XNAS:TFSL TFS Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from              to             
Commission File Number 001-33390
__________________________
TFS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
__________________________
United States of America
 
52-2054948
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
7007 Broadway Avenue
Cleveland, Ohio
 
44105
(Address of Principal Executive Offices)
 
(Zip Code)
(216) 441-6000
Registrant’s telephone number, including area code:
Not Applicable
(Former name or former address, if changed since last report)
__________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
 
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
(do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date.
As of August 3, 2012 there were 308,945,893 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 73.5% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.
 
TFS Financial Corporation
INDEX
 
 
Page
PART l – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 





Item 1. Financial Statements
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
 
June 30,
2012
 
September 30,
2011
ASSETS
 
 
 
Cash and due from banks
$
42,597

 
$
35,532

Other interest-earning cash equivalents
275,755

 
259,314

Cash and cash equivalents
318,352

 
294,846

Investment securities:
 
 
 
Available for sale (amortized cost $381,372 and $15,760, respectively)
384,479

 
15,899

Held to maturity (fair value $0 and $398,725, respectively)
0

 
392,527

 
384,479

 
408,426

Mortgage loans held for sale, at lower of cost or market
233,154

 
0

Loans held for investment, net:
 
 
 
Mortgage loans
10,240,417

 
9,920,907

Other loans
4,908

 
6,868

Deferred loan fees, net
(17,634
)
 
(19,854
)
Allowance for loan losses
(107,374
)
 
(156,978
)
Loans, net
10,120,317

 
9,750,943

Mortgage loan servicing assets, net
21,805

 
28,919

Federal Home Loan Bank stock, at cost
35,620

 
35,620

Real estate owned
19,692

 
19,155

Premises, equipment, and software, net
60,553

 
59,487

Accrued interest receivable
35,152

 
35,854

Bank owned life insurance contracts
175,620

 
170,845

Other assets
90,253

 
88,853

TOTAL ASSETS
$
11,494,997

 
$
10,892,948

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
$
8,957,149

 
$
8,715,910

Borrowed funds
569,733

 
139,856

Borrowers’ advances for insurance and taxes
32,814

 
58,235

Principal, interest, and related escrow owed on loans serviced
94,539

 
151,859

Accrued expenses and other liabilities
35,322

 
53,164

Total liabilities
9,689,557

 
9,119,024

Commitments and contingent liabilities


 


Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding
0

 
0

Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares shares issued; 308,945,893 and 308,915,893 outstanding at June 30, 2012 and September 30, 2011, respectively
3,323

 
3,323

Paid-in capital
1,691,144

 
1,686,216

Treasury stock, at cost; 23,372,857 and 23,402,857 shares at June 30, 2012 and September 30, 2011, respectively
(281,726
)
 
(282,090
)
Unallocated ESOP shares
(75,834
)
 
(79,084
)
Retained earnings—substantially restricted
472,185

 
461,836

Accumulated other comprehensive loss
(3,652
)
 
(16,277
)
Total shareholders’ equity
1,805,440

 
1,773,924

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
11,494,997

 
$
10,892,948

See accompanying notes to unaudited consolidated financial statements.
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,
 
2012
 
2011
 
2012
 
2011
INTEREST INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
102,143

 
$
103,845

 
$
308,046

 
$
309,439

Investment securities available for sale
543

 
43

 
613

 
198

Investment securities held to maturity
973

 
2,871

 
4,245

 
9,001

Other interest and dividend earning assets
566

 
527

 
1,674

 
1,822

Total interest and dividend income
104,225

 
107,286

 
314,578

 
320,460

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
37,704

 
43,723

 
116,800

 
135,387

Borrowed funds
657

 
518

 
1,874

 
1,441

Total interest expense
38,361

 
44,241

 
118,674

 
136,828

NET INTEREST INCOME
65,864

 
63,045

 
195,904

 
183,632

PROVISION FOR LOAN LOSSES
31,000

 
22,500

 
73,000

 
79,500

NET INTEREST INCOME AFTER PROVISION FOR
 
 
 
