TFSL 06-30-2015 MASTER 10Q
Table of Contents


 
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, 2015
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from              to             
Commission File Number 001-33390
__________________________
TFS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
__________________________
United States of America
 
52-2054948
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
7007 Broadway Avenue
Cleveland, Ohio
 
44105
(Address of Principal Executive Offices)
 
(Zip Code)
(216) 441-6000
Registrant’s telephone number, including area code:
Not Applicable
(Former name or former address, if changed since last report)
__________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
 
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
(do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date.
As of August 4, 2015 there were 292,653,308 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 77.6% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.
 

Table of Contents


TFS Financial Corporation
INDEX
 
 
Page
 
 
 
 
 
 
 
PART l – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
June 30, 2015 and September 30, 2014
 
 
 
 
Consolidated Statements of Income
Three and nine months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income
Three and nine months ended June 30, 2015 and 2014
 
 
 
 
Nine months ended June 30, 2015 and 2014
 
 
 
 
Nine months ended June 30, 2015 and 2014
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


2
Table of Contents


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
LIHTC: Low Income Housing Tax Credit
CFPB:  Consumer Financial Protection Bureau
LIP:  Loans-in-Process
CLTV:  Combined Loan-to-Value
LTV:  Loan-to-Value
Company: TFS Financial Corporation and its
MGIC:  Mortgage Guaranty Insurance Corporation
subsidiaries
MOU:  Memorandum of Understanding
DFA: Dodd-Frank Wall Street Reform and Consumer
NOW:  Negotiable Order of Withdrawal
Protection Act of 2010
OCC:  Office of the Comptroller of the Currency
DIF:  Depository Insurance Fund
OCI:  Other Comprehensive Income
EaR:  Earnings at Risk
OTS:  Office of Thrift Supervision
ESOP:  Third Federal Employee (Associate) Stock
PMI:  Private Mortgage Insurance
Ownership Plan
PMIC:  PMI Mortgage Insurance Co.
EVE:  Economic Value of Equity
QTL:  Qualified Thrift Lender
FASB:  Financial Accounting Standards Board
REMICs:  Real Estate Mortgage Investment Conduits
FDIC:  Federal Deposit Insurance Corporation
REIT:  Real Estate Investment Trust
FHFA:  Federal Housing Finance Agency
SEC:  United States Securities and Exchange
FHLB:  Federal Home Loan Bank
Commission
Fannie Mae:  Federal National Mortgage Association
TDR:  Troubled Debt Restructuring
FRB-Cleveland: Federal Reserve Bank of Cleveland
Third Federal Savings, MHC: Third Federal Savings
FRS:  Board of Governors of the Federal Reserve System
and Loan Association of Cleveland, MHC
 
 




3
Table of Contents


Item 1. Financial Statements
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
 
June 30,
2015
 
September 30,
2014
ASSETS
 
 
 
Cash and due from banks
$
26,545

 
$
26,886

Interest-earning cash equivalents
197,658

 
154,517

Cash and cash equivalents
224,203

 
181,403

Investment securities available for sale (amortized cost $567,946 and $570,549, respectively)
569,352

 
568,868

Mortgage loans held for sale, at lower of cost or market ($10,298 and $4,570 measured at fair value, respectively)
10,658

 
4,962

Loans held for investment, net:
 
 
 
Mortgage loans
11,074,210

 
10,708,483

Other consumer loans
3,679

 
4,721

Deferred loan expenses (fees), net
7,144

 
(1,155
)
Allowance for loan losses
(76,904
)
 
(81,362
)
Loans, net
11,008,129

 
10,630,687

Mortgage loan servicing rights, net
10,287

 
11,669

Federal Home Loan Bank stock, at cost
69,470

 
40,411

Real estate owned
19,381

 
21,768

Premises, equipment, and software, net
56,199

 
56,443

Accrued interest receivable
32,035

 
31,952

Bank owned life insurance contracts
194,675

 
190,152

Other assets
65,117

 
64,880

TOTAL ASSETS
$
12,259,506

 
$
11,803,195

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
$
8,462,059

 
$
8,653,878

Borrowed funds
1,899,080

 
1,138,639

Borrowers’ advances for insurance and taxes
44,173

 
76,266

Principal, interest, and related escrow owed on loans serviced
44,940

 
54,670

Accrued expenses and other liabilities
47,979

 
40,285

Total liabilities
10,498,231

 
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; 293,595,601 and 301,654,581 outstanding at June 30, 2015 and September 30, 2014, respectively
3,323

