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 December 31, 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 every Interactive Data File required to be submitted 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 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.



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	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 February 5, 2019, there were 280,083,345 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 81.1% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

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TFS Financial Corporation

INDEX



		Page

	Glossary of Terms	3

PART l – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Statements of Condition
	December 31, 2018 and September 30, 2018	4

	Consolidated Statements of Income
	Three Months Ended December 31, 2018 and 2017	5

	Consolidated Statements of Comprehensive Income
	Three Months Ended December 31, 2018 and 2017	6

	Consolidated Statements of Shareholders’ Equity
	Three Months Ended December 31, 2018 and 2017	7

	Consolidated Statements of Cash Flows
	Three Months Ended December 31, 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	62

Item 4.	Controls and Procedures	66

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	66

Item 1A.	Risk Factors	66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67

Item 3.	Defaults Upon Senior Securities	67

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	68

SIGNATURES		69

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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 Corporation
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)



	December 31, 2018			September 30, 2018
ASSETS
Cash and due from banks	$	42,528		$	29,056
Interest-earning cash equivalents	244,091			240,719
Cash and cash equivalents	286,619			269,775
Investment securities available for sale (amortized cost $575,273 and $549,211, respectively)	564,479			531,965
Mortgage loans held for sale, at lower of cost or market (none measured at fair value)	755			659
Loans held for investment, net:
Mortgage loans	12,918,938			12,872,125
Other consumer loans	3,000			3,021
Deferred loan expenses, net	39,526			38,566
Allowance for loan losses	(41,938		)	(42,418		)
Loans, net	12,919,526			12,871,294
Mortgage loan servicing rights, net	8,643			8,840
Federal Home Loan Bank stock, at cost	93,544			93,544
Real estate owned	2,888			2,794
Premises, equipment, and software, net	62,829			63,399
Accrued interest receivable	39,446			38,696
Bank owned life insurance contracts	213,568			212,021
Other assets	46,381			44,344
TOTAL ASSETS	$	14,238,678		$	14,137,331
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,597,179		$	8,491,583
Borrowed funds	3,734,329			3,721,699
Borrowers’ advances for insurance and taxes	96,451			103,005
Principal, interest, and related escrow owed on loans serviced	30,577			31,490
Accrued expenses and other liabilities	36,362			31,150
Total liabilities	12,494,898			12,378,927
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; 280,135,164 and 280,311,070 outstanding at December 31, 2018 and September 30, 2018, respectively	3,323			3,323
Paid-in capital	1,727,909			1,726,992
Treasury stock, at cost; 52,183,586 and 52,007,680 shares at December 31, 2018 and September 30, 2018, respectively	(757,464		)	(754,272		)
Unallocated ESOP shares	(47,667		)	(48,751		)
Retained earnings—substantially restricted	815,918			807,890
Accumulated other comprehensive income	1,761			23,222
Total shareholders’ equity	1,743,780			1,758,404
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	14,238,678		$	14,137,331

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except share and per share data)



	For the Three Months Ended
	December 31,
	2018			2017
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	112,491		$	102,626
Investment securities available for sale	3,124			2,589
Other interest and dividend earning assets	2,673			2,014
Total interest and dividend income	118,288			107,229
INTEREST EXPENSE:
Deposits	32,762			22,994
Borrowed funds	17,714			14,247
Total interest expense	50,476			37,241
NET INTEREST INCOME	67,812			69,988
PROVISION (CREDIT) FOR LOAN LOSSES	(2,000		)	(3,000		)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES	69,812			72,988
NON-INTEREST INCOME:
Fees and service charges, net of amortization	1,776			1,760
Net gain on the sale of loans	111			478
Increase in and death benefits from bank owned life insurance contracts	1,547			1,554
Other	1,242			1,052
Total non-interest income	4,676			4,844
NON-INTEREST EXPENSE:
Salaries and employee benefits	25,364			23,253
Marketing services	4,797			5,038
Office property, equipment and software	6,986			6,651
Federal insurance premium and assessments	2,766			2,718
State franchise tax	1,262			1,126
Other expenses	6,805			6,990
Total non-interest expense	47,980			45,776
INCOME BEFORE INCOME TAXES	26,508			32,056
INCOME TAX EXPENSE	6,175			12,443
NET INCOME	$	20,333		$	19,613
Earnings per share - basic and diluted	$	0.07		$	0.07
Weighted average shares outstanding
Basic	275,376,254			275,816,329
Diluted	277,073,317			277,624,291