 
 
 
 
LOAN LOSSES
34,864

 
40,545

 
122,904

 
104,132

NON-INTEREST INCOME
 
 
 
 
 
 
 
Fees and service charges, net of amortization
2,960

 
4,507

 
9,057

 
11,829

Increase in bank owned life insurance contracts
1,607

 
1,621

 
4,829

 
4,840

(Loss) income on private equity investments
(35
)
 
763

 
60

 
977

Other
1,779

 
1,868

 
4,485

 
6,199

Total non-interest income
6,311

 
8,759

 
18,431

 
23,845

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
18,375

 
19,694

 
59,809

 
56,994

Marketing services
2,376

 
2,102

 
7,130

 
6,306

Office property, equipment and software
5,392

 
4,986

 
15,463

 
14,983

Federal insurance premium and assessments
3,390

 
2,759

 
10,779

 
14,591

State franchise tax
1,672

 
1,459

 
4,377

 
3,826

Real estate owned expense, net
2,424

 
1,994

 
6,431

 
5,906

Appraisal and other loan review expense
322

 
1,005

 
2,475

 
4,907

Other operating expenses
6,791

 
5,553

 
20,077

 
18,958

Total non-interest expense
40,742

 
39,552

 
126,541

 
126,471

INCOME BEFORE INCOME TAXES
433

 
9,752

 
14,794

 
1,506

INCOME TAX (BENEFIT) EXPENSE
(459
)
 
3,767

 
4,421

 
645

NET INCOME
$
892

 
$
5,985

 
$
10,373

 
$
861

Earnings per share—basic and diluted
$

 
$
0.02

 
$
0.03

 
$

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
301,274,602

 
300,347,978

 
301,157,535

 
300,234,492

Diluted
301,936,577

 
301,147,673

 
301,681,201

 
300,918,065

See accompanying notes to unaudited interim consolidated financial statements.
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
Nine Months Ended June 30, 2012 and 2011
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other
comprehensive
income (loss)
 
 
 
 
Common
stock
 
Paid-in
capital
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Retained
earnings
 
Unrealized
gains/(losses)
on securities
 
Pension
obligation
 
Total
shareholders’
equity
Balance at September 30, 2010
 
$
3,323

 
1,686,062

 
(288,366
)
 
(82,699
)
 
452,633

 
90

 
(18,146
)
 
$
1,752,897

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
861

 

 

 
861

Change in unrealized losses on securities available for sale
 

 

 

 

 

 
(31
)
 

 
(31
)
Change in pension obligation
 

 

 

 

 

 

 
5,052

 
5,052

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,882

ESOP shares allocated or committed to be released
 

 
(281
)
 

 
2,531

 

 

 

 
2,250

Compensation costs for stock-based plans
 

 
5,397

 
(3
)
 

 

 

 

 
5,394

Excess tax effect from stock-based compensation
 

 
(36
)
 

 

 

 

 

 
(36
)
Treasury stock allocated to restricted stock plan
 

 
(581
)
 
572

 

 
9

 

 

 

Balance at June 30, 2011
 
$
3,323

 
1,690,561

 
(287,797
)
 
(80,168
)
 
453,503

 
59

 
(13,094
)
 
$
1,766,387

Balance at September 30, 2011
 
$
3,323

 
1,686,216

 
(282,090
)
 
(79,084
)
 
461,836

 
90

 
(16,367
)
 
$
1,773,924

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
10,373

 

 

 
10,373

Change in unrealized gains on securities available for sale
 

 

 

 

 

 
1,931

 

 
1,931

Change in pension obligation
 

 

 

 

 

 

 
10,694

 
10,694

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
22,998

ESOP shares allocated or committed to be released
 

 
(235
)
 

 
3,250

 

 

 

 
3,015

Compensation costs for stock-based plans
 

 
5,503

 

 

 

 

 

 
5,503

Treasury stock allocated to restricted stock plan
 

 
(340
)
 
364

 

 
(24
)
 

 

 

Balance at June 30, 2012
 
$
3,323

 
1,691,144

 
(281,726
)
 
