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EX-32 - EXHIBIT 32 - TFS Financial CORPtfslfy18marex32.htm
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EX-31.1 - EXHIBIT 31.1 - TFS Financial CORPtfslfy18marex311.htm

 
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 March 31, 2018
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)
________________________________________

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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer
 
x
 
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
(do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
 
 
 
 
 
 
 
 
Emerging Growth Company
 
o
 
 
 
 
 
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 May 4, 2018, there were 280,545,644 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 81.0% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.
 



TFS Financial Corporation
INDEX
 
 
Page
 
 
 
 
 
 
 
PART l – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statements of Condition
 
 
March 31, 2018 and September 30, 2017
 
 
 
 
 
 
Three and Six Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
Three and Six Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
Six Months Ended March 31, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows
 
 
Six Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


2


GLOSSARY OF TERMS
TFS Financial Corporation provides the following list of acronyms and defined terms as a tool for the reader. The acronyms and defined terms identified below are used throughout the document.
ACT: Tax Cuts and Jobs Act
FRB-Cleveland:  Federal Reserve Bank of Cleveland
AOCI:  Accumulated Other Comprehensive Income
Freddie Mac: Federal Home Loan Mortgage Association
ARM:  Adjustable Rate Mortgage
FRS:  Board of Governors of the Federal Reserve System
ASC: Accounting Standards Codification
GAAP:  Generally Accepted Accounting Principles
ASU:  Accounting Standards Update
Ginnie Mae:  Government National Mortgage Association
Association: Third Federal Savings and Loan
GVA:  General Valuation Allowances
Association of Cleveland
HARP:  Home Affordable Refinance Program
BOLI:  Bank Owned Life Insurance
HPI:  Home Price Index
CDs:  Certificates of Deposit
IRR:  Interest Rate Risk
CFPB:  Consumer Financial Protection Bureau
IRS:  Internal Revenue Service
CLTV:  Combined Loan-to-Value
IVA:  Individual Valuation Allowance
Company:  TFS Financial Corporation and its
LIHTC:  Low Income Housing Tax Credit
subsidiaries
LIP:  Loans-in-Process
DFA:  Dodd-Frank Wall Street Reform and Consumer
LTV:  Loan-to-Value
Protection Act
MGIC:  Mortgage Guaranty Insurance Corporation
EaR:  Earnings at Risk
OCC:  Office of the Comptroller of the Currency
EPS: Earnings per Share
OCI:  Other Comprehensive Income
ESOP:  Third Federal Employee (Associate) Stock
OTS:  Office of Thrift Supervision
Ownership Plan
PMI:  Private Mortgage Insurance
EVE:  Economic Value of Equity
PMIC:  PMI Mortgage Insurance Co.
Fannie Mae:  Federal National Mortgage Association
QTL:  Qualified Thrift Lender
FASB:  Financial Accounting Standards Board
REMICs:  Real Estate Mortgage Investment Conduits
FDIC:  Federal Deposit Insurance Corporation
SEC:  United States Securities and Exchange Commission
FHFA:  Federal Housing Finance Agency
TDR:  Troubled Debt Restructuring
FHLB:  Federal Home Loan Bank
Third Federal Savings, MHC:  Third Federal Savings
FICO:  Financing 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)
 
March 31,
2018
 
September 30,
2017
ASSETS
 
 
 
Cash and due from banks
$
33,822

 
$
35,243

Interest-earning cash equivalents
237,267

 
232,975

Cash and cash equivalents
271,089

 
268,218

Investment securities available for sale (amortized cost $558,224 and $541,964, respectively)
545,001

 
537,479

Mortgage loans held for sale, at lower of cost or market ($469 and $0 measured at fair value, respectively)
469

 
351

Loans held for investment, net:
 
 
 
Mortgage loans
12,688,172

 
12,434,339

Other consumer loans
2,812

 
3,050

Deferred loan expenses, net
35,023

 
30,865

Allowance for loan losses
(43,106
)
 
