Edgar Filing: TFS Financial CORP

TFSL 12.31.2012 MASTER 10Q

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 December 31, 2012



¨	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 February 1, 2013 there were 309,035,125 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 73.5% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

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TFS Financial Corporation

INDEX



		Page
PART l – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3

	Consolidated Statements of Condition December 31, 2012 and September 30, 2012	3

	Consolidated Statements of Income Three months ended December 31, 2012 and 2011	4

	Consolidated Statements of Comprehensive Income Three months ended December 31, 2012 and 2011	5

	Consolidated Statements of Shareholders’ Equity Three months ended December 31, 2012 and 2011	6

	Consolidated Statements of Cash Flows Three months ended December 31, 2012 and 2011	7

	Notes to Unaudited Interim Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	63

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	63

Item 5.	Other Information	64

Item 6.	Exhibits	64

SIGNATURES		65

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Item 1. Financial Statements

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except share data)



	December 31, 2012			September 30, 2012
ASSETS
Cash and due from banks	$	46,795		$	38,914
Other interest-earning cash equivalents	286,759			269,348
Cash and cash equivalents	333,554			308,262
Investment securities:
Available for sale (amortized cost $447,959 and $417,416, respectively)	450,880			421,430
Mortgage loans held for sale, at lower of cost or market ($3,107 measured at fair value, September 30, 2012)	324,322			124,528
Loans held for investment, net:
Mortgage loans	9,960,370			10,339,402
Other loans	4,173			4,612
Deferred loan fees, net	(18,128		)	(18,561		)
Allowance for loan losses	(105,201		)	(100,464		)
Loans, net	9,841,214			10,224,989
Mortgage loan servicing assets, net	17,787			19,613
Federal Home Loan Bank stock, at cost	35,620			35,620
Real estate owned	18,605			19,647
Premises, equipment, and software, net	60,915			61,150
Accrued interest receivable	33,360			34,887
Bank owned life insurance contracts	178,882			177,279
Other assets	84,489			90,720
TOTAL ASSETS	$	11,379,628		$	11,518,125
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,804,495		$	8,981,419
Borrowed funds	468,000			488,191
Borrowers’ advances for insurance and taxes	67,422			67,864
Principal, interest, and related escrow owed on loans serviced	129,036			127,539
Accrued expenses and other liabilities	90,631			46,262
Total liabilities	9,559,584			9,711,275
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; 309,035,125 and 309,009,393 outstanding at December 31, 2012 and September 30, 2012, respectively	3,323			3,323
Paid-in capital	1,693,240			1,691,884
Treasury stock, at cost; 23,283,625 and 23,309,357 shares at December 31, 2012 and September 30, 2012, respectively	(280,622		)	(280,937		)
Unallocated ESOP shares	(73,668		)	(74,751		)
Retained earnings—substantially restricted	484,307			473,247
Accumulated other comprehensive loss	(6,536		)	(5,916		)
Total shareholders’ equity	1,820,044			1,806,850
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	11,379,628		$	11,518,125

See accompanying notes to unaudited consolidated financial statements.

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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,
	2012		2011
INTEREST INCOME:
Loans, including fees	$	98,689	$	103,207
Investment securities available for sale	1,113		37
Investment securities held to maturity	—		1,734
Other interest and dividend earning assets	586		557
Total interest and dividend income	100,388		105,535
INTEREST EXPENSE:
Deposits	31,135		40,706
Borrowed funds	837		574
Total interest expense	31,972		41,280
NET INTEREST INCOME	68,416		64,255
PROVISION FOR LOAN LOSSES	18,000		15,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	50,416		49,255
NON-INTEREST INCOME
Fees and service charges, net of amortization	2,303		2,813
Net gain on the sale of loans	3,022		—
Increase in and death benefits from bank owned life insurance contracts	1,605		1,612
Other	1,317		1,284
Total non-interest income	8,247		5,709
NON-INTEREST EXPENSE
Salaries and employee benefits	20,603		20,385
Marketing services	3,125		2,377
Office property, equipment and software	5,021		4,998
Federal insurance premium and assessments	3,714		3,877
State franchise tax	1,663		989
Real estate owned expense, net	1,165		2,335
Appraisal and other loan review expense	683		990
Other operating expenses	6,560		6,528
Total non-interest expense	42,534		42,479
INCOME BEFORE INCOME TAXES	16,129		12,485
INCOME TAX EXPENSE	4,976		4,026
NET INCOME	$	11,153	$	8,459
Earnings per share—basic and diluted	$	0.04	$	0.03
Weighted average shares outstanding
Basic	301,576,327		301,044,732
Diluted	302,244,741		301,416,252