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(In thousands)



	For the Three Months Ended
	December 31,
	2018			2017
Net income	$	20,333		$	19,613
Other comprehensive income (loss), net of tax:
Net change in unrealized loss on securities available for sale	5,097			(4,270		)
Net change in cash flow hedges	(26,822		)	12,585
Change in pension obligation	264			(2,817		)
Total other comprehensive income (loss)	(21,461		)	5,498
Total comprehensive income (loss)	$	(1,128	)	$	25,111

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, 2017	$	3,323	$	1,722,672		$	(735,530	)	$	(53,084	)	$	760,070		$	(7,492	)	$	1,689,959
Net income	—		—			—			—			19,613			—			19,613
Other comprehensive income, net of tax	—		—			—			—			42			5,498			5,540
ESOP shares allocated or committed to be released	—		567			—			1,083			—			—			1,650
Compensation costs for stock-based plans	—		878			—			—			—			—			878
Purchase of treasury stock (492,000 shares)	—		—			(7,542		)	—			—			—			(7,542		)
Treasury stock allocated to restricted stock plan	—		(3,050		)	2,038			—			—			—			(1,012		)
Dividends paid to common shareholders ($0.17 per common share)	—		—			—			—			(8,408		)	—			(8,408		)
Balance at December 31, 2017	$	3,323	$	1,721,067		$	(741,034	)	$	(52,001	)	$	771,317		$	(1,994	)	$	1,700,678

Balance at September 30, 2018	$	3,323	$	1,726,992		$	(754,272	)	$	(48,751	)	$	807,890		$	23,222		$	1,758,404
Net income	—		—			—			—			20,333			—			20,333
Other comprehensive income (loss), net of tax	—		—			—			—			—			(21,461		)	(21,461		)
ESOP shares allocated or committed to be released	—		581			—			1,084			—			—			1,665
Compensation costs for stock-based plans	—		1,081			—			—			—			—			1,081
Purchase of treasury stock (242,500 shares)	—		—			(3,776		)	—			—			—			(3,776		)
Treasury stock allocated to restricted stock plan	—		(745		)	584			—			—			—			(161		)
Dividends paid to common shareholders ($0.25 per common share)	—		—			—			—			(12,305		)	—			(12,305		)
Balance at December 31, 2018	$	3,323	$	1,727,909		$	(757,464	)	$	(47,667	)	$	815,918		$	1,761		$	1,743,780

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands



	For the Three Months Ended
	December 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	20,333		$	19,613
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense	2,746			2,528
Depreciation and amortization	5,406			5,394
Deferred income taxes	434			4,785
Provision (credit) for loan losses	(2,000		)	(3,000		)
Net gain on the sale of loans	(111		)	(478		)
Other net losses (gains)	(293		)	69
Principal repayments on and proceeds from sales of loans held for sale	7,068			3,654
Loans originated for sale	(7,287		)	(4,523		)
Increase in bank owned life insurance contracts	(1,551		)	(1,543		)
Cash collateral received from (provided to) derivative counterparties	(35,319		)	16,850
Net decrease in interest receivable and other assets	6,097			4,092
Net increase in accrued expenses and other liabilities	3,582			50,577
Net cash (used in) provided by operating activities	(895		)	98,018
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated	(647,400		)	(780,652		)
Principal repayments on loans	583,980			603,929
Proceeds from principal repayments and maturities of:
Securities available for sale	31,998			35,452
Proceeds from sale of:
Loans	13,393			26,268
Real estate owned	1,423			2,547
Purchases of:
FHLB stock	—			(2,121		)
Securities available for sale	(59,052		)	(42,786		)
Premises and equipment	(917		)	(3,802		)
Other	(310		)	(11		)
Net cash used in investing activities	(76,885		)	(161,176		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	105,596			55,726
Net decrease in borrowers' advances for insurance and taxes	(6,554		)	(5,048		)
Net decrease in principal and interest owed on loans serviced	(913		)	(2,859		)
Net increase in short-term borrowed funds	110,031			165,337
Proceeds from long-term borrowed funds	—			88
Repayment of long-term borrowed funds	(97,401		)	(77,947		)
Purchase of treasury shares	(3,669		)	(7,372		)
Acquisition of treasury shares through net settlement of stock benefit plans compensation	(161		)	(1,012		)
Dividends paid to common shareholders	(12,305		)	(8,408		)
Net cash provided by financing activities	94,624			118,505
NET INCREASE IN CASH AND CASH EQUIVALENTS	16,844			55,347
CASH AND CASH EQUIVALENTS—Beginning of period	269,775			268,218
CASH AND CASH EQUIVALENTS—End of period	$	286,619		$	323,565
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	32,368		$	22,268
Cash paid for interest on borrowed funds	16,450			12,726
Cash paid for income taxes	42			287
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned	1,295			1,293
Transfer of loans from held for investment to held for sale	13,382			26,141
Treasury stock issued for stock benefit plans	746			3,050

