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TFS Financial CORP - Quarter Report: 2015 June (Form 10-Q)

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

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


Table of Contents


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


2

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GLOSSARY OF TERMS
TFS Financial Corporation provides the following list of acronyms as a tool for the reader. The acronyms identified below are used throughout the document.
AOCI:  Accumulated Other Comprehensive Income
GAAP:  Generally Accepted Accounting Principles
ARM: Adjustable Rate Mortgage
GVA:  General Valuation Allowances
ASC: Accounting Standards Codification
HARP:  Home Affordable Refinance Program
ASU: Accounting Standards Update
HPI:  Home Price Index
Association: Third Federal Savings and Loan
IRR:  Interest Rate Risk
Association of Cleveland
IRS:  Internal Revenue Service
BAAS:  OCC Bank Accounting Advisory Series
IVA:  Individual Valuation Allowance
CDs:  Certificates of Deposit
LIHTC: Low Income Housing Tax Credit
CFPB:  Consumer Financial Protection Bureau
LIP:  Loans-in-Process
CLTV:  Combined Loan-to-Value
LTV:  Loan-to-Value
Company: TFS Financial Corporation and its
MGIC:  Mortgage Guaranty Insurance Corporation
subsidiaries
MOU:  Memorandum of Understanding
DFA: Dodd-Frank Wall Street Reform and Consumer
NOW:  Negotiable Order of Withdrawal
Protection Act of 2010
OCC:  Office of the Comptroller of the Currency
DIF:  Depository Insurance Fund
OCI:  Other Comprehensive Income
EaR:  Earnings at Risk
OTS:  Office of Thrift Supervision
ESOP:  Third Federal Employee (Associate) Stock
PMI:  Private Mortgage Insurance
Ownership Plan
PMIC:  PMI Mortgage Insurance Co.
EVE:  Economic Value of Equity
QTL:  Qualified Thrift Lender
FASB:  Financial Accounting Standards Board
REMICs:  Real Estate Mortgage Investment Conduits
FDIC:  Federal Deposit Insurance Corporation
REIT:  Real Estate Investment Trust
FHFA:  Federal Housing Finance Agency
SEC:  United States Securities and Exchange
FHLB:  Federal Home Loan Bank
Commission
Fannie Mae:  Federal National Mortgage Association
TDR:  Troubled Debt Restructuring
FRB-Cleveland: Federal Reserve Bank of Cleveland
Third Federal Savings, MHC: Third Federal Savings
FRS:  Board of Governors of the Federal Reserve System
and Loan Association of Cleveland, MHC
 
 




3

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

 
$
26,886

Interest-earning cash equivalents
197,658

 
154,517

Cash and cash equivalents
224,203

 
181,403

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

 
568,868

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

 
4,962

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

 
10,708,483

Other consumer loans
3,679

 
4,721

Deferred loan expenses (fees), net
7,144

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

 
10,630,687

Mortgage loan servicing rights, net
10,287

 
11,669

Federal Home Loan Bank stock, at cost
69,470

 
40,411

Real estate owned
19,381

 
21,768

Premises, equipment, and software, net
56,199

 
56,443

Accrued interest receivable
32,035

 
31,952

Bank owned life insurance contracts
194,675

 
190,152

Other assets
65,117

 
64,880

TOTAL ASSETS
$
12,259,506

 
$
11,803,195

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

 
$
8,653,878

Borrowed funds
1,899,080

 
1,138,639

Borrowers’ advances for insurance and taxes
44,173

 
76,266

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

 
54,670

Accrued expenses and other liabilities
47,979

 
40,285

Total liabilities
10,498,231

 
9,963,738

Commitments and contingent liabilities


 


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

 

Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 293,595,601 and 301,654,581 outstanding at June 30, 2015 and September 30, 2014, respectively
3,323

 
3,323

Paid-in capital
1,705,603

 
1,702,441

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

 
589,678

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

 
1,839,457

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

 
$
11,803,195

See accompanying notes to unaudited interim consolidated financial statements.

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TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share and per share data)
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
92,248

 
$
90,884

 
$
276,123

 
$
271,830

Investment securities available for sale
2,218

 
2,325

 
7,321

 
6,730

Other interest and dividend earning assets
1,206

 
547

 
3,611

 
1,560

Total interest and dividend income
95,672

 
93,756

 
287,055

 
280,120

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
23,001

 
23,210

 
70,899

 
68,434

Borrowed funds
5,082

 
2,674

 
14,009

 
6,985

Total interest expense
28,083

 
25,884

 
84,908

 
75,419

NET INTEREST INCOME
67,589

 
67,872

 
202,147

 
204,701

PROVISION FOR LOAN LOSSES

 
4,000

 
3,000

 
15,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
67,589

 
63,872

 
199,147

 
189,701

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

 
2,356

 
6,098

 
7,038

Net gain on the sale of loans
1,495

 
673

 
3,337

 
1,545

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

 
1,610

 
5,092

 
4,806

Other
1,078

 
1,071

 
3,447

 
2,933

Total non-interest income
6,126

 
5,710

 
17,974

 
16,322

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

 
21,973

 
70,946

 
67,380

Marketing services
7,200

 
3,492

 
17,385

 
10,105

Office property, equipment and software
5,465

 
5,242

 
16,516

 
15,514

Federal insurance premium and assessments
3,006

 
2,402

 
8,355

 
7,496

State franchise tax
1,449

 
1,498

 
4,400

 
4,916

Real estate owned expense, net
1,653

 
2,015

 
6,988

 
6,968

Other operating expenses
5,969

 
6,227

 
18,031

 
18,260

Total non-interest expense
47,819

 
42,849

 
142,621

 
130,639

INCOME BEFORE INCOME TAXES
25,896

 
26,733

 
74,500

 
75,384

INCOME TAX EXPENSE
8,638

 
9,102

 
24,932

 
25,344

NET INCOME
$
17,258

 
$
17,631

 
$
49,568

 
$
50,040

Earnings per share—basic and diluted
$
0.06

 
$
0.06

 
$
0.17

 
$
0.17

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
288,553,691

 
298,681,954

 
291,251,487

 
299,860,726

Diluted
290,759,754

 
300,533,021

 
293,444,799

 
301,251,074


See accompanying notes to unaudited interim consolidated financial statements.

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Table of Contents


TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
17,258

 
$
17,631

 
$
49,568

 
$
50,040

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

 
2,007

 
2,021

Change in pension obligation
123

 
48

 
370

 
144

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

 
2,377

 
2,165

Total comprehensive income
$
15,087

 
$
19,874

 
$
51,945

 
$
52,205

See accompanying notes to unaudited interim consolidated financial statements.


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TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(In thousands)
 
 
 
Common
stock
 
Paid-in
capital
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Retained
earnings
 
Accumulated other
comprehensive
loss
 
Total
shareholders’
equity
Balance at September 30, 2013
 
$
3,323

 
$
1,696,370

 
$
(278,215
)
 
$
(70,418
)
 
$
529,021

 
$
(8,604
)
 
$
1,871,477

Net income
 

 

 

 

 
50,040

 

 
50,040

Other comprehensive income, net of tax
 

 

 

 

 

 
2,165

 
2,165

ESOP shares allocated or committed to be released
 

 
788

 

 
3,250

 

 

 
4,038

Compensation costs for stock-based plans
 

 
5,335

 

 

 

 

 
5,335

Excess tax effect from stock-based compensation
 

 
34

 

 

 

 

 
34

Purchase of treasury stock (3,143,650 shares)
 

 

 
(68,279
)
 

 

 

 
(68,279
)
Treasury stock allocated to restricted stock plan
 

 
(1,531
)
 
1,905

 

 
(320
)
 

 
54

Balance at June 30, 2014
 
$
3,323

 
$
1,700,996

 
$
(344,589
)
 
$
(67,168
)
 
$
578,741

 
$
(6,439
)
 
$
1,864,864

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2014
 
$
3,323

 
$
1,702,441

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

 
$
(10,792
)
 
$
1,839,457

Net income
 

 

 

 

 
49,568

 

 
49,568

Other comprehensive income, net of tax
 

 

 

 

 

 
2,377

 
2,377

ESOP shares allocated or committed to be released
 

 
1,532

 

 
3,250

 

 

 
4,782

Compensation costs for stock-based plans
 

 
5,656

 

 

 

 

 
5,656

Excess tax effect from stock-based compensation
 

 
1,239

 

 

 

 

 
1,239

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

 

 
(124,981
)
 

 

 

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

 
(5,265
)
 
3,425

 

 
(1,399
)
 

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

 

 

 

 
(13,584
)
 

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

 
$
1,705,603

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

 
$
(8,415
)
 
$
1,761,275

See accompanying notes to unaudited interim consolidated financial statements.


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Table of Contents


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

 
$
50,040

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

 
9,427

Depreciation and amortization
 
12,534

 
9,128

Deferred income tax expense
 
(388
)
 

Provision for loan losses
 
3,000

 
15,000

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

 
1,794

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

 
23,653

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

 
6,215

Other
 
305

 
114

Net cash provided by operating activities
 
76,168

 
85,258

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

 
1,279,312

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

 
89,332

Proceeds from sale of:
 
 
 
 
Loans
 
83,029

 
34,631

Real estate owned
 
19,040

 
18,684

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

 
24

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

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

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

 
340,000

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

 
34

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

Dividends paid to common shareholders
 
(13,584
)
 

Net cash provided by financing activities
 
386,534

 
379,037

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

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

 
285,996

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

 
$
255,510

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

 
$
67,469

Cash paid for interest on borrowed funds
 
13,457

 
6,557

Cash paid for income taxes
 
15,383

 
14,100

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

 
18,055

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

 
35,395

Treasury stock issued for stock benefit plans
 
6,676

 

See accompanying notes to unaudited interim consolidated financial statements.

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Table of Contents


TFS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands unless otherwise indicated)
 
 
 
 
 

1.
BASIS OF PRESENTATION
TFS Financial Corporation, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering, and, to a much lesser extent, other financial services. On June 30, 2015, approximately 77% of the Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC. The thrift subsidiary of TFS Financial Corporation is Third Federal Savings and Loan Association of Cleveland.
The accounting and reporting policies followed by the Company conform in all material respects to accounting principles generally accepted in the United States of America and to general practices in the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the valuation of mortgage loan servicing rights, the valuation of deferred tax assets, and the determination of pension obligations and stock-based compensation are particularly subject to change.
The unaudited interim consolidated financial statements were prepared without an audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at June 30, 2015, and its results of operations and cash flows for the periods presented. Such adjustments are the only adjustments reflected in the unaudited interim financial statements. In accordance with Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014 contains consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2015 or for any other period.
2.
EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a dilutive impact. At June 30, 2015 and 2014, respectively, the ESOP held 6,283,426 and 6,716,765 shares that were neither allocated to participants nor committed to be released to participants.

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The following is a summary of the Company's earnings per share calculations.
 
 
For the Three Months Ended June 30,
 
 
2015
 
2014
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
17,258

 
 
 
 
 
$
17,631

 
 
 
 
Less: income allocated to restricted stock units
 
145

 
 
 
 
 
84

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

 
288,553,691

 
$
0.06

 
$
17,547

 
298,681,954

 
$
0.06

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

 
 
 
 
 
1,851,067

 
 
Income available to common shareholders
 
$
17,113

 
290,759,754

 
$
0.06

 
$
17,547

 
300,533,021

 
$
0.06

 
 
 
 
 
 
 
 
 
 
 
 
 

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

 
 
 
 
 
$
50,040

 
 
 
 
Less: income allocated to restricted stock units
 
424

 
 
 
 
 
240

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

 
291,251,487

 
$
0.17

 
$
49,800

 
299,860,726

 
$
0.17

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

 
 
 
 
 
1,390,348

 
 
Income available to common shareholders
 
$
49,144

 
293,444,799

 
$
0.17

 
$
49,800

 
301,251,074

 
$
0.17

The following is a summary of outstanding stock options that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Options to purchase shares
1,359,000

 
784,600

 
1,391,400

 
829,300

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

 
$
8

 
$

 
$
2,008

REMICs
 
555,856

 
2,449

 
(1,691
)
 
556,614

Fannie Mae certificates
 
10,090

 
715

 
(75
)
 
10,730

Total
 
$
567,946

 
$
3,172

 
$
(1,766
)
 
$
569,352

    

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Table of Contents


 
 
September 30, 2014
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
U.S. government and agency obligations
 
$
2,000

 
$
23

 
$

 
$
2,023

REMICs
 
557,895

 
1,896

 
(4,184
)
 
555,607

Fannie Mae certificates
 
10,654

 
749

 
(165
)
 
11,238

Total
 
$
570,549

 
$
2,668

 
$
(4,349
)
 
$
568,868



Gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time the individual securities have been in a continuous loss position, at June 30, 2015 and September 30, 2014, were as follows:
 
June 30, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Available for sale—
 
 
 
 
 
 
 
 
 
 
 
  REMICs
$
133,939

 
$
666

 
$
87,887

 
$
1,025

 
$
221,826

 
$
1,691

Fannie Mae certificates
4,823

 
75

 

 

 
4,823

 
75

Total
$
138,762

 
$
741

 
$
87,887

 
$
1,025

 
$
226,649

 
$
1,766

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Available for sale—
 
 
 
 
 
 
 
 

 

  REMICs
$
182,151

 
$
947

 
$
162,321

 
$
3,237

 
$
344,472

 
$
4,184

Fannie Mae certificates

 

 
4,826

 
165

 
4,826

 
165

Total
$
182,151

 
$
947

 
$
167,147

 
$
3,402

 
$
349,298

 
$
4,349


 
 
 
 
 
 
 
 
 
 
 
The unrealized losses on investment securities were attributable to interest rate increases. The contractual terms of U.S. government and agency obligations do not permit the issuer to settle the security at a price less than the par value of the investment. The contractual cash flows of mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. REMICs are issued by or backed by securities issued by these governmental agencies. It is expected that the securities would not be settled at a price substantially less than the amortized cost of the investment. The U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.
Since the decline in value is attributable to changes in interest rates and not credit quality and because the Association has neither the intent to sell the securities nor is it more likely than not the Association will be required to sell the securities for the time periods necessary to recover the amortized cost, these investments are not considered other-than-temporarily impaired. At June 30, 2015, the amortized cost and fair value of U.S. government and agency obligations available for sale, categorized as due within one year, are $2,000 and $2,008, respectively. At September 30, 2014, the amortized cost and fair value of those obligations, then categorized as due in more than one year but less than five years, were $2,000 and $2,023, respectively.

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4.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans held for investment consist of the following:
 
 
June 30,
2015
 
September 30,
2014
Real estate loans:
 
 
 
 
Residential Core
 
$
9,271,050

 
$
8,828,839

Residential Home Today
 
140,432

 
154,196

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

 
1,696,929

Construction
 
51,020

 
57,104

Real estate loans
 
11,104,329

 
10,737,068

Other consumer loans
 
3,679

 
4,721

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

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

 
$
10,630,687

At June 30, 2015 and September 30, 2014, respectively, $10,658 and $4,962 of loans were classified as mortgage loans held for sale.
A large concentration of the Company’s lending is in Ohio and Florida. As of June 30, 2015 and September 30, 2014, the percentages of residential real estate loans held in Ohio were 64% and 68%, respectively, and the percentages held in Florida were 17% as of both dates. As of June 30, 2015 and September 30, 2014, home equity loans and lines of credit were concentrated in Ohio (39% and 40% respectively), Florida (27% and 28% respectively), and California (13% at each date). Although somewhat dissipating during the last two years, the lingering effects of the adverse economic conditions and market for real estate in Ohio and Florida that arose in connection with the financial crisis of 2008, continue to unfavorably impact the ability of borrowers in those areas to repay their loans.
Home Today is an affordable housing program targeted to benefit low- and moderate-income home buyers. Through this program the Association provided the majority of loans to borrowers who would not otherwise qualify for the Association’s loan products, generally because of low credit scores. Although the credit profiles of borrowers in the Home Today program might be described as sub-prime, Home Today loans generally contain the same features as loans offered to our Core borrowers. Borrowers in the Home Today program must complete financial management education and counseling and must be referred to the Association by a sponsoring organization with which the Association has partnered as part of the program. Borrowers must also meet a minimum credit score threshold. Because the Association applied less stringent underwriting and credit standards to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential real estate mortgage loans. While effective March 27, 2009, the Home Today underwriting guidelines were changed to be substantially the same as the Association’s traditional first mortgage product, the majority of loans in this program were originated prior to that date. As of June 30, 2015 and September 30, 2014, the principal balance of Home Today loans originated prior to March 27, 2009 was $137,358 and $151,164, respectively. The Association does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, a loan-to-value ratio greater than 100%, or pay option adjustable-rate mortgages.

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Table of Contents


An age analysis of the recorded investment in loan receivables that are past due at June 30, 2015 and September 30, 2014 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due. Balances are net of deferred fees and any applicable loans-in-process.
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
$
9,047

 
$
2,829

 
$
26,855

 
$
38,731

 
$
9,232,807

 
$
9,271,538

Residential Home Today
5,199

 
2,283

 
10,425

 
17,907

 
120,644

 
138,551

Home equity loans and lines of credit
4,687

 
2,086

 
7,159

 
13,932

 
1,636,689

 
1,650,621

Construction

 

 
427

 
427

 
20,217

 
20,644

Total real estate loans
18,933

 
7,198

 
44,866

 
70,997

 
11,010,357

 
11,081,354

Other consumer loans

 

 

 

 
3,679

 
3,679

Total
$
18,933

 
$
7,198

 
$
44,866

 
$
70,997

 
$
11,014,036

 
$
11,085,033

 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
$
9,067

 
$
3,899

 
$
37,451

 
$
50,417

 
$
8,772,180

 
$
8,822,597

Residential Home Today
7,887

 
2,553

 
15,105

 
25,545

 
126,417

 
151,962

Home equity loans and lines of credit
6,044

 
1,785

 
9,037

 
16,866

 
1,687,349

 
1,704,215

Construction
200

 

 

 
200

 
28,354

 
28,554

Total real estate loans
23,198

 
8,237

 
61,593

 
93,028

 
10,614,300

 
10,707,328

Other consumer loans

 

 

 

 
4,721

 
4,721

Total
$
23,198

 
$
8,237

 
$
61,593

 
$
93,028

 
$
10,619,021

 
$
10,712,049

The recorded investment of loan receivables in non-accrual status is summarized in the following table. Balances are net of deferred fees.
 
June 30,
2015
 
September 30,
2014
Real estate loans:
 
 
 
Residential Core
$
67,458

 
$
79,388

Residential Home Today
24,393

 
29,960

Home equity loans and lines of credit
23,168

 
26,189

Construction
427

 

Total real estate loans
115,446

 
135,537

Other consumer loans

 

Total non-accrual loans
$
115,446

 
$
135,537

Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans restructured in TDRs that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status. At June 30, 2015 and September 30, 2014, respectively, the recorded investment in non-accrual loans includes $70,580 and $73,946 which are performing according to the terms of their agreement, of which $46,775 and $49,019 are loans in Chapter 7 bankruptcy status primarily where all borrowers have filed, and have not reaffirmed or been dismissed.
Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income

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and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid payment first. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized. A non-accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in non-accrual status when collectability is uncertain, such as a TDR that has not met minimum payment requirements, a loan with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. The number of days past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment.
The recorded investment in loan receivables at June 30, 2015 and September 30, 2014 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans not individually evaluated. Balances of recorded investments are net of deferred fees and any applicable loans-in-process.
 
 
June 30, 2015
 
September 30, 2014
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
124,740

 
$
9,146,798

 
$
9,271,538

 
$
131,719

 
$
8,690,878

 
$
8,822,597

Residential Home Today
 
61,021

 
77,530

 
138,551

 
67,177

 
84,785

 
151,962

Home equity loans and lines of credit
 
33,369

 
1,617,252

 
1,650,621

 
34,490

 
1,669,725

 
1,704,215

Construction
 
427

 
20,217

 
20,644

 

 
28,554

 
28,554

Total real estate loans
 
219,557

 
10,861,797

 
11,081,354

 
233,386

 
10,473,942

 
10,707,328

Other consumer loans
 

 
3,679

 
3,679

 

 
4,721

 
4,721

Total
 
$
219,557

 
$
10,865,476

 
$
11,085,033

 
$
233,386

 
$
10,478,663

 
$
10,712,049

An analysis of the allowance for loan losses at June 30, 2015 and September 30, 2014 is summarized in the following table. The analysis provides details of the allowance for loan losses according to the method of evaluation, distinguishing between allowances for loan losses determined by evaluating individual loans and allowances for loan losses determined by evaluating groups of loans collectively.
 
 
June 30, 2015
 
September 30, 2014
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
10,269

 
$
15,686

 
$
25,955

 
$
8,889

 
$
22,191

 
$
31,080

Residential Home Today
 
4,137

 
6,942

 
11,079

 
6,366

 
10,058

 
16,424

Home equity loans and lines of credit
 
554

 
39,280

 
39,834

 
532

 
33,299

 
33,831

Construction
 
26

 
10

 
36

 

 
27

 
27

Total real estate loans
 
14,986

 
61,918

 
76,904

 
15,787

 
65,575

 
81,362

Other consumer loans
 

 

 

 

 

 

Total
 
$
14,986

 
$
61,918

 
$
76,904

 
$
15,787

 
$
65,575

 
$
81,362

At June 30, 2015 and September 30, 2014, individually evaluated loans that required an allowance were comprised only of loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, and loans with a further deterioration in the fair value of collateral not yet identified as uncollectible. All other individually evaluated loans received a charge-off, if applicable.
Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. At June 30, 2015 and September 30, 2014, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $14,953 and $15,787.

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Table of Contents


Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have historically experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable rate mortgages).
As described earlier in this footnote, Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At June 30, 2015 and September 30, 2014, respectively, approximately 36% and 42% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co., which was seized by the Arizona Department of Insurance and through March 31, 2015 paid all claim payments at 67%. In April 2015, the Association was notified that, in addition to a catch-up adjustment for prior claims, all future claims will be paid at 70%. Appropriate adjustments have been made to the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated collectively. The amount of loans in our owned portfolio covered by mortgage insurance provided by PMIC as of June 30, 2015 and September 30, 2014, respectively, was $145,495 and $186,233 of which $133,245 and $170,128 was current. The amount of loans in our owned portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of June 30, 2015 and September 30, 2014, respectively, was $61,458 and $74,254 of which $60,700 and $73,616 was current. As of June 30, 2015, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "high credit quality" however, MGIC continues to make claims payments in accordance with its contractual obligations and the Association has not increased its estimated loss severity factors related to MGIC's claim paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which were assessed as being non-investment grade.
Home equity loans and lines of credit represent a significant portion of the residential real estate portfolio, primarily comprised of home equity lines of credit. The state of the economy and low housing prices continue to have an adverse impact on a portion of this portfolio since the home equity lines generally are in a second lien position. Post-origination deterioration in economic and housing market conditions may also impact a borrower's ability to afford the higher payments required during the end of draw repayment period that follows the period of interest only payments on home equity lines of credit originated prior to 2012 or the ability to secure alternative financing. Beginning in February 2013, the terms on new home equity lines of credit included monthly principal and interest payments throughout the entire term to minimize the potential payment differential between the during draw and after draw periods.
The Association originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Association’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Association offers construction/permanent loans with fixed or adjustable rates, and a current maximum loan-to-completed-appraised value ratio of 80%. Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Association may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. This is more likely to occur when home prices are falling.
Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment.

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Table of Contents


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

 
$
85,370

 
$

 
$
72,840

 
$
94,419

 
$

Residential Home Today
 
25,032

 
52,967

 

 
28,045

 
57,854

 

Home equity loans and lines of credit
 
23,256

 
32,616

 

 
26,618

 
38,046

 

Construction
 

 

 

 

 

 

Other consumer loans
 

 

 

 

 

 

Total
 
$
114,187

 
$
170,953

 
$

 
$
127,503

 
$
190,319

 
$

With an IVA recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
58,841

 
$
59,668

 
$
10,269

 
$
58,879

 
$
59,842

 
$
8,889

Residential Home Today
 
35,989

 
36,481

 
4,137

 
39,132

 
39,749

 
6,366

Home equity loans and lines of credit
 
10,113

 
10,125

 
554

 
7,872

 
7,909

 
532

Construction
 
427

 
572

 
26

 

 

 

Other consumer loans
 

 

 

 

 

 

Total
 
$
105,370

 
$
106,846

 
$
14,986

 
$
105,883

 
$
107,500

 
$
15,787

Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
124,740

 
$
145,038

 
$
10,269

 
$
131,719

 
$
154,261

 
$
8,889

Residential Home Today
 
61,021

 
89,448

 
4,137

 
67,177

 
97,603

 
6,366

Home equity loans and lines of credit
 
33,369

 
42,741

 
554

 
34,490

 
45,955

 
532

Construction
 
427

 
572

 
26

 

 

 

Other consumer loans
 

 

 

 

 

 

Total
 
$
219,557

 
$
277,799

 
$
14,986

 
$
233,386

 
$
297,819

 
$
15,787

At June 30, 2015 and September 30, 2014, respectively, the recorded investment in impaired loans includes $181,600 and $186,428 of loans restructured in TDRs of which $17,051 and $20,851 were 90 days or more past due.
For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Association will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered in determining that a loan is impaired may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan.