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)



	For the Three Months Ended
	December 31,
	2012			2011
Net income	$	11,153		$	8,459
Other comprehensive (loss) income, net of tax
Change in net unrealized gains on securities available for sale	(710		)	(11		)
Change in pension obligation	90			10,620
Total other comprehensive (loss) income	(620		)	10,609
Total comprehensive income	$	10,533		$	19,068

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

Three Months Ended December 31, 2012 and 2011

(In thousands)



	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, 2011	$	3,323	$	1,686,216		$	(282,090	)	$	(79,084	)	$	461,836		$	(16,277	)	$	1,773,924
Net income	—		—			—			—			8,459			—			8,459
Other comprehensive income, net of tax	—		—			—			—			—			10,609			10,609
ESOP shares allocated or committed to be released	—		(113		)	—			1,083			—			—			970
Compensation costs for stock-based plans	—		1,998			—			—			—			—			1,998
Balance at December 31, 2011	$	3,323	$	1,688,101		$	(282,090	)	$	(78,001	)	$	470,295		$	(5,668	)	$	1,795,960
Balance at September 30, 2012	$	3,323	$	1,691,884		$	(280,937	)	$	(74,751	)	$	473,247		$	(5,916	)	$	1,806,850
Net income	—		—			—			—			11,153			—			11,153
Other comprehensive loss, net of tax	—		—			—			—			—			(620		)	(620		)
ESOP shares allocated or committed to be released	—		(137		)	—			1,083			—			—			946
Compensation costs for stock-based plans	—		1,715			—			—			—			—			1,715
Treasury stock allocated to restricted stock plan	—		(222		)	315			—			(93		)	—			—
Balance at December 31, 2012	$	3,323	$	1,693,240		$	(280,622	)	$	(73,668	)	$	484,307		$	(6,536	)	$	1,820,044

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)



	For the Three Months Ended
	December 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,153		$	8,459
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	2,661			2,968
Depreciation and amortization	6,221			6,047
Provision for loan losses	18,000			15,000
Net gain on the sale of loans	(3,022		)	—
Other net (gains) losses	(415		)	415
Principal repayments on and proceeds from sales of loans held for sale	22,197			—
Loans originated for sale	(15,757		)	—
Increase in bank owned life insurance contracts	(1,613		)	(1,618		)
Net decrease in interest receivable and other assets	7,998			4,811
Net increase in accrued expenses and other liabilities	44,751			55,006
Other	33			334
Net cash provided by operating activities	92,207			91,422
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated	(511,600		)	(821,282		)
Principal repayments on loans	606,535			539,416
Proceeds from principal repayments and maturities of:
Securities available for sale	57,918			517
Securities held to maturity	—			55,523
Proceeds from sale of:
Loans	61,231			—
Real estate owned	6,519			4,661
Purchases of:
Securities available for sale	(90,305		)	(9		)
Securities held to maturity	—			(14,423		)
Premises and equipment	(1,158		)	(1,014		)
Other	5			(11		)
Net cash provided by (used in) investing activities	129,145			(236,622		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits	(176,924		)	(57,397		)
Net (decrease) increase in borrowers’ advances for insurance and taxes	(442		)	3,218
Net increase in principal and interest owed on loans serviced	1,497			34,021
Net (decrease) increase in short term borrowed funds	(84,926		)	124,633
Proceeds from long term borrowed funds	70,000			—
Repayment of long term borrowed funds	(5,265		)	—
Net cash (used in) provided by financing activities	(196,060		)	104,475
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	25,292			(40,725		)
CASH AND CASH EQUIVALENTS—Beginning of period	308,262			294,846
CASH AND CASH EQUIVALENTS—End of period	$	333,554		$	254,121
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	31,673		$	41,464
Cash paid for interest on borrowed funds	763			564
Cash paid for income taxes	6,600			4,500
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned	4,992			4,109
Transfer of loans from held for investment to held for sale	264,908			—

See accompanying notes to unaudited interim consolidated financial statements.