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 December 31, 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 December 31, 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.

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, 2018 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, 2019 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 and performance 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 December 31, 2018 and 2017, respectively, the ESOP held 4,766,736 and 5,200,076 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 December 31,
	2018					2017
	Income		Shares	Per share amount		Income		Shares	Per share amount
	(Dollars in thousands, except per share data)
Net income	$	20,333				$	19,613
Less: income allocated to restricted stock units	372					244
Basic earnings per share:
Income available to common shareholders	$	19,961	275,376,254	$	0.07	$	19,369	275,816,329	$	0.07
Diluted earnings per share:
Effect of dilutive potential common shares			1,697,063					1,807,962
Income available to common shareholders	$	19,961	277,073,317	$	0.07	$	19,369	277,624,291	$	0.07

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



	For the Three Months Ended December 31,
	2018	2017
Options to purchase shares	1,885,600	1,104,640
Restricted and performance stock units	131,500	—


3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:



	December 31, 2018
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	563,554	$	500	$	(11,445	)	$	552,609
Fannie Mae certificates	7,736		235		(80		)	7,891
U.S. government and agency obligations	3,983		—		(4		)	3,979
Total	$	575,273	$	735	$	(11,529	)	$	564,479



	September 30, 2018
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
REMICs	$	537,330	$	7	$	(17,338	)	$	519,999
Fannie Mae certificates	7,906		237		(145		)	7,998
U.S. government and agency obligations	3,975		—		(7		)	3,968
Total	$	549,211	$	244	$	(17,490	)	$	531,965

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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 December 31, 2018 and September 30, 2018, were as follows:



	December 31, 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	$	53,829	$	172	$	410,322	$	11,273	$	464,151	$	11,445
Fannie Mae certificates	—		—		4,369		80		4,369		80
U.S. government and agency obligations	3,979		4		—		—		3,979		4
Total	$	57,808	$	176	$	414,691	$	11,353	$	472,499	$	11,529



	September 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	$	113,111	$	1,799	$	400,558	$	15,539	$	513,669	$	17,338
Fannie Mae certificates	—		—		4,337		145		4,337		145
U.S. government and agency obligations	3,968		7		—		—		3,968		7
Total	$	117,079	$	1,806	$	404,895	$	15,684	$	521,974	$	17,490

We believe 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 December 31, 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 $3,983 and $3,979, respectively.

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4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:



	December 31, 2018			September 30, 2018
Real estate loans:
Residential Core	$	10,903,831		$	10,930,811
Residential Home Today	92,570			94,933
Home equity loans and lines of credit	1,898,185			1,818,918
Construction	59,185			64,012
Real estate loans	12,953,771			12,908,674
Other consumer loans	3,000			3,021
Add (deduct):
Deferred loan expenses, net	39,526			38,566
Loans in process ("LIP")	(34,833		)	(36,549		)
Allowance for loan losses	(41,938		)	(42,418		)
Loans held for investment, net	$	12,919,526		$	12,871,294

At December 31, 2018 and September 30, 2018, respectively, $755 and $659 of loans were classified as mortgage loans held for sale.

A large concentration of the Company’s lending is in Ohio and Florida. As of December 31, 2018 and September 30, 2018, the percentage of aggregate Residential Core, Home Today and Construction loans held in Ohio was 56% as of both dates and the percentage held in Florida was 16% as of both dates. As of December 31, 2018 and September 30, 2018, home equity loans and lines of credit were concentrated in Ohio (35% and 36%), Florida (20% as of both dates), and California (15% as of both dates).

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 December 31, 2018 and September 30, 2018, the principal balance of Home Today loans originated prior to March 27, 2009 was $89,417 and $91,805, 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, since fiscal 2016 the Association has offered 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 LTV ratio greater than 100%, or pay-option adjustable-rate mortgages.

