Edgar Filing: TFS Financial CORP

Document

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, 2017



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

For transition period from to

Commission File Number 001-33390

________________________________________

TFS FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

________________________________________



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

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

(216) 441-6000

Registrant’s telephone number, including area code:

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

________________________________________

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

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

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



Large accelerated filer	x		Accelerated filer	¨

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

Emerging Growth Company	o

If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of August 3, 2017, there were 281,445,875 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 80.7% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

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TFS Financial Corporation

INDEX



		Page

	Glossary of Terms	3

PART l – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Statements of Condition
	June 30, 2017 and September 30, 2016	4

	Consolidated Statements of Income
	Three and Nine Months Ended June 30, 2017 and 2016	5

	Consolidated Statements of Comprehensive Income
	Three and Nine Months Ended June 30, 2017 and 2016	6

	Consolidated Statements of Shareholders’ Equity
	Nine Months Ended June 30, 2017 and 2016	7

	Consolidated Statements of Cash Flows
	Nine Months Ended June 30, 2017 and 2016	8

	Notes to Unaudited Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	70

Item 4.	Controls and Procedures	74

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	74

Item 1A.	Risk Factors	74

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

Item 3.	Defaults Upon Senior Securities	75

Item 4.	Mine Safety Disclosures	75

Item 5.	Other Information	75

Item 6.	Exhibits	76

SIGNATURES		77

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GLOSSARY OF TERMS

TFS Financial Corporation provides the following list of acronyms and defined terms as a tool for the reader. The acronyms and defined terms identified below are used throughout the document.



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

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Item 1. Financial Statements

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except share data)



	June 30, 2017			September 30, 2016
ASSETS
Cash and due from banks	$	30,045		$	27,914
Interest-earning cash equivalents	234,854			203,325
Cash and cash equivalents	264,899			231,239
Investment securities available for sale (amortized cost $533,385 and $517,228, respectively)	529,579			517,866
Mortgage loans held for sale, at lower of cost or market (none measured at fair value)	803			4,686
Loans held for investment, net:
Mortgage loans	12,288,086			11,748,099
Other consumer loans	2,957			3,116
Deferred loan expenses, net	28,859			19,384
Allowance for loan losses	(54,930		)	(61,795		)
Loans, net	12,264,972			11,708,804
Mortgage loan servicing rights, net	8,625			8,852
Federal Home Loan Bank stock, at cost	87,110			69,853
Real estate owned	5,524			6,803
Premises, equipment, and software, net	58,350			61,003
Accrued interest receivable	34,607			32,818
Bank owned life insurance contracts	204,294			200,144
Other assets	66,816			63,994
TOTAL ASSETS	$	13,525,579		$	12,906,062
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,175,859		$	8,331,368
Borrowed funds	3,542,772			2,718,795
Borrowers’ advances for insurance and taxes	55,864			92,313
Principal, interest, and related escrow owed on loans serviced	25,469			49,401
Accrued expenses and other liabilities	47,991			53,727
Total liabilities	11,847,955			11,245,604
Commitments and contingent liabilities
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 281,872,724 and 284,219,019 outstanding at June 30, 2017 and September 30, 2016, respectively	3,323			3,323
Paid-in capital	1,721,153			1,716,818
Treasury stock, at cost; 50,446,026 and 48,099,731 shares at June 30, 2017 and September 30, 2016, respectively	(726,396		)	(681,569		)
Unallocated ESOP shares	(54,168		)	(57,418		)
Retained earnings—substantially restricted	745,513			698,930
Accumulated other comprehensive loss	(11,801		)	(19,626		)
Total shareholders’ equity	1,677,624			1,660,458
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	13,525,579		$	12,906,062

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except share and per share data)