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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 (the “Holding Company”), a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Holding Company and its subsidiaries (collectively, “TFS Financial” or the “Company”) is retail consumer banking, including mortgage lending, deposit gathering, and other insignificant financial services. On December 31, 2012, approximately 73% of the Holding Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC (“Third Federal Savings, MHC”). The thrift subsidiary of TFS Financial is Third Federal Savings and Loan Association of Cleveland (the “Association”).

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 (“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 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 TFS Financial at December 31, 2012, 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 Holding Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 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, 2013.


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 December 31, 2012 and 2011, respectively, the ESOP held 7,366,775 and 7,800,115 shares that were neither allocated to participants nor committed to be released to participants.

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The following is a summary of the Company's earnings per share calculations.



	For the Three Months Ended December 31,
	2012					2011
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	11,153				$	8,459
Less: income allocated to restricted stock units	58					36
Basic earnings per share:
Income available to common shareholders	$	11,095	301,576,327	$	0.04	$	8,423	301,044,732	$	0.03
Diluted earnings per share:
Effect of dilutive potential common shares			668,414					371,520
Income available to common shareholders	$	11,095	302,244,741	$	0.04	$	8,423	301,416,252	$	0.03

Outstanding stock options and restricted stock units are excluded from the computation of diluted earnings per share when their inclusion would be anti-dilutive. 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 December 31,
	2012	2011
Options to purchase shares	6,654,525	6,283,425
Restricted stock units	226,500	140,000


3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:



	December 31, 2012
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	51	$	—		$	2,051
Freddie Mac certificates	916		61		—			977
Ginnie Mae certificates	15,147		600		—			15,747
Real estate mortgage investment conduits (REMICs)	415,643		2,113		(751		)	417,005
Fannie Mae certificates	6,890		847		—			7,737
Money market accounts	7,363		—		—			7,363
Total	$	447,959	$	3,672	$	(751	)	$	450,880



	September 30, 2012
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	56	$	—		$	2,056
Freddie Mac certificates	922		67		—			989
Ginnie Mae certificates	16,123		663		—			16,786
REMICs	383,545		2,772		(308		)	386,009
Fannie Mae certificates	7,125		764		—			7,889
Money market accounts	7,701		—		—			7,701
Total	$	417,416	$	4,322	$	(308	)	$	421,430

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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 December 31, 2012 and September 30, 2012, were as follows:



	December 31, 2012
	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	$	168,251	$	743	$	4,103	$	8	$	172,354	$	751
Total	$	168,251	$	743	$	4,103	$	8	$	172,354	$	751



	September 30, 2012
	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	$	80,219	$	291	$	6,550	$	17	$	86,769	$	308
Total	$	80,219	$	291	$	6,550	$	17	$	86,769	$	308


4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:



	December 31, 2012			September 30, 2012
Real estate loans:
Residential non-Home Today	$	7,649,508		$	7,943,165
Residential Home Today	201,615			208,325
Home equity loans and lines of credit	2,078,406			2,155,496
Construction	61,670			69,152
Real estate loans	9,991,199			10,376,138
Consumer and other loans	4,173			4,612
Less:
Deferred loan fees—net	(18,128		)	(18,561		)
Loans-in-process (“LIP”)	(30,829		)	(36,736		)
Allowance for loan losses	(105,201		)	(100,464		)
Loans held for investment, net	$	9,841,214		$	10,224,989

At December 31, 2012 and September 30, 2012, respectively, $324,322 and $124,528 of long-term loans were classified as mortgage loans held for sale.

