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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2014
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 or former address, if changed since last report)
__________________________

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
 
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
(do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date.
As of August 4, 2014 there were 303,373,527 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 74.9% 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
 
 
Page
 
 
 
 
 
 
 
PART l – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
June 30, 2014 and September 30, 2013
 
 
 
 
Consolidated Statements of Income
Three a
nd nine months ended June 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Income
Three
and nine months ended June 30, 2014 and 2013
 
 
 
 
Nine months ended June 30, 2014 and 2103
 
 
 
 
Nine months ended June 30, 2014 and 2103
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


2


GLOSSARY OF TERMS
TFS Financial Corporation provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
AOCI:  Accumulated Other Comprehensive Income
GAAP:  Generally Accepted Accounting Principles
ARM: Adjustable Rate Mortgage
GVA:  General Valuation Allowances
ASC: Accounting Standards Codification
HARP:  Home Affordable Refinance Program
ASU: Accounting Standards Update
High LTV: High loan-to-value
Association: Third Federal Savings and Loan
HPI:  Home Price Index
Association of Cleveland
IRR:  Interest Rate Risk
BAAS:  OCC Bank Accounting Advisory Series
IRS:  Internal Revenue Service
CDs:  Certificates of Deposit
IVA:  Individual Valuation Allowance
CFPB:  Consumer Financial Protection Bureau
LIP:  Loans-in-Process
CLTV:  Combined Loan-to-Value
MGIC:  Mortgage Guaranty Insurance Corporation
Company: TFS Financial Corporation and its
MOU:  Memorandum of Understanding
subsidiaries
NOW:  Negotiable Order of Withdrawal
DFA: Dodd-Frank Wall Street Reform and Consumer
OCC:  Office of the Comptroller of the Currency
Protection Act of 2010
OCI:  Other Comprehensive Income
DIF:  Depository Insurance Fund
OTS:  Office of Thrift Supervision
EaR:  Earnings at Risk
PMI:  Private Mortgage Insurance
ESOP:  Third Federal Employee (Associate) Stock
PMIC:  PMI Mortgage Insurance Co.
Ownership Plan
QTL:  Qualified Thrift Lender
EVE:  Economic Value of Equity
REMICs:  Real Estate Mortgage Investment Conduits
FASB:  Financial Accounting Standards Board
REIT:  Real Estate Investment Trust
FDIC:  Federal Deposit Insurance Corporation
SEC:  United States Securities and Exchange
FHFA:  Federal Housing Finance Agency
Commission
FHLB:  Federal Home Loan Bank
TDR:  Troubled Debt Restructuring
Fannie Mae:  Federal National Mortgage Association
Third Federal Savings, MHC: Third Federal Savings
FRB-Cleveland: Federal Reserve Bank of Cleveland
and Loan Association of Cleveland, MHC
FRS:  Board of Governors of the Federal Reserve System
 
 
 




3


Item 1. Financial Statements
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
 
June 30,
2014
 
September 30,
2013
ASSETS
 
 
 
Cash and due from banks
$
38,100

 
$
34,694

Interest-earning cash equivalents
217,410

 
251,302

Cash and cash equivalents
255,510

 
285,996

Investment securities available for sale (amortized cost $524,493 and $480,664, respectively)
524,314

 
477,376

Mortgage loans held for sale, at lower of cost or market ($5,252 and $3,369 measured at fair value, respectively)
5,340

 
4,179

Loans held for investment, net:
 
 
 
Mortgage loans
10,592,431

 
10,185,674

Other consumer loans
3,710

 
4,100

Deferred loan fees, net
(4,408
)
 
(13,171
)
Allowance for loan losses
(82,502
)
 
