2015 Annual Report
A Shared Sense of Community.
a letter from our
chairman and
chief executive officer
excellence ·· fun fun fun
respect ·· excellence
trust ·· respect
love ·· trust
excellence
excellence
respect
respect
respect
trust
trust
trust
love
love
love
Dear Stockholders,
My parents Ben and Gerome Stefanski started Third Federal in 1938 with the help and support of their
friends and neighbors in Slavic Village. In return, they promised to help them achieve the American
dream of homeownership and financial stability.
Today, helping and supporting one another continues to be a central part of who we are and how we
do business. It’s that sense of community – neighbors, friends, colleagues and shareholders helping
one another – that makes Third Federal truly unique and special.
During this past year, I have been blessed to receive that love and support from many of you. As some
of you know, I lost my wife Rhonda to cancer last year. Through the tragedy, we all gained an even
greater appreciation for the importance of the Third Federal family. When we experience a loss, we
gain strength and courage through our sense of community and reliance on one another. Our values
of Love, Trust, Respect, Commitment to Excellence and Fun have always served us well, and are the
foundation that continues to keep us strong, stable and safe, in spite of challenges we may face.
Third Federal’s overall financial health is strong, stable and safe as well. In fact, for more than 25
years in-a-row, independent rating agency BauerFinancial has rated Third Federal five-star superior
for financial safety and soundness, a point of pride for us and our loyal customers. We also continued
to provide financial support to our communities by investing in education, and enhancing literacy. In
addition, we hosted two successful Rhonda’s Kiss benefits this year. Through these efforts, we raised
money to pay for medical supplies and services to help cancer patients in the inner city maintain their
dignity during treatment. Finally, the Third Federal Foundation, in partnership with the Marc A. and
Rhonda L. Stefanski Foundation, donated $5 million to Cleveland Clinic and Case Western Reserve
University to fund the creation of The Rhonda and Marc Stefanski Center for Community Health
Education to address health disparities in Cleveland.
Our greatest success this year, though, was that we never wavered in our support for one another.
That same attitude is reflected in our Yes! We Can associate campaign – by loving and supporting
one another, we can accomplish great things. Thank you to our loyal shareholders for your ongoing
support, and to our dedicated associates for another great year. The Third Federal community is as
strong as ever, and for that, I thank you from the bottom of my heart.
Love,
Marc A. Stefanski
Chairman and CEO
THIS PAGE INTENTIONALLY LEFT BLANK
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 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
(State or Other Jurisdiction of
Incorporation or Organization)
7007 Broadway Avenue
Cleveland, Ohio
(Address of Principal Executive Offices)
52-2054948
(I.R.S. Employer
Identification No.)
44105
(Zip Code)
(216) 441-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
The NASDAQ Stock Market, LLC
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
___________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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 definition of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act
(Check one):
Large accelerated filer
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
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference
No
to the last sale price on March 31, 2015, as reported by the NASDAQ Global Select Market, was approximately $996.1 million.
At November 23, 2015 there were 289,901,597 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which
227,119,132 shares, or 78.34% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland,
MHC, the Registrant’s mutual holding company.
Portions of the registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE (to the Extent Indicated Herein)
TFS Financial Corporation
INDEX
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
4
45
48
49
49
49
49
52
56
75
78
78
79
81
81
82
82
82
82
82
2
TFS Financial Corporation provides the following list of acronyms as a tool for the reader. The acronyms identified below are
used throughout the document.
GLOSSARY OF TERMS
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
Association: Third Federal Savings and Loan
Association of Cleveland
HPI: Home Price Index
IRR: Interest Rate Risk
IRS: Internal Revenue Service
BAAS: OCC Bank Accounting Advisory Series
IVA: Individual Valuation Allowance
BOLI: Bank Owned Life Insurance
CDs: Certificates of Deposit
CFPB: Consumer Financial Protection Bureau
LIHTC: Low Income Housing Tax Credit
LIP: Loans-in-Process
LTV: Loan-to-Value
CLTV: Combined Loan-to-Value
MGIC: Mortgage Guaranty Insurance Corporation
Company: TFS Financial Corporation and its
MOU: Memorandum of Understanding
subsidiaries
NOW: Negotiable Order of Withdrawal
DFA: Dodd-Frank Wall Street Reform and Consumer
OCC: Office of the Comptroller of the Currency
Protection Act of 2010
DIF: Depository Insurance Fund
EaR: Earnings at Risk
EPS: Earnings per Share
OCI: Other Comprehensive Income
OTS: Office of Thrift Supervision
PMI: Private Mortgage Insurance
PMIC: PMI Mortgage Insurance Co.
ESOP: Third Federal Employee (Associate) Stock
QTL: Qualified Thrift Lender
Ownership Plan
REMICs: Real Estate Mortgage Investment Conduits
EVE: Economic Value of Equity
REIT: Real Estate Investment Trust
FASB: Financial Accounting Standards Board
SVA: Specific Valuation Allowance
FDIC: Federal Deposit Insurance Corporation
SEC: United States Securities and Exchange
FHFA: Federal Housing Finance Agency
FHLB: Federal Home Loan Bank
Commission
TDR: Troubled Debt Restructuring
Fannie Mae: Federal National Mortgage Association
Third Federal Savings, MHC: Third Federal Savings
FRB-Cleveland: Federal Reserve Bank of Cleveland
FRS: Board of Governors of the Federal Reserve System
and Loan Association of Cleveland, MHC
3
PART I
Item 1.
Business
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 globally, 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 and 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 Item 1A. Risk Factors for a
discussion of certain risks related to our business.
4
TFS FINANCIAL CORPORATION
TFS Financial Corporation (“we,” “us,” or “our”) was organized in 1997 as the mid-tier stock holding company for the
Association. We completed our initial public stock offering on April 20, 2007 and issued 100,199,618 shares of common stock,
or 30.16% of our post-offering outstanding common stock, to subscribers in the offering. Additionally, at the time of the public
offering, 5,000,000 shares of our common stock, or 1.50% of our outstanding shares, were issued to the newly formed
charitable foundation, Third Federal Foundation. Third Federal Savings, MHC, our mutual holding company parent, holds the
remainder of our outstanding common stock (227,119,132 shares). Net proceeds from our initial public stock offering were
approximately $886 million and reflected the costs we incurred in completing the offering as well as a $106.5 million loan to
the ESOP related to its acquisition of shares in the initial public stock offering.
Our ownership of the Association remains our primary business activity.
We also operate Third Capital, Inc. as a wholly-owned subsidiary. See Third Capital, Inc. below.
As the holding company of the Association, we are authorized to pursue other business activities permitted by applicable
laws and regulations for savings and loan holding companies, which include making equity investments and the acquisition of
banking and financial services companies.
Our cash flow depends primarily on earnings from the investment of the portion of the net offering proceeds we retained,
and any dividends we receive from the Association and Third Capital, Inc. All of our officers are also officers of the
Association. In addition, we use the services of the support staff of the Association from time to time. We may hire additional
employees, as needed, to the extent we expand our business in the future.
THIRD CAPITAL, INC.
Third Capital, Inc. is a Delaware corporation that was organized in 1998 as our wholly-owned subsidiary. At
September 30, 2015, Third Capital, Inc. had consolidated assets of $79.6 million, and for the fiscal year ended September 30,
2015, Third Capital, Inc. had consolidated net income of $0.3 million. Third Capital, Inc. has no separate operations other than
as the holding company for its operating subsidiaries, and as a minority investor or partner in other entities including minority
investments in private equity funds. The following is a description of the entities, other than the private equity funds, in which
Third Capital, Inc. is the owner, an investor or a partner.
Hazelmere Investment Group I, Ltd. This Ohio limited liability company engages in net lease transactions of
commercial buildings in targeted markets. Third Capital, Inc. is a partner of this entity, receives a priority return on amounts
contributed to acquire investment properties and has a 70% ownership interest in remaining earnings. Hazelmere Investment
Group I, Ltd.recorded a net loss of $19 thousand during the fiscal year ended September 30, 2015.
Third Cap Associates, Inc. This Ohio corporation owns 49% and 60% of two title agencies that provide escrow and
settlement services in the State of Ohio, primarily to customers of the Association. For the fiscal year ended September 30,
2015, Third Cap Associates, Inc. recorded net income of $0.5 million.
Third Capital Mortgage Insurance Company. Through March 31, 2014, this Vermont corporation reinsured (on a second
tier, excess loss basis) private mortgage insurance on residential mortgage loans originated by the Association. Effective March
31, 2014, all remaining contracts for reinsurance were terminated. The process to dissolve this company is underway as of
September 30, 2015. For the fiscal year ended September 30, 2015, Third Capital Mortgage Insurance Company recorded a net
loss of $10 thousand.
THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND
General
The Association is a federally chartered savings and loan association headquartered in Cleveland, Ohio, that was
organized in 1938. In May 1997, the Association reorganized into its current two-tier mutual holding company structure. The
Association’s principal business consists of originating and servicing residential real estate mortgage loans and attracting retail
savings deposits.
The Association’s business strategy is to originate mortgage loans with interest rates that are competitive with those of
similar products offered by other financial institutions in its markets. Similarly, the Association offers high-yield checking
accounts and high-yield savings accounts and certificate of deposit accounts, each bearing interest rates that are competitive
with similar products offered by other financial institutions in its markets. The Association expects to continue to pursue this
business philosophy. While this strategy does not enable the Association to earn the highest rates of interest on loans that it
5
offers or to pay the lowest rates on its deposit accounts, the Association believes that this strategy is the primary reason for its
successful growth in the past and will continue to be a successful strategy in the future.