Charge-offs on residential mortgage loans, home equity loans and lines of credit, and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the recorded investment in the loans.

Partial or full charge-offs are also recognized for the amount of impairment on loans considered collateral dependent that meet the conditions described below.

For residential mortgage loans, payments are greater than 180 days delinquent;
For home equity lines of credit, equity loans, and residential loans restructured in a TDR, payments are greater than 90 days delinquent;
For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan;
For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy;
For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed;
For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent, and

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Table of Contents


For all classes of loans, it becomes evident that a loss is probable.

Collateral dependent residential mortgage loans and construction loans are charged off to the extent the recorded investment in a loan, net of anticipated mortgage insurance claims, exceeds the fair value less costs to dispose of the underlying property. Management can determine the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged off to the extent the recorded investment in the loan plus the balance of any senior liens exceeds the fair value less costs to dispose of the underlying property or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio that is identified as collateral dependent will continue to be reported as impaired until it is no longer considered collateral dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off consequent to impairment evaluation will continue to be individually evaluated for impairment until, at a minimum, the impairment has been recovered.

The following summarizes the effective dates of charge-off policies that changed or were first implemented during the current and previous four fiscal years and the portfolios to which those policies apply.
Effective Date
Policy
Portfolio(s) Affected
6/30/2014
A loan is considered collateral dependent and any collateral shortfall is charged off when, within 60 days of notification, all borrowers obligated on a loan filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed (1)
All
9/30/2012
Pursuant to an OCC directive, a loan is considered collateral dependent and any collateral shortfall is charged off when all borrowers obligated on a loan are discharged through Chapter 7 bankruptcy
All
6/30/2012
Loans in any form of bankruptcy greater than 30 days past due are considered collateral dependent and any collateral shortfall is charged off
All
12/31/2011
Pursuant to an OCC directive, impairment on collateral dependent loans previously reserved for in the allowance were charged off. Charge-offs are recorded to recognize confirmed collateral shortfalls on impaired loans (2)
All
9/30/2010
Timing of impairment evaluation was accelerated to include equity loans greater than 90 days delinquent (3)
Home Equity Loans
____________________________

(1)
Prior to 6/30/2014, collateral shortfalls on loans in Chapter 7 bankruptcy were charged off when all borrowers were discharged of the obligation or when the loan was 30 days or more past due. Adoption of this policy did not result in a material change to total charge-offs or the provision for loan losses in the three or nine months ending June 30, 2014.
(2)
Prior to 12/31/2011, partial charge-offs were not used, but a reserve in the allowance was established when the recorded investment in the loan exceeded the fair value of the collateral less costs to dispose. Individual loans were only charged off when a triggering event occurred, such as a foreclosure action was culminated, a short sale was approved, or a deed was accepted in lieu of repayment.
(3)
Prior to 9/30/2010, impairment evaluations on equity loans were performed when the loan was greater than 180 days delinquent.
Loans restructured in TDRs that are not evaluated based on collateral are separately evaluated for impairment on a loan by loan basis at the time of restructuring and at each subsequent reporting date for as long as they are reported as TDRs. The impairment evaluation is based on the present value of expected future cash flows discounted at the effective interest rate of the original loan. Expected future cash flows include a discount factor representing a potential for default. Valuation allowances are recorded for the excess of the recorded investments over the result of the cash flow analysis. Loans discharged in Chapter 7 bankruptcy are reported as TDRs and also evaluated based on the present value of expected future cash flows unless evaluated based on collateral. We evaluate these loans using the expected future cash flows because we expect the borrower, not liquidation of the collateral, to be the source of repayment for the loan. Other consumer loans are not considered for restructuring. A loan restructured in a TDR is classified as an impaired loan for a minimum of one year. After one year, that loan may be reclassified out of the balance of impaired loans if the loan was restructured to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is not impaired based on the terms of the restructuring agreement. No loans whose terms were restructured in TDRs were reclassified from impaired loans during the three and nine months ended June 30, 2015 and June 30, 2014.

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Table of Contents


The average recorded investment in impaired loans and the amount of interest income recognized during the period that the loans were impaired are summarized below.
 
 
For the Three Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
67,486

 
$
384

 
$
78,386

 
$
271

Residential Home Today
 
25,748

 
70

 
30,082

 
54

Home equity loans and lines of credit
 
23,745

 
66

 
28,214

 
81

Construction
 

 

 
76

 

Other consumer loans
 

 

 

 

Total
 
$
116,979

 
$
520

 
$
136,758

 
$
406

With an IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
58,837

 
$
640

 
$
57,180

 
$
689

Residential Home Today
 
36,460

 
465

 
40,827

 
522

Home equity loans and lines of credit
 
9,122

 
71

 
6,968

 
61

Construction
 
214

 
5

 

 

Other consumer loans
 

 

 

 

Total
 
$
104,633

 
$
1,181

 
$
104,975

 
$
1,272

Total impaired loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
126,323

 
$
1,024

 
$
135,566

 
$
960

Residential Home Today
 
62,208

 
535

 
70,909

 
576

Home equity loans and lines of credit
 
32,867

 
137

 
35,182

 
142

Construction
 
214

 
5

 
76

 

Other consumer loans
 

 

 

 

Total
 
$
221,612

 
$
1,701

 
$
241,733

 
$
1,678


18

Table of Contents


 
 
For the Nine Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
69,370

 
$
970

 
$
81,214

 
$
846

Residential Home Today
 
26,539

 
193

 
31,391

 
207

Home equity loans and lines of credit
 
24,937

 
224

 
27,498

 
258

Construction
 

 

 
211

 
6

Other consumer loans
 

 

 

 

Total
 
$
120,846

 
$
1,387

 
$
140,314

 
$
1,317

With an IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
58,860

 
$
1,954

 
$
60,493

 
$
2,112

Residential Home Today
 
37,561

 
1,428

 
43,052

 
1,611

Home equity loans and lines of credit
 
8,993

 
197

 
6,972

 
180

Construction
 
214

 
5

 
33

 

Other consumer loans
 

 

 

 

Total
 
$
105,628

 
$
3,584

 
$
110,550

 
$
3,903

Total impaired loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
128,230

 
$
2,924

 
$
141,707

 
$
2,958

Residential Home Today
 
64,100

 
1,621

 
74,443

 
1,818

Home equity loans and lines of credit
 
33,930

 
421

 
34,470

 
438

Construction
 
214

 
5

 
244

 
6

Other consumer loans
 

 

 

 

Total
 
$
226,474

 
$
4,971

 
$
250,864

 
$
5,220

 
 
 
 
 
 
 
 
 
Interest on loans in non-accrual status is recognized on a cash-basis. The amounts of interest income on impaired loans recognized using a cash-basis method were $329 and $912 for the three months and nine months ended June 30, 2015, respectively, and $267 and $896 for the three months and nine months ended June 30, 2014, respectively. 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. Interest income on the remaining impaired loans is recognized on an accrual basis.
The recorded investment in TDRs by type of concession as of June 30, 2015 and September 30, 2014 is shown in the tables below.    
June 30, 2015
 
Reduction in
Interest Rates
 
Payment
Extensions
 
Forbearance
or Other Actions
 
Multiple
Concessions
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
16,709

 
$
946

 
$
8,576

 
$
21,957

 
$
23,584

 
$
32,270

 
$
104,042

Residential Home Today
 
8,170

 
15

 
6,217

 
12,917

 
22,257

 
6,521

 
56,097

Home equity loans and lines of credit
 
99

 
2,814

 
433

 
3,602

 
839

 
13,674

 
21,461

Total
 
$
24,978

 
$
3,775

 
$
15,226

 
$
38,476

 
$
46,680

 
$
52,465

 
$
181,600

September 30, 2014
 
Reduction in
Interest Rates
 
Payment
Extensions
 
Forbearance
or Other Actions
 
Multiple
Concessions
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
16,693

 
$
1,265

 
$
10,248

 
$
21,113

 
$
22,687

 
$
33,576

 
$
105,582

Residential Home Today
 
11,374

 
78

 
7,448

 
15,085

 
20,823

 
5,301

 
60,109

Home equity loans and lines of credit
 
74

 
1,833

 
769

 
1,213

 
819

 
16,029

 
20,737

Total
 
$
28,141

 
$
3,176

 
$
18,465

 
$
37,411

 
$
44,329

 
$
54,906

 
$
186,428


19

Table of Contents


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. As the economy slowly improves, the need for multiple restructurings continues to linger. 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 and nine months ended June 30, 2015 and June 30, 2014 (set forth in the table 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 June 30, 2015
 
 
Reduction in
Interest Rates
 
Payment
Extensions
 
Forbearance
or Other Actions
 
Multiple
Concessions
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
934

 
$

 
$
494

 
$
591

 
$
1,321

 
$
1,095

 
$
4,435

Residential Home Today
 

 

 
505

 
66

 
865

 
297

 
1,733

Home equity loans and lines of credit
 

 
303

 

 
1,418

 
115

 
432

 
2,268

Total
 
$
934

 
$
303

 
$
999

 
$
2,075

 
$
2,301

 
$
1,824

 
$
8,436

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2014
 
 
Reduction in
Interest Rates
 
Payment
Extensions
 
Forbearance
or Other Actions
 
Multiple
Concessions
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
1,443

 
$

 
$

 
$
1,829

 
$
2,134

 
$
1,197

 
$
6,603

Residential Home Today
 
210

 

 

 
231

 
871

 
273

 
1,585

Home equity loans and lines of credit
 

 
426

 
94

 
356

 
200

 
282

 
1,358

Total
 
$
1,653

 
$
426

 
$
94

 
$
2,416

 
$
3,205

 
$
1,752

 
$
9,546

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30, 2015
 
 
Reduction in
Interest Rates
 
Payment
Extensions
 
Forbearance
or Other Actions
 
Multiple
Concessions
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
2,234

 
$

 
$
832

 
$
3,438

 
$
3,734

 
$
5,338

 
$
15,576

Residential Home Today
 
81

 

 
863

 
222

 
4,352

 
2,031

 
7,549

Home equity loans and lines of credit
 

 
1,292

 

 
2,448

 
212

 
1,260

 
5,212

Total
 
$
2,315

 
$
1,292

 
$
1,695

 
$
6,108

 
$
8,298

 
$
8,629

 
$
28,337

 
 
For the Nine Months Ended June 30, 2014
 
 
Reduction in
Interest Rates
 
Payment
Extensions
 
Forbearance
or Other Actions
 
Multiple
Concessions
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
2,354

 
$

 
$
224

 
$
3,920

 
$
4,131

 
$
3,964

 
$
14,593

Residential Home Today
 
371

 

 
66

 
456

 
3,095

 
504

 
4,492

Home equity loans and lines of credit
 

 
977

 
94

 
899

 
311

 
1,828

 
4,109

Total
 
$
2,725

 
$
977

 
$
384

 
$
5,275

 
$
7,537

 
$
6,296

 
$
23,194



20

Table of Contents


Below summarizes the information on TDRs restructured within the previous 12 months of the period listed for which there was a subsequent payment default, at least 30 days past due on one scheduled payment, during the period presented.
 
 
For the Three Months Ended June 30,
 
 
2015
 
2014
TDRs That Subsequently Defaulted
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Residential Core
 
26

 
$
2,874

 
22

 
$
1,876

Residential Home Today
 
19

 
1,024

 
22

 
816

Home equity loans and lines of credit
 
21

 
557

 
23

 
810

Total
 
66

 
$
4,455

 
67

 
$
3,502

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30,
 
 
2015
 
2014
TDRs That Subsequently Defaulted
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Residential Core
 
37

 
$
3,790

 
31

 
$
2,640

Residential Home Today
 
27

 
1,440

 
29

 
1,054

Home equity loans and lines of credit
 
39

 
748

 
47

 
945

Total
 
103

 
$
5,978

 
107

 
$
4,639

 
 
 
 
 
 
 
 
 

The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade. Balances are net of deferred fees and any applicable LIP.
 
 
Pass
 
Special
Mention
 
Substandard
 
Loss
 
Total
June 30, 2015
 
 
 
 
 
 
 
 
 
 
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
9,200,313

 
$

 
$
71,225

 
$

 
$
9,271,538

Residential Home Today
 
112,538

 

 
26,013

 

 
138,551

Home equity loans and lines of credit
 
1,618,873

 
4,936

 
26,812

 

 
1,650,621

Construction
 
20,217

 

 
427

 

 
20,644

Total
 
$
10,951,941

 
$
4,936

 
$
124,477

 
$

 
$
11,081,354

 
 
Pass
 
Special
Mention
 
Substandard
 
Loss
 
Total
September 30, 2014
 
 
 
 
 
 
 
 
 
 
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
8,739,183

 
$

 
$
83,414

 
$

 
$
8,822,597

Residential Home Today
 
120,827

 

 
31,135

 

 
151,962

Home equity loans and lines of credit
 
1,667,939

 
6,084

 
30,192

 

 
1,704,215

Construction
 
28,554

 

 

 

 
28,554

Total
 
$
10,556,503

 
$
6,084

 
$
144,741

 
$

 
$
10,707,328

Residential loans are internally assigned a grade that complies with the guidelines outlined in the OCC’s Handbook for Rating Credit Risk. Pass loans are assets well protected by the current paying capacity of the borrower. Special Mention loans have a potential weakness that the Association feels deserve management’s attention and may result in further deterioration in their repayment prospects and/or the Association’s credit position. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Also included in Substandard are performing home equity loans and lines of credit where the customer has a severely delinquent first mortgage to which the performing home equity loan or line of credit is subordinate and loans in Chapter 7

21

Table of Contents


bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. Loss loans are considered uncollectible and are charged off when identified.
At June 30, 2015 and September 30, 2014, respectively, the recorded investment of impaired loans includes $104,051 and $103,459 of TDRs that are individually evaluated for impairment, but have adequately performed under the terms of the restructuring and are classified as Pass loans. At June 30, 2015 and September 30, 2014, respectively, there were $8,971 and $14,814 of loans classified substandard and $4,936 and $6,084 of loans designated special mention that are not included in the recorded investment of impaired loans; rather, they are included in loans collectively evaluated for impairment.
Other consumer loans are internally assigned a grade of nonperforming when they become 90 days or more past due. At June 30, 2015 and September 30, 2014, no consumer loans were graded as nonperforming.
During the three months ended December 31, 2013, $5,321 of residential loans were deemed uncollectible and fully charged-off as a result of implementing a new practice of charging off the remaining balance on loans that had remained delinquent and in the foreclosure process for greater than 1,500 days. These loans previously were recorded at estimated net realizable value, with the potential for additional loss recognized within the allowance for loan losses. Any future foreclosure proceeds on these loans would result in recoveries of prior charge-offs.

Activity in the allowance for loan losses is summarized as follows:
 
For the Three Months Ended June 30, 2015
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
28,507

 
$
(2,647
)
 
$
(1,472
)
 
$
1,567

 
$
25,955

Residential Home Today
12,578

 
(1,198
)
 
(910
)
 
609

 
11,079

Home equity loans and lines of credit
35,990

 
3,827

 
(1,956
)
 
1,973

 
39,834

Construction
18

 
18

 

 

 
36

Total real estate loans
77,093

 

 
(4,338
)
 
4,149

 
76,904

Other consumer loans

 

 

 

 

Total
$
77,093

 
$

 
$
(4,338
)
 
$
4,149

 
$
76,904

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2014
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
32,642

 
$
328

 
$
(2,043
)
 
$
585

 
$
31,512

Residential Home Today
16,919

 
883

 
(1,180
)
 
355

 
16,977

Home equity loans and lines of credit
33,785

 
2,841

 
(4,143
)
 
1,497

 
33,980

Construction
45

 
(52
)
 
(151
)
 
191

 
33

Total real estate loans
83,391

 
4,000

 
(7,517
)
 
2,628

 
82,502

Other consumer loans

 

 

 

 

Total
$
83,391

 
$
4,000

 
$
(7,517
)
 
$
2,628

 
$
82,502

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30, 2015
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
31,080

 
$
(3,056
)
 
$
(5,656
)
 
$
3,587

 
$
25,955

Residential Home Today
16,424

 
(3,811
)
 
(2,573
)
 
1,039

 
11,079

Home equity loans and lines of credit
33,831

 
10,028

 
(8,709
)
 
4,684

 
39,834

Construction
27

 
(161
)
 

 
170

 
36

Total real estate loans
81,362

 
3,000

 
(16,938
)
 
9,480

 
76,904

Other consumer loans

 

 

 

 

Total
$
81,362

 
$
3,000

 
$
(16,938
)
 
$
9,480

 
$
76,904


22

Table of Contents


 
For the Nine Months Ended June 30, 2014
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
35,427

 
$
7,274

 
$
(13,226
)
 
$
2,037

 
$
31,512

Residential Home Today
24,112

 
(2,336
)
 
(6,501
)
 
1,702

 
16,977

Home equity loans and lines of credit
32,818

 
10,222

 
(13,078
)
 
4,018

 
33,980

Construction
180

 
(160
)
 
(192
)
 
205

 
33

Total real estate loans
92,537

 
15,000

 
(32,997
)
 
7,962

 
82,502

Other consumer loans

 

 

 

 

Total
$
92,537

 
$
15,000

 
$
(32,997
)
 
$
7,962

 
$
82,502

5.
DEPOSITS
Deposit account balances are summarized as follows:
 
 
June 30,
2015
 
September 30,
2014
Negotiable order of withdrawal accounts
 
$
1,005,044

 
$
990,326

Savings accounts
 
1,624,088

 
1,661,920

Certificates of deposit
 
5,830,929

 
6,000,216

 
 
8,460,061

 
8,652,462

Accrued interest
 
1,998

 
1,416

Total deposits
 
$
8,462,059

 
$
8,653,878

Brokered certificates of deposit, which are used as a cost effective funding alternative, totaled $520,110 and $356,685 at June 30, 2015 and September 30, 2014, respectively. The FDIC places restrictions on banks with regard to issuing brokered deposits based on the bank's capital classification. As a well-capitalized institution at June 30, 2015 and September 30, 2014, the Association may accept brokered deposits without FDIC restrictions.
6.    OTHER COMPREHENSIVE INCOME (LOSS)

The change in accumulated other comprehensive income (loss) by component is as follows:
 
For the Three Months Ended
 
For the Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
Unrealized gains (losses) on securities available for sale
 
Defined Benefit Plan
 
Total
 
Unrealized gains (losses) on securities available for sale
 
Defined Benefit Plan
 
Total
Balance at beginning of period
$
3,209

 
$
(9,453
)
 
$
(6,244
)
 
$
(2,310
)
 
$
(6,372
)
 
$
(8,682
)
Other comprehensive (loss) income before reclassifications, net of tax benefit (expense) of $1,235 and $(1,182)
(2,294
)
 

 
(2,294
)
 
2,195

 

 
2,195

Amounts reclassified from accumulated other comprehensive income (loss), net of tax benefit of $67 and $26

 
123

 
123

 

 
48

 
48

Other comprehensive (loss) income
(2,294
)
 
123

 
(2,171
)
 
2,195

 
48

 
2,243

Balance at end of period
$
915

 
$
(9,330
)
 
$
(8,415
)
 
$
(115
)
 
$
(6,324
)
 
$
(6,439
)
 
 
 
 
 
 
 
 
 
 
 
 

23

Table of Contents


 
For the Nine Months Ended
 
For the Nine Months Ended
 
June 30, 2015
 
June 30, 2014
 
Unrealized gains (losses) on securities available for sale
 
Defined Benefit Plan
 
Total
 
Unrealized gains (losses) on securities available for sale
 
Defined Benefit Plan
 
Total
Balance at beginning of period
$
(1,092
)
 
$
(9,700
)
 
$
(10,792
)
 
$
(2,136
)
 
$
(6,468
)
 
$
(8,604
)
Other comprehensive income before reclassifications, net of tax expense of $1,081 and $1,088
2,007

 

 
2,007

 
2,021

 

 
2,021

Amounts reclassified from accumulated other comprehensive income (loss), net of tax benefit of $200 and $78

 
370

 
370

 

 
144

 
144

Other comprehensive income
2,007

 
370

 
2,377

 
2,021

 
144

 
2,165

Balance at end of period
$
915

 
$
(9,330
)
 
$
(8,415
)
 
$
(115
)
 
$
(6,324
)
 
$
(6,439
)

The following table presents the reclassification adjustment out of accumulated other comprehensive income (loss) included in net income and the corresponding line item on the consolidated statements of income for the periods indicated:
 
 Amounts Reclassified from Accumulated
 Other Comprehensive Income
 
 
Details about Accumulated Other Comprehensive Income Components
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
Line Item in the Statement of Income
2015
 
2014
 
2015
 
2014
 
Actuarial loss
$
190

 
$
74

 
$
570

 
$
222

 
 (a)
Income tax benefit
(67
)
 
(26
)
 
(200
)
 
(78
)
 
 Income tax expense
Net of income tax benefit
$
123

 
$
48

 
$
370

 
$
144

 
 
(a) These items are included in the computation of net period pension cost. See Note 8. Defined Benefit Plan for additional disclosure.
7.
INCOME TAXES
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various state and city jurisdictions. Federal income tax returns and the Association's Ohio Franchise Tax returns have been audited and settled for tax years through 2010 and 2011, respectively. With few exceptions, the Company is no longer subject to federal or state tax examinations for tax years prior to 2011.
The Company recognizes interest and penalties on income tax assessments or income tax refunds, where applicable, in the financial statements as a component of its provision for income taxes.
The Company makes certain investments in limited partnerships which invest in affordable housing projects that qualify for the Low Income Housing Tax Credit. The Company acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnership. The balance of these investments is included in Other Assets on the Consolidated Statements of Condition, $991 at June 30, 2015 and $0 at September 30, 2014.
The Company accounts for its interests in LIHTCs using the proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income taxes was not material during the three and nine months ended June 30, 2015 and June 30, 2014.
8.
DEFINED BENEFIT PLAN
The Third Federal Savings Retirement Plan (the “Plan”) is a defined benefit pension plan. Effective December 31, 2002, the Plan was amended to limit participation to employees who met the Plan’s eligibility requirements on that date. Effective December 31, 2011, the Plan was amended to freeze future benefit accruals for participants in the Plan. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, and those eligible

24

Table of Contents


participants who no longer receive service credits under the Plan, participate in a separate tier of the Company’s defined contribution 401(k) Savings Plan. Benefits under the Plan are based on years of service and the employee’s average annual compensation (as defined in the Plan) through December 31, 2011. The funding policy of the Plan is consistent with the funding requirements of U.S. federal and other governmental laws and regulations.
The components, including an estimated settlement adjustment due to expected lump sum payments exceeding the interest cost for the year, of net periodic cost recognized in the statements of income are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
Interest cost
 
$
782

 
$
801

 
$
2,347

 
$
2,403

Expected return on plan assets
 
(1,104
)
 
(1,055
)
 
(3,311
)
 
(3,166
)
Amortization of net loss
 
190

 
74

 
570

 
222

Estimated net loss due to settlement
 
228

 
180

 
684

 
541

Net periodic cost
 
$
96

 
$

 
$
290

 
$

There were no required minimum employer contributions during the nine months ended June 30, 2015. The Company made a voluntary contribution of $2,000 during the three months ended June 30, 2015. No minimum employer contributions are expected during the remainder of the fiscal year.
9.
EQUITY INCENTIVE PLAN
In December 2014 and May 2015, respectively, 961,200 and 433,200 options to purchase our common stock and 295,500 and 81,600 restricted stock units were granted to certain directors, officers and employees of the Company. The awards were made pursuant to the shareholder-approved 2008 Equity Incentive Plan.
During the nine months ended June 30, 2015 and 2014, the Company recorded $5,656 and $5,335, respectively, of stock-based compensation expense, comprised of stock option expense of $2,624 and $2,464, respectively, and restricted stock units expense of $3,032 and $2,871, respectively.
At June 30, 2015, 7,373,475 shares were subject to options, with a weighted average exercise price of $11.89 per share and a weighted average grant date fair value of $2.98 per share. Expected future expense related to the 2,468,802 non-vested options outstanding as of June 30, 2015 is $4,029 over a weighted average of 2.6 years. At June 30, 2015, 906,662 restricted stock units, with a weighted average grant date fair value of $12.94 per unit, are unvested. Expected future compensation expense relating to the 1,277,040 restricted stock units outstanding as of June 30, 2015 is $5,585 over a weighted average period of 2.4 years. Each unit is equivalent to one share of common stock.
10.
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to originate loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire from 5 to 10 years following the date that the line of credit was established, subject to various conditions, including compliance with payment obligation, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated statements of condition. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The
Company generally uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made.