(75,834
)
 
472,185

 
2,021

 
(5,673
)
 
$
1,805,440

See accompanying notes to unaudited interim consolidated financial statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
 
 
For the Nine Months Ended
 
 
June 30,
 
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
10,373

 
$
861

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
ESOP and stock-based compensation expense
 
8,518

 
7,644

Depreciation and amortization
 
14,397

 
15,380

Deferred income tax (benefit) expense
 
(500
)
 
400

Provision for loan losses
 
73,000

 
79,500

Net gain on the sale of loans
 

 
(490
)
Other net losses
 
1,720

 
3,283

Principal repayments on loans held for sale
 
12,766

 
0

Increase in bank owned life insurance contracts
 
(4,822
)
 
(4,846
)
Net (increase) decrease in interest receivable and other assets
 
(9,317
)
 
5,992

Net (decrease) increase in accrued expenses and other liabilities
 
(1,388
)
 
48,450

Other
 
557

 
662

Net cash provided by operating activities
 
105,304

 
156,836

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Loans originated
 
(2,299,916
)
 
(1,993,393
)
Principal repayments on loans
 
1,591,983

 
1,371,213

Proceeds from principal repayments and maturities of:
 
 
 
 
Securities available for sale
 
19,495

 
10,102

Securities held to maturity
 
139,533

 
214,681

Proceeds from sale of:
 
 
 
 
Loans
 

 
33,722

Real estate owned
 
16,950

 
11,201

Purchases of:
 
 
 
 
Securities available for sale
 
(41,919
)
 
(2,288
)
Securities held to maturity
 
(93,509
)
 
(12,424
)
Premises and equipment
 
(2,755
)
 
(2,279
)
Other
 
(35
)
 
(853
)
Net cash used in investing activities
 
(670,173
)
 
(370,318
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net increase (decrease) in deposits
 
241,239

 
(150,045
)
Net decrease in borrowers’ advances for insurance and taxes
 
(25,421
)
 
(22,584
)
Net decrease in principal and interest owed on loans serviced
 
(57,320
)
 
(194,995
)
Net increase in short term borrowed funds
 
427,877

 
100,016

Proceeds from long term borrowed funds
 
5,000

 
29,955

Repayment of long term borrowed funds
 
(3,000
)
 
(15,000
)
Excess tax benefit related to stock-based compensation
 

 
(36
)
Net cash provided by (used in) financing activities
 
588,375

 
(252,689
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
23,506

 
(466,171
)
CASH AND CASH EQUIVALENTS—Beginning of period
 
294,846

 
743,740

CASH AND CASH EQUIVALENTS—End of period
 
$
318,352

 
$
277,569

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid for interest on deposits
 
$
117,280

 
$
136,097

Cash paid for interest on borrowed funds
 
1,874

 
1,418

Cash paid for income taxes
 
15,694

 
4,500

SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Transfer of loans to real estate owned
 
17,191

 
17,700

Transfer of loans from held for sale to held for investment
 

 
25,027

Transfer of loans from held for investment to held for sale
 
245,920

 

Transfer of investments from held to maturity to available for sale
 
343,687

 

See accompanying notes to unaudited interim consolidated financial statements.

2


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 (the “Holding Company”), a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Holding Company and its subsidiaries (collectively, “TFS Financial” or the “Company”) is retail consumer banking, including mortgage lending, deposit gathering, and other insignificant financial services. On June 30, 2012, approximately 74% of the Holding Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC (“Third Federal Savings, MHC”). The thrift subsidiary of TFS Financial is Third Federal Savings and Loan Association of Cleveland (the “Association”).
The accounting and reporting policies followed by the Company conform in all material respects to accounting principles generally accepted in the United States of America (“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 mortgage loan servicing rights, the valuation of deferred tax assets, and the determination of pension obligations and stock-based compensation are particularly subject to change.
The unaudited interim consolidated financial statements were prepared without an audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of TFS Financial at June 30, 2012, and its results of operations and cash flows for the periods presented. In accordance with Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Holding Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 contains consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2012.
2.
EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a dilutive impact. At June 30, 2012 and 2011, respectively, the ESOP held 7,583,445 and 8,016,786 shares that were neither allocated to participants nor committed to be released to participants.