(48,948
)
Loans, net
12,682,901

 
12,419,306

Mortgage loan servicing rights, net
8,034

 
8,375

Federal Home Loan Bank stock, at cost
93,544

 
89,990

Real estate owned
3,668

 
5,521

Premises, equipment, and software, net
63,651

 
60,875

Accrued interest receivable
36,439

 
35,479

Bank owned life insurance contracts
208,935

 
205,883

Other assets
42,297

 
61,086

TOTAL ASSETS
$
13,956,028

 
$
13,692,563

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
$
8,350,422

 
$
8,151,625

Borrowed funds
3,717,064

 
3,671,377

Borrowers’ advances for insurance and taxes
88,158

 
100,446

Principal, interest, and related escrow owed on loans serviced
31,922

 
35,766

Accrued expenses and other liabilities
38,667

 
43,390

Total liabilities
12,226,233

 
12,002,604

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; 280,644,630 and 281,291,750 outstanding at March 31, 2018 and September 30, 2017, respectively
3,323

 
3,323

Paid-in capital
1,723,254

 
1,722,672

Treasury stock, at cost; 51,674,120 and 51,027,000 shares at March 31, 2018 and September 30, 2017, respectively
(746,645
)
 
(735,530
)
Unallocated ESOP shares
(50,917
)
 
(53,084
)
Retained earnings—substantially restricted
786,167

 
760,070

Accumulated other comprehensive income (loss)
14,613

 
(7,492
)
Total shareholders’ equity
1,729,795

 
1,689,959

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
13,956,028

 
$
13,692,563

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 Six Months Ended
 
March 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
105,239

 
$
97,676

 
$
207,865

 
$
193,056

Investment securities available for sale
2,759

 
2,198

 
5,348

 
4,051

Other interest and dividend earning assets
2,182

 
1,209

 
4,196

 
2,190

Total interest and dividend income
110,180

 
101,083

 
217,409

 
199,297

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
23,630

 
21,320

 
46,624

 
43,377

Borrowed funds
14,852

 
9,477

 
29,099

 
17,404

Total interest expense
38,482

 
30,797

 
75,723

 
60,781

NET INTEREST INCOME
71,698

 
70,286

 
141,686

 
138,516

PROVISION (CREDIT) FOR LOAN LOSSES

(4,000
)
 
(6,000
)
 
(7,000
)
 
(6,000
)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES
75,698

 
76,286

 
148,686

 
144,516

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Fees and service charges, net of amortization
1,799

 
1,673

 
3,559

 
3,449

Net gain on the sale of loans
65

 
330

 
543

 
1,213

Increase in and death benefits from bank owned life insurance contracts
1,509

 
1,559

 
3,063

 
3,163

Other
1,243

 
990

 
2,295

 
2,095

Total non-interest income
4,616

 
4,552

 
9,460

 
9,920

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
26,057

 
23,945

 
49,310

 
47,700

Marketing services
6,016

 
4,791

 
11,054

 
9,326

Office property, equipment and software
6,728

 
6,111

 
13,379

 
11,984

Federal insurance premium and assessments
3,008

 
2,664

 
5,726

 
4,936

State franchise tax
1,284

 
1,317

 
2,410

 
2,671

Real estate owned expense, net
536

 
829

 
1,119

 
1,880

Other expenses
6,059

 
5,637

 
12,466

 
12,059

Total non-interest expense
49,688

 
45,294

 
95,464

 
90,556

INCOME BEFORE INCOME TAXES
30,626

 
35,544

 
62,682

 
63,880

INCOME TAX EXPENSE
7,312

 
12,083

 
19,755

 
20,809

NET INCOME
$
23,314

 
$
23,461

 
$
42,927

 
$
43,071

Earnings per share—basic and diluted
$
0.08

 
$
0.08

 
$
0.15

 
$
0.15

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
275,656,445

 
277,787,284

 
275,737,265

 
277,857,265

Diluted
277,256,178

 
279,911,556

 
277,434,648

 
280,091,879


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 Six Months Ended
 
March 31,
 
March 31,
 
2018
 
2017
 
2018
 
2017
Net income
$
23,314

 
$
23,461

 
$
42,927

 
$
43,071

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in unrealized loss on securities available for sale
(3,262
)
 
