Edgar Filing: TFS Financial CORP

TFSL 06-30-2014 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 June 30, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 001-33390

__________________________

TFS FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

__________________________



United States of America		52-2054948
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

7007 Broadway Avenue Cleveland, Ohio		44105
(Address of Principal Executive Offices)		(Zip Code)

(216) 441-6000

Registrant’s telephone number, including area code:

Not Applicable

(Former name or former address, if changed since last report)

__________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý		Accelerated filer	¨

Non-accelerated filer	¨	(do not check if a smaller reporting company)	Smaller Reporting Company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date.

As of August 4, 2014 there were 303,373,527 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 74.9% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

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TFS Financial Corporation

INDEX



		Page

	Glossary of Terms	3

PART l – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Statements of Condition June 30, 2014 and September 30, 2013	4

	Consolidated Statements of Income Three and nine months ended June 30, 2014 and 2013	5

	Consolidated Statements of Comprehensive Income Three and nine months ended June 30, 2014 and 2013	6

	Consolidated Statements of Shareholders’ Equity Nine months ended June 30, 2014 and 2103	7

	Consolidated Statements of Cash Flows Nine months ended June 30, 2014 and 2103	8

	Notes to Unaudited Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69

Item 4.	Controls and Procedures	72

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	73

Item 1A.	Risk Factors	73

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73

Item 3.	Defaults Upon Senior Securities	74

Item 4.	Mine Safety Disclosures	74

Item 5.	Other Information	74

Item 6.	Exhibits	74

SIGNATURES		75

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GLOSSARY OF TERMS

TFS Financial Corporation provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.



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

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Item 1. Financial Statements

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except share data)



	June 30, 2014			September 30, 2013
ASSETS
Cash and due from banks	$	38,100		$	34,694
Interest-earning cash equivalents	217,410			251,302
Cash and cash equivalents	255,510			285,996
Investment securities available for sale (amortized cost $524,493 and $480,664, respectively)	524,314			477,376
Mortgage loans held for sale, at lower of cost or market ($5,252 and $3,369 measured at fair value, respectively)	5,340			4,179
Loans held for investment, net:
Mortgage loans	10,592,431			10,185,674
Other consumer loans	3,710			4,100
Deferred loan fees, net	(4,408		)	(13,171		)
Allowance for loan losses	(82,502		)	(92,537		)
Loans, net	10,509,231			10,084,066
Mortgage loan servicing rights, net	12,254			14,074
Federal Home Loan Bank stock, at cost	40,411			35,620
Real estate owned	20,593			22,666
Premises, equipment, and software, net	57,312			58,517
Accrued interest receivable	31,705			31,489
Bank owned life insurance contracts	188,520			183,724
Other assets	70,828			71,639
TOTAL ASSETS	$	11,716,018		$	11,269,346
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,703,221		$	8,464,499
Borrowed funds	1,017,400			745,117
Borrowers’ advances for insurance and taxes	42,281			71,388
Principal, interest, and related escrow owed on loans serviced	41,129			75,745
Accrued expenses and other liabilities	47,123			41,120
Total liabilities	9,851,154			9,397,869
Commitments and contingent liabilities
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 304,096,983 and 309,230,591 outstanding at June 30, 2014 and September 30, 2013, respectively	3,323			3,323
Paid-in capital	1,700,996			1,696,370
Treasury stock, at cost; 28,221,767 and 23,088,159 shares at June 30, 2014 and September 30, 2013, respectively	(344,589		)	(278,215		)
Unallocated ESOP shares	(67,168		)	(70,418		)
Retained earnings—substantially restricted	578,741			529,021
Accumulated other comprehensive loss	(6,439		)	(8,604		)
Total shareholders’ equity	1,864,864			1,871,477
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	11,716,018		$	11,269,346

See accompanying notes to unaudited interim consolidated financial statements.