The following is a summary of our earnings per share calculations.
 
 
For the Three Months Ended June 30,
 
 
2012
 
2011
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
892

 
 
 
 
 
$
5,985

 
 
 
 
Less: income allocated to restricted stock units
 
5

 
 
 
 
 
33

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
887

 
301,274,602

 
$
0.00

 
$
5,952

 
300,347,978

 
$
0.02

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
661,975

 
 
 
 
 
799,695

 
 
Income available to common shareholders
 
$
887

 
301,936,577

 
$
0.00

 
$
5,952

 
301,147,673

 
$
0.02

 
 
 
For the Nine Months Ended June 30,
 
 
2012
 
2011
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
10,373

 
 
 
 
 
$
861

 
 
 
 
Less: income allocated to restricted stock units
 
55

 
 
 
 
 
5

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
10,318

 
301,157,535

 
$
0.03

 
$
856

 
300,234,492

 
$
0.00

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
523,666

 
 
 
 
 
683,573

 
 
Income available to common shareholders
 
$
10,318

 
301,681,201

 
$
0.03

 
$
856

 
300,918,065

 
$
0.00

Outstanding stock options and restricted stock units are excluded from the computation of diluted earnings per share when their inclusion would be anti-dilutive. For the three and nine months ended June 30, 2012, options to purchase 6,217,925 shares and 30,000 and 76,500 restricted stock units, respectively, were outstanding but not included in the computation of diluted earnings per share because the effect would be antidilutive. For the three and nine months ended June 30, 2011, options to purchase 5,005,925 shares were outstanding but not included in the computation of diluted earnings per share because the effect would be antidilutive.

3.
INVESTMENT SECURITIES
Investments available for sale are summarized as follows:
    
 
 
June 30, 2012
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
U.S. government and agency obligations
 
$
2,000

 
$
50

 
$

 
$
2,050

Freddie Mac certificates
 
1,100

 
47

 

 
1,147

Ginnie Mae certificates
 
16,904

 
466

 

 
17,370

Real estate mortgage investment conduits (REMICs)
 
346,170

 
2,254

 
(451
)
 
347,973

Fannie Mae certificates
 
7,267

 
741

 

 
8,008

Money market accounts
 
7,931

 

 

 
7,931

Total
 
$
381,372

 
$
3,558

 
$
(451
)
 
$
384,479

    
 
 
September 30, 2011
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
U.S. government and agency obligations
 
$
2,000

 
$
46

 
$

 
$
2,046

REMICs
 
5,244

 
93

 

 
5,337

Money market accounts
 
8,516

 

 

 
8,516

Total
 
$
15,760

 
$
139

 
$

 
$
15,899


    

During the quarter ended June 30, 2012, all of the Company's investment securities previously classified as held to maturity, $343,687, were transferred to the available for sale portfolio to ensure that the securities would be eligible for inclusion in the computation of regulatory liquidity. At the time of transfer, a net unrealized gain of $2,286 was recorded in accumulated other comprehensive income. At June 30, 2012, all investment securities held by the Company are classified as available for sale.
Investment securities held to maturity are summarized as follows:
 
 
September 30, 2011
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
Freddie Mac certificates
 
$
2,724

 
$
118

 
$

 
$
2,842

Ginnie Mae certificates
 
19,532

 
501

 

 
20,033

REMICs
 
362,489

 
4,837

 
(58
)
 
367,268

Fannie Mae certificates
 
7,782

 
800

 

 
8,582

Total
 
$
392,527

 
$
6,256

 
$
(58
)
 
$
398,725





Gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time the individual securities have been in a continuous loss position, at June 30, 2012 and September 30, 2011, were as follows:
 
June 30, 2012
 
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
$
84,153

 
$
439

 
$
6,204

 
$
12

 
$
90,357

 
$
451

Total
$
84,153

 
$
439

 
$
6,204

 
$
12

 
$
90,357

 
$
451

 
September 30, 2011
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Held to maturity—
 