692

 
(6,259
)
 
(5,335
)
Net change in cash flow hedges
19,552

 
257

 
27,812

 
12,877

Change in pension obligation
317

 
346

 
594

 
691

Total other comprehensive income
16,607

 
1,295

 
22,147

 
8,233

Total comprehensive income
$
39,921

 
$
24,756

 
$
65,074

 
$
51,304

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)
 
 
 
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, 2016
 
$
3,323

 
$
1,716,818

 
$
(681,569
)
 
$
(57,418
)
 
$
698,930

 
$
(19,626
)
 
$
1,660,458

Net income
 

 

 

 

 
43,071

 

 
43,071

Other comprehensive income, net of tax
 

 

 

 

 

 
8,233

 
8,233

ESOP shares allocated or committed to be released
 

 
1,729

 

 
2,167

 

 

 
3,896

Compensation costs for stock-based plans
 

 
2,048

 

 

 
(29
)
 

 
2,019

Purchase of treasury stock (1,357,210 shares)
 

 

 
(23,954
)
 

 

 

 
(23,954
)
Treasury stock allocated to restricted stock plan
 

 
(877
)
 
(1,547
)
 

 

 

 
(2,424
)
Dividends paid to common shareholders ($0.25 per common share)
 

 

 

 

 
(12,909
)
 

 
(12,909
)
Balance at March 31, 2017
 
$
3,323

 
$
1,719,718

 
$
(707,070
)
 
$
(55,251
)
 
$
729,063

 
$
(11,393
)
 
$
1,678,390

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2017
 
$
3,323

 
$
1,722,672

 
$
(735,530
)
 
$
(53,084
)
 
$
760,070

 
$
(7,492
)
 
$
1,689,959

Net income
 

 

 

 

 
42,927

 

 
42,927

Other comprehensive income, net of tax
 

 

 

 

 
42

 
22,105

 
22,147

ESOP shares allocated or committed to be released
 

 
1,106

 

 
2,167

 

 

 
3,273

Compensation costs for stock-based plans
 

 
2,525

 

 

 

 

 
2,525

Purchase of treasury stock (858,000 shares)
 

 

 
(13,034
)
 

 

 

 
(13,034
)
Treasury stock allocated to restricted stock plan
 

 
(3,049
)
 
1,919

 

 

 

 
(1,130
)
Dividends paid to common shareholders ($0.34 per common share)
 

 

 

 

 
(16,872
)
 

 
(16,872
)
Balance at March 31, 2018
 
$
3,323

 
$
1,723,254

 
$
(746,645
)
 
$
(50,917
)
 
$
786,167

 
$
14,613

 
$
1,729,795

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 Six Months Ended
 
 
March 31,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
42,927

 
$
43,071

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
ESOP and stock-based compensation expense
 
5,798

 
5,915

Depreciation and amortization
 
12,661

 
11,093

Deferred income taxes
 
4,604

 
(10
)
Provision (credit) for loan losses
 
(7,000
)
 
(6,000
)
Net gain on the sale of loans
 
(543
)
 
(1,213
)
Other net losses
 
409

 
425

Principal repayments on and proceeds from sales of loans held for sale
 
7,919

 
14,824

Loans originated for sale
 
(7,884
)
 
(14,623
)
Increase in bank owned life insurance contracts
 
(3,052
)
 
(3,166
)
Cash collateral received from derivative counterparties
 
41,280

 
17,844

Net decrease in interest receivable and other assets
 
698

 
691

Net decrease in accrued expenses and other liabilities
 
(2,699
)
 
(4,630
)
Net cash provided by operating activities
 
95,118

 
64,221

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Loans originated
 
(1,504,338
)
 
(1,813,251
)
Principal repayments on loans
 
1,177,999

 
1,223,532

Proceeds from principal repayments and maturities of:
 
 
 