The Association attracts retail deposits from the general public in the areas surrounding its main office and its branch
offices. It also utilizes its internet website, direct mail solicitation and its customer service call center to generate loan
applications and attract retail deposits. Since September 2013, brokered CDs and more extensive use of longer-term advances
from the FHLB of Cincinnati have also been used as a cost effective funding alternatives. In addition to residential real estate
mortgage loans, the Association originates residential construction loans to individuals for the construction of their personal
residences by a qualified builder. The Association also offers home equity loans and lines of credit subject to certain property
and credit performance conditions. The Association retains in its portfolio a large portion of the loans that it originates. Loans
that the Association sells consist primarily of long-term, fixed-rate residential real estate mortgage loans. Between June 2010
and May 2013, the volume of loan sales decreased significantly because, until May 2013, the Association had not adopted
certain loan origination requirements for the sale of loans to Fannie Mae that became effective on July 1, 2010. The Association
retains the servicing rights on all loans that it sells. The Association’s revenues are derived primarily from interest on loans and,
to a lesser extent, interest on interest-earning deposits in other financial institutions, deposits maintained at the FRS, federal
funds sold, and investment securities, including mortgage-backed securities. The Association also generates revenues from fees
and service charges. The Association’s primary sources of funds are deposits, borrowings, principal and interest payments on
loans and securities and proceeds from loan sales.
The Association’s website address is www.thirdfederal.com. Filings of the Company made with the SEC are available for
free on the Association’s website. Information on that website is not and should not be considered a part of this document.
Market Area
The Association conducts its operations from its main office in Cleveland, Ohio, and from 38 additional, full-service
branches and eight loan production offices located throughout the states of Ohio and Florida. In Ohio, the Association
maintains 21 full-service offices located in the northeast Ohio counties of Cuyahoga, Lake, Lorain, Medina and Summit, four
loan production offices located in the central Ohio counties of Franklin and Delaware (Columbus, Ohio) and four loan
production offices located in the southern Ohio counties of Butler and Hamilton (Cincinnati, Ohio). In Florida, the Association
maintains 17 full-service branches located in the counties of Pasco, Pinellas, Hillsborough, Sarasota, Lee, Collier, Palm Beach
and Broward. While the economies and housing markets in Ohio and Florida were negatively impacted by the 2008 financial
crisis and its aftermath, more recently, such markets have improved and are reflected in improving credit metrics
(delinquencies, charge-offs). During the past year, the trend in employment has been stable in Ohio and positive in Florida and
the trend in housing prices has also generally been increasing in both regions. However, the strength and sustainability of the
recovery is not assured and the economy's fragility persists.
The Association also provides savings products in all 50 states and first mortgage refinance loans and home equity loan
products in 21 states and the District of Columbia through its customer service call center and its internet site.
Competition
The Association faces intense competition in its market areas both in making loans and attracting deposits. Its market
areas have a high concentration of financial institutions, including large money center and regional banks, community banks
and credit unions, and it faces additional competition for deposits from money market funds, brokerage firms, mutual funds and
insurance companies. Some of its competitors offer products and services that the Association currently does not offer, such as
commercial business loans, trust services and private banking.
The majority of the Association’s deposits are held in its offices located in Cuyahoga County, Ohio. As of June 30, 2015
(the latest date for which information is publicly available), the Association had $4.7 billion of deposits in Cuyahoga County,
and ranked third among all financial institutions with offices in the county in terms of deposits, with a market share of 9.62%.
As of that date, the Association had $6.1 billion of deposits in the State of Ohio, and ranked ninth among all financial
institutions in the state in terms of deposits, with a market share of 2.03%. As of June 30, 2015, the Association had $2.5 billion
of deposits in the State of Florida, and ranked 27th among all financial institutions in terms of deposits, with a market share of
0.49%.
The DFA, which was signed into law in July 2010, required that the FDIC amend its regulations on assessing insured
institutions in order to fund the DIF. The resulting change effectively eliminated the funding cost advantage that borrowed
funds generally had when compared to the funding cost associated with deposits. As a result, many financial institutions,
including institutions that compete in our markets, have targeted retail deposit gathering as a more attractive funding source
than borrowings, and have become more active and more competitive in their deposit product pricing. The combination of
reduced demand for borrowed funds, more competition with respect to rates paid to depositors, and low savings rates that lead
6
to reduced appeal for investors that have traditionally allocated a portion of their portfolios to insured savings accounts, has
created an increasingly difficult marketplace for attracting deposits, which could adversely affect future operating results.
From October 2014 through September 30, 2015, per data furnished by MarketTrac®, the Association had the third largest
market share of conventional purchase mortgage loans originated in Cuyahoga County, Ohio. For the same period, it also had
the third largest market share of conventional purchase mortgage loans originated in the seven northeast Ohio counties which
comprise the Cleveland and Akron metropolitan statistical areas. In addition, based on the same statistics, the Association has
consistently been one of the ten largest lenders in both Franklin County (Columbus, Ohio) and Hamilton County (Cincinnati,
Ohio) since it entered those markets in 1999.
The Association’s primary strategy for increasing and retaining its customer base is to offer competitive deposit and loan
rates and other product features, delivered with exceptional customer service, in each of the markets it serves.
We rely on the reputation that has been built during the Association’s 77-year history of serving its customers and the
communities in which it operates, the Association’s high capital levels, and the Association's extensive liquidity alternatives
which, in combination, serve to maintain and nurture customer and marketplace confidence. The Company’s high capital ratio
continues to reflect the beneficial impact of our April 2007 initial public offering, which raised net proceeds of $886 million. At
September 30, 2015, our ratio of shareholders’ equity to total assets was 14.0%. Our liquidity alternatives include management
and monitoring of the level of liquid assets held in our portfolio as well as the maintenance of alternative wholesale funding
sources. For the year ended September 30, 2015, our liquidity ratio averaged 9.56% (which we compute as the sum of cash and
cash equivalents plus unpledged investment securities for which ready markets exist, divided by total assets) and, through the
Association, we had the ability to immediately borrow an additional $584.5 million from the FHLB of Cincinnati under
existing credit arrangements along with $116.8 million from the Federal Reserve Bank of Cleveland. From the perspective of
collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the immediately
available limit at September 30, 2015 was $3.64 billion, subject to satisfaction of the FHLB of Cincinnati's 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 $72.9 million. See “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation—Liquidity and Capital Resources.”
We continue to utilize a multi-faceted approach to support our efforts to instill customer and marketplace confidence.
First, we provide thorough and timely information to all of our associates so as to prepare them for their day-to-day interactions
with customers and other individuals who are not part of the Company. We believe that it is important that our customers and
others sense the comfort level and confidence of our associates throughout their dealings. Second, we encourage our
management team to maintain a presence and to be available in our branches and other areas of customer contact, so as to
provide more opportunities for informal contact and interaction with our customers and community members. Third, our CEO
remains accessible to both local and national media, as a spokesman for our institution as well as an observer and interpreter of
financial marketplace situations and events. Fourth, we periodically include advertisements in local newspapers that display our
strong capital levels and history of service. We also continue to emphasize our traditional tagline—“STRONG * STABLE *
SAFE”—in our advertisements and branch displays. Finally, for customers who adhere to the old adage of trust but verify, we
refer them to the safety/security rankings of a nationally recognized, independent rating organization that specializes in the
evaluation of financial institutions, which has awarded the Association its highest rating for more than one hundred consecutive
quarters.
Lending Activities
The Association’s principal lending activity is the origination of fixed-rate and adjustable-rate, first mortgage loans to
purchase or refinance residential real estate. The Association also originates residential construction loans to individuals (for
the construction of their personal residences by a qualified builder) and originates home equity loans and lines of credit in Ohio
and Florida. We offer home equity lines of credit in 20 additional states and home equity loans in six additional states.
Between June 28, 2010 and March 20, 2012 the Association suspended the acceptance of new home equity line of credit
applications. Effective March 20, 2012, the Association began offering new home equity lines of credit to qualifying existing
home equity customers. In February 2013, we modified the product design and offered the product to all customers in Ohio,
Florida and selected counties in Kentucky and in April 2013 we extended the offer to both existing customers and new
consumers in Ohio, Florida and selected counties in Kentucky. Over the course of the fiscal year ended September 30, 2014, we
expanded the product offering to now include 21 states and the District of Columbia. Refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation - Monitoring and Limiting Our Credit Risk for
additional information regarding home equity loans and lines of credit. At September 30, 2015, residential real estate, fixed-rate
and adjustable-rate, first mortgage loans totaled $9.60 billion, or 85.1% of our loan portfolio, home equity loans and lines of
credit totaled $1.63 billion, or 14.4% of our loan portfolio, and residential construction loans totaled $55.4 million, or 0.5% of
7
our loan portfolio. At September 30, 2015 adjustable-rate, residential real estate, first mortgage loans totaled $3.86 billion and
comprised 34.2% of our loan portfolio.
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 for the periods indicated, excluding loans held for sale. The majority of our
construction loan portfolio is secured by properties located in Ohio and the balances of consumer loans are immaterial.
Therefore, neither was segregated by geographic location.
2015
2014
September 30,
2013
2012
2011
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real estate loans:
Residential Core(1)
Ohio
Florida
Other
$ 5,903,051
$ 5,986,801
$ 5,947,791
$ 6,088,264
1,621,763
1,938,125
1,570,087
1,271,951
1,465,907
704,813
1,396,612
458,289
$ 5,691,614
1,269,242
159,933
Total
9,462,939
83.9%
8,828,839
82.2%
8,118,511
79.4%
7,943,165
76.5% 7,120,789
71.5%
Residential Home
Today(1)
Ohio
Florida
Other
129,416
6,050
280
146,974
6,909
313
170,206
7,826
321
199,456
8,540
329
252,879
10,784
356
Total
135,746
1.2
154,196
1.5
178,353
1.7
208,325
2.0
264,019
2.6
Home equity loans and
lines of credit
Ohio
Florida
California
Other
Total
Construction
Other consumer loans
641,321
421,904
216,233
345,781
1,625,239
55,421
3,468
675,911
475,375
213,309
332,334
721,890
539,152
227,841
369,515
838,492
628,554
256,900
431,550
982,591
712,087
293,307
503,213
14.4
0.5
—
1,696,929
15.8
1,858,398
18.2
2,155,496
20.8
2,491,198
25.0
57,104
4,721
0.5
—
72,430
4,100
0.7
—
69,152
4,612
0.7
—
82,048
6,868
0.8
0.1
Total loans receivable
11,282,813
100.0% 10,741,789
100.0% 10,231,792
100.0% 10,380,750
100.0% 9,964,922
100.0%
Deferred loan expenses
(fees), net
Loans in process
Allowance for loan
losses
10,112
(33,788)
(71,554)
(1,155)
(28,585)
(81,362)
(13,171)
(42,018)
(92,537)
Total loans receivable, net
$11,187,583
$10,630,687
$10,084,066
(18,561)
(36,736)
(100,464)
$10,224,989
(19,854)
(37,147)
(156,978)
$ 9,750,943
______________________
(1) Residential Core and Home Today loans are primarily one- to four-family residential mortgage loans. See the Residential
Real Estate Mortgage Loans section which follows for a further description of Home Today and Core loans.