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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				For the Nine Months Ended
	June 30,				June 30,
	2014		2013		2014		2013
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	90,884	$	92,399	$	271,830	$	286,329
Investment securities available for sale	2,325		1,260		6,730		3,452
Other interest and dividend earning assets	547		545		1,560		1,646
Total interest and dividend income	93,756		94,204		280,120		291,427
INTEREST EXPENSE:
Deposits	23,210		27,049		68,434		86,214
Borrowed funds	2,674		1,027		6,985		2,739
Total interest expense	25,884		28,076		75,419		88,953
NET INTEREST INCOME	67,872		66,128		204,701		202,474
PROVISION FOR LOAN LOSSES	4,000		5,000		15,000		33,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	63,872		61,128		189,701		169,474
NON-INTEREST INCOME:
Fees and service charges, net of amortization	2,356		2,141		7,038		6,590
Net gain on the sale of loans	673		3,978		1,545		8,257
Increase in and death benefits from bank owned life insurance contracts	1,610		1,611		4,806		4,793
Other	1,071		1,094		2,933		3,537
Total non-interest income	5,710		8,824		16,322		23,177
NON-INTEREST EXPENSE:
Salaries and employee benefits	21,973		21,929		67,380		64,356
Marketing services	3,492		3,219		10,105		9,471
Office property, equipment and software	5,242		5,004		15,514		15,318
Federal insurance premium and assessments	2,402		2,878		7,496		9,835
State franchise tax	1,498		1,564		4,916		4,976
Real estate owned expense, net	2,015		2,087		6,968		4,768
Other operating expenses	6,227		9,585		18,260		25,305
Total non-interest expense	42,849		46,266		130,639		134,029
INCOME BEFORE INCOME TAXES	26,733		23,686		75,384		58,622
INCOME TAX EXPENSE	9,102		7,439		25,344		18,432
NET INCOME	$	17,631	$	16,247	$	50,040	$	40,190
Earnings per share—basic and diluted	$	0.06	$	0.05	$	0.17	$	0.13
Weighted average shares outstanding
Basic	298,681,954		301,913,844		299,860,726		301,746,918
Diluted	300,533,021		302,926,219		301,251,074		302,587,159

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)



	For the Three Months Ended					For the Nine Months Ended
	June 30,					June 30,
	2014		2013			2014		2013
Net income	$	17,631	$	16,247		$	50,040	$	40,190
Other comprehensive income (loss), net of tax
Change in net unrealized income (loss) on securities available for sale	2,195		(2,903		)	2,021		(3,827		)
Change in pension obligation	48		91			144		271
Total other comprehensive income (loss)	2,243		(2,812		)	2,165		(3,556		)
Total comprehensive income	$	19,874	$	13,435		$	52,205	$	36,634

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

Nine Months Ended June 30, 2014 and 2013

(In thousands)



	Common stock		Paid-in capital			Treasury stock			Unallocated common stock held by ESOP			Retained earnings			Accumulated other comprehensive loss			Total shareholders’ equity
Balance at September 30, 2012	$	3,323	$	1,691,884		$	(280,937	)	$	(74,751	)	$	473,247		$	(5,916	)	$	1,806,850
Net income	—		—			—			—			40,190			—			40,190
Other comprehensive loss, net of tax	—		—			—			—			—			(3,556		)	(3,556		)
ESOP shares allocated or committed to be released	—		2			—			3,250			—			—			3,252
Compensation costs for stock-based plans	—		5,090			—			—			—			—			5,090
Treasury stock allocated to restricted stock plan	—		(1,616		)	1,847			—			(126		)	—			105
Balance at June 30, 2013	$	3,323	$	1,695,360		$	(279,090	)	$	(71,501	)	$	513,311		$	(9,472	)	$	1,851,931

Balance at September 30, 2013	$	3,323	$	1,696,370		$	(278,215	)	$	(70,418	)	$	529,021		$	(8,604	)	$	1,871,477
Net income	—		—			—			—			50,040			—			50,040
Other comprehensive income, net of tax	—		—			—			—			—			2,165			2,165
ESOP shares allocated or committed to be released	—		788			—			3,250			—			—			4,038
Compensation costs for stock-based plans	—		5,335			—			—			—			—			5,335
Excess tax effect from stock-based compensation	—		34			—			—			—			—			34
Purchase of treasury stock (3,143,650 shares)	—		—			(68,279		)	—			—			—			(68,279		)
Treasury stock allocated to restricted stock plan	—		(1,531		)	1,905			—			(320		)	—			54
Balance at June 30, 2014	$	3,323	$	1,700,996		$	(344,589	)	$	(67,168	)	$	578,741		$	(6,439	)	$	1,864,864