 
Securities available for sale
 
67,588

 
82,458

Proceeds from sale of:
 
 
 
 
Loans
 
60,101

 
130,176

Real estate owned
 
4,520

 
4,722

Purchases of:
 
 
 
 
FHLB stock
 
(3,554
)
 
(13,024
)
Securities available for sale
 
(86,184
)
 
(112,084
)
Premises and equipment
 
(5,744
)
 
(663
)
Other
 

 
(24
)
Net cash used in investing activities
 
(289,612
)
 
(498,158
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net (decrease) increase in deposits
 
198,797

 
(143,363
)
Net decrease in borrowers' advances for insurance and taxes
 
(12,288
)
 
(7,581
)
Net decrease in principal and interest owed on loans serviced
 
(3,844
)
 
(12,842
)
Net increase in short-term borrowed funds
 
159,833

 
697,482

Proceeds from long-term borrowed funds
 
88

 

Repayment of long-term borrowed funds
 
(114,234
)
 
(50,088
)
Purchase of treasury shares
 
(12,985
)
 
(24,813
)
Acquisition of treasury shares through net settlement of stock benefit plans compensation
 
(1,130
)
 
(2,424
)
Dividends paid to common shareholders
 
(16,872
)
 
(12,909
)
Net cash provided by financing activities
 
197,365

 
443,462

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
2,871

 
9,525

CASH AND CASH EQUIVALENTS—Beginning of period
 
268,218

 
231,239

CASH AND CASH EQUIVALENTS—End of period
 
$
271,089

 
$
240,764

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid for interest on deposits
 
$
45,786

 
$
43,504

Cash paid for interest on borrowed funds
 
27,060

 
14,746

Cash paid for income taxes
 
14,827

 
19,982

SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Transfer of loans to real estate owned
 
2,900

 
3,901

Transfer of loans from held for sale to held for investment
 
149

 

Transfer of loans from held for investment to held for sale
 
60,274

 
130,368

Treasury stock issued for stock benefit plans
 
3,049

 
877

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 March 31, 2018, 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 loan losses, the valuation of deferred tax assets, and the determination of pension obligations 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 March 31, 2018, 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, 2017 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, 2018 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. 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. At March 31, 2018 and 2017, respectively, the ESOP held 5,091,741 and 5,525,081 shares, respectively, 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 March 31,
 
 
2018
 
2017
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
23,314

 
 
 
 
 
$
23,461

 
 
 
 
Less: income allocated to restricted stock units
 
300

 
 
 
 
 
221

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
23,014

 
275,656,445

 
$
0.08

 
$
23,240

 
277,787,284

 
$
0.08

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
1,599,733

 
 
 
 
 
2,124,272

 
 
Income available to common shareholders
 
$
23,014

 
277,256,178

 
$
0.08

 
$
23,240

 
279,911,556

 
$
0.08

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
For the Six Months Ended March 31,
 
 
2018
 
2017
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
42,927

 
 
 
 
 
$
43,071

 
 
 
 
Less: income allocated to restricted stock units
 
543

 
 
 
 
 
425

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
42,384

 
275,737,265

 
$
0.15

 
$
42,646

 
277,857,265

 
$
0.15

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
1,697,383

 
 
 
 
 
2,234,614

 
 
Income available to common shareholders
 
$
42,384

 
277,434,648

 
$
0.15

 
$
42,646

 
280,091,879

 
$
0.15

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 March 31,
 
For the Six Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Options to purchase shares
2,571,240

 
693,900

 
2,149,740

 
693,900

Restricted stock units
15,501

 
16,500

 
11,001

 
16,500

3.
INVESTMENT SECURITIES
Investments available for sale are summarized as follows:
 
 
March 31, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
REMICs
 
$
549,984

 
$
2

 
$
(13,442
)
 
$
536,544

Fannie Mae certificates
 
8,240

 
324

 
(107
)
 
8,457

Total
 
$
558,224

 
$
326

 
$
(13,549
)
 
$
545,001

    

10


 
 