8
Loan Portfolio Maturities. The following table summarizes the scheduled repayments of the loan portfolio at
September 30, 2015, according to each loan's final due date. Demand loans, loans having no stated repayment schedule or
maturity, are reported as being due in the fiscal year ending September 30, 2016. Maturities are based on the final contractual
payment date and do not reflect the impact of prepayments and scheduled principal amortization.
Due During the Years
Ending September 30,
2016
2017
2018
2019 to 2020
2021 to 2025
2026 to 2030
2031 and beyond
Total
Residential Real Estate
Core
Home
Today
Home Equity
Loans
and Lines of
Credit
Construction
Loans
Other
Consumer
Loans
Total
(In thousands)
$
1,143
$
— $
2,059
$
— $ 3,468
$
6,996
24,002
66,395
2,033,374
1,254,716
6,076,313
24
369
560
2,169
437
1,420
1,685
4,803
112,383
1,217,107
132,187
285,782
—
—
—
—
4,052
51,369
6,670
8,440
26,056
71,758
—
—
—
— 2,147,926
— 2,476,312
— 6,545,651
$ 9,462,939
$
135,746
$ 1,625,239
$
55,421
$ 3,468
$11,282,813
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2015 that are
contractually due after September 30, 2016.
Real estate loans:
Residential Core
Residential Home Today
Home Equity Loans and Lines of Credit
Construction
Total
Due After September 30, 2016
Fixed
Adjustable
Total
(In thousands)
$ 5,604,934
$ 3,856,862
$ 9,461,796
135,652
17,518
41,664
94
135,746
1,605,662
1,623,180
13,757
55,421
$ 5,799,768
$ 5,476,375
$ 11,276,143
Residential Real Estate Mortgage Loans. The Association’s primary lending activity is the origination of residential real
estate mortgage loans. A comparison of 2015 data to the corresponding 2014 data can be found in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation.” The Association currently offers fixed-rate
conventional mortgage loans with terms of 30 years or less that are fully amortizing with monthly loan payments, and
adjustable-rate mortgage loans that amortize over a period of up to 30 years, provide an initial fixed interest rate for three or
five years and then adjust annually. At September 30, 2015, there were no “interest only” residential real estate mortgage loans
held in the Association's portfolio.
The Association generally originates both fixed- and adjustable-rate mortgage loans in amounts up to the maximum
conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which is currently $417,000 and
$625,500, respectively, for single-family homes in most of our lending markets. The Association also originates loans in
amounts that exceed the lending limit for conforming loans, which the Association refers to as “jumbo loans.” The Association
generally underwrites jumbo loans in a manner similar to conforming loans. Jumbo loans are not uncommon in the
Association’s market areas.
The Association has always considered the promotion of home ownership a primary goal. In that regard, it has
historically offered affordable housing programs in all of its market areas. These programs are targeted toward low- and
moderate-income home buyers. The Association’s primary program is called Home Today and is described in detail below.
Prior to March 27, 2009, loans originated under the Home Today program had higher risk characteristics. The Association did
not classify Home Today as a sub-prime lending program based on the exclusion provided to community development loans in
the Expanded Guidance for Sub-prime Lending issued by the OTS and the OCC. In the aftermath of the 2008 financial crisis, a
great deal of attention was focused on sub-prime lending and its negative effect on borrowers and financial markets. Borrowers
in our Home Today program are not charged higher fees or interest rates than our Core (non-Home Today) borrowers. Home
Today loans are not "interest only" or negative amortizing and contain no low initial payment features or adjustable interest
rates, which are features often associated with sub-prime lending. While the credit risk profiles of the Association’s borrowers
9
in the Home Today program are generally higher risk than the credit risk profiles of its Core borrowers, the Association
attempts to mitigate that higher risk through the use of private mortgage insurance and continued pre- and post-purchase
counseling. The Association’s philosophy has been to provide borrowers the opportunity for home ownership within their
financial means.
Since March 27, 2009, borrowers under the Home Today program are subject to substantially the same underwriting
requirements as Core borrowers and borrowers must complete a financial management education program. Prior to March 27,
2009, through the Home Today program, the Association originated loans with its standard terms to borrowers who might not
have otherwise qualified for such loans. To previously qualify for the Association’s Home Today program, a borrower must
have completed financial management education and counseling and must have been referred to the Association by a
sponsoring organization with which the Association had partnered as part of the program. Borrowers must have met a minimum
credit score threshold. The Association will originate loans with a LTV ratio of up to 90% through its Home Today program,
provided that any loan originated through this program with a LTV ratio in excess of 80% must meet the underwriting criteria
mandated by the Association's private mortgage insurance carrier. Because the Association previously applied less stringent
underwriting and credit standards to these loans, the vast majority of loans originated under the Home Today program generally
have greater credit risk than our Core residential real estate mortgage loans. Effective October 2007, the private mortgage
insurance carrier that provides coverage for the Home Today loans with LTV ratios in excess of 80% imposed more restrictive
lending requirements that decreased the volume of Home Today lending. As of September 30, 2015, the Association had $135.7
million of loans outstanding that were originated through its Home Today program, most of which were originated prior to
March 27, 2009. At September 30, 2015, of the loans that were originated under the Home Today program, 13.0% were
delinquent 30 days or more in repayments, compared to 0.4% for the portfolio of Core loans as of that date. At September 30,
2015, $9.1 million, or 6.8%, of loans originated under the Home Today program were delinquent 90 days and over and $22.6
million of Home Today loans were non-accruing loans, representing 21.1% of total non-accruing loans as of that date. See “—
Non-performing Assets and Restructured Loans—Delinquent Loans” for a discussion of the asset quality of this portion of the
Association’s loan portfolio.
Prior to November 2008, the Association also originated loans under its high LTV program. These loans had initial LTV
ratios of 90% or greater and could be as high as 95%. To qualify for this program, the loan applicant was required to satisfy
more stringent underwriting criteria (credit score, income qualification, and other criteria). Borrowers did not obtain private
mortgage insurance with respect to these loans. High LTV loans were originated with higher interest rates than the
Association’s other residential real estate loans. The Association believes that the higher credit quality of this portion of the
portfolio offsets the risk of not requiring private mortgage insurance. While these loans were not initially covered by private
mortgage insurance, the Association had negotiated with a private mortgage insurance carrier a contract under which, at the
Association’s option, a pre-determined dollar amount of qualifying loans could be grouped and submitted to the carrier for
pooled private mortgage insurance coverage. As of September 30, 2015, the Association had $99.1 million of loans outstanding
that were originated through its High LTV program, $86.5 million of which the Association has insured through the private
mortgage insurance carrier. The High LTV program was suspended in November 2008.
For loans with LTV ratios in excess of 80% but equal to or less than 95% (which are available only for purchase
transactions), the Association requires private mortgage insurance, except that for adjustable-rate, first mortgage loans that
meet enhanced credit qualification parameters, LTV ratios of up to 85% may be obtained without private mortgage insurance.
LTV ratios in excess of 80% are not available for refinance transactions except that for adjustable-rate, first mortgage loans that
meet enhanced credit qualification parameters, LTV ratios of up to 85% may be obtained without private mortgage insurance.
The Association actively monitors its interest rate risk position to determine its desired level of investment in fixed-rate
mortgages. While the sales of first mortgage loans remain strategically important for us, since fiscal 2010, they have played a
lesser role in our management of interest rate risk.
The Association currently retains the servicing rights on all loans sold in order to generate fee income and reinforce its
commitment to customer service. One- to four-family residential mortgage real estate loans that have been sold were
underwritten generally to Fannie Mae guidelines and comply with applicable federal, state and local laws. At the time of the
closing of these loans the Association owned the loans and subsequently sold them to Fannie Mae and others providing normal
and customary representations and warranties, including representations and warranties related to compliance, generally with
Fannie Mae underwriting standards. At the time of sale, the loans were free from encumbrances except for the mortgages filed
by the Association which, with other underwriting documents, were subsequently assigned and delivered to Fannie Mae and
others. For the fiscal years ended September 30, 2015 and 2014, the Association recognized servicing fees, net of amortization,
related to these servicing rights of $5.4 million and $6.8 million, respectively. As of September 30, 2015 and 2014, the
principal balance of loans serviced for others totaled $2.18 billion and $2.51 billion, respectively. In November 2013, the
Association entered into a resolution agreement with Fannie Mae pursuant to which, 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
10
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) that were originated by the Association between January
1, 2000 and December 31, 2008 and delivered to Fannie Mae prior to January 1, 2009. At September 30, 2015, substantially all
of the loans serviced for Fannie Mae and others were performing in accordance with their contractual terms and management
believes that it has no material repurchase obligations associated with these loans. However, an accrual for $0.9 million has
been maintained for potential repurchase or loss reimbursement requests at September 30, 2015.
The Association currently offers “Smart Rate” adjustable-rate mortgage loan products secured by residential properties
with interest rates that are fixed for an initial period of three or five years, after which the interest rate generally resets every
year based upon a contractual spread or margin above the Prime Rate as published in the Wall Street Journal. These adjustable-
rate loans provide the borrower with an attractive rate reset option, based on the Association’s then current lending rates.
Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans primarily because the
underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for
default. Prior to July 2010, the Association’s adjustable-rate mortgage loan products secured by residential properties offered
interest rates that were fixed for an initial period ranging from one year to five years, after which the interest rate generally
reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a
constant maturity of one year, as published weekly by the FRS (“Traditional ARM”). All of the Association’s adjustable-rate
mortgage loans are subject to periodic and lifetime limitations on interest rate changes. At September 30, 2015, there were no
“interest only” residential real estate mortgage loans held in the Association's portfolio.