	For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	99,699		$	93,752		$	292,755		$	280,663
Investment securities available for sale	2,522			2,374			6,573			7,407
Other interest and dividend earning assets	1,500			867			3,690			2,499
Total interest and dividend income	103,721			96,993			303,018			290,569
INTEREST EXPENSE:
Deposits	21,831			22,543			65,208			67,333
Borrowed funds	11,618			7,061			29,022			20,447
Total interest expense	33,449			29,604			94,230			87,780
NET INTEREST INCOME	70,272			67,389			208,788			202,789
PROVISION (CREDIT) FOR LOAN LOSSES	(4,000		)	(3,000		)	(10,000		)	(5,000		)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	74,272			70,389			218,788			207,789
NON-INTEREST INCOME:
Fees and service charges, net of amortization	1,714			1,729			5,163			5,524
Net gain on the sale of loans	259			1,834			1,472			4,576
Increase in and death benefits from bank owned life insurance contracts	1,703			1,612			4,866			5,796
Other	1,128			933			3,223			3,032
Total non-interest income	4,804			6,108			14,724			18,928
NON-INTEREST EXPENSE:
Salaries and employee benefits	23,735			23,055			71,965			73,057
Marketing services	5,183			4,499			14,509			13,151
Office property, equipment and software	5,985			5,924			17,969			17,626
Federal insurance premium and assessments	2,531			2,393			7,467			8,216
State franchise tax	1,318			1,240			3,989			4,132
Real estate owned expense, net	376			1,826			2,256			5,700
Other operating expenses	5,541			6,039			17,070			17,068
Total non-interest expense	44,669			44,976			135,225			138,950
INCOME BEFORE INCOME TAXES	34,407			31,521			98,287			87,767
INCOME TAX EXPENSE	11,619			10,901			32,428			30,020
NET INCOME	$	22,788		$	20,620		$	65,859		$	57,747
Earnings per share—basic and diluted	$	0.08		$	0.07		$	0.23		$	0.20
Weighted average shares outstanding
Basic	277,056,490			280,815,430			277,590,340			282,326,922
Diluted	278,986,397			283,011,869			279,719,537			284,602,870

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)



	For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net income	$	22,788		$	20,620		$	65,859		$	57,747
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on securities available for sale	2,446			1,025			(2,889		)	317
Net change in cash flow hedges	(3,199		)	(2,672		)	9,678			(4,317		)
Change in pension obligation	345			251			1,036			752
Total other comprehensive income (loss)	(408		)	(1,396		)	7,825			(3,248		)
Total comprehensive income	$	22,380		$	19,224		$	73,684		$	54,499

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, except share and per share data)



	Common stock		Paid-in capital			Treasury stock			Unallocated common stock held by ESOP			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders’ equity
Balance at September 30, 2015	$	3,323	$	1,707,629		$	(548,557	)	$	(61,751	)	$	641,791		$	(13,065	)	$	1,729,370
Net income	—		—			—			—			57,747			—			57,747
Other comprehensive loss, net of tax	—		—			—			—			—			(3,248		)	(3,248		)
ESOP shares allocated or committed to be released	—		2,519			—			3,250			—			—			5,769
Compensation costs for stock-based plans	—		4,710			—			—			—			—			4,710
Excess tax effect from stock-based compensation	—		2,695			—			—			—			—			2,695
Purchase of treasury stock (5,333,000 shares)	—		—			(94,649		)	—			—			—			(94,649		)
Treasury stock allocated to restricted stock plan	—		(3,029		)	(3,556		)	—			—			—			(6,585		)
Dividends paid to common shareholders ($0.30 per common share)	—		—			—			—			(16,811		)	—			(16,811		)
Balance at June 30, 2016	$	3,323	$	1,714,524		$	(646,762	)	$	(58,501	)	$	682,727		$	(16,313	)	$	1,678,998

Balance at September 30, 2016	$	3,323	$	1,716,818		$	(681,569	)	$	(57,418	)	$	698,930		$	(19,626	)	$	1,660,458
Net income	—		—			—			—			65,859			—			65,859
Other comprehensive income, net of tax	—		—			—			—			—			7,825			7,825
ESOP shares allocated or committed to be released	—		2,398			—			3,250			—			—			5,648
Compensation costs for stock-based plans	—		3,004			—			—			(29		)	—			2,975
Purchase of treasury stock (2,561,710 shares)	—		—			(43,349		)	—			—			—			(43,349		)
Treasury stock allocated to restricted stock plan	—		(1,067		)	(1,478		)	—			—			—			(2,545		)
Dividends paid to common shareholders ($0.375 per common share)	—		—			—			—			(19,247		)	—			(19,247		)
Balance at June 30, 2017	$	3,323	$	1,721,153		$	(726,396	)	$	(54,168	)	$	745,513		$	(11,801	)	$	1,677,624