September 30, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
REMICs
 
$
533,427

 
$
52

 
$
(4,943
)
 
$
528,536

Fannie Mae certificates
 
8,537

 
419

 
(13
)
 
8,943

Total
 
$
541,964

 
$
471

 
$
(4,956
)
 
$
537,479

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 March 31, 2018 and September 30, 2017, were as follows:
 
March 31, 2018
 
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
$
246,728

 
$
4,941

 
$
288,785

 
$
8,501

 
$
535,513

 
$
13,442

Fannie Mae certificates
4,441

 
107

 

 

 
4,441

 
107

Total
$
251,169

 
$
5,048

 
$
288,785

 
$
8,501

 
$
539,954

 
$
13,549

 
September 30, 2017
 
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
$
246,113

 
$
1,508

 
$
260,837

 
$
3,435

 
$
506,950

 
$
4,943

Fannie Mae certificates
4,601

 
13

 

 

 
4,601

 
13

Total
$
250,714

 
$
1,521

 
$
260,837

 
$
3,435

 
$
511,551

 
$
4,956


 
 
 
 
 
 
 
 
 
 
 
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 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.

11


4.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans held for investment consist of the following:
 
 
March 31,
2018
 
September 30,
2017
Real estate loans:
 
 
 
 
Residential Core
 
$
10,873,401

 
$
10,746,204

Residential Home Today
 
101,361

 
108,964

Home equity loans and lines of credit
 
1,690,708

 
1,552,315

Construction
 
54,524

 
60,956

Real estate loans
 
12,719,994

 
12,468,439

Other consumer loans
 
2,812

 
3,050

Add (deduct):
 
 
 
 
Deferred loan expenses, net
 
35,023

 
30,865

Loans in process ("LIP")
 
(31,822
)
 
(34,100
)
Allowance for loan losses
 
(43,106
)
 
(48,948
)
Loans held for investment, net
 
$
12,682,901

 
$
12,419,306

At March 31, 2018 and September 30, 2017, respectively, $469 and $351 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 March 31, 2018 and September 30, 2017, the percentage of aggregate Residential Core, Home Today and Construction loans held in Ohio was 57% as of both dates and the percentage held in Florida was 16% as of both dates. As of March 31, 2018 and September 30, 2017, home equity loans and lines of credit were concentrated in Ohio (37% and 39%), Florida (21% and 22% ), and California (14% and 13%).
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. 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 contained the same features as loans offered to our Residential Core borrowers. Borrowers with a Home Today loan completed financial management education and counseling and were referred to the Association by a sponsoring organization with which the Association partnered as part of the program. 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 in the Residential Core portfolio. As of March 31, 2018 and September 30, 2017, the principal balance of Home Today loans originated prior to March 27, 2009 was $97,974 and $105,485, respectively. Since loans are no longer originated under the Home Today program, the Home Today portfolio will continue to decline in balance due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of customers and the communities served, during fiscal 2016 the Association began to offer Fannie Mae eligible, Home Ready loans. These loans are originated in accordance with Fannie Mae's underwriting standards. While the Association retains the servicing to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae. 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


An age analysis of the recorded investment in loan receivables that are past due at March 31, 2018 and September 30, 2017 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 adjusted for deferred loan fees or expenses and any applicable loans-in-process.
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
$
7,863

 
$
2,948

 
$
11,050

 
$
21,861

 
$
10,866,832

 
$
10,888,693

Residential Home Today
2,485

 
894

 
5,913

 
9,292

 
91,977

 
101,269

Home equity loans and lines of credit
3,986

 
1,427

 
5,883

 
11,296

 
1,699,534

 
1,710,830

Construction

 

 

 

 
22,403

 
22,403

Total real estate loans
14,334

 
5,269

 
22,846

 
42,449

 
12,680,746

 
12,723,195

Other consumer loans

 

 

 