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)



	For the Nine Months Ended
	June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	50,040		$	40,190
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	9,427			8,447
Depreciation and amortization	9,128			17,318
Deferred income tax expense	—			(564		)
Provision for loan losses	15,000			33,000
Net gain on the sale of loans	(1,545		)	(8,257		)
Other net losses	1,794			(612		)
Principal repayments on and proceeds from sales of loans held for sale	23,653			59,796
Loans originated for sale	(22,982		)	(51,319		)
Increase in bank owned life insurance contracts	(4,817		)	(4,802		)
Net (increase) decrease in interest receivable and other assets	(769		)	16,074
Net increase in accrued expenses and other liabilities	6,215			6,948
Other	114			353
Net cash provided by operating activities	85,258			116,572
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated	(1,773,626		)	(1,737,217		)
Principal repayments on loans	1,279,312			1,787,026
Proceeds from principal repayments and maturities of:
Securities available for sale	89,332			161,664
Proceeds from sale of:
Loans	34,631			282,353
Real estate owned	18,684			19,116
Purchases of:
FHLB stock	(4,791		)	—
Securities available for sale	(135,841		)	(206,000		)
Premises and equipment	(2,506		)	(1,727		)
Other	24			(116		)
Net cash (used in) provided by investing activities	(494,781		)	305,099
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	238,722			(350,889		)
Net decrease in borrowers’ advances for insurance and taxes	(29,107		)	(20,337		)
Net decrease in principal and interest owed on loans serviced	(34,616		)	(48,599		)
Net decrease in short term borrowed funds	(18,572		)	(204,836		)
Proceeds from long term borrowed funds	340,000			200,000
Repayment of long term borrowed funds	(49,145		)	(8,293		)
Purchase of treasury shares	(68,279		)	—
Excess tax benefit related to stock-based compensation	34			—
Net cash provided by (used in) financing activities	379,037			(432,954		)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(30,486		)	(11,283		)
CASH AND CASH EQUIVALENTS—Beginning of period	285,996			308,262
CASH AND CASH EQUIVALENTS—End of period	$	255,510		$	296,979
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	67,469		$	86,519
Cash paid for interest on borrowed funds	6,557			2,575
Cash paid for income taxes	14,100			15,200
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned	18,055			18,835
Transfer of loans from held for sale to held for investment	—			154,913
Transfer of loans from held for investment to held for sale	35,395			337,009

See accompanying notes to unaudited interim consolidated financial statements.

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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, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering, and, to a much lesser extent other financial services. On June 30, 2014, approximately 75% of the Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC. The thrift subsidiary of TFS Financial Corporation is Third Federal Savings and Loan Association of Cleveland.

The accounting and reporting policies followed by the Company conform in all material respects to accounting principles generally accepted in the United States of America and to general practices in the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the valuation of mortgage loan servicing rights, the valuation of deferred tax assets, and the determination of pension obligations and stock-based compensation are particularly subject to change.

The unaudited interim consolidated financial statements were prepared without an audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at June 30, 2014, and its results of operations and cash flows for the periods presented. In accordance with Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013 contains consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2014 or for any other period.


2.	EARNINGS PER SHARE

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a dilutive impact. At June 30, 2014 and 2013, respectively, the ESOP held 6,716,765 and 7,150,105 shares that were neither allocated to participants nor committed to be released to participants.