 
 
 
 
 
 
 
 
 
 
  REMICs
$
5,961

 
$
29

 
$
11,353

 
$
29

 
$
17,314

 
$
58

Total
$
5,961

 
$
29

 
$
11,353

 
$
29

 
$
17,314

 
$
58

 
 
 
 
 
 
 
 
 
 
 
 

4.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans held for investment consist of the following:
 
 
June 30,
2012
 
September 30,
2011
Real estate loans:
 
 
 
 
Residential non-Home Today
 
$
7,747,541

 
$
7,120,789

Residential Home Today
 
221,423

 
264,019

Home equity loans and lines of credit
 
2,239,014

 
2,491,198

Construction
 
66,262

 
82,048

Real estate loans
 
10,274,240

 
9,958,054

Consumer and other loans
 
4,908

 
6,868

Less:
 
 
 
 
Deferred loan fees—net
 
(17,634
)
 
(19,854
)
Loans-in-process (“LIP”)
 
(33,823
)
 
(37,147
)
Allowance for loan losses
 
(107,374
)
 
(156,978
)
Loans held for investment, net
 
$
10,120,317

 
$
9,750,943

At June 30, 2012, $233,154 of long-term, fixed-rate loans were classified as mortgage loans held for sale.
In an October 2011 directive, the Office of the Comptroller of the Currency required all specific valuation allowances (“SVA”) on collateral-dependent loans (SVAs established when the recorded investment in an impaired loan exceeded the
measured value of the collateral) maintained by savings institutions to be charged off by March 31, 2012. As permitted, the Company elected to early-adopt this methodology effective for the quarter ended December 31, 2011. As a result, reported loan charge-offs for the nine months ended June 30, 2012 were impacted by the charge-off of specific valuation allowances, which had a balance of $55,507 at September 30, 2011. This one-time charge-off did not impact the provision for loan losses for the quarter ended December 31, 2011 or the nine months ended June 30, 2012; however, reported loan charge-offs during the December 2011 quarter increased and the balances of loans, the allowance for loan losses, non-accrual status loans and loan delinquencies as of December 31, 2011, all decreased accordingly.
A large concentration of the Company’s lending is in Ohio and Florida. As of June 30, 2012 and September 30, 2011, the percentages of residential real estate loans held in Ohio were 78% and 81%, and the percentages held in Florida were 17%

3


and 17%, respectively. As of June 30, 2012 and September 30, 2011, home equity loans and lines of credit were concentrated in the states of Ohio (39% and 39%), Florida (29% and 29%) and California (12% and 12%), respectively. The economic conditions and market for real estate in those states, to a greater extent Florida, have impacted the ability of borrowers in those areas to repay their loans.
Home Today is an affordable housing program targeted to benefit low- and moderate-income home buyers. Through this program, prior to March 27, 2009, the Association provided 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 for loans originated prior to March 27, 2009 might be described as sub-prime, Home Today loans generally contain the same features as loans offered to our non-Home Today borrowers. Borrowers in the Home Today program must complete financial management education and counseling and must be referred to the Association by a sponsoring organization with which the Association has partnered as part of the program. Borrowers must also meet a minimum credit score threshold. Because prior to March 27, 2009 the Association applied less stringent underwriting and credit standards to these loans, loans originated under the Home Today program prior to that date have greater credit risk than its traditional residential real estate mortgage loans. Effective March 27, 2009, the Home Today underwriting guidelines were changed to be substantially the same as the Association’s traditional first mortgage product. As of June 30, 2012 and September 30, 2011, the principal balance of Home Today loans originated prior to March 27, 2009 was $217,330 and $261,817, respectively. The Association does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, a loan-to-value ratio greater than 100%, or pay option adjustable-rate mortgages.
The recorded investment of loan receivables in non-accrual status is summarized in the following table. Balances are net of deferred fees.
 