All adjustable-rate mortgage loans with initial fixed-rate periods of one, three or five years have initial and periodic caps
of two percentage points on interest rate changes, with a cap of six percentage points for the life of the loan for Traditional
ARM and five or six percentage points for the life of Smart Rate loans. Previously, the Association also offered Traditional
ARM loans with an initial fixed-rate period of seven years. Loans originated under that program, which was discontinued in
August 2007, had a cap of five percentage points on the initial change in interest rate, with a two percentage point cap on
subsequent changes and a cap of five percentage points for the life of the loan. Many of the borrowers who select adjustable-
rate mortgage loans have shorter-term credit needs than those who select long-term, fixed-rate mortgage loans. The Association
will permit borrowers to convert non-“Smart Rate” adjustable-rate mortgage loans into fixed-rate mortgage loans at no cost to
the borrower. The Association has never offered “Option ARM” loans, where borrowers can pay less than the interest owed on
their loan, resulting in an increased principal balance during the life of the loan. At September 30, 2015, "Smart Rate"
adjustable-rate mortgage loans totaled $3.72 billion, or 95.9% of the adjustable-rate mortgage loan portfolio and Traditional
ARMs totaled $158.5 million, or 4.1% of the adjustable-rate mortgage loan portfolio.
The Association requires title insurance on all of its residential real estate mortgage loans. The Association also requires
that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance up to $250
thousand) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. A majority
of its residential real estate mortgage loans have a mortgage escrow account from which disbursements are made for real estate
taxes and to a lesser extent for hazard insurance and flood insurance. The Association does not conduct environmental testing
on residential real estate mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection
with the origination of the loan.
Home Equity Loans and Home Equity Lines of Credit. The Association offers home equity loans and home equity lines
of credit, which are primarily secured by a second mortgage on residences. The array of home equity products offered by the
Association varied significantly between June 28, 2010 and September 30, 2015. Prior to June 28, 2010, the Association
offered home equity loans and home equity lines of credit. The Association also offered a home equity lending product that was
secured by a third mortgage, although the Association only originated this loan to borrowers where the Association also held
the second mortgage. Between June 28, 2010 and March 19, 2012, we suspended the acceptance of new home equity credit
applications with the exception of bridge loans (loans where borrowers can utilize the existing equity in their current home to
fund the purchase of a new home before they have sold their current home) and, in accordance with a reduction plan that was
accepted by our primary federal banking regulator in December 2010, we actively pursued strategies to decrease the
outstanding balance of our home equity lending portfolio as well as our exposure to undrawn home equity lines of credit.
During the quarter ended June 30, 2011, we achieved the balance and exposure reduction targets included in the home equity
lending reduction plan. Beginning March 20, 2012, we again offered new home equity lines of credit to qualifying existing
home equity customers. In February 2013, we further modified the product design and in April 2013 we extended the offer to
both existing home equity customers and new consumers in Ohio, Florida and selected counties in Kentucky. Over the course
of the fiscal year ended September 30, 2014, we expanded the home equity product offering to now include 21 states and the
District of Columbia. These offers were, and are, subject to certain property and credit performance conditions which, among
other items, related to CLTV, geography, borrower income verification, minimum credit scores and draw period duration. At
September 30, 2015 and 2014, home equity loans totaled $169.0 million, or 1.5%, and $162.1 million, or 1.5%, respectively, of
11
total loans receivable (which included $146.8 million and $135.9 million respectively, of home equity lines of credit which
were in the amortization period and no longer eligible to be drawn upon and $2.1 million and $1.1 million of bridge loans), and
home equity lines of credit totaled $1.46 billion, or 12.9%, and $1.53 billion, or 14.3%, respectively, of total loans receivable. A
bridge loan permits a borrower to utilize the existing equity in their current home to fund the purchase of a new home before
the current home is sold. Bridge loans are originated for a one-year term, with no prepayment penalties. These loans have fixed
interest rates, and are currently limited to a combined 80% LTV ratio (first and second mortgage liens). The Association
charges a closing fee with respect to bridge loans. Additionally, at September 30, 2015 and 2014, the unadvanced amounts of
home equity lines of credit totaled $1.20 billion and $1.13 billion, respectively.
Prior to June 28, 2010, the underwriting standards for home equity loans and home equity lines of credit included an
evaluation of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. In addition, prior to June 28, 2010, through a series of
modifications and program adjustments, the home equity lending parameters became increasingly restrictive and included the
additional evaluation of the applicant’s employment and income verification. From a geographic perspective, product offerings
peaked in 2008 when offers were extended (primarily via direct mail) to targeted borrowers in 18 states. Generally, the least
restrictive qualifications, and the most attractive product features from a borrower’s perspective, were in place during portions
of fiscal 2006 and 2007, when combined LTV ratios of up to 89.99% were permitted, minimum credit scores were reduced to
620, maximum loan amounts reached $250,000 and pricing for lines of credit reached Prime minus 1.01% when drawn
balances exceeded $50,000. The Association originated its home equity loans and home equity lines of credit without
application fees (except for bridge loans) or borrower-paid closing costs. Home equity loans were offered with fixed interest
rates, were fully amortizing and had terms of up to 15 years. The Association’s home equity lines of credit were offered with
adjustable rates of interest indexed to the Prime Rate, as reported in The Wall Street Journal.
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 CLTV percent of our home equity loans, home equity lines of credit and
bridge loan portfolio as of September 30, 2015. Home equity lines of credit in the draw period are reported according to
geographical distribution.
Home equity lines of credit in draw period (by
state):
Ohio
Florida
California
Other(1)
Total home equity lines of credit in draw
period
Home equity lines in repayment, home equity
loans and bridge loans
Total
Credit
Exposure
Principal
Balance
(Dollars in thousands)
$1,191,002
$ 542,101
570,734
330,336
561,636
390,689
206,773
316,725
2,653,708
1,456,288
168,951
$2,822,659
168,951
$1,625,239
Percent
Delinquent
90 days or more
Mean CLTV
Percent at
Origination(2)
Current
Mean
CLTV
Percent(3)
0.18%
0.30%
0.02%
0.17%
0.14%
1.70%
0.34%
60%
61%
66%
63%
61%
67%
62%
57%
67%
61%
63%
60%
49%
59%
______________________
(1) No individual other state has a committed or drawn balance greater than 10% of total loans and 5% of equities.
(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 September 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 September 30, 2015, 43.2% of our home equity lending portfolio was either in first lien position (25.5%) or was in a
subordinate (second) lien position behind a first lien that we held (9.7%) or behind a first lien that was held by a loan that we
originated, sold and now service for others (8.0%). At September 30, 2015, 18.1% of our home equity line of credit portfolio in
the draw period was making only the minimum payment on their outstanding line balance.
12
The following table sets forth by calendar origination year, the 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 September 30, 2015. Home equity lines of credit in the draw period
are included in the year originated:
Credit
Exposure
Principal
Balance
(Dollars in thousands)
Percent
Delinquent
90 Days or More
Mean CLTV
Percent at
Origination(1)
Current Mean
CLTV
Percent(2)
Home equity lines of credit in draw period:
2005 and prior
$
466,329
$
245,280
2006
2007
2008
2009
2010
2011 (3)
2012
2013
2014
2015
Total home equity lines of credit in
draw period
Home equity lines in repayment, home equity
loans and bridge loans
Total
______________________
206,546
327,502
702,069
281,766
23,404
162
25,173
74,351
260,373
286,033
130,260
220,567
435,731
137,371
10,513
162
10,591
34,441
114,886
116,486
2,653,708
1,456,288
168,951
168,951
$ 2,822,659
$ 1,625,239
0.17%
0.62%
0.35%
0.16%
0.03%
—%
—%
—%
—%
—%
—%
0.14%
1.70%
0.34%
56%
65%
66%
63%
55%
58%
39%
50%
60%
60%
61%
61%
67%
62%
55%
69%
71%
62%
55%
52%
20%
44%
50%
56%
60%
60%
49%
59%
(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 September 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.
(3) Amounts represent home equity lines of credit that were previously originated, and that were closed and subsequently
replaced in 2011.
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.
13
The following table sets forth by fiscal year when the draw period expires, the principal balance of home equity lines of
credit in the draw period as of September 30, 2015, segregated by the current combined LTV range.
Home equity lines of credit in draw
period (by End of Draw Fiscal Year):
< 80%
80 - 89.9% 90 - 100%
>100%
Unknown
(2)
Total
Current CLTV Category
2016
2017
2018 (1)
2019 (1)
2020 (1)
2021
Post 2022
Total
$78,075
130,528
378,000
324,884
173,609
29
91
$17,884
29,046
77,306
33,327
3,125
—
41
(Dollars in thousands)
$14,422
$25,587
26,654
40,129
4,436
191
—
—
41,045
35,115
3,470
200
—
—
$748
3,608
7,435
5,986
1,286
—
31
$136,716
230,881
537,985
372,103
178,411
29
163
$1,085,216
$160,729
$85,832
$105,417
$19,094
$1,456,288
______________________
(1) Home equity lines of credit whose draw period ends in fiscal years 2018, 2019 and 2020, include $17.7 million, $92.5
million and $149.7 million, 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 percents 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 LTV 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.
In light of the past 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 home equity
lines of credit which are delinquent 90 days or more.
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 September 30, 2015.
Home equity lines of credit in draw period (by
current mean CLTV):
< 80%
80 - 89.9%
90 - 100%
> 100%
Unknown (1)
Credit
Exposure
Principal
Balance
Percent
of Total
(Dollars in thousands)
Percent
Delinquent
90 days or
More
Mean
CLTV
Percent at
Origination(2)
Current
Mean
CLTV
Percent(3)
$ 2,171,680
229,043
103,995
114,623
34,367
$ 2,653,708
$1,085,216
160,729
85,832
105,417
19,094
$1,456,288
74.6%
11.0%
5.9%
7.2%
1.3%
100.0%
0.08%
0.36%
0.33%
0.60%
0.20%
0.14%
57%
78%
80%
81%
56%
61%
54%
84%
94%
119%
(1)
60%
______________________
(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 September 30, 2015. Property
values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in
14
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.
Construction Loans. 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%. At
September 30, 2015, construction loans totaled $55.4 million, or 0.5% of total loans receivable. At September 30, 2015, the
unadvanced portion of these construction loans totaled $33.8 million.