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



	For the Three Months Ended June 30,
	2014					2013
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	17,631				$	16,247
Less: income allocated to restricted stock units	84					82
Basic earnings per share:
Income available to common shareholders	$	17,547	298,681,954	$	0.06	$	16,165	301,913,844	$	0.05
Diluted earnings per share:
Effect of dilutive potential common shares			1,851,067					1,012,375
Income available to common shareholders	$	17,547	300,533,021	$	0.06	$	16,165	302,926,219	$	0.05



	For the Nine Months Ended June 30,
	2014					2013
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	50,040				$	40,190
Less: income allocated to restricted stock units	240					209
Basic earnings per share:
Income available to common shareholders	$	49,800	299,860,726	$	0.17	$	39,981	301,746,918	$	0.13
Diluted earnings per share:
Effect of dilutive potential common shares			1,390,348					840,241
Income available to common shareholders	$	49,800	301,251,074	$	0.17	$	39,981	302,587,159	$	0.13

The following is a summary of outstanding stock options and restricted stock units that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.



	For the Three Months Ended June 30,		For the Nine Months Ended June 30,
	2014	2013	2014	2013
Options to purchase shares	784,600	5,259,516	829,300	6,333,116
Restricted stock units	—	20,000	—	20,000

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3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:



	June 30, 2014
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	28	$	—		$	2,028
Freddie Mac certificates	597		37		—			634
Ginnie Mae certificates	9,726		414		—			10,140
REMICs	501,309		2,467		(3,784		)	499,992
Fannie Mae certificates	10,861		783		(124		)	11,520
Total	$	524,493	$	3,729	$	(3,908	)	$	524,314



	September 30, 2013
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	37	$	—		$	2,037
Freddie Mac certificates	894		56		—			950
Ginnie Mae certificates	11,919		423		—			12,342
REMICs	448,881		1,506		(5,810		)	444,577
Fannie Mae certificates	11,495		805		(305		)	11,995
Money market accounts	5,475		—		—			5,475
Total	$	480,664	$	2,827	$	(6,115	)	$	477,376

Gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time the individual securities have been in a continuous loss position, at June 30, 2014 and September 30, 2013, were as follows:



	June 30, 2014
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Available for sale—
REMICs	$	86,331	$	447	$	165,420	$	3,337	$	251,751	$	3,784
Fannie Mae certificates	—		—		4,896		124		4,896		124
Total	$	86,331	$	447	$	170,316	$	3,461	$	256,647	$	3,908



	September 30, 2013
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Available for sale—
REMICs	$	237,774	$	4,984	$	45,768	$	826	$	283,542	$	5,810
Fannie Mae certificates	4,806		305		—		—		4,806		305
Total	$	242,580	$	5,289	$	45,768	$	826	$	288,348	$	6,115

The unrealized losses on investment securities were attributable to interest rate increases. The contractual terms of U.S. government and agency obligations do not permit the issuer to settle the security at a price less than the par value of the investment. The contractual cash flows of mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. REMICs are issued by or backed by securities issued by these governmental agencies. It is expected that the securities

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would not be settled at a price substantially less than the amortized cost of the investment. The U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.

Since the decline in value is attributable to changes in interest rates and not credit quality and because the Association has neither the intent to sell the securities nor is it more likely than not the Association will be required to sell the securities for the time periods necessary to recover the amortized cost, these investments are not considered other-than-temporarily impaired. At June 30, 2014, the amortized cost and fair value of U.S. government and agency obligations available for sale due in more than one year but less than five years are $2,000 and $2,028, respectively as compared to $2,000 and $2,037 at September 30, 2013.


4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:



	June 30, 2014			September 30, 2013
Real estate loans:
Residential non-Home Today	$	8,680,964		$	8,118,511
Residential Home Today	159,820			178,353
Home equity loans and lines of credit	1,719,630			1,858,398
Construction	64,239			72,430
Real estate loans	10,624,653			10,227,692
Other consumer loans	3,710			4,100
Less:
Deferred loan fees—net	(4,408		)	(13,171		)
LIP	(32,222		)	(42,018		)
Allowance for loan losses	(82,502		)	(92,537		)
Loans held for investment, net	$	10,509,231		$	10,084,066

At June 30, 2014 and September 30, 2013, respectively, $5,340 and $4,179 of loans were classified as mortgage loans held for sale.