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At June 30, 2015, the Company had commitments to originate loans as follows:
Fixed-rate mortgage loans
$
314,655

Adjustable-rate mortgage loans
270,350

Equity loans and lines of credit including bridge loans
47,449

Total
$
632,454

At June 30, 2015, the Company had unfunded commitments outstanding as follows:
Equity lines of credit
$
1,193,728

Construction loans
30,119

Private equity investments
12,941

Total
$
1,236,788

At June 30, 2015, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity, is $1,366,920.
At June 30, 2015 and September 30, 2014, the Company had $10,301 and $4,570, respectively, in commitments to securitize and sell mortgage loans.
Management expects that the above commitments will be funded through normal operations.
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business.  In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition, results of operation, or statements of cash flows.
11.
FAIR VALUE
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date and a fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. The Company’s policy is to recognize transfers between levels of the hierarchy as of the end of the reporting period in which the transfer occurs. The three levels of inputs are defined as follows:
Level 1 –
  
quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 –
  
quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with few transactions, or model-based valuation techniques using assumptions that are observable in the market.
Level 3 –
  
a company’s own assumptions about how market participants would price an asset or liability.
As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At June 30, 2015 and September 30, 2014, respectively, there were $10,298 and $4,570 loans held for sale, with unpaid principal balances of $10,301 and $4,491, subject to pending agency contracts for which the fair value option was elected. Included in the net gain on the sale of loans is $63 and $177 for the three months ending June 30, 2015 and 2014, respectively, and $(48) and $117 for the nine months ending June 30, 2015 and 2014, respectively, related to changes during the period in the fair value of loans held for sale subject to pending agency contracts.
Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value.
Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. At June 30, 2015 and September 30, 2014, respectively, this includes $569,352 and $568,868 of investments in U.S. government and agency obligations including U.S. Treasury notes and sequentially structured, highly liquid collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae. Both are measured using the market approach. The fair values of treasury notes and collateralized mortgage obligations represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for

26

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reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities.
Mortgage Loans Held for Sale—The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At June 30, 2015 and September 30, 2014 there were $10,298 and $4,570, respectively, of loans held for sale measured at fair value and $360 and $392, respectively, of loans held for sale carried at cost.
Impaired Loans—Impaired loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated for impairment and that impairment is measured using a fair value measurement, such as the observable market price of the loan or the fair value of the collateral less estimated costs to dispose. Impairment is measured using the market approach based on the fair value of the collateral less estimated costs to dispose for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 4. Loans and Allowance for Loan Losses. To calculate impairment of collateral-dependent loans, the fair market values of the collateral, estimated using exterior appraisals in the majority of instances, are reduced by calculated costs to dispose derived from historical experience and recent market conditions. Any indicated impairment is recognized by a charge to the allowance for loan losses. Subsequent increases in collateral values or principal pay downs on loans with recognized impairment could result in an impaired loan being carried below its fair value. When no impairment loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum recovery the Company can expect. The recorded investment of loans individually evaluated for impairment based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of costs to dispose on fair values is determined at the time of impairment or when additional impairment is recognized and is included in quantitative information about significant unobservable inputs later in this note.
Loans held for investment that have been restructured in TDRs and are performing according to the restructured terms of the loan agreement are individually evaluated for impairment using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At June 30, 2015 and September 30, 2014, respectively, this included $104,872 and $105,954 in recorded investment of TDRs with related allowances for loss of $14,953 and $15,787.
Real Estate Owned—Real estate owned includes real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of the cost basis or fair value less estimated costs to dispose. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At June 30, 2015 and September 30, 2014, these adjustments were not significant to reported fair values. At June 30, 2015 and September 30, 2014, respectively, $14,415 and $17,970 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis where the cost basis equals or exceeds the estimate of fair values less costs to dispose of these properties. Real estate owned, as reported in the Consolidated Statements of Condition, includes estimated costs to dispose of $1,773 and $1,667 related to properties measured at fair value and $6,739 and $5,465 of properties carried at their original or adjusted cost basis at June 30, 2015 and September 30, 2014, respectively.
Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio and forward commitments on contracts to deliver mortgage loans. Derivatives are reported at fair value in other assets or other liabilities on the Consolidated Statement of Condition with changes in value recorded in current earnings. Fair value is estimated using a market approach based on quoted secondary market pricing for loan portfolios with characteristics similar to loans underlying the derivative contracts. The fair value of interest rate lock commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy.

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Assets and liabilities carried at fair value on a recurring basis in the Consolidated Statements of Condition at June 30, 2015 and September 30, 2014 are summarized below.
 
 
 
Recurring Fair Value Measurements at Reporting Date Using
 
June 30, 2015
 
Quoted Prices in
Active Markets for
Identical Assets

 
                Significant Other
Observable Inputs

 
Significant
Unobservable
Inputs

 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. government and agency obligations
$
2,008

 
$

 
$
2,008

 
$

REMIC's
556,614

 

 
556,614

 

Fannie Mae certificates
10,730

 

 
10,730

 

Mortgage loans held for sale
10,298

 

 
10,298

 

Derivatives:
 
 
 
 
 
 
 
Interest rate lock commitments
86

 

 

 
86

Total
$
579,736

 
$

 
$
579,650

 
$
86

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Forward commitments for the sale of mortgage loans
$
5

 
$

 
$
5

 
$

Total
$
5

 
$

 
$
5

 
$

 
 
 
 
Recurring Fair Value Measurements at Reporting Date Using
 
September 30, 2014
 
Quoted Prices in
Active Markets for
Identical Assets

 
                         Significant Other
Observable Inputs

 
Significant
Unobservable
Inputs

 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. government and agency obligations
$
2,023

 
$

 
$
2,023

 
$

REMIC's
555,607

 

 
555,607

 

Fannie Mae certificates
11,238

 

 
11,238

 

Mortgage loans held for sale
4,570

 

 
4,570

 

Derivatives:
 
 
 
 
 
 
 
Interest rate lock commitments
59

 

 

 
59

Total
$
573,497

 
$

 
$
573,438

 
$
59

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Forward commitments for the sale of mortgage loans
$
14

 
$

 
$
14

 
$

Total
$
14

 
$

 
$
14

 
$


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The table below presents a reconciliation of the beginning and ending balances and the location within the Consolidated Statements of Income where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$
169

 
$
68

 
$
59

 
$
158

Gain (loss) during the period due to changes in fair value:
 
 
 
 
 
 
 
Included in other non-interest income
(83
)
 
8

 
27

 
(82
)
Ending balance
$
86

 
$
76

 
$
86

 
$
76

Change in unrealized gains for the period included in earnings for assets held at end of the reporting date
$
86

 
$
76

 
$
86

 
$
76

Summarized in the tables below are those assets measured at fair value on a nonrecurring basis. This includes loans held for investment that are individually evaluated for impairment, excluding performing TDRs valued using the present value of cash flow method, and properties included in real estate owned that are carried at fair value less estimated costs to dispose at the reporting date.
 
 
 
Nonrecurring Fair Value Measurements at Reporting Date Using
 
June 30,
2015
 
Quoted Prices in
Active Markets for
Identical Assets

 
                        Significant Other
Observable Inputs

 
Significant
Unobservable
Inputs

 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans, net of allowance
$
114,652

 
$

 
$

 
$
114,652

Real estate owned(1)
14,415

 

 

 
14,415

Total
$
129,067

 
$

 
$

 
$
129,067

(1) 
Amounts represent fair value measurements of properties before deducting estimated costs to dispose.

 
 
 
Nonrecurring Fair Value Measurements at Reporting Date Using
 
September 30,
2014
 
Quoted Prices in
Active Markets for
Identical Assets

 
                 Significant Other
Observable Inputs

 
Significant
Unobservable
Inputs

 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans, net of allowance
$
127,432

 
$

 
$

 
$
127,432

Real estate owned(1)
17,970

 

 

 
17,970

Total
$
145,402

 
$

 
$

 
$
145,402

(1) 
Amounts represent fair value measurements of properties before deducting estimated costs to dispose.
The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy.
 
Fair Value
 
 
 
 
 
 
 
 
 
Weighted
 
6/30/2015
 
Valuation Technique(s)
 
Unobservable Input
 
Range
 
Average
Impaired loans, net of allowance
$114,652
 
Market comparables of collateral discounted to estimated net proceeds
 
Discount appraised value to estimated net proceeds based on historical experience:
 
 
 
 
 
 
 
 
• Residential Properties
 
0
-
24%
 
8.1%
 
 
 
 
 
 
 
Interest rate lock commitments
$86
 
Quoted Secondary Market pricing
 
Closure rate
 
0
-
100%
 
77.0%

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Table of Contents


 
Fair Value
 
 
 
 
 
 
 
 
 
Weighted
 
9/30/2014
 
Valuation Technique(s)
 
Unobservable Input
 
Range
 
Average
Impaired loans, net of allowance
$127,432
 
Market comparables of collateral discounted to estimated net proceeds
 
Discount appraised value to estimated net proceeds based on historical experience:
 
 
 
 
 
 
 
 
• Residential Properties
 
0
-
24%
 
8.3%
 
 
 
 
 
 
 
Interest rate lock commitments
$59
 
Quoted Secondary Market pricing
 
Closure rate
 
0
-
100%
 
76.0%
The following table presents the estimated fair value of the Company’s financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
June 30, 2015
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
  Cash and due from banks
$
26,545

 
$
26,545

 
$
26,545

 
$

 
$

  Interest earning cash equivalents
197,658

 
197,658

 
197,658

 

 

Investment securities available for sale
569,352

 
569,352

 

 
569,352

 

  Mortgage loans held for sale
10,658

 
10,667

 

 
10,667

 

  Loans, net:
 
 
 
 
 
 
 
 
 
Mortgage loans held for investment
11,004,450

 
11,372,347

 

 

 
11,372,347

Other loans
3,679

 
3,843

 

 

 
3,843

  Federal Home Loan Bank stock
69,470

 
69,470

 
N/A

 

 

  Private equity investments
245

 
245

 

 

 
245

  Accrued interest receivable
32,035

 
32,035

 

 
32,035

 

  Derivatives
86

 
86

 

 

 
86

Liabilities:
 
 
 
 
 
 
 
 
 
  NOW and passbook accounts
$
2,629,132

 
$
2,629,132

 
$

 
$
2,629,132

 
$

  Certificates of deposit
5,832,927

 
5,717,948

 

 
5,717,948

 

  Borrowed funds
1,899,080

 
1,908,810

 

 
1,908,810

 

  Borrowers’ advances for taxes and insurance
44,173

 
44,173

 

 
44,173

 

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

 
44,940

 

 
44,940

 

Derivatives
5

 
5

 

 
5

 


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Table of Contents


 
September 30, 2014
 
Carrying
 
Estimated Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
  Cash and due from banks
$
26,886

 
$
26,886

 
$
26,886

 
$

 
$

  Interest earning cash equivalents
154,517

 
154,517

 
154,517

 

 

Investment securities available for sale
568,868

 
568,868

 

 
568,868

 

  Mortgage loans held for sale
4,962

 
4,974

 

 
4,974

 

  Loans, net:
 
 
 
 
 
 
 
 
 
Mortgage loans held for investment
10,625,966

 
10,876,564

 

 

 
10,876,564

Other loans
4,721

 
4,894

 

 

 
4,894

  Federal Home Loan Bank stock
40,411

 
40,411

 
N/A

 

 

  Private equity investments
551

 
551

 

 

 
551

  Accrued interest receivable
31,952

 
31,952

 

 
31,952

 

Derivatives
59

 
59

 

 

 
59

Liabilities:
 
 
 
 
 
 
 
 
 
  NOW and passbook accounts
$
2,652,246

 
$
2,652,246

 
$

 
$
2,652,246

 
$

  Certificates of deposit
6,001,632

 
5,875,499

 

 
5,875,499

 

  Borrowed funds
1,138,639

 
1,139,647

 

 
1,139,647

 

  Borrowers’ advances for taxes and insurance
76,266

 
76,266

 

 
76,266

 

Principal, interest and escrow owed on loans serviced
54,670

 
54,670

 

 
54,670

 

Derivatives
14

 
14

 

 
14

 

Presented below is a discussion of the valuation techniques and inputs used by the Company to estimate fair value.

Cash and Due from Banks, Interest Earning Cash Equivalents— The carrying amount is a reasonable estimate of fair value.
Investment and Mortgage-Backed Securities— Estimated fair value for investment and mortgage-backed securities is based on quoted market prices, when available. If quoted prices are not available, management will use as part of their estimation process fair values which are obtained from third party independent nationally recognized pricing services using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.
Mortgage Loans Held for Sale— Fair value of mortgage loans held for sale is based on quoted secondary market pricing for loan portfolios with similar characteristics.
Loans— For mortgage loans held for investment and other loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. The use of current rates to discount cash flows reflects current market expectations with respect to credit exposure. Impaired loans are measured at the lower of cost or fair value as described earlier in this footnote.
Federal Home Loan Bank Stock— It is not practical to estimate the fair value of FHLB stock due to restrictions on its transferability. The fair value is estimated to be the carrying value, which is par. All transactions in capital stock of the FHLB Cincinnati are executed at par.
Private Equity Investments— Private equity investments are initially valued based upon transaction price. The carrying value is subsequently adjusted when it is considered necessary based on current performance and market conditions. The carrying values are adjusted to reflect expected exit values. These investments are included in Other Assets in the accompanying Consolidated Statements of Condition at fair value.
Deposits— The fair value of demand deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities.

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Borrowed Funds— Estimated fair value for borrowed funds is estimated using discounted cash flows and rates currently charged for borrowings of similar remaining maturities.
Accrued Interest Receivable, Borrowers’ Advances for Insurance and Taxes, and Principal, Interest and Related Escrow Owed on Loans Serviced— The carrying amount is a reasonable estimate of fair value.
Derivatives— Fair value is estimated based on the valuation techniques and inputs described earlier in this footnote.
12.
DERIVATIVE INSTRUMENTS
The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income. In addition, the Company enters into commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments meet the definition of a derivative and are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income. The Company had no derivatives designated as hedging instruments under FASB ASC 815, “Derivatives and Hedging,” at June 30, 2015 or September 30, 2014.
The following table provides the locations within the Consolidated Statements of Condition and the fair values for derivatives not designated as hedging instruments.
 
 
Asset Derivatives
 
 
June 30, 2015
 
September 30, 2014
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Interest rate lock commitments
 
Other Assets
 
$
86

 
Other Assets
 
$
59

 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives
 
 
June 30, 2015
 
September 30, 2014
 
 
Location
 
Fair Value
 
Location
 
Fair Value
Forward commitments for the sale of mortgage loans
 
Other Liabilities
 
$
5

 
Other Liabilities
 
$
14

The following table summarizes the locations and amounts of gain or (loss) recognized within the Consolidated Statements of Income on derivative instruments not designated as hedging instruments.
 
 
 
Amount of Gain or (Loss) Recognized in Income
on Derivatives
 
 
 
Three Months Ended
 
Nine Months Ended
 
Location of Gain or (Loss)
 
June 30,
 
June 30,
 
Recognized in Income
 
2015
 
2014
 
2015
 
2014
Interest rate lock commitments
Other non-interest income
 
$
(83
)
 
$
8

 
$
27

 
$
(82
)
Forward commitments for the sale of mortgage loans
Net gain on the sale of loans
 
(5
)
 
(17
)
 
9

 
(8
)
Total
 
 
$
(88
)
 
$
(9
)
 
$
36

 
$
(90
)
13.
RECENT ACCOUNTING PRONOUNCEMENTS
Pending as of June 30, 2015
In May 2015, the FASB issued ASU 2015-07 Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share. Under this amendment, investments for which fair value is measured at net value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. The amendments in this Update are effective for public companies for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting the amendments on its consolidated financial statements.

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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), affecting any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. ASC Topic 606 does not apply to rights or obligations associated with financial instruments. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of adopting the amendments on its consolidated financial statements.
In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure to reduce diversity by clarifying when an in-substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The only impact of these amendments on the Company's consolidated financial statements will be the addition of a disclosure of loans in foreclosure in Note 4. Loans and Allowance for Loan Losses.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company’s consolidated financial statements or do not apply to its operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include, among other things:
statements of our goals, intentions and expectations;
statements regarding our business plans and prospects and growth and operating strategies;
statements concerning trends in our provision for loan losses and charge-offs;
statements regarding the trends in factors affecting our financial condition and results of operations, including asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:
significantly increased competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;
general economic conditions, either nationally or in our market areas, including employment prospects, real estate values and conditions that are worse than expected;
decreased demand for our products and services and lower revenue and earnings because of a recession or other events;
adverse changes and volatility in the securities markets, credit markets or real estate markets;
legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements and changes related to our ability to pay dividends and the ability of Third Federal Savings, MHC to waive dividends;
our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;
changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board;
future adverse developments concerning Fannie Mae or Freddie Mac;
changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the FRS and changes in the level of government support of housing finance;
changes in policy and/or assessment rates of taxing authorities that adversely affect us;
changes in our organization, or compensation and benefit plans and changes in expense trends (including, but not limited to trends affecting non-performing assets, charge-offs and provisions for loan losses);
the impact of the governmental effort to restructure the U.S. financial and regulatory system, including the extensive reforms enacted in the DFA and the continuing impact of our coming under the jurisdiction of new federal regulators;
the inability of third-party providers to perform their obligations to us;
a slowing or failure of the moderate economic recovery;
the adoption of implementing regulations by a number of different regulatory bodies under the DFA, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us;
the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets, and
the ability of the U.S. Government to manage federal debt limits.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Please see Part II, Other Information Item 1A. Risk Factors for a discussion of certain risks related to our business.

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Overview
Our business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to our customers.
Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in April 2007, the nation’s largest mutually-owned savings and loan association based on total assets. We credit our success to our continued emphasis on our primary values: “Love, Trust, Respect, and a Commitment to Excellence, along with Having Fun.” Our values are reflected in the design and pricing of our loan and deposit products, and historically, in our Home Today program, as described below. Our values are further reflected in the Broadway Redevelopment Initiative (a long-term revitalization program encompassing the three-mile corridor of the Broadway-Slavic Village neighborhood in Cleveland, Ohio where our main office was established and continues to be located) and the educational programs we have established and/or supported. We intend to continue to adhere to our primary values and to support our customers and the communities in which we operate.
In connection with the financial crisis of 2008 and its subsequent turmoil, regionally high unemployment, weak residential real estate values, less than robust capital and credit markets, and a general lack of confidence in the financial services sector of the economy presented significant challenges for us. Since the latter portion of calendar 2012 however, improving regional employment levels, recovering residential real estate values, recovering capital and credit markets and greater confidence in the financial services sector have resulted in better credit metrics and improved operating results for us.
Management believes that the following matters are those most critical to our success: (1) controlling our interest rate risk exposure; (2) monitoring and limiting our credit risk; (3) maintaining access to adequate liquidity and diverse funding sources; and (4) monitoring and controlling operating expenses.
Controlling Our Interest Rate Risk Exposure. Although the significant housing and credit quality issues that arose in connection with the 2008 financial crisis had a distinctly negative effect on our operating results and, as described below, are a matter of continuing concern for us, historically our greatest risk has been our exposure to changes in interest rates. When we hold long-term, fixed-rate assets, funded by liabilities with shorter re-pricing characteristics, we are exposed to potentially adverse impacts from changing interest rates, and most notably when interest rates are rising. Generally, and particularly over extended periods of time that encompass full economic cycles, interest rates associated with longer-term assets, like fixed-rate mortgages, have been higher than interest rates associated with shorter-term funding sources, like deposits. This difference has been an important component of our net interest income and is fundamental to our operations. We manage the risk of holding longer-term, fixed-rate mortgage assets primarily by maintaining high levels of regulatory capital and by promoting adjustable-rate loans and shorter-term, fixed-rate loans.
High Levels of Regulatory Capital
At June 30, 2015, as computed in accordance with the revised, effective January 1, 2015, capital requirements and computational methodologies promulgated by the federal banking agencies, the Company’s Tier 1 (leverage) capital totaled $1.76 billion or 13.94% of net average assets and 24.09% of risk-weighted assets, while the Association’s Tier 1(leverage) capital totaled $1.58 billion or 12.53% of net average assets and 21.70% of risk-weighted assets. Each of these measures was more than twice the minimum requirements currently in effect for the Association, for designation as “well capitalized” under regulatory prompt corrective action provisions which set minimum levels of 5.00% of net average assets and 8.00% of risk-weighted assets. Refer to the Liquidity and Capital Resources of this Item 2 for additional discussion regarding regulatory capital requirements.
Promotion of Adjustable-Rate Loans and Shorter-Term, Fixed-Rate Loans
In July 2010, we began marketing an adjustable-rate mortgage loan product that provides us with improved interest rate risk characteristics when compared to a 30-year, fixed-rate mortgage loan. Since its introduction, our “Smart Rate” adjustable rate mortgage has offered borrowers an interest rate lower than that of a 30-year, fixed-rate loan. The interest rate in the Smart Rate mortgage is locked for three or five years then resets annually after that. The Smart Rate mortgage contains a feature to re-lock the rate an unlimited number of times at our then current interest rate and fee schedule, for another three or five years (which must be the same as the original lock period) without having to complete a full refinance transaction. Re-lock eligibility is subject to a satisfactory payment performance history by the borrower (never 60 days late, no 30-day delinquencies during the last twelve months, current at the time of re-lock, and no foreclosures or bankruptcies since the Smart Rate application was taken). In addition to a satisfactory payment history, re-lock eligibility requires that the property continues to be the borrower’s primary residence. The loan term cannot be extended in connection with a re-lock nor can new funds be advanced. All interest rate caps and floors remain as originated.

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Beginning in the latter portion of fiscal 2012, we began to feature our ten-year, fully amortizing fixed-rate first mortgage loan in our product promotions. The ten-year, fixed-rate loan has a less severe interest rate risk profile when compared to loans with fixed-rate terms of 15 to 30 years and helps us to more effectively manage our interest rate risk exposure, yet provides our borrowers with the certainty of a fixed interest rate throughout the life of the obligation.
The following tables set forth our first mortgage loan production and balances segregated by loan structure at origination.
 
For the Nine Months Ended June 30, 2015
 
For the Nine Months Ended June 30, 2014
 
Amount
 
Percent
 
Amount
 
Percent
First Mortgage Loan Originations:
 
 
 
 
 
 
 
ARM production
$
710,804

 
43.4
%
 
$
597,066

 
38.0
%
Fixed-rate production:
 
 
 
 
 
 
 
    Terms less than or equal to 10 years
479,721

 
29.3

 
660,993

 
42.1

    Terms greater than 10 years
448,468

 
27.3

 
312,896

 
19.9

        Total fixed-rate production
928,189

 
56.6

 
973,889

 
62.0

Total First Mortgage Loan Originations:
$
1,638,993

 
100.0
%
 
$
1,570,955

 
100.0
%
 
June 30, 2015
 
June 30, 2014
 
Amount
 
Percent
 
Amount
 
Percent
Residential Mortgage Loans Held For Investment, at the indicated dates:
 
 
 
 
 
 
 
ARM Loans
$
3,730,648

 
39.6
%
 
$
3,368,497

 
38.1
%
Fixed-rate Loans:
 
 
 
 
 
 
 
    Terms less than or equal to 10 years
1,772,000

 
18.8

 
1,371,556

 
15.5

    Terms greater than 10 years
3,908,834

 
41.6

 
4,100,731

 
46.4

        Total fixed-rate loans
5,680,834

 
60.4

 
5,472,287

 
61.9

Total Residential Mortgage Loans Held For Investment:
$
9,411,482

 
100.0
%
 
$
8,840,784

 
100.0
%
The following table sets forth the balances as of June 30, 2015 for all ARM loans segregated by the next scheduled interest rate reset date.
 
Current Balance of ARM Loans Scheduled for Interest Rate Reset
During the Fiscal Years Ending September 30,
(in thousands)
2015
$
82

2016
361,367

2017
789,669

2018
1,060,877

2019
738,667

2020
779,986

     Total
$
3,730,648

At June 30, 2015 and September 30, 2014, mortgage loans held for sale, all of which were long-term, fixed-rate first mortgage loans and all of which were held for sale to Fannie Mae, totaled $10.7 million and $5.0 million, respectively.