(92,537
)
Loans, net
10,509,231

 
10,084,066

Mortgage loan servicing rights, net
12,254

 
14,074

Federal Home Loan Bank stock, at cost
40,411

 
35,620

Real estate owned
20,593

 
22,666

Premises, equipment, and software, net
57,312

 
58,517

Accrued interest receivable
31,705

 
31,489

Bank owned life insurance contracts
188,520

 
183,724

Other assets
70,828

 
71,639

TOTAL ASSETS
$
11,716,018

 
$
11,269,346

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
$
8,703,221

 
$
8,464,499

Borrowed funds
1,017,400

 
745,117

Borrowers’ advances for insurance and taxes
42,281

 
71,388

Principal, interest, and related escrow owed on loans serviced
41,129

 
75,745

Accrued expenses and other liabilities
47,123

 
41,120

Total liabilities
9,851,154

 
9,397,869

Commitments and contingent liabilities


 


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; 304,096,983 and 309,230,591 outstanding at June 30, 2014 and September 30, 2013, respectively
3,323

 
3,323

Paid-in capital
1,700,996

 
1,696,370

Treasury stock, at cost; 28,221,767 and 23,088,159 shares at June 30, 2014 and September 30, 2013, respectively
(344,589
)
 
(278,215
)
Unallocated ESOP shares
(67,168
)
 
(70,418
)
Retained earnings—substantially restricted
578,741

 
529,021

Accumulated other comprehensive loss
(6,439
)
 
(8,604
)
Total shareholders’ equity
1,864,864

 
1,871,477

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
11,716,018

 
$
11,269,346

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
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
90,884

 
$
92,399

 
$
271,830

 
$
286,329

Investment securities available for sale
2,325

 
1,260

 
6,730

 
3,452

Other interest and dividend earning assets
547

 
545

 
1,560

 
1,646

Total interest and dividend income
93,756

 
94,204

 
280,120

 
291,427

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
23,210

 
27,049

 
68,434

 
86,214

Borrowed funds
2,674

 
1,027

 
6,985

 
2,739

Total interest expense
25,884

 
28,076

 
75,419

 
88,953

NET INTEREST INCOME
67,872

 
66,128

 
204,701

 
202,474

PROVISION FOR LOAN LOSSES
4,000

 
5,000

 
15,000

 
33,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
63,872

 
61,128

 
189,701

 
169,474

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Fees and service charges, net of amortization
2,356

 
2,141

 
7,038

 
6,590

Net gain on the sale of loans
673

 
3,978

 
1,545

 
8,257

Increase in and death benefits from bank owned life insurance contracts
1,610

 
1,611

 
4,806

 
4,793

Other
1,071

 
1,094

 
2,933

 
3,537

Total non-interest income
5,710

 
8,824

 
16,322

 
23,177

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
21,973

 
21,929

 
67,380

 
64,356

Marketing services
3,492

 
3,219

 
10,105

 
9,471

Office property, equipment and software
5,242

 
5,004

 
15,514

 
15,318

Federal insurance premium and assessments
2,402

 
2,878

 
7,496

 
9,835

State franchise tax
1,498

 
1,564

 
4,916

 
4,976

Real estate owned expense, net
2,015

 
2,087

 
6,968

 
4,768

Other operating expenses
6,227

 
9,585

 
18,260

 
25,305

Total non-interest expense
42,849

 
46,266

 
130,639

 
134,029

INCOME BEFORE INCOME TAXES
26,733

 
23,686

 
75,384

 
58,622

INCOME TAX EXPENSE
9,102

 
7,439

 
25,344

 
18,432

NET INCOME
$
17,631

 
$
16,247

 
$
50,040

 
$
40,190

Earnings per share—basic and diluted
$
0.06

 
$
0.05

 
$
0.17

 
$
0.13

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
298,681,954

 
301,913,844

 
299,860,726

 
301,746,918

Diluted
300,533,021

 
302,926,219

 
301,251,074

 
302,587,159


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
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
17,631

 
$
16,247

 
$
50,040

 
$
40,190

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Change in net unrealized income (loss) on securities available for sale
2,195

 
(2,903
)
 
2,021

 
(3,827
)
Change in pension obligation
48

 
91

 
144

 
271

Total other comprehensive income (loss)
2,243

 
(2,812
)
 
2,165

 
(3,556
)
Total comprehensive income
$
19,874

 
$
13,435

 
$
52,205

 
$
36,634

See accompanying notes to unaudited interim consolidated financial statements.


