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, 2018



¨	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 grow th 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, 2018, there were 280,372,327 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 81.0% 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, 2018 and September 30, 2017	4

	Consolidated Statements of Income
	Three and Nine Months Ended June 30, 2018 and 2017	5

	Consolidated Statements of Comprehensive Income
	Three and Nine Months Ended June 30, 2018 and 2017	6

	Consolidated Statements of Shareholders’ Equity
	Nine Months Ended June 30, 2018 and 2017	7

	Consolidated Statements of Cash Flows
	Nine Months Ended June 30, 2018 and 2017	8

	Notes to Unaudited Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	67

Item 4.	Controls and Procedures	71

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	71

Item 1A.	Risk Factors	71

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72

Item 3.	Defaults Upon Senior Securities	72

Item 4.	Mine Safety Disclosures	72

Item 5.	Other Information	72

Item 6.	Exhibits	73

SIGNATURES		74

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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.



ACT: Tax Cuts and Jobs Act	FRB-Cleveland: Federal Reserve Bank of Cleveland
AOCI: Accumulated Other Comprehensive Income	Freddie Mac: Federal Home Loan Mortgage Association
ARM: Adjustable Rate Mortgage	FRS: Board of Governors of the Federal Reserve System
ASC: Accounting Standards Codification	GAAP: Generally Accepted Accounting Principles
ASU: Accounting Standards Update	Ginnie Mae: Government National Mortgage Association
Association: Third Federal Savings and Loan	GVA: General Valuation Allowances
Association of Cleveland	HARP: Home Affordable Refinance Program
BOLI: Bank Owned Life Insurance	HPI: Home Price Index
CDs: Certificates of Deposit	IRR: Interest Rate Risk
CFPB: Consumer Financial Protection Bureau	IRS: Internal Revenue Service
CLTV: Combined Loan-to-Value	IVA: Individual Valuation Allowance
Company: TFS Financial Corporation and its	LIHTC: Low Income Housing Tax Credit
subsidiaries	LIP: Loans-in-Process
DFA: Dodd-Frank Wall Street Reform and Consumer	LTV: Loan-to-Value
Protection Act	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	PMI: Private Mortgage Insurance
EVE: Economic Value of Equity	PMIC: PMI Mortgage Insurance Co.
Fannie Mae: Federal National Mortgage Association	QTL: Qualified Thrift Lender
FASB: Financial Accounting Standards Board	REMICs: Real Estate Mortgage Investment Conduits
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, 2018			September 30, 2017
ASSETS
Cash and due from banks	$	31,105		$	35,243
Interest-earning cash equivalents	227,442			232,975
Cash and cash equivalents	258,547			268,218
Investment securities available for sale (amortized cost $556,829 and $541,964, respectively)	541,958			537,479
Mortgage loans held for sale, at lower of cost or market ($1,719 and $0 measured at fair value, respectively)	1,717			351
Loans held for investment, net:
Mortgage loans	12,673,233			12,434,339
Other consumer loans	3,040			3,050
Deferred loan expenses, net	38,080			30,865
Allowance for loan losses	(42,971		)	(48,948		)
Loans, net	12,671,382			12,419,306
Mortgage loan servicing rights, net	9,111			8,375
Federal Home Loan Bank stock, at cost	93,544			89,990
Real estate owned	3,191			5,521
Premises, equipment, and software, net	63,282			60,875
Accrued interest receivable	36,883			35,479
Bank owned life insurance contracts	210,473			205,883
Other assets	46,505			61,086
TOTAL ASSETS	$	13,936,593		$	13,692,563
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,408,288		$	8,151,625
Borrowed funds	3,664,761			3,671,377
Borrowers’ advances for insurance and taxes	60,496			100,446
Principal, interest, and related escrow owed on loans serviced	22,688			35,766
Accrued expenses and other liabilities	35,066			43,390
Total liabilities	12,191,299			12,002,604
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; 280,450,062 and 281,291,750 outstanding at June 30, 2018 and September 30, 2017, respectively	3,323			3,323
Paid-in capital	1,725,049			1,722,672
Treasury stock, at cost; 51,868,688 and 51,027,000 shares at June 30, 2018 and September 30, 2017, respectively	(751,173		)	(735,530		)
Unallocated ESOP shares	(49,834		)	(53,084		)
Retained earnings—substantially restricted	798,626			760,070
Accumulated other comprehensive income (loss)	19,303			(7,492		)
Total shareholders’ equity	1,745,294			1,689,959
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	13,936,593		$	13,692,563