A large concentration of the Company’s lending is in Ohio and Florida. As of December 31, 2012 and September 30, 2012, the percentages of residential real estate loans held in Ohio were both 77%, and the percentages held in Florida were both 17%, respectively. As of both December 31, 2012 and September 30, 2012, home equity loans and lines of credit were concentrated in the states of Ohio (39% ), Florida (29% ) and California (12% ), respectively. The economic conditions and market for real estate in those states, 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, prior to March 27, 2009, the Association provided 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 for loans originated prior to March 27, 2009 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

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with which the Association has partnered as part of the program. Borrowers must also meet a minimum credit score threshold. Because prior to March 27, 2009 the Association applied less stringent underwriting and credit standards to Home Today loans, loans originated under the program prior to that date have greater credit risk than its traditional residential real estate mortgage loans. Effective March 27, 2009, the Home Today underwriting guidelines were changed to be substantially the same as the Association’s traditional first mortgage product. As of December 31, 2012 and September 30, 2012, the principal balance of Home Today loans originated prior to March 27, 2009 was $197,751 and $204,733, 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.

The recorded investment of loan receivables in non-accrual status is summarized in the following table. Balances are net of deferred fees.



	December 31, 2012		September 30, 2012
Real estate loans:
Residential non-Home Today	$	101,933	$	105,780
Residential Home Today	41,226		41,087
Home equity loans and lines of credit	36,096		35,316
Construction	356		377
Total real estate loans	179,611		182,560
Consumer and other loans	—		—
Total non-accrual loans	$	179,611	$	182,560

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 6 months after restructuring. Beginning with the quarter ended March 31, 2012, home equity loans and lines of credit where the customer has a severely delinquent first mortgage are placed in non-accrual status. Beginning in the quarter ended September 30, 2012, loans in Chapter 7 bankruptcy status where all borrowers have been discharged of their obligation are also placed in non-accrual status. At December 31, 2012 and September 30, 2012, the recorded investment in non accrual loans includes $47,427 and $47,742, respectively, in troubled debt restructurings which are current according to the terms of their agreement of which $30,375 and $30,631 are performing loans in Chapter 7 bankruptcy status where all borrowers have been discharged of their obligations. Additionally, at December 31, 2012 and September 30, 2012, the recorded investment in non-accrual status loans includes $7,063 and $8,807, respectively, of performing second lien loans subordinate to first mortgages delinquent greater than 90 days. 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 been discharged of their obligation. 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.

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An age analysis of the recorded investment in loan receivables that are past due at December 31, 2012 and September 30, 2012 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
December 31, 2012
Real estate loans:
Residential non-Home Today	$	10,529	$	8,670	$	72,406	$	91,605	$	7,535,068	$	7,626,673
Residential Home Today	9,656		5,266		27,101		42,023		156,219		198,242
Home equity loans and lines of credit	6,697		3,849		16,661		27,207		2,059,796		2,087,003
Construction	—		—		356		356		29,968		30,324
Total real estate loans	26,882		17,785		116,524		161,191		9,781,051		9,942,242
Consumer and other loans	—		—		—		—		4,173		4,173
Total	$	26,882	$	17,785	$	116,524	$	161,191	$	9,785,224	$	9,946,415



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2012
Real estate loans:
Residential non-Home Today	$	15,015	$	10,661	$	74,807	$	100,483	$	7,818,927	$	7,919,410
Residential Home Today	10,874		4,736		27,517		43,127		161,743		204,870
Home equity loans and lines of credit	8,676		3,210		16,587		28,473		2,136,255		2,164,728
Construction	—		—		377		377		31,456		31,833
Total real estate loans	34,565		18,607		119,288		172,460		10,148,381		10,320,841
Consumer and other loans	—		—		—		—		4,612		4,612
Total	$	34,565	$	18,607	$	119,288	$	172,460	$	10,152,993	$	10,325,453

In an October 2011 directive, the OCC required all specific valuation allowances (“SVA”) on collateral-dependent loans (SVAs established when the recorded investment in an impaired loan exceeded the measured value of the collateral) maintained by savings institutions to be charged off by March 31, 2012. As permitted, the Company elected to early-adopt this methodology effective for the quarter ended December 31, 2011. As a result, reported loan charge-offs for the quarter ended December 31, 2011 included the charge-off of specific valuation allowances, which had a balance of $55,507 at September 30, 2011. The one-time SVA related charge-off did not impact the provision for loan losses for the quarter ended December 31, 2011; however, reported loan charge-offs during the three months ended December 31, 2011 increased and the allowance for loan losses decreased accordingly.