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)



	For the Nine Months Ended
	June 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	65,859		$	57,747
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	8,623			10,479
Depreciation and amortization	16,542			14,008
Deferred income tax (benefit) expense	(117		)	38
Provision for loan losses	(10,000		)	(5,000		)
Net gain on the sale of loans	(1,472		)	(4,576		)
Other net losses	253			1,229
Principal repayments on and proceeds from sales of loans held for sale	23,491			12,164
Loans originated for sale	(19,831		)	(12,118		)
Increase in bank owned life insurance contracts	(4,731		)	(3,243		)
Cash collateral received from derivative counterparties	6,043			—
Net increase in interest receivable and other assets	(701		)	(12,049		)
Net decrease in accrued expenses and other liabilities	(2,605		)	(3,878		)
Other	—			162
Net cash provided by operating activities	81,354			54,963
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated	(2,632,204		)	(2,018,772		)
Principal repayments on loans	1,878,296			1,619,065
Proceeds from principal repayments and maturities of:
Securities available for sale	116,871			110,859
Proceeds from sale of:
Loans	195,756			140,854
Real estate owned	6,657			16,898
Purchases of:
FHLB stock	(17,257		)	(383		)
Securities available for sale	(137,272		)	(59,523		)
Premises and equipment	(1,339		)	(7,479		)
Other	530			583
Net cash used in investing activities	(589,962		)	(197,898		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits	(155,509		)	83,042
Net decrease in borrowers' advances for insurance and taxes	(36,449		)	(38,143		)
Net decrease in principal and interest owed on loans serviced	(23,932		)	(14,908		)
Net increase in short-term borrowed funds	210,244			413,161
Proceeds from long-term borrowed funds	700,000			40,290
Repayment of long-term borrowed funds	(86,267		)	(179,186		)
Purchase of treasury shares	(44,027		)	(94,676		)
Excess tax benefit related to stock-based compensation	—			2,695
Acquisition of treasury shares through net settlement of stock benefit plans compensation	(2,545		)	(6,585		)
Dividends paid to common shareholders	(19,247		)	(16,811		)
Net cash provided by financing activities	542,268			188,879
NET INCREASE IN CASH AND CASH EQUIVALENTS	33,660			45,944
CASH AND CASH EQUIVALENTS—Beginning of period	231,239			155,369
CASH AND CASH EQUIVALENTS—End of period	$	264,899		$	201,313
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	65,168		$	67,173
Cash paid for interest on borrowed funds	24,316			19,392
Cash paid for income taxes	30,955			25,782
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned	5,597			9,722
Transfer of loans from held for investment to held for sale	196,540			138,253
Treasury stock issued for stock benefit plans	1,067			3,029

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. As of June 30, 2017, approximately 81% of the Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC. The thrift subsidiary of TFS Financial Corporation is Third Federal Savings and Loan Association of Cleveland.

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

The unaudited interim consolidated financial statements were prepared without an audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at June 30, 2017, and its results of operations and cash flows for the periods presented. Such adjustments are the only adjustments reflected in the unaudited interim financial statements. In accordance with SEC Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 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, 2017 or for any other period.


2.	EARNINGS PER SHARE

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a dilutive impact. Unvested shares awarded pursuant to the Company's restricted stock plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. At June 30, 2017 and 2016, respectively, the ESOP held 5,416,746 and 5,850,086 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,
	2017					2016
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	22,788				$	20,620
Less: income allocated to restricted stock units	216					184
Basic earnings per share:
Income available to common shareholders	$	22,572	277,056,490	$	0.08	$	20,436	280,815,430	$	0.07
Diluted earnings per share:
Effect of dilutive potential common shares			1,929,907					2,196,439
Income available to common shareholders	$	22,572	278,986,397	$	0.08	$	20,436	283,011,869	$	0.07