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,
	2018			2017			2018			2017
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	105,956		$	99,699		$	313,821		$	292,755
Investment securities available for sale	2,891			2,522			8,239			6,573
Other interest and dividend earning assets	2,271			1,500			6,467			3,690
Total interest and dividend income	111,118			103,721			328,527			303,018
INTEREST EXPENSE:
Deposits	26,310			21,831			72,934			65,208
Borrowed funds	14,535			11,618			43,634			29,022
Total interest expense	40,845			33,449			116,568			94,230
NET INTEREST INCOME	70,273			70,272			211,959			208,788
PROVISION (CREDIT) FOR LOAN LOSSES	(2,000		)	(4,000		)	(9,000		)	(10,000		)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES	72,273			74,272			220,959			218,788
NON-INTEREST INCOME:
Fees and service charges, net of amortization	2,018			1,714			5,577			5,163
Net gain on the sale of loans	2,529			259			3,072			1,472
Increase in and death benefits from bank owned life insurance contracts	1,538			1,703			4,601			4,866
Other	1,106			1,128			3,401			3,223
Total non-interest income	7,191			4,804			16,651			14,724
NON-INTEREST EXPENSE:
Salaries and employee benefits	27,199			23,470			76,509			71,170
Marketing services	5,284			5,183			16,338			14,509
Office property, equipment and software	7,135			5,985			20,514			17,969
Federal insurance premium and assessments	2,800			2,531			8,526			7,467
State franchise tax	1,176			1,318			3,586			3,989
Real estate owned expense, net	524			376			1,643			2,256
Other expenses	7,311			5,806			19,777			17,865
Total non-interest expense	51,429			44,669			146,893			135,225
INCOME BEFORE INCOME TAXES	28,035			34,407			90,717			98,287
INCOME TAX EXPENSE	7,160			11,619			26,915			32,428
NET INCOME	$	20,875		$	22,788		$	63,802		$	65,859
Earnings per share—basic and diluted	$	0.07		$	0.08		$	0.23		$	0.23
Weighted average shares outstanding
Basic	275,468,237			277,056,490			275,647,589			277,590,340
Diluted	277,200,873			278,986,397			277,346,709			279,719,537

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,
	2018			2017			2018			2017
Net income	$	20,875		$	22,788		$	63,802		$	65,859
Other comprehensive income (loss), net of tax:
Net change in unrealized loss on securities available for sale	(1,301		)	2,446			(7,560		)	(2,889		)
Net change in cash flow hedges	5,675			(3,199		)	33,487			9,678
Change in pension obligation	316			345			910			1,036
Total other comprehensive income (loss)	4,690			(408		)	26,837			7,825
Total comprehensive income	$	25,565		$	22,380		$	90,639		$	73,684

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, 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

Balance at September 30, 2017	$	3,323	$	1,722,672		$	(735,530	)	$	(53,084	)	$	760,070		$	(7,492	)	$	1,689,959
Net income	—		—			—			—			63,802			—			63,802
Other comprehensive income, net of tax	—		—			—			—			42			26,795			26,837
ESOP shares allocated or committed to be released	—		1,697			—			3,250			—			—			4,947
Compensation costs for stock-based plans	—		3,629			—			—			—			—			3,629
Purchase of treasury stock (1,113,911 shares)	—		—			(16,994		)	—			—			—			(16,994		)
Treasury stock allocated to restricted stock plan	—		(2,949		)	1,351			—			—			—			(1,598		)
Dividends paid to common shareholders ($0.51 per common share)	—		—			—			—			(25,288		)	—			(25,288		)
Balance at June 30, 2018	$	3,323	$	1,725,049		$	(751,173	)	$	(49,834	)	$	798,626		$	19,303		$	1,745,294

