Edgar Filing: TFS Financial CORP

TFSL 12-31-2014 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 December 31, 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 February 2, 2015 there were 298,315,471 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 76.1% 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 December 31, 2014 and September 30, 2014	4

	Consolidated Statements of Income Three months ended December 31, 2014 and 2013	5

	Consolidated Statements of Comprehensive Income Three months ended December 31, 2014 and 2013	6

	Consolidated Statements of Shareholders’ Equity Three months ended December 31, 2014 and 2013	7

	Consolidated Statements of Cash Flows Three months ended December 31, 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	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	64

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	64

Item 1A.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 3.	Defaults Upon Senior Securities	65

Item 4.	Mine Safety Disclosures	65

Item 5.	Other Information	65

Item 6.	Exhibits	65

SIGNATURES		66

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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 throughout the document.



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	HPI: Home Price Index
Association: Third Federal Savings and Loan	IRR: Interest Rate Risk
Association of Cleveland	IRS: Internal Revenue Service
BAAS: OCC Bank Accounting Advisory Series	IVA: Individual Valuation Allowance
CDs: Certificates of Deposit	LIP: Loans-in-Process
CFPB: Consumer Financial Protection Bureau	LTV: Loan-to-Value
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)



	December 31, 2014			September 30, 2014
ASSETS
Cash and due from banks	$	28,149		$	26,886
Interest-earning cash equivalents	247,671			154,517
Cash and cash equivalents	275,820			181,403
Investment securities available for sale (amortized cost $581,480 and $570,549, respectively)	580,467			568,868
Mortgage loans held for sale, at lower of cost or market ($0 and $4,570 measured at fair value, respectively)	1,379			4,962
Loans held for investment, net:
Mortgage loans	10,844,202			10,708,483
Other consumer loans	4,636			4,721
Deferred loan expenses (fees), net	1,643			(1,155		)
Allowance for loan losses	(79,762		)	(81,362		)
Loans, net	10,770,719			10,630,687
Mortgage loan servicing rights, net	11,229			11,669
Federal Home Loan Bank stock, at cost	64,086			40,411
Real estate owned	21,984			21,768
Premises, equipment, and software, net	56,407			56,443
Accrued interest receivable	31,926			31,952
Bank owned life insurance contracts	191,484			190,152
Other assets	62,342			64,880
TOTAL ASSETS	$	12,067,843		$	11,803,195
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,539,214		$	8,653,878
Borrowed funds	1,504,705			1,138,639
Borrowers’ advances for insurance and taxes	74,354			76,266
Principal, interest, and related escrow owed on loans serviced	49,577			54,670
Accrued expenses and other liabilities	87,300			40,285
Total liabilities	10,255,150			9,963,738
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; 299,146,837 and 301,654,581 outstanding at December 31, 2014 and September 30, 2014, respectively	3,323			3,323
Paid-in capital	1,701,982			1,702,441
Treasury stock, at cost; 33,171,913 and 30,664,169 shares at December 31, 2014 and September 30, 2014, respectively	(417,578		)	(379,109		)
Unallocated ESOP shares	(65,001		)	(66,084		)
Retained earnings—substantially restricted	600,202			589,678
Accumulated other comprehensive loss	(10,235		)	(10,792		)
Total shareholders’ equity	1,812,693			1,839,457
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	12,067,843		$	11,803,195

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
	December 31,
	2014		2013
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	91,835	$	90,401
Investment securities available for sale	2,555		2,100
Other interest and dividend earning assets	1,346		518
Total interest and dividend income	95,736		93,019
INTEREST EXPENSE:
Deposits	24,476		23,262
Borrowed funds	4,124		1,962
Total interest expense	28,600		25,224
NET INTEREST INCOME	67,136		67,795
PROVISION FOR LOAN LOSSES	2,000		6,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	65,136		61,795
NON-INTEREST INCOME:
Fees and service charges, net of amortization	2,158		2,289
Net gain on the sale of loans	698		339
Increase in and death benefits from bank owned life insurance contracts	1,901		1,613
Other	1,196		837
Total non-interest income	5,953		5,078
NON-INTEREST EXPENSE:
Salaries and employee benefits	23,565		22,082
Marketing services	4,500		3,253
Office property, equipment and software	5,393		4,989
Federal insurance premium and assessments	2,461		2,547
State franchise tax	1,403		1,687
Real estate owned expense, net	2,700		1,945
Other operating expenses	5,951		6,356
Total non-interest expense	45,973		42,859
INCOME BEFORE INCOME TAXES	25,116		24,014
INCOME TAX EXPENSE	8,472		7,990
NET INCOME	$	16,644	$	16,024
Earnings per share—basic and diluted	$	0.06	$	0.05
Weighted average shares outstanding
Basic	293,797,138		300,634,212
Diluted	296,128,813		301,868,676