Other Interest Rate Risk Management Tools
In years prior to fiscal 2010, in addition to maintaining high levels of regulatory capital, we also managed interest rate risk by actively selling long-term, fixed-rate mortgage loans in the secondary market, a strategy pursuant to which we were able to modulate the amount of long-term, fixed-rate loans held in our portfolio. Also prior to fiscal 2010, we actively marketed home equity lines of credit which carry an adjustable rate of interest indexed to the prime rate and provide interest rate sensitivity to

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that portion of our assets. In light of the economic and regulatory environments that existed between 2010 and 2012, neither of these strategies were utilized during that period in managing our interest rate risk exposure.
Beginning in March 2012, the Association began offering redesigned home equity lines of credit subject to certain property and credit performance conditions. Through these redesigned products, we have begun the process of re-establishing home equity line of credit lending as a meaningful strategy used to manage our interest rate risk profile. At June 30, 2015, home equity lines of credit totaled $1.48 billion. Our home equity lending is discussed in the Allowance for Loan Losses section of the Critical Accounting Policies that follows this Overview.
While the sales of first mortgage loans and originations of new home equity lines of credit remain strategically important for us, since fiscal 2010, they have played only minor roles in our management of interest rate risk. Loan sales are discussed later in this Part 1, Item 2. under the heading Liquidity and Capital Resources, and in Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Notwithstanding our efforts to manage interest rate risk, should a rapid and substantial increase occur in general market interest rates, it is probable that, prospectively and particularly over a multi-year time horizon, the level of our net interest income would be adversely impacted.
Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the confluence of unfavorable regional and macro-economic events that culminated in the 2008 housing market collapse and financial crisis, coupled with our pre-2010 expanded participation in the second lien mortgage lending markets, significantly refocused our attention with respect to credit risk. In response to the evolving economic landscape, we continuously revise and update our quarterly analysis and evaluation procedures, as needed, for each category of our lending with the objective of identifying and recognizing all appropriate credit impairments. At June 30, 2015, 90% of our assets consisted of residential real estate loans (both “held for sale” and “held for investment”) and home equity loans and lines of credit, which were originated predominantly to borrowers in the states of Ohio and Florida. Our analytic procedures and evaluations include specific reviews of all home equity loans and lines of credit that become 90 or more days past due, as well as specific reviews of all first mortgage loans that become 180 or more days past due. We transfer performing home equity lines of credit subordinate to first mortgages delinquent greater than 90 days to non-accrual status. We also charge-off performing loans to collateral value and classify those loans as non-accrual within 60 days of notification of all borrowers filing Chapter 7 bankruptcy, that have not reaffirmed or been dismissed, regardless of how long the loans have been performing. Loans where at least one borrower has been discharged of their obligation in Chapter 7 bankruptcy, are classified as TDRs. At June 30, 2015, $48.9 million of loans in Chapter 7 bankruptcy status were included in total TDRs. At June 30, 2015, the recorded investment in non-accrual status loans included $46.8 million of performing loans in Chapter 7 bankruptcy status, of which $43.6 million were also reported as TDRs.
In response to the unfavorable regional and macro-economic environment that arose beginning in 2008, and in an effort to limit our credit risk exposure and improve the credit performance of new customers, we tightened our credit eligibility criteria in evaluating a borrower’s ability to successfully fulfill his or her repayment obligation and we revised the design of many of our loan products to require higher borrower down-payments, limited the products available for condominiums, eliminated certain product features (such as interest-only adjustable-rate loans and loans above certain loan-to-value ratios), and we previously suspended home equity lending products with the exception of bridge loans between June 2010 and March 2012. The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflect the higher credit standards to which we have subjected all new originations. As of June 30, 2015, loans originated prior to 2009 had a balance of $2.69 billion, of which $62.6 million, or 2.3%, were delinquent, while loans originated in 2009 and after had a balance of $8.41 billion, of which $8.4 million, or 0.1%, were delinquent.
One aspect of our heightened credit risk relates to high concentrations of our loans that are secured by residential real estate in individual states, such as Ohio and Florida, particularly in light of the difficulties that arose in connection with the 2008 housing crisis with respect to the real estate markets in those two states. At June 30, 2015, approximately 63.9% and 17.1% of the combined total of our residential Core and construction loans held for investment were secured by properties in Ohio and Florida, respectively. Our 30 or more days delinquency ratios on those loans in Ohio and Florida at June 30, 2015 were 0.5% and 0.6%, respectively. Our 30 or more days delinquency ratio for the Core portfolio as a whole was 0.4% at June 30, 2015. Also, at June 30, 2015, approximately 39.5% and 26.6% of our home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively. Our 30 days or more delinquency ratios on those loans in Ohio and Florida at June 30, 2015 were 1.1% and 0.8%, respectively. Our 30 or more days delinquency ratio for the home equity loans and lines of credit portfolio as a whole at June 30, 2015 was 0.8%. While we focus our attention on, and are concerned with respect to the resolution of all loan delinquencies, our highest concern relates to loans that are secured by properties in Florida. The "Loan Portfolio Composition" portion of this Overview section and the “Allowance for Loan Losses” portion of the Critical Accounting Policies section that immediately follows this Overview, provides extensive details regarding our loan

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portfolio composition, delinquency statistics, our methodology in evaluating our loan loss provisions and the adequacy of our allowance for loan losses. In an effort to moderate the concentration of our credit risk exposure in individual states, particularly Ohio and Florida, we have utilized direct mail marketing, our internet site and our customer service call center to extend our lending activities to other attractive geographic locations. Currently, in addition to Ohio and Florida, we are actively lending in 19 other states and the District of Columbia, and as a result of that activity, the concentration ratios of the combined total of our residential, Core and construction loans held for investment for Ohio and Florida, as disclosed earlier in this paragraph, have trended downward from their September 30, 2010 levels when the concentrations were 79.1% in Ohio and 19.0% in Florida. Of the total mortgage and equity loan originations for the nine months ended June 30, 2015, 38.1% are secured by properties in states other than Ohio or Florida. Although somewhat dissipating during the last two years, the lingering effects of the adverse economic conditions and market for real estate in Ohio and Florida that arose in connection with the financial crisis of 2008, continue to unfavorably impact the ability of borrowers in those areas to repay their loans.
Our residential Home Today loans are another area of heightened credit risk. Although the principal balance in these loans totaled $140.4 million at June 30, 2015, and constituted only 1.2% of our total “held for investment” loan portfolio balance, these loans comprised 23.2% and 25.2% of our 90 days or greater delinquencies and our total delinquencies, respectively, at that date. At June 30, 2015, approximately 95.4% and 4.4% of our residential, Home Today loans were secured by properties in Ohio and Florida, respectively. At June 30, 2015, the percentages of those loans delinquent 30 days or more in Ohio and Florida were 12.8% and 16.5%, respectively. The disparity between the portfolio composition ratio and delinquency composition ratio reflects the nature of the Home Today loans. We do not offer, and have 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, or low initial payment features with adjustable interest rates. Our Home Today loans, the majority of which were entered into with borrowers that had credit profiles that would not have otherwise qualified for our loan products due to deficient credit scores, generally contained the same features as loans offered to our Core borrowers. The overriding objective of our Home Today lending, just as it is with our Core lending, was to create successful homeowners. We have attempted to manage our Home Today credit risk by requiring that borrowers attend pre- and post-borrowing financial management education and counseling and that the borrowers be referred to us by a sponsoring organization with which we have partnered. Further, to manage the credit aspect of these loans, inasmuch as the majority of these buyers do not have sufficient funds for required down payments, many loans include private mortgage insurance. At June 30, 2015, 36.2% of Home Today loans included private mortgage insurance coverage. From a peak recorded investment of $306.6 million at December 31, 2007, the total recorded investment of the Home Today portfolio has declined to $138.6 million at June 30, 2015. This trend generally reflects the evolving conditions in the mortgage real estate market and the tightening of standards imposed by issuers of private mortgage insurance. As part of our effort to manage credit risk, effective March 27, 2009, the Home Today underwriting guidelines were revised to be substantially the same as our traditional mortgage product. At June 30, 2015, the recorded investment in Home Today loans originated subsequent to March 27, 2009 was $2.6 million. Unless private mortgage insurance requirements loosen among other things, we expect the Home Today portfolio to continue to decline in balance due to contractual amortization.
Maintaining Access to Adequate Liquidity and Diverse Funding Sources. For most insured depositories, customer and community confidence are critical to their ability to maintain access to adequate liquidity and to conduct business in an orderly fashion. The Company believes that maintaining high levels of capital is one of the most important factors in nurturing customer and community confidence. Accordingly, we have managed the pace of our growth in a manner that reflects our emphasis on high capital levels. At June 30, 2015, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a “well capitalized” status) was 12.53%. The Association's current Tier 1 (leverage) capital ratio is lower than its ratio at September 30, 2014 (13.47%), due primarily to:
the implementation, effective January 1, 2015, of the modified calculation methodology for the Tier 1 (leverage) capital ratio related to the standardized approach of the Basel III capital framework for U.S. banking organizations ("Basel III Rules"). This computational change reduced our Tier 1 (leverage) capital ratio by an estimated 46 basis points. The new methodology specifies that the denominator of the ratio is defined as "net average assets" rather than "adjusted tangible assets", as had previously been the case. As more fully described below in this Part 1, Item 2. under the heading Comparison of Financial Condition at June 30, 2015 and September 30, 2014, the strategy to increase net income that we employed beginning October 1, 2014, increased the balance of our average assets during a portion of the quarter, but did not impact our adjusted tangible assets at quarter end, as used in the denominator of the previous methodology's calculation; and
a $66 million cash dividend payment that the Association made to the Company, its sole shareholder, in December 2014 that reduced the Association's Tier 1 (leverage) capital ratio by an estimated 55 basis points. The amount of the dividend was determined using regulatory guidelines that generally provide a "safe harbor" authorization for dividends in an amount that does not exceed the Association's current calendar year-to-date net income, plus the preceding two year's retained net income, less prior dividend payments made during that time frame.

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Because of its intercompany nature, this dividend payment did not impact the Company's consolidated capital ratios. Additionally, on February 24, 2015, the Company received the non-objection of its regulators for the Association to pay a special dividend of $150 million to the Company. This amount is equal to the voluntary contribution of capital that the Company made to the Association in October 2010. Payment of this special dividend will be made in the future as funds are needed by the Company. Because of its intercompany nature, this future dividend payment will have no impact on the Company's capital ratios or its consolidated statement of condition but will reduce the Association's reported capital ratios.
We expect to continue to remain a well capitalized institution.
In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits (including brokered CDs), borrowings from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. At June 30, 2015, deposits totaled $8.46 billion (including $520.1 million of brokered CDs), while borrowings totaled $1.90 billion and borrowers’ advances and servicing escrows totaled $89.1 million, combined. In evaluating funding sources, we consider many factors, including cost, duration, current availability, expected sustainability, impact on operations and capital levels.
To attract deposits, we offer our customers attractive rates of return on our deposit products. Our deposit products typically offer rates that are highly competitive with the rates on similar products offered by other financial institutions. We intend to continue this practice, subject to market conditions.
We preserve the availability of alternative funding sources through various mechanisms. First, by maintaining high capital levels, we retain the flexibility to increase our balance sheet size without jeopardizing our capital adequacy. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. Second, we pledge available real estate mortgage loans and investment securities with the FHLB of Cincinnati and the FRB-Cleveland. At June 30, 2015, these collateral pledge support arrangements provide the Association with the ability to immediately borrow an additional $853.8 million from the FHLB of Cincinnati and $123.8 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the immediately available limits at June 30, 2015 was $3.45 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement we would need to increase our ownership of FHLB of Cincinnati common stock by an additional $69.0 million. Third, we invest in high quality marketable securities that exhibit limited market price variability, and to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At June 30, 2015, our investment securities portfolio totaled $569.4 million. Finally, cash flows from operating activities have been a regular source of funds. During the nine months ended June 30, 2015 and 2014, cash flows from operations totaled $76.2 million and $85.3 million, respectively.
Historically, a portion of the residential first mortgage loans that we originated were considered to be highly liquid as they were eligible for delivery/sale to Fannie Mae. However, due to delivery requirement changes imposed by Fannie Mae during and subsequent to the 2008 financial crisis, effective July 1, 2010, that was no longer an available source of liquidity. In response to Fannie Mae's delivery requirement changes, during fiscal 2013 we took the following measures: (1) we completed $276.9 million of non-agency eligible, whole loan sales, all on a servicing retained basis; and (2) we implemented certain loan origination changes required by Fannie Mae which resulted in our November 15, 2013 reinstatement as an approved seller to Fannie Mae. The non-agency sales which included both fixed-rate and Smart Rate loans, demonstrated that, with adequate lead time, the majority of our residential, first mortgage loan portfolio could be available for liquidity management purposes. Also, implementation of the loan origination changes required by Fannie Mae, to which a portion of our loan production will be subjected, elevates the level of liquidity available for those loans. At June 30, 2015, $10.7 million of agency eligible, long-term, fixed-rate first mortgage loans were classified as “held for sale”. During the nine months ended June 30, 2015, $20.9 million of agency-compliant HARP II loans and $82.0 million of long-term, fixed-rate, agency-compliant, non-HARP II first mortgage loans were sold to Fannie Mae.
Overall, while customer and community confidence can never be assured, the Company believes that its liquidity is adequate and that it has access to adequate alternative funding sources.
Monitoring and Controlling Operating Expenses. We continue to focus on managing operating expenses. Our ratio of non-interest expense to average assets was 1.48% for the nine months ended June 30, 2015 and 1.52% for the nine months ended June 30, 2014. As of June 30, 2015, our average assets per full-time employee and our average deposits per full-time employee were $12.1 million and $8.4 million, respectively. We believe that each of these measures compares favorably with the averages for our peer group. Our average deposits (exclusive of brokered CDs) held at our branch offices ($209.0 million

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per branch office as of June 30, 2015) contributes to our expense management efforts by limiting the overhead costs of serving our deposit customers. We will continue our efforts to control operating expenses as we grow our business.



Loan Portfolio Composition. The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location at the indicated dates, excluding loans held for sale. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of other consumer loans are considered immaterial. Therefore, neither is segregated by geographic location. 
 
June 30, 2015
 
March 31, 2015
 
September 30, 2014
 
June 30, 2014
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
$
5,906,917

 
 
 
$
5,930,611

 
 
 
$
5,986,801

 
 
 
$
6,004,940

 
 
Florida
1,597,748

 
 
 
1,582,412

 
 
 
1,570,087

 
 
 
1,563,114

 
 
Other
1,766,385

 
 
 
1,615,600

 
 
 
1,271,951

 
 
 
1,112,910

 
 
Total Residential Core
9,271,050

 
83.5
%
 
9,128,623

 
83.1
%
 
8,828,839

 
82.2
%
 
8,680,964

 
81.7
%
Residential Home Today

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
133,918

 
 
 
138,762

 
 
 
146,974

 
 
 
152,293

 
 
Florida
6,212

 
 
 
6,361

 
 
 
6,909

 
 
 
7,214

 
 
Other
302

 
 
 
304

 
 
 
313

 
 
 
313

 
 
Total Residential Home Today
140,432

 
1.2

 
145,427

 
1.4

 
154,196

 
1.5

 
159,820

 
1.5

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
647,976

 
 
 
654,729

 
 
 
675,911

 
 
 
679,660

 
 
Florida
437,455

 
 
 
453,234

 
 
 
475,375

 
 
 
486,884

 
 
California
216,372

 
 
 
213,794

 
 
 
213,309

 
 
 
214,747

 
 
Other
340,024

 
 
 
334,574

 
 
 
332,334

 
 
 
338,339

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

 
14.8

 
1,656,331

 
15.1

 
1,696,929

 
15.8

 
1,719,630

 
16.2

Total Construction
51,020

 
0.5

 
44,949

 
0.4

 
57,104

 
0.5

 
64,239

 
0.6

Other consumer loans
3,679

 

 
3,874

 

 
4,721

 

 
3,710

 

Total loans receivable
11,108,008

 
100.0
%
 
10,979,204

 
100.0
%
 
10,741,789

 
100.0
%
 
10,628,363

 
100.0
%
Deferred loan expenses (fees), net
7,144

 
 
 
4,525

 
 
 
(1,155
)
 
 
 
(4,408
)
 
 
Loans in process
(30,119
)
 
 
 
(25,068
)
 
 
 
(28,585
)
 
 
 
(32,222
)
 
 
Allowance for loan losses
(76,904
)
 
 
 
(77,093
)
 
 
 
(81,362
)
 
 
 
(82,502
)
 
 
Total loans receivable, net
$
11,008,129

 
 
 
$
10,881,568

 
 
 
$
10,630,687

 
 
 
$
10,509,231

 
 

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On June 30, 2015, the unpaid principal balance of our home equity loans and lines of credit portfolio consisted of $163.9 million in home equity loans (which included $142.2 million of home equity lines of credit, which are in the amortization period and no longer eligible to be drawn upon, and $1.4 million in bridge loans) and $1.48 billion in home equity lines of credit. The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of June 30, 2015. Home equity lines of credit in the draw period are reported according to geographic distribution.
 
 
Credit
Exposure
 
Principal
Balance
 
Percent
Delinquent
90 Days or More
 
Mean CLTV
Percent at
Origination (2)
 
Current Mean
CLTV Percent (3)
 
 
(Dollars in thousands)
 
 
 
 
 
 
Home equity lines of credit in draw period (by state)
 
 
 
 
 
 
 
 
 
 
Ohio
 
$
1,200,633

 
$
548,922

 
0.18
%
 
60
%
 
59
%
Florida
 
591,828

 
412,180

 
0.35
%
 
61
%
 
70
%
California
 
326,652

 
206,913

 
0.08
%
 
66
%
 
62
%
Other (1)
 
552,588

 
309,958

 
0.26
%
 
63
%
 
64
%
Total home equity lines of credit in draw period
 
2,671,701

 
1,477,973

 
0.23
%
 
61
%
 
62
%
Home equity lines in repayment, home equity loans and bridge loans
 
163,854

 
163,854

 
2.30
%
 
67
%
 
50
%
Total
 
$
2,835,555

 
$
1,641,827

 
0.44
%
 
62
%
 
61
%
_________________
(1)
No individual other state has a committed or drawn balance greater than 10% of total equities nor 5% of total loans.
(2)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)
Current Mean CLTV is based on best available first mortgage and property values as of June 30, 2015. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
At June 30, 2015, 43.1% of our home equity lending portfolio was either in a first lien position (25.6%), in a subordinate (second) lien position behind a first lien that we held (9.2%) or behind a first lien that was held by a loan that we serviced for others (8.3%). In addition, at June 30, 2015, 18.3% of our home equity line of credit portfolio in the draw period was making only the required minimum payment on their outstanding line balance.

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Table of Contents


The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of June 30, 2015. Home equity lines of credit in the draw period are stratified by the calendar year originated:
 
 
Credit
Exposure
 
Principal
Balance
 
Percent
Delinquent
90 Days or More
 
Mean CLTV
Percent at
Origination (1)
 
Current Mean
CLTV
Percent (2)
 
 
(Dollars in thousands)
 
 
 
 
 
 
Home equity lines of credit in draw period
 
 
 
 
 
 
 
 
 
 
2005 and prior
 
$
515,820

 
$
275,572

 
0.31
%
 
57
%
 
57
%
2006
 
215,208

 
136,792

 
0.49
%
 
65
%
 
71
%
2007
 
338,221

 
230,312

 
0.41
%
 
66
%
 
73
%
2008
 
721,393

 
450,626

 
0.20
%
 
63
%
 
64
%
2009
 
289,750

 
141,049

 
0.03
%
 
55
%
 
57
%
2010
 
24,102

 
10,398

 
%
 
58
%
 
53
%
2011
 
232

 
164

 
%
 
39
%
 
49
%
2012
 
26,757

 
11,243

 
%
 
50
%
 
46
%
2013
 
76,619

 
35,143

 
%
 
60
%
 
52
%
2014
 
268,465

 
114,774

 
%
 
60
%
 
57
%
2015
 
195,134

 
71,900

 
%
 
61
%
 
61
%
Total home equity lines of credit in draw period
 
2,671,701

 
1,477,973

 
0.23
%
 
61
%
 
62
%
Home equity lines in repayment, home equity loans and bridge loans
 
163,854

 
163,854

 
2.30
%
 
67
%
 
50
%
Total
 
$
2,835,555

 
$
1,641,827

 
0.44
%
 
62
%
 
61
%
_________________
(1)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(2)
Current Mean CLTV is based on best available first mortgage and property values as of June 30, 2015. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
In general, the home equity line of credit product originated prior to June 2010 (when new home equity lending was temporarily suspended) was characterized by a ten year draw period followed by a ten year repayment period; however, there were two types of transactions that could result in a draw period that extended beyond ten years. The first transaction involved customer requests for increases in the amount of their home equity line of credit. When the customer’s credit performance and profile supported the increase, the draw period term was reset for the ten year period following the date of the increase in the home equity line of credit amount. A second transaction that impacted the draw period involved extensions. For a period of time prior to June 2008, the Association had a program that evaluated home equity lines of credit that were nearing the end of their draw period and made a determination as to whether or not the customer should be offered an additional ten year draw period. If the account and customer met certain pre-established criteria, an offer was made to extend the otherwise expiring draw period by ten years from the date of the offer. If the customer chose to accept the extension, the origination date of the account remained unchanged but the account would have a revised draw period that was extended by ten years. As a result of these two programs, the reported draw periods for certain home equity line of credit accounts exceed ten years.


42

Table of Contents


The following table sets forth by fiscal year that the draw period expires, the principal balance of home equity lines of credit in the draw period as of June 30, 2015, segregated by the current combined LTV range.
 
Current CLTV Category
Home equity lines of credit in draw period (by end of draw fiscal year):
< 80%
 
80 - 89.9%
 
90 - 100%
 
>100%
 
Unknown (2)
 
Total
 
(Dollars in thousands)
2015
$15,428
 
$2,412
 
$2,245
 
$1,739
 
$136
 
$21,960
2016
76,540

 
20,082

 
14,943

 
31,025

 
750

 
143,340

2017
129,286

 
32,076

 
26,809

 
49,697

 
3,694

 
241,562

2018 (1)
375,483

 
80,582

 
47,858

 
44,818

 
7,620

 
556,361

2019 (1)
327,657

 
36,702

 
7,336

 
3,954

 
5,932

 
381,581

2020 (1)
127,541

 
4,145

 
306

 
200

 
842

 
133,034

Post 2020
44

 
42

 

 

 
49

 
135

   Total
$1,051,979
 
$176,041
 
$99,497
 
$131,433
 
$19,023
 
$1,477,973
______________________
(1)
Home equity lines of credit whose draw period ends in fiscal years 2018, 2019, and 2020 include $18,070, $93,519, and $104,146 respectively, of lines where the customer has an amortizing payment during the draw period.
(2)
Market data necessary for stratification is not readily available.
As shown in the origination by year table, which is the second preceding table above, the percent of loans delinquent 90 days or more (seriously delinquent) originated during the years preceding the 2008 financial and housing crisis are comparatively higher than the years following 2008. Those years saw rapidly increasing housing prices, especially in our Florida market. As the housing prices declined along with the general economic downturn and higher levels of unemployment that accompanied the 2008 financial crisis, we see that reflected in delinquencies for those years. Home equity lines of credit originated during those years also saw higher loan amounts, higher permitted loan-to-value ratios, and lower credit scores. Reflective of the general decrease in housing values since 2006 and through the aftermath of the 2008 financial crisis, current mean CLTV percentages remain higher than the mean CLTV percentages at origination.
As described above, in light of the past and continuing weakness in the housing market, the current level of delinquencies and the uncertainty with respect to future employment levels and economic prospects, we currently conduct an expanded loan level evaluation of our equity lines of credit which are delinquent 90 days or more.

43

Table of Contents


The following table sets forth the breakdown of current mean CLTV percentages for our home equity lines of credit in the draw period as of June 30, 2015.
 