 
3,323

Paid-in capital
1,705,603

 
1,702,441

Treasury stock, at cost; 38,723,149 and 30,664,169 shares at June 30, 2015 and September 30, 2014, respectively
(500,665
)
 
(379,109
)
Unallocated ESOP shares
(62,834
)
 
(66,084
)
Retained earnings—substantially restricted
624,263

 
589,678

Accumulated other comprehensive loss
(8,415
)
 
(10,792
)
Total shareholders’ equity
1,761,275

 
1,839,457

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
12,259,506

 
$
11,803,195

See accompanying notes to unaudited interim consolidated financial statements.

4
Table of Contents


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,
 
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
92,248

 
$
90,884

 
$
276,123

 
$
271,830

Investment securities available for sale
2,218

 
2,325

 
7,321

 
6,730

Other interest and dividend earning assets
1,206

 
547

 
3,611

 
1,560

Total interest and dividend income
95,672

 
93,756

 
287,055

 
280,120

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
23,001

 
23,210

 
70,899

 
68,434

Borrowed funds
5,082

 
2,674

 
14,009

 
6,985

Total interest expense
28,083

 
25,884

 
84,908

 
75,419

NET INTEREST INCOME
67,589

 
67,872

 
202,147

 
204,701

PROVISION FOR LOAN LOSSES
—

 
4,000

 
3,000

 
15,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
67,589

 
63,872

 
199,147

 
189,701

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Fees and service charges, net of amortization
1,961

 
2,356

 
6,098

 
7,038

Net gain on the sale of loans
1,495

 
673

 
3,337

 
1,545

Increase in and death benefits from bank owned life insurance contracts
1,592

 
1,610

 
5,092

 
4,806

Other
1,078

 
1,071

 
3,447

 
2,933

Total non-interest income
6,126

 
5,710

 
17,974

 
16,322

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
23,077

 
21,973

 
70,946

 
67,380

Marketing services
7,200

 
3,492

 
17,385

 
10,105

Office property, equipment and software
5,465

 
5,242

 
16,516

 
15,514

Federal insurance premium and assessments
3,006

 
2,402

 
8,355

 
7,496

State franchise tax
1,449

 
1,498

 
4,400

 
4,916

Real estate owned expense, net
1,653

 
2,015

 
6,988

 
6,968

Other operating expenses
5,969

 
6,227

 
18,031

 
18,260

Total non-interest expense
47,819

 
42,849

 
142,621

 
130,639

INCOME BEFORE INCOME TAXES
25,896

 
26,733

 
74,500

 
75,384

INCOME TAX EXPENSE
8,638

 
9,102

 
24,932

 
25,344

NET INCOME
$
17,258

 
$
17,631

 
$
49,568

 
$
50,040

Earnings per share—basic and diluted
$
0.06

 
$
0.06

 
$
0.17

 
$
0.17

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
288,553,691

 
298,681,954

 
291,251,487

 
299,860,726

Diluted
290,759,754

 
300,533,021

 
293,444,799

 
301,251,074


See accompanying notes to unaudited interim consolidated financial statements.

5
Table of Contents


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,
 
2015
 
2014
 
2015
 
2014
Net income
$
17,258

 
$
17,631

 
$
49,568

 
$
50,040

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in net unrealized (loss) income on securities available for sale
(2,294
)
 
2,195

 
2,007

 
2,021

Change in pension obligation
123

 
48

 
370

 
144

Total other comprehensive (loss) income
(2,171
)
 
2,243

 
2,377

 
2,165

Total comprehensive income
$
15,087

 
$
19,874

 
$
51,945

 
$
52,205

See accompanying notes to unaudited interim consolidated financial statements.