 
2,812

 
2,812

Total
$
14,334

 
$
5,269

 
$
22,846

 
$
42,449

 
$
12,683,558

 
$
12,726,007

 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
$
6,077

 
$
2,593

 
$
11,975

 
$
20,645

 
$
10,740,398

 
$
10,761,043

Residential Home Today
4,067

 
1,496

 
6,851

 
12,414

 
95,269

 
107,683

Home equity loans and lines of credit
4,418

 
1,952

 
5,408

 
11,778

 
1,558,273

 
1,570,051

Construction

 

 

 

 
26,427

 
26,427

Total real estate loans
14,562

 
6,041

 
24,234

 
44,837

 
12,420,367

 
12,465,204

Other consumer loans

 

 

 

 
3,050

 
3,050

Total
$
14,562

 
$
6,041

 
$
24,234

 
$
44,837

 
$
12,423,417

 
$
12,468,254

At March 31, 2018 and September 30, 2017, real estate loans include $12,380 and $14,736, respectively, of loans that were in the process of foreclosure.
Loans are placed in non-accrual status when they are contractually 90 days or more past due. 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 where the borrowers' sustained ability to repay is not reasonably assured at the time of modification are placed in non-accrual status for a minimum of twelve 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 recorded investment of loans in non-accrual status is summarized in the following table. Balances are adjusted for deferred loan fees or expenses.
 
March 31,
2018
 
September 30,
2017
Real estate loans:
 
 
 
Residential Core
$
41,223

 
$
43,797

Residential Home Today
16,248

 
18,109

Home equity loans and lines of credit
20,777

 
17,185

Total non-accrual loans
$
78,248

 
$
79,091


13


At March 31, 2018 and September 30, 2017, respectively, the recorded investment in non-accrual loans includes $55,402 and $54,858, which are performing according to the terms of their agreement, of which $31,971 and $34,142 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 first applied to the oldest scheduled, unpaid payment. 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. 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.
The recorded investment in loan receivables at March 31, 2018 and September 30, 2017 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 adjusted for deferred loan fees or expenses and any applicable loans-in-process.
 
 
March 31, 2018
 
September 30, 2017
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
92,297

 
$
10,796,396

 
$
10,888,693

 
$
94,747

 
$
10,666,296

 
$
10,761,043

Residential Home Today
 
44,373

 
56,896

 
101,269

 
46,641

 
61,042

 
107,683

Home equity loans and lines of credit
 
43,603

 
1,667,227

 
1,710,830

 
39,172

 
1,530,879

 
1,570,051

Construction
 

 
22,403

 
22,403

 

 
26,427

 
26,427

Total real estate loans
 
180,273

 
12,542,922

 
12,723,195

 
180,560

 
12,284,644

 
12,465,204

Other consumer loans
 

 
2,812

 
2,812

 

 
3,050

 
3,050

Total
 
$
180,273

 
$
12,545,734

 
$
12,726,007

 
$
180,560

 
$
12,287,694

 
$
12,468,254

An analysis of the allowance for loan losses at March 31, 2018 and September 30, 2017 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.
 
 
March 31, 2018
 
September 30, 2017
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
7,140

 
$
6,940

 
$
14,080

 
$
7,336

 
$
6,850

 
$
14,186

Residential Home Today
 
2,116

 
1,624

 
3,740

 
2,250

 
2,258

 
4,508

Home equity loans and lines of credit
 
2,046

 
23,236

 
25,282

 
1,475

 
28,774

 
30,249

Construction
 

 
4

 
4

 

 
5

 
5

Total
 
$
11,302

 
$
31,804

 
$
43,106

 
$
11,061

 
$
37,887

 
$
48,948

At March 31, 2018 and September 30, 2017, 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 TDRs, 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.

