recurring Fair Value Measurements at Reporting Date Using
 December 31, 2020Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
(Level 1)(Level 2)(Level 3)
Assets
Investment securities available for sale:
REMICs$441,501 $$441,501 $
Fannie Mae certificates6,108 6,108 
Mortgage loans held for sale107,978 107,978 
Derivatives:
Interest rate lock commitments1,231 1,231 
Total$556,818 $$555,587 $1,231 
Liabilities
Derivatives:
Forward commitments for the sale of mortgage loans$209 $$209 $
Total$209 $$209 $
28

  Recurring Fair Value Measurements at Reporting Date Using
 September 30, 2020Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
(Level 1)(Level 2)(Level 3)
Assets
Investment securities available for sale:
REMIC's$447,203 $$447,203 $
Fannie Mae certificates6,235 6,235 
     Mortgage loans held for sale36,078 36,078 
Derivatives:
Interest rate lock commitments1,194 1,194 
Total$490,710 $$489,516 $1,194 
Liabilities
Derivatives:
Forward commitments for the sale of mortgage loans$134 $$134 $
Total$134 $$134 $
The table below presents a reconciliation of the beginning and ending balances and the location within the CONSOLIDATED STATEMENTS OF INCOME where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Three Months Ended December 31,
20202019
Beginning balance$1,194 $44 
Gain during the period due to changes in fair value:
Included in other non-interest income37 10 
Ending balance$1,231 $54 
Change in unrealized gains for the period included in earnings for assets held at end of the reporting date$1,231 $54 
Summarized in the tables below are those assets measured at fair value on a nonrecurring basis.
  Nonrecurring Fair Value Measurements at Reporting Date Using
 December 31,
2020
Quoted Prices in
Active Markets for
Identical Assets
 Significant Other
Observable Inputs
Significant
Unobservable
Inputs
(Level 1)(Level 2)(Level 3)
Collateral-dependent loans, net of allowance$61,930 $$$61,930 
Real estate owned(1)
116 116 
Total$62,046 $$$62,046 
(1)Amounts represent fair value measurements of properties before deducting estimated costs to dispose.
29

  Nonrecurring Fair Value Measurements at Reporting Date Using
 September 30,
2020
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable Inputs
Significant
Unobservable
Inputs
(Level 1)(Level 2)(Level 3)
Collateral-dependent loans, net of allowance$60,702 $$$60,702 
Real estate owned(1)
213 213 
Total$60,915 $$$60,915 
(1)Amounts represent fair value measurements of properties before deducting estimated costs to dispose.
The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy. The interest rate lock commitments include both mortgage origination applications and preapprovals. Preapprovals have a much lower closure rate than origination applications as reflected in the weighted average closure rate.
Fair Value
December 31, 2020Valuation Technique(s)Unobservable InputRangeWeighted Average
Collateral-dependent loans, net of allowance$61,930Market comparables of collateral discounted to estimated net proceedsDiscount appraised value to estimated net proceeds based on historical experience:
• Residential Properties0-34%5.6%
Interest rate lock commitments$1,231Quoted Secondary Market pricingClosure rate0-100%76.3%
Fair Value
September 30, 2020Valuation Technique(s)Unobservable InputRangeWeighted Average
Collateral-dependent loans, net of allowance$60,702Market comparables of collateral discounted to estimated net proceedsDiscount appraised value to estimated net proceeds based on historical experience:
• Residential Properties0-34%6.0%
Interest rate lock commitments$1,194Quoted Secondary Market pricingClosure rate0-100%69.7%
The following tables present the estimated fair value of the Company’s financial instruments and their carrying amounts as reported in the CONSOLIDATED STATEMENTS OF CONDITION.
30

December 31, 2020
CarryingFairLevel 1Level 2Level 3
AmountValue
Assets:
  Cash and due from banks$29,512 $29,512 $29,512 $$
  Interest earning cash equivalents470,408 470,408 470,408 
Investment securities available for sale447,609 447,609 447,609 
  Mortgage loans held for sale111,288 111,471 111,471 
  Loans, net:
Mortgage loans held for investment12,896,871 13,126,758 13,126,758 
Other loans2,637 2,637 2,637 
  Federal Home Loan Bank stock136,793 136,793 N/A
  Accrued interest receivable34,840 34,840 34,840 
Cash collateral received from or held by counterparty36,861 36,861 36,861 
Derivatives1,231 1,231 1,231 
Liabilities:
  Checking and passbook accounts2,762,574 2,762,574 2,762,574 
  Certificates of deposit6,428,026 6,564,037 6,564,037 
  Borrowed funds3,444,998 3,471,188 3,471,188 
  Borrowers’ advances for insurance and taxes142,248 142,248 142,248 
Principal, interest and escrow owed on loans serviced50,866 50,866 50,866 
Derivatives209 209 209 
September 30, 2020
CarryingFairLevel 1Level 2Level 3
AmountValue
Assets:
  Cash and due from banks$25,270 $25,270 $25,270 $$
  Interest earning cash equivalents472,763 472,763 472,763 
Investment securities available for sale453,438 453,438 453,438 
  Mortgage loans held for sale36,871 36,926 36,926 
  Loans, net:
Mortgage loans held for investment13,100,481 13,299,261 13,299,261 
Other loans2,581 2,594 2,594 
  Federal Home Loan Bank stock136,793 136,793 N/A
  Accrued interest receivable36,634 36,634 36,634 
Cash collateral received from or held by counterparty41,824 41,824 41,824 
Derivatives1,194 1,194 1,194 
Liabilities:
  Checking and passbook accounts$2,623,347 $2,623,347 $$2,623,347 $
  Certificates of deposit6,602,207 6,739,561 6,739,561 
  Borrowed funds3,521,745 3,550,120 3,550,120 
  Borrowers’ advances for insurance and taxes111,536 111,536 111,536 
Principal, interest and escrow owed on loans serviced45,895 45,895 45,895 
Derivatives134 134 134 
31

Presented below is a discussion of the valuation techniques and inputs used by the Company to estimate fair value.

Cash and Due from Banks, Interest Earning Cash Equivalents, Cash Collateral Received from or Held by Counterparty— The carrying amount is a reasonable estimate of fair value.
Investment Securities Available for Sale Estimated fair value for investment and mortgage-backed securities is based on quoted market prices, when available. If quoted prices are not available, management will use as part of their estimation process fair values which are obtained from third party independent nationally recognized pricing services using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Mortgage Loans Held for Sale— Fair value of mortgage loans held for sale is based on quoted secondary market pricing for loan portfolios with similar characteristics.
Loans— For mortgage loans held for investment and other loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. The use of current rates to discount cash flows reflects current market expectations with respect to credit exposure. Collateral-dependent loans are measured at the lower of cost or fair value as described earlier in this footnote.
Federal Home Loan Bank Stock— It is not practical to estimate the fair value of FHLB stock due to restrictions on its transferability. The fair value is estimated to be the carrying value, which is par. All transactions in capital stock of the FHLB Cincinnati are executed at par.
Deposits— The fair value of demand deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities.
Borrowed Funds— Estimated fair value for borrowed funds is estimated using discounted cash flows and rates currently charged for borrowings of similar remaining maturities.
Accrued Interest Receivable, Borrowers’ Advances for Insurance and Taxes, and Principal, Interest and Related Escrow Owed on Loans Serviced— The carrying amount is a reasonable estimate of fair value.
Derivatives— Fair value is estimated based on the valuation techniques and inputs described earlier in this footnote.
13.    DERIVATIVE INSTRUMENTS
The Company enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy. For hedges of the Company's borrowing program, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the Company's FHLB borrowings. At December 31, 2020 and September 30, 2020, the interest rate swaps used in the Company's asset/liability management strategy have weighted average terms of 2.8 years and 3.0 years and weighted average fixed-rate interest payments of 1.77% and 1.76%, respectively.
Cash flow hedges are initially assessed for effectiveness using regression analysis. Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in OCI and are subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Quarterly, a qualitative analysis is performed to monitor the ongoing effectiveness of the hedging instrument. All derivative positions were initially and continue to be highly effective at December 31, 2020.
The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME.
In addition, the Company is party to derivative instruments when it enters into interest rate lock commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the CONSOLIDATED STATEMENTS OF INCOME.
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The following tables provide the locations within the CONSOLIDATED STATEMENTS OF CONDITION, notional values and fair values, at the reporting dates, for all derivative instruments.
December 31, 2020September 30, 2020
Notional ValueFair ValueNotional ValueFair Value
Derivatives designated as hedging instruments
Cash flow hedges: Interest rate swaps
Other Liabilities$2,900,000 $$2,975,000 $
Total cash flow hedges: Interest rate swaps$2,900,000 $$2,975,000 $
Derivatives not designated as hedging instruments
Interest rate lock commitments
Other Assets$23,966 $1,231 $21,755 $1,194 
Forward Commitments for the sale of mortgage loans
Other Liabilities102,817 (209)34,179 (134)
Total derivatives not designated as hedging instruments$126,783 $1,022 $55,934 $1,060 
The following tables present the net gains and losses recorded within the CONSOLIDATED STATEMENTS OF INCOME and the CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME relating to derivative instruments.
Three Months Ended
 Location of Gain or (Loss)December 31,
 Recognized in Income20202019
Cash flow hedges
Amount of gain/(loss) recognizedOther comprehensive income$3,371 $20,218 
Amount of gain/(loss) reclassified from AOCIInterest expense: Borrowed funds(11,208)971 
Derivatives not designated as hedging instruments
Interest rate lock commitmentsOther non-interest income$37 $10 
Forward commitments for the sale of mortgage loansNet gain/(loss) on the sale of loans(209)
The Company estimates that $43,711 of the amounts reported in AOCI will be reclassified as a debit to interest expense during the twelve months ending December 31, 2021.
Derivatives contain an element of credit risk which arises from the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. The Company's exposure is limited to the replacement value of the contracts rather than the notional or principal amounts. Credit risk is minimized through counterparty margin payments, transaction limits and monitoring procedures. All of the Company's swap transactions are cleared through a registered clearing broker to a central clearing organization. The clearing organization establishes daily cash and upfront cash or securities margin requirements to cover potential exposure in the event of default. This process shifts the risk away from the counterparty, since the clearing organization acts as the middleman on each cleared transaction. At December 31, 2020 and September 30, 2020, there was $36,861 and $41,824, respectively, included in other assets related to initial margin requirements held by the central clearing organization. For derivative transactions cleared through certain clearing parties, variation margin payments are recognized as settlements on a daily basis. The fair value of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. As of October 16th, 2020, the price alignment interest (PAI) is discounted based on the US Secured Overnight Rate (SOFR), replacing the Federal Funds Rate. At transition, the Company received three basis swaps which were concurrently sold as part of a mandatory re-hedging process with no material impact to net income. This change in the price alignment interest discount is part of an initiative to establish a more risk-free rate.
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14.    RECENT ACCOUNTING PRONOUNCEMENTS