Activity in the allowance for loan losses is summarized as follows:



	For the Three Months Ended December 31, 2012
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	31,618	$	5,777		$	(4,635	)	$	331	$	33,091
Residential Home Today	22,588		5,238			(3,534		)	91		24,383
Home equity loans and lines of credit	45,508		7,259			(6,308		)	787		47,246
Construction	750		(274		)	(5		)	10		481
Total real estate loans	100,464		18,000			(14,482		)	1,219		105,201
Consumer and other loans	—		—			—			—		—
Total	$	100,464	$	18,000		$	(14,482	)	$	1,219	$	105,201

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	For the Three Months Ended December 31, 2011
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	49,484	$	7,178		$	(27,538	)	$	103	$	29,227
Residential Home Today	31,025		12,903			(23,888		)	52		20,092
Home equity loans and lines of credit	74,071		(4,897		)	(23,224		)	485		46,435
Construction	2,398		(184		)	(1,086		)	1		1,129
Total real estate loans	156,978		15,000			(75,736		)	641		96,883
Consumer and other loans	—		—			—			—		—
Total	$	156,978	$	15,000		$	(75,736	)	$	641	$	96,883

The recorded investment in loan receivables at December 31, 2012 and September 30, 2012 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.



	December 31, 2012						September 30, 2012
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	161,067	$	7,465,606	$	7,626,673	$	165,121	$	7,754,289	$	7,919,410
Residential Home Today	91,630		106,612		198,242		95,355		109,515		204,870
Home equity loans and lines of credit	38,295		2,048,708		2,087,003		37,016		2,127,712		2,164,728
Construction	1,184		29,140		30,324		1,378		30,455		31,833
Total real estate loans	292,176		9,650,066		9,942,242		298,870		10,021,971		10,320,841
Consumer and other loans	—		4,173		4,173		—		4,612		4,612
Total	$	292,176	$	9,654,239	$	9,946,415	$	298,870	$	10,026,583	$	10,325,453

An analysis of the allowance for loan losses at December 31, 2012 and September 30, 2012 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 not individually evaluated.



	December 31, 2012						September 30, 2012
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	7,048	$	26,043	$	33,091	$	6,220	$	25,398	$	31,618
Residential Home Today	8,532		15,851		24,383		9,747		12,841		22,588
Home equity loans and lines of credit	2,941		44,305		47,246		3,928		41,580		45,508
Construction	37		444		481		41		709		750
Total real estate loans	18,558		86,643		105,201		19,936		80,528		100,464
Consumer and other loans	—		—		—		—		—		—
Total	$	18,558	$	86,643	$	105,201	$	19,936	$	80,528	$	100,464

At December 31, 2012, 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, performing second liens subordinate to first mortgages delinquent greater than 90 days 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.

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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 December 31, 2012 and September 30, 2012, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings were $16,671 and $17,720; allowances on performing second liens subordinate to first mortgages delinquent greater than 90 days were $1,499 and $1,550; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $388 and $666.

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 experienced severe performance problems at other financial institutions (e.g., sub-prime, no documentation or pay option adjustable rate mortgages).

As described earlier in this footnote, Home Today loans, particularly those originated prior to March 27, 2009, have greater credit risk than traditional residential real estate mortgage loans. At December 31, 2012 and September 30, 2012, respectively, approximately 53% and 54% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co. (“PMIC”), which the Arizona Department of Insurance seized in 2011 and indicated that all claims payments would be reduced by 50%. Appropriate adjustments have been made to all of the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were increased for loans evaluated collectively. The amount of loans in our owned portfolio covered by mortgage insurance provided by PMIC as of December 31, 2012 and September 30, 2012, respectively, was $283,033 and $303,621 of which $253,031 and $273,225 was current. The amount of loans in our owned portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation ("MGIC") as of December 31, 2012 and September 30, 2012, respectively, was $111,745 and $118,055 of which $109,580 and $116,132 was current. As of December 31, 2012, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "investment grade"; 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 we 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 this portfolio since the home equity lines generally are in a second lien position. Between June 28, 2010 and March 20, 2012, due to the deterioration in overall housing conditions including concerns for loans and lines in a second lien position, home equity lines of credit and home equity loans were not offered by the Association. Beginning March 20, 2012, the Association offers new home equity lines of credit to qualifying existing home equity customers, subject to certain property and credit performance conditions.