 
Credit
Exposure
 
Principal
Balance
 
Percent
of Total
 
Percent
Delinquent
90 Days or
More
 
Mean CLTV
Percent at
Origination (2)
 
Current
Mean
CLTV
Percent (3)
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Home equity lines of credit in draw period (by current mean CLTV)
 
 
 
 
 
 
 
 
 
 
 
 
< 80%
 
$
2,116,647

 
$
1,051,979

 
71.2
%
 
0.15
%
 
57
%
 
54
%
80 - 89.9%
 
253,395

 
176,041

 
11.9
%
 
0.31
%
 
78
%
 
84
%
90 - 100%
 
123,851

 
99,497

 
6.7
%
 
0.23
%
 
80
%
 
94
%
> 100%
 
143,009

 
131,433

 
8.9
%
 
0.70
%
 
81
%
 
119
%
Unknown (1)
 
34,799

 
19,023

 
1.3
%
 
1.03
%
 
55
%
 
(1
)
 
 
$
2,671,701

 
$
1,477,973

 
100.0
%
 
0.23
%
 
61
%
 
62
%
_________________
(1)
Market data necessary for stratification is not readily available.
(2)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)
Current Mean CLTV is based on best available first mortgage and property values as of June 30, 2015. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
Delinquent Loans. The following tables set forth the number and recorded investment in loan delinquencies by type, segregated by geographic location and severity of delinquency at the dates indicated. The majority of our construction loan portfolio is secured by properties located in Ohio and there were no delinquencies in the other consumer loan portfolio; therefore, neither is segregated by geography.
 
 
Loans Delinquent for
 
Total
 
 
30-89 Days
 
90 Days or More
 
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
 
(Dollars in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
118

 
$
10,537

 
210

 
$
17,677

 
328

 
$
28,214

Florida
 
6

 
1,171

 
79

 
8,135

 
85

 
9,306

Other
 
2

 
168

 
8

 
1,043

 
10

 
1,211

Total Residential Core
 
126

 
11,876

 
297

 
26,855

 
423

 
38,731

Residential Home Today
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
130

 
7,142

 
254

 
9,708

 
384

 
16,850

Florida
 
5

 
340

 
12

 
675

 
17

 
1,015

Kentucky
 

 

 
1

 
42

 
1

 
42

Total Residential Home Today
 
135

 
7,482

 
267

 
10,425

 
402

 
17,907

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
137

 
3,598

 
214

 
3,573

 
351

 
7,171

Florida
 
28

 
1,556

 
146

 
1,875

 
174

 
3,431

California
 
8

 
716

 
14

 
266

 
22

 
982

Other
 
23

 
903

 
58

 
1,445

 
81

 
2,348

Total Home equity loans and lines of credit
 
196

 
6,773

 
432

 
7,159

 
628

 
13,932

Construction
 

 

 
1

 
427

 
1

 
427

Other consumer loans
 

 

 

 

 

 

Total
 
457

 
$
26,131

 
997

 
$
44,866

 
1,454

 
$
70,997


44

Table of Contents


 
 
Loans Delinquent for
 
Total
 
 
30-89 Days
 
90 Days or More
 
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
 
(Dollars in thousands)
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
102

 
$
9,026

 
223

 
$
19,972

 
325

 
$
28,998

Florida
 
7

 
885

 
96

 
9,865

 
103

 
10,750

Other
 

 

 
8

 
1,066

 
8

 
1,066

Total Residential Core
 
109

 
9,911

 
327

 
30,903

 
436

 
40,814

Residential Home Today
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
108

 
6,290

 
289

 
11,553

 
397

 
17,843

Florida
 
5

 
372

 
13

 
772

 
18

 
1,144

Kentucky
 
1

 
42

 

 

 
1

 
42

Total Residential Home Today
 
114

 
6,704

 
302

 
12,325

 
416

 
19,029

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
139

 
3,969

 
201

 
3,614

 
340

 
7,583

Florida
 
49

 
2,540

 
160

 
1,912

 
209

 
4,452

California
 
8

 
664

 
16

 
436

 
24

 
1,100

Other
 
21

 
762

 
63

 
1,654

 
84

 
2,416

Total Home equity loans and lines of credit
 
217

 
7,935

 
440

 
7,616

 
657

 
15,551

Construction
 

 

 

 

 

 

Other consumer loans
 

 

 

 

 

 

Total
 
440

 
$
24,550

 
1,069

 
$
50,844

 
1,509

 
$
75,394


 
 
Loans Delinquent for
 
Total
 
 
30-89 Days
 
90 Days or More
 
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
 
(Dollars in thousands)
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
108

 
$
10,416

 
263

 
$
22,218

 
371

 
$
32,634

Florida
 
14

 
2,006

 
141

 
14,291

 
155

 
16,297

Other
 
3

 
544

 
4

 
942

 
7

 
1,486

Total Residential Core
 
125

 
12,966

 
408

 
37,451

 
533

 
50,417

Residential Home Today
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
168

 
9,797

 
328

 
14,256

 
496

 
24,053

Florida
 
9

 
643

 
18

 
849

 
27

 
1,492

Total Residential Home Today
 
177

 
10,440

 
346

 
15,105

 
523

 
25,545

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
123

 
3,753

 
214

 
3,637

 
337

 
7,390

Florida
 
36

 
2,365

 
184

 
3,010

 
220

 
5,375

California
 
11

 
753

 
16

 
298

 
27

 
1,051

Other
 
21

 
958

 
59

 
2,092

 
80

 
3,050

Total Home equity loans and lines of credit
 
191

 
7,829

 
473

 
9,037

 
664

 
16,866

Construction
 
1

 
200

 

 

 
1

 
200

Other consumer loans
 

 

 

 

 

 

Total
 
494

 
$
31,435

 
1,227

 
$
61,593

 
1,721

 
$
93,028



45

Table of Contents


 
 
Loans Delinquent for
 
Total
 
 
30-89 Days
 
90 Days or More
 
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
 
(Dollars in thousands)
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
135

 
$
14,053

 
260

 
$
22,841

 
395

 
$
36,894

Florida
 
16

 
2,431

 
167

 
17,535

 
183

 
19,966

Kentucky
 
2

 
331

 
3

 
495

 
5

 
826

Total Residential Core
 
153

 
16,815

 
430

 
40,871

 
583

 
57,686

Residential Home Today
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
162

 
9,590

 
336

 
14,658

 
498

 
24,248

Florida
 
3

 
184

 
17

 
798

 
20

 
982

Total Residential Home Today
 
165

 
9,774

 
353

 
15,456

 
518

 
25,230

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
 
118

 
3,451

 
217

 
4,845

 
335

 
8,296

Florida
 
40

 
2,438

 
188

 
3,500

 
228

 
5,938

California
 
6

 
294

 
16

 
588

 
22

 
882

Other
 
29

 
1,783

 
57

 
1,887

 
86

 
3,670

Total Home equity loans and lines of credit
 
193

 
7,966

 
478

 
10,820

 
671

 
18,786

Construction
 

 

 

 

 

 

Other consumer loans
 

 

 

 

 

 

Total
 
511

 
$
34,555

 
1,261

 
$
67,147

 
1,772

 
$
101,702

Loans delinquent 90 days or more were 0.4% of total net loans at June 30, 2015 compared to 0.5% at March 31, 2015, and decreased 0.2% from 0.6% at June 30, 2014. Loans delinquent 30 to 89 days remained at 0.2% of total net loans at June 30, 2015 compared to March 31, 2015 and decreased 0.1% from June 30, 2014. During the last several years, the inability of borrowers to repay their loans has been primarily a result of high unemployment and uncertain economic prospects in our primary lending markets. Although regional employment levels have improved, we believe the breadth and sustainability of the economic recovery has slowed and, accordingly, some borrowers who were current on their loans at June 30, 2015 may experience payment problems in the future. The excess number of housing units available for sale in certain segments of the market today also may limit a borrower’s ability to sell a home he or she can no longer afford. In many Florida areas, although housing values have recovered to a certain extent over the past year, values remain depressed from the state’s market peak which may limit a borrower’s ability to sell a home at a price that equals or exceeds the balance of the outstanding mortgage indebtedness.

46

Table of Contents


Non-Performing Assets and Troubled Debt Restructurings. The following table sets forth the recorded investments and categories of our non-performing assets and TDRs at the dates indicated.
 
 
June 30,
2015
 
March 31,
2015
 
September 30,
2014
 
June 30,
2014
 
 
(Dollars in thousands)
Non-accrual loans:
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
67,458

 
$
71,180

 
$
79,388

 
$
80,369

Residential Home Today
 
24,393

 
26,455

 
29,960

 
31,007

Home equity loans and lines of credit
 
23,168

 
24,658

 
26,189

 
28,267

Construction
 
427

 

 

 

Other consumer loans
 

 

 

 

Total non-accrual loans (1)(2)
 
115,446

 
122,293

 
135,537

 
139,643

Real estate owned
 
19,381

 
20,278

 
21,768

 
20,593

Other non-performing assets
 

 

 

 

Total non-performing assets
 
$
134,827

 
$
142,571

 
$
157,305

 
$
160,236

Ratios:
 
 
 
 
 
 
 
 
Total non-accrual loans to total loans
 
1.04
%
 
1.12
%
 
1.27
%
 
1.32
%
Total non-accrual loans to total assets
 
0.94
%
 
1.01
%
 
1.15
%
 
1.19
%
Total non-performing assets to total assets
 
1.10
%
 
1.18
%
 
1.33
%
 
1.37
%
TDRs: (not included in non-accrual loans above)
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
60,251

 
$
61,099

 
$
59,630

 
$
59,252

Residential Home Today
 
36,741

 
37,404

 
39,148

 
40,696

Home equity loans and lines of credit
 
10,789

 
9,094

 
8,117

 
7,476

Construction
 

 

 

 

Other consumer loans
 

 

 

 

Total
 
$
107,781

 
$
107,597

 
$
106,895

 
$
107,424

_________________
(1)
Totals at June 30, 2015March 31, 2015, September 30, 2014 and June 30, 2014, include $56.8 million, $57.7 million, $58.7 million and $56.1 million, respectively, in TDRs, which are less than 90 days past due but included with nonaccrual loans for a minimum period of six months from the restructuring date due to their non-accrual status prior to restructuring, because they have been partially charged off, or because all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy.
(2)
Includes $17.1 million, $19.0 million, $20.9 million and $22.4 million in TDRs that are 90 days or more past due at June 30, 2015March 31, 2015, September 30, 2014 and June 30, 2014, respectively.
The gross interest income that would have been recorded during the nine months ended June 30, 2015 and June 30, 2014 on non-accrual loans if they had been accruing during the entire period and TDRs if they had been current and performing in accordance with their original terms during the entire period was $9.7 million and $10.2 million, respectively. The interest income recognized on those loans included in net income for the nine months ended June 30, 2015 and June 30, 2014 was $4.9 million and $5.1 million, respectively.
At June 30, 2015March 31, 2015, September 30, 2014 and June 30, 2014, the recorded investment of impaired loans includes accruing TDRs and loans that are returned to accrual status when contractual payments are less than 90 days past due. These loans continue to be individually evaluated for impairment until at a minimum, contractual payments are less than 30 days past due. Also, the recorded investment of non-accrual loans includes loans that are not included in the recorded investment of impaired loans because they are included in loans collectively evaluated for impairment.

47

Table of Contents


The table below sets forth the recorded investments and categories between non-accrual loans and impaired loans at the dates indicated.
 
 
June 30,
2015
 
March 31, 2015
 
September 30,
2014
 
June 30,
2014
 
 
(Dollars in thousands)
Non-Accrual Loans
 
$
115,446

 
$
122,293

 
$
135,537

 
$
139,643

Accruing TDRs
 
107,781

 
107,597

 
106,895

 
107,424

Performing Impaired
 
4,882

 
5,417

 
5,389

 
5,777

Collectively Evaluated
 
(8,552
)
 
(11,646
)
 
(14,435
)
 
(14,161
)
Total Impaired loans
 
$
219,557

 
$
223,661

 
$
233,386

 
$
238,683

In response to the economic challenges facing many borrowers, the Association continues to restructure loans, resulting in $181.6 million of TDRs (accrual and non-accrual) recorded at June 30, 2015. There was a $4.8 million decrease in the recorded investment of TDRs from September 30, 2014 and a $4.3 million decrease in the aggregate balance from June 30, 2014.
Loan restructuring is a method used to help families keep their homes and preserve our neighborhoods. This involves making changes to the borrowers’ loan terms through interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions, including beyond that provided in the original agreement; principal forgiveness; capitalization of delinquent payments in special situations; or some combination of the above. Loans discharged through Chapter 7 bankruptcy are also reported as TDRs per OCC interpretive guidance issued in July 2012. For discussion on impairment measurement, see Note 4 to the Unaudited Interim Consolidated Financial Statements: LOANS AND ALLOWANCE FOR LOAN LOSSES.

48

Table of Contents


The following table sets forth the recorded investment in accrual and non-accrual TDRs, by the types of concessions granted, as of June 30, 2015.
 
 
Reduction in
Interest Rates
 
Payment
Extensions
 
Forbearance
or Other Actions
 
Multiple
Concessions
 
Multiple
Restructurings
 
Bankruptcy
 
Total
 
 
(In thousands)
Accrual
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
14,734

 
$
691

 
$
7,354

 
$
17,541

 
$
11,864

 
$
8,067

 
$
60,251

Residential Home Today
 
5,983

 

 
4,129

 
11,679

 
13,702

 
1,248

 
36,741

Home equity loans and lines of credit
 
99

 
2,656

 
309

 
3,101

 
347

 
4,277

 
10,789

Construction
 

 

 

 

 

 

 

Total
 
$
20,816

 
$
3,347

 
$
11,792

 
$
32,321

 
$
25,913

 
$
13,592

 
$
107,781

Non-Accrual, Performing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
1,483

 
$
155

 
$
374

 
$
3,383

 
$
8,950

 
$
20,301

 
$
34,646

Residential Home Today
 
1,332

 
10

 
607

 
926

 
5,403

 
3,633

 
11,911

Home equity loans and lines of credit
 

 
71

 
82

 
501

 
492

 
9,065

 
10,211

Construction
 

 

 

 

 

 

 

Total
 
$
2,815

 
$
236

 
$
1,063

 
$
4,810

 
$
14,845

 
$
32,999

 
$
56,768

Non-Accrual, Non-Performing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
492

 
$
100

 
$
848

 
$
1,033

 
$
2,770

 
$
3,902

 
$
9,145

Residential Home Today
 
855

 
5

 
1,481

 
312

 
3,152

 
1,640

 
7,445

Home equity loans and lines of credit
 

 
87

 
42

 

 

 
332

 
461

Construction
 

 

 

 

 

 

 

Total
 
$
1,347

 
$
192

 
$
2,371

 
$
1,345

 
$
5,922

 
$
5,874

 
$
17,051

TDRs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
16,709

 
$
946

 
$
8,576

 
$
21,957

 
$
23,584

 
$
32,270

 
$
104,042

Residential Home Today
 
8,170

 
15

 
6,217

 
12,917

 
22,257

 
6,521

 
56,097

Home equity loans and lines of credit
 
99

 
2,814

 
433

 
3,602

 
839

 
13,674

 
21,461

Construction
 

 

 

 

 

 

 

Total
 
$
24,978

 
$
3,775

 
$
15,226

 
$
38,476

 
$
46,680

 
$
52,465

 
$
181,600

TDRs in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan was not accruing interest at the time of restructuring, continues to not accrue interest and is performing according to the terms of the restructuring, but has not been current for at least six consecutive months since its restructuring, has a partial charge-off, or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status, where all borrowers have filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring.
Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially give rise to materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are our policies with respect to our allowance for loan losses, mortgage servicing rights, income taxes and pension benefits.


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Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. Our allowance for loan losses consists of two components:
(1)
individual valuation allowances established for any impaired loans dependent on cash flows, such as performing TDRs, and IVAs related to a portion of the allowance on loans individually reviewed that represents further deterioration in the fair value of the collateral not yet identified as uncollectible; and
(2)
general valuation allowances, which are comprised of quantitative GVAs, which are general allowances for loan losses for each loan type based on historical loan loss experience and qualitative GVAs, which are adjustments to the quantitative GVAs, maintained to cover uncertainties that affect our estimate of incurred probable losses for each loan type.
The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include:
changes in lending policies and procedures including underwriting standards, collection, charge-off or recovery practices;
changes in national, regional, and local economic and business conditions and trends including housing market factors and trends, such as the status of loans in foreclosure, real estate in judgment and real estate owned, and unemployment statistics and trends;
changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw period;
changes in the experience, ability or depth of lending management;
changes in the volume or severity of past due loans, volume of nonaccrual loans, or the volume and severity of adversely classified loans including the trending of delinquency statistics (both current and historical), historical loan loss experience and trends, the frequency and magnitude of multiple restructurings of loans previously the subject of TDRs, and uncertainty surrounding borrowers’ ability to recover from temporary hardships for which short-term loan restructurings are granted;
changes in the quality of the loan review system;
changes in the value of the underlying collateral including asset disposition loss statistics (both current and historical) and the trending of those statistics, and additional charge-offs on individually reviewed loans;
existence of any concentrations of credit; and
effect of other external factors such as competition, or legal and regulatory requirements including market conditions and regulatory directives that impact the entire financial services industry.
When loan restructurings qualify as TDRs and the loans are performing according to the terms of the restructuring, we record an IVA based on the present value of expected future cash flows, which includes a factor for subsequent potential defaults, discounted at the effective interest rate of the original loan contract. Potential defaults are distinguished from multiple restructurings as borrowers who default are generally not eligible for subsequent restructurings. At June 30, 2015, the balance of such individual valuation allowances was $15.0 million. In instances when loans require more than one restructuring, additional valuation allowances may be required. The new valuation allowance on a loan that has been restructured more than once, is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the restructured agreement. Due to the immaterial amount of this exposure to date, we continue to capture this exposure as a component of our qualitative GVA evaluation. The significance of this exposure will be monitored and if warranted, we will enhance our loan loss methodology to include a new default factor (developed to reflect the estimated impact to the balance of the allowance for loan losses that will occur as a result of subsequent future restructurings) that will be assessed against all loans reviewed collectively. If new default factors are implemented, the qualitative GVA methodology will be adjusted to preclude duplicative loss consideration.

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We evaluate the allowance for loan losses based upon the combined total of the quantitative and qualitative GVAs and IVAs. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Home equity loans and lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and credit lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and eroded housing prices, as arose beginning in 2008, these higher loan-to-value ratios represent a greater risk of loss to the Company. In general, a borrower with more equity in the property has more of a vested interest in keeping the loan current compared to a borrower with little or no equity in the property. In light of the past weakness in the housing market, the historical level of delinquencies and the current uncertainty with respect to future employment levels and economic prospects, we currently conduct an expanded loan level evaluation of our home equity loans and lines of credit, including bridge loans, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. Our home equity loans and lines of credit portfolio continues to comprise a significant portion of our net charge-offs, although the level of home equity loans and lines of credit charge-offs has receded over the last year from levels previously experienced. At June 30, 2015, we had a recorded investment of $1.65 billion in home equity loans and equity lines of credit outstanding, $7.2 million, or 0.4%, of which were 90 days or more past due.
We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions.
The following table sets forth the allowance for loan losses allocated by loan category, the percent of allowance in each category to the total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
June 30, 2015
 
March 31, 2015
 
 
Amount
 
Percent of
Allowance
to Total
Allowance
 
Percent of
Loans in
Category to Total 
Loans
 
Amount
 
Percent of
Allowance
to Total
Allowance
 
Percent of
Loans in
Category to Total 
Loans
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
25,955

 
33.8
%
 
83.5
%
 
$
28,507

 
37.0
%
 
83.1
%
Residential Home Today
 
11,079

 
14.4

 
1.2

 
12,578

 
16.3

 
1.4

Home equity loans and lines of credit
 
39,834

 
51.8

 
14.8

 
35,990

 
46.7

 
15.1

Construction
 
36

 

 
0.5

 
18

 

 
0.4

Other consumer loans
 

 

 

 

 

 

Total allowance
 
$
76,904

 
100.0
%
 
100.0
%
 
$
77,093

 
100.0
%
 
100.0
%

 
 
September 30, 2014
 
June 30, 2014
 
 
Amount
 
Percent of
Allowance
to Total
Allowance
 
Percent of
Loans in
Category to Total 
Loans
 
Amount
 
Percent of
Allowance
to Total
Allowance
 
Percent of
Loans in
Category to Total 
Loans
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
31,080

 
38.2
%
 
82.2
%
 
$
31,512

 
38.2
%
 
81.7
%
Residential Home Today
 
16,424

 
20.2

 
1.5

 
16,977

 
20.6

 
1.5

Home equity loans and lines of credit
 
33,831

 
41.6

 
15.8

 
33,980

 
41.2

 
16.2

Construction
 
27

 

 
0.5

 
33

 

 
0.6

Other consumer loans
 

 

 

 

 

 

Total allowance
 
$
81,362

 
100.0
%
 
100.0
%
 
$
82,502

 
100.0
%
 
100.0
%

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The following table sets forth activity in our allowance for loan losses segregated by geographic location for the periods indicated. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of other consumer loans are considered immaterial, therefore neither is segregated by geography.
 
As of and For the Three Months Ended June 30,
 
As of and For the Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Allowance balance (beginning of the period)
$
77,093

 
$
83,391

 
$
81,362

 
$
92,537

Charge-offs:

 
 
 
 
 
 
Real estate loans:

 
 
 
 
 
 
Residential Core

 
 
 
 
 
 
Ohio
1,244

 
1,028

 
3,665

 
6,636

Florida
201

 
1,015

 
1,360

 
6,558

Other
27

 

 
631

 
32

Total Residential Core
1,472

 
2,043

 
5,656

 
13,226

Residential Home Today

 
 
 
 
 
 
Ohio
864

 
1,057

 
2,401

 
6,338

Florida
46

 
123

 
172

 
163

Total Residential Home Today
910

 
1,180

 
2,573

 
6,501

Home equity loans and lines of credit

 
 
 
 
 
 
Ohio
1,245

 
1,019

 
4,094

 
3,845

Florida
554

 
2,201

 
3,316

 
6,447

California
157

 
275

 
465

 
1,020

Other

 
648

 
834

 
1,766

Total Home equity loans and lines of credit
1,956

 
4,143

 
8,709

 
13,078

Construction

 
151

 

 
192

Other consumer loans

 

 

 

Total charge-offs
4,338

 
7,517

 
16,938

 
32,997

Recoveries:
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Residential Core
1,567

 
585

 
3,587

 
2,037

Residential Home Today
609

 
355

 
1,039

 
1,702

Home equity loans and lines of credit
1,973

 
1,497

 
4,684

 
4,018

Construction

 
191

 
170

 
205

Other consumer loans

 

 

 

Total recoveries
4,149

 
2,628

 
9,480

 
7,962

Net charge-offs
(189
)
 
(4,889
)
 
(7,458
)
 
(25,035
)
Provision for loan losses

 
4,000

 
3,000

 
15,000

Allowance balance (end of the period)
$
76,904

 
$
82,502

 
$
76,904

 
$
82,502

Ratios:
 
 
 
 
 
 
 
Net charge-offs (annualized) to average loans outstanding
0.01
%
 
0.19
%
 
0.09
%
 
0.32
%
Allowance for loan losses to non-accrual loans at end of the year
66.61
%
 
59.08
%
 
66.61
%
 
59.08
%
Allowance for loan losses to the total recorded investment in loans at end of the period
0.69
%
 
0.78
%
 
0.69
%
 
0.78
%
The net charge-offs of $7.5 million during the nine months ended June 30, 2015 decreased from $25.0 million during the nine months ended June 30, 2014, as credit quality continued to improve during the current fiscal year. Also, during the three months ended December 31, 2013, a new practice of charging off the remaining balance of loans that remained delinquent for at least 1,500 days as a result of stalled foreclosure processes was implemented. Of the residential charge-offs during the nine months ended June 30, 2014, $5.3 million were attributable to full charge-offs of loans 1,500 days past due. In March 2014 and April 2015, $1.3 million and $415 thousand in recoveries were recorded representing cumulative one-time payments received as a result of PMIC increasing the cash percentage of the partial claim payment plan from 55% to 67% and 67% to 70%,

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respectively. The adjusted net charge-offs for the nine months ended June 30, 2014 were $21.0 million, resulting in a net decrease of $14.0 million from the adjusted net charge-offs during the nine months ended June 30, 2015.
We continue to evaluate loans becoming delinquent for potential losses and record provisions for our estimate of those losses. We expect a moderate level of charge-offs to continue as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.
During the three months ended June 30, 2015, the total allowance for loan losses decreased $0.2 million, to $76.9 million from $77.1 million at March 31, 2015, as we recorded a $0.0 million provision for loan losses, which was less than the actual net charge-offs of $0.2 million. The allowance for loan losses related to loans evaluated collectively decreased by $0.6 million during the three months ended June 30, 2015, and the allowance for loan losses related to loans evaluated individually increased by $0.4 million. Refer to the "activity in the allowance for loan losses" and "analysis of the allowance for loan losses" tables in Note 4 of the Notes to the Unaudited Interim Consolidated Financial Statements for more information. Other than the less significant construction and other consumer loans segments, changes during the three months ended June 30, 2015 in the balances of the GVAs, excluding changes in IVAs, related to the significant loan segments are described as follows:

Residential Core – The total balance of this segment of the loan portfolio increased 1.6% or $144.8 million during the quarter, while the total allowance for loan losses for this segment decreased 9.0% or $2.6 million. The portion of this loan segment’s allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated), decreased 16.2%, or $3.0 million, to $15.7 million at June 30, 2015 from $18.7 million at March 31, 2015. The ratio of this portion of the allowance for loan losses to the total balance of loans in this loan segment that were evaluated collectively, decreased to 0.17% at June 30, 2015 from 0.21% at March 31, 2015. Total delinquencies decreased 5.1% to $38.7 million at June 30, 2015 from $40.8 million at March 31, 2015. While loans 90 or more days delinquent decreased 13.1% to $26.9 million at June 30, 2015 from $30.9 million at March 31, 2015, loans 30 to 89 days delinquent increased by 19.8%, or $2.0 million. The positive trending in the amount of net charge-offs continued as net charge-offs for the quarter ended June 30, 2015 were less at $0.1 million as compared to $1.5 million during the quarter ended June 30, 2014. The credit profile of this portfolio segment improved during the quarter due to the addition of high credit quality, residential first mortgage loans. As there continues to be a consistent improving trend in this portfolio, reductions in the allowance are warranted.
Residential Home Today – The total balance of this segment of the loan portfolio decreased 3.4% or $4.8 million as new originations have effectively stopped since the imposition of more restrictive lending requirements in 2009. The total allowance for loan losses for this segment decreased from $12.6 million at the prior quarter to $11.1 million at June 30, 2015. The portion of this loan segment’s allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated), decreased by 16.9% to $6.9 million at June 30, 2015 from $8.4 million at March 31, 2015. Similarly, the ratio of this portion of the allowance to the total balance of loans in this loan segment that were evaluated collectively, decreased 1.5% to 9.0% at June 30, 2015 from 10.5% at March 31, 2015. Total delinquencies decreased to $17.9 million at June 30, 2015 from $19.0 million at March 31, 2015. While delinquencies greater than 90 days decreased to $10.4 million from $12.3 million during the same period, loans 30 to 89 days delinquent increased by 11.6%, or $0.8 million. Net charge-offs were less at $0.3 million during the quarter ended June 30, 2015, as compared to $0.8 million during the quarter ended June 30, 2014. The allowance for this portfolio fluctuates based on not only the generally declining portfolio balance, but also on the credit profile trends in this portfolio. This portfolio's allowance decreased this quarter based on the decrease in the Home Today balance yet continued depressed home values remain in this portfolio.
Home Equity Loans and Lines of Credit – The total balance of this segment of the loan portfolio decreased 0.8% or $14.0 million to $1.65 billion at June 30, 2015 from $1.66 billion at March 31, 2015. The total allowance for loan losses for this segment increased 10.7% to $39.8 million from $36.0 million at March 31, 2015. During the quarter ended June 30, 2015, the portion of this loan segment's allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated) increased by $3.8 million, or 10.8%, to $39.3 million from $35.4 million at March 31, 2015. The ratio of this portion of the allowance to the total balance of loans in this loan segment that were evaluated collectively also increased to 2.4% at June 30, 2015 from 2.2% at March 31, 2015. Total delinquencies for this portfolio segment decreased 10.4% to $13.9 million at June 30, 2015 as compared to $15.6 million at March 31, 2015. Delinquencies greater than 90 days decreased 6.0% to $7.2 million at June 30, 2015 from $7.6 million at March 31, 2015, while 30 to 89 day delinquent loans decreased 14.6% to $6.8 million at June 30, 2015 from $7.9 million at the prior quarter end. Net charge-offs for this loan segment during the current quarter were less at $0.0 million as compared to $2.6 million for the quarter ended June 30, 2014. While there were some improvements in the credit metrics of this portfolio during the quarter, the allowance considers the adverse impact of potential payment increases that will be faced by borrowers as home equity lines of credit near the end of their draw periods, and as a result, the allowance for this loan segment remains elevated.

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Mortgage Servicing Rights. Mortgage servicing rights represent the present value of the estimated future net servicing fees expected to be received pursuant to the right to service loans that are in our loan servicing portfolio but are owned by others. Mortgage servicing rights are recognized as assets for both purchased rights and for the allocated value of retained servicing rights on loans sold. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights. A number of estimates affect the capitalized value and include: (1) the mortgage loan prepayment speed assumption; (2) the estimated prospective cost expected to be incurred in connection with servicing the mortgage loans; and (3) the discount factor used to compute the present value of the mortgage servicing right. The mortgage loan prepayment speed assumption is significantly affected by interest rates. In general, during periods of falling interest rates, mortgage loans prepay faster and the value of our mortgage servicing rights decreases. Conversely, during periods of rising rates, the value of mortgage servicing rights generally increases due to slower rates of prepayments. The estimated prospective cost expected to be incurred in connection with servicing the mortgage loans is deducted from the retained servicing fee (gross mortgage loan interest rate less amounts remitted to third parties – investor pass-through rate, guarantee fee, mortgage insurance fee, etc.) to determine the net servicing fee for purposes of capitalization computations. To the extent that prospective actual costs incurred to service the mortgage loans differ from the estimate, our future results will be adversely (or favorably) impacted. The discount factor selected to compute the present value of the servicing right reflects expected marketplace yield requirements.
The amount and timing of mortgage servicing rights amortization is adjusted monthly based on actual results. In addition, on a quarterly basis, we perform a valuation review of mortgage servicing rights for potential decreases in value. This quarterly valuation review entails applying current assumptions to the portfolio classified by interest rates and, secondarily, by prepayment characteristics. At June 30, 2015, the capitalized value of our right to service $2.25 billion of loans for others was $10.3 million, or 0.46% of the serviced loan portfolio, and was based on an estimated weighted-average life of 4.2 years. Activity in the balance of mortgage servicing rights is summarized as follows:
 
 
Three Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
 
Mortgage Servicing Rights
 
Valuation Allowance
 
Net
 
Mortgage Servicing Rights
 
Valuation Allowance
 
Net
 
 
(Dollars in thousands)
Balance - beginning of period
 
$
10,741

 
$

 
$
10,741

 
$
12,845

 
$

 
$
12,845

Additions from loan securitizations/sales
 
274

 
 
 
274

 
83

 
 
 
83

Amortization
 
(728
)
 
 
 
(728
)
 
(674
)
 
 
 
(674
)
Net change in valuation allowance
 
 
 

 

 
 
 

 

Balance - end of period
 
$
10,287

 
$

 
$
10,287

 
$
12,254

 
$

 
$
12,254

Fair value of capitalized amounts
 
 
 
 
 
$
23,050

 
 
 
 
 
$
28,114

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Nine Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
 
Mortgage Servicing Rights
 
Valuation Allowance
 
Net
 
Mortgage Servicing Rights
 
Valuation Allowance
 
Net
 
 
(Dollars in thousands)
Balance - beginning of period
 
$
11,669

 
$

 
$
11,669

 
$
14,074

 
$

 
$
14,074

Additions from loan securitizations/sales
 
577

 
 
 
577

 
296

 
 
 
296

Amortization
 
(1,959
)
 
 
 
(1,959
)
 
(2,116
)
 
 
 
(2,116
)
Net change in valuation allowance
 
 
 

 

 
 
 

 

Balance - end of period
 
$
10,287

 
$

 
$
10,287

 
$
12,254

 
$

 
$
12,254

Fair value of capitalized amounts
 
 
 
 
 
$
23,050

 
 
 
 
 
$
28,114


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At June 30, 2015, substantially all of the 24,604 loans serviced for Fannie Mae and others were performing in accordance with their contractual terms and management believes that it had no material repurchase obligations associated with these loans at that date. The following table summarizes our repurchases and loss reimbursements to investors, charges related to default servicing non-compliance and compensatory fees incurred during the indicated periods. All transactions, except for the fiscal 2015 loan repurchase, were related to loans serviced for Fannie Mae. There were no material repurchase or loss reimbursement requests outstanding at June 30, 2015. An accrual for $0.9 million remains available to cover probable losses. On November 7, 2013, the Association entered into a resolution agreement with Fannie Mae pursuant to which, on November 14, 2013, the Association remitted $3.1 million to Fannie Mae. The remittance amount included $0.4 million related to outstanding mortgage insurance claim payments on 42 loans. Under the terms of the resolution agreement, Fannie Mae withdrew all outstanding repurchase and make-whole demands and generally waived its right to enforce future repurchase obligations with respect to all mortgage loans (approximately 23,400 active loans or loans with a remaining balance as of the resolution agreement date) that were originated by the Association between January 1, 2000 and December 31, 2008 and delivered to Fannie Mae prior to January 1, 2009. The Association believes that by entering into this resolution agreement, a potentially large uncertainty with respect to future performance has been substantially reduced. Also, at June 30, 2015, the serviced loan portfolio included 794 loans for $130.5 million delivered to Fannie Mae subsequent to the Association's November 15, 2013 reinstatement as a Fannie Mae- approved seller. Exclusive of certain life-of-loan representation and warranty continuations (principally related to clear title/first lien enforceability) repurchase exposure related to those loans expires following 12 to 36 months of performance.
 
 
Three Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
 
Number
of
Loans
 
Balance
 
Losses or
Charges
Incurred
 
Number
of
Loans
 
Balance
 
Losses or
Charges
Incurred
 
 
(Dollars in thousands)
Repurchased loans:
 
 
 
 
 
 
 
 
 
 
 
 
Non-recourse, non-performing loans (1)
 

 
$

 
$

 

 
$

 
$

Compensatory fees related to default servicing (3)
 

 

 
1

 

 

 
57

 
 

 
$

 
$
1

 

 
$

 
$
57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
 
Number
of
Loans
 
Balance
 
Losses or
Charges
Incurred
 
Number
of
Loans
 
Balance
 
Losses or
Charges
Incurred
 
 
(Dollars in thousands)
Repurchased loans:
 
 
 
 
 
 
 
 
 
 
 
 
Non-recourse, non-performing loans (1)
 
1

 
$
521

 
$
194

 

 
$

 
$

Post-disposition file reviews (2)
 

 

 

 
1

 

 
51

Compensatory fees related to default servicing (3)
 

 

 
53

 

 

 
152

 
 
1

 
$
521

 
$
247

 
1

 
$

 
$
203

_________________
(1)
Repurchase of this non-recourse, non performing loan was attributed to servicing non-compliance.
(2)
Post-disposition file reviews resulted in losses or charges when loans which had been sold to Fannie Mae failed to perform; the underlying collateral was sold; a loss was incurred; and a post-disposition file review identified underwriting (primarily debt-to-income ratio) non-compliance.
(3)
Compensatory fees related to default servicing represented instances in which the Association's default servicing procedures did not comply with Fannie Mae's servicing requirements
Income Taxes. We consider accounting for income taxes a critical accounting policy due to the subjective nature of certain estimates that are involved in the calculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We must assess the realization of the deferred tax asset and, to the extent that we believe that recovery is not likely, a valuation allowance is established. Adjustments to increase or decrease existing valuation allowances, if any, are charged or credited, respectively, to income tax expense. At June 30, 2015, no valuation allowances were outstanding. Even though we have determined a valuation allowance is not required for deferred tax assets at June 30, 2015, there is no guarantee that those assets will be recognizable in the future.

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Pension Benefits. The determination of our obligations and expense for pension benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate and expected long-term rate of return on plan assets. Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions could materially affect future pension obligations and expense.



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Comparison of Financial Condition at June 30, 2015 and September 30, 2014
Total assets increased $456.3 million, or 4%, to $12.26 billion at June 30, 2015 from $11.80 billion at September 30, 2014. This increase was primarily the result of increases in the balances of loans held for investment, cash and cash equivalents, and FHLB stock.
Cash and cash equivalents increased $42.8 million, or 24%, to $224.2 million at June 30, 2015 from $181.4 million at September 30, 2014 and reflects the decision to maintain higher liquidity.
Investment securities increased slightly by $0.5 million, to $569.4 million at June 30, 2015 from $568.9 million at September 30, 2014. While the change was minimal it was the result of $114.5 million in purchases combined with $3.1 million in net unrealized gains, which exceeded $113.0 million in principal paydowns and $4.1 million of net acquisition premium amortization that occurred in the mortgage-backed securities portfolio during the nine months ended June 30, 2015. There were no sales of investment securities during the nine months ended June 30, 2015.
Loans held for investment, net, increased $377.4 million, or 4%, to $11.01 billion at June 30, 2015 from $10.63 billion at September 30, 2014. Residential mortgage loans increased $428.4 million, or 5%, to $9.41 billion at June 30, 2015. The increase in residential mortgage loans was partially offset by $3.6 million in net charge-offs during the nine months ended June 30, 2015. The total allowance for loan losses decreased $4.5 million, or 6%, to $76.9 million at June 30, 2015 from $81.4 million at September 30, 2014, primarily reflecting improved credit metrics, including reduced net charge-offs and lower loan delinquencies. During the nine months ended June 30, 2015, $710.8 million of three- and five-year “SmartRate” loans were originated while $928.2 million of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated. These fixed-rate originations were partially offset by paydowns and fixed-rate loan sales. Between September 30, 2014 and June 30, 2015 the total fixed-rate portion of first mortgage loan portfolio increased $150.9 million and was comprised of an increase of $277.8 million in the balance of fixed-rate loans with original terms of 10 years or less and a decrease of $126.9 million in the balance of fixed-rate loans with original terms greater than 10 years. Historically, the preponderance of our new loan originations was comprised of fixed-rate loans with original terms greater than 10 years which were frequently offset by fixed-rate loan sales. During the nine months ended June 30, 2015, we completed $102.9 million in loan sales to Fannie Mae, which included $20.9 million of agency-compliant HARP II loans and $82.0 million of long-term, fixed-rate, agency-compliant, non-HARP II first mortgage loans. The relatively low volume of long-term, fixed-rate first mortgage loan sales since June 30, 2010 reflects the impact of changes imposed by Fannie Mae, the Association’s primary loan investor, related to requirements for loans that it accepts, as well as the strategy of originating adjustable-rate loans and fixed-rate loans with original terms of 10 years or less with the expectation that such loans would be carried as held for investment loans on our balance sheet. The sale of non-HARP II loans in the current fiscal year is the result of our implementation of certain loan origination changes required by Fannie Mae, and which resulted in our November 15, 2013 reinstatement as an approved seller to Fannie Mae. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional discussion regarding loan sales to Fannie Mae and our management of interest rate risk.
Partially offsetting the increase in residential mortgage loans was a $55.1 million decrease in home equity loans and lines of credit during the current period as repayments exceeded new originations and additional draws on existing accounts. Between June 28, 2010 and March 20, 2012, we suspended the acceptance of new home equity loan and line of credit applications with the exception of bridge loans. Beginning in March, 2012, we offered redesigned home equity lines of credit, subject to certain property and credit performance conditions. At June 30, 2015, the recorded investment related to home equity lines of credit originated subsequent to March 20, 2012, totaled $238.8 million. At June 30, 2015, pending commitments to extend new home equity lines of credit totaled $44.4 million. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.
Our investment in FHLB stock increased $29.1 million, or 72%, to $69.5 million at June 30, 2015 from $40.4 million at September 30, 2014. The increase relates to our strategy to increase net income that was implemented effective October 1, 2014. This strategy involves borrowing, on an overnight basis, approximately $1.00 billion of additional funds from the FHLB at the beginning of a particular quarter and repaying it prior to the end of that quarter. The proceeds of the borrowings, net of the required investment in FHLB stock, are deposited at the Federal Reserve. The increased borrowings necessitate additional purchases of FHLB stock, which generally remain outstanding over the quarter end. Because of increases in the interest rates charged by the FHLB, the borrowing and reinvest portion of the strategy was suspended in May 2015 and was not in place at June 30, 2015. However, we may continue this strategy in the future.
Deposits decreased $191.8 million, or 2%, to $8.46 billion at June 30, 2015 from $8.65 billion at September 30, 2014. The decrease in deposits resulted primarily from a $169.3 million decrease in CDs, combined with a $35.4 million decrease in high-yield savings accounts (a subcategory of savings accounts) partially offset by a $11.3 million increase in high-yield checking accounts (a subcategory of our negotiable order of withdrawal accounts). The change in CDs is attributed to a $332.2

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million net decrease in our traditional CDs partially offset by a $162.9 million increase in brokered CDs acquired in the current period. We believe that our high-yield savings accounts as well as our high-yield checking accounts provide a stable source of funds. In addition, our high-yield savings accounts are expected to reprice in a manner similar to our home equity lending products, and, therefore, assist us in managing interest rate risk. The balance of brokered CDs at June 30, 2015 was $520.1 million.
Borrowed funds, all from the FHLB of Cincinnati, increased $760.4 million or 67%, to $1.90 billion at June 30, 2015 from $1.14 billion at September 30, 2014. The increase reflects an additional $400.3 million of mainly four- to five-year term advances and a $372.0 million increase in lower cost, short-term borrowings, offset by principal repayments on maturing term advances. The increase in advances, was used primarily to fund loan growth, increase liquidity, purchase FHLB stock and to supplement the decrease in deposits. Also, intra-quarter, overnight advances from the FHLB were used to fund the strategy (which was suspended in May 2015) to increase net income as described earlier in this section.
Total shareholders’ equity decreased $78.2 million, or 4%, to $1.76 billion at June 30, 2015 from $1.84 billion at September 30, 2014. This net decrease primarily reflected the effect of $125.0 million of repurchases of outstanding common stock and $13.6 million of dividend payments, which were partially offset by $49.6 million of net income and the positive impact related to awards under the stock-based compensation plan and the allocation of shares held by the ESOP. Refer to Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional details regarding the repurchase of shares of common stock. As a result of a July 31, 2014 mutual member vote, Third Federal Savings, MHC, the mutual holding company that owns 77% of the outstanding stock of the Company, waived the receipt of its share of the dividend paid.


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Comparison of Operating Results for the Three Months Ended June 30, 2015 and 2014
Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effects thereof were not material. Average balances are derived from daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.
 
 
Three Months Ended
 
Three Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (2)
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (2)
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-earning cash
  equivalents
 
$
690,969

 
$
537

 
0.31
%
 
$
232,264

 
$
161

 
0.28
%
  Investment securities
 
2,012

 
7

 
1.39
%
 
2,452

 
6

 
0.98
%
  Mortgage-backed securities
 
570,014

 
2,211

 
1.55
%
 
488,856

 
2,319

 
1.90
%
  Loans (1)
 
10,990,743

 
92,248

 
3.36
%
 
10,504,196

 
90,884

 
3.46
%
  Federal Home Loan Bank stock
 
69,470

 
669

 
3.85
%
 
40,411

 
386

 
3.82
%
Total interest-earning assets
 
12,323,208

 
95,672

 
3.11
%
 
11,268,179

 
93,756

 
3.33
%
Noninterest-earning assets
 
320,364

 
 
 
 
 
321,857

 
 
 
 
Total assets
 
$
12,643,572

 
 
 
 
 
$
11,590,036

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
  NOW accounts
 
$
1,008,235

 
340

 
0.13
%
 
$
1,030,521

 
364

 
0.14
%
  Savings accounts
 
1,632,992

 
748

 
0.18
%
 
1,741,477

 
825

 
0.19
%
  Certificates of deposit
 
5,832,034

 
21,913

 
1.50
%
 
5,757,457

 
22,021

 
1.53
%
  Borrowed funds
 
2,182,151

 
5,082

 
0.93
%
 
980,163

 
2,674

 
1.09
%
Total interest-bearing liabilities
 
10,655,412

 
28,083

 
1.05
%
 
9,509,618

 
25,884

 
1.09
%
Noninterest-bearing liabilities
 
200,489

 
 
 
 
 
201,738

 
 
 
 
Total liabilities
 
10,855,901

 
 
 
 
 
9,711,356

 
 
 
 
Shareholders’ equity
 
1,787,671

 
 
 
 
 
1,878,680

 
 
 
 
Total liabilities and shareholders’ equity
 
$
12,643,572

 
 
 
 
 
$
11,590,036

 
 
 
 
Net interest income
 
 
 
$
67,589

 
 
 
 
 
$
67,872

 
 
Interest rate spread (2)(3)(4)
 
 
 
 
 
2.06
%
 
 
 
 
 
2.24
%
Net interest-earning assets (5)
 
$
1,667,796

 
 
 
 
 
$
1,758,561

 
 
 
 
Net interest margin (2)(6)
 
 
 
2.19
%
 
 
 
 
 
2.41
%
 
 
Average interest-earning assets to average interest-bearing liabilities
 
115.65
%
 
 
 
 
 
118.49
%
 
 
 
 
Selected performance ratios (4):
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (2)
 
 
 
0.55
%
 
 
 
 
 
0.61
%
 
 
Return on average equity (2)
 
 
 
3.86
%
 
 
 
 
 
3.75
%
 
 
Average equity to average assets
 
 
 
14.14
%
 
 
 
 
 
16.21
%
 
 
_________________
(1)
Loans include both mortgage loans held for sale and loans held for investment.
(2)
Annualized.
(3)
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)
These performance ratios in fiscal 2015 are impacted by the intra-quarter strategy to increase net income as described earlier in this Item 2.
(5)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(6)
Net interest margin represents net interest income divided by total interest-earning assets.


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General. Net income decreased $0.3 million, or 2%, to $17.3 million for the quarter ended June 30, 2015 from $17.6 million for the quarter ended June 30, 2014. The decrease in net income was attributable primarily to an increase in other non-interest expenses and a decrease in net interest income partially offset by a decrease in the provision for loan losses.