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,
	2014		2013
Net income	$	16,644	$	16,024
Other comprehensive income (loss), net of tax
Change in net unrealized income (loss) on securities available for sale	433		(1,947		)
Change in pension obligation	124		48
Total other comprehensive income (loss)	557		(1,899		)
Total comprehensive income	$	17,201	$	14,125

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

(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, 2013	$	3,323	$	1,696,370		$	(278,215	)	$	(70,418	)	$	529,021		$	(8,604	)	$	1,871,477
Net income	—		—			—			—			16,024			—			16,024
Other comprehensive loss, net of tax	—		—			—			—			—			(1,899		)	(1,899		)
ESOP shares allocated or committed to be released	—		212			—			1,084			—			—			1,296
Compensation costs for stock-based plans	—		1,797			—			—			—			—			1,797
Excess tax effect from stock-based compensation	—		49			—			—			—			—			49
Purchase of treasury stock (2,156,250 shares)	—		—			(26,058		)	—			—			—			(26,058		)
Treasury stock allocated to restricted stock plan	—		(727		)	677			—			(196		)	—			(246		)
Balance at December 31, 2013	$	3,323	$	1,697,701		$	(303,596	)	$	(69,334	)	$	544,849		$	(10,503	)	$	1,862,440

Balance at September 30, 2014	$	3,323	$	1,702,441		$	(379,109	)	$	(66,084	)	$	589,678		$	(10,792	)	$	1,839,457
Net income	—		—			—			—			16,644			—			16,644
Other comprehensive income, net of tax	—		—			—			—			—			557			557
ESOP shares allocated or committed to be released	—		520			—			1,083			—			—			1,603
Compensation costs for stock-based plans	—		2,099			—			—			—			—			2,099
Excess tax effect from stock-based compensation	—		945			—			—			—			—			945
Purchase of treasury stock (2,802,500 shares)	—		—			(41,555		)	—			—			—			(41,555		)
Treasury stock allocated to restricted stock plan	—		(4,023		)	3,086			—			(1,409		)	—			(2,346		)
Dividends paid to common shareholders ($0.07 per common share)	—		—			—			—			(4,711		)	—			(4,711		)
Balance at December 31, 2014	$	3,323	$	1,701,982		$	(417,578	)	$	(65,001	)	$	600,202		$	(10,235	)	$	1,812,693

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,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,644		$	16,024
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	3,702			2,847
Depreciation and amortization	3,865			3,129
Provision for loan losses	2,000			6,000
Net gain on the sale of loans	(698		)	(339		)
Other net losses	890			679
Principal repayments on and proceeds from sales of loans held for sale	3,842			10,022
Loans originated for sale	(4,748		)	(7,143		)
Increase in bank owned life insurance contracts	(1,628		)	(1,619		)
Net decrease in interest receivable and other assets	2,179			1,951
Net increase in accrued expenses and other liabilities	45,418			48,853
Other	118			188
Net cash provided by operating activities	71,584			80,592
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated	(611,208		)	(535,266		)
Principal repayments on loans	446,149			437,672
Proceeds from principal repayments and maturities of:
Securities available for sale	33,679			30,015
Proceeds from sale of:
Loans	20,385			11,079
Real estate owned	5,691			6,993
Purchases of:
FHLB stock	(23,675		)	(1,279		)
Securities available for sale	(45,853		)	(44,147		)
Premises and equipment	(1,160		)	(1,070		)
Other	295			18
Net cash used in investing activities	(175,697		)	(95,985		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits	(114,664		)	(150,267		)
Net decrease in borrowers' advances for insurance and taxes	(1,912		)	(2,506		)
Net decrease in principal and interest owed on loans serviced	(5,093		)	(15,767		)
Net decrease in short term borrowed funds	224,284			124,225
Proceeds from long term borrowed funds	150,294			130,000
Repayment of long term borrowed funds	(8,512		)	(13,320		)
Purchase of treasury shares	(39,755		)	(26,058		)
Excess tax benefit related to stock-based compensation	945			—
Taxes paid on equity compensation	(2,346		)	—
Dividends paid to common shareholders	(4,711		)	—
Net cash provided by financing activities	198,530			46,307
NET INCREASE IN CASH AND CASH EQUIVALENTS	94,417			30,914
CASH AND CASH EQUIVALENTS—Beginning of period	181,403			285,996
CASH AND CASH EQUIVALENTS—End of period	$	275,820		$	316,910
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	24,543		$	23,470
Cash paid for interest on borrowed funds	3,839			1,737
Cash paid for income taxes	80			508
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned	6,807			6,503
Transfer of loans from held for investment to held for sale	15,545			11,095