	For the Nine Months Ended June 30,
	2017					2016
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	65,859				$	57,747
Less: income allocated to restricted stock units	641					545
Basic earnings per share:
Income available to common shareholders	$	65,218	277,590,340	$	0.23	$	57,202	282,326,922	$	0.20
Diluted earnings per share:
Effect of dilutive potential common shares			2,129,197					2,275,948
Income available to common shareholders	$	65,218	279,719,537	$	0.23	$	57,202	284,602,870	$	0.20

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



	For the Three Months Ended June 30,		For the Nine Months Ended June 30,
	2017	2016	2017	2016
Options to purchase shares	1,105,440	393,500	693,900	393,500
Restricted stock units	16,500	—	16,500	—


3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:



	June 30, 2017
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	524,736	$	113	$	(4,343	)	$	520,506
Fannie Mae certificates	8,649		435		(11		)	9,073
Total	$	533,385	$	548	$	(4,354	)	$	529,579

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	September 30, 2016
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	508,044	$	1,447	$	(1,494	)	$	507,997
Fannie Mae certificates	9,184		685		—			9,869
Total	$	517,228	$	2,132	$	(1,494	)	$	517,866

Gross unrealized losses on available for sale securities and the estimated fair value of the related securities, aggregated by the length of time the securities have been in a continuous loss position, at June 30, 2017 and September 30, 2016, were as follows:



	June 30, 2017
	Less Than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Available for sale—
REMICs	$	335,518	$	2,636	$	133,914	$	1,707	$	469,432	$	4,343
Fannie Mae certificates	4,636		11		—		—		4,636		11
Total	$	340,154	$	2,647	$	133,914	$	1,707	$	474,068	$	4,354



	September 30, 2016
	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	$	210,735	$	797	$	73,361	$	697	$	284,096	$	1,494

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.

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4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:



	June 30, 2017			September 30, 2016
Real estate loans:
Residential Core	$	10,623,746		$	10,069,652
Residential Home Today	112,048			121,938
Home equity loans and lines of credit	1,520,728			1,531,282
Construction	68,721			61,382
Real estate loans	12,325,243			11,784,254
Other consumer loans	2,957			3,116
Add (deduct):
Deferred loan expenses, net	28,859			19,384
Loans in process ("LIP")	(37,157		)	(36,155		)
Allowance for loan losses	(54,930		)	(61,795		)
Loans held for investment, net	$	12,264,972		$	11,708,804

At June 30, 2017 and September 30, 2016, respectively, $803 and $4,686 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, 2017 and September 30, 2016, the percentage of aggregate Residential Core, Home Today and Construction loans held in Ohio were 57% and 60%, respectively, and the percentages held in Florida were 16% as of both dates. As of June 30, 2017 and September 30, 2016, home equity loans and lines of credit were concentrated in Ohio (39% as of both dates), Florida (23% and 24%), and California (14% as of both dates).

Home Today began as 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 Residential Core borrowers. Borrowers with a Home Today loan completed financial management education and counseling and were referred to the Association by a sponsoring organization with which the Association partnered as part of the program. Because the Association applied less stringent underwriting and credit standards to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential real estate mortgage loans in the Residential Core portfolio. Effective March 27, 2009, the Home Today underwriting guidelines were changed to be substantially the same as the Association’s traditional first mortgage product and the program focused on financial education and down payment assistance. The majority of loans in this program were originated prior to that date and loans are no longer originated under the Home Today program. As of June 30, 2017 and September 30, 2016, the principal balance of Home Today loans originated prior to March 27, 2009 was $108,326 and $118,255, respectively. Since loans are no longer originated under the Home Today program, the Home Today portfolio will continue to decline in balance due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of customers and the communities served, during fiscal 2016 the Association began to offer Fannie Mae eligible, Home Ready loans. These loans are originated in accordance with Fannie Mae's underwriting standards. While the Association retains the servicing to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae. The Association does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, a loan-to-value ratio greater than 100%, or pay option adjustable-rate mortgages.