Interest and Dividend Income. Interest and dividend income increased $1.9 million, or 2% to $95.7 million during the current quarter compared to $93.8 million during the same quarter in the prior year. The increase in interest and dividend income resulted primarily from an increase in interest income from loans, interest earning cash equivalents and FHLB stock.
Interest income on loans increased $1.3 million, or 1%, to $92.2 million during the current quarter compared to $90.9 million during the same quarter in the prior year. This change was attributed to a $486.5 million, or a 5%, increase in the average balance of loans to $10.99 billion for the quarter ended June 30, 2015 compared to $10.50 billion during the same quarter last year as new loan production exceeded repayments and loan sales. Partially offsetting the impact from the increase in the average balance was a 10 basis point decrease in the average yield on loans to 3.36% for the current quarter from 3.46% for the same quarter last year as historically low interest rates have kept the level of refinance activity relatively high resulting in new originations at lower rates compared to the rest of our portfolio. Additionally, our “SmartRate” adjustable-rate first mortgage loan originations and our 10-year fixed-rate mortgage loan originations for the quarter ended June 30, 2015, were originated at interest rates below rates offered on our longer-term, fixed-rate products and contributed to the lower average yield.
Interest income on interest-earning cash equivalents increased $0.3 million, or 150%, to $0.5 million during the current quarter compared to $0.2 million during the quarter ended June 30, 2014. The increase can be attributed to implementing a strategy to increase income as discussed earlier in the Comparison of Financial Condition section. Additionally, as a result of the additional required investment in FHLB stock, dividend income on FHLB stock increased during the current quarter compared to the same quarter last year.
Interest Expense. Interest expense increased $2.2 million, or 8%, to $28.1 million during the current quarter compared to $25.9 million during the quarter ended June 30, 2014. The increase resulted primarily from an increase in interest expense on borrowed funds.
Interest expense on borrowed funds increased $2.4 million, to $5.1 million during the current quarter compared to $2.7 million during the quarter ended June 30, 2014. The change was mainly attributable to an increase in the average balance of borrowed funds to $2.18 billion during the current quarter from an average balance of $980.2 million during the same quarter of the prior year, and was partially offset by a 16 basis point decrease in the average rate we paid on borrowed funds to 0.93% for the current quarter from 1.09% for the same quarter last year. The increase in FHLB of Cincinnati borrowings and the lower average rate paid can be attributed primarily to implementing the strategy, using lower cost overnight borrowings, discussed earlier. The increase in the average balance of borrowed funds during the current quarter was also used to fund mortgage loan originations and supplement the decrease in deposits.
Net Interest Income. Net interest income decreased $0.3 million, or less than 1%, to $67.6 million during the current quarter from $67.9 million during the quarter ended June 30, 2014. Our average interest earning assets during the current quarter increased $1.06 billion or 9% when compared to the quarter ended June 30, 2014. However, due to a greater increase in average interest-bearing liabilities, average net interest-earning assets decreased $90.8 million, to $1.67 billion during the current quarter from $1.76 billion during the quarter ended June 30, 2014. The change in average assets can be attributed primarily to the implementation of the net income strategy discussed earlier and to a lesser extent, growth of our loan and investments portfolios. The net income strategy increased other interest-earning cash equivalents, while the change in average liabilities is due mainly to the same strategy and the growth of our loan and investments portfolios, but also to the funds required for our loan growth and stock repurchase program and the payments of dividends on our common stock. This strategy serves to increase net income slightly but also negatively impacts the interest rate spread and net interest margin due to the increase in the average balance of low yield interest-earning cash equivalents. Our interest rate spread decreased 18 basis points to 2.06% compared to 2.24% during the same quarter last year. Our net interest margin decreased 22 basis points to 2.19% in the current quarter compared to 2.41% the same quarter last year. As discussed earlier, this essentially risk-free net income strategy was suspended in May 2015 and was not in place at June 30, 2015.
Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level we consider adequate to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or conditions change. We assess the allowance for loan losses on a quarterly basis and

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make provisions for loan losses in order to maintain the adequacy of the allowance as described in the next paragraph. Recently, improving regional employment levels, stabilization in residential real estate values in many markets, recovering capital and credit markets, and upturns in consumer confidence have resulted in better credit metrics for us. Nevertheless, the depth of the decline in housing values that accompanied the 2008 financial crisis still presents significant challenges for many of our borrowers who may attempt to sell their homes or refinance their loans as a means to self-cure a delinquency.
Based on our evaluation of the above factors, we did not record a provision for loan losses during the quarter ended June 30, 2015 and we recorded a provision of $4.0 million during the quarter ended June 30, 2014. There was no provision recorded in the current quarter, which reflected reduced levels of loan delinquencies and charge-offs, but we continue our awareness of the relative values of residential properties in comparison to their cyclical peaks as well as the uncertainty that persists in the current economic environment, which continues to challenge many of our loan customers. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan, uncollected balances have been charged against the allowance for loan losses previously provided. The decreased level of charge-offs during the current quarter occurred throughout our entire loan portfolio. Net charge-offs recorded in the current quarter were $0.2 million. The loan loss provision of $4.0 million recorded for the quarter ended June 30, 2014 was also exceeded by net charge-offs of $4.9 million. Loan loss provisions are recorded with the objective of aligning our overall allowance for loan losses with our current estimates of loss in the portfolio. The allowance for loan losses was $76.9 million, or 0.69% of total recorded investment in loans receivable, at June 30, 2015, compared to $82.5 million or 0.78% of total recorded investment in loans receivable at June 30, 2014. Balances of recorded investments are net of deferred fees and any applicable loans-in-process.
In comparison to the balance at March 31, 2015, the total recorded investment in non-accrual loans decreased $6.8 million during the quarter ended June 30, 2015. Since June 30, 2014, the total recorded investment in non-accrual loans decreased $24.2 million. The recorded investment in non-accrual loans in our residential, Core portfolio decreased $3.7 million, or 5% during the current quarter, to $67.5 million at June 30, 2015, and decreased $12.9 million, or 16% since June 30, 2014. At June 30, 2015, the recorded investment in our Core portfolio was $9.27 billion, compared to $9.13 billion at March 31, 2015 and $8.67 billion at June 30, 2014. During the current quarter, the Core portfolio had net recoveries of $0.1 million, as compared to net charge-offs of $1.5 million during the quarter ended March 31, 2015 and $1.5 million during the quarter ended June 30, 2014.
The recorded investment in non-accrual loans in our residential, Home Today portfolio decreased $2.1 million, or 8% during the current quarter, to $24.4 million at June 30, 2015, and decreased $6.6 million, or 21% since June 30, 2014. At June 30, 2015, the recorded investment in our Home Today portfolio was $138.6 million, compared to $143.4 million at March 31, 2015 and $157.4 million at June 30, 2014. During the current quarter, Home Today net charge-offs were $0.3 million as compared to net charge-offs of $0.3 million during the quarter ended March 31, 2015 and $0.8 million during the quarter ended June 30, 2014.
The recorded investment in non-accrual home equity loans and lines of credit decreased $1.5 million, or 6%, during the current quarter, to $23.2 million at June 30, 2015, and decreased $5.1 million, or 18% since June 30, 2014. The recorded investment in our home equity loans and lines of credit portfolio at June 30, 2015, was $1.65 billion, compared to $1.66 billion at March 31, 2015 and $1.73 billion at June 30, 2014. During the current quarter, home equity loans and lines of credit portfolio had net recoveries of $17 thousand, as compared to net charge-offs of $1.8 million during the quarter ended March 31, 2015 and $2.6 million during the quarter ended June 30, 2014. We believe that non-performing home equity loans and lines of credit are, on a relative basis, of greater concern than Core loans as these home equity loans and lines of credits generally hold subordinated positions and accordingly, represent a higher level of risk. The non-performing balances of home equity loans and lines of credit were $23.2 million or 1% of the home equity loans and lines of credit portfolio at June 30, 2015 compared to $24.7 million, or 1% at March 31, 2015 and $28.3 million, or 2% at June 30, 2014.
Non-Interest Income. Non-interest income increased $0.4 million, or 7%, to $6.1 million during the current quarter compared to $5.7 million during the quarter ended June 30, 2014, mainly as a result of an increase in net gain on the sale of loans during the current quarter partially offset by a decrease in loan fees and service charges. The increase in the net gain on sales of loans primarily reflected a higher volume of loan sales in the current quarter, $46.8 million, as compared to $16.8 million during the quarter ended June 30, 2014. This increase was partially offset by a decrease in net loan servicing fees received in connection with the smaller portfolio of loans serviced for others.
Non-Interest Expense. Non-interest expense increased $5.0 million, or 12%, to $47.8 million during the current quarter compared to $42.8 million during the quarter ended June 30, 2014 primarily from higher marketing services expenditures incurred principally in support of our lending activities, including the impact of our home buyer's credit program, an increase in Federal insurance premiums, and an increase in salaries and employee benefits resulting from normal compensation increases, health insurance and the effect of the Company's higher stock price on equity-based compensation and benefit plans.

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Income Tax Expense. The provision for income taxes was $8.6 million during the current quarter compared to $9.1 million during the quarter ended June 30, 2014. The net provision for the current quarter included $8.8 million of federal tax partially offset by $186 thousand of state income tax benefit. The provision for the quarter ended June 30, 2014 included $9.0 million of federal tax and $82 thousand of state income tax expense. Our effective federal tax rate was 33.8% during the current quarter and the quarter ended June 30, 2014. Our provision for income taxes in the current quarter aligns our year-to-date provision with our expectations for the full fiscal year. Our expected effective income tax rate for this fiscal year is below the federal statutory rate because of our ownership of bank-owned life insurance.


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Comparison of Operating Results for the Nine Months Ended June 30, 2015 and 2014
Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effects thereof were not material. Average balances are derived from daily average balances. Non-accrual loans were included in the computation of loan average balances, and have been reflected in the table as carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.
 
 
Nine Months Ended
 
Nine Months Ended
 
 
June 30, 2015
 
June 30, 2014
 
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (2)
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (2)
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-earning cash
equivalents
 
$
974,697

 
$
1,906

 
0.26
%
 
$
234,888

 
$
455

 
0.26
%
  Investment securities
 
2,017

 
19

 
1.26
%
 
4,336

 
21

 
0.65
%
Mortgage-backed securities
 
572,117

 
7,302

 
1.70
%
 
481,290

 
6,709

 
1.86
%
  Loans (1)
 
10,884,685

 
276,123

 
3.38
%
 
10,361,608

 
271,830

 
3.50
%
  Federal Home Loan Bank stock
 
66,656

 
1,705

 
3.41
%
 
38,464

 
1,105

 
3.83
%
Total interest-earning assets
 
12,500,172

 
287,055

 
3.06
%
 
11,120,586

 
280,120

 
3.36
%
Noninterest-earning assets
 
317,948

 
 
 
 
 
308,551

 
 
 
 
Total assets
 
$
12,818,120

 
 
 
 
 
$
11,429,137

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
  NOW accounts
 
$
996,606

 
1,031

 
0.14
%
 
$
1,027,675

 
1,087

 
0.14
%
  Savings accounts
 
1,642,357

 
2,294

 
0.19
%
 
1,785,387

 
2,621

 
0.20
%
  Certificates of deposit
 
5,866,258

 
67,574

 
1.54
%
 
5,590,765

 
64,726

 
1.54
%
  Borrowed funds
 
2,312,056

 
14,009

 
0.81
%
 
955,956

 
6,985

 
0.97
%
Total interest-bearing liabilities
 
10,817,277

 
84,908

 
1.05
%
 
9,359,783

 
75,419

 
1.07
%
Noninterest-bearing liabilities
 
188,907

 
 
 
 
 
194,260

 
 
 
 
Total liabilities
 
11,006,184

 
 
 
 
 
9,554,043

 
 
 
 
Shareholders’ equity
 
1,811,936

 
 
 
 
 
1,875,094

 
 
 
 
Total liabilities and shareholders’ equity
 
$
12,818,120

 
 
 
 
 
$
11,429,137

 
 
 
 
Net interest income
 
 
 
$
202,147

 
 
 
 
 
$
204,701

 
 
Interest rate spread (2)(3)(4)
 
 
 
 
 
2.01
%
 
 
 
 
 
2.29
%
Net interest-earning assets (5)
 
$
1,682,895

 
 
 
 
 
$
1,760,803

 
 
 
 
Net interest margin (2)(6)
 
 
 
2.16
%
 
 
 
 
 
2.45
%
 
 
Average interest-earning assets to average interest-bearing liabilities
 
115.56
%
 
 
 
 
 
118.81
%
 
 
 
 
Selected performance ratios (4):
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (2)
 
 
 
0.52
%
 
 
 
 
 
0.58
%
 
 
Return on average equity (2)
 
 
 
3.65
%
 
 
 
 
 
3.56
%
 
 
Average equity to average assets
 
 
 
14.14
%
 
 
 
 
 
16.41
%
 
 
_________________
(1)
Loans include both mortgage loans held for sale and loans held for investment.
(2)
Annualized.
(3)
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)
These performance ratios in fiscal 2015 are impacted by the intra-quarter strategy to increase net income as described earlier in this Item 2.
(5)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(6)
Net interest margin represents net interest income divided by total interest-earning assets.


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General. Net income decreased $0.4 million, or 1% to $49.6 million for the nine months ended June 30, 2015 compared to $50.0 million for the nine months ended June 30, 2014. The decrease in net income was attributable primarily to an increase in other non-interest expenses and a decrease in net interest income substantially offset by a decrease in the provision for loan losses.
Interest and Dividend Income. Interest and dividend income increased $7.0 million, or 2%, to $287.1 million during the nine months ended June 30, 2015 compared to $280.1 million during the same nine months in the prior year. The increase in interest and dividend income resulted primarily from an increase in interest income from loans combined with increases in income on interest earning cash equivalents, and to a lesser extent, FHLB stock and mortgage-backed securities.
Interest income on loans increased $4.3 million, or 2%, to $276.1 million for the nine months ended June 30, 2015 compared to $271.8 million for the nine months ended June 30, 2014. This increase was attributed primarily to a $523.1 million increase in the average balance of loans to $10.88 billion in the current nine month period compared to $10.36 billion during the same nine months in the prior year as new loan production exceeded repayments and loan sales. The impact from the increase in the average balance of loans was partially offset by a 12 basis point decrease in the average yield on loans to 3.38% for the nine months ended June 30, 2015 from 3.50% for the same nine months in the prior year as historically low interest rates have kept the level of refinance activity relatively high resulting in new originations at lower rates compared to the rest of our portfolio. Additionally, both our “Smart Rate” adjustable-rate first mortgage loan and our 10-year, fixed-rate first mortgage loan originations for the nine months ended June 30, 2015, were originated at interest rates below rates offered on our traditional 15- and 30-year fixed-rate products and contributed to the lower average yield. During the nine months ended June 30, 2015, loan sales totaled $102.9 million while during the nine months ended June 30, 2014, loan sales totaled $57.6 million.
Interest income on interest-earning cash equivalents increased $1.4 million, or 280%, to $1.9 million for the nine months ended June 30, 2015 compared to $0.5 million during the same nine months in the prior year. The increase can be attributed to implementing a strategy to increase income as discussed earlier in the Comparison of Financial Condition section. Additionally, as a result of the additional required investment in FHLB stock, dividend income on FHLB stock increased $0.6 million, or 55%, to $1.7 million for the nine months ended June 30, 2015 compared to $1.1 million during the same nine months in the prior year.
Interest income on mortgage-backed securities increased $0.6 million, or 9%, to $7.3 million for the nine months ended June 30, 2015 compared to $6.7 million during the same nine months in the prior year. This increase was attributed to a $90.8 million, or 19%, increase in the average balance of mortgage-backed securities to $572.1 million for the nine months ended June 30, 2015 compared to $481.3 million during the same nine months last year. The impact from the increase in average balance was partially offset by a 16 basis point decrease in the average yield on mortgage-backed securities to 1.70% for the nine months in the current year from 1.86% for the same nine months in the prior year.
Interest Expense. Interest expense increased $9.5 million, or 13%, to $84.9 million during the current nine months compared to $75.4 million during the nine months ended June 30, 2014. The change resulted primarily from an increase in interest expense on borrowed funds combined with an increase in interest expense on CDs.
Interest expense on borrowed funds increased $7.0 million, or 100%, to $14.0 million during the nine months ended June 30, 2015 from $7.0 million during the nine months ended June 30, 2014. The increase was attributed to a $1.36 billion increase in the average balance of borrowed funds, all from the FHLB of Cincinnati, to $2.31 billion during the current nine months from $956.0 million during the same nine months of the prior year. Partially offsetting the impact of the increased volume in borrowed funds is a 16 basis point decrease in the average rate paid for these funds, to 0.81% during the nine months ended June 30, 2015 from 0.97% during the nine months ended June 30, 2014. The increase in FHLB of Cincinnati borrowings and the lower average rate paid can be attributed to implementing the strategy, using lower cost overnight borrowings, discussed earlier. To better manage funding costs, longer term borrowed funds from the FHLB of Cincinnati were also used to fund mortgage loan originations and supplement the decrease in deposits.
Interest expense on CDs increased $2.9 million, or 4%, to $67.6 million during the nine months ended June 30, 2015 compared to $64.7 million during the nine months ended June 30, 2014. The increase was attributed to a $275.5 million, or 5%, increase in the average balance of CDs to $5.87 billion during the current nine months from $5.59 billion during the same nine months of the prior year. The average rate paid on CDs was the same at 1.54% for each period. Rates were adjusted on deposits in response to changes in general market rates as well as to changes in the rates paid by our competition on short-term CDs. Additionally, to optimally manage our funding costs during the current nine month period, many maturing, higher rate CDs that were not renewed were replaced with longer-term brokered CDs or lower rate borrowed funds.

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Net Interest Income. Net interest income decreased $2.6 million, or 1%, to $202.1 million during the nine months ended June 30, 2015 from $204.7 million during the nine months ended June 30, 2014. Average interest-earning assets increased during the current nine months by $1.38 billion or 12% when compared to the nine months ended June 30, 2014. However, due to a greater increase in average interest-bearing liabilities, average net interest-earning assets decreased $77.9 million, to $1.68 billion during the current nine months from $1.76 billion during the nine months ended June 30, 2014. The change in average assets can be attributed primarily to the implementation of the strategy discussed earlier and to a lesser extent, growth of our loan and investments portfolios. The net income strategy increased other interest-earning cash equivalents, while the change in average liabilities is due mainly to that same net income strategy and the growth of our loan and investments portfolios, but also to the funds required for our stock repurchase program and the payments of dividends on our common stock. The net income strategy serves to increase net income slightly but also negatively impacts the interest rate spread and net interest margin due to the increase in the average balance of low-yield, interest-earning cash equivalents. Our interest rate spread decreased 28 basis points to 2.01% compared to 2.29% during the same nine months last year. Our net interest margin was 2.16% for the current nine month period and 2.45% for the same nine months in the prior period. As discussed earlier, this essentially risk-free net income strategy was suspended in May 2015 and was not in place at June 30, 2015.
Provision for Loan Losses. Based on our evaluation of the factors described earlier, we recorded a provision for loan losses of $3.0 million during the nine months ended June 30, 2015 and a provision of $15.0 million during the nine months ended June 30, 2014. The level of net charge-offs decreased during the current nine months to $7.5 million from $25.0 million during the nine months ended June 30, 2014. The current provision reflected reduced levels of loan delinquencies but was tempered by our awareness of the relative values of residential properties in comparison to their cyclical peaks as well as the uncertainty that persists in the current economic environment, which continues to challenge many of our loan customers. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan, uncollected balances have been charged against the allowance for loan losses previously provided. The net charge-offs of $25.0 million during the nine months ended June 30, 2014 included $5.3 million of loans charged-off due to a new practice, instituted in that fiscal period, of fully charging off loans that had not been resolved due to prolonged foreclosure proceedings and had remained delinquent for more than 1,500 days. These loans previously were recorded at estimated net realizable value, with the potential for additional loss recognized within the allowance for loan losses. Any future foreclosure proceeds on these loans will result in recoveries of prior charge-offs. Net charge-offs exceeded the $3.0 million loan loss provision recorded for the current nine months and resulted in a decrease in the balance of the allowance for loan losses. Net charge-offs of $25.0 million recorded for the nine months ended June 30, 2014 exceeded the loan loss provision of $15.0 million. The allowance for loan losses was $76.9 million, or 0.69% of the total recorded investment in loans receivable, at June 30, 2015, compared to $82.5 million, or 0.78% of the total recorded investment in loans receivable, at June 30, 2014. Balances of recorded investments are net of deferred fees and any applicable loans-in-process.
The total recorded investment in non-accrual loans decreased $20.1 million during the nine month period ended June 30, 2015 compared to a $16.2 million decrease during the nine month period ended June 30, 2014. The recorded investment in non-accrual loans in our residential, Core portfolio decreased $11.9 million, or 15%, during the current nine month period, to $67.5 million at June 30, 2015, compared to a $10.7 million decrease during the nine month period ended June 30, 2014. At June 30, 2015, the recorded investment in our Core portfolio was $9.27 billion, compared to $8.82 billion at September 30, 2014. During the current nine month period, Core portfolio net charge-offs were $2.1 million, as compared to net charge-offs of $11.2 million, which included $4.4 million of charge-offs related to loans delinquent more than 1,500 days and $0.9 million of recoveries related to the PMIC partial claim catch-up payment during the nine months ended June 30, 2014.
The recorded investment in non-accrual loans in our residential, Home Today portfolio decreased $5.6 million, or 19% during the current nine month period, to $24.4 million at June 30, 2015 compared to a $3.8 million decrease during the nine month period ended June 30, 2014. At June 30, 2015, the recorded investment in our Home Today portfolio was $138.6 million, compared to $152.0 million at September 30, 2014. During the current nine month period, Home Today net charge-offs were $1.5 million, as compared to net charge-offs of $4.8 million, which included $0.9 million of charge-offs related to loans delinquent more than 1,500 days and $0.4 million of recoveries related to the PMIC partial claim catch-up payment during the nine months ended June 30, 2014.
The recorded investment in non-accrual home equity loans and lines of credit decreased $3.0 million, or 12%, during the current nine month period, to $23.2 million at June 30, 2015 compared to a $1.7 million decrease during the nine month period ended June 30, 2014. The recorded investment in our home equity loans and lines of credit portfolio at June 30, 2015, was $1.65 billion, compared to $1.70 billion at September 30, 2014. During the current nine month period, home equity loans and lines of credit net charge-offs were $4.0 million as compared to net charge-offs of $9.1 million, of which there were no charge-offs related to loans delinquent more than 1,500 days, during the nine months ended June 30, 2014. We believe that non-performing home equity loans and lines of credit, on a relative basis, represent a higher level of credit risk than core loans as these home equity loans and lines of credit generally hold subordinated positions.

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Non-Interest Income. Non-interest income increased $1.7 million, or 10%, to $18.0 million during the nine months ended June 30, 2015 compared to $16.3 million during the nine months ended June 30, 2014, mainly as a result of an increase in net gain on the sale of loans partially offset by a decrease in loan fees and service charges. The increase in the net gain on sales of loans primarily reflected a higher volume of loan sales in the current nine months, $102.9 million, as compared to $57.6 million during the nine months ended June 30, 2014. This increase was partially offset by a decrease in net loan servicing fees received in connection with the smaller portfolio of loans serviced for others.
Non-Interest Expense. Non-interest expense increased $12.0 million, or 9%, to $142.6 million during the nine months ended June 30, 2015 when compared to $130.6 million during the nine months ended June 30, 2014. This net increase resulted primarily from an increase in marketing services, higher salaries and employee benefits, office property and equipment, and federal insurance premiums partially offset by decreases in state franchise tax and other operating expenses. Marketing increased $7.3 million, or 72%, to $17.4 million during the current nine month period compared to $10.1 million during the nine month period ended June 30, 2014 as a result of marketing services expenditures incurred in support of our lending activities. Salaries and employee benefits increased $3.5 million, or 5%, to $70.9 million during the current nine month period compared to $67.4 million during the nine month period ended June 30, 2014. This increase was primarily due to a $1.1 million increase in associate compensation costs, a $0.7 million increase in expenses related to the ESOP plan, and a $0.5 million increase in compensation costs related to health insurance.
Income Tax Expense. The provision for income taxes was $24.9 million during the current nine month period compared to $25.3 million during the nine months ended June 30, 2014. The provision for the current nine month period included $24.9 million of federal income tax provision and $37 thousand of state income tax provision. The provision for the nine months ended June 30, 2014 included $25.2 million of federal income tax provision and $152 thousand of state income tax provision. Our effective federal tax rate was 33.4% during the current nine months compared to 33.5% during the nine months ended June 30, 2014. Our provision for income taxes in the current nine months is aligned with our expectations for the full fiscal year. Our expected effective income tax rates are below the federal statutory rate because of our ownership of bank-owned life insurance.

Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB of Cincinnati, borrowings from the FRB-Cleveland Discount Window, proceeds from brokered CDs transactions, principal repayments and maturities of securities, and sales of loans. As described below, the available liquidity from loan sales has decreased significantly from pre-June 2010 levels.
In addition to the primary sources of funds described above, we have the ability to obtain funds through the use of collateralized borrowings in the wholesale markets, and from sales of securities. Also, access to the equity capital markets via a supplemental minority stock offering or a full (second step) transaction remain as other potential sources of liquidity, although these channels generally require six to nine months of lead time.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Association’s Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the sum of cash and cash equivalents plus unpledged investment securities for which ready markets exist, divided by total assets). For the three months ended June 30, 2015, our liquidity ratio averaged 8.41%, which, except for the preceding quarters of the current fiscal year, exceeded the averages of the last several years. The increase in the current average liquidity ratio reflects the impact of a strategy to increase net income, as discussed earlier in the Comparison of Financial Condition section, that was first implemented at the beginning of the quarter ended December 31, 2014. While the essentially risk-free strategy serves to increase our average liquidity ratio and our net income, it also decreases our interest rate spread ratio and our net interest margin due to the increase in the average balance of low yield interest-earning cash equivalents. We expect to continue this strategy for as long as it is effective in increasing net income. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2015.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2015, cash and cash equivalents totaled $224.2 million

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which represented an increase of 24% from September 30, 2014. The increase reflects the replenishment of cash equivalents to a level that is more comparable to quarter ends prior to September 30, 2014.
Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $569.4 million at June 30, 2015.
Between July 1, 2010 and May 2013, our traditional mortgage loan processing did not comply with Fannie Mae’s standard requirements and accordingly, during that time, and until Fannie Mae reinstated the Association as an approved seller on November 15, 2013, our ability to meaningfully manage liquidity through the use of loan sales was limited. In response to this limitation and the accompanying interest rate risk management implications, the following steps were taken:
during the quarter ended June 30, 2012, the Association implemented the procedures necessary for participation in Fannie Mae's HARP II program;
during the fiscal year ended September 30, 2013, the Association negotiated several loan sales with private investors; and
in May 2013, the Association adopted the loan origination process changes required by Fannie Mae. These loan origination process changes are applied to a portion of its fixed-rate loan originations. Subsequent to the Association's November 15, 2013 reinstatement as an approved seller by Fannie Mae, the Association is able to securitize and sell those loans that are originated using the Fannie Mae compliant procedures, in the secondary market.
During the nine month period ended June 30, 2015, loan sales totaled $102.9 million, which included $20.9 million of loans that qualified under Fannie Mae's HARP II initiative with the remainder comprised of long-term, fixed-rate residential, non-HARP II first mortgage loans, which were sold to Fannie Mae subsequent to the Association's reinstatement as an approved seller. Loans originated under the HARP II initiative are classified as “held for sale” at origination. Loans originated under non-HARP II Fannie Mae compliant procedures are classified as “held for investment” until they are specifically identified for sale. At June 30, 2015, $10.7 million of long-term, fixed-rate residential first mortgage loans were classified as “held for sale”, of which $0.4 million qualified under Fannie Mae's HARP II initiative. There were $10.3 million of loan sale commitments outstanding at June 30, 2015.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows (unaudited) included in the unaudited interim Consolidated Financial Statements.
At June 30, 2015, we had $632.5 million in loan commitments outstanding. In addition to commitments to originate loans, we had $1.19 billion in undisbursed home equity lines of credit to borrowers. CDs due within one year of June 30, 2015 totaled $1.90 billion, or 22% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, sales of investment securities, other deposit products, including new CDs, brokered CDs, FHLB advances, borrowings from the FRB-Cleveland Discount Window or other collateralized borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the CDs due on or before June 30, 2016. We believe, however, based on past experience, that a significant portion of such deposits will remain with us. Generally, we have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating residential mortgage loans and purchasing investments. During the nine months ended June 30, 2015, we originated $1.64 billion of residential mortgage loans, and during the nine months ended June 30, 2014, we originated $1.57 billion of residential mortgage loans. We purchased $114.5 million of securities during the nine months ended June 30, 2015, and $135.8 million during the nine months ended June 30, 2014.
Financing activities consist primarily of changes in deposit accounts, changes in the balances of principal and interest owed on loans serviced for others, FHLB advances and borrowings from the FRB-Cleveland Discount Window. We experienced a net decrease in total deposits of $191.8 million during the nine months ended June 30, 2015, which reflected the active management of the offered rates on maturing CDs, and compared to a net increase of $238.7 million during the nine months ended June 30, 2014. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. The net decrease in total deposits during the nine months ended June 30, 2015, was partially reduced by the $163.4 million increase in the balance of brokered CDs, to $520.1 million, from $356.7 million at September 30, 2014. During the nine months ended June 30, 2014 the balance of brokered CDs increased by $314.0 million. Principal and interest owed on loans serviced for others decreased $9.7 million to $44.9 million during the nine months ended June 30, 2015 compared to a net decrease of $34.6 million to $41.1 million during the nine months ended June 30, 2014. During the nine months ended June 30, 2015, we increased our advances from the FHLB of Cincinnati by $760.4 million, as we replaced our net savings outflow, funded new loan originations and actively managed our liquidity ratio. During the nine months ended June 30, 2014, our advances from the FHLB of Cincinnati increased by $272.3 million.