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.
Loan Originations, Purchases, Sales, Participations and Servicing. Lending activities are conducted primarily by the
Association’s loan personnel (all of whom are salaried employees) operating at our main and branch office locations and at our
loan production offices. All loans that the Association originates are underwritten pursuant to its policies and procedures,
which, for real estate loans, are generally consistent with Fannie Mae underwriting guidelines, subject to the discussion below.
The Association originates both adjustable-rate and fixed-rate loans and advertises extensively throughout its market area. Its
ability to originate fixed- or adjustable-rate loans is dependent upon the relative consumer demand for such loans, which is
affected by current market interest rates as well as anticipated future market interest rates. The Association’s loan origination
and sales activity may be adversely affected by a rising interest rate environment or economic recession, which typically results
in decreased loan demand. The Association’s residential real estate mortgage loan originations are generated by its in-house
loan representatives, by direct mail solicitations, by referrals from existing or past customers, by referrals from local builders
and real estate brokers, from calls to its telephone call center and from the internet.
The Association decides whether to retain the loans that it originates, sell loans in the secondary market or securitize
loans after evaluating current and projected market interest rates, its interest rate risk objectives, its liquidity needs and other
factors. The Association sold to Fannie Mae, in either whole loan or security form, $160.1 million of long-term, fixed-rate
residential real estate mortgage loans (all on a servicing retained basis) during the fiscal year ended September 30, 2015. In
addition to sales to Fannie Mae, during the fiscal year ended September 30, 2013, the Association also sold to private parties,
non-agency eligible, long-term fixed-rate and adjustable-rate loans on a servicing retained basis. As described in Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation - Controlling Our Interest Rate Risk
Exposure, effective July 1, 2010, Fannie Mae, historically the Association’s primary loan investor, implemented certain loan
origination requirement changes affecting loan eligibility that, prior to May 2013, we had not adopted. In May 2013, we
implemented loan origination changes with respect to a portion of our loan originations, which were approved by Fannie Mae
on November 15, 2013, which allow that portion of our first mortgage loan originations that were processed using the revised
procedures to be eligible for securitization and sale in Fannie Mae mortgage backed security form. The balance of loans held
for sale was $0.1 million (one loan) at September 30, 2015 which was originated pursuant to the guidelines of Fannie Mae's
HARP II.
Historically, the Association has retained the servicing rights on all residential real estate mortgage loans that it has sold,
and intends to continue this practice into the future. At September 30, 2015, the Association serviced loans owned by others
with a principal balance of $2.18 billion, including $4.2 million of loans sold to Fannie Mae subject to recourse. All recourse
sales occurred prior to the year 2000. Loan servicing includes collecting and remitting loan payments, accounting for principal
and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied
defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. The
Association retains a portion of the interest paid by the borrower on the loans it services as consideration for its servicing
activities. The Association did not enter into any loan participations during the fiscal year ended September 30, 2015 and does
not expect to do so in the near future.
Loan Approval Procedures and Authority. The Association’s lending activities follow written, non-discriminatory
underwriting standards and loan origination procedures established by its Board of Directors. The loan approval process is
intended to assess the borrower’s ability to repay the loan and the value of the property that will secure the loan. To assess the
15
borrower’s ability to repay, the Association reviews the borrower’s employment and credit history and information on the
historical and projected income and expenses of the borrower.
The Association’s policies and loan approval limits are established by its Board of Directors. The Association’s Board of
Directors has delegated authority to its Executive Committee (consisting of the Association’s Chief Executive Officer and two
directors) to review and assign lending authorities to certain individuals of the Association to consider and approve loans within
their designated authority. Residential real estate mortgage loans and construction loans in amounts above $625,000 require the
approval of two individuals with designated underwriting authority. Loans in amounts below $625,000 require the approval of
one individual with designated underwriting authority.
The Association also maintains automated underwriting systems for point-of-sale approvals of residential real estate
mortgage loans. Applications for loans that meet certain credit and income criteria may receive a credit approval subject to an
appraisal of the subject property.
The Association requires independent third-party appraisals of real property. Appraisals are performed by independent
licensed appraisers.
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 was segregated by geography.
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
September 30, 2015
Real estate loans:
Residential Core
Ohio
Florida
Other
Total Residential Core
Residential Home Today
Ohio
Florida
Kentucky
Total Residential Home Today
Home equity loans and lines of credit
Ohio
Florida
California
Other
Total Home equity loans and lines of credit
Construction
Other consumer loans
Total
$ 10,622
1,634
309
12,565
8,021
352
—
8,373
2,633
1,894
680
967
6,174
—
—
$ 27,112
188
70
8
266
231
11
1
243
189
124
13
48
374
1
—
884
$ 14,746
7,509
1,051
23,306
8,371
674
23
9,068
2,772
1,608
49
1,146
5,575
427
—
$ 38,376
299
80
10
389
378
16
1
395
$ 25,368
9,143
1,360
35,871
16,392
1,026
23
17,441
317
160
22
78
577
1
—
1,362
5,405
3,502
729
2,113
11,749
427
—
$ 65,488
111
10
2
123
147
5
—
152
128
36
9
30
203
—
—
478
16
September 30, 2014
Real estate loans:
Residential Core
Ohio
Florida
Other
Total Residential Core
Residential Home Today
Ohio
Florida
Total Residential Home Today
Home equity loans and lines of credit
Ohio
Florida
California
Other
Total Home equity loans and lines of credit
Construction
Other consumer loans
Total
September 30, 2013
Real estate loans:
Residential Core
Ohio
Florida
Other
Total Residential Core
Residential Home Today
Ohio
Florida
Total Residential Home Today
Home equity loans and lines of credit
Ohio
Florida
California
Other
Total Home equity loans and lines of credit
Construction
Other consumer loans
Total
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
108
14
3
125
168
9
177
123
36
11
21
191
1
—
494
$ 10,416
2,006
544
12,966
9,797
643
10,440
3,753
2,365
753
958
7,829
200
—
$ 31,435
263
141
4
408
328
18
346
$ 22,218
14,291
942
37,451
14,256
849
15,105
214
184
16
59
473
—
—
1,227
3,637
3,010
298
2,092
9,037
—
—
$ 61,593
371
155
7
533
496
27
523
$ 32,634
16,297
1,486
50,417
24,053
1,492
25,545
337
220
27
80
664
1
—
1,721
7,390
5,375
1,051
3,050
16,866
200
—
$ 93,028
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
$ 17,064
2,743
465
20,272
14,213
373
14,586
5,304
4,228
749
1,990
12,271
—
—
$ 47,129
340
200
3
543
377
16
393
$ 31,498
24,405
581
56,484
17,748
593
18,341
200
170
27
49
446
2
—
1,384
5,132
3,589
1,479
1,842
12,042
41
—
$ 86,908
505
217
6
728
590
22
612
$ 48,562
27,148
1,046
76,756
31,961
966
32,927
351
226
36
79
692
2
—
2,034
10,436
7,817
2,228
3,832
24,313
41
—
$ 134,037
165
17
3
185
213
6
219
151
56
9
30
246
—
—
650
17
September 30, 2012
Real estate loans:
Residential Core
Ohio
Florida
Other
Total Residential Core
Residential Home Today
Ohio
Florida
Total Residential Home Today
Home equity loans and lines of credit
Ohio
Florida
California
Other
Total Home equity loans and lines of credit
Construction
Other consumer loans
Total
September 30, 2011
Real estate loans:
Residential Core
Ohio
Florida
Other
Total Residential Core
Residential Home Today
Ohio
Florida
Total Residential Home Today
Home equity loans and lines of credit
Ohio
Florida
California
Other
Total Home equity loans and lines of credit
Construction
Other consumer loans
Total
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
181
32
2
215
208
7
215
133
58
16
27
234
—
—
664
$ 19,301
5,974
401
25,676
15,068
542
15,610
4,572
3,657
1,637
2,020
11,886
—
—
$ 53,172
436
258
1
695
519
21
540
$ 43,871
30,873
63
74,807
26,604
913
27,517
145
94
20
43
302
8
—
1,545
5,994
6,210
1,863
2,520
16,587
377
—
$ 119,288
617
290
3
910
727
28
755
$ 63,172
36,847
464
100,483
41,672
1,455
43,127
278
152
36
70
536
8
—
2,209
10,566
9,867
3,500
4,540
28,473
377
—
$ 172,460
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
204
37
3
244
213
11
224
158
103
18
36
315
1
—
784
$ 20,315
8,438
574
29,327
18,395
1,135
19,530
5,457
7,408
1,789
2,771
17,425
72
—
$ 66,354
529
272
4
805
634
25
659
$ 62,340
55,700
477
118,517
57,664
2,321
59,985
227
149
20
81
477
20
—
1,961
10,553
16,211
2,207
7,550
36,521
3,770
—
$ 218,793
733
309
7
1,049
$ 82,655
64,138
1,051
147,844
847
36
883
385
252
38
117
792
21
—
2,745
76,059
3,456
79,515
16,010
23,619
3,996
10,321
53,946
3,842
—
$ 285,147
Total loans seriously delinquent (i.e. delinquent 90 days or over) decreased 23 basis points to 0.34% of total net loans at
September 30, 2015, from 0.57% at September 30, 2014. Seriously delinquent loans to total net loans decreased in the
residential Core portfolio from 0.35% to 0.21%. Such loans in the residential Home Today portfolio decreased from 0.14% to
0.08%; and in the home equity loans and lines of credit portfolio decreased from 0.10% to 0.05%. The SVA charge-off that was
recorded during the quarter ended December 31, 2011 contributed to the decrease in the reported balances of delinquent and
18
nonperforming loans during fiscal 2012. The balance of the SVA at September 30, 2011 was $55.5 million. During the last
several years, the inability of borrowers to repay their loans is primarily a result of high unemployment in prior years and
uncertain economic prospects in our primary lending markets. Although regional employment levels have improved, the
breadth and sustainability of the economic recovery remains tenuous and accordingly, we expect some borrowers who are
current on their loans at September 30, 2015 to experience payment problems in the future. The excess number of housing units
available for sale in certain markets today also may limit a borrower's ability to sell a home he or she can no longer afford. In
many Florida areas, housing values continue to remain depressed due to prior rapid building and speculation, which has
resulted in considerable inventory on the market and may limit a borrower’s ability to sell a home. As a result, the level of loan
accounts delinquent 90 days or more may increase in the future.