Adopted during the three months ended December 31, 2020
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update replace the existing incurred loss impairment methodology with a methodology that reflects the expected credit losses for the remaining life of the asset. The FASB has also issued additional ASU's to clarify the scope and provide additional guidance for ASU 2016-13. The amendments expand disclosures of credit quality indicators, requiring disaggregation by year of origination (vintage). Additionally, credit losses on available for sale debt securities will be recognized as an allowance rather than a write-down, with reversals permitted as credit loss estimates decline.
The Company adopted ASU 2016-13 and all related amendments on October 1, 2020 using the modified-retrospective approach. Results for reporting periods beginning after October 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of the amendments resulted in a cumulative-effect reduction to opening retained earnings of $35,763, net of income taxes, resulting from a pretax increase to the allowance for credit losses on loans, including the liability for unfunded commitments, of $46,147. A 24-month reasonable and supportable period using economic forecasts is used with immediate reversion to the historical mean loss rates to derive loss estimates on loans and off-balance sheet credit exposures. ASC 326 also made changes to the accounting for available-for-sale debt securities, by requiring credit losses be presented as an allowance rather than as a write-down when management does not intend to sell or believe that it is more likely than not they will be required to sell the securities. The adoption did not have a material impact on available-for-sale securities, which are composed of agency-backed mortgage securities. Additionally, the Association elected the option to phase-in, over a five-year period, the initial impact of this standard's update on regulatory capital as permitted by the regulatory transition rules. Refer to NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES, for additional disclosures required by ASC 326.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update add, remove and modify the disclosure requirements on fair value measurements in Topic 820. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this Update. The Company adopted the amendments effective October 1, 2020. The Update did not have a material impact on the Company's consolidated financial statements or disclosures.
In August 2018, the FASB issued ASU 2018-15, Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. Current U.S. GAAP does not specifically address the accounting for implementation costs of a hosting arrangement that is a service contract. Accordingly, the amendments in this Update improve current U.S. GAAP because they clarify and align the accounting for implementation costs for hosting arrangements, regardless of whether they convey a license to the hosted software. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, for all entities. The Company adopted the amendments effective October 1, 2020. The Update did not have a material impact on the Company's consolidated financial statements or disclosures.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) - Scope. The amendments clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. The Company has elected to apply the amendments on a full retrospective basis as of March 12, 2020, which is when the Company adopted ASU 2020-04, Reference Rate Reform (Topic 848). The amendments did not have a material impact on the Company's consolidated financial statements or disclosures.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company's consolidated financial statements or do not apply to its operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
     This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include, among other things:
statements of our goals, intentions and expectations;
statements regarding our business plans and prospects and growth and operating strategies;
statements concerning trends in our provision for credit losses and charge-offs on loans and off-balance sheet exposures;
statements regarding the trends in factors affecting our financial condition and results of operations, including asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
     These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:
significantly increased competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;
general economic conditions, either globally, nationally or in our market areas, including employment prospects, real estate values and conditions that are worse than expected;
the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets, and changes in estimates of the allowance for credit losses;
decreased demand for our products and services and lower revenue and earnings because of a recession or other events;
changes in consumer spending, borrowing and savings habits;
adverse changes and volatility in the securities markets, credit markets or real estate markets;
legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements and changes related to our ability to pay dividends and the ability of Third Federal Savings, MHC to waive dividends;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board;
the adoption of implementing regulations by a number of different regulatory bodies, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us;
our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;
future adverse developments concerning Fannie Mae or Freddie Mac;
changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the FRS and changes in the level of government support of housing finance;
the continuing governmental efforts to restructure the U.S. financial and regulatory system;
the ability of the U.S. Government to remain open, function properly and manage federal debt limits;
changes in policy and/or assessment rates of taxing authorities that adversely affect us or our customers;
changes in accounting and tax estimates;
changes in our organization, or compensation and benefit plans and changes in expense trends (including, but not limited to trends affecting non-performing assets, charge-offs and provisions for credit losses);
the inability of third-party providers to perform their obligations to us;
civic unrest;
cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems; and
the impact of any wide-spread pandemic, including COVID-19, on our business, our customers, and the economy.
        Because of these and other uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Please see Part II Other Information Item 1A. Risk Factors for a discussion of certain risks related to our business.
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Overview
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 supported 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.
COVID-19 Pandemic. 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.
Branches are open and most have returned to normal operating business hours. Some branches have reduced weekend lobby hours for enhanced safety. We have expanded mobile banking deposit features, including mobile deposit limits.
We continue to support our associates and their families by providing a one-time after tax bonus of $1,500 in December 2020.
All associates working at branches and operations center are safely distanced and working in contained areas for safety. Onsite associates have received additional benefits to recognize their commitment to the organization and our customers.
Through December 31, 2020, there were 2,096 customers, representing $276.2 million of loans, who have been helped by COVID-19 related forbearance plans. As a result of payoffs and customer resolutions, there were 665 customers, representing $94.1 million of loans, or 0.73% of total loans, remaining in COVID-19 forbearance plans as of December 31, 2020.
We continue to support recovery in the community as 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 North Broadway neighborhood near our headquarters that will offer more than 80 new units of affordable housing.
Continuation of strong credit quality and capital levels to support potential loan performance issues and our commitment to paying an attractive dividend.
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 historical low market interest rates are lower than the rates in effect when 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 December 31, 2020, the Company’s Tier 1 (leverage) capital totaled $1.78 billion, or 12.15% of net average assets and 22.25% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.52 billion, or 10.37% of net average assets and 19.01% of risk-weighted assets. Each of these measures was more than twice the requirements currently in effect for
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the Association for designation as “well capitalized” under regulatory prompt corrective action provisions, which set minimum levels of 5.00% of net average assets and 8.00% of risk-weighted assets. Refer to the Liquidity and Capital Resources section of this Item 2 for additional discussion regarding regulatory capital requirements.
Promotion of Adjustable-Rate Loans and Shorter-Term Fixed-Rate Loans
We market an adjustable-rate mortgage loan that provides us with improved interest rate risk characteristics when compared to a 30-year, fixed-rate mortgage loan. Our “Smart Rate” adjustable-rate mortgage offers borrowers an interest rate lower than that of a 30-year, fixed-rate loan. The interest rate of the Smart Rate mortgage is locked for three or five years then resets annually. The Smart Rate mortgage contains a feature to re-lock the rate an unlimited number of times at our then-current interest rate and fee schedule, for another three or five years (which must be the same as the original lock period) without having to complete a full refinance transaction. Re-lock eligibility is subject to a satisfactory payment performance history by the borrower (current at the time of re-lock, and no foreclosures or bankruptcies since the Smart Rate application was taken). In addition to a satisfactory payment history, re-lock eligibility requires that the property continues to be the borrower’s primary residence. The loan term cannot be extended in connection with a re-lock nor can new funds be advanced. All interest rate caps and floors remain as originated.
We also offer a ten-year, fully amortizing fixed-rate, first mortgage loan. The ten-year, fixed-rate loan has a more desirable interest rate risk profile when compared to loans with fixed-rate terms of 15 to 30 years and can help to more effectively manage interest rate risk exposure, yet provides our borrowers with the certainty of a fixed interest rate throughout the life of the obligation.
The following tables set forth our first mortgage loan production and balances segregated by loan structure at origination.
For the Three Months Ended December 31, 2020For the Three Months Ended December 31, 2019
AmountPercentAmountPercent
(Dollars in thousands)
First Mortgage Loan Originations:
ARM (all Smart Rate) production$368,034 32.8 %$303,720 40.5 %
Fixed-rate production:
    Terms less than or equal to 10 years203,121 18.1 %63,068 8.4 %
    Terms greater than 10 years550,697 49.1 %383,795 51.1 %
        Total fixed-rate production753,818 67.2 %446,863 59.5 %
Total First Mortgage Loan Originations$1,121,852 100.0 %$750,583 100.0 %
December 31, 2020September 30, 2020
AmountPercentAmountPercent
(Dollars in thousands)
Balance of Residential Mortgage Loans Held For Investment:
ARM (primarily Smart Rate) Loans$5,088,344 47.4 %$5,122,266 47.2 %
Fixed-rate:
    Terms less than or equal to 10 years1,357,059 12.6 %1,284,605 11.8 %
    Terms greater than 10 years4,284,886 40.0 %4,443,140 41.0 %
        Total fixed-rate5,641,945 52.6 %5,727,745 52.8 %
Total Residential Mortgage Loans Held For Investment$10,730,289 100.0 %$10,850,011 100.0 %
The following table sets forth the balances as of December 31, 2020 for all ARM loans segregated by the next scheduled interest rate reset date.
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Current Balance of ARM Loans Scheduled for Interest Rate Reset
During the Fiscal Years Ending September 30,(In thousands)
2021$361,855 
2022725,170 
2023638,203 
2024414,106 
20251,653,765 
20261,295,245 
     Total$5,088,344 
At December 31, 2020 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 $111.3 million and $36.9 million, respectively.

Loan Portfolio Yield
    The following tables set forth the balance and interest yield as of December 31, 2020 for the portfolio of loans held for investment, by type of loan, structure and geographic location.
December 31, 2020
BalancePercentYield
(Dollars in thousands)
Total Loans:
Fixed Rate
      Terms less than or equal to 10 years$1,357,059 10.5 %2.91 %
      Terms greater than 10 years4,284,886 33.1 %3.80 %
Total Fixed-Rate loans5,641,945 43.6 %3.58 %
ARMs5,088,344 39.2 %2.95 %
Home Equity Loans and Lines of Credit2,170,596 16.8 %2.54 %
Construction and Other Loans56,466 0.4 %3.46 %
Total Loans Receivable$12,957,351 100.0 %3.16 %
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December 31, 2020
BalanceFixed Rate BalancePercentYield
(Dollars in thousands)
Residential Mortgage Loans
Ohio$5,934,786 $4,168,266 45.8 %3.48 %
Florida1,853,165 731,294 14.3 %3.24 %
Other2,942,338 742,385 22.7 %2.90 %
     Total Residential Mortgage Loans10,730,289 5,641,945 82.8 %3.28 %
Home Equity Loans and Lines of Credit
Ohio638,210 39,728 4.9 %2.59 %
Florida428,972 29,579 3.3 %2.55 %
California327,376 16,122 2.6 %2.57 %
Other776,038 14,270 6.0 %2.48 %
     Total Home Equity Loans and Lines of Credit2,170,596 99,699 16.8 %2.54 %
Construction and Other Loans56,466 56,466 0.4 %3.46 %
Total Loans Receivable$12,957,351 $5,798,110 100.0 %3.16 %

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 December 31, 2020, the principal balance of home equity lines of credit totaled $1.88 billion. Our home equity lending is discussed in the Allowance for Credit Losses section of the Critical Accounting Policies that follows this Overview.
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 three months ended December 31, 2020, the balance of deposits decreased $35.0 million, which included a $23.5 million decrease in the balance of brokered CDs (which is inclusive of acquisition costs and subsequent amortization). Additionally, during the three months ended December 31, 2020, we decreased total FHLB of Cincinnati advances bv $76.7 million, including a $75.0 million decrease in 90 day advances, which were in place to support interest rate swap contracts that matured during the quarter. The balance of our advances from the FHLB of Cincinnati at December 31, 2020 consist solely of term advances from the FHLB of Cincinnati; and shorter-term advances from the FHLB of Cincinnati that were matched/correlated to interest rate exchange contracts that extended the effective durations of those shorter-term advances to approximately four to seven years at inception. There are no remaining short-term advances not associated with interest rate swap contracts. Interest rate swaps are discussed later in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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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. Prior to fiscal 2010, this strategy was used to a greater extent to manage our interest rate risk, but it remains a tool available to us. The sales of first mortgage loans increased significantly during fiscal 2020 and continued into fiscal 2021, due to an increase in the number of fixed-rate refinances. At December 31, 2020, we serviced $2.09 billion of loans for others, of which $799.4 million was sold in the secondary market prior to fiscal 2010. We can also manage interest rate risk by selling non-Fannie Mae compliant mortgage loans to private investors, although those transactions are dependent upon favorable market conditions, including motivated private investors, and involve more complicated negotiations and longer settlement timelines. Loan sales are discussed later in this Part I, Item 2. under the heading Liquidity and Capital Resources, and in Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Notwithstanding our efforts to manage interest rate risk, should a rapid and substantial increase occur in general market interest rates, or an extended period of a flat or inverted yield curve market persist, it is expected that, prospectively and particularly over a multi-year time horizon, the level of our net interest income would be adversely impacted.
Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the memory of the 2008 housing market collapse and financial crisis is a constant reminder to focus on credit risk. In response to the evolving economic landscape, we continuously revise and update our quarterly analysis and evaluation procedures, as needed, for each category of our lending with the objective of identifying and recognizing all appropriate credit losses. Continuous analysis and evaluation updates will be important as we monitor the impact to our borrowers as a result of the COVID-19 global pandemic. At December 31, 2020, 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. We also charge-off performing loans to collateral value and classify those loans as non-accrual within 60 days of notification of all borrowers filing Chapter 7 bankruptcy, that have not reaffirmed or been dismissed, regardless of how long the loans have been performing. Loans where at least one borrower has been discharged of their obligation in Chapter 7 bankruptcy are classified as TDRs. At December 31, 2020, $17.4 million of loans in Chapter 7 bankruptcy status with no other modification to terms were included in total TDRs. At December 31, 2020, the amortized cost in non-accrual status loans included $19.5 million of performing loans in Chapter 7 bankruptcy status, of which $19.1 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 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 60%. The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflects the higher credit standards to which we have subjected all new originations. As of December 31, 2020, loans originated prior to 2009 had a balance of $573.0 million, of which $15.1 million, or 2.6%, were delinquent, while loans originated in 2009 and after had a balance of $12.51 billion, of which $12.7 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, in light of the difficulties that arose in connection with the 2008 housing crisis with respect to the real estate markets in those two states. At December 31, 2020, approximately 55.2% and 17.3% of the combined total of our Residential Core and construction loans held for investment and approximately 29.4% 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 and home equity loan originations for the three months ended December 31, 2020, 27.1% are secured by properties in states other than Ohio or Florida.
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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 $72.1 million at December 31, 2020, and constituted only 0.6% of our total “held for investment” loan portfolio balance, they comprised 13.0% and 15.0% of our 90 days or greater delinquencies and our total delinquencies, respectively, at that date. At December 31, 2020, approximately 95.5% and 4.4% of our residential Home Today loans were secured by properties in Ohio and Florida, respectively. At December 31, 2020, the percentages of those loans delinquent 30 days or more in Ohio and Florida were 6.0% and 3.3%, respectively. We attempted to manage our Home Today credit risk by requiring private mortgage insurance for some loans. At December 31, 2020, 12.0% 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 $71.8 million at December 31, 2020. 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/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 December 31, 2020, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a “well capitalized” status) was 10.37%. The Association's Tier 1 (leverage) capital ratio is lower at December 31, 2020 than its ratio at September 30, 2020, which was 10.39%, due primarily to 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 38 basis points. Because of its intercompany nature, this dividend payment did not impact the Company's consolidated capital ratios which are reported in the Liquidity and Capital Resources section of this Item 2. We expect to continue to remain a well capitalized institution.
In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits (including brokered CDs), borrowings from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. At December 31, 2020, deposits totaled $9.19 billion (including $530.4 million of brokered CDs), while borrowings totaled $3.44 billion and borrowers’ advances and servicing escrows totaled $193.1 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 interest on our deposit products. Our deposit products typically offer rates that are highly competitive with the rates on similar products offered by other financial institutions. We intend to continue this practice, subject to market conditions.
We preserve the availability of alternative funding sources through various mechanisms. First, by maintaining high capital levels, we retain the flexibility to increase our balance sheet size without jeopardizing our capital adequacy. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. Second, we pledge available real estate mortgage loans and investment securities with the FHLB of Cincinnati and the FRB-Cleveland. At December 31, 2020, these collateral pledge support arrangements provided the Association with the ability to borrow a maximum of $7.5 billion from the FHLB of Cincinnati and $334.0 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 balance outstanding at December 31, 2020 was $4.08 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement for the maximum limit of borrowing, we would need to increase our ownership of FHLB of Cincinnati common stock by an additional $178.7 million. Third, we have the ability to purchase overnight Fed Funds up to $200 million through various arrangements with other institutions. Fourth, we invest in high quality marketable securities that exhibit limited market price variability, and to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At December 31, 2020, our investment securities portfolio totaled $447.6 million. Finally, cash flows from operating activities have been a regular source of funds. During the three months ended December 31, 2020 and 2019, cash flows from operations provided $24.2 million and $29.4 million, respectively.
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First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more, and Home Ready) originated under Fannie Mae compliant procedures are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures, which are not eligible for sale to Fannie Mae. For loans that are not originated under Fannie Mae procedures, the Association’s ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors. Refer to the Liquidity and Capital Resources section of the Overview for information on loan sales.
Overall, while customer and community confidence can never be assured, the Company believes that its liquidity is adequate and that it has access to adequate alternative funding sources.
Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. Our ratio of annualized non-interest expense to average assets was 1.41% for the three months ended December 31, 2020 and 1.30% for the three months ended December 31, 2019. As of December 31, 2020, our average assets per full-time employee and our average deposits per full-time employee were $14.7 million and $9.3 million, respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average of deposits (exclusive of brokered CDs) held at our branch offices ($234.1 million per branch office as of December 31, 2020) 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.