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,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	63,802		$	65,859
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	8,576			8,623
Depreciation and amortization	19,517			16,542
Deferred income taxes	4,565			(117		)
Provision (credit) for loan losses	(9,000		)	(10,000		)
Net gain on the sale of loans	(3,072		)	(1,472		)
Other net losses	411			253
Principal repayments on and proceeds from sales of loans held for sale	15,697			23,491
Loans originated for sale	(17,032		)	(19,831		)
Increase in bank owned life insurance contracts	(4,590		)	(4,731		)
Cash collateral received from derivative counterparties	48,265			6,043
Net increase in interest receivable and other assets	(4,774		)	(701		)
Net decrease in accrued expenses and other liabilities	(6,029		)	(2,605		)
Net cash provided by operating activities	116,336			81,354
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated	(2,473,615		)	(2,632,204		)
Principal repayments on loans	1,861,161			1,878,296
Proceeds from principal repayments and maturities of:
Securities available for sale	102,843			116,871
Proceeds from sale of:
Loans	356,350			195,756
Real estate owned	5,500			6,657
Purchases of:
FHLB stock	(3,554		)	(17,257		)
Securities available for sale	(121,113		)	(137,272		)
Premises and equipment	(6,716		)	(1,339		)
Other	—			530
Net cash used in investing activities	(279,144		)	(589,962		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	256,663			(155,509		)
Net decrease in borrowers' advances for insurance and taxes	(39,950		)	(36,449		)
Net decrease in principal and interest owed on loans serviced	(13,078		)	(23,932		)
Net increase in short-term borrowed funds	173,557			910,244
Proceeds from long-term borrowed funds	15,088			—
Repayment of long-term borrowed funds	(195,261		)	(86,267		)
Purchase of treasury shares	(16,996		)	(44,027		)
Acquisition of treasury shares through net settlement of stock benefit plans compensation	(1,598		)	(2,545		)
Dividends paid to common shareholders	(25,288		)	(19,247		)
Net cash provided by financing activities	153,137			542,268
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(9,671		)	33,660
CASH AND CASH EQUIVALENTS—Beginning of period	268,218			231,239
CASH AND CASH EQUIVALENTS—End of period	$	258,547		$	264,899
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	71,507		$	65,168
Cash paid for interest on borrowed funds	42,850			24,316
Cash paid for income taxes	25,092			30,955
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned	3,414			5,597
Transfer of loans from held for sale to held for investment	149			—
Transfer of loans from held for investment to held for sale	356,562			196,540
Treasury stock issued for stock benefit plans	2,949			1,067

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, 2018, 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, 2018, 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. Reclassifications in the amounts of $265 and $795 have been made between the salaries and employee benefits and other non-interest expense line items within the Consolidated Statements of Income for the three and nine months ended June 30, 2017 to conform to the required presentation of net benefit cost prescribed by ASU 2017-07 Compensation - Retirement Benefits (Topic 715) that was adopted by the Company as of October 1, 2017. A reclassification in the amount of $700,000 has been made between the proceeds from long-term borrowed funds and net increase in short-term borrowed funds line items within the Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 to conform to the classification presented for the nine months ended June 30, 2018.

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, 2017 contains audited 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, 2018 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, 2018 and 2017, respectively, the ESOP held 4,983,406 and 5,416,746 shares, respectively, 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,
	2018					2017
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	20,875				$	22,788
Less: income allocated to restricted stock units	287					216
Basic earnings per share:
Income available to common shareholders	$	20,588	275,468,237	$	0.07	$	22,572	277,056,490	$	0.08
Diluted earnings per share:
Effect of dilutive potential common shares			1,732,636					1,929,907
Income available to common shareholders	$	20,588	277,200,873	$	0.07	$	22,572	278,986,397	$	0.08



	For the Nine Months Ended June 30,
	2018					2017
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	63,802				$	65,859
Less: income allocated to restricted stock units	829					641
Basic earnings per share:
Income available to common shareholders	$	62,973	275,647,589	$	0.23	$	65,218	277,590,340	$	0.23
Diluted earnings per share:
Effect of dilutive potential common shares			1,699,120					2,129,197
Income available to common shareholders	$	62,973	277,346,709	$	0.23	$	65,218	279,719,537	$	0.23

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,
	2018	2017	2018	2017
Options to purchase shares	2,111,540	1,105,440	2,148,840	693,900
Restricted stock units	—	16,500	11,001	16,500


3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:



	June 30, 2018
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	544,790	$	12	$	(14,991	)	$	529,811
Fannie Mae certificates	8,071		277		(168		)	8,180
U.S. government obligations	3,968		—		(1		)	3,967
Total	$	556,829	$	289	$	(15,160	)	$	541,958

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	September 30, 2017
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	533,427	$	52	$	(4,943	)	$	528,536
Fannie Mae certificates	8,537		419		(13		)	8,943
Total	$	541,964	$	471	$	(4,956	)	$	537,479

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, 2018 and September 30, 2017, were as follows:



	June 30, 2018
	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	$	223,447	$	4,810	$	301,059	$	10,181	$	524,506	$	14,991
Fannie Mae certificates	4,347		168		—		—		4,347		168
U.S. government obligations	3,967		1		—		—		3,967		1
Total	$	231,761	$	4,979	$	301,059	$	10,181	$	532,820	$	15,160



	September 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	$	246,113	$	1,508	$	260,837	$	3,435	$	506,950	$	4,943
Fannie Mae certificates	4,601		13		—		—		4,601		13
Total	$	250,714	$	1,521	$	260,837	$	3,435	$	511,551	$	4,956

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 Company has neither the intent to sell the securities nor is it more likely than not the Company 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, 2018, the amortized cost and fair value of U.S. government obligations, categorized as due in more than one year but less than five years, are $3,968 and $3,967, respectively. At September 30, 2017, the Company did not have U.S. government obligations.