June 30,
2012
 
September 30,
2011
Real estate loans:
 
 
 
Residential non-Home Today
$
88,091

 
$
125,014

Residential Home Today
40,276

 
69,602

Home equity loans and lines of credit
25,255

 
36,872

Construction
381

 
3,770

Total real estate loans
154,003

 
235,258

Consumer and other loans

 

Total non-accrual loans
$
154,003

 
$
235,258

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans modified in troubled debt restructurings that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months. Home equity loans and lines of credit where the customer has a delinquent first mortgage greater than 90 days past due are also placed in non-accrual status. At June 30, 2012, the recorded investment in non-accrual status loans includes $8,868 of performing second lien loans subordinate to first mortgages delinquent greater than 90 days. Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid principal and interest payment first. A non-accrual loan, other than a troubled debt restructuring, a loan with a partial charge-off, or equity loan or line of credit with a delinquent first mortgage greater than 90 days, is returned to accrual status when contractual payments are less than 90 days past due. The number of days past due is determined by the number of days the oldest contractual principal and interest payment remains unpaid. Total performing non-accrual loans at June 30, 2012 and September 30, 2011 includes $12,135 and $16,465, respectively, in troubled debt restructurings which are current according to the terms of their agreement but included with non-accrual loans for a minimum period of six months from the restructuring date due to their non-accrual status prior to restructuring or because they have been partially charged-off.
Age analysis of the recorded investment in loan receivables that are past due at June 30, 2012 and September 30, 2011 is summarized in the following tables. When a loan is more than 30 days past due on its scheduled principal and interest payments, the loan is considered 30 days or more past due. Balances are net of deferred fees and any applicable loans-in-process.

4


 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
13,909

 
$
7,521

 
$
80,698

 
$
102,128

 
$
7,621,891

 
$
7,724,019

Residential Home Today
9,761

 
4,080

 
31,121

 
44,962

 
172,913

 
217,875

Home equity loans and lines of credit
7,686

 
5,132

 
16,238

 
29,056

 
2,219,925

 
2,248,981

Construction

 
20

 
381

 
401

 
31,507

 
31,908

Total real estate loans
31,356

 
16,753

 
128,438

 
176,547

 
10,046,236

 
10,222,783

Consumer and other loans

 

 

 

 
4,908

 
4,908

Total
$
31,356

 
$
16,753

 
$
128,438

 
$
176,547

 
$
10,051,144

 
$
10,227,691

 
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
19,509

 
$
9,818

 
$
118,517

 
$
147,844

 
$
6,942,424

 
$
7,090,268

Residential Home Today
12,399

 
7,131

 
59,985

 
79,515

 
183,372

 
262,887

Home equity loans and lines of credit
11,299

 
6,126

 
36,521

 
53,946

 
2,449,707

 
2,503,653

Construction
72

 

 
3,770

 
3,842

 
40,403

 
44,245

Total real estate loans
43,279

 
23,075

 
218,793

 
285,147

 
9,615,906

 
9,901,053

Consumer and other loans

 

 

 

 
6,868

 
6,868

Total
$
43,279

 
$
23,075

 
$
218,793

 
$
285,147

 
$
9,622,774

 
$
9,907,921

Activity in the allowance for loan losses is summarized as follows:
 
For the Three Months Ended June 30, 2012
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential non-Home Today
$
30,302

 
$
12,897

 
$
(9,401
)
 
$
265

 
$
34,063

Residential Home Today
20,118

 
7,678

 
(5,188
)
 
10

 
22,618

Home equity loans and lines of credit
49,331

 
11,148

 
(11,194
)
 
662

 
49,947

Construction
1,545

 
(723
)
 
(76
)
 

 
746

Total real estate loans
101,296

 
31,000

 
(25,859
)
 
937

 
107,374

Consumer and other loans

 

 

 

 

Total
$
101,296

 
$
31,000

 
$
(25,859
)
 
$
937

 
$
107,374


 
 
For the Three Months Ended June 30, 2011
 
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
49,419

 
$
5,312

 
$
(5,067
)
 
$
131

 
$
49,795

Residential Home Today
 
24,685

 
4,810

 
(2,239
)
 