Non-performing Assets and Restructured Loans; Collection Procedures. Within 15 days of a borrower’s delinquency,
the Association attempts personal, direct contact with the borrower to determine the reason for the delinquency, to ensure that
the borrower correctly understands the terms of the loan and to emphasize the importance of making payments on or before the
due date. If necessary, subsequent late charges and delinquent notices are issued and the borrower’s account will be monitored
on a regular basis thereafter. The Association also mails system-generated reminder notices on a monthly basis. When a loan is
more than 30 days past due, the Association attempts to contact the borrower and develop a plan of repayment. By the 90th day
of delinquency, the Association may recommend foreclosure. By this date, if a repayment agreement has not been established,
or if an agreement is established but is subsequently broken, the borrower’s credit file is reviewed and, if considered necessary,
the loan will be evaluated for impairment. For further discussion on evaluating loans for impairment, see Note 5. LOANS AND
ALLOWANCE FOR LOAN LOSSES. A summary report of all loans 30 days or more past due is provided to the Association’s
Board of Directors.
Loans are placed in non-accrual status when they are contractually 90 days or more past due or if collection of principal
or interest in full is in doubt. 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. Beginning with the quarter ended March 31, 2012, home equity loans and
lines of credit which are subordinate to a first mortgage lien where the customer is seriously delinquent, are placed in non-
accrual status. Beginning in the quarter ended September 30, 2012, loans in Chapter 7 bankruptcy status where all borrowers
have been discharged from their mortgage obligation are placed in non-accrual status. Beginning in the quarter ended June 30,
2014, loans in Chapter 7 bankruptcy status where all borrowers had filed, and had not reaffirmed or been dismissed, are also
placed in non-accrual status. For discussion on interest recognition, see Note 5. LOANS AND ALLOWANCE FOR LOAN
LOSSES.
19
The table below sets forth the recorded investments and categories of our non-performing assets and TDRs at the dates
indicated.
Non-accrual loans:
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit(1)
Construction
Other consumer loans
Total non-accrual loans(2)(3)(4)
Real estate owned
Other non-performing assets
September 30,
2015
2014
2013
2012
2011
(Dollars in thousands)
$ 62,293
$ 79,388
$ 91,048
$ 105,780
$ 125,014
22,556
21,514
427
—
106,790
17,492
—
29,960
26,189
—
—
135,537
21,768
—
34,813
29,943
41
—
155,845
22,666
—
41,087
35,316
377
—
182,560
19,647
—
69,602
36,872
3,770
—
235,258
19,155
—
Total non-performing assets
$ 124,282
$ 157,305
$ 178,511
$ 202,207
$ 254,413
Ratios:
Total non-accrual loans to total loans
Total non-accrual loans to total assets
Total non-performing assets to total assets
TDRs (not included in non-accrual
loans above):
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total
______________________
0.95%
0.86%
1.00%
1.27%
1.15%
1.33%
1.53%
1.38%
1.58%
1.77%
1.58%
1.76%
2.37%
2.16%
2.34%
$ 60,175
$ 59,630
$ 63,045
$ 66,988
$ 50,841
35,674
11,904
—
39,148
8,117
—
46,435
7,092
259
57,168
9,761
613
67,240
2,171
863
$ 107,753
$ 106,895
$ 116,831
$ 134,530
$ 121,115
(1) The totals at September 30, 2015, 2014, 2013 and 2012 include $1.8 million, $2.5 million, $5.3 million and $8.8 million of
performing home equity lines of credit, pursuant to regulatory guidance regarding senior lien delinquency issued in
January 2012.
(2) At September 30, 2015, 2014, 2013, 2012 and 2011 the totals include $55.5 million, $58.7 million, $54.3 million, $47.7
million and $16.5 million respectively, in TDRs which: are less than 90 days past due but included with non-accrual loans
for a minimum period of six months from the restructuring date due to their non-accrual status prior to restructuring;
because they have been partially charged off; or because all borrowers have filed Chapter 7 bankruptcy, and had not
reaffirmed or been dismissed.
(3) At September 30, 2015, 2014, 2013, 2012, and 2011 the totals include $15.0 million, $20.9 million, $30.6 million, $39.1
million, and $28.6 million in TDRs that are 90 days or more past due respectively.
(4) During the quarter ended December 31, 2011, in accordance with an OCC directive, our SVAs (which had a balance of
$55.5 million as of September 30, 2011) were charged off, which reduced the balance of non-accrual loans.
The gross interest income that would have been recorded during the year ended September 30, 2015 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 $12.7 million. The interest income recognized on those loans included in net income
for the year ended September 30, 2015 was $6.7 million.
Impaired 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. For discussion on impairment measurement, see Note 5. LOANS AND ALLOWANCE FOR LOAN LOSSES.
20
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. 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. The table below sets forth a reconciliation of the recorded investments and categories between non-accrual loans
and impaired loans at the dates indicated.
Balance of Non-Accrual Loans
Accruing TDRs
Performing Impaired Loans
Less Loans Collectively Evaluated
Balance of Total Impaired loans
At or For the Years Ended September 30,
2015
2014
2013
2012
2011
(Dollars in thousands)
$106,790
107,753
5,276
(7,647)
$212,172
$135,537
106,895
5,389
(14,435)
$233,386
$155,845
116,831
7,761
(17,396)
$263,041
$182,560
134,530
2,776
(20,996)
$298,870
$235,258
121,115
7,975
(24,576)
$339,772
The level of loan restructurings has decreased, resulting in $178.3 million of total (accrual and non-accrual) TDRs
recorded at September 30, 2015, an $8.2 million decrease from September 30, 2014. Of the $178.3 million of TDRs recorded at
September 30, 2015, $101.9 million is in the residential, Core portfolio and $53.9 million is in the Home Today portfolio.
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 those 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 5. LOANS AND ALLOWANCE FOR LOAN LOSSES.
21
The following table sets forth the recorded investments of accrual and non-accrual TDRs, by the types of concessions
granted as of September 30, 2015.
Reduction in
Interest Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings
Bankruptcy
Total
(Dollars in thousands)
Accrual
Residential Core
$
13,963
$
683
$
7,574
$ 17,823
$
12,453
$
7,679
$
60,175
Residential Home Today
5,959
—
4,008
11,291
13,286
1,130
35,674
Home equity loans and lines of
credit
Construction
Total
Non-Accrual, Performing
Residential Core
Residential Home Today
Home equity loans and lines of
credit
Construction
Total
Non-Accrual, Non-Performing
Residential Core
Residential Home Today
Home equity loans and lines of
credit
Construction
Total
Total TDRs
Residential Core
Residential Home Today
Home equity loans and lines of
credit
Construction
Total
96
—
20,018
1,099
1,124
—
—
2,223
681
651
—
—
1,332
15,743
7,734
$
$
$
$
$
$
$
$
$
$
$
$
2,992
—
389
—
3,827
—
3,675
$ 11,971
$ 32,941
360
617
78
—
1,055
318
1,018
42
—
$
3,504
$
$
882
372
—
4,758
884
129
15
—
1,378
$
1,028
8,252
$ 22,211
151
$
7
174
—
332
100
5
87
—
192
934
12
$
$
$
$
342
—
4,258
—
11,904
—
26,081
$ 13,067
$ 107,753
8,360
$ 20,422
$
33,896
5,199
3,761
11,590
567
—
8,858
—
14,126
$ 33,041
1,781
$
3,443
4,114
1,381
—
—
322
—
$
$
10,049
—
55,535
7,878
6,627
466
—
5,224
$
5,817
$
14,971
22,594
$ 32,215
$ 101,949
$
$
$
$
$
$
5,643
12,302
21,928
6,272
53,891
96
—
3,253
—
509
—
4,214
—
909
—
13,438
22,419
—
—
$
23,573
$
4,199
$ 14,404
$ 38,727
$
45,431
$ 51,925
$ 178,259
TDRs on 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 not to 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.
Real Estate Owned. Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real
estate owned until sold. When property is acquired, it is recorded at the estimated fair market value at the date of foreclosure
less estimated costs to sell, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would
be willing to pay on the basis of current market conditions. Subsequent to acquisition, real estate owned is carried at the lower
of the cost basis or estimated fair market value less estimated costs to sell. Increases in the fair market value are recognized
through income not exceeding the valuation allowance. Holding costs and declines in estimated fair market value result in
charges to expense after acquisition. At September 30, 2015, we had $17.5 million in real estate owned.
Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and
other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered
substandard if it is inadequately protected by the current payment capacity of the borrower or the collateral pledged has a
22
defined weakness that jeopardizes the liquidation of the debt. Substandard assets include those assets characterized by the
distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or
improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their
continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess potential weaknesses that deserve management's attention and may result in
further deterioration in their repayment prospects and/or the Association's credit position, are required to be designated as
special mention.
When we classify assets as either substandard or doubtful, we allocate a portion of the related general loss allowances to
such assets as we deem prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb
credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. When we
classify a problem asset as loss, we charge-off that portion of the asset that is uncollectible. Our determinations as to the
classification of our assets and the amount of our loss allowances are subject to review by the Association's primary federal
regulator, the OCC, which can require that we establish additional loss allowances. We regularly review our asset portfolio to
determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of
assets at September 30, 2015, the recorded investment of classified assets consists of substandard assets of $134.4 million,
including $17.5 million of real estate owned, and $4.3 million of assets designated special mention. As of September 30, 2015,
there were no individual assets with balances exceeding $1 million that were classified as substandard. Substandard assets at
September 30, 2015 include $38.4 million of loans 90 or more days past due and $78.5 million of loans less than 90 days past
due displaying a weakness sufficient to warrant an adverse classification, the majority of which are TDRs.
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 accounting principles generally accepted in the United States of America. Our allowance for loan losses
consists of two components:
(1) individual valuation allowances (IVAs) 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 prior to December 31,
2011, SVAs for impaired loans;
(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.