6
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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
 
—

 
—

 
—

 
—

 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2014
 
$
3,323

 
$
1,702,441

 
$
(379,109
)
 
$
(66,084
)
 
$
589,678

 
$
(10,792
)
 
$
1,839,457

Net income
 
—

 
—

 
—

 
—

 
49,568

 
—

 
49,568

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
2,377

 
2,377

ESOP shares allocated or committed to be released
 
—

 
1,532

 
—

 
3,250

 
—

 
—

 
4,782

Compensation costs for stock-based plans
 
—

 
5,656

 
—

 
—

 
—

 
—

 
5,656

Excess tax effect from stock-based compensation
 
—

 
1,239

 
—

 
—

 
—

 
—

 
1,239

Purchase of treasury stock (8,480,500 shares)
 
—

 
—

 
(124,981
)
 
—

 
—

 
—

 
(124,981
)
Treasury stock allocated to restricted stock plan
 
—

 
(5,265
)
 
3,425

 
—

 
(1,399
)
 
—

 
(3,239
)
Dividends paid to common shareholders ($0.21 per common share)
 
—

 
—

 
—

 
—

 
(13,584
)
 
—

 
(13,584
)
Balance at June 30, 2015
 
$
3,323

 
$
1,705,603

 
$
(500,665
)
 
$
(62,834
)
 
$
624,263

 
$
(8,415
)
 
$
1,761,275

See accompanying notes to unaudited interim consolidated financial statements.


7
Table of Contents


TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
 
 
For the Nine Months Ended
 
 
June 30,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
49,568

 
$
50,040

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
ESOP and stock-based compensation expense
 
10,438

 
9,427

Depreciation and amortization
 
12,534

 
9,128

Deferred income tax expense
 
(388
)
 
—

Provision for loan losses
 
3,000

 
15,000

Net gain on the sale of loans
 
(3,337
)
 
(1,545
)
Other net losses
 
1,956

 
1,794

Principal repayments on and proceeds from sales of loans held for sale
 
21,077

 
23,653

Loans originated for sale
 
(20,641
)
 
(22,982
)
Increase in bank owned life insurance contracts
 
(4,825
)
 
(4,817
)
Net increase in interest receivable and other assets
 
(1,490
)
 
(769
)
Net increase in accrued expenses and other liabilities
 
7,971

 
6,215

Other
 
305

 
114

Net cash provided by operating activities
 
76,168

 
85,258

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Loans originated
 
(1,940,576
)
 
(1,773,626
)
Principal repayments on loans
 
1,452,227

 
1,279,312

Proceeds from principal repayments and maturities of:
 
 
 
 
Securities available for sale
 
112,983

 
89,332

Proceeds from sale of:
 
 
 
 
Loans
 
83,029

 
34,631

Real estate owned
 
19,040

 
18,684

Purchases of:
 
 
 
 
FHLB stock
 
(29,059
)
 
(4,791
)
Securities available for sale
 
(114,462
)
 
(135,841
)
Premises and equipment
 
(3,388
)
 
(2,506
)
Other
 
304

 
24

Net cash used in investing activities
 
(419,902
)
 
(494,781
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net (decrease) increase in deposits
 
(191,819
)
 
238,722

Net decrease in borrowers' advances for insurance and taxes
 
(32,093
)
 
(29,107
)
Net decrease in principal and interest owed on loans serviced
 
(9,730
)
 
(34,616
)
Net increase (decrease) in short term borrowed funds
 
372,551

 
(18,572
)
Proceeds from long term borrowed funds
 
400,294

 
340,000

Repayment of long term borrowed funds
 
(12,404
)
 
(49,145
)
Purchase of treasury shares
 
(124,681
)
 
(68,279
)
Excess tax benefit related to stock-based compensation
 
1,239

 
34

Acquisition of treasury shares through net settlement of stock benefit plans compensation
 
(3,239
)
 
—

Dividends paid to common shareholders
 
(13,584
)
 
—

Net cash provided by financing activities
 
386,534

 
379,037

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
42,800

 
(30,486
)
CASH AND CASH EQUIVALENTS—Beginning of period
 
181,403

 
285,996

CASH AND CASH EQUIVALENTS—End of period
 
$
224,203

 
$
255,510

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid for interest on deposits
 
$
70,317

 
$
67,469

Cash paid for interest on borrowed funds
 
13,457

 
6,557

Cash paid for income taxes
 
15,383

 
14,100

SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Transfer of loans to real estate owned
 
18,557

 
18,055

Transfer of loans from held for investment to held for sale
 
87,196

 
35,395

Treasury stock issued for stock benefit plans
 
6,676

 
—

See accompanying notes to unaudited interim consolidated financial statements.