6



TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
Nine Months Ended June 30, 2014 and 2013
(In thousands)
 
 
 
Common
stock
 
Paid-in
capital
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Retained
earnings
 
Accumulated other
comprehensive
loss
 
Total
shareholders’
equity
Balance at September 30, 2012
 
$
3,323

 
$
1,691,884

 
$
(280,937
)
 
$
(74,751
)
 
$
473,247

 
$
(5,916
)
 
$
1,806,850

Net income
 

 

 

 

 
40,190

 

 
40,190

Other comprehensive loss, net of tax
 

 

 

 

 

 
(3,556
)
 
(3,556
)
ESOP shares allocated or committed to be released
 

 
2

 

 
3,250

 

 

 
3,252

Compensation costs for stock-based plans
 

 
5,090

 

 

 

 

 
5,090

Treasury stock allocated to restricted stock plan
 

 
(1,616
)
 
1,847

 

 
(126
)
 

 
105

Balance at June 30, 2013
 
$
3,323

 
$
1,695,360

 
$
(279,090
)
 
$
(71,501
)
 
$
513,311

 
$
(9,472
)
 
$
1,851,931

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013
 
$
3,323

 
$
1,696,370

 
$
(278,215
)
 
$
(70,418
)
 
$
529,021

 
$
(8,604
)
 
$
1,871,477

Net income
 

 

 

 

 
50,040

 

 
50,040

Other comprehensive income, net of tax
 

 

 

 

 

 
2,165

 
2,165

ESOP shares allocated or committed to be released
 

 
788

 

 
3,250

 

 

 
4,038

Compensation costs for stock-based plans
 

 
5,335

 

 

 

 

 
5,335

Excess tax effect from stock-based compensation
 

 
34

 

 

 

 

 
34

Purchase of treasury stock (3,143,650 shares)
 

 

 
(68,279
)
 

 

 

 
(68,279
)
Treasury stock allocated to restricted stock plan
 

 
(1,531
)
 
1,905

 

 
(320
)
 

 
54

Balance at June 30, 2014
 
$
3,323

 
$
1,700,996

 
$
(344,589
)
 
$
(67,168
)
 
$
578,741

 
$
(6,439
)
 
$
1,864,864

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 Nine Months Ended
 
 
June 30,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
50,040

 
$
40,190

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
ESOP and stock-based compensation expense
 
9,427

 
8,447

Depreciation and amortization
 
9,128

 
17,318

Deferred income tax expense
 

 
(564
)
Provision for loan losses
 
15,000

 
33,000

Net gain on the sale of loans
 
(1,545
)
 
(8,257
)
Other net losses
 
1,794

 
(612
)
Principal repayments on and proceeds from sales of loans held for sale
 
23,653

 
59,796

Loans originated for sale
 
(22,982
)
 
(51,319
)
Increase in bank owned life insurance contracts
 
(4,817
)
 
(4,802
)
Net (increase) decrease in interest receivable and other assets
 
(769
)
 
16,074

Net increase in accrued expenses and other liabilities
 
6,215

 
6,948

Other
 
114

 
353

Net cash provided by operating activities
 
85,258

 
116,572

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Loans originated
 
(1,773,626
)
 
(1,737,217
)
Principal repayments on loans
 
1,279,312

 
1,787,026

Proceeds from principal repayments and maturities of:
 
 
 
 
Securities available for sale
 
89,332

 
161,664

Proceeds from sale of:
 
 
 
 
Loans
 
34,631

 
282,353

Real estate owned
 
18,684

 
19,116

Purchases of:
 
 
 
 
FHLB stock
 
(4,791
)
 

Securities available for sale
 
(135,841
)
 
(206,000
)
Premises and equipment
 
(2,506
)
 