A large concentration of the Company’s lending is in Ohio and Florida. As of June 30, 2014 and September 30, 2013, the percentages of residential real estate loans held in Ohio were 70% and 74%, respectively, and the percentages held in Florida were 18% as of both dates. As of June 30, 2014 and September 30, 2013, home equity loans and lines of credit were concentrated in the states of Ohio (40% and 39%), Florida (28% and 29%), California (12% at each date) and New Jersey (5% at each date). The economic conditions and market for real estate in Ohio and Florida, including to a greater extent Florida, have impacted the ability of borrowers in those areas to repay their loans.

Home Today is an affordable housing program targeted to benefit low- and moderate-income home buyers. Through this program the Association provided the majority of loans to borrowers who would not otherwise qualify for the Association’s loan products, generally because of low credit scores. Although the credit profiles of borrowers in the Home Today program might be described as sub-prime, Home Today loans generally contain the same features as loans offered to our non-Home Today borrowers. Borrowers in the Home Today program must complete financial management education and counseling and must be referred to the Association by a sponsoring organization with which the Association has partnered as part of the program. Borrowers must also meet a minimum credit score threshold. Because the Association applied less stringent underwriting and credit standards to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential real estate mortgage loans. While effective March 27, 2009, the Home Today underwriting guidelines were changed to be substantially the same as the Association’s traditional first mortgage product, the majority of loans in this program were originated prior to that date. As of June 30, 2014 and September 30, 2013, the principal balance of Home Today loans originated prior to March 27, 2009 was $156,588 and $174,974, respectively. The Association does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, a loan-to-value ratio greater than 100%, or pay option adjustable-rate mortgages.

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



	June 30, 2014		September 30, 2013
Real estate loans:
Residential non-Home Today	$	80,369	$	91,048
Residential Home Today	31,007		34,813
Home equity loans and lines of credit	28,267		29,943
Construction	—		41
Total real estate loans	139,643		155,845
Other consumer loans	—		—
Total non-accrual loans	$	139,643	$	155,845

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans modified in troubled debt restructurings that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status. Prior to June 30, 2014, loans in Chapter 7 bankruptcy status where all borrowers filed were only placed in non-accrual status upon discharge. At June 30, 2014 and September 30, 2013, respectively, the recorded investment in non-accrual loans includes $72,497 and $68,937 which are performing according to the terms of their agreement, of which $44,633 and $42,042 are loans in Chapter 7 bankruptcy status primarily where all borrowers have filed, and have not reaffirmed or been dismissed.

Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid payment first. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized. A non-accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in non-accrual status when collectability is uncertain, such as a troubled debt restructuring that has not met minimum payment requirements, a loan with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. The number of days past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment.

An age analysis of the recorded investment in loan receivables that are past due at June 30, 2014 and September 30, 2013 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due. Balances are net of deferred fees and any applicable loans-in-process.



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
June 30, 2014
Real estate loans:
Residential non-Home Today	$	11,300	$	5,515	$	40,871	$	57,686	$	8,614,559	$	8,672,245
Residential Home Today	6,809		2,965		15,456		25,230		132,216		157,446
Home equity loans and lines of credit	5,711		2,255		10,820		18,786		1,707,617		1,726,403
Construction	—		—		—		—		31,929		31,929
Total real estate loans	23,820		10,735		67,147		101,702		10,486,321		10,588,023
Other consumer loans	—		—		—		—		3,710		3,710
Total	$	23,820	$	10,735	$	67,147	$	101,702	$	10,490,031	$	10,591,733

Table of Contents



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2013
Real estate loans:
Residential non-Home Today	$	15,398	$	4,874	$	56,484	$	76,756	$	8,024,657	$	8,101,413
Residential Home Today	8,597		5,989		18,341		32,927		142,666		175,593
Home equity loans and lines of credit	7,495		4,776		12,042		24,313		1,841,111		1,865,424
Construction	—		—		41		41		30,032		30,073
Total real estate loans	31,490		15,639		86,908		134,037		10,038,466		10,172,503
Other consumer loans	—		—		—		—		4,100		4,100
Total	$	31,490	$	15,639	$	86,908	$	134,037	$	10,042,566	$	10,176,603