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 December 31, 2014, approximately 76% 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 December 31, 2014, 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 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, 2014 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, 2015 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 December 31, 2014 and 2013, respectively, the ESOP held 6,500,096 and 6,933,435 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,
	2014					2013
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	16,644				$	16,024
Less: income allocated to restricted stock units	147					77
Basic earnings per share:
Income available to common shareholders	$	16,497	293,797,138	$	0.06	$	15,947	300,634,212	$	0.05
Diluted earnings per share:
Effect of dilutive potential common shares			2,331,675					1,234,464
Income available to common shareholders	$	16,497	296,128,813	$	0.06	$	15,947	301,868,676	$	0.05

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,
	2014	2013
Options to purchase shares	961,200	3,486,500
Restricted stock units	208,000	—


3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:



	December 31, 2014
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	17	$	—		$	2,017
REMICs	569,023		1,770		(3,488		)	567,305
Fannie Mae certificates	10,457		728		(40		)	11,145
Total	$	581,480	$	2,515	$	(3,528	)	$	580,467



	September 30, 2014
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	23	$	—		$	2,023
REMICs	557,895		1,896		(4,184		)	555,607
Fannie Mae certificates	10,654		749		(165		)	11,238
Total	$	570,549	$	2,668	$	(4,349	)	$	568,868

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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, 2014 and September 30, 2014, were as follows:



	December 31, 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	$	176,429	$	827	$	155,105	$	2,661	$	331,534	$	3,488
Fannie Mae certificates	—		—		4,920		40		4,920		40
Total	$	176,429	$	827	$	160,025	$	2,701	$	336,454	$	3,528



	September 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	$	182,151	$	947	$	162,321	$	3,237	$	344,472	$	4,184
Fannie Mae certificates	—		—		4,826		165		4,826		165
Total	$	182,151	$	947	$	167,147	$	3,402	$	349,298	$	4,349

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. At December 31, 2014, the amortized cost and fair value of U.S. government and agency obligations available for sale, categorized as due within one year, are $2,000 and $2,017, respectively. At September 30, 2014, the amortized cost and fair value of those obligations, then categorized as due in more than one year but less than five years, were $2,000 and $2,023, respectively.

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4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:



	December 31, 2014			September 30, 2014
Real estate loans:
Residential Core	$	8,996,102		$	8,828,839
Residential Home Today	149,696			154,196
Home equity loans and lines of credit	1,677,300			1,696,929
Construction	48,899			57,104
Real estate loans	10,871,997			10,737,068
Other consumer loans	4,636			4,721
Less:
Deferred loan expenses (fees)—net	1,643			(1,155		)
LIP	(27,795		)	(28,585		)
Allowance for loan losses	(79,762		)	(81,362		)
Loans held for investment, net	$	10,770,719		$	10,630,687

At December 31, 2014 and September 30, 2014, respectively, $1,379 and $4,962 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 December 31, 2014 and September 30, 2014, the percentages of residential real estate loans held in Ohio were 67% and 68%, respectively, and the percentages held in Florida were 17% as of both dates. As of December 31, 2014 and September 30, 2014, home equity loans and lines of credit were concentrated in Ohio (40% at each date), Florida (28% at each date), and California (13% at each date). The economic conditions and market for real estate in Ohio and 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 Core 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 December 31, 2014 and September 30, 2014, the principal balance of Home Today loans originated prior to March 27, 2009 was $146,677 and $151,164, 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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An age analysis of the recorded investment in loan receivables that are past due at December 31, 2014 and September 30, 2014 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, 2014
Real estate loans:
Residential Core	$	9,005	$	6,842	$	33,388	$	49,235	$	8,942,449	$	8,991,684
Residential Home Today	7,184		3,536		13,690		24,410		123,116		147,526
Home equity loans and lines of credit	6,815		1,791		7,707		16,313		1,668,751		1,685,064
Construction	—		—		—		—		21,571		21,571
Total real estate loans	23,004		12,169		54,785		89,958		10,755,887		10,845,845
Other consumer loans	—		—		—		—		4,636		4,636
Total	$	23,004	$	12,169	$	54,785	$	89,958	$	10,760,523	$	10,850,481