25

 
27,281

Home equity loans and lines of credit
 
72,510

 
11,830

 
(12,970
)
 
484

 
71,854

Construction
 
4,132

 
548

 
(308
)
 
2

 
4,374

Total real estate loans
 
150,746

 
22,500

 
(20,584
)
 
642

 
153,304

Consumer and other loans
 
1

 

 

 

 
1

Total
 
$
150,747

 
$
22,500

 
$
(20,584
)
 
$
642

 
$
153,305

 

5


 
 
For the Nine Months Ended June 30, 2012
 
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
49,484

 
$
28,537

 
$
(44,565
)
 
$
607

 
$
34,063

Residential Home Today
 
31,025

 
26,395

 
(34,896
)
 
94

 
22,618

Home equity loans and lines of credit
 
74,071

 
18,455

 
(44,767
)
 
2,188

 
49,947

Construction
 
2,398

 
(387
)
 
(1,268
)
 
3

 
746

Total real estate loans
 
156,978

 
73,000

 
(125,496
)
 
2,892

 
107,374

Consumer and other loans
 

 

 

 

 

Total
 
$
156,978

 
$
73,000

 
$
(125,496
)
 
$
2,892

 
$
107,374

 
 
 
For the Nine Months Ended June 30, 2011
 
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
41,246

 
$
21,281

 
$
(13,027
)
 
$
295

 
$
49,795

Residential Home Today
 
13,331

 
19,451

 
(5,586
)
 
85

 
27,281

Home equity loans and lines of credit
 
73,780

 
38,520

 
(41,743
)
 
1,297

 
71,854

Construction
 
4,882

 
248

 
(791
)
 
35

 
4,374

Total real estate loans
 
133,239

 
79,500

 
(61,147
)
 
1,712

 
153,304

Consumer and other loans
 
1

 

 

 

 
1

Total
 
$
133,240

 
$
79,500

 
$
(61,147
)
 
$
1,712

 
$
153,305

The recorded investment in loan receivables at June 30, 2012 and September 30, 2011 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans not individually evaluated. Balances of recorded investments are net of deferred fees and any applicable loans-in-process. 
 
 
June 30, 2012
 
September 30, 2011
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
138,445

 
$
7,585,574

 
$
7,724,019

 
$
159,924

 
$
6,930,344

 
$
7,090,268

Residential Home Today
 
100,693

 
117,182

 
217,875

 
134,381

 
128,506

 
262,887

Home equity loans and lines of credit
 
23,295

 
2,225,686

 
2,248,981

 
39,738

 
2,463,915

 
2,503,653

Construction
 
1,613

 
30,295

 
31,908

 
5,729

 
38,516

 
44,245

Total real estate loans
 
264,046

 
9,958,737

 
10,222,783

 
339,772

 
9,561,281

 
9,901,053

Consumer and other loans
 

 
4,908

 
4,908

 

 
6,868

 
6,868

Total
 
$
264,046

 
$
9,963,645

 
$
10,227,691

 
$
339,772

 
$
9,568,149

 
$
9,907,921

    








6



An analysis of the allowance for loan losses at June 30, 2012 and September 30, 2011 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 not individually evaluated.
 
 
June 30, 2012
 
September 30, 2011
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
5,420

 
$
28,643

 
$
34,063

 
$
25,395

 
$
24,089

 
$
49,484

Residential Home Today
 
8,383

 
14,235

 
22,618

 
21,938

 
9,087

 
31,025

Home equity loans and lines of credit
 
2,773

 
47,174

 
49,947

 
14,324

 
59,747

 
74,071

Construction
 
46

 
700

 
746

 
1,255

 
1,143

 
2,398

Total real estate loans
 
16,622

 
90,752

 
107,374

 
62,912

 
94,066

 
156,978

Consumer and other loans
 

 

 

 

 

 