In an October 2011 directive applicable to institutions subject to its regulation, the OCC required all SVAs on collateral
dependent loans maintained by savings institutions to be charged off by March 31, 2012. As permitted, the Association elected
to early-adopt this methodology effective for the quarter ended December 31, 2011. Additionally, the OCC issued guidance in
July 2012 which requires loans, where at least one borrower has been discharged of their obligation, in Chapter 7 bankruptcy,
to be classified as TDRs. Also required is the charge off of performing loans to collateral value when all borrowers have had
their obligations discharged in Chapter 7 bankruptcy, regardless of how long the loans have been performing. As a result,
reported loan charge-offs for the year ended September 30, 2012 were impacted by the charge-off of SVAs, which had a
balance of $55.5 million at September 30, 2011 and the charge-off of $15.8 million in connection with the Chapter 7 related
guidance. The one-time SVA related charge-off did not materially impact the provision for loan losses for the year ended
September 30, 2012; however, reported loan charge-offs during the year ended September 30, 2012 increased and the balance
of the allowance for loan losses as of September 30, 2012 decreased accordingly. Additionally, the SVA charge-off contributed
to the decrease in the reported balances of seriously delinquent and non-accrual loans for the year ended September 30, 2012.
As a result of our adoption of this required change, effective for the year ended September 30, 2012 and prospectively, the
balance of the SVA component of the allowance for loan losses was and will be zero. The Chapter 7 related charge-offs
increased the provision for loan losses for the year ended September 30, 2012.
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:
23
• 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;
• 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 not eligible for a subsequent restructuring. At September 30, 2015, the balance of
such IVAs was $14.1 million. In instances when loans require multiple restructurings, additional valuation allowances may be
required. The new valuation allowance on a loan that has multiple restructurings, 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.
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 lines are usually in a second lien position and when combined with the first mortgage, result in generally higher
overall LTV ratios. In a stressed housing market with high delinquencies and decreasing housing prices, as arose beginning in
2008, these higher LTV ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has
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 current 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. Although the level of home equity loans and lines of credit charge-offs has been reduced
during the year from previous levels, our home equity loans and lines of credit portfolio continued to comprise a significant
portion of our net charge-offs during the current year. At September 30, 2015, we had a recorded investment of $1.63 billion in
home equity loans and equity lines of credit outstanding, 0.3% of which were delinquent 90 days or more.
Construction loans generally have greater credit risk than traditional residential real estate mortgage loans as discussed in
the Construction Loans section above.
24
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. For more information regarding the allowance for loan losses, see Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
25
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 immaterial; therefore neither was segregated.
At or For the Years Ended September 30,
2015
2014
2013
2012
2011
Allowance balance (beginning of the year)
Charge-offs:
$ 81,362
$ 92,537
(Dollars in thousands)
$ 100,464
$ 156,978
Real estate loans:
Residential Core
Ohio
Florida
Other
Total Residential Core
Residential Home Today
Ohio
Florida
Total Residential Home Today
Home equity loans and lines of credit(1)
Ohio
Florida
California
Other
Total Home equity loans and lines of credit
Construction
Other consumer loans
Total charge-offs
Recoveries:
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Other consumer loans
Total recoveries
Net charge-offs
Provision for loan losses
Allowance balance (end of the year)
Ratios:
Net charge-offs to average loans outstanding
Allowance for loan losses to non-accrual loans at end
of the year
Allowance for loan losses to the total recorded investment
in loans at end of the year
4,522
1,703
641
6,866
3,277
175
3,452
5,241
4,017
498
1,278
11,034
—
—
21,352
8,406
7,782
32
16,220
7,336
286
7,622
4,879
8,004
1,021
2,039
15,943
192
—
39,977
10,534
6,129
56
16,719
11,869
433
12,302
4,604
14,147
2,490
2,302
23,543
294
—
52,858
25,828
29,285
249
55,362
41,325
1,890
43,215
13,957
30,473
5,747
12,858
63,035
1,268
—
162,880
$ 133,240
8,915
8,889
—
17,804
6,852
99
6,951
10,564
30,319
4,895
5,636
51,414
994
1
77,164
5,369
1,533
7,468
174
—
14,544
(6,808)
(3,000)
$ 71,554
2,742
1,909
4,918
233
—
9,802
(30,175)
19,000
$ 81,362
2,061
775
4,964
131
—
7,931
(44,927)
37,000
$ 92,537
850
162
3,318
36
—
4,366
(158,514)
102,000
$ 100,464
338
108
1,921
35
—
2,402
(74,762)
98,500
$ 156,978
0.06%
0.29%
0.44%
1.54%
0.76%
67.00%
60.03%
59.38%
55.03%
66.73%
0.64%
0.76%
0.91%
0.97%
1.58%
Charge-offs decreased during the year ended September 30, 2015 in all portfolios when compared to the year ended
September 30, 2014, reflecting the improving market conditions. We continue to evaluate loans becoming delinquent for
potential losses and record provisions for our estimate of those losses.
26
Allocation of Allowance for Loan Losses. The following tables set 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.
2015
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans
Amount
Amount
At September 30,
2014
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans
2013
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans
Amount
(Dollars in thousands)
Real estate loans:
Residential Core
$ 22,596
31.6%
83.9% $ 31,080
38.2%
82.2% $ 35,427
38.3%
79.4%
Residential Home
Today
Home equity loans
and lines of credit
Construction
Other consumer loans
9,997
38,926
35
—
14.0
54.4
—
—
1.2
16,424
14.4
0.5
—
33,831
27
—
20.2
41.6
—
—
1.5
24,112
15.8
0.5
—
32,818
180
—
26.0
35.5
0.2
—
1.7
18.2
0.7
—
Total allowance $ 71,554
100.0%
100.0% $ 81,362
100.0%
100.0% $ 92,537
100.0%
100.0%
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Other consumer loans
Total allowance
At September 30,
2012
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans
Amount
2011
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans
Amount
(Dollars in thousands)
$ 31,618
31.5%
76.5% $ 49,484
31.5%
71.5%
22,588
45,508
750
—
22.5
45.3
0.7
—
2.0
20.8
0.7
—
31,025
74,071
2,398
—
19.8
47.2
1.5
—
2.6
25.0
0.8
0.1
$100,464
100.0%
100.0% $ 156,978
100.0%
100.0%
During the year ended September 30, 2015, the total allowance for loan losses decreased $9.8 million, to $71.6 million
from $81.4 million at September 30, 2014, as we recorded a negative $3.0 million provision for loan losses, which was less
than the actual net charge-offs of $6.8 million for the year. The allowance for loan losses related to loans evaluated collectively
decreased by $8.3 million during the year ended September 30, 2015, and the allowance for loan losses related to loans
evaluated individually decreased by $1.5 million. Refer to the "Activity in the Allowance for Loan Losses" and "Analysis of the
Allowance for Loan Losses" tables in Note 5 of the Notes to our Consolidated Financial Statements for more
information. Other than the less significant construction and other consumer loans segments, changes during the year ended
September 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 7.3% or $643.5 million while the
total allowance for loan losses for this segment decreased 27.3% or $8.5 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 $8.9 million, or 40.3%, from $22.2 million at September 30, 2014 to $13.2 million
at September 30, 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 0.14% for September 30, 2015 from 0.26% at
September 30, 2014. The decreases in the balance and ratio of the allowance for loan losses were reflective of the
improvements in the levels of loan delinquencies and the reduction in the amount of net charge offs during the current
year when compared to prior periods. These improvements occurred as the balance of this loan segment grew during
the year due to the addition of high credit quality, residential first mortgage loans. Total delinquencies decreased
27
28.9% to $35.9 million at September 30, 2015 from $50.4 million at September 30, 2014. Loans 90 or more days
delinquent decreased 37.8% to $23.3 million at September 30, 2015 from $37.5 million at September 30, 2014. Net
charge-offs during the current year were less at $1.5 million as compared to $13.5 million during the year ended
September 30, 2014. As there continues to be a consistent improving trend in asset quality of this portfolio, additional
reductions in the allowance may be warranted.
• Residential Home Today – The total balance of this segment of the loan portfolio decreased 11.8% or $18.0 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 by $6.4 million or 39.1%. 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 42.0% from $10.1 million at September 30, 2014 to $5.8 million at
September 30, 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 4.2% to 7.7% at September 30, 2015 from 11.9% at September 30,
2014. Total delinquencies decreased from $25.5 million at September 30, 2014 to $17.4 million at September 30,
2015. Delinquencies greater than 90 days decreased from $15.1 million to $9.1 million during the same period. The
credit profile of the remaining Home Today portfolio segment in total improved during the year and net charge-offs
were less at $1.9 million during the year ended September 30, 2015 as compared to $5.7 million during the year ended
September 30, 2014. Despite the improving trends, there still remains concern surrounding the overall credit profile of
the Home Today borrowers based on the generally less stringent credit requirements that were in place at the time that
these borrowers qualified for their loans. This increases the risk when impairment is identified through discharged
Chapter 7 bankruptcy, restructurings and a high portfolio delinquency when compared to the other portfolios.
• Home Equity Loans and Lines of Credit – The total balance of this segment of the loan portfolio decreased 4.1% or
$69.8 million from $1.70 billion at September 30, 2014 to $1.63 billion at September 30, 2015. The total allowance
for loan losses for this segment increased 15.1% to $38.9 million from $33.8 million at September 30, 2014. 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 $4.9 million, or 14.6%, from $33.3 million to $38.2
million during the year ended September 30, 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 September 30, 2015 from 2.0% at
September 30, 2014. Net charge-offs for this loan segment during the current year were less at $3.6 million as
compared to $11.0 million for the year ended September 30, 2014. Total delinquencies for this portfolio segment
decreased 30.3% to $11.7 million at September 30, 2015 as compared to $16.9 million at September 30, 2014.
Delinquencies greater than 90 days decreased 38.3% to $5.6 million at September 30, 2015 from $9.0 million at
September 30, 2014. While the credit metrics of this loan segment improved during the current year, the increases in
the balance and ratio of this loan segment's allowance for loan losses reflect our consideration of the potentially
adverse impact that required payment increases that occur as home equity lines of credit near the end of their draw
periods may have on our borrowers ability to meet their debt service obligations.