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2014
Real estate loans:
Residential Core	$	9,067	$	3,899	$	37,451	$	50,417	$	8,772,180	$	8,822,597
Residential Home Today	7,887		2,553		15,105		25,545		126,417		151,962
Home equity loans and lines of credit	6,044		1,785		9,037		16,866		1,687,349		1,704,215
Construction	200		—		—		200		28,354		28,554
Total real estate loans	23,198		8,237		61,593		93,028		10,614,300		10,707,328
Other consumer loans	—		—		—		—		4,721		4,721
Total	$	23,198	$	8,237	$	61,593	$	93,028	$	10,619,021	$	10,712,049

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



	December 31, 2014		September 30, 2014
Real estate loans:
Residential Core	$	73,585	$	79,388
Residential Home Today	28,249		29,960
Home equity loans and lines of credit	25,005		26,189
Construction	—		—
Total real estate loans	126,839		135,537
Other consumer loans	—		—
Total non-accrual loans	$	126,839	$	135,537

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans restructured 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. At December 31, 2014 and September 30, 2014, respectively, the recorded investment in non-accrual loans includes $72,054 and $73,946 which are performing according to the terms of their agreement, of which $47,075 and $49,019 are loans in Chapter 7 bankruptcy status primarily where all borrowers have filed, and have not reaffirmed or been dismissed.

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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.

The recorded investment in loan receivables at December 31, 2014 and September 30, 2014 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, 2014						September 30, 2014
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	130,933	$	8,860,751	$	8,991,684	$	131,719	$	8,690,878	$	8,822,597
Residential Home Today	64,903		82,623		147,526		67,177		84,785		151,962
Home equity loans and lines of credit	32,794		1,652,270		1,685,064		34,490		1,669,725		1,704,215
Construction	—		21,571		21,571		—		28,554		28,554
Total real estate loans	228,630		10,617,215		10,845,845		233,386		10,473,942		10,707,328
Other consumer loans	—		4,636		4,636		—		4,721		4,721
Total	$	228,630	$	10,621,851	$	10,850,481	$	233,386	$	10,478,663	$	10,712,049

An analysis of the allowance for loan losses at December 31, 2014 and September 30, 2014 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.



	December 31, 2014						September 30, 2014
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	8,408	$	20,309	$	28,717	$	8,889	$	22,191	$	31,080
Residential Home Today	5,866		10,568		16,434		6,366		10,058		16,424
Home equity loans and lines of credit	740		33,855		34,595		532		33,299		33,831
Construction	—		16		16		—		27		27
Total real estate loans	15,014		64,748		79,762		15,787		65,575		81,362
Other consumer loans	—		—		—		—		—		—
Total	$	15,014	$	64,748	$	79,762	$	15,787	$	65,575	$	81,362

At December 31, 2014 and September 30, 2014, 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 December 31, 2014 and September 30, 2014, respectively, allowances on individually

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reviewed loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings were $14,830 and $15,787, and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $184 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 December 31, 2014 and September 30, 2014, respectively, approximately 40% and 42% 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 and currently pays all claim payments at 67%. 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 December 31, 2014 and September 30, 2014, respectively, was $171,639 and $186,233 of which $155,781 and $170,128 was current. The amount of loans in our owned portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of December 31, 2014 and September 30, 2014, respectively, was $70,052 and $74,254 of which $68,983 and $73,616 was current. As of December 31, 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. 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.

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 80%. Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Association may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. This is more likely to occur when home prices are falling.

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

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The recorded investment and the unpaid principal balance of impaired loans, including those reported as troubled debt restructurings, as of December 31, 2014 and September 30, 2014 are summarized as follows. Balances of recorded investments are net of deferred fees.