Construction loans generally have greater credit risk than traditional residential real estate mortgage loans. The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make a loan on 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. In addition, the ultimate sale or rental of the property may not occur as anticipated. Effective August 30, 2011, the Association made the strategic decision to exit the commercial construction loan business and ceased accepting new builder relationships. Builder commitments in place at that time, to provide additional financing were honored for a limited period, giving our customers the ability to secure new borrowing relationships.

Reflective of the much publicized foreclosure and mortgage servicing problems that have confronted the industry, the Company has generally experienced longer foreclosure timelines than those experienced in the past, particularly in Florida. The longer foreclosure timelines in Florida generally have a greater impact on the Association’s first position liens as opposed to subordinate liens primarily because the significant property value decline in Florida since 2008, when coupled with the subordinate lien position of home equity lending products, generally results in a high percentage of full charge-offs on the date of initial evaluation. Once a home equity loan or line of credit has been fully charged off, foreclosure timing is no longer relevant. Longer foreclosure timelines generally result in greater loss experience rates on first position liens where full charge-offs are not as prevalent, particularly to the extent that property values continue to decline during the foreclosure process. These expected higher loss experience rates are factored into the determination of collateral fair value and are considered in making charge-off decisions.

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The recorded investment and the unpaid principal balance of impaired loans, including those whose terms have been modified in troubled debt restructurings, as of December 31, 2012 and September 30, 2012 are summarized as follows. Balances of recorded investments are net of deferred fees.



	December 31, 2012						September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Residential non-Home Today	$	93,660	$	122,930	$	—	$	96,227	$	126,806	$	—
Residential Home Today	36,334		69,033		—		36,578		68,390		—
Home equity loans and lines of credit	29,608		47,932		—		24,397		41,974		—
Construction	780		1,080		—		970		1,349		—
Consumer and other loans	—		—		—		—		—		—
Total	$	160,382	$	240,975	$	—	$	158,172	$	238,519	$	—
With an allowance recorded:
Residential non-Home Today	$	67,407	$	69,036	$	7,048	$	68,894	$	70,577	$	6,220
Residential Home Today	55,296		56,444		8,532		58,777		60,104		9,747
Home equity loans and lines of credit	8,687		9,294		2,941		12,619		13,554		3,928
Construction	404		404		37		408		408		41
Consumer and other loans	—		—		—		—		—		—
Total	$	131,794	$	135,178	$	18,558	$	140,698	$	144,643	$	19,936
Total impaired loans:
Residential non-Home Today	$	161,067	$	191,966	$	7,048	$	165,121	$	197,383	$	6,220
Residential Home Today	91,630		125,477		8,532		95,355		128,494		9,747
Home equity loans and lines of credit	38,295		57,226		2,941		37,016		55,528		3,928
Construction	1,184		1,484		37		1,378		1,757		41
Consumer and other loans	—		—		—		—		—		—
Total	$	292,176	$	376,153	$	18,558	$	298,870	$	383,162	$	19,936

At December 31, 2012 and September 30, 2012, respectively, the recorded investment in impaired loans includes $214,037 and $221,399 of loans modified in troubled debt restructurings of which $40,104 and $39,127 are 90 days or more past due.