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4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:



	June 30, 2018			September 30, 2017
Real estate loans:
Residential Core	$	10,805,753		$	10,746,204
Residential Home Today	98,252			108,964
Home equity loans and lines of credit	1,747,863			1,552,315
Construction	60,715			60,956
Real estate loans	12,712,583			12,468,439
Other consumer loans	3,040			3,050
Add (deduct):
Deferred loan expenses, net	38,080			30,865
Loans in process ("LIP")	(39,350		)	(34,100		)
Allowance for loan losses	(42,971		)	(48,948		)
Loans held for investment, net	$	12,671,382		$	12,419,306

At June 30, 2018 and September 30, 2017, respectively, $1,717 and $351 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, 2018 and September 30, 2017, the percentage of aggregate Residential Core, Home Today and Construction loans held in Ohio were 56% and 57%, respectively, and the percentage held in Florida was 16% as of both dates. As of June 30, 2018 and September 30, 2017, home equity loans and lines of credit were concentrated in Ohio (36% and 39%), Florida (21% and 22% ), and California (14% and 13%).

Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers and most loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after September 30, 2016. 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 contained 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. As of June 30, 2018 and September 30, 2017, the principal balance of Home Today loans originated prior to March 27, 2009 was $94,824 and $105,485, 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, 2018 and September 30, 2017 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, 2018
Real estate loans:
Residential Core	$	6,509	$	4,106	$	9,923	$	20,538	$	10,801,943	$	10,822,481
Residential Home Today	2,495		945		4,937		8,377		89,752		98,129
Home equity loans and lines of credit	4,361		1,535		5,913		11,809		1,757,581		1,769,390
Construction	—		—		—		—		21,313		21,313
Total real estate loans	13,365		6,586		20,773		40,724		12,670,589		12,711,313
Other consumer loans	—		—		—		—		3,040		3,040
Total	$	13,365	$	6,586	$	20,773	$	40,724	$	12,673,629	$	12,714,353



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2017
Real estate loans:
Residential Core	$	6,077	$	2,593	$	11,975	$	20,645	$	10,740,398	$	10,761,043
Residential Home Today	4,067		1,496		6,851		12,414		95,269		107,683
Home equity loans and lines of credit	4,418		1,952		5,408		11,778		1,558,273		1,570,051
Construction	—		—		—		—		26,427		26,427
Total real estate loans	14,562		6,041		24,234		44,837		12,420,367		12,465,204
Other consumer loans	—		—		—		—		3,050		3,050
Total	$	14,562	$	6,041	$	24,234	$	44,837	$	12,423,417	$	12,468,254

At June 30, 2018 and September 30, 2017, real estate loans include $10,438 and $14,736, 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 with a partial charge-off are placed in non-accrual and will remain in non-accrual status until, at a minimum, the impairment is recovered. 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 restructured in TDRs with a high debt-to-income ratio 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, 2018		September 30, 2017
Real estate loans:
Residential Core	$	39,618	$	43,797
Residential Home Today	14,799		18,109
Home equity loans and lines of credit	16,917		17,185
Total non-accrual loans	$	71,334	$	79,091

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At June 30, 2018 and September 30, 2017, respectively, the recorded investment in non-accrual loans includes $50,562 and $54,858, which are performing according to the terms of their agreement, of which $30,751 and $34,142 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 first applied to the oldest scheduled, unpaid payment. 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, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. 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, 2018 and September 30, 2017 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, 2018						September 30, 2017
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	92,724	$	10,729,757	$	10,822,481	$	94,747	$	10,666,296	$	10,761,043
Residential Home Today	43,139		54,990		98,129		46,641		61,042		107,683
Home equity loans and lines of credit	45,800		1,723,590		1,769,390		39,172		1,530,879		1,570,051
Construction	—		21,313		21,313		—		26,427		26,427
Total real estate loans	181,663		12,529,650		12,711,313		180,560		12,284,644		12,465,204
Other consumer loans	—		3,040		3,040		—		3,050		3,050
Total	$	181,663	$	12,532,690	$	12,714,353	$	180,560	$	12,287,694	$	12,468,254

An analysis of the allowance for loan losses at June 30, 2018 and September 30, 2017 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, 2018						September 30, 2017
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	7,262	$	11,221	$	18,483	$	7,336	$	6,850	$	14,186
Residential Home Today	2,216		1,156		3,372		2,250		2,258		4,508
Home equity loans and lines of credit	2,551		18,561		21,112		1,475		28,774		30,249
Construction	—		4		4		—		5		5
Total	$	12,029	$	30,942	$	42,971	$	11,061	$	37,887	$	48,948

At June 30, 2018 and September 30, 2017, 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, 2018 and September 30, 2017, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $11,943 and $11,061; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $86 and $0.

Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have historically experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable-rate mortgages). The portfolio contains adjustable-rate mortgage loans whereby the interest rate is locked initially for mainly three or five years then resets annually, subject to various re-lock options available to the borrower. The adjustable-rate feature may impact a borrower's ability to afford the higher payments upon rate reset during periods of rising interest rates. The principal amount of loans in the portfolio that are adjustable-rate mortgage loans was $5,065,976 and $4,816,567 at June 30, 2018 and September 30, 2017, respectively.

As described earlier in this footnote, Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At June 30, 2018 and September 30, 2017, respectively, approximately 19% and 22% 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 72.5%. 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, 2018 and September 30, 2017, respectively, was $43,997 and $61,470, of which $41,083 and $56,511 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, 2018 and September 30, 2017, respectively, was $22,677 and $28,946 of which $22,558 and $28,870 was current. As of June 30, 2018, 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, which are comprised primarily of home equity lines of credit, represent a significant portion of the residential real estate portfolio. 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 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, 2018 and September 30, 2017 are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees or expenses.



	June 30, 2018						September 30, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related IVA recorded:
Residential Core	$	53,188	$	69,202	$	—	$	47,507	$	65,132	$	—
Residential Home Today	16,386		35,626		—		18,780		41,064		—
Home equity loans and lines of credit	22,382		28,769		—		18,793		25,991		—
Total	$	91,956	$	133,597	$	—	$	85,080	$	132,187	$	—
With an IVA recorded:
Residential Core	$	39,536	$	39,585	$	7,262	$	47,240	$	47,747	$	7,336
Residential Home Today	26,753		26,722		2,216		27,861		28,210		2,250
Home equity loans and lines of credit	23,418		23,445		2,551		20,379		20,389		1,475
Total	$	89,707	$	89,752	$	12,029	$	95,480	$	96,346	$	11,061
Total impaired loans:
Residential Core	$	92,724	$	108,787	$	7,262	$	94,747	$	112,879	$	7,336
Residential Home Today	43,139		62,348		2,216		46,641		69,274		2,250
Home equity loans and lines of credit	45,800		52,214		2,551		39,172		46,380		1,475
Total	$	181,663	$	223,349	$	12,029	$	180,560	$	228,533	$	11,061

At June 30, 2018 and September 30, 2017, respectively, the recorded investment in impaired loans includes $164,145 and $162,020 of loans restructured in TDRs of which $10,942 and $11,884 were 90 days or more past due.

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,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	53,559	$	609	$	49,609	$	383
Residential Home Today	16,927		154		19,484		133
Home equity loans and lines of credit	21,853		117		19,162		75
Total	$	92,339	$	880	$	88,255	$	591
With an IVA recorded:
Residential Core	$	38,952	$	313	$	49,932	$	473
Residential Home Today	26,830		324		28,923		361
Home equity loans and lines of credit	22,849		150		19,645		124
Total	$	88,631	$	787	$	98,500	$	958
Total impaired loans:
Residential Core	$	92,511	$	922	$	99,541	$	856
Residential Home Today	43,757		478		48,407		494
Home equity loans and lines of credit	44,702		267		38,807		199
Total	$	180,970	$	1,667	$	186,755	$	1,549

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	For the Nine Months Ended June 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	50,348	$	2,369	$	50,954	$	1,125
Residential Home Today	17,583		1,126		19,810		282
Home equity loans and lines of credit	20,588		290		19,754		224
Total	$	88,519	$	3,785	$	90,518	$	1,631
With an IVA recorded:
Residential Core	$	43,388	$	1,268	$	52,001	$	1,451
Residential Home Today	27,307		1,280		29,948		1,099
Home equity loans and lines of credit	21,899		425		17,636		722
Total	$	92,594	$	2,973	$	99,585	$	3,272
Total impaired loans:
Residential Core	$	93,736	$	3,637	$	102,955	$	2,576
Residential Home Today	44,890		2,406		49,758		1,381
Home equity loans and lines of credit	42,487		715		37,390		946
Total	$	181,113	$	6,758	$	190,103