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An age analysis of the recorded investment in loan receivables that are past due at December 31, 2018 and September 30, 2018 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, 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
December 31, 2018
Real estate loans:
Residential Core	$	8,701	$	2,124	$	10,814	$	21,639	$	10,898,316	$	10,919,955
Residential Home Today	3,980		1,495		4,234		9,709		82,611		92,320
Home equity loans and lines of credit	3,575		2,001		6,758		12,334		1,909,874		1,922,208
Construction	—		—		—		—		23,981		23,981
Total real estate loans	16,256		5,620		21,806		43,682		12,914,782		12,958,464
Other consumer loans	—		—		—		—		3,000		3,000
Total	$	16,256	$	5,620	$	21,806	$	43,682	$	12,917,782	$	12,961,464



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2018
Real estate loans:
Residential Core	$	7,539	$	2,335	$	10,807	$	20,681	$	10,926,294	$	10,946,975
Residential Home Today	2,787		1,765		3,814		8,366		86,383		94,749
Home equity loans and lines of credit	4,152		2,315		5,933		12,400		1,829,427		1,841,827
Construction	—		—		—		—		27,140		27,140
Total real estate loans	14,478		6,415		20,554		41,447		12,869,244		12,910,691
Other consumer loans	—		—		—		—		3,021		3,021
Total	$	14,478	$	6,415	$	20,554	$	41,447	$	12,872,265	$	12,913,712

At December 31, 2018 and September 30, 2018, real estate loans include $9,565 and $8,501, 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 loan receivables in non-accrual status is summarized in the following table. Balances are adjusted for deferred loan fees and expenses.



	December 31, 2018		September 30, 2018
Real estate loans:
Residential Core	$	41,011	$	41,628
Residential Home Today	14,438		14,641
Home equity loans and lines of credit	21,523		21,483
Total non-accrual loans	$	76,972	$	77,752

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At December 31, 2018 and September 30, 2018, respectively, the recorded investment in non-accrual loans includes $55,166 and $57,197, which are performing according to the terms of their agreement, of which $28,099 and $29,439 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 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, 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 December 31, 2018 and September 30, 2018 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, expenses and any applicable loans-in-process.



	December 31, 2018						September 30, 2018
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	91,392	$	10,828,563	$	10,919,955	$	91,360	$	10,855,615	$	10,946,975
Residential Home Today	40,436		51,884		92,320		41,523		53,226		94,749
Home equity loans and lines of credit	48,864		1,873,344		1,922,208		47,911		1,793,916		1,841,827
Construction	—		23,981		23,981		—		27,140		27,140
Total real estate loans	180,692		12,777,772		12,958,464		180,794		12,729,897		12,910,691
Other consumer loans	—		3,000		3,000		—		3,021		3,021
Total	$	180,692	$	12,780,772	$	12,961,464	$	180,794	$	12,732,918	$	12,913,712

An analysis of the allowance for loan losses at December 31, 2018 and September 30, 2018 is summarized in the following table. The analysis provides details of the allowance for loan losses according to the method of evaluation, distinguishing between allowances for loan losses determined by evaluating individual loans and allowances for loan losses determined by evaluating groups of loans collectively.



	December 31, 2018						September 30, 2018
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential Core	$	6,961	$	12,204	$	19,165	$	6,934	$	11,354	$	18,288
Residential Home Today	2,269		1,479		3,748		2,139		1,065		3,204
Home equity loans and lines of credit	3,301		15,720		19,021		3,014		17,907		20,921
Construction	—		4		4		—		5		5
Total	$	12,531	$	29,407	$	41,938	$	12,087	$	30,331	$	42,418

At December 31, 2018 and September 30, 2018, 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 December 31, 2018 and September 30, 2018, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $12,411 and $12,002; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $120 and $85.

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 recently 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 $5,155,558 and $5,166,282 at December 31, 2018 and September 30, 2018, respectively.

As described earlier in this footnote, Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At December 31, 2018 and September 30, 2018, respectively, approximately 17% and 18% 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 December 31, 2018 and September 30, 2018, respectively, was $36,580 and $39,367, of which $33,095 and $36,075 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 December 31, 2018 and September 30, 2018, respectively, was $19,730 and $20,912 of which $19,564 and $20,792 was current. As of December 31, 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 December 31, 2018 and September 30, 2018 are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees and expenses.