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An age analysis of the recorded investment in loan receivables that are past due at June 30, 2017 and September 30, 2016 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due. Balances are adjusted for deferred loan fees or expenses and any applicable loans-in-process.



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
June 30, 2017
Real estate loans:
Residential Core	$	6,640	$	3,703	$	12,017	$	22,360	$	10,615,953	$	10,638,313
Residential Home Today	3,804		1,421		7,377		12,602		98,140		110,742
Home equity loans and lines of credit	4,177		1,642		5,134		10,953		1,525,843		1,536,796
Construction	—		—		—		—		31,094		31,094
Total real estate loans	14,621		6,766		24,528		45,915		12,271,030		12,316,945
Other consumer loans	—		—		—		—		2,957		2,957
Total	$	14,621	$	6,766	$	24,528	$	45,915	$	12,273,987	$	12,319,902



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2016
Real estate loans:
Residential Core	$	6,653	$	3,157	$	15,593	$	25,403	$	10,054,211	$	10,079,614
Residential Home Today	5,271		2,583		7,356		15,210		105,225		120,435
Home equity loans and lines of credit	4,605		1,811		4,932		11,348		1,531,242		1,542,590
Construction	—		—		—		—		24,844		24,844
Total real estate loans	16,529		7,551		27,881		51,961		11,715,522		11,767,483
Other consumer loans	—		—		—		—		3,116		3,116
Total	$	16,529	$	7,551	$	27,881	$	51,961	$	11,718,638	$	11,770,599

At June 30, 2017 and September 30, 2016, real estate loans include $15,178 and $20,047, respectively, of loans that were in the process of foreclosure.

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans restructured in TDRs that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. Loans where the borrowers' sustained ability to repay is not fully supported at the time of modification are placed in non-accrual status for a minimum of twelve months. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status.

The recorded investment of loans in non-accrual status is summarized in the following table. Balances are adjusted for deferred loan fees or expenses.



	June 30, 2017		September 30, 2016
Real estate loans:
Residential Core	$	44,941	$	51,304
Residential Home Today	18,871		19,451
Home equity loans and lines of credit	17,328		19,206
Total non-accrual loans	$	81,140	$	89,961

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At June 30, 2017 and September 30, 2016, respectively, the recorded investment in non-accrual loans includes $56,612 and $62,081, which are performing according to the terms of their agreement, of which $36,340 and $40,546 are loans in Chapter 7 bankruptcy status primarily where all borrowers have filed, and have not reaffirmed or been dismissed.

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

The recorded investment in loan receivables at June 30, 2017 and September 30, 2016 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans not individually evaluated. Balances of recorded investments are adjusted for deferred loan fees or expenses and any applicable loans-in-process.



	June 30, 2017						September 30, 2016
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	98,368	$	10,539,945	$	10,638,313	$	107,541	$	9,972,073	$	10,079,614
Residential Home Today	48,099		62,643		110,742		51,415		69,020		120,435
Home equity loans and lines of credit	38,885		1,497,911		1,536,796		35,894		1,506,696		1,542,590
Construction	—		31,094		31,094		—		24,844		24,844
Total real estate loans	185,352		12,131,593		12,316,945		194,850		11,572,633		11,767,483
Other consumer loans	—		2,957		2,957		—		3,116		3,116
Total	$	185,352	$	12,134,550	$	12,319,902	$	194,850	$	11,575,749	$	11,770,599

An analysis of the allowance for loan losses at June 30, 2017 and September 30, 2016 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, 2017						September 30, 2016
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	7,719	$	5,524	$	13,243	$	8,927	$	6,141	$	15,068
Residential Home Today	2,338		2,189		4,527		2,979		4,437		7,416
Home equity loans and lines of credit	1,411		35,743		37,154		722		38,582		39,304
Construction	—		6		6		—		7		7
Total	$	11,468	$	43,462	$	54,930	$	12,628	$	49,167	$	61,795

At June 30, 2017 and September 30, 2016, 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.

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Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. At June 30, 2017 and September 30, 2016, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $11,438 and $12,432; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $30 and $196.