14


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 March 31, 2018 and September 30, 2017, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $11,249 and $11,061; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $53 and $0.
Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have 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 March 31, 2018 and September 30, 2017, respectively, approximately 20% and 22% 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 Department of Insurance in 2011 and currently pays all claim payments at 71.5%. 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 the Association's total owned residential portfolio covered by mortgage insurance provided by PMIC as of March 31, 2018 and September 30, 2017, respectively, was $48,444 and $61,470, of which $44,694 and $56,511 was current. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of March 31, 2018 and September 30, 2017, respectively, was $24,906 and $28,946 of which $24,787 and $28,870 was current. As of March 31, 2018, 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 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. Post-origination deterioration in economic and housing market conditions may 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. 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 draw and after draw periods.
The Association originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Association’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 Association offers construction/permanent loans with fixed or adjustable rates, and a current maximum loan-to-completed-appraised value ratio of 85%.
Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment.
For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Association will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered in determining that a loan is impaired 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.

15


The recorded investment and the unpaid principal balance of impaired loans, including those reported as TDRs, as of March 31, 2018 and September 30, 2017 are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees or expenses.
 
 
March 31, 2018
 
September 30, 2017
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related IVA recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
53,929

 
$
70,129

 
$

 
$
47,507

 
$
65,132

 
$

Residential Home Today
 
17,467

 
37,076

 

 
18,780

 
41,064

 

Home equity loans and lines of credit
 
21,324

 
27,759

 

 
18,793

 
25,991

 

Total
 
$
92,720

 
$
134,964

 
$

 
$
85,080

 
$
132,187

 
$

With an IVA recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
38,368

 
$
38,446

 
$
7,140

 
$
47,240

 
$
47,747

 
$
7,336

Residential Home Today
 
26,906

 
26,891

 
2,116

 
27,861

 
28,210

 
2,250

Home equity loans and lines of credit
 
22,279

 
22,317

 
2,046

 
20,379

 
20,389

 
1,475

Total
 
$
87,553

 
$
87,654

 
$
11,302

 
$
95,480

 
$
96,346

 
$
11,061

Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
92,297

 
$
108,575

 
$
7,140

 
$
94,747

 
$
112,879

 
$
7,336

Residential Home Today
 
44,373

 
63,967

 
2,116

 
46,641

 
69,274

 
2,250

Home equity loans and lines of credit
 
43,603

 
50,076

 
2,046

 
39,172

 
46,380

 
1,475

Total
 
$
180,273

 
$
222,618

 
$
11,302

 
$
180,560

 
$
228,533

 
$
11,061

At March 31, 2018 and September 30, 2017, respectively, the recorded investment in impaired loans includes $161,676 and $162,020 of loans restructured in TDRs of which $10,408 and $11,884 were 90 days or more past due.

The average recorded investment in impaired loans and the amount of interest income recognized during the period that the loans were impaired are summarized below.
 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
50,403

 
$
1,374

 
$
51,256

 
$
431

Residential Home Today
 
17,454

 
856

 
19,601

 
42

Home equity loans and lines of credit
 
20,071

 
99

 
19,622

 
82

Total
 
$
87,928

 
$
2,329

 
$
90,479

 
$
555

With an IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
42,180

 
$
535

 
$
51,075

 
$
468

Residential Home Today
 
27,211

 
620

 
29,785

 
361

Home equity loans and lines of credit
 
21,633

 
144

 
18,095

 
120

Total
 
$
91,024

 
$
1,299

 
$
98,955

 
$
949

Total impaired loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
92,583

 
$
1,909

 
$
102,331

 
$
899

Residential Home Today
 
44,665

 
1,476

 
49,386

 
403

Home equity loans and lines of credit
 
41,704

 
243

 
37,717

 
202

Total
 
$
178,952

 
$
3,628

 
$
189,434

 
$
1,504

 
 
 
 
 
 
 
 
 

16



 
 
For the Six Months Ended March 31,
 
 
2018
 
2017
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
50,718

 
$
1,760

 
$
52,216

 
$
742

Residential Home Today
 
18,124

 
972

 
19,782

 
149

Home equity loans and lines of credit
 
20,059

 
173

 
19,957

 
149

Total
 
$
88,901

 
$
2,905

 
$
91,955

 
$
1,040

With an IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
42,804

 
$
955

 
$
51,912

 
$
978

Residential Home Today
 
27,384

 
956

 
30,282

 
738

Home equity loans and lines of credit
 
21,329