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Critical Accounting Policies and Use of Significant Estimates
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. We provide for credit losses based on a life of loan methodology. Accordingly, all credit losses are charged to, and all recoveries are credited to, the related allowance. Additions to the allowance for credit losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and off-balance sheet exposures and make provisions (or releases) for losses in order to maintain the allowance for credit losses in accordance with U.S. GAAP. The Company adopted CECL guidance ASC Topic 326: Financial Instruments - Credit Losses on October 1, 2020. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for further discussion on CECL methodology. Our allowance for credit losses consists of three components:
(1)individual valuation allowances (IVAs) established for any loans dependent on cash flows, such as performing TDRs, and on loans individually reviewed that represents further deterioration in the fair value of the collateral not yet identified as uncollectible;
(2)general valuation allowances (GVAs) for loans, which are comprised of quantitative GVAs, which are general allowances for credit losses for each loan type based on historical loan loss experience and qualitative GVAs, which are adjustments to the quantitative GVAs, maintained to cover uncertainties that affect our estimate of probable losses for each loan type; and
(3)GVAs for off-balance sheet credit exposures, which are comprised of expected lifetime losses on unfunded loan commitments to extend credit where the obligations are not unconditionally cancellable.
The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include:
changes in lending policies and procedures including underwriting standards, collection, charge-off or recovery practices;
management's view of changes in national, regional, and local economic and business conditions and trends including treasury yields, housing market factors and trends, such as the status of loans in foreclosure, real estate in judgment and real estate owned, and unemployment statistics and trends and how it aligns with economic modeling forecasts;
changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw period and adjustable-rate mortgage loans nearing a rate reset;
changes in the experience, ability or depth of lending management;
changes in the volume or severity of past due loans, volume of non-accrual loans, or the volume and severity of adversely classified loans including the trending of delinquency statistics (both current and historical), historical loan loss experience and trends, the frequency and magnitude of multiple restructurings of loans previously the subject of TDRs, and uncertainty surrounding borrowers’ ability to recover from temporary hardships for which short-term loan restructurings are granted;
changes in the quality of the loan review system;
changes in the value of the underlying collateral including asset disposition loss statistics (both current and historical) and the trending of those statistics, and additional charge-offs and recoveries on individually reviewed loans;
existence of any concentrations of credit;
effect of other external factors such as the COVID-19 pandemic, competition, market interest rate changes or legal and regulatory requirements including market conditions and regulatory directives that impact the entire financial services industry; and
limitations within our models to predict life of loan net losses.
As of December 31, 2020 some of our borrowers have experienced unemployment or reduced income as a result of the COVID-19 global pandemic and have requested some type of loan payment forbearance. We began offering short-term
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forbearance plans to borrowers affected by COVID-19 on March 13, 2020. These forbearance plans totaled $94.1 million, or 0.73% of total loans receivable, at December 31, 2020, of which $80.3 million were related to first mortgage loans and $13.7 million were related to home equity loans and lines of credit. Although we are not currently receiving payments on loans in active COVID-19 forbearance plans, the majority of these accounts are reported as current and accruing and are not currently included in the amortized cost of TDRs as the Company has elected to apply the temporary suspension of TDR requirements provided by the revised interagency statement and the CARES Act for eligible loan modifications. Further details about active COVID-19 forbearance plans and post-forbearance loan workouts can be found in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
When loan restructurings qualify as TDRs and the loans are performing according to the terms of the restructuring, we record an IVA based on the present value of expected future cash flows, which includes a factor for potential subsequent defaults, discounted at the effective interest rate of the original loan contract. Potential defaults are distinguished from multiple restructurings as borrowers who default are generally not eligible for subsequent restructurings. At December 31, 2020, the balance of such individual valuation allowances was $13.3 million. In instances when loans require multiple restructurings, additional valuation allowances may be required. The new valuation allowance on a loan that has multiple restructurings is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the restructured agreement. Due to the immaterial amount of this exposure to date, we capture this exposure as a component of our qualitative GVA evaluation as the estimated change in the present value of cash flows on restructurings expected to subsequently restructure based on historical activity.
Home equity loans and lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and credit lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and decreasing housing prices, these higher loan-to-value ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has a vested interest in keeping the loan current when compared to a borrower with little or no equity in the property. In light of the past weakness in the housing market and uncertainty with respect to future employment levels and economic prospects, we conduct an expanded loan level evaluation of our home equity loans and lines of credit, including bridge loans used to aid borrowers in buying a new home before selling their old one, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. As part of the adoption of CECL on October 1, 2020, we have established an allowance for our unfunded commitments on this portfolio, which is recorded in other liabilities. Our home equity loans and lines of credit portfolio continues to comprise a significant portion of our gross charge-offs. At December 31, 2020, we had an amortized cost of $2.20 billion in home equity loans and equity lines of credit outstanding, of which $4.5 million, or 0.2% were delinquent 90 days or more.
Through the Home Today program, the Company provided the majority of loans to borrowers who would not otherwise qualify for the Company’s loan products, generally because of low credit scores. Because the Company applied less stringent underwriting and credit standards to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential real estate mortgage loans in the Residential Core portfolio. Since loans are no longer originated under the Home Today program, the Home Today portfolio will continue to decline in balance, primarily due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of customers and the communities served, since fiscal 2016 the Company has offered Fannie Mae eligible, Home Ready loans. These loans are originated in accordance with Fannie Mae's underwriting standards. While the Company retains the servicing to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae. The Company does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, an LTV ratio greater than 100%, or pay-option adjustable-rate mortgages.
We evaluate the allowance for credit losses based upon the combined total of the quantitative and qualitative GVAs and IVAs. We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions.
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The following tables set forth the allowance for credit losses on loans allocated by loan category, the percent of allowance in each category to the total allowance on loans, and the percent of loans in each category to total loans at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. This table does not include allowances for credit losses on unfunded loan commitments, which are primarily related to undrawn home equity lines of credit.
 December 31, 2020
 AmountPercent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to Total 
Loans
 (Dollars in thousands)
Real estate loans:
Residential Core$46,351 65.9 %82.2 %
Residential Home Today(568)(0.8)%0.6 %
Home equity loans and lines of credit23,752 33.8 %16.8 %
Construction755 1.1 %0.4 %
Allowance for credit losses on loans$70,290 100.0 %100.0 %

 September 30, 2020December 31, 2019
 AmountPercent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to Total 
Loans
AmountPercent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to Total 
Loans
 (Dollars in thousands)
Real estate loans:
Residential Core$22,381 47.7 %82.0 %$18,312 49.1 %82.5 %
Residential Home Today5,654 12.0 %0.6 %4,232 11.4 %0.6 %
Home equity loans and lines of credit18,898 40.3 %17.0 %14,744 39.5 %16.5 %
Construction— %0.4 %— %0.4 %
Total allowance$46,937 100.0 %100.0 %$37,292 100.0 %100.0 %
The following table sets forth activity in our allowance for credit losses segregated by geographic location for the periods indicated. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of other loans are considered immaterial, therefore neither was segregated.
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 As of and For the Three Months Ended December 31,
 20202019
 (Dollars in thousands)
Allowance balance for credit losses on loans (beginning of the period)$46,937 $38,913 
Adoption of ASU 2016-13 for allowance for credit losses on loans24,095 
Charge-offs:
Real estate loans:
Residential Core
Ohio59 274 
Florida196 
Other15 
Total Residential Core61 485 
Residential Home Today
Ohio109 359 
Total Residential Home Today109 359 
Home equity loans and lines of credit
Ohio314 244 
Florida201 352 
California108 — 
Other61 149 
Total Home equity loans and lines of credit684 745 
Total charge-offs854 1,589 
Recoveries:
Real estate loans:
Residential Core460 810 
Residential Home Today423 527 
Home equity loans and lines of credit1,229 1,631 
Total recoveries2,112 2,968 
Net recoveries (charge-offs)1,258 1,379 
Provision (release) for credit losses on loans(2,000)(3,000)
Allowance balance for loans (end of the period)$70,290 $37,292 
Allowance balance for credit losses on unfunded commitments (beginning of the period)$— 
Adoption of ASU 2016-13 for allowance for credit losses on unfunded commitments22,052 
Provision (release) for credit losses on unfunded loan commitments— 
Allowance balance for unfunded loan commitments (end of the period)22,052 
Allowance balance for all credit losses (end of the period)$92,342 
Ratios:
Net recoveries (charge-offs) to average loans outstanding (annualized)0.04 %0.04 %
Allowance for credit losses on loans to non-accrual loans at end of the period138.90 %61.84 %
Allowance for credit losses on loans to the total amortized cost in loans at end of the period0.54 %0.28 %
Net recoveries continued, totaling $1.3 million during the three months ended December 31, 2020 compared to $1.4 million during the three months ended December 31, 2019. We reported net recoveries for 15 out of the last 16 quarters, primarily due to improvements in the values of properties used to secure loans that were fully or partially charged off after the 2008 collapse of the housing market. Charge-offs are recognized on loans identified as collateral-dependent and subject to individual review when the collateral value does not sufficiently support full repayment of the obligation. Recoveries are recognized on previously charged off loans as borrowers perform their repayment obligations or as loans with improved collateral positions reach final resolution.
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Gross charge-offs decreased and remained at relatively low levels, during the three months ended December 31, 2020 when compared to the three months ended December 31, 2019. We continue to evaluate loans becoming delinquent for potential losses and record provisions for the estimate of potential losses of those loans. Subject to the duration and depth of the impact from COVID-19, we expect a moderate level of charge-offs to continue as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.
During the three months ended December 31, 2020, the total allowance for credit losses increased $45.4 million, to $92.3 million from $46.9 million at September 30, 2020, primarily related to to the adoption of CECL on October 1, 2020. The total allowance for credit losses at adoption was $93.1 million, composed of $71.0 million of allowance for credit losses on loans and $22.1 million of allowance for credit losses on off-balance sheet exposures. At December 31, 2020, the total allowance for credit losses decreased $0.8 million since adoption to $92.3 million, composed of $70.3 million of allowance for credit losses on loans and $22.0 million of allowance for credit losses on off-balance sheet exposures. During the three months ended December 31, 2020, we recorded net recoveries of $1.3 million. Refer to the "Activity in the Allowance for Credit Losses" and "Analysis of the Allowance for Credit Losses" tables in Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for more information.
Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. Changes during the three months ended December 31, 2020 since the adoption of CECL on October 1, 2020 in the allowance for credit loss balances are primarily related to changes in the credit for loan losses as the allowance for credit losses on off-balance sheet remained relatively unchanged. Other than the less significant construction and other loans segments, the changes related to the significant loan segments are described as follows:

Residential Core – The amortized cost of this segment decreased 1.1%, or $116.3 million, and its total allowance decreased 0.9% or $0.5 million as of December 31, 2020 as compared to October 1, 2020. Total delinquencies increased 0.2% to $16.9 million at December 31, 2020 from $16.8 million at September 30, 2020. Delinquencies greater than 90 days increased by 7.5% to $10.7 million at December 31, 2020 from $10.0 million at September 30, 2020. Net recoveries were slightly more at $0.4 million for the quarter ended December 31, 2020 compared to $0.3 million during the quarter ended December 31, 2019. While economic forecasts showed fairly significant improvements this quarter, continued uncertainty around the economic impacts related to COVID-19 and how quickly improvements might occur following the recent release of a vaccine, led management to maintain the allowance at a level determined using similar economic forecast expectations as the prior quarter.
Residential Home Today – The amortized cost of this segment decreased 4.1%, or $3.0 million, as we are no longer originating loans under the Home Today program. The total allowance for this segment decreased to a net recovery position of $0.6 million at December 31, 2020, from a net allowance position of $0.4 million at October 1, 2020. Total delinquencies decreased to $4.2 million at December 31, 2020 from $4.5 million at September 30, 2020. Delinquencies greater than 90 days decreased 7.9% to $2.3 million from $2.5 million at September 30, 2020. There were net recoveries of $0.3 million recorded during the current quarter compared to net recoveries of $0.2 million recorded during the quarter ended December 31, 2019. This allowance decreased since CECL adoption, reflecting not only the declining portfolio balance, but the lower historical loss rates applied to the remaining balance and the higher expected recoveries related to the loans as they age. Under the CECL methodology, the life of loan concept allows for qualitative adjustments for the expected future recoveries of previously charged-off loans which is driving the current allowance balance for Home Today loans negative.
Home Equity Loans and Lines of Credit – The amortized cost of this segment decreased 2.8%, or $62.2 million, to $2.20 billion at December 31, 2020 from $2.26 billion at September 30, 2020. The total allowance for this segment slightly decreased by 0.2% to $42.5 million from $42.6 million at October 1, 2020. Total delinquencies for this portfolio segment increased 3.2% to $7.1 million at December 31, 2020 as compared to $6.8 million at September 30, 2020. Delinquencies greater than 90 days increased 6.2% to $4.5 million at December 31, 2020 from $4.3 million at September 30, 2020. Net recoveries for this loan segment during the current quarter were less at $0.5 million as compared to $0.9 million for the quarter ended December 31, 2019. Similar to the Core segment above, prior quarter economic forecast expectations were used in evaluating the allowance, as opposed to the fairly significant improvements forecast during the current quarter. This approach was also supported by the increase in delinquencies and the decrease in net recoveries during the quarter. The slight allowance decrease since CECL adoption reflects the loan balance decrease in this segment offset by an increase in the allowance for unfunded commitments.
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Loan Portfolio Composition
The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location at the indicated dates, excluding loans held for sale. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of other loans are immaterial. Therefore, neither was segregated by geographic location. 
 December 31, 2020September 30, 2020December 31, 2019
 AmountPercentAmountPercentAmountPercent
 (Dollars in thousands)
Real estate loans:
Residential Core
Ohio$5,865,909 $6,020,882 $6,378,193 
Florida1,849,997 1,823,125 1,769,129 
Other2,942,254 2,930,838 2,984,566 
Total Residential Core10,658,160 82.2 %10,774,845 82.0 %11,131,888 82.5 %
Residential Home Today
Ohio68,877 71,801 78,866 
Florida3,168 3,280 3,724 
Other84 85 89 
Total Residential Home Today72,129 0.675,166 0.682,679 0.6
Home equity loans and lines of credit
Ohio638,210 655,867 676,085 
Florida428,972 432,301 426,479 
California327,376 349,701 365,474 
Other776,038 794,367 753,342 
Total Home equity loans and lines of credit2,170,596 16.82,232,236 17.02,221,380 16.5
Total Construction53,829 0.447,985 0.451,404 0.4
Other loans2,637 2,581 2,900 
Total loans receivable12,957,351 100.0 %13,132,813 100.0 %13,490,251 100.0 %
Deferred loan expenses, net42,138 42,459 43,785 
Loans in process(29,691)(25,273)(28,972)
Allowance for credit losses on loans(70,290)(46,937)(37,292)
Total loans receivable, net$12,899,508 $13,103,062 $13,467,772 
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The following table summarizes vintage and FICO score by portfolio as of the period presented. Balances are adjusted for deferred loan fees, expenses and any applicable loans-in-process.
Revolving LoansRevolving Loans
By fiscal year of originationAmortizedConverted
20212020201920182017PriorCost BasisTo TermTotal
December 31, 2020
Real estate loans:
Residential Core
          <680$4,303 $21,657 $12,688 $15,165 $10,534 $91,089 $— $— $155,436 
          680-740175,495 495,523 264,589 304,310 327,550 893,908 — — 2,461,375 
          741+674,877 1,648,639 796,057 860,555 1,009,042 3,054,227 — — 8,043,397 
          Unknown (1)
112 808 — 773 747 12,233 — — 14,673 
Total Residential Core854,787 2,166,627 1,073,334 1,180,803 1,347,873 4,051,457 — — 10,674,881 
Residential Home Today (2)
          <680— — — — — 58,114 — — 58,114 
          680-740— — — — — 5,328 — — 5,328 
          741+— — — — — 3,572 — — 3,572 
          Unknown— — — — — 4,753 — — 4,753 
Total Residential Home Today— — — — — 71,767 — — 71,767 
Home equity loans and lines of credit
          <680— 47 236 192 342 303 5,165 12,177 18,462 
          680-7403,002 4,780 8,461 6,846 5,353 3,369 472,345 75,646 579,802 
          741+10,618 17,128 13,671 12,709 10,498 5,492 1,398,542 124,116 1,592,774 
          Unknown— — — 19 — 33 1,402 4,327 5,781 
Total Home equity loans and lines of credit13,620 21,955 22,368 19,766 16,193 9,197 1,877,454 216,266 2,196,819 
Construction
          680-74090 2,410 — — — — — — 2,500 
          741+851 19,214 129 — — — — — 20,194 
          Unknown1,000 — — — — — — — 1,000 
Total Construction1,941 21,624 129 — — — — — 23,694 
Total net real estate loans$870,348 $2,210,206 $1,095,831 $1,200,569 $1,364,066 $4,132,421 $1,877,454 $216,266 $12,967,161 
(1) Market data necessary for stratification is not readily available.
(2) No new originations of Home Today loans since fiscal 2016.






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The following table summarizes vintage and LTV by portfolio as of the period presented. Balances are adjusted for deferred loan fees, expenses and any applicable loans-in-process.
Revolving LoansRevolving Loans
By fiscal year of originationAmortizedConverted
20212020201920182017PriorCost BasisTo TermTotal
December 31, 2020
Real estate loans:
          Residential Core
          <80%$642,440 $1,236,866 $492,594 $614,101 $787,397 $2,463,925 $— $— $6,237,323 
          80-89.9%196,069 847,492 527,073 523,594 516,582 1,458,177 — — 4,068,987 
          90-100%16,278 82,269 53,667 42,986 43,894 125,290 — — 364,384 
          >100%— — — 122 — 1,016 — — 1,138 
          Unknown (1)
— — — — — 3,049 — — 3,049 
Total Residential Core854,787 2,166,627 1,073,334 1,180,803 1,347,873 4,051,457 — — 10,674,881 
Residential Home Today (2)
          <80%— — — — — 14,133 — — 14,133 
          80-89.9%— — — — — 22,635 — — 22,635 
          90-100%— — — — — 34,999 — — 34,999 
Total Residential Home Today— — — — — 71,767 — — 71,767 
Home equity loans and lines of credit
<80%13,581 21,411 21,524 18,267 12,154 6,046 1,758,491 144,681 1,996,155 
80-89.9%39 544 788 1,264 1,893 879 117,085 65,384 187,876 
90-100%— — — 120 840 957 764 686 3,367 
>100%— — 56 115 1,306 1,302 524 815 4,118 
         Unknown (1)
— — — — — 13 590 4,700 5,303 
Total Home equity loans and lines of credit13,620 21,955 22,368 19,766 16,193 9,197 1,877,454 216,266 2,196,819 
Construction
<80%735 11,599 129 — — — — — 12,463 
80-89.9%206 10,025 — — — — — — 10,231 
         Unknown (1)
1,000 — — — — — — — 1,000 
Total Construction1,941 21,624 129 — — — — — 23,694 
Total net real estate loans$870,348 $2,210,206 $1,095,831 $1,200,569 $1,364,066 $4,132,421 $1,877,454 $216,266 $12,967,161 
(1) Market data necessary for stratification is not readily available.
(2) No new originations of Home Today loans since fiscal 2016.
At December 31, 2020, the unpaid principal balance of our home equity loans and lines of credit portfolio consisted of $290.0 million in home equity loans (which included $187.9 million of home equity lines of credit, which are in the amortization period and no longer eligible to be drawn upon, and $5.8 million in bridge loans) and $1.88 billion in home equity lines of credit. The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of December 31, 2020. Home equity lines of credit in the draw period are reported according to geographic distribution.
50