During the quarter ended March 31, 2014, $1,300 in recoveries were recorded representing the cumulative one-time payment received as a result of PMIC increasing the cash percentage of the partial claim payment plan as discussed later in this note. During the quarter ended December 31, 2013, $5,321 of residential loans were deemed uncollectible and fully charged-off as a result of implementing a new practice of charging off the remaining balance on loans that had remained delinquent and in the foreclosure process for greater than 1,500 days. These loans previously were recorded at estimated net realizable value, with the potential for additional loss recognized within the allowance for loan losses. Any future foreclosure proceeds on these loans would result in recoveries of prior charge-offs.

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



	For the Three Months Ended June 30, 2014
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	32,642	$	328		$	(2,043	)	$	585	$	31,512
Residential Home Today	16,919		883			(1,180		)	355		16,977
Home equity loans and lines of credit	33,785		2,841			(4,143		)	1,497		33,980
Construction	45		(52		)	(151		)	191		33
Total real estate loans	83,391		4,000			(7,517		)	2,628		82,502
Other consumer loans	—		—			—			—		—
Total	$	83,391	$	4,000		$	(7,517	)	$	2,628	$	82,502



	For the Three Months Ended June 30, 2013
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	34,172	$	2,842		$	(4,304	)	$	609	$	33,319
Residential Home Today	27,743		791			(2,332		)	444		26,646
Home equity loans and lines of credit	38,968		1,462			(5,819		)	1,774		36,385
Construction	334		(95		)	(68		)	3		174
Total real estate loans	101,217		5,000			(12,523		)	2,830		96,524
Other consumer loans	—		—			—			—		—
Total	$	101,217	$	5,000		$	(12,523	)	$	2,830	$	96,524

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	For the Nine Months Ended June 30, 2014
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	35,427	$	7,274		$	(13,226	)	$	2,037	$	31,512
Residential Home Today	24,112		(2,336		)	(6,501		)	1,702		16,977
Home equity loans and lines of credit	32,818		10,222			(13,078		)	4,018		33,980
Construction	180		(160		)	(192		)	205		33
Total real estate loans	92,537		15,000			(32,997		)	7,962		82,502
Other consumer loans	—		—			—			—		—
Total	$	92,537	$	15,000		$	(32,997	)	$	7,962	$	82,502



	For the Nine Months Ended June 30, 2013
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	31,618	$	14,703		$	(14,203	)	$	1,201	$	33,319
Residential Home Today	22,588		13,167			(9,705		)	596		26,646
Home equity loans and lines of credit	45,508		5,648			(18,797		)	4,026		36,385
Construction	750		(518		)	(121		)	63		174
Total real estate loans	100,464		33,000			(42,826		)	5,886		96,524
Other consumer loans	—		—			—			—		—
Total	$	100,464	$	33,000		$	(42,826	)	$	5,886	$	96,524

The recorded investment in loan receivables at June 30, 2014 and September 30, 2013 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans not individually evaluated. Balances of recorded investments are net of deferred fees and any applicable loans-in-process.



	June 30, 2014						September 30, 2013
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	134,310	$	8,537,935	$	8,672,245	$	149,102	$	7,952,311	$	8,101,413
Residential Home Today	69,820		87,626		157,446		79,065		96,528		175,593
Home equity loans and lines of credit	34,553		1,691,850		1,726,403		34,387		1,831,037		1,865,424
Construction	—		31,929		31,929		487		29,586		30,073
Total real estate loans	238,683		10,349,340		10,588,023		263,041		9,909,462		10,172,503
Other consumer loans	—		3,710		3,710		—		4,100		4,100
Total	$	238,683	$	10,353,050	$	10,591,733	$	263,041	$	9,913,562	$	10,176,603

Table of Contents

An analysis of the allowance for loan losses at June 30, 2014 and September 30, 2013 is summarized in the following table. The analysis provides details of the allowance for loan losses according to the method of evaluation, distinguishing between allowances for loan losses determined by evaluating individual loans and allowances for loan losses determined by evaluating groups of loans collectively.