8
Table of Contents


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, 2015, approximately 77% 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, 2015, 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 June 30, 2015 and 2014, respectively, the ESOP held 6,283,426 and 6,716,765 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,
 
 
2015
 
2014
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
17,258

 
 
 
 
 
$
17,631

 
 
 
 
Less: income allocated to restricted stock units
 
145

 
 
 
 
 
84

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
17,113

 
288,553,691

 
$
0.06

 
$
17,547

 
298,681,954

 
$
0.06

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
2,206,063

 
 
 
 
 
1,851,067

 
 
Income available to common shareholders
 
$
17,113

 
290,759,754

 
$
0.06

 
$
17,547

 
300,533,021

 
$
0.06

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
For the Nine Months Ended June 30,
 
 
2015
 
2014
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
49,568

 
 
 
 
 
$
50,040

 
 
 
 
Less: income allocated to restricted stock units
 
424

 
 
 
 
 
240

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
49,144

 
291,251,487

 
$
0.17

 
$
49,800

 
299,860,726

 
$
0.17

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
2,193,312

 
 
 
 
 
1,390,348

 
 
Income available to common shareholders
 
$
49,144

 
293,444,799

 
$
0.17

 
$
49,800

 
301,251,074

 
$
0.17

The following is a summary of outstanding stock options 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,
 
2015
 
2014
 
2015
 
2014
Options to purchase shares
1,359,000

 
784,600

 
1,391,400

 
829,300

3.
INVESTMENT SECURITIES
Investments available for sale are summarized as follows:
 
 
June 30, 2015
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
U.S. government and agency obligations
 
$
2,000

 
$
8

 
$
—

 
$
2,008

REMICs
 
555,856

 
2,449

 
(1,691
)
 
556,614

Fannie Mae certificates
 
10,090

 
715

 
(75
)
 
10,730

Total
 
$
567,946

 
$
3,172

 
$
(1,766
)
 
$
569,352

    

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Table of Contents


 
 
September 30, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
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



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, 2015 and September 30, 2014, were as follows:
 
June 30, 2015
 
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
$
133,939

 
$
666

 
$
87,887

 
$
1,025

 
$
221,826

 
$
1,691

Fannie Mae certificates
4,823

 
75

 
—

 
—

 
4,823

 
75

Total
$
138,762

 
$
741

 
$
87,887

 
$
1,025

 
$
226,649

 
$
1,766

 
 
 
 
 
 
 
 
 
 
 
 
 
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 June 30, 2015, 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 $2,008, 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:
 
 
June 30,
2015
 
September 30,
2014
Real estate loans:
 
 
 
 
Residential Core
 
$
9,271,050

 
$
8,828,839

Residential Home Today
 
140,432

 
154,196

Home equity loans and lines of credit
 
1,641,827

 
1,696,929

Construction
 
51,020

 
57,104

Real estate loans
 
11,104,329

 
10,737,068

Other consumer loans
 
3,679

 
4,721

Less:
 
 
 
 
Deferred loan expenses (fees), net
 
7,144

 
(1,155
)
LIP
 
(30,119
)
 
(28,585
)
Allowance for loan losses
 
(76,904
)
 
(81,362
)
Loans held for investment, net
 
$
11,008,129

 
$
10,630,687

At June 30, 2015 and September 30, 2014, respectively, $10,658 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 June 30, 2015 and September 30, 2014, the percentages of residential real estate loans held in Ohio were 64% and 68%, respectively, and the percentages held in Florida were 17% as of both dates. As of June 30, 2015 and September 30, 2014, home equity loans and lines of credit were concentrated in Ohio (39% and 40% respectively), Florida (27% and 28% respectively), and California (13% at each date). Although somewhat dissipating during the last two years, the lingering effects of the adverse economic conditions and market for real estate in Ohio and Florida that arose in connection with the financial crisis of 2008, continue to unfavorably impact 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 June 30, 2015 and September 30, 2014, the principal balance of Home Today loans originated prior to March 27, 2009 was $137,358 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 June 30, 2015 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
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
$
9,047