Credit
Exposure
Principal
Balance
Percent
Delinquent
90 Days or More
Mean CLTV
Percent at
Origination (2)
Current Mean
CLTV Percent (3)
 (Dollars in thousands)   
Home equity lines of credit in draw period (by state)
Ohio$1,513,098 $536,356 0.10 %59 %49 %
Florida740,230 349,906 0.06 %56 %49 %
California644,439 278,102 0.06 %60 %56 %
Other (1)1,614,855 716,225 0.03 %63 %57 %
Total home equity lines of credit in draw period4,512,622 1,880,589 0.06 %60 %52 %
Home equity lines in repayment, home equity loans and bridge loans290,007 290,007 1.18 %64 %43 %
Total$4,802,629 $2,170,596 0.21 %60 %51 %
_________________
(1)No other individual state has a committed or drawn balance greater than 10% of our total equity lending portfolio and 5% of total loans.
(2)Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)Current Mean CLTV is based on best available first mortgage and property values as of December 31, 2020. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
At December 31, 2020, 38.3% of our home equity lending portfolio was either in a first lien position (21.8%), in a subordinate (second) lien position behind a first lien that we held (13.8%) or behind a first lien that was held by a loan that we originated, sold and now service for others (2.7%). At December 31, 2020, 13.2% of our home equity line of credit portfolio in the draw period was making only the minimum payment on the outstanding line balance.
The following table sets forth by calendar origination year, the credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of December 31, 2020. Home equity lines of credit in the draw period are included in the year originated:
Credit
Exposure
Principal
Balance
Percent
Delinquent
90 Days or More
Mean CLTV
Percent at
Origination (1)
Current Mean
CLTV
Percent (2)
 (Dollars in thousands)   
Home equity lines of credit in draw period (3)
2010 and Prior$640 $228 — %18 %50 %
201340 18 — %79 %50 %
201481,252 21,038 — %59 %38 %
2015122,526 38,357 — %58 %40 %
2016330,589 117,892 0.17 %61 %45 %
2017696,241 286,499 0.14 %59 %48 %
2018928,993 426,033 0.03 %60 %52 %
20191,237,901 605,553 0.05 %62 %58 %
20201,114,440 384,971 0.02 %59 %57 %
Total home equity lines of credit in draw period4,512,622 1,880,589 0.06 %60 %52 %
Home equity lines in repayment, home equity loans and bridge loans290,007 290,007 1.18 %64 %43 %
Total$4,802,629 $2,170,596 0.21 %60 %51 %
________________
(1)Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
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(2)Current Mean CLTV is based on best available first mortgage and property values as of December 31, 2020. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
(3)There are no remaining principal balances of home equity lines of credit for years 2011 and 2012. Those years are excluded from the table above.
The following table sets forth by fiscal year when the draw period expires, the principal balance of home equity lines of credit in the draw period as of December 31, 2020, segregated by the current combined LTV range.
Current CLTV Category
Home equity lines of credit in draw period (by end of draw fiscal year):< 80%80 - 89.9%90 - 100%>100%Unknown (1)Total
(Dollars in thousands)
2021$34,304 $116 $— $77 $— $34,497 
202283 — — — — 83 
202318 — — — — 18 
202413,169 — — — — 13,169 
202538,347 — — 16 38,363 
202663,080 — — — — 63,080 
Post 20261,727,699 2,994 302 95 289 1,731,379 
   Total$1,876,700 $3,110 $302 $172 $305 $1,880,589 
_________________
(1)Market data necessary for stratification is not readily available.
The following table sets forth the breakdown of current mean CLTV percentages for our home equity lines of credit in the draw period as of December 31, 2020.
Credit
Exposure
Principal
Balance
Percent
of Total Principal Balance
Percent
Delinquent
90 Days or
More
Mean CLTV
Percent at
Origination (2)
Current
Mean
CLTV
Percent (3)
 (Dollars in thousands)    
Home equity lines of credit in draw period (by current mean CLTV)
< 80%$4,497,458 $1,876,700 99.8 %0.10 %60 %52 %
80 - 89.9%13,088 3,110 0.2 %0.70 %77 %82 %
90 - 100%514 302 — %— %76 %94 %
> 100%882 172 — %12.80 %56 %130 %
Unknown (1)680 305 — %— %39 %(1)
$4,512,622 $1,880,589 100.0 %0.06 %60 %52 %
_________________
(1)Market data necessary for stratification is not readily available.
(2)Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)Current Mean CLTV is based on best available first mortgage and property values as of December 31, 2020. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
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Delinquent Loans
The following tables set forth the amortized cost in loan delinquencies by type, segregated by geographic location and severity of delinquency as of the dates indicated.
 Loans Delinquent for
 30-89 Days90 Days or MoreTotal
 (Dollars in thousands)
December 31, 2020
Real estate loans:
Residential Core
Ohio$4,875 $7,113 $11,988 
Florida751 2,887 3,638 
Other540 705 1,245 
Total Residential Core6,166 10,705 16,871 
Residential Home Today
Ohio1,848 2,264 4,112 
Florida85 20 105 
Total Residential Home Today1,933 2,284 4,217 
Home equity loans and lines of credit
Ohio535 1,840 2,375 
Florida714 883 1,597 
California399 653 1,052 
Other895 1,146 2,041 
Total Home equity loans and lines of credit2,543 4,522 7,065 
Total$10,642 $17,511 $28,153 
 Loans Delinquent for
 30-89 Days90 Days or MoreTotal
(Dollars in thousands)
September 30, 2020
Real estate loans:
Residential Core
Ohio$5,463 $6,982 $12,445 
Florida1,023 1,852 2,875 
Other401 1,124 1,525 
Total Residential Core6,887 9,958 16,845 
Residential Home Today
Ohio1,974 2,390 4,364 
Florida83 90 173 
Total Residential Home Today2,057 2,480 4,537 
Home equity loans and lines of credit
Ohio898 1,938 2,836 
Florida634 564 1,198 
California383 489 872 
Other670 1,269 1,939 
Total Home equity loans and lines of credit2,585 4,260 6,845 
Total$11,529 $16,698 $28,227 
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 Loans Delinquent for
 30-89 Days90 Days or MoreTotal
 (Dollars in thousands)
December 31, 2019
Real estate loans:
Residential Core
Ohio$6,919 $6,437 $13,356 
Florida1,997 852 2,849 
Other892 765 1,657 
Total Residential Core9,808 8,054 17,862 
Residential Home Today
Ohio4,003 3,038 7,041 
Florida111 158 269 
Total Residential Home Today4,114 3,196 7,310 
Home equity loans and lines of credit
Ohio1,358 2,121 3,479 
Florida776 627 1,403 
California569 506 1,075 
Other953 1,922 2,875 
Total Home equity loans and lines of credit3,656 5,176 8,832 
Total$17,578 $16,426 $34,004 
Total loans seriously delinquent (i.e. delinquent 90 days or more) were 0.14% of total net loans at December 31, 2020, 0.13% at September 30, 2020, and 0.12% at December 31, 2019. Total loans delinquent (i.e. delinquent 30 days or more) were 0.22% of total net loans at December 31, 2020, 0.21% at September 30, 2020, and 0.25% at December 31, 2019.
Non-Performing Assets and Troubled Debt Restructurings
The following table sets forth the amortized costs and categories of our non-performing assets and TDRs at the dates indicated.
December 31,
2020
September 30,
2020
December 31,
2019
 (Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential Core$29,492 $31,823 $33,310 
Residential Home Today9,891 10,372 11,551 
Home equity loans and lines of credit11,223 11,174 15,447 
Total non-accrual loans (1)(2)50,606 53,369 60,308 
Real estate owned102 185 2,813 
Total non-performing assets$50,708 $53,554 $63,121 
Ratios:
Total non-accrual loans to total loans0.39 %0.41 %0.45 %
Total non-accrual loans to total assets0.35 %0.36 %0.41 %
Total non-performing assets to total assets0.35 %0.37 %0.43 %
TDRs: (not included in non-accrual loans above)
Real estate loans:
Residential Core$45,844 $45,929 $48,047 
Residential Home Today23,272 23,859 24,878 
Home equity loans and lines of credit28,289 29,336 29,192 
Total$97,405 $99,124 $102,117 
_________________
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(1)At December 31, 2020, September 30, 2020, and December 31, 2019, the totals include $31.3 million, $35.0 million, and $40.8 million, respectively, in TDRs, which are less than 90 days past due but included with non-accrual loans for a minimum period of six months from the restructuring date due to their non-accrual status prior to restructuring, because of a prior partial charge off, or because all borrowers have filed Chapter 7 bankruptcy, and not reaffirmed or been dismissed.
(2)At December 31, 2020, September 30, 2020, and December 31, 2019, the totals include $7.6 million, $7.2 million and $8.4 million in TDRs that are 90 days or more past due, respectively.
The gross interest income that would have been recorded during the three months ended December 31, 2020 and December 31, 2019 on non-accrual loans, if they had been accruing during the entire period and TDRs if they had been current and performing in accordance with their original terms during the entire period, was $1.8 million and $2.1 million, respectively. The interest income recognized on those loans included in net income for the three months ended December 31, 2020 and December 31, 2019 was $1.1 million and $1.3 million, respectively.
The amortized cost of collateral-dependent loans includes accruing TDRs and loans that are returned to accrual status when contractual payments are less than 90 days past due. These loans continue to be individually evaluated based on collateral until, at a minimum, contractual payments are less than 30 days past due. Also, the amortized cost of non-accrual loans includes loans that are not included in the amortized cost of collateral-dependent loans because they are included in loans collectively evaluated for credit losses.
The table below sets forth a reconciliation of the amortized costs and categories between non-accrual loans and collateral-dependent loans at the dates indicated. For prior periods, the tables below set forth a reconciliation of the amortized cost and categories between non-accrual loans and impaired loans, under previously applicable GAAP.
December 31,
2020
(Dollars in thousands)
Non-Accrual Loans$50,606 
Accruing Collateral-Dependent TDRs8,157 
Other Accruing Collateral-Dependent Loans7,313 
Less: Loans Collectively Evaluated(4,146)
Total Collateral-Dependent loans$61,930 
September 30,
2020
December 31,
2019
(Dollars in thousands)
Non-Accrual Loans$53,369 $60,308 
Accruing TDRs99,124 102,118 
Performing Impaired Loans5,959 4,667 
Less: Loans Collectively Evaluated(3,235)(3,844)
Total Impaired Loans$155,217 $163,249 
In response to the economic challenges facing many borrowers, we continue to restructure loans. Loan restructuring is a method used to help families keep their homes and preserve our neighborhoods. This involves making changes to the borrowers' loan terms through interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions including those beyond that provided in the original agreement; principal forgiveness; capitalization of delinquent payments in special situations; or some combination of the above. Loans discharged through Chapter 7 bankruptcy are also reported as TDRs per OCC interpretive guidance. For discussion on TDR measurement, see Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS. We had $136.4 million of TDRs (accrual and non-accrual) recorded at December 31, 2020. This was a decrease in the amortized cost of TDRs of $4.9 million and $14.9 million from September 30, 2020 and December 31, 2019, respectively.
55

The following table sets forth the amortized cost in accrual and non-accrual TDRs, by the types of concessions granted, as of December 31, 2020. Initial concessions granted by loans restructured as TDRs can include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also can occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Company.
Initial RestructuringsMultiple
Restructurings
BankruptcyTotal
 (In thousands)
Accrual
Residential Core$26,289 $14,010 $5,545 $45,844 
Residential Home Today12,791 9,227 1,254 23,272 
Home equity loans and lines of credit26,780 654 855 28,289 
Total$65,860 $23,891 $7,654 $97,405 
Non-Accrual, Performing
Residential Core$3,373 $6,011 $8,936 $18,320 
Residential Home Today970 4,753 1,662 7,385 
Home equity loans and lines of credit2,233 2,250 1,155 5,638 
Total$6,576 $13,014 $11,753 $31,343 
Non-Accrual, Non-Performing
Residential Core$1,716 $2,147 $486 $4,349 
Residential Home Today590 1,050 168 1,808 
Home equity loans and lines of credit1,135 155 194 1,484 
Total$3,441 $3,352 $848 $7,641 
Total TDRs
Residential Core$31,378 $22,168 $14,967 $68,513 
Residential Home Today14,351 15,030 3,084 32,465 
Home equity loans and lines of credit30,148 3,059 2,204 35,411 
Total$75,877 $40,257 $20,255 $136,389 
TDRs in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan was not accruing interest at the time of restructuring, continues to not accrue interest and is performing according to the terms of the restructuring, but has not been current for at least six consecutive months since its restructuring, has a partial charge-off, or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status, where all borrowers have filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring.
Income Taxes. We consider accounting for income taxes a critical accounting policy due to the subjective nature of certain estimates, including the impact of tax rate changes, such as those implemented by the Tax Cuts and Jobs Act signed into law in 2017, and the impact of other tax law changes, such as those implemented by the CARES Act signed into law in March, 2020, 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 December 31, 2020, no valuation allowances were outstanding. Even though we have determined a valuation allowance is not required for deferred tax assets at December 31, 2020, there is no guarantee that those assets, if any, 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.
56