	June 30, 2014						September 30, 2013
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	8,951	$	22,561	$	31,512	$	7,138	$	28,289	$	35,427
Residential Home Today	6,885		10,092		16,977		7,677		16,435		24,112
Home equity loans and lines of credit	634		33,346		33,980		1,018		31,800		32,818
Construction	—		33		33		5		175		180
Total real estate loans	16,470		66,032		82,502		15,838		76,699		92,537
Other consumer loans	—		—		—		—		—		—
Total	$	16,470	$	66,032	$	82,502	$	15,838	$	76,699	$	92,537

At June 30, 2014 and September 30, 2013, individually evaluated loans that required an allowance were comprised only of loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings, and loans with a further deterioration in the fair value of collateral not yet identified as uncollectible. All other individually evaluated loans received a charge-off, if applicable.

Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. At June 30, 2014 and September 30, 2013, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings were $16,470 and $15,749, and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $0 and $89.

Residential non-Home Today mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have historically experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable rate mortgages).

As described earlier in this footnote, Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At June 30, 2014 and September 30, 2013, respectively, approximately 44% and 50% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co., which the Arizona Department of Insurance seized in 2011 and indicated that all claims payments would be reduced by 50%. In March 2013, PMIC notified the Association that all payments would be paid at 55% of the claim with the remainder deferred. In March 2014, PMIC notified the Association that the cash percentage of the partial claim payment plan would increase further to 67% of the claim. Appropriate adjustments have been made to the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated collectively. The amount of loans in our owned portfolio covered by mortgage insurance provided by PMIC as of June 30, 2014 and September 30, 2013, respectively, was $200,139 and $236,713 of which $184,290 and $214,920 was current. The amount of loans in our owned portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of June 30, 2014 and September 30, 2013, respectively, was $78,797 and $91,478 of which $77,607 and $90,099 was current. As of June 30, 2014, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "high credit quality"; however, MGIC continues to make claims payments in accordance with its contractual obligations and the Association has not increased its estimated loss severity factors related to MGIC's claim paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which were assessed as being non-investment grade.

Home equity lines of credit represent a significant portion of the residential real estate portfolio. The state of the economy and low housing prices continue to have an adverse impact on a portion of this portfolio since the home equity lines generally are in a second lien position. Post-origination deterioration in economic and housing market conditions may also impact a borrower's ability to afford the higher payments required during the end of draw repayment period that follows the period of interest only payments on home equity lines of credit originated prior to 2012 or the ability to secure alternative financing.

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When the Association began to offer new home equity lines of credit again, the product was designed with prudent property and credit performance conditions to reduce future risk. Beginning in February 2013, the terms on new home equity lines of credit included monthly principal and interest payments throughout the entire term to minimize the potential payment differential between the during draw and after draw periods.

Construction loans generally have greater credit risk than traditional residential real estate mortgage loans. The repayment of these loans depends upon the availability of permanent financing upon completion of all improvements. In the event the Association makes a loan on a property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Construction loans also expose the Association to the risk that improvements will not be completed on time in accordance with specifications and projected costs.

Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment.

The recorded investment and the unpaid principal balance of impaired loans, including those reported as troubled debt restructurings, as of June 30, 2014 and September 30, 2013 are summarized as follows. Balances of recorded investments are net of deferred fees.



	June 30, 2014						September 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Residential non-Home Today	$	76,387	$	99,027	$	—	$	86,040	$	114,799	$	—
Residential Home Today	29,618		60,853		—		33,163		66,366		—
Home equity loans and lines of credit	27,502		39,455		—		27,494		58,267		—
Construction	—		—		—		422		544		—
Other consumer loans	—		—		—		—		—		—
Total	$	133,507	$	199,335	$	—	$	147,119	$	239,976	$	—
With an allowance recorded:
Residential non-Home Today	$	57,923	$	58,905	$	8,951	$	63,062	$	64,468	$	7,138
Residential Home Today	40,202		40,831		6,885		45,902		46,698		7,677