(1,727
)
Other
 
24

 
(116
)
Net cash (used in) provided by investing activities
 
(494,781
)
 
305,099

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net increase (decrease) in deposits
 
238,722

 
(350,889
)
Net decrease in borrowers’ advances for insurance and taxes
 
(29,107
)
 
(20,337
)
Net decrease in principal and interest owed on loans serviced
 
(34,616
)
 
(48,599
)
Net decrease in short term borrowed funds
 
(18,572
)
 
(204,836
)
Proceeds from long term borrowed funds
 
340,000

 
200,000

Repayment of long term borrowed funds
 
(49,145
)
 
(8,293
)
Purchase of treasury shares
 
(68,279
)
 

Excess tax benefit related to stock-based compensation
 
34

 

Net cash provided by (used in) financing activities
 
379,037

 
(432,954
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
(30,486
)
 
(11,283
)
CASH AND CASH EQUIVALENTS—Beginning of period
 
285,996

 
308,262

CASH AND CASH EQUIVALENTS—End of period
 
$
255,510

 
$
296,979

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid for interest on deposits
 
$
67,469

 
$
86,519

Cash paid for interest on borrowed funds
 
6,557

 
2,575

Cash paid for income taxes
 
14,100

 
15,200

SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Transfer of loans to real estate owned
 
18,055

 
18,835

Transfer of loans from held for sale to held for investment
 

 
154,913

Transfer of loans from held for investment to held for sale
 
35,395

 
337,009

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. On June 30, 2014, approximately 75% 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 accounting principles generally accepted in the United States of America 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 loan losses, the valuation of mortgage loan servicing rights, the valuation of deferred tax assets, and the determination of pension obligations and stock-based compensation are particularly subject to change.
The unaudited interim consolidated financial statements were prepared without an audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at June 30, 2014, and its results of operations and cash flows for the periods presented. In accordance with 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, 2013 contains 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, 2014 or for any other period.
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 earnings per share amounts, 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, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a dilutive impact. At June 30, 2014 and 2013, respectively, the ESOP held 6,716,765 and 7,150,105 shares that were neither allocated to participants nor committed to be released to participants.

9


The following is a summary of the Company's earnings per share calculations.
 
 
For the Three Months Ended June 30,
 
 
2014
 
2013
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
17,631

 
 
 
 
 
$
16,247

 
 
 
 
Less: income allocated to restricted stock units
 
84

 
 
 
 
 
82

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
17,547

 
298,681,954

 
$
0.06

 
$
16,165

 
301,913,844

 
$
0.05

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
1,851,067

 
 
 
 
 
1,012,375

 
 
Income available to common shareholders
 
$
17,547

 
300,533,021

 
$
0.06

 
$
16,165

 
302,926,219

 
$
0.05

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
For the Nine Months Ended June 30,
 
 
2014
 
2013
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
50,040

 
 
 
 
 
$
40,190

 
 
 
 
Less: income allocated to restricted stock units
 
240

 
 
 
 
 
209

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
49,800

 
299,860,726

 
$
0.17

 
$
39,981

 
301,746,918

 
$
0.13

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
1,390,348

 
 
 
 
 
840,241

 
 
Income available to common shareholders
 
$
49,800

 
301,251,074

 
$
0.17

 
$
39,981

 
302,587,159

 
$
0.13

The following is a summary of outstanding stock options and restricted stock units that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Options to purchase shares
784,600

 
5,259,516

 
829,300

 
6,333,116

Restricted stock units

 
20,000

 

 
20,000


10


3.
INVESTMENT SECURITIES
Investments available for sale are summarized as follows:
 
 
June 30, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
U.S. government and agency obligations
 
$
2,000

 
$
28

 
$

 
$
2,028

Freddie Mac certificates
 
597

 
37

 

 
634

Ginnie Mae certificates
 
9,726

 
414

 

 
10,140

REMICs
 
501,309

 
2,467

 
(3,784
)
 
499,992

Fannie Mae certificates
 
10,861

 
783

 
(124
)
 