Comparison of Financial Condition at December 31, 2020 and September 30, 2020
Total assets decreased $69.4 million, or less than 1%, to $14.57 billion at December 31, 2020 from $14.64 billion at September 30, 2020. This decrease was primarily the result of loan sales and principal repayments on loans exceeding the total of new loan originations and the impact of adopting CECL, offset by an increase in bank owned life insurance.
Cash and cash equivalents increased $1.9 million, or less than 1%, to $499.9 million at December 31, 2020 from $498.0 million at September 30, 2020. We manage cash to maintain the level of liquidity described later in the Liquidity and Capital Resources section.
Investment securities, all of which are classified as available for sale, decreased $5.8 million, or 1%, to $447.6 million at December 31, 2020 from $453.4 million at September 30, 2020. Investment securities decreased as $93.0 million in purchases and a $1.8 million reduction of unrealized losses were exceeded by the combined effect of $94.9 million in principal paydowns and $2.1 million of net acquisition premium amortization that occurred in the mortgage-backed securities portfolio during the three months ended December 31, 2020. There were no sales of investment securities during the three months ended December 31, 2020.
Loans held for investment, net, decreased $203.6 million, or 2%, to $12.90 billion at December 31, 2020 from $13.10 billion at September 30, 2020. This decrease was based on a combination of a $119.7 million, or 1%, decrease in residential mortgage loans to $10.73 billion at December 31, 2020 from $10.85 billion at September 30, 2020 and a $61.6 million decrease in the balance of home equity loans and lines of credit during the three months ended December 31, 2020, as loan sales and repayments on existing loans exceeded new originations and additional draws on existing accounts. Total first mortgage loan originations were $1.12 billion for the quarter ended December 31, 2020 and $750.6 million for the quarter ended December 31, 2019. The current period mortgage loan originations included 77% refinance transactions, 33% adjustable rate mortgages and 18% fixed-rate mortgages with terms of 10 years or less. During the three months ended December 31, 2020, $368.0 million of three- and five-year “Smart Rate” loans were originated while $753.8 million of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated. These originations were offset by paydowns and fixed-rate loan sales. Between September 30, 2020 and December 31, 2020, the total fixed-rate portion of the first mortgage loan portfolio decreased $85.8 million and was comprised of a decrease of $158.2 million in the balance of fixed-rate loans with original terms greater than 10 years partially offset by an increase of $72.5 million in the balance of fixed-rate loans with original terms of 10 years or less. During the three months ended December 31, 2020, we sold or committed to sell $293.5 million in loan sales, which consisted of completed sales totaling $190.5 million and $103.0 million of principal balances in contracts pending settlement. Loan sales included $13.9 million of agency-compliant Home Ready loans and $279.6 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans sold to Fannie Mae. During the three months ended December 31, 2020, we purchased long-term, fixed-rate first mortgage loans which had a remaining unpaid principal balance of $11.0 million.
Commitments originated for home equity lines of credit and equity and bridge loans were $300.6 million for the three months ended December 31, 2020 compared to $349.5 million for the three months ended December 31, 2019. At December 31, 2020, pending commitments to originate new home equity loans and lines of credit were $249.7 million. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.
On October 1, 2020, the Company adopted the Current Expected Credit Loss ("CECL") methodology and recognized a $46.1 increase to the allowance for credit losses, and a related $35.8 million reduction to retained earnings, net of tax. The allowance for credit losses was $92.3 million, or 0.71% of total loans receivable, at December 31, 2020, including a $22.0
million allowance for unfunded commitments recorded in other liabilities. The allowance for loan losses was $46.9 million, or 0.36% of total loans receivable, at September 30, 2020 and $37.3 million, or 0.28% of total loans receivable, at December 31, 2019. Gross loan charge-offs were $0.8 million for the quarter ended December 31, 2020 and $1.6 million for the quarter ended December 31, 2019, while loan recoveries were $2.1 million in the current quarter and $3.0 million in the prior year quarter. As a result of loan recoveries exceeding charge-offs, the Company reported net loan recoveries of $1.3 million for the three months ended December 31, 2020 as compared to net loan recoveries of $1.4 million for the three months ended December 31, 2019.
However, while actual loan charge-offs and delinquencies remained low at December 31, 2020, some borrowers have experienced unemployment or reduced income as a result of the COVID-19 pandemic. While we continue to offer assistance to our borrowers, which includes forbearance programs, an allowance to capture expected losses on these loans is accounted for within the CECL methodology. Refer to Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for additional discussion.
The amount of FHLB stock owned was unchanged at $136.8 million at December 31, 2020 compared to September 30, 2020. FHLB stock ownership requirements dictate the amount of stock owned at any given time.
57

Total bank owned life insurance contracts increased $71.6 million, to $294.6 million at December 31, 2020, from $222.9 million at September 30, 2020, primarily due to $70.0 million of additional premiums placed during the quarter.
Other assets, including prepaid expenses, decreased $5.6 million to $99.2 million at December 31, 2020 from $104.8 million at September 30, 2020. This decrease was primarily due to a $4.3 million decrease in margin requirements and receivables on interest rate swap contracts and a $1.2 million decrease in prepaid franchise tax.
Deposits decreased $35.0 million, or less than 1%, to $9.19 billion at December 31, 2020 from $9.23 billion at September 30, 2020. The decrease in deposits resulted primarily from a $173.9 million decrease in CDs, as the low current market interest rates have impacted customers' desires to maintain longer-term CDs. This decrease was partially offset by a $64.2 million increase in checking accounts, a $39.8 million increase in savings accounts, and a $35.3 million increase in money market accounts. The balance of brokered CDs included in total deposits at December 31, 2020 was $530.4 million, a decrease of $23.5 million during the three months ended December 31, 2020, compared to a balance of $553.9 million at September 30, 2020.
Borrowed funds, all from the FHLB of Cincinnati, decreased $76.7 million, or 2%, to $3.44 billion at December 31, 2020 from $3.52 billion at September 30, 2020. This decrease consisted of a $75.0 million decrease in 90-day advances, which were in place to support interest rate swap contracts that matured during the quarter, and a $1.7 million decrease in long-term borrowings. Proceeds from loan sales were used to retire the maturing advances. There were no new advances during the quarter ended December 31, 2020. Short-term advances had a zero balance at December 31, 2020 and September 30, 2020. The total balance of borrowed funds of $3.44 billion at December 31, 2020 consisted of no overnight and short-term advances, long-term advances of $545.1 million with a remaining weighted average maturity of approximately three years and short-term advances of $2.90 billion aligned with interest rate swap contracts with a remaining weighted average effective maturity of approximately 2.8 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 I, Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional discussion regarding short-term borrowings and interest-rate swaps.
Borrowers' advances for insurance and taxes increased by $30.7 million to $142.2 million at December 31, 2020 from $111.5 million at September 30, 2020. This change primarily reflects the cyclical nature of real estate tax payments that have been collected from borrowers and are in the process of being remitted to various taxing agencies.
Accrued expenses and other liabilities increased by $20.7 million to $86.3 million at December 31, 2020 from $65.6 million at September 30, 2020. The change was mainly due to a $22.0 million increase in the liability for off-balance sheet exposures on commitments to originate new loans and undrawn equity lines of credit and construction loan balances upon the October 1, 2020 adoption of CECL, partially offset by a $1.4 million decrease in payables outstanding.
Total shareholders’ equity decreased $14.0 million, or 1%, to $1.66 billion at December 31, 2020 from $1.67 billion at September 30, 2020. This net decrease primarily reflected the combination of the $35.8 million, net of tax, impact upon the October 1, 2020 adoption of CECL and $14.1 million of cash dividend payments, partially offset by the positive effect of $25.0 million of net income, a $10.4 million increase in accumulated other comprehensive income, mainly the result of changes in market interest rates related to our interest rate swaps, and a $0.4 million net positive impact related to activity in the Company's stock compensation plan and ESOP. No shares of the Company's common stock were repurchased during the quarter ended December 31, 2020. As a result of a July 14, 2020 mutual member vote, Third Federal Savings, MHC, the mutual holding company that owns approximately 81% of the outstanding stock of the Company, waived the receipt of its share of the dividends paid. Refer to Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional details regarding the repurchase of shares of common stock and the dividend waiver.

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Comparison of Operating Results for the Three Months Ended December 31, 2020 and 2019
Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effects thereof were not material. Average balances are derived from daily average balances. Non-accrual loans are included in the computation of loan average balances, but only cash payments received on those loans during the period presented are reflected in the yield. The yields set forth below include the effect of deferred fees, deferred expenses, discounts and premiums that are amortized or accreted to interest income or interest expense.
Three Months EndedThree Months Ended
December 31, 2020December 31, 2019
Average
Balance
Interest
Income/
Expense
Yield/
Cost (1)
Average
Balance
Interest
Income/
Expense
Yield/
Cost (1)
 (Dollars in thousands)
Interest-earning assets:
  Interest-earning cash
equivalents
$476,589 $128 0.11 %$229,986 $949 1.65 %
  Investment securities— — — %— — — %
Mortgage-backed securities447,544 987 0.88 %545,729 2,864 2.10 %
  Loans (2)13,090,927 100,126 3.06 %13,241,863 115,225 3.48 %
  Federal Home Loan Bank stock136,793 688 2.01 %101,858 1,014 3.98 %
Total interest-earning assets14,151,853 101,929 2.88 %14,119,436 120,052 3.40 %
Noninterest-earning assets525,312 489,200 
Total assets$14,677,165 $14,608,636 
Interest-bearing liabilities:
  Checking accounts$1,017,811 321 0.13 %$867,971 483 0.22 %
  Savings accounts1,662,095 914 0.22 %1,490,074 3,024 0.81 %
  Certificates of deposit6,493,523 26,461 1.63 %6,505,776 34,809 2.14 %
  Borrowed funds3,471,593 15,490 1.78 %3,746,170 17,551 1.87 %
Total interest-bearing liabilities12,645,022 43,186 1.37 %12,609,991 55,867 1.77 %
Noninterest-bearing liabilities376,897 273,002 
Total liabilities13,021,919 12,882,993 
Shareholders’ equity1,655,246 1,725,643 
Total liabilities and shareholders’ equity$14,677,165 $14,608,636 
Net interest income$58,743 $64,185 
Interest rate spread (1)(3)1.51 %1.63 %
Net interest-earning assets (4)$1,506,831 $1,509,445 
Net interest margin (1)(5)1.66 %1.82 %
Average interest-earning assets to average interest-bearing liabilities111.92 %111.97 %
Selected performance ratios:
Return on average assets (1)0.68 %0.70 %
Return on average equity (1)6.04 %5.94 %
Average equity to average assets11.28 %11.81 %
_________________
(1)Annualized.
(2)Loans include both mortgage loans held for sale and loans held for investment.
(3)Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5)Net interest margin represents net interest income divided by total interest-earning assets.
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General. Net income decreased $0.6 million to $25.0 million for the three months ended December 31, 2020 compared to $25.6 million for the three months ended December 31, 2019. The decrease in net income was attributable to a decline in net interest income and an increase in other non-interest expenses, partially offset by an increase in non-interest income, mainly an increase in the net gains on sale of loans.
Interest and Dividend Income. Interest and dividend income decreased $18.2 million, or 15%, to $101.9 million during the three months ended December 31, 2020 compared to $120.1 million during the same three months in the prior year. The decrease in interest and dividend income resulted from decreases in interest income from all classes of interest-earning assets, mainly due to decreases in market interest rates.
Interest income on loans decreased $15.1 million, or 13%, to $100.1 million for the three months ended December 31, 2020 compared to $115.2 million for the three months ended December 31, 2019. This decrease was attributed mainly to a 42 basis point decrease in the average yield on loans to 3.06% for the three months ended December 31, 2020 from 3.48% for the same three months in the prior fiscal year, as well as a $150.9 million decrease in the average balance of loans to $13.09 billion for the current three months compared to $13.24 billion during the same three months in the prior fiscal year as repayments and loan sales exceeded new loan production. Overall, market interest rate decreases during the period drove an increase in the number of loan refinances, which reduced our loan yields, as well as yields on home equity lending products that feature interest rates that reset based on the prime rate.
Interest income on mortgage-backed securities decreased $1.9 million, or 66%, to $1.0 million during the current three months compared to $2.9 million during the three months ended December 31, 2019. This decrease was attributed to a 122 basis point decrease in the average yield on mortgage-backed securities as well as a $98.2 million decrease in the average balance of mortgage-backed securities to $447.5 million for the current three months compared to $545.7 million during the prior period.
Interest income on other interest earning cash equivalents decreased $0.8 million, or 87%, to $0.1 million during the current three months compared to $0.9 million for the three months ended December 31, 2019. The decrease was attributed to a 154 basis point decrease in the average yield partially offset by a $246.6 million increase in the average balance of other interest earning cash equivalents to $476.6 million from $230.0 million for the same three months in the prior fiscal year.
Interest income on FHLB stock decreased $0.3 million, or 30%, to $0.7 million during the current three months compared to $1.0 million for the three months ended December 31, 2019. This decrease was attributed to a 197 basis point decrease in the average yield on FHLB stock partially offset by a $34.9 million increase in the average balance of FHLB stock to $136.8 million compared to $101.9 million for the same three months in the prior fiscal year.
Interest Expense. Interest expense decreased $12.7 million, or 23%, to $43.2 million during the current three months compared to $55.9 million during the three months ended December 31, 2019. This decrease resulted from decreases in interest expense on both deposits and borrowed funds.
Interest expense on CDs decreased $8.3 million, or 24%, to $26.5 million during the three months ended December 31, 2020 compared to $34.8 million during the three months ended December 31, 2019. The decrease was attributed primarily to a 51 basis point decrease in the average rate we paid on CDs to 1.63% during the current three months from 2.14% during the same three months last year. In addition, there was a $12.3 million, or less than 1%, decrease in the average balance of CDs to $6.49 billion from $6.51 billion during the same three months of the prior year. Interest expense on savings and checking accounts decreased $2.1 million and $0.2 million, respectively, to $0.9 million and $0.3 million during the three months ended December 31, 2020, compared to $3.0 million and $0.5 million for the same three month period of the prior fiscal year. Rates were adjusted on deposits in response to changes in market interest rates as well as to changes in the rates paid by our competitors.
Interest expense on borrowed funds, all from the FHLB of Cincinnati, as impacted by related interest rate swap contracts, decreased $2.1 million, or 12%, to $15.5 million during the three months ended December 31, 2020 from $17.6 million during the three months ended December 31, 2019. The decrease was attributed to a nine basis point decrease in the average rate paid for these funds to 1.78%, during the three months ended December 31, 2020 from 1.87% for the three months ended December 31, 2019. Additionally, there was a $274.6 million, or 7%, decrease in the average balance of borrowed funds to $3.47 billion during the current three months from $3.75 billion during the same three months of the prior fiscal year. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion.
Net Interest Income. Net interest income decreased $5.5 million, or 9%, to $58.7 million during the three months ended December 31, 2020 from $64.2 million during the three months ended December 31, 2019. Average interest-earning assets
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increased during the current three months by $32.4 million, or less than 1%, when compared to the three months ended December 31, 2019. The increase in average assets was attributed primarily to the growth of our interest earning cash equivalents and to a lesser extent FHLB stock, investments which do not yield as much as our loans, which experienced a decrease in average balance. However, the increase in average interest earning assets was offset by a 52 basis point decrease in the yield on those assets to 2.88% from 3.40%. Average interest-bearing liabilities increased by $35.0 million and experienced a 40 basis point decrease in cost, as our interest rate spread decreased 12 basis points to 1.51% compared to 1.63% during the same three months last year reflecting the challenging interest rate environment. Our net interest margin was 1.66% for the current three months and 1.82% for the same three months in the prior fiscal year.
Provision (Credit) for Credit Losses. We recorded a credit for credit losses on loans and off-balance sheet exposures of $2.0 million during the three months ended December 31, 2020 and a $3.0 million credit for loan losses during the three months ended December 31, 2019. In the current three months, we recorded net recoveries of $1.3 million, as compared to net recoveries of $1.4 million for the three months ended December 31, 2019. On October 1, 2020, the Company adopted the Current Expected Credit Loss ("CECL") methodology and recognized a $46.2 million increase to the allowance for credit losses. The credit for credit losses in the current three months mainly reflected the impact of the net recoveries during the period as the actual allowance for credit losses declined only $0.7 million from the initial CECL adoption balance. Our analysis of the allowance for credit losses under CECL addresses the preliminary economic impact from the COVID-19 outbreak that has led to increased unemployment and deterioration in the overall macro-economic environment. We continue to monitor the effect unemployment will have on our borrowers and the broader market, including the longer term impact to the relative values of residential properties. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan balance, uncollected balances have been charged against the allowance for credit losses previously provided. The increase as a result of the CECL adoption, partially offset by the credit for credit losses recorded for the current three months resulted in an overall increase in the balance of the allowance for credit losses. The allowance for credit losses on loans was $70.3 million, or 0.54% of the total amortized cost in loans receivable, at December 31, 2020, compared to $37.3 million, or 0.28% of the total amortized cost in loans receivable, at December 31, 2019. Balances of amortized costs are net of deferred fees, expenses and any applicable loans-in-process. In addition, there was a $22.0 million liability for unfunded loan commitments recorded at December 31, 2020 as a result of the CECL adoption.Refer to the Critical Accounting Policies section of the Overview and Note 4. LOANS AND ALLOWANCES FOR CREDIT LOSSES of the NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS for further discussion.
Non-Interest Income. Non-interest income increased $9.6 million, or 80%, to $21.5 million during the three months ended December 31, 2020 compared to $11.9 million during the three months ended December 31, 2019. The increase in non-interest income was primarily due to a $13.5 million increase in the net gain on sale of loans during the most recent three months partially offset by a decline in other income. This increase was mainly due to an increase in activity and the percentage level of gains, as there were loan sales of $293.5 million, including commitments to sell, during the three months ended December 31, 2020, compared to loan sales of $208.5 million during the three months ended December 31, 2019. The prior three months ending December 31, 2019 benefited from a $4.7 million gain on sale of the remaining commercial property held by a non-thrift, partially owned subsidiary of the Company.
Non-Interest Expense. Non-interest expense increased $4.4 million, or 9%, to $51.7 million during the three months ended December 31, 2020 compared to $47.3 million during the three months ended December 31, 2019. This increase resulted primarily from a $2.5 million increase in salary and employee benefits, a $1.2 million increase in marketing expense and a $1.1 million increase in other operating expenses. The majority of the increase in salaries and benefits was a result of a one-time after-tax bonus of $1,500 to all associates in recognition of their special efforts during this pandemic year. The increase in marketing expenses during the three months ended December 31, 2020 was attributed to the timing of media campaigns supporting our lending activities. The increase in other operating expenses was mainly due to a $0.7 million increase of appraisal related expenses due to increased loan origination activity.
Income Tax Expense. The provision for income taxes was $5.5 million during the three months ended December 31, 2020 and $6.2 million for the three months ended December 31, 2019. The provision for the current three months included $5.3 million of federal income tax provision and $0.2 million of state income tax provision. The provision for the three months ended December 31, 2019 included $5.8 million of federal income tax provision and $0.4 million of state income tax provision. Our effective federal tax rate was 17.4% during the three months ended December 31, 2020 and 18.5% during the three months ended December 31, 2019.