For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Company 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. Impairment is measured based on the fair value of the collateral less costs to dispose when it is probable that the sole source of repayment for the loan is the underlying collateral. The fair value less estimated cost to dispose of the underlying property is compared to the recorded investment in the loan, net of anticipated mortgage insurance claims, to estimate a loss recorded as a charge-off in the allowance for credit losses. This applies to all mortgage loans and lines of credit. Equity loans, bridge loans, and loans modified in troubled debt restructurings are included in loans individually evaluated based on the fair value of the collateral at 90 or more days past due. Also, loans in Chapter 7 bankruptcy, where all borrowers' obligations related to the loan have been discharged, regardless of delinquency, are evaluated based on collateral. Collateral-based evaluations on all other loans are performed at 180 more days past due. An individual impairment evaluation may be performed on a loan in any portfolio prior to the guidelines established when it becomes evident that a loss is probable. A loan in any portfolio that is identified for individual evaluation based on a failure to make timely payments will continue to be reported as impaired until it 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 consequent to impairment evaluation will continue to be individually evaluated for impairment until, at a minimum, the impairment has been recovered.

Loans are charged off when less than the full payment is accepted as satisfaction for a loan; a foreclosure action is completed and the fair value of the collateral received is insufficient to satisfy the loan; management concludes the costs of

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foreclosure exceed the potential recovery; or, in the case of equity loans and lines of credit, management determines the collateral is not sufficient to satisfy the loan.

Loans modified in troubled debt restructurings that are not evaluated based on collateral are separately evaluated for impairment 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 troubled debt restructurings. The impairment 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 recorded investments over the result of the cash flow analysis. Loans in Chapter 7 bankruptcy and less than 30 days past due, where at least one borrower has not had the debt discharged, are evaluated based on the expected future cash flows. Consumer loans are not considered for restructuring. A loan modified in a troubled debt restructuring is classified as an impaired loan for a minimum of one year. After one year, a loan is no longer included in the balance of impaired loans if the loan was modified to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is not impaired based on the terms of restructuring agreement. No troubled debt restructurings were reclassified from impaired loans during the quarter ended December 31, 2012.

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 December 31,
	2012				2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential non-Home Today	$	94,944	$	399	$	54,855	$	221
Residential Home Today	36,456		68		25,677		265
Home equity loans and lines of credit	27,003		182		16,779		54
Construction	875		4		824		12
Consumer and other loans	—		—		—		—
Total	$	159,278	$	653	$	98,135	$	552
With an allowance recorded:
Residential non-Home Today	$	68,151	$	842	$	93,117	$	721
Residential Home Today	57,037		642		96,572		619
Home equity loans and lines of credit	10,653		74		15,400		39
Construction	406		4		3,322		20
Consumer and other loans	—		—		—		—
Total	$	136,247	$	1,562	$	208,411	$	1,399
Total impaired loans:
Residential non-Home Today	$	163,095	$	1,241	$	147,972	$	942
Residential Home Today	93,493		710		122,249		884
Home equity loans and lines of credit	37,656		256		32,179		93
Construction	1,281		8		4,146		32
Consumer and other loans	—		—		—		—
Total	$	295,525	$	2,215	$	306,546	$	1,951

The amounts of interest income on impaired loans recognized using a cash-basis method was $599 for the quarter ended December 31, 2012, and $566 for the quarter ended December 31, 2011.

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The recorded investment in total troubled debt restructurings as of December 31, 2012 and September 30, 2012 is shown in the tables below.



December 31, 2012	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Bankruptcy		Total
Residential non-Home Today	$	20,423	$	2,500	$	14,632	$	19,602	$	15,701	$	41,917	$	114,775
Residential Home Today	19,833		358		11,912		23,386		18,011		5,631		79,131
Home equity loans and lines of credit	88		733		855		181		485		17,084		19,426
Construction	—		607		—		—		—		98		705
Total	$	40,344	$	4,198	$	27,399	$	43,169	$	34,197	$	64,730	$	214,037



September 30, 2012	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Bankruptcy		Total
Residential non-Home Today	$	22,039	$	2,802	$	17,106	$	20,787	$	9,438	$	45,861	$	118,033
Residential Home Today	21,977		360		13,991		27,058		11,960		6,548		81,894
Home equity loans and lines of credit	105		646		960		257		384		18,334		20,686
Construction	—		634		—		—		—		152		786
Total	$	44,121	$	4,442	$	32,057	$	48,102	$	21,782	$	70,895	$	221,399

For all loans modified during the quarter ended December 31, 2012 and December 31, 2011(set forth in the table below), the pre-modification outstanding recorded investment was not materially different from the post-modification outstanding recorded investment.