11,520

Total
 
$
524,493

 
$
3,729

 
$
(3,908
)
 
$
524,314

    
 
 
September 30, 2013
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
U.S. government and agency obligations
 
$
2,000

 
$
37

 
$

 
$
2,037

Freddie Mac certificates
 
894

 
56

 

 
950

Ginnie Mae certificates
 
11,919

 
423

 

 
12,342

REMICs
 
448,881

 
1,506

 
(5,810
)
 
444,577

Fannie Mae certificates
 
11,495

 
805

 
(305
)
 
11,995

Money market accounts
 
5,475

 

 

 
5,475

Total
 
$
480,664

 
$
2,827

 
$
(6,115
)
 
$
477,376



Gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time the individual securities have been in a continuous loss position, at June 30, 2014 and September 30, 2013, were as follows:
 
June 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Available for sale—
 
 
 
 
 
 
 
 
 
 
 
  REMICs
$
86,331

 
$
447

 
$
165,420

 
$
3,337

 
$
251,751

 
$
3,784

Fannie Mae certificates

 

 
4,896

 
124

 
4,896

 
124

Total
$
86,331

 
$
447

 
$
170,316

 
$
3,461

 
$
256,647

 
$
3,908

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Available for sale—
 
 
 
 
 
 
 
 

 

  REMICs
$
237,774

 
$
4,984

 
$
45,768

 
$
826

 
$
283,542

 
$
5,810

Fannie Mae certificates
4,806

 
305

 

 

 
4,806

 
305

Total
$
242,580

 
$
5,289

 
$
45,768

 
$
826

 
$
288,348

 
$
6,115


 
 
 
 
 
 
 
 
 
 
 
The unrealized losses on investment securities were attributable to interest rate increases. 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

11


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 interest rates and not credit quality and because the Association has neither the intent to sell the securities nor is it more likely than not the Association will be required to sell the securities for the time periods necessary to recover the amortized cost, these investments are not considered other-than-temporarily impaired. At June 30, 2014, the amortized cost and fair value of U.S. government and agency obligations available for sale due in more than one year but less than five years are $2,000 and $2,028, respectively as compared to $2,000 and $2,037 at September 30, 2013.
4.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans held for investment consist of the following:
 
 
June 30,
2014
 
September 30,
2013
Real estate loans:
 
 
 
 
Residential non-Home Today
 
$
8,680,964

 
$
8,118,511

Residential Home Today
 
159,820

 
178,353

Home equity loans and lines of credit
 
1,719,630

 
1,858,398

Construction
 
64,239

 
72,430

Real estate loans
 
10,624,653

 
10,227,692

Other consumer loans
 
3,710

 
4,100

Less:
 
 
 
 
Deferred loan fees—net
 
(4,408
)
 
(13,171
)
LIP
 
(32,222
)
 
(42,018
)
Allowance for loan losses
 
(82,502
)
 
(92,537
)
Loans held for investment, net
 
$
10,509,231

 
$
10,084,066

At June 30, 2014 and September 30, 2013, respectively, $5,340 and $4,179 of loans were classified as mortgage loans held for sale.
A large concentration of the Company’s lending is in Ohio and Florida. As of June 30, 2014 and September 30, 2013, the percentages of residential real estate loans held in Ohio were 70% and 74%, respectively, and the percentages held in Florida were 18% as of both dates. As of June 30, 2014 and September 30, 2013, home equity loans and lines of credit were concentrated in the states of Ohio (40% and 39%), Florida (28% and 29%), California (12% at each date) and New Jersey (5% at each date). The economic conditions and market for real estate in Ohio and Florida, including to a greater extent Florida, have impacted the ability of borrowers in those areas to repay their loans.
Home Today is an affordable housing program targeted to benefit low- and moderate-income home buyers. Through this program the Association provided the majority of loans to borrowers who would not otherwise qualify for the Association’s loan products, generally because of low credit scores. Although the credit profiles of borrowers in the Home Today program might be described as sub-prime, Home Today loans generally contain the same features as loans offered to our non-Home Today borrowers. Borrowers in the Home Today program must complete financial management education and counseling and must be referred to the Association by a sponsoring organization with which the Association has partnered as part of the program. Borrowers must also meet a minimum credit score threshold. Because the Association 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. While effective March 27, 2009, the Home Today underwriting guidelines were changed to be substantially the same as the Association’s traditional first mortgage product, the majority of loans in this program were originated prior to that date. As of June 30, 2014 and September 30, 2013, the principal balance of Home Today loans originated prior to March 27, 2009 was $156,588 and $174,974, respectively. The Association 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, a loan-to-value ratio greater than 100%, or pay option adjustable-rate mortgages.