While the portfolio performance has improved, loan losses on home equity loans and lines of credit continued to
comprise a large component of our losses for 2015 and are expected to continue to represent a large portion of our losses for the
foreseeable future, until non-performing loan balances begin to decrease by more than the charge-offs.
Our analysis for evaluating the adequacy of and the appropriateness of our loan loss provision and allowance for loan
losses is continually refined as new information becomes available and actual loss experience is acquired. During the last
several years, numerous modifications to our procedures have been made including the following:
• As of September 30, 2011, $7.4 million of the SVA was reclassified as an IVA. This portion represents the allowance
on individually reviewed loans dependent on cash flows, such as performing TDRs, and a portion of the allowance on
loans that represents further deterioration in the fair value not supported by an appraisal.
• As of September 30, 2012, home equity loans and lines of credit where the customer has a severely delinquent first
mortgage are also placed in non-accrual status and classified Substandard, receiving a higher GVA factor than if they
remained in the performing Pass category. Also, all loans in Chapter 7 bankruptcy status, where at least one borrower
has been discharged of their obligation, have been added to the individually reviewed population. Those loans where
all borrowers have had their obligation discharged are evaluated for impairment based on the fair value of the
underlying collateral. Those loans where at least one borrower has not had the debt discharged are evaluated for
impairment based on the present value of cash flow analysis. As noted above, during the year ended September 30,
2012, in accordance with an OCC directive, our SVAs (which had a balance of $55.5 million as of September 30,
2011) were charged off. This one-time charge-off did not impact the provision for loan losses for the year ended
September 30, 2012; however, reported loan charge-offs during the year ended September 30, 2012 increased and the
28
balances of loans, the allowance for loan losses, non-accrual status loans and loan delinquencies all decreased
accordingly.
During the years ended September 30, 2015, 2014 and 2013 no material changes were made to the allowance or
allowance methodology.
Investments
The Association’s Board of Directors is responsible for establishing and overseeing the Association’s investment policy.
The investment policy is reviewed at least annually by management and any changes to the policy are recommended to the
Board of Directors, or a committee thereof, and are subject to its approval. This policy dictates that investment decisions be
made based on the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for
pledging requirements, and consistency with our interest rate risk management strategy. The Association’s Investment
Committee, which consists of its chief operating officer, chief financial officer and other members of management, oversees its
investing activities and strategies. The portfolio manager is responsible for making securities portfolio decisions in accordance
with established policies. The portfolio manager has the authority to purchase and sell securities within specific guidelines
established in the investment policy, but historically the portfolio manager has executed purchases only after extensive
discussions with other Investment Committee members. All transactions are formally reviewed by the Investment Committee at
least quarterly. Any investment which, subsequent to its purchase, fails to meet the guidelines of the policy is reported to the
Investment Committee, which decides whether to hold or sell the investment.
The Association’s current investment policy requires that it invest primarily in debt securities issued by the U.S.
Government, agencies of the U.S. Government, and government-sponsored entities, which include Fannie Mae and Freddie
Mac. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations and real estate
mortgage investment conduits issued or backed by securities issued by these governmental agencies and government-sponsored
entities. The investment policy also permits investments in asset-backed securities, banker’s acceptances, money market funds,
term federal funds, repurchase agreements and reverse repurchase agreements.
The Association’s current investment policy does not permit investment in municipal bonds, corporate debt obligations,
preferred or common stock of government agencies or equity securities other than its required investment in the common stock
of the FHLB of Cincinnati. As of September 30, 2015, we held no asset-backed securities or securities with sub-prime credit
risk exposure, nor did we hold any banker’s acceptances, term federal funds, repurchase agreements or reverse repurchase
agreements. As a federal savings association, the Association is not permitted to invest in equity securities. This general
restriction does not apply to the Company. The Association’s current investment policy permits the use of interest rate
agreements (caps, floors and collars) and interest rate exchange contracts (swaps) in managing our interest rate risk exposure.
The use of financial futures, however, is prohibited without specific approval from its Board of Directors.
FASB ASC 320, “Investments-Debt and Equity Securities,” requires that, at the time of purchase, we designate a security
as held to maturity, available-for-sale, or trading, depending on our ability and intent. Securities designated as available-for-sale
are reported at fair value, while securities designated as held to maturity are reported at amortized cost. During the quarter
ended June 30, 2012, the Company's primary regulator indicated that the Company's reported balance of liquid assets could not
include any investment security not classified as available for sale. In response to the guidance of the Company's primary
regulator, all of the Company's investment securities previously classified as held to maturity were transferred to the available
for sale portfolio to ensure that the securities would be eligible for inclusion in the computation of regulatory liquidity. At
September 30, 2015, all investment securities held by the Company are classified as available for sale. We do not have a trading
portfolio.
Our investment portfolio at September 30, 2015, primarily consisted of $2.0 million of U.S. government and federal
agency obligations, $9.9 million in primarily fixed-rate securities guaranteed by Fannie Mae, and $570.2 million of REMICs
collateralized only by securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
U.S. Government and Federal Agency Obligations. While U.S. Government and federal agency securities generally
provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent
appropriate, for liquidity purposes, as collateral for borrowings and as an interest rate risk hedge in the event of significant
mortgage loan prepayments.
Mortgage-Backed Securities. We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie
Mac or Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal
administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae or
Ginnie Mae. In September 2008, the Federal Housing Finance Agency placed Freddie Mac and Fannie Mae into
29
conservatorship. The U.S. Treasury Department has established financing agreements to ensure that Fannie Mae and Freddie
Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.
Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate
that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation
interest in a pool of single-family or multi-family mortgages, although we invest primarily in mortgage-backed securities
backed by one- to four-family mortgages. The issuers of such securities (generally Ginnie Mae, Fannie Mae and Freddie Mac)
pool and resell the participation interests in the form of securities to investors such as the Association, and guarantee the
payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such
securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are more
liquid than individual mortgage loans since there is an active trading market for such securities. While there has been
significant disruption in the demand for private issuer mortgage-backed securities, the U.S. Treasury support for Fannie Mae
and Freddie Mac guarantees has maintained an orderly market for the mortgage-backed securities the Company typically
purchases. In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations.
Investments in mortgage-backed securities involve a risk that the timing of actual payments will be earlier or later than the
timing estimated when the mortgage-backed security was purchased, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically
review current prepayment speeds to determine whether prepayment estimates require modifications that could cause
amortization or accretion adjustments.
REMICs are types of debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-
backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a
residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are
generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and
interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders.
The following table sets forth the amortized cost and fair value of our securities portfolio (excluding FHLB of Cincinnati
common stock) at the dates indicated.
2015
At September 30,
2014
2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
Investments available for sale:
U.S. Government and agency obligations
$
2,000
$
2,002
$
2,000
$
2,023
$
2,000
$
2,037
Freddie Mac certificates
Ginnie Mae certificates
REMICs
Fannie Mae certificates
Money market accounts
—
—
—
—
—
—
—
—
894
950
11,919
12,342
570,194
572,451
557,895
555,607
448,881
444,577
9,897
10,600
10,654
11,238
—
—
—
—
11,495
5,475
11,995
5,475
Total investment securities available
for sale
$ 582,091
$ 585,053
$ 570,549
$ 568,868
$ 480,664
$ 477,376
30
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio and the mortgage-
backed securities portfolio at September 30, 2015 are summarized in the following table. Maturities are based on the final
contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. All of our
securities at September 30, 2015 were taxable securities.
One Year or Less
More than
One Year Through
Five years
More than
Five Years Through
Ten Years
More than Ten
Years
Total Securities
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
(Dollars in thousands)
Investments
available-for-sale:
U.S. Government
and agency
obligations
REMICs
Fannie Mae
certificates
$
2,000
1.25% $
—
—
—%
—%
—
334
785
—% $
—
—% $
—
—% $
2,000
$
2,002
2.39%
27,833
1.60%
542,027
1.56%
570,194
572,451
1.25%
1.56%
6.61%
4,868
1.74%
4,244
6.48%
9,897
10,600
4.16%
Total investment
securities
available-for-sale $
Sources of Funds
2,000
1.25% $
1,119
5.35% $ 32,701
1.62% $ 546,271
1.60% $ 582,091
$ 585,053
1.60%
General. Deposits traditionally have been the primary source of funds for the Association’s lending and investment
activities. The Association also borrows, primarily from the FHLB of Cincinnati and the FRB-Cleveland Discount Window, to
supplement cash flow, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage its cost
of funds. Additional sources of funds are scheduled loan payments, maturing investments, loan prepayments, collateralized
wholesale borrowings, income on other earning assets, the proceeds from loan sales, and beginning in September 2013,
brokered CDs.
Deposits. The Association obtains deposits primarily from the areas in which its branch offices are located, as well as
from its customer service call center, its internet website, and beginning in September 2013, from brokered CDs. It relies on its
competitive pricing, convenient locations, and customer service to attract and retain its non-brokered deposits. It offers a
variety of retail deposit accounts with a range of interest rates and terms. Its retail deposit accounts consist of savings accounts
(primarily high-yield savings), NOW accounts (primarily high-yield checking accounts), CDs, individual retirement accounts,
and other qualified plan accounts.
Interest rates paid, maturity terms, service fees, and withdrawal penalties are established on a periodic basis. Deposit rates
and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, interest rates
paid by competitors, and our deposit growth goals.
At September 30, 2015, deposits totaled $8.29 billion. NOW accounts totaled $994.4 million (including $923.5 million of
high-yield checking accounts) and savings accounts totaled $1.61 billion (including $1.49 billion of high-yield savings
accounts). At September 30, 2015, the Association had a total of $5.68 billion in CDs (including $520.1 million of brokered
CDs), of which $1.56 billion had remaining maturities of one year or less. Based on historical experience and its current pricing
strategy, management believes the Association will retain a large portion of these accounts upon maturity.
31
The following table sets forth the distribution of the Association’s average total deposit accounts, by account type, for the
fiscal years indicated.
2015
2014
2013
For the Years Ended September 30,
Average
Balance
Percent
Weighted
Average
Rate
Average
Balance
Percent
Weighted
Average
Rate
Average
Balance
Percent
Weighted
Average
Rate
(Dollars in thousands)
Deposit type