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Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Cincinnati and the FRB-Cleveland Discount Window, each of which provides an additional source of funds. Additionally, in evaluating funding alternatives, we may participate in the brokered CDs market . At June 30, 2015 we had $1.90 billion of FHLB of Cincinnati advances and no outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at June 30, 2015, we had $520.1 million of brokered CDs. During the nine months ended June 30, 2015, we had average outstanding advances from the FHLB of Cincinnati of $2.31 billion as compared to average outstanding advances of $956.0 million during the nine months ended June 30, 2014. In addition to funding the growth of our loan and investments portfolios, the significant increase in the balance of average outstanding advances during the current period reflects the impact of the strategy to increase net income as discussed earlier in the Comparison of Financial Condition section. At June 30, 2015, we had the ability to immediately borrow an additional $853.8 million from the FHLB of Cincinnati and $123.8 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the immediately available limits at June 30, 2015 was $3.45 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement, we would have to increase our ownership of FHLB of Cincinnati common stock by an additional $69.0 million. During the nine months ended June 30, 2015, we purchased an additional $29.1 million of FHLB of Cincinnati common stock. Substantially all of the additional purchases arose in connection with the previously described strategy to increase net income.
The Association and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The Basel III capital framework for U.S. banking organizations ("Basel III Rules") includes both a revised definition of capital and guidelines for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. In July 2013, the OCC and the other federal bank regulatory agencies issued a final rule that, effective January 1, 2015 for the standardized approach, revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the DFA and revised the definition of assets used in the Tier 1 (leverage) capital ratio from adjusted tangible assets (a measurement computed based on quarter-end asset balances) to net average assets (a measurement that captures the intra-quarter impact of our strategy to increase net income that was described earlier in this section). Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). The final rule also requires unrealized gains and losses on certain "available-for-sale" security holdings and change in defined benefit plan to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The Association exercised its one time opt-out election with the filing of its March 31, 2015 regulatory call report. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. Effective January 1, 2015, the Association implemented the new capital requirements for the standardized approach to the Basel III Rules, subject to transitional provisions extending through the end of 2018. The final rule also implemented consolidated capital requirements for savings and loan holding companies effective January 1, 2015.
As of June 30, 2015, the Association exceeded all regulatory requirements to be considered “Well Capitalized” as presented in the table below (dollar amounts in thousands).
 
 
Actual
 
Required
 
 
Amount
 
Ratio
 
Amount
 
Ratio
Total Capital to Risk-Weighted Assets
 
$
1,656,986

 
22.76
%
 
$
728,167

 
10.00
%
Tier 1 (leverage) Capital to Net Average Assets
 
1,580,078

 
12.53
%
 
630,542

 
5.00
%
Tier 1 Capital to Risk-Weighted Assets
 
1,580,078

 
21.70
%
 
582,533

 
8.00
%
Common Equity Tier 1 Capital to Risk-Weighted Assets
 
1,580,065

 
21.70
%
 
473,308

 
6.50
%
The capital ratios of the Company as of June 30, 2015 are presented in the table below (dollar amounts in thousands).
 
 
Actual
 
 
Amount
 
Ratio
Total Capital to Risk-Weighted Assets
 
$
1,838,691

 
25.14
%
Tier 1 (leverage) Capital to Net Average Assets
 
1,761,787

 
13.94
%
Tier 1 Capital to Risk-Weighted Assets
 
1,761,787

 
24.09
%
Common Equity Tier 1 Capital to Risk-Weighted Assets
 
1,761,787

 
24.09
%

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Prior to its July 21, 2011 merger into the OCC, the OTS issued, effective February 7, 2011, memoranda of understanding covering the Association, Third Federal Savings, MHC and the Company. On December 22, 2012, the Association's primary regulator terminated the MOU applicable to the Association. On April 1, 2014, the FRS, the primary regulator for Third Federal Savings, MHC and the Company, terminated the MOUs applicable to Third Federal Savings, MHC and the Company. The items in the MOUs applicable to Third Federal Savings, MHC and the Company during the year ended September 30, 2014, pertained to plans for new debt, dividends or stock repurchases and the further refinement and enhancement of our enterprise risk management processes. Specifically, the Company was required to submit a written request for non-objection to the FRS at least 45 days prior to the anticipated date of proposed debt, dividend or capital distribution (e.g. stock repurchase) transactions and without the receipt of a written non-objection from the FRS, was prohibited from consummating any such proposed transaction. On September 26, 2013, the Company announced that it had received the FRS's written non-objection to the resumption of its fourth stock repurchase plan that, at that time, had 2,156,250 shares of its outstanding common stock remaining to be purchased under the terms of the plan. Repurchases of those shares were completed during the quarter ended December 31, 2013. Concurrently with the April 4, 2014 announcement of the termination of the MOUs enforced by the FRS, the Company announced its fifth stock repurchase plan, covering 5,000,000 shares. The fifth repurchase plan was completed on September 17, 2014. On September 9, 2014, the Company announced its sixth stock repurchase program, covering 10,000,000 shares. There were 9,094,550 shares repurchased under the sixth authorized program between September 17, 2014, when it began, and June 30, 2015. The sixth stock repurchase plan was completed on August 3, 2015. Repurchases under the seventh share repurchase authorization, covering 10,000,000 shares and which was announced on July 30, 2015, began on August 4, 2015.
In addition to the operational liquidity considerations described above, which are primarily those of the Association, the Company, as a separate legal entity, also monitors and manages its own, parent company only liquidity which provides the source of funds necessary to support all of the parent company's stand-alone operations, including its capital distribution strategies which encompass its share repurchase and dividend payment programs. The Company's primary source of liquidity is dividends received from the Association. The amount of dividends that the Association may declare and pay to the Company in any calendar year, without the receipt of prior approval from the OCC but with prior notice to the FRB-Cleveland, cannot exceed net income for the current calendar year-to-date period plus retained net income (as defined) for the preceding two calendar years, reduced by prior dividend payments made during those periods. During the nine months ended June 30, 2015 the Company received a $66 million dividend from the Association and repurchased $124.7 million of common stock. During each quarter beginning August 2014, the Company's Board of Directors declared and paid $0.07 per share dividends. Also on August 28, 2014, the Company announced that on July 31, 2014, Third Federal Savings, MHC had received the approval of its members (depositors and certain loan customers of the Association) with respect to the waiver of dividends, and subsequently received the non-objection of the FRB-Cleveland, to waive receipt of dividends on the Company’s common stock that Third Federal Savings, MHC owned, up to $0.28 per share during the 12 months ending July 31, 2015. Third Federal Savings, MHC waived its right to receive each of the four $0.07 per share dividend payments. During the nine months ended June 30, 2015, common stock dividends paid by the Company totaled $13.6 million. On August 5, 2015, at a special meeting of members of Third Federal Savings, MHC, the members voted to approve Third Federal Savings, MHC's proposed waiver of dividends, aggregating up to $0.40 per share, to be declared on the Company’s common stock during the twelve months subsequent to the members’ approval (i.e., through August 5, 2016). Following the receipt of the members’ approval at the August 5, 2015 special meeting, Third Federal Savings, MHC filed a notice with, and a request for non-objection from, the FRB-Cleveland for the proposed dividend waivers. Action on the non-objection request to the FRB-Cleveland is pending as of the filing date of this quarterly report.
At June 30, 2015, the Company had, in the form of cash and a demand loan from the Association, $92.7 million of funds readily available to support its stand-alone operations. Additionally, the Company has received the non-objection of its regulators for the Association to pay a special dividend of $150 million to the Company. This amount is equal to the voluntary contribution of capital that the Company made to the Association in October 2010. Payment of this special dividend will be made in the future as funds are needed by the Company. Because of its intercompany nature, this future dividend payment will have no impact on the Company's capital ratios or its consolidated statement of condition but will reduce the Association's reported capital ratios.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk has historically been interest rate risk. In general, our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established risk parameter limits deemed appropriate given our business strategy, operating environment, capital, liquidity and performance objectives. Additionally, our Board of Directors has also authorized the formation of an Asset/

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Liability Management Committee comprised of key operating personnel which is responsible for managing this risk consistent with the guidelines and risk limits approved by the Board of Directors. Further, the Board has established the Directors Risk Committee which, among other responsibilities, conducts regular oversight and review of the guidelines, policies and deliberations of the Asset/Liability Management Committee. We have sought to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we have historically used the following strategies to manage our interest rate risk:
(i)
marketing adjustable-rate and shorter-maturity (10-year, fixed-rate mortgage) loan products;
(ii)
lengthening the weighted average remaining term of major funding sources, primarily by offering attractive interest rates on deposit products, particularly longer-term certificates of deposit, and through the use of longer-term advances from the FHLB of Cincinnati and longer-term brokered certificates of deposit;
(iii)
investing in shorter- to medium-term investments and mortgage-backed securities;
(iv)
maintaining high levels of capital; and
(v)
securitizing and/or selling long-term, fixed-rate residential real estate mortgage loans.
During the nine months ended June 30, 2015, $102.9 million of agency-compliant, long-term, fixed-rate mortgage loans were sold, all on a servicing retained basis, and, at June 30, 2015, $10.7 million of agency-compliant, long-term, fixed-rate residential first mortgage loans were classified as “held for sale”. Of the loan sales during the nine months ended June 30, 2015, $20.9 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage loans which were sold under Fannie Mae's HARP II program, and $82.0 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage loans which had been originated under our revised procedures and were sold to Fannie Mae under our re-instated seller contract, as described in the next paragraph. At June 30, 2015, we had $10.3 of outstanding loan sales commitments.
Fannie Mae, historically the Association’s primary loan investor, implemented, effective July 1, 2010, certain loan origination requirement changes affecting loan eligibility that we chose not to adopt until May 2013. Subsequent to the May 2013 implementation date of our revised procedures, and, upon review and validation by Fannie Mae which was received on November 15, 2013, fixed-rate, first mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more and HARP II loans) that were originated under the revised procedures were eligible for sale to Fannie Mae either as whole loans or as mortgage-backed securities. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures. For loans originated prior to May 2013 and for those loans originated subsequent to April 2013 that are not originated under the revised (Fannie Mae) procedures, the Association’s ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values that meet the requirements of private third-party investors similar to the four transactions that were completed during fiscal 2013.
In response to the evolving secondary market environment, since July 2010, we have actively marketed an adjustable-rate mortgage loan product and since fiscal 2012, have promoted a 10-year fixed-rate mortgage loan product. Each of these products provides us with improved interest rate risk characteristics when compared to longer-term, fixed-rate mortgage loans. Shortening the average duration of our interest-earning assets by increasing our investments in shorter-term loans and investments, as well as loans and investments with variable rates of interest, helps to better match the maturities and interest rate repricing of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. By following these strategies, we believe that we are better positioned to react to increases in market interest rates.
Economic Value of Equity. Using customized modeling software, the Association prepares periodic estimates of the amounts by which the net present value of its cash flows from assets, liabilities and off-balance sheet items (the institution’s economic value of equity or EVE) would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach in measuring the interest rate sensitivity of EVE. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumption that instantaneous changes (measured in basis points) occur at all maturities along the United States Treasury yield curve and other relevant market interest rates. A basis point equals one, one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is tailored specifically to our organization, which, we believe, improves its predictive accuracy. The following table presents the estimated changes in the Association’s EVE at June 30, 2015 that would result from the indicated instantaneous changes in the United States Treasury yield curve and other relevant market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

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EVE as a Percentage  of
Present Value of Assets (3)
Change in
Interest Rates
(basis points) (1)
 
Estimated
EVE (2)
 
Estimated Increase (Decrease) in
EVE
 
EVE
Ratio  (4)
 
Increase
(Decrease)
(basis
points)
Amount
 
Percent
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
+300
 
$
1,679,182

 
$
(573,141
)
 
(25.45
)%
 
14.81
%
 
(310
)
+200
 
1,909,014

 
(343,309
)
 
(15.24
)%
 
16.23
%
 
(168
)
+100
 
2,109,700

 
(142,623
)
 
(6.33
)%
 
17.32
%
 
(59
)
  0
 
2,252,323

 

 

 
17.91
%
 

-100
 
2,261,339

 
9,016

 
0.40
 %
 
17.59
%
 
(32
)
_________________
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at June 30, 2015, in the event of an increase of 200 basis points in all interest rates, the Association would experience a 15.24% decrease in EVE. In the event of a 100 basis point decrease in interest rates, the Association would experience a 0.40% increase in EVE.
The following table is based on the calculations contained in the previous table, and sets forth the change in the EVE at a +200 basis point rate of shock at June 30, 2015, with comparative information as of September 30, 2014. By regulation, the Association must measure and manage its interest rate risk for interest rate shocks relative to established risk tolerances in EVE.
Risk Measure (+200 bps Rate Shock)
 
 
At June 30,
2015
 
At September 30, 2014
Pre-Shock EVE Ratio
 
17.91
 %
 
18.46
 %
Post-Shock EVE Ratio
 
16.23
 %
 
16.37
 %
Sensitivity Measure in basis points
 
(168
)
 
(209
)
Percentage Change in EVE
 
(15.24
)%
 
(17.36
)%
Certain shortcomings are inherent in the methodologies used in measuring interest rate risk through changes in EVE. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE tables presented above assume:
no new growth or business volumes;
that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, except for reductions to reflect mortgage loan principal repayments along with modeled prepayments and defaults; and
that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities.
Accordingly, although the EVE tables provide an indication of our interest rate risk exposure as of the indicated dates, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and will differ from actual results. In addition to our core business activities, which primarily sought to originate Smart Rate (adjustable) and 10 year fixed-rate loans funded by borrowings from the FHLB and intermediate term CDs (including brokered CDs), and which generally had a favorable impact on our IRR profile, the impact of three other items resulted in the 2.12% improvement in the Percentage Change in EVE measure at June 30, 2015 when compared to the measure at September 30, 2014. While our core business activities, as described earlier in this paragraph, improved our Percentage Change in EVE by 0.97%, the most significant factor contributing to the overall improvement was the change in market interest rates. Since September 30, 2014, the change in market interest rates ranged from an increase of 8 basis points for the two year term to a decrease of 11 basis points for the five year term and a decrease of 14 basis points for the ten year term. The changes in interest rates resulted in an improvement of 2.97% in the Percentage Change in EVE. Partially offsetting the beneficial impacts of the changes in market interest rates and the balance sheet repositioning was the impact of the $66 million cash

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dividend that the Association paid to the Company. Because of its intercompany nature, this payment had no impact on the Company's capital position, or the Company's overall IRR profile but reduced the Association's regulatory capital and regulatory capital ratios and negatively impacted the Association's Percentage Change in EVE by approximately 0.41%. Additionally, numerous modifications and enhancements to our modeling assumptions and methodologies, which are continually challenged and evaluated, have been implemented since September 30, 2014 and, on a net basis, negatively impacted the Association's Percentage Change in EVE by 1.41%. These changes primarily impacted the estimated timing of cash flows related to our Smart Rate portfolio of adjustable rate, first mortgage loans, and attempt to more closely align the model’s projections with our historical experience for those products. The IRR simulation results presented above were in line with management's expectations and were within the risk limits established by our Board of Directors.
Our simulation model possesses random patterning capabilities and accommodates extensive regression analytics applicable to the prepayment and decay profiles of our borrower and depositor portfolios. The model facilitates the generation of alternative modeling scenarios and provides us with timely decision making data that is integral to our IRR management processes. Modeling our IRR profile and measuring our IRR exposure are processes that are subject to continuous revision, refinement, modification, enhancement, back testing and validation. We continually evaluate, challenge and update the methodology and assumptions used in our IRR model, including behavioral equations that have been derived based on third-party studies of our customer historical performance patterns. Changes to the methodology and/or assumptions used in the model will result in reported IRR profiles and reported IRR exposures that will be different, and perhaps significantly, from the results reported above.
Earnings at Risk. In addition to EVE calculations, we use our simulation model to analyze the sensitivity of our net interest income to changes in interest rates (the institution’s EaR). Net interest income is the difference between the interest income that we earn on our interest-earning assets, such as loans and securities, and the interest that we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for prospective 12 and 24 month periods using customized (based on our portfolio characteristics) assumptions with respect to loan prepayment rates, default rates and deposit decay rates, and the implied forward yield curve as of the market date for assumptions as to projected interest rates. We then calculate what the net interest income would be for the same period in the event of instantaneous changes in market interest rates. The simulation process is subject to continual enhancement, modification, refinement and adaptation in order that it might most accurately reflect our current circumstances, factors and expectations. As of June 30, 2015, we estimated that our EaR for the 12 months ending June 30, 2016 would decrease by 2.0% in the event of an instantaneous 200 basis point increase in market interest rates. As is the case with any model that projects future results, the further into the future that the model extends, the less precise/reliable the results become. With that in mind, as of June 30, 2015, we estimated that our EaR for a second 12 month period ending June 30, 2017 would decrease by 2.82% in the event of an instantaneous 200 basis point increase in market interest rates.At June 30, 2015, the IRR simulations results were in line with management's expectations and were within the risk limits established by our Board of Directors.
Certain shortcomings are also inherent in the methodologies used in determining interest rate risk through changes in EaR. Modeling changes in EaR require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the interest rate risk information presented above assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. In addition to the preparation of computations as described above, we also formulate simulations based on a variety of non-linear changes in interest rates and a variety of non-constant balance sheet composition scenarios.
Other Considerations. The EVE and EaR analyses are similar in that they both start with the same month end balance sheet amounts, weighted average coupon and maturity. The underlying prepayment, decay and default assumptions are also the same and they both start with the same month end "markets" (Treasury and Libor yield curves, etc.). From that similar starting point, the models follow divergent paths. EVE is a stochastic model using 300 different interest rate paths to compute market value at the cohorted transaction level for each of the categories on the balance sheet whereas EaR uses the implied forward curve to compute interest income/expense at the cohorted transaction level for each of the categories on the balance sheet.
EVE is considered as a point in time calculation with a "liquidation" view of the Association where all the cash flows (including interest, principal and prepayments) are modeled and discounted using discount factors derived from the current market yield curves. It provides a long term view and helps to define changes in equity and duration as a result of changes in interest rates. On the other hand, EaR is based on balance sheet projections going one year and two years forward and assumes new business volume and pricing to calculate net interest income under different interest rate environments. EaR is calculated to determine the sensitivity of net interest income under different interest rate scenarios. With each of these models specific policy limits have been established that are compared with the actual month end results. These limits have been approved by

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the Association's Board of Directors and are used as benchmarks to evaluate and moderate interest rate risk. In the event that there is a breach of policy limits, management is responsible for taking such action, similar to those described under the preceding heading of General, as may be necessary in order to return the Association's interest rate risk profile to a position that is in compliance with the policy. At June 30, 2015 the IRR profile as disclosed above did not breach our internal limits.
Item 4. Controls and Procedures
Under the supervision of and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated
and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in the “Risk Factors” disclosed in the Annual Report on Form 10-K, filed with the SEC on November 26, 2014 (File No. 001-33390).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Not applicable
(b)
Not applicable
(c)
The following table summarizes our stock repurchase activity during the quarter ended June 30, 2015 and the stock repurchase plan approved by our Board of Directors.
 
 
 
Average
 
Total Number of
 
Maximum Number
 
Total Number
 
Price
 
Shares Purchased
 
of Shares that May
 
of Shares
 
Paid per
 
as Part of Publicly
 
Yet be Purchased
Period
Purchased
 
Share
 
Announced Plans (1)
 
Under the Plans
April 1, 2015 through April 30, 2015
1,040,000

 
$
14.71

 
1,040,000

 
2,723,450

May 1, 2015 through May 31, 2015
908,000

 
14.71

 
908,000

 
1,815,450

June 1, 2015 through June 30, 2015
910,000

 
15.69

 
910,000

 
905,450

 
2,858,000

 
15.02

 
2,858,000

 
 
 
 
 
 
 
 
 
 
(1)
On September 9, 2014, the Company announced its sixth stock repurchase program, which authorized the repurchase of up to an additional 10,000,000 shares of the Company’s outstanding common stock. Purchases under the program will be on an ongoing basis and subject to the availability of stock, general market conditions, the trading price of the stock,

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alternative uses of capital, and our financial performance. Repurchased shares will be held as treasury stock and be available for general corporate use.
On July 30, 2015, the Company announced it’s seventh stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock.
On August 5, 2015, at a special meeting of members of Third Federal Savings, MHC, the members (depositors and certain loan customers of the Association) of Third Federal Savings, MHC voted to approve Third Federal Savings, MHC's proposed waiver of dividends, aggregating up to $0.40 per share, to be declared on the Company’s common stock during the twelve months subsequent to the members’ approval (i.e., through August 5, 2016). The members approved the waiver by casting 63% of the eligible votes in favor of the waiver. Of the votes cast, 97% were in favor of the proposal. Third Federal Savings, MHC is the 77% majority shareholder of the Company.
Following the receipt of the members’ approval at the August 5, 2015 special meeting, Third Federal Savings, MHC filed a notice with, and a request for non-objection from the FRB-Cleveland for the proposed dividend waivers. Both the non-objection from the FRB-Cleveland and the timing of the non-objection are unknown as of the filing date of this quarterly report.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
Item 6.
(a) Exhibits
31.1
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
 
 
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
 
 
 
 
32
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
 
 
 
 
 
 
 
101
  
The following unaudited financial statements from TFS Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, filed on August 6, 2015, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, (vi) the Notes to Consolidated Financial Statements.
101.INS
  
Interactive datafile                            XBRL Instance Document
 
 
101.SCH
  
Interactive datafile                            XBRL Taxonomy Extension Schema Document
 
 
101.CAL
  
Interactive datafile                            XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
  
Interactive datafile                            XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
  
Interactive datafile                            XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
  
Interactive datafile                            XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
TFS Financial Corporation
 
 
 
 
Dated:
August 6, 2015
 
/s/    Marc A. Stefanski
 
 
 
Marc A. Stefanski
 
 
 
Chairman of the Board, President
and Chief Executive Officer
 
 
 
 
Dated:
August 6, 2015
 
/s/    David S. Huffman
 
 
 
David S. Huffman
 
 
 
Chief Financial Officer and Secretary


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