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
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Discount Window, overnight Fed Funds through various arrangements with other institutions, proceeds from brokered CDs transactions, principal repayments and maturities of securities, and sales of loans.
In addition to the primary sources of funds described above, we have the ability to obtain funds through the use of collateralized borrowings in the wholesale markets, and from sales of securities. Also, debt issuance by the Company and access to the equity capital markets via a supplemental minority stock offering or a full conversion (second-step) transaction remain as other potential sources of liquidity, although these channels generally require up to nine months of lead time.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Association’s Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the sum of cash and cash equivalents plus unencumbered investment securities for which ready markets exist, divided by total assets). For the three months ended December 31, 2020, our liquidity ratio averaged 6.19%. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2020.
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 and the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2020, cash and cash equivalents totaled $499.9 million, which represented an increase of less than 1% from September 30, 2020.
Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $447.6 million at December 31, 2020.
During the three-month period ended December 31, 2020, loan sales totaled $293.5 million, which includes sales to Fannie Mae, consisting of $279.6 million of long-term, fixed-rate, agency-compliant, non-Home Ready first mortgage loans (including $96.5 million in contracts pending settlement) and $13.9 million of loans that qualified under Fannie Mae's Home Ready initiative (including $6.3 million in contracts pending settlement). Loans originated under the Home Ready initiative are classified as “held for sale” at origination. Loans originated under non-Home Ready, Fannie Mae compliant procedures are classified as “held for investment” until they are specifically identified for sale. At December 31, 2020, $111.3 million of long-term, fixed-rate residential first mortgage loans were classified as “held for sale,” of which $108.0 million were loan sale commitments outstanding at December 31, 2020 and $3.3 million were qualified under Fannie Mae's Home Ready initiative and not yet committed for sale.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) included in the UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
At December 31, 2020, we had $996.1 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had $2.63 billion in unfunded home equity lines of credit to borrowers. CDs due within one year of December 31, 2020 totaled $3.30 billion, or 35.9% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, sales of investment securities, other deposit products, including new CDs, brokered CDs, FHLB advances, borrowings from the FRB-Cleveland Discount Window or other collateralized borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the CDs due on or before December 31, 2021. We believe, however, based on past experience, that a significant portion of such deposits will remain with us. Generally, we have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating residential mortgage loans, home equity loans and lines of credit and purchasing investments. During the three months ended December 31, 2020, we originated $1.12 billion of residential mortgage loans, and $306.1 million of commitments for home equity loans and lines of credit, while during the three months ended December 31, 2019, we originated $750.6 million of residential mortgage loans and $349.5 million of commitments for home equity loans and lines of credit. We purchased $93.0 million of securities during the three months ended December 31, 2020, and $56.4 million during the three months ended December 31, 2019.
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
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agreements and borrowings from the FRB-Cleveland Discount Window. We experienced a net decrease in total deposits of $35.0 million during the three months ended December 31, 2020, which reflected the active management of the offered rates on maturing CDs, compared to a net increase of $234.5 million during the three months ended December 31, 2019. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. During the three months ended December 31, 2020, there was a $23.5 million decrease in the balance of brokered CDs (exclusive of acquisition costs and subsequent amortization), which had a balance of $530.4 million at December 31, 2020. At December 31, 2019 the balance of brokered CDs was $501.4 million. Principal and interest owed on loans serviced for others experienced a net increase of $5.0 million to $50.9 million during the three months ended December 31, 2020 compared to a net decrease of $1.4 million to $31.5 million during the three months ended December 31, 2019. During the three months ended December 31, 2020 we decreased our advances from the FHLB of Cincinnati by $76.7 million utilizing proceeds from loan sales. During the three months ended December 31, 2019, our advances from the FHLB of Cincinnati decreased by $13.3 million.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Cincinnati and the FRB-Cleveland Discount Window, each of which provides an additional source of funds. Also, in evaluating funding alternatives, we may participate in the brokered CD market. At December 31, 2020 we had $3.44 billion of FHLB of Cincinnati advances and no outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at December 31, 2020, we had $530.4 million of brokered CDs. During the three months ended December 31, 2020, we had average outstanding advances from the FHLB of Cincinnati of $3.47 billion as compared to average outstanding advances of $3.75 billion during the three months ended December 31, 2019. Refer to the Extending the Duration of Funding Sources section of the Overview and the General section of Item 3. Quantitative and Qualitative Disclosures About Market Risk for further discussion. At December 31, 2020, we had the ability to borrow a maximum of $7.53 billion from the FHLB of Cincinnati and $334.0 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for collateral based additional borrowings beyond the outstanding balance at December 31, 2020 was $4.08 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement for the maximum limit of borrowing, we would have to increase our ownership of FHLB of Cincinnati common stock by an additional $178.7 million.