	December 31, 2014						September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related IVA recorded:
Residential Core	$	72,243	$	93,025	$	—	$	72,840	$	94,419	$	—
Residential Home Today	27,309		56,981		—		28,045		57,854		—
Home equity loans and lines of credit	24,377		33,403		—		26,618		38,046		—
Construction	—		—		—		—		—		—
Other consumer loans	—		—		—		—		—		—
Total	$	123,929	$	183,409	$	—	$	127,503	$	190,319	$	—
With an IVA recorded:
Residential Core	$	58,690	$	59,626	$	8,408	$	58,879	$	59,842	$	8,889
Residential Home Today	37,594		38,135		5,866		39,132		39,749		6,366
Home equity loans and lines of credit	8,417		8,454		740		7,872		7,909		532
Construction	—		—		—		—		—		—
Other consumer loans	—		—		—		—		—		—
Total	$	104,701	$	106,215	$	15,014	$	105,883	$	107,500	$	15,787
Total impaired loans:
Residential Core	$	130,933	$	152,651	$	8,408	$	131,719	$	154,261	$	8,889
Residential Home Today	64,903		95,116		5,866		67,177		97,603		6,366
Home equity loans and lines of credit	32,794		41,857		740		34,490		45,955		532
Construction	—		—		—		—		—		—
Other consumer loans	—		—		—		—		—		—
Total	$	228,630	$	289,624	$	15,014	$	233,386	$	297,819	$	15,787

At December 31, 2014 and September 30, 2014, respectively, the recorded investment in impaired loans includes $184,623 and $186,428 of loans restructured in troubled debt restructurings of which $19,143 and $20,851 were 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.

Charge-offs on residential mortgage loans, home equity loans and lines of credit, and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the recorded investment in the loans.

Partial or full charge-offs are also recognized for the amount of impairment on loans considered collateral dependent that meet the conditions described below.


•	For residential mortgage loans, payments are greater than 180 days delinquent;


•	For home equity lines of credit, equity loans, and residential loans restructured in a troubled debt restructuring, payments are greater than 90 days delinquent;


•	For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan;


•	For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy;


•	For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed;

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•	For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent;


•	For all classes of loans, it becomes evident that a loss is probable.

Collateral dependent residential mortgage loans and construction loans are charged off to the extent the recorded investment in a loan, net of anticipated mortgage insurance claims, exceeds the fair value less costs to dispose of the underlying property. Management can determine the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged off to the extent the recorded investment in the loan plus the balance of any senior liens exceeds the fair value less costs to dispose of the underlying property or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio that is identified as collateral dependent will continue to be reported as impaired until it is no longer considered collateral dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off consequent to impairment evaluation will continue to be individually evaluated for impairment until, at a minimum, the impairment has been recovered.

The following summarizes the effective dates of charge-off policies that changed or were first implemented during the current and previous four fiscal years and the portfolios to which those policies apply.



Effective Date	Policy	Portfolio(s) Affected
6/30/2014	A loan is considered collateral dependent and any collateral shortfall is charged off when, within 60 days of notification, all borrowers obligated on a loan filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed (1)	All
9/30/2012	Pursuant to an OCC directive, a loan is considered collateral dependent and any collateral shortfall is charged off when all borrowers obligated on a loan are discharged through Chapter 7 bankruptcy	All
6/30/2012	Loans in any form of bankruptcy greater than 30 days past due are considered collateral dependent and any collateral shortfall is charged off	All
12/31/2011	Pursuant to an OCC directive, impairment on collateral dependent loans previously reserved for in the allowance were charged off. Charge-offs are recorded to recognize confirmed collateral shortfalls on impaired loans (2)	All
9/30/2010	Timing of impairment evaluation was accelerated to include equity loans greater than 90 days delinquent (3)	Home Equity Loans

____________________________


(1)	Prior to 6/30/2014, collateral shortfalls on loans in Chapter 7 bankruptcy were charged off when all borrowers were discharged of the obligation or when the loan was 30 days or more past due. Adoption of this policy did not result in a material change to total charge-offs or the provision for loan losses in the three or nine months ending June 30, 2014.


(2)	Prior to 12/31/2011, partial charge-offs were not used, but a reserve in the allowance was established when the recorded investment in the loan exceeded the fair value of the collateral less costs to dispose. Individual loans were only charged off when a triggering event occurred, such as a foreclosure action was culminated, a short sale was approved, or a deed was accepted in lieu of repayment.