Total
 
$
16,622

 
$
90,752

 
$
107,374

 
$
62,912

 
$
94,066

 
$
156,978

At June 30, 2012, individually evaluated loans that required an allowance were comprised only of loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings, performing second liens subordinate to first mortgages delinquent greater than 90 days 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. At September 30, 2011, individually evaluated loans were comprised of loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings, and impaired loans for which the recorded investment in the impaired loan exceeded the measured value of the collateral, previously referred to as an SVA. Effective for the quarter ended December 31, 2011, and in accordance with the previously described regulatory directive, SVAs were charged-off against the recorded loan balance.
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, 2012 and September 30, 2011, respectively, individually allocated, collateral-based reserves on impaired loans were $0 and $55,507; allowances on other individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing troubled debt restructurings were $14,170 and $7,010; allowances on performing second liens subordinate to first mortgages delinquent greater than 90 days were $2,018 and $0; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $434 and $395. Prior to the quarter ended December 31, 2011, specific valuation allowances were assessed on impaired loans as described throughout this footnote.
Residential non-Home Today 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 experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable rate mortgages).
As described earlier in this footnote, Home Today loans, particularly those originated prior to March 27, 2009, have greater credit risk than traditional residential real estate mortgage loans. At June 30, 2012, approximately 55% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co. (“PMIC”), which the Arizona Department of Insurance seized in 2011 and indicated that all claims payments would be reduced by 50%. Appropriate adjustments have been made to all of the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were increased for loans evaluated collectively. The amount of loans in our owned portfolio covered by mortgage insurance provided by PMIC as of June 30, 2012 was $319 million of which $287 million was current. The amount of loans in our owned portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation ("MGIC") as of June 30, 2012 was $124 million of which $122 million was current. As of June 30, 2012, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "investment grade"; 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 we assessed as being non-investment grade.

7


Home equity lines of credit represent a significant portion of the residential real estate portfolio. The state of the economy and low housing prices continue to have an adverse impact on this portfolio since the home equity lines generally are in a second lien position. Effective June 28, 2010, due to the deterioration in overall housing conditions including concerns for loans and lines in a second lien position, home equity lines of credit and home equity loans were no longer offered by the Association. Beginning March 20, 2012, the Association offers new home equity lines of credit to qualifying existing home equity customers, subject to certain property and credit performance conditions.
Construction loans generally have greater credit risk than traditional residential real estate mortgage loans. The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make a loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Construction loans also expose the Association to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. Effective August 30, 2011, the Association made the strategic decision to exit the commercial construction loan business and ceased accepting new builder relationships. Existing builder commitments to provide additional financing will be honored for a period of not longer than one year, giving our customers the ability to secure new borrowing relationships.
Reflective of the much publicized foreclosure and mortgage servicing problems that have confronted the industry, the Company has generally experienced longer foreclosure timelines than those experienced in the past, particularly in Florida. The longer foreclosure timelines in Florida generally have a greater impact on the Association’s first position liens as opposed to subordinate liens primarily because the significant property value decline in Florida since 2008, when coupled with the subordinate lien position of home equity lending products, generally results in a high percentage of full charge-offs on the date of initial evaluation. Once a home equity loan or line of credit has been fully charged off, foreclosure timing is no longer relevant. Longer foreclosure timelines generally result in greater loss experience rates on first position liens where full charge-offs are not as prevalent, particularly to the extent that property values continue to decline during the foreclosure process. These expected higher loss experience rates are factored into the determination of collateral fair value and are considered in making charge-off decisions.

8


The recorded investment and the unpaid principal balance of impaired loans, including those whose terms have been modified in troubled debt restructurings, as of June 30, 2012 and September 30, 2011 are summarized as follows. Balances of recorded investments are net of deferred fees.
 
 
June 30, 2012
 
September 30, 2011
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential non-Home Today
 
$
77,263

 
$
103,346

 
$

 
$
32,713

 
$
32,854

 
$

Residential Home Today
 
36,563

 
64,259

 

 
8,614

 
8,651

 

Home equity loans and lines of credit
 
17,941

 
25,984

 

 
12,121

 
12,061

 

Construction
 
1,201

 
1,574

 

 
798