12


The recorded investment of loan receivables in non-accrual status is summarized in the following table. Balances are net of deferred fees.
 
June 30,
2014
 
September 30,
2013
Real estate loans:
 
 
 
Residential non-Home Today
$
80,369

 
$
91,048

Residential Home Today
31,007

 
34,813

Home equity loans and lines of credit
28,267

 
29,943

Construction

 
41

Total real estate loans
139,643

 
155,845

Other consumer loans

 

Total non-accrual loans
$
139,643

 
$
155,845

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans modified in troubled debt restructurings that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. 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. Prior to June 30, 2014, loans in Chapter 7 bankruptcy status where all borrowers filed were only placed in non-accrual status upon discharge. At June 30, 2014 and September 30, 2013, respectively, the recorded investment in non-accrual loans includes $72,497 and $68,937 which are performing according to the terms of their agreement, of which $44,633 and $42,042 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, including certain loans individually reviewed for impairment, 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 and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid payment first. 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. 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 troubled debt restructuring 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, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. 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.
An age analysis of the recorded investment in loan receivables that are past due at June 30, 2014 and September 30, 2013 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. Balances are net of deferred fees and any applicable loans-in-process.
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
11,300

 
$
5,515

 
$
40,871

 
$
57,686

 
$
8,614,559

 
$
8,672,245

Residential Home Today
6,809

 
2,965

 
15,456

 
25,230

 
132,216

 
157,446

Home equity loans and lines of credit
5,711

 
2,255

 
10,820

 
18,786

 
1,707,617

 
1,726,403

Construction

 

 

 

 
31,929

 
31,929

Total real estate loans
23,820

 
10,735

 
67,147

 
101,702

 
10,486,321

 
10,588,023

Other consumer loans

 

 

 

 
3,710

 
3,710

Total
$
23,820

 
$
10,735

 
$
67,147

 
$
101,702

 
$
10,490,031

 
$
10,591,733


13


 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
15,398

 
$
4,874

 
$
56,484

 
$
76,756

 
$
8,024,657

 
$
8,101,413

Residential Home Today
8,597

 
5,989

 
18,341

 
32,927

 
142,666

 
175,593

Home equity loans and lines of credit
7,495

 
4,776

 
12,042

 
24,313

 
1,841,111

 
1,865,424

Construction

 

 
41

 
41

 
30,032

 
30,073

Total real estate loans
31,490

 
15,639

 
86,908

 
134,037

 
10,038,466

 
10,172,503

Other consumer loans

 

 

 

 
4,100

 
4,100

Total
$
31,490

 
$
15,639

 
$
86,908

 
$
134,037

 
$
10,042,566

 
$
10,176,603

During the quarter ended March 31, 2014, $1,300 in recoveries were recorded representing the cumulative one-time payment received as a result of PMIC increasing the cash percentage of the partial claim payment plan as discussed later in this note. During the quarter ended December 31, 2013, $5,321 of residential loans were deemed uncollectible and fully charged-off as a result of implementing a new practice of charging off the remaining balance on loans that had remained delinquent and in the foreclosure process for greater than 1,500 days. These loans previously were recorded at estimated net realizable value, with the potential for additional loss recognized within the allowance for loan losses. Any future foreclosure proceeds on these loans would result in recoveries of prior charge-offs.
Activity in the allowance for loan losses is summarized as follows:
 