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 Basil III. The impact of the Rule was not material to the Association’s regulatory ratios.
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In February 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 September 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 December 31, 2020, the Association exceeded the regulatory requirement for the "capital conservation buffer".
As of December 31, 2020, the Association exceeded all regulatory requirements to be considered “Well Capitalized” as presented in the table below (dollar amounts in thousands).
 ActualWell Capitalized Levels
 AmountRatioAmountRatio
Total Capital to Risk-Weighted Assets$1,566,470 19.59 %$799,456 10.00 %
Tier 1 (Leverage) Capital to Net Average Assets1,520,089 10.37 %732,582 5.00 %
Tier 1 Capital to Risk-Weighted Assets1,520,089 19.01 %639,565 8.00 %
Common Equity Tier 1 Capital to Risk-Weighted Assets1,519,927 19.01 %519,646 6.50 %
The capital ratios of the Company as of December 31, 2020 are presented in the table below (dollar amounts in thousands).
 Actual
 AmountRatio
Total Capital to Risk-Weighted Assets$1,828,854 22.83 %
Tier 1 (Leverage) Capital to Net Average Assets1,782,473 12.15 %
Tier 1 Capital to Risk-Weighted Assets1,782,473 22.25 %
Common Equity Tier 1 Capital to Risk-Weighted Assets1,782,473 22.25 %
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 STATEMENTS OF CONDITION but reduced the Association's reported capital ratios. At December 31, 2020, the Company had, in the form of cash and a demand loan from the Association, $225.0 million of funds readily available to support its stand-alone operations.
The Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock was approved by the Board of Directors on October 27, 2016 and repurchases began on January 6, 2017. There were 4,108,921 shares repurchased under that program between its start date and December 31, 2020. During the three months ended December 31, 2020, the Company did not repurchase any shares of its common stock. The share repurchase plan has been suspended as part of the response to COVID-19, but recent repurchase volume had decreased already as the Company has placed more emphasis on dividends in its evaluation of capital deployment.
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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 and December 15, 2020. Third Federal Savings, MHC is the 81% majority shareholder of the Company.
The payment of dividends, support of asset growth and, once the internal suspension has been lifted, strategic stock repurchases are planned to continue in the future as the focus for future capital deployment activities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk has historically been interest rate risk. In general, our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and advances from the FHLB of Cincinnati. As a result, a fundamental component of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established risk parameter limits deemed appropriate given our business strategy, operating environment, capital, liquidity and performance objectives. Additionally, our Board of Directors has authorized the formation of an Asset/Liability Management Committee comprised of key operating personnel, which is responsible for managing this risk in a matter that is consistent with the guidelines and risk limits approved by the Board of Directors. Further, the Board has established the Directors Risk Committee, which, among other responsibilities, conducts regular oversight and review of the guidelines, policies and deliberations of the Asset/Liability Management Committee. We have sought to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:
(i)marketing adjustable-rate and shorter-maturity (10-year, fixed-rate mortgage) loan products;
(ii)lengthening the weighted average remaining term of major funding sources, primarily by offering attractive interest rates on deposit products, particularly longer-term certificates of deposit, and through the use of longer-term advances from the FHLB of Cincinnati (or shorter-term advances converted to longer-term durations via the use of interest rate exchange contracts that qualify as cash flow hedges) and longer-term brokered certificates of deposit;
(iii)investing in shorter- to medium-term investments and mortgage-backed securities;
(iv)maintaining the levels of capital required for "well capitalized" designation; and
(v)securitizing and/or selling long-term, fixed-rate residential real estate mortgage loans.
During the three months ended December 31, 2020, $293.5 million of agency-compliant, long-term, fixed-rate mortgage loans were sold, or committed to be sold, to Fannie Mae on a servicing retained basis. At December 31, 2020, $111.3 million of agency-compliant, long-term, fixed-rate residential first mortgage loans were classified as “held for sale.” Of the agency-compliant loan sales during the three months ended December 31, 2020, $13.9 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage loans which were sold under Fannie Mae's Home Ready program, and $279.6 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage refinance loans which were sold to Fannie Mae, as described in the next paragraph. At December 31, 2020, the principal balance of loan sales included $103.0 million in contracts pending settlement.
First mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more, and Home Ready) are originated under Fannie Mae procedures and are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures, which are not eligible for sale to Fannie Mae. For loans that are not originated under Fannie Mae procedures, the Association’s ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors.
The Association actively markets equity lines of credit, an adjustable-rate mortgage loan product and a 10-year fixed-rate mortgage loan product. Each of these products provides us with improved interest rate risk characteristics when compared to longer-term, fixed-rate mortgage loans. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and investments, as well as loans and investments with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates.
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The Association evaluates funding source alternatives as it seeks to extend its liability duration. Extended duration funding sources that are currently considered include: retail certificates of deposit (which, subject to a fee, generally provide depositors with an early withdrawal option, but do not require pledged collateral); brokered certificates of deposit (which generally do not provide an early withdrawal option and do not require collateral pledges); collateralized borrowings which are not subject to creditor call options (generally advances from the FHLB of Cincinnati); and interest rate exchange contracts ("swaps") which are subject to collateral pledges and which require specific structural features to qualify for hedge accounting treatment (hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive income (loss) in the equity section of the balance sheet rather than being included in operating results of the income statement). The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment. The Association attempts to be opportunistic in the timing of its funding duration deliberations and when evaluating alternative funding sources, compares effective interest rates, early withdrawal/call options and collateral requirements.
The Association is a party to interest rate swap agreements. Each of the Association's swap agreements is registered on the Chicago Mercantile Exchange and involves the exchange of interest payment amounts based on a notional principal balance. No exchange of principal amounts occur and the notional principal amount does not appear on our balance sheet. The Association uses swaps to extend the duration of its funding sources. In each of the Association's agreements, interest paid is based on a fixed rate of interest throughout the term of each agreement while interest received is based on an interest rate that resets at a specified interval (generally three months) throughout the term of each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that point in time. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the conditions of the agreement. The notional amount of the Association's swap portfolio at December 31, 2020 was $2.90 billion. The swap portfolio's weighted average fixed pay rate was 1.77% and the weighted average remaining term was 2.8 years. Concurrent with the execution of each swap, the Association entered into a short-term borrowing from the FHLB of Cincinnati in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap. Each individual swap agreement has been designated as a cash flow hedge of interest rate risk associated with the Company's variable rate borrowings from the FHLB of Cincinnati.
Economic Value of Equity. Using customized modeling software, the Association prepares periodic estimates of the amounts by which the net present value of its cash flows from assets, liabilities and off-balance sheet items (the institution's economic value of equity or EVE) would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach in measuring the interest rate sensitivity of EVE. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumption that instantaneous changes (measured in basis points) occur at all maturities along the United States Treasury yield curve and other relevant market interest rates. A basis point equals one, one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is tailored specifically to our organization, which, we believe, improves its predictive accuracy. The following table presents the estimated changes in the Association’s EVE at December 31, 2020 that would result from the indicated instantaneous changes in the United States Treasury yield curve and other relevant market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
    EVE as a Percentage  of
Present Value of Assets (3)
Change in
Interest Rates
(basis points) (1)
Estimated
EVE (2)
Estimated Increase (Decrease) in
EVE
EVE
Ratio  (4)
Increase
(Decrease)
(basis
points)
AmountPercent
 (Dollars in thousands)   
+300$1,166,903 $(290,090)(19.91)%8.50 %(137)
+2001,374,786 (82,207)(5.64)%9.71 %(16)
+1001,485,030 28,037 1.92 %10.23 %36 
  01,456,993 — — %9.87 %— 
-1001,186,463 (270,530)(18.57)%8.01 %(186)
_________________
(1)Assumes an instantaneous uniform change in interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)EVE Ratio represents EVE divided by the present value of assets.
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The table above indicates that at December 31, 2020, in the event of an increase of 200 basis points in all interest rates, the Association would experience a 5.64% decrease in EVE. In the event of a 100 basis point decrease in interest rates, the Association would experience a 18.57% decrease in EVE.
The following table is based on the calculations contained in the previous table, and sets forth the change in the EVE at a +200 basis point rate of shock at December 31, 2020, with comparative information as of September 30, 2020. By regulation, the Association must measure and manage its interest rate risk for interest rate shocks relative to established risk tolerances in EVE.
Risk Measure (+200 Basis Points Rate Shock)
At December 31,
2020
At September 30, 2020
Pre-Shock EVE Ratio9.87 %9.70 %
Post-Shock EVE Ratio9.71 %9.63 %
Sensitivity Measure in basis points(16)(7)
Percentage Change in EVE(5.64)%(4.63)%
Certain shortcomings are inherent in the methodologies used in measuring interest rate risk through changes in EVE. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE tables presented above assume:
no new growth or business volumes;
that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, except for reductions to reflect mortgage loan principal repayments along with modeled prepayments and defaults; and
that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities.
Accordingly, although the EVE tables provide an indication of our interest rate risk exposure as of the indicated dates, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and will differ from actual results. In addition to our core business activities, which sought to originate Smart Rate (adjustable), home equity lines of credit (adjustable) and 10-year fixed-rate loans funded by borrowings from the FHLB and intermediate term CDs (including brokered CDs), and which are intended to have a favorable impact on our IRR profile, the impact of several other items and events resulted in the 1.01% deterioration in the Percentage Change in EVE measure at December 31, 2020 when compared to the measure at September 30, 2020. Factors contributing to this deterioration included changes in market rates, capital actions by the Association and changes due to business activity. Movement in market interest rates included a decrease of one basis point for the two-year term, an increase of eight basis points for the five-year term and an increase of 23 basis points for the ten-year term. Negatively impacting the Percentage Change in EVE was a $55.0 million cash dividend that the Association paid to the Company. Because of its intercompany nature, this payment had no impact on the Company's capital position, or the Company's overall IRR profile, but reduced the Association's regulatory capital and regulatory capital ratios and negatively impacted the Association's Percentage Change in EVE by approximately 0.21%. Additionally, modifications and enhancements to our modeling assumptions and methodologies, as a result of the model software change, impacted the Association's Percentage Change in EVE. While our core business activities, as described at the beginning of this paragraph, are generally intended to have a positive impact on our IRR profile, the actual impact is determined by a number of factors, including the pace of mortgage asset additions to our balance sheet (including consideration of outstanding commitments to originate those assets) in comparison to the pace of the addition of duration extending funding sources. The IRR simulation results presented above were in line with management's expectations and were within the risk limits established by our Board of Directors.
Our simulation model possesses random patterning capabilities and accommodates extensive regression analytics applicable to the prepayment and decay profiles of our borrower and depositor portfolios. The model facilitates the generation of alternative modeling scenarios and provides us with timely decision making data that is integral to our IRR management processes. Modeling our IRR profile and measuring our IRR exposure are processes that are subject to continuous revision, refinement, modification, enhancement, back testing and validation. We continually evaluate, challenge and update the methodology and assumptions used in our IRR model, including behavioral equations that have been derived based on third-party studies of our customer historical performance patterns. Changes to the methodology and/or assumptions used in the model will result in reported IRR profiles and reported IRR exposures that will be different, and perhaps significantly, from the results reported above.
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Earnings at Risk. In addition to EVE calculations, we use our simulation model to analyze the sensitivity of our net interest income to changes in interest rates (the institution’s EaR). Net interest income is the difference between the interest income that we earn on our interest-earning assets, such as loans and securities, and the interest that we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for prospective 12 and 24 month periods using customized (based on our portfolio characteristics) assumptions with respect to loan prepayment rates, default rates and deposit decay rates, and the implied forward yield curve as of the market date for assumptions as to projected interest rates. We then calculate what the estimated net interest income would be for the same period under numerous interest rate scenarios. The simulation process is subject to continual enhancement, modification, refinement and adaptation, in order that it might most accurately reflect our current circumstances, factors and expectations. As of December 31, 2020, we estimated that our EaR for the 12 months ending December 31, 2021 would increase by 3.78% in the event that market interest rates used in the simulation were adjusted in equal monthly amounts (termed a "ramped" format) during the 12 month measurement period to an aggregate increase in 200 basis points. The Association uses the "ramped" assumption in preparing the EaR simulation estimates for use in its public disclosures. In addition to conforming to predominate industry practice, the Association also believes that the ramped assumption provides a more probable/plausible scenario for net interest income simulations than instantaneous shocks which provide a theoretical analysis but a much less credible economic scenario. The Association continues to calculate instantaneous scenarios, and as of December 31, 2020, we estimated that our EaR for the 12 months ending December 31, 2021, would increase by 5.03% in the event of an instantaneous 200 basis point increase in market interest rates.
Certain shortcomings are also inherent in the methodologies used in determining interest rate risk through changes in EaR. Modeling changes in EaR require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the interest rate risk information presented above assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. In addition to the preparation of computations as described above, we also formulate simulations based on a variety of non-linear changes in interest rates and a variety of non-constant balance sheet composition scenarios.
Other Considerations. The EVE and EaR analyses are similar in that they both start with the same month end balance sheet amounts, weighted average coupon and maturity. The underlying prepayment, decay and default assumptions are also the same and they both start with the same month end "markets" (Treasury and Libor yield curves, etc.). From that similar starting point, the models follow divergent paths. EVE is a stochastic model using 100 different interest rate paths to compute market value at the account level for each of the categories on the balance sheet whereas EaR uses the implied forward curve to compute interest income/expense at the account level for each of the categories on the balance sheet.
EVE is considered as a point in time calculation with a "liquidation" view of the Association where all the cash flows (including interest, principal and prepayments) are modeled and discounted using discount factors derived from the current market yield curves. It provides a long term view and helps to define changes in equity and duration as a result of changes in interest rates. On the other hand, EaR is based on balance sheet projections going one year and two years forward and assumes new business volume and pricing to calculate net interest income under different interest rate environments. EaR is calculated to determine the sensitivity of net interest income under different interest rate scenarios. With each of these models, specific policy limits have been established that are compared with the actual month end results. These limits have been approved by the Association's Board of Directors and are used as benchmarks to evaluate and moderate interest rate risk. In the event that there is a breach of policy limits that extends beyond two consecutive quarter end measurement periods, management is responsible for taking such action, similar to those described under the preceding heading of General, as may be necessary in order to return the Association's interest rate risk profile to a position that is in compliance with the policy. At December 31, 2020, the IRR profile as disclosed above was within our internal limits.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated
and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that
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evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management as of December 31, 2020, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in the "Risk Factors" previously disclosed in our Annual Report on Form 10-K, filed with the SEC on November 24, 2020 (File No. 001-33390).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)Not applicable
(b)Not applicable
(c)We did not repurchase any stock during the quarter ended December 31, 2020. On October 27, 2016, the Company announced that the Board of Directors approved the Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock. Purchases under the program will be on an ongoing basis and subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses of capital, and our financial performance. Repurchased shares will be held as treasury stock and be available for general corporate use. The repurchase program commenced in January 2017, and in response to COVID-19, was restricted significantly in March, 2020 and suspended in April, 2020. The program has 5,891,079 max number of shares that may be purchased under the plan as of December 31, 2020. The program has no expiration date.
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 is the 81% majority shareholder of the Company.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
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Item 6.
(a) Exhibits
</