 
$
2,829

 
$
26,855

 
$
38,731

 
$
9,232,807

 
$
9,271,538

Residential Home Today
5,199

 
2,283

 
10,425

 
17,907

 
120,644

 
138,551

Home equity loans and lines of credit
4,687

 
2,086

 
7,159

 
13,932

 
1,636,689

 
1,650,621

Construction
—

 
—

 
427

 
427

 
20,217

 
20,644

Total real estate loans
18,933

 
7,198

 
44,866

 
70,997

 
11,010,357

 
11,081,354

Other consumer loans
—

 
—

 
—

 
—

 
3,679

 
3,679

Total
$
18,933

 
$
7,198

 
$
44,866

 
$
70,997

 
$
11,014,036

 
$
11,085,033

 
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.
 
June 30,
2015
 
September 30,
2014
Real estate loans:
 
 
 
Residential Core
$
67,458

 
$
79,388

Residential Home Today
24,393

 
29,960

Home equity loans and lines of credit
23,168

 
26,189

Construction
427

 
—

Total real estate loans
115,446

 
135,537

Other consumer loans
—

 
—

Total non-accrual loans
$
115,446

 
$
135,537

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans restructured in TDRs that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. 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 June 30, 2015 and September 30, 2014, respectively, the recorded investment in non-accrual loans includes $70,580 and $73,946 which are performing according to the terms of their agreement, of which $46,775 and $49,019 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

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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 TDR that has not met minimum payment requirements, a loan with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days, 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 June 30, 2015 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.
 
 
June 30, 2015
 
September 30, 2014
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
124,740

 
$
9,146,798

 
$
9,271,538

 
$
131,719

 
$
8,690,878

 
$
8,822,597

Residential Home Today
 
61,021

 
77,530

 
138,551

 
67,177

 
84,785

 
151,962

Home equity loans and lines of credit
 
33,369

 
1,617,252

 
1,650,621

 
34,490

 
1,669,725

 
1,704,215

Construction
 
427

 
20,217

 
20,644

 
—

 
28,554

 
28,554

Total real estate loans
 
219,557

 
10,861,797

 
11,081,354

 
233,386

 
10,473,942

 
10,707,328

Other consumer loans
 
—

 
3,679

 
3,679

 
—

 
4,721

 
4,721

Total
 
$
219,557

 
$
10,865,476

 
$
11,085,033

 
$
233,386

 
$
10,478,663

 
$
10,712,049

An analysis of the allowance for loan losses at June 30, 2015 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.
 
 
June 30, 2015
 
September 30, 2014
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
10,269

 
$
15,686

 
$
25,955

 
$
8,889

 
$
22,191

 
$
31,080

Residential Home Today
 
4,137

 
6,942

 
11,079

 
6,366

 
10,058

 
16,424

Home equity loans and lines of credit
 
554

 
39,280

 
39,834

 
532

 
33,299

 
33,831

Construction
 
26

 
10

 
36

 
—

 
27

 
27

Total real estate loans
 
14,986

 
61,918

 
76,904

 
15,787

 
65,575

 
81,362

Other consumer loans
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
14,986

 
$
61,918

 
$
76,904

 
$
15,787

 
$
65,575

 
$
81,362

At June 30, 2015 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 TDRs, and loans with a further deterioration in the fair value of collateral not yet identified as uncollectible. All other individually evaluated loans received a charge-off, if applicable.
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, 2015 and September 30, 2014, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $14,953 and $15,787.