For the Three Months Ended June 30, 2014
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
32,642

 
$
328

 
$
(2,043
)
 
$
585

 
$
31,512

Residential Home Today
16,919

 
883

 
(1,180
)
 
355

 
16,977

Home equity loans and lines of credit
33,785

 
2,841

 
(4,143
)
 
1,497

 
33,980

Construction
45

 
(52
)
 
(151
)
 
191

 
33

Total real estate loans
83,391

 
4,000

 
(7,517
)
 
2,628

 
82,502

Other consumer loans

 

 

 

 

Total
$
83,391

 
$
4,000

 
$
(7,517
)
 
$
2,628

 
$
82,502

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2013
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
34,172

 
$
2,842

 
$
(4,304
)
 
$
609

 
$
33,319

Residential Home Today
27,743

 
791

 
(2,332
)
 
444

 
26,646

Home equity loans and lines of credit
38,968

 
1,462

 
(5,819
)
 
1,774

 
36,385

Construction
334

 
(95
)
 
(68
)
 
3

 
174

Total real estate loans
101,217

 
5,000

 
(12,523
)
 
2,830

 
96,524

Other consumer loans

 

 

 

 

Total
$
101,217

 
$
5,000

 
$
(12,523
)
 
$
2,830

 
$
96,524

 
 
 
 
 
 
 
 
 
 

14


 
For the Nine Months Ended June 30, 2014
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
35,427

 
$
7,274

 
$
(13,226
)
 
$
2,037

 
$
31,512

Residential Home Today
24,112

 
(2,336
)
 
(6,501
)
 
1,702

 
16,977

Home equity loans and lines of credit
32,818

 
10,222

 
(13,078
)
 
4,018

 
33,980

Construction
180

 
(160
)
 
(192
)
 
205

 
33

Total real estate loans
92,537

 
15,000

 
(32,997
)
 
7,962

 
82,502

Other consumer loans

 

 

 

 

Total
$
92,537

 
$
15,000

 
$
(32,997
)
 
$
7,962

 
$
82,502

 
For the Nine Months Ended June 30, 2013
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
31,618

 
$
14,703

 
$
(14,203
)
 
$
1,201

 
$
33,319

Residential Home Today
22,588

 
13,167

 
(9,705
)
 
596

 
26,646

Home equity loans and lines of credit
45,508

 
5,648

 
(18,797
)
 
4,026

 
36,385

Construction
750

 
(518
)
 
(121
)
 
63

 
174

Total real estate loans
100,464

 
33,000

 
(42,826
)
 
5,886

 
96,524

Other consumer loans

 

 

 

 

Total
$
100,464

 
$
33,000

 
$
(42,826
)
 
$
5,886

 
$
96,524


The recorded investment in loan receivables at June 30, 2014 and September 30, 2013 is summarized in the following table. The table provides details of the recorded balances 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 not individually evaluated. Balances of recorded investments are net of deferred fees and any applicable loans-in-process.
 
 
June 30, 2014
 
September 30, 2013
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
134,310

 
$
8,537,935

 
$
8,672,245

 
$
149,102

 
$
7,952,311

 
$
8,101,413

Residential Home Today
 
69,820

 
87,626

 
157,446

 
79,065

 
96,528

 
175,593

Home equity loans and lines of credit
 
34,553

 
1,691,850

 
1,726,403

 
34,387

 
1,831,037

 
1,865,424

Construction
 

 
31,929

 
31,929

 
487

 
29,586

 
30,073

Total real estate loans
 
238,683

 
10,349,340

 
10,588,023

 
263,041

 
9,909,462

 
10,172,503

Other consumer loans
 

 
3,710

 
3,710

 

 
4,100

 
4,100

Total
 
$
238,683

 
$
10,353,050

 
$
10,591,733

 
$
263,041

 
$
9,913,562

 
$
10,176,603


15


An analysis of the allowance for loan losses at June 30, 2014 and September 30, 2013 is summarized in the following table. The analysis provides details of the allowance for loan losses according to the method of evaluation, distinguishing between allowances for loan losses determined by evaluating individual loans and allowances for loan losses determined by evaluating groups of loans collectively.
 