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, 2017 and September 30, 2016, respectively, approximately 23% and 27% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co., which was seized by the Arizona Department of Insurance in 2011 and currently pays all claim payments at 71.5%. Appropriate adjustments have been made to the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated collectively. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided by PMIC as of June 30, 2017 and September 30, 2016, respectively, was $68,299 and $91,784, of which $62,956 and $84,007 was current. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of June 30, 2017 and September 30, 2016, respectively, was $31,722 and $40,578 of which $31,500 and $40,190 was current. As of June 30, 2017, 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. Post-origination deterioration in economic and housing market conditions may impact a borrower's ability to afford the higher payments required during the end of draw repayment period that follows the period of interest only payments on home equity lines of credit originated prior to 2012 or the ability to secure alternative financing. Beginning in February 2013, the terms on new home equity lines of credit included monthly principal and interest payments throughout the entire term to minimize the potential payment differential between the 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 85%.

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

For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Association will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered in determining that a loan is impaired may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan.

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The recorded investment and the unpaid principal balance of impaired loans, including those reported as TDRs, as of June 30, 2017 and September 30, 2016 are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees or expenses.



	June 30, 2017						September 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related IVA recorded:
Residential Core	$	48,347	$	66,531	$	—	$	53,560	$	72,693	$	—
Residential Home Today	19,511		41,977		—		20,108		44,914		—
Home equity loans and lines of credit	18,958		27,024		—		20,549		30,216		—
Construction	—		—		—		—		—		—
Total	$	86,816	$	135,532	$	—	$	94,217	$	147,823	$	—
With an IVA recorded:
Residential Core	$	50,021	$	50,615	$	7,719	$	53,981	$	54,717	$	8,927
Residential Home Today	28,588		28,930		2,338		31,307		31,725		2,979
Home equity loans and lines of credit	19,927		19,944		1,411		15,345		15,357		722
Construction	—		—		—		—		—		—
Total	$	98,536	$	99,489	$	11,468	$	100,633	$	101,799	$	12,628
Total impaired loans:
Residential Core	$	98,368	$	117,146	$	7,719	$	107,541	$	127,410	$	8,927
Residential Home Today	48,099		70,907		2,338		51,415		76,639		2,979
Home equity loans and lines of credit	38,885		46,968		1,411		35,894		45,573		722
Construction	—		—		—		—		—		—
Total	$	185,352	$	235,021	$	11,468	$	194,850	$	249,622	$	12,628

At June 30, 2017 and September 30, 2016, respectively, the recorded investment in impaired loans includes $165,511 and $170,602 of loans restructured in TDRs of which $12,621 and $12,368 were 90 days or more past due.

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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,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	49,609	$	383	$	56,115	$	303
Residential Home Today	19,484		133		20,712		71
Home equity loans and lines of credit	19,162		75		20,584		70
Construction	—		—		—		—
Total	$	88,255	$	591	$	97,411	$	444
With an IVA recorded:
Residential Core	$	49,932	$	473	$	55,453	$	544
Residential Home Today	28,923		361		32,933		412
Home equity loans and lines of credit	19,645		124		13,490		93
Construction	—		—		—		—
Total	$	98,500	$	958	$	101,876	$	1,049
Total impaired loans:
Residential Core	$	99,541	$	856	$	111,568	$	847
Residential Home Today	48,407		494		53,645		483
Home equity loans and lines of credit	38,807		199		34,074		163
Construction	—		—		—		—
Total	$	186,755	$	1,549	$	199,287	$	1,493



	For the Nine Months Ended June 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	50,954	$	1,125	$	58,808	$	949
Residential Home Today	19,810		282		21,626		286
Home equity loans and lines of credit	19,754		224		21,634		207
Construction	—		—		—		—
Total	$	90,518	$	1,631	$	102,068	$	1,442
With an IVA recorded:
Residential Core	$	52,001	$	1,451	$	55,980	$	1,702
Residential Home Today	29,948		1,099		33,837		1,267
Home equity loans and lines of credit	17,636		722		12,763		253
Construction	—		—		213		—
Total	$	99,585	$	3,272	$	102,793	$	3,222
Total impaired loans:
Residential Core	$	102,955	$	2,576	$	114,788	$	2,651