(3)	Prior to 9/30/2010, impairment evaluations on equity loans were performed when the loan was greater than 180 days delinquent.

Loans restructured 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 discharged in Chapter 7 bankruptcy are reported as troubled debt restructurings and also evaluated based on the present value of expected future cash flows unless evaluated based on collateral. We evaluate these loans using the expected future cash flows because we expect the borrower, not liquidation of the collateral, to be the source of repayment for the loan. Other consumer loans are not considered for restructuring. A loan restructured in a troubled debt restructuring is classified as an impaired loan for a minimum of one year. After one year, that loan may be reclassified out of the balance of impaired loans if the loan was restructured 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 the restructuring agreement. No loans whose terms were restructured in troubled debt restructurings were reclassified from impaired loans during the three months ended December 31, 2014 and December 31, 2013.

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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,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	72,542	$	287	$	83,211	$	281
Residential Home Today	27,677		58		32,439		87
Home equity loans and lines of credit	25,498		72		28,037		92
Construction	—		—		475		5
Other consumer loans	—		—		—		—
Total	$	125,717	$	417	$	144,162	$	465
With an IVA recorded:
Residential Core	$	58,785	$	664	$	62,313	$	743
Residential Home Today	38,363		487		44,652		553
Home equity loans and lines of credit	8,145		67		6,892		60
Construction	—		—		33		—
Other consumer loans	—		—		—		—
Total	$	105,293	$	1,218	$	113,890	$	1,356
Total impaired loans:
Residential Core	$	131,327	$	951	$	145,524	$	1,024
Residential Home Today	66,040		545		77,091		640
Home equity loans and lines of credit	33,643		139		34,929		152
Construction	—		—		508		5
Other consumer loans	—		—		—		—
Total	$	231,010	$	1,635	$	258,052	$	1,821

Interest on loans in non-accrual status is recognized on a cash-basis. The amounts of interest income on impaired loans recognized using a cash-basis method were $277 for the quarter ended December 31, 2014 and $344 for the quarter ended December 31, 2013. 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. Interest income on the remaining impaired loans is recognized on an accrual basis.

The recorded investment in troubled debt restructurings by type of concession as of December 31, 2014 and September 30, 2014 is shown in the tables below.



December 31, 2014	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	16,518	$	1,253	$	10,088	$	22,361	$	23,296	$	32,549	$	106,065
Residential Home Today	10,114		62		7,844		14,200		21,244		5,118		58,582
Home equity loans and lines of credit	105		2,466		660		1,671		736		14,338		19,976
Total	$	26,737	$	3,781	$	18,592	$	38,232	$	45,276	$	52,005	$	184,623

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September 30, 2014	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	16,693	$	1,265	$	10,248	$	21,113	$	22,687	$	33,576	$	105,582
Residential Home Today	11,374		78		7,448		15,085		20,823		5,301		60,109
Home equity loans and lines of credit	74		1,833		769		1,213		819		16,029		20,737
Total	$	28,141	$	3,176	$	18,465	$	37,411	$	44,329	$	54,906	$	186,428

Troubled debt restructured loans may be restructured more than once. Among other requirements, a subsequent restructuring may be available for a borrower upon the expiration of temporary restructuring terms if the borrower cannot return to regular loan payments. If the borrower is experiencing an income curtailment that temporarily has reduced his/her capacity to repay, such as loss of employment, reduction of hours, non-paid leave or short term disability, a temporary restructuring is considered. If the borrower lacks the capacity to repay the loan at the current terms due to a permanent condition, a permanent restructuring is considered. In evaluating the need for a subsequent restructuring, the borrower’s ability to repay is generally assessed utilizing a debt to income and cash flow analysis. As the economy slowly improves, the need for multiple restructurings continues to linger. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Association.

For all loans restructured during three months ended December 31, 2014 and December 31, 2013 (set forth in the table below), the pre-restructured outstanding recorded investment was not materially different from the post-restructured outstanding recorded investment.

The following tables set forth the recorded investment in troubled debt restructured loans restructured during the periods presented, according to the types of concessions granted.



	For the Three Months Ended December 31, 2014
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	766	$	—	$	978	$	1,858	$	1,269	$	1,879	$	6,750
Residential Home Today	82		—		1,159		64		1,313		167		2,785
Home equity loans and lines of credit	—		652		—		477