 
June 30, 2014
 
September 30, 2013
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
8,951

 
$
22,561

 
$
31,512

 
$
7,138

 
$
28,289

 
$
35,427

Residential Home Today
 
6,885

 
10,092

 
16,977

 
7,677

 
16,435

 
24,112

Home equity loans and lines of credit
 
634

 
33,346

 
33,980

 
1,018

 
31,800

 
32,818

Construction
 

 
33

 
33

 
5

 
175

 
180

Total real estate loans
 
16,470

 
66,032

 
82,502

 
15,838

 
76,699

 
92,537

Other consumer loans
 

 

 

 

 

 

Total
 
$
16,470

 
$
66,032

 
$
82,502

 
$
15,838

 
$
76,699

 
$
92,537

At June 30, 2014 and September 30, 2013, individually evaluated loans that required an allowance were comprised only of loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings, and loans with a further deterioration in the fair value of collateral not yet identified as uncollectible. All other individually evaluated loans received a charge-off, if applicable.
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. At June 30, 2014 and September 30, 2013, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings were $16,470 and $15,749, and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $0 and $89.
Residential non-Home Today mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have historically experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable rate mortgages).
As described earlier in this footnote, Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At June 30, 2014 and September 30, 2013, respectively, approximately 44% and 50% 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 the Arizona Department of Insurance seized in 2011 and indicated that all claims payments would be reduced by 50%. In March 2013, PMIC notified the Association that all payments would be paid at 55% of the claim with the remainder deferred. In March 2014, PMIC notified the Association that the cash percentage of the partial claim payment plan would increase further to 67% of the claim. Appropriate adjustments have been made to the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated collectively. The amount of loans in our owned portfolio covered by mortgage insurance provided by PMIC as of June 30, 2014 and September 30, 2013, respectively, was $200,139 and $236,713 of which $184,290 and $214,920 was current. The amount of loans in our owned portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of June 30, 2014 and September 30, 2013, respectively, was $78,797 and $91,478 of which $77,607 and $90,099 was current. As of June 30, 2014, 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 claims payments in accordance with its contractual obligations and the Association has not increased its estimated loss severity factors related to MGIC's claim paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which were assessed as being non-investment grade.
Home equity lines of credit represent a significant portion of the residential real estate portfolio. The state of the economy and low housing prices continue to have an adverse impact on a portion of this portfolio since the home equity lines generally are in a second lien position. Post-origination deterioration in economic and housing market conditions may also impact a borrower's ability to afford the higher payments required during the end of draw repayment period that follows the period of interest only payments on home equity lines of credit originated prior to 2012 or the ability to secure alternative financing.

16


When the Association began to offer new home equity lines of credit again, the product was designed with prudent property and credit performance conditions to reduce future risk. Beginning in February 2013, the terms on new home equity lines of credit included monthly principal and interest payments throughout the entire term to minimize the potential payment differential between the during draw and after draw periods.
Construction loans generally have greater credit risk than traditional residential real estate mortgage loans. The repayment of these loans depends upon the availability of permanent financing upon completion of all improvements. In the event the Association makes a loan on a property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Construction loans also expose the Association to the risk that improvements will not be completed on time in accordance with specifications and projected costs.
Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment.
The recorded investment and the unpaid principal balance of impaired loans, including those reported as troubled debt restructurings, as of June 30, 2014 and September 30, 2013 are summarized as follows. Balances of recorded investments are net of deferred fees.
 
 
June 30, 2014
 
September 30, 2013
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
76,387

 
$
99,027

 
$

 
$
86,040

 
$
114,799

 
$

Residential Home Today
 
29,618

 
60,853

 

 
33,163

 
66,366