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Table of Contents


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 June 30, 2015 and September 30, 2014, respectively, approximately 36% 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 through March 31, 2015 paid all claim payments at 67%. In April 2015, the Association was notified that, in addition to a catch-up adjustment for prior claims, all future claims will be paid at 70%. 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, 2015 and September 30, 2014, respectively, was $145,495 and $186,233 of which $133,245 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 June 30, 2015 and September 30, 2014, respectively, was $61,458 and $74,254 of which $60,700 and $73,616 was current. As of June 30, 2015, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "high credit quality"; however, MGIC continues to make claims payments in accordance with its contractual obligations and the Association has not increased its estimated loss severity factors related to MGIC's claim paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which were assessed as being non-investment grade.
Home equity loans and lines of credit represent a significant portion of the residential real estate portfolio, primarily comprised of home equity lines of credit. 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. 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.

15
Table of Contents


The recorded investment and the unpaid principal balance of impaired loans, including those reported as TDRs, as of June 30, 2015 and September 30, 2014 are summarized as follows. Balances of recorded investments are net of deferred fees.
 
 
June 30, 2015
 
September 30, 2014
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related IVA recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
65,899

 
$
85,370

 
$
—

 
$
72,840

 
$
94,419

 
$
—

Residential Home Today
 
25,032

 
52,967

 
—

 
28,045

 
57,854

 
—

Home equity loans and lines of credit
 
23,256

 
32,616

 
—

 
26,618

 
38,046

 
—

Construction
 
—

 
—

 
—

 
—

 
—

 
—

Other consumer loans
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
114,187

 
$
170,953

 
$
—

 
$
127,503

 
$
190,319

 
$
—

With an IVA recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
58,841

 
$
59,668

 
$
10,269

 
$
58,879

 
$
59,842

 
$
8,889

Residential Home Today
 
35,989

 
36,481

 
4,137

 
39,132

 
39,749

 
6,366

Home equity loans and lines of credit
 
10,113

 
10,125

 
554

 
7,872

 
7,909

 
532

Construction
 
427

 
572

 
26

 
—

 
—

 
—

Other consumer loans
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
105,370

 
$
106,846

 
$
14,986

 
$
105,883

 
$
107,500

 
$
15,787

Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
124,740

 
$
145,038

 
$
10,269

 
$
131,719

 
$
154,261

 
$
8,889

Residential Home Today
 
61,021

 
89,448

 
4,137

 
67,177

 
97,603

 
6,366

Home equity loans and lines of credit
 
33,369

 
42,741

 
554

 
34,490

 
45,955

 
532

Construction
 
427

 
572

 
26

 
—

 
—

 
—

Other consumer loans
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
219,557

 
$
277,799

 
$
14,986

 
$
233,386

 
$
297,819

 
$
15,787

At June 30, 2015 and September 30, 2014, respectively, the recorded investment in impaired loans includes $181,600 and $186,428 of loans restructured in TDRs of which $17,051 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 Association will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered in determining that a loan is impaired may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan.

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

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•
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 TDRs 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 TDRs. 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 TDRs 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 TDR 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 TDRs were reclassified from impaired loans during the three and nine months ended June 30, 2015 and June 30, 2014.

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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 June 30,
 
 
2015
 
2014
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
67,486

 
$
384

 
$
78,386

 
$
271

Residential Home Today
 
25,748

 
70

 
30,082

 
54

Home equity loans and lines of credit
 
23,745

 
66

 
28,214

 
81

Construction
 
—

 
—

 
76

 
—

Other consumer loans
 
—

 
—

 
—

 
—

Total
 
$
116,979

 
$
520

 
$
136,758

 
$
406

With an IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
58,837

 
$
640

 
$
57,180

 
$
689

Residential Home Today
 
36,460

 
465

 
40,827

 
522

Home equity loans and lines of credit
 
9,122

 
71

 
6,968

 
61

Construction
 
214

 
5

 
—

 
—

Other consumer loans
 
—

 
—

 
—

 
—

Total
 
$
104,633

 
$
1,181

 
$
104,975

 
$
1,272

Total impaired loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
126,323

 
$
1,024

 
$
135,566

 
$
960

Residential Home Today
 
62,208

 
535

 
70,909

 
576

Home equity loans and lines of credit
 
32,867

 
137

 
35,182

 
142

Construction
 
214

 
5

 
76

 
—

Other consumer loans
 
—

 
—

 
—