	December 31, 2018						September 30, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related IVA recorded:
Residential Core	$	51,810	$	70,116	$	—	$	53,656	$	69,516	$	—
Residential Home Today	15,517		41,124		—		16,006		35,532		—
Home equity loans and lines of credit	22,829		30,602		—		22,423		28,504		—
Total	$	90,156	$	141,842	$	—	$	92,085	$	133,552	$	—
With an IVA recorded:
Residential Core	$	39,582	$	39,651	$	6,961	$	37,704	$	37,774	$	6,934
Residential Home Today	24,919		24,891		2,269		25,517		25,492		2,139
Home equity loans and lines of credit	26,035		26,034		3,301		25,488		25,519		3,014
Total	$	90,536	$	90,576	$	12,531	$	88,709	$	88,785	$	12,087
Total impaired loans:
Residential Core	$	91,392	$	109,767	$	6,961	$	91,360	$	107,290	$	6,934
Residential Home Today	40,436		66,015		2,269		41,523		61,024		2,139
Home equity loans and lines of credit	48,864		56,636		3,301		47,911		54,023		3,014
Total	$	180,692	$	232,418	$	12,531	$	180,794	$	222,337	$	12,087

At December 31, 2018 and September 30, 2018, respectively, the recorded investment in impaired loans includes $165,850 and $165,391 of loans restructured in TDRs of which $10,713 and $10,468 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 December 31,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related IVA recorded:
Residential Core	$	52,733	$	460	$	47,192	$	386
Residential Home Today	15,762		72		18,110		116
Home equity loans and lines of credit	22,626		104		18,805		74
Total	$	91,121	$	636	$	84,107	$	576
With an IVA recorded:
Residential Core	$	38,643	$	305	$	46,616	$	420
Residential Home Today	25,218		296		27,689		336
Home equity loans and lines of credit	25,762		158		20,683		131
Total	$	89,623	$	759	$	94,988	$	887
Total impaired loans:
Residential Core	$	91,376	$	765	$	93,808	$	806
Residential Home Today	40,980		368		45,799		452
Home equity loans and lines of credit	48,388		262		39,488		205
Total	$	180,744	$	1,395	$	179,095	$	1,463

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Interest on loans in non-accrual status is recognized on a cash basis. The amount of interest income on impaired loans recognized using a cash basis method was $392 for the three months ended December 31, 2018 and $413 for the three months ended December 31, 2017. 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. Interest income on the remaining impaired loans is recognized on an accrual basis.

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 restructured in a TDR with a high debt-to-income ratio at time of modification;


•	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


•	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.

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 months ended December 31, 2018 and December 31, 2017.

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The recorded investment in TDRs by type of concession as of December 31, 2018 and September 30, 2018 is shown in the tables below.



December 31, 2018	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	8,528	$	410	$	11,014	$	19,997	$	23,253	$	21,321	$	84,523
Residential Home Today	3,959		45		4,567		9,463		17,863		3,666		39,563
Home equity loans and lines of credit	143		5,624		1,495		27,721		2,602		4,179		41,764
Total	$	12,630	$	6,079	$	17,076	$	57,181	$	43,718	$	29,166	$	165,850



September 30, 2018	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	9,019	$	418	$	10,203	$	19,625	$	23,116	$	21,832	$	84,213
Residential Home Today	4,051		47		4,671		9,474		18,483		3,683		40,409
Home equity loans and lines of credit	148		6,192		1,950		25,478		2,563		4,438		40,769
Total	$	13,218	$	6,657	$	16,824	$	54,577	$	44,162	$	29,953	$	165,391

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

For all loans restructured during the three months ended December 31, 2018 and December 31, 2017 (set forth in the tables below), the pre-restructured outstanding recorded investment was not materially different from the post-restructured outstanding recorded investment.

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



	For the Three Months Ended December 31, 2018
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	—	$	—	$	1,801	$	965	$	2	$	922	$	3,690
Residential Home Today	—		—		52		220		—		125		397
Home equity loans and lines of credit	—		78		156		3,300		—		200		3,734
Total	$	—	$	78	$	2,009	$	4,485	$	2	$	1,247	$	7,821

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	For the Three Months Ended December 31, 2017
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Restructurings		Bankruptcy		Total
Residential Core	$	164	$	—	$	615	$	556	$	1,196	$	663	$	3,194
Residential Home Today	—		—		159		93		835		241		1,328
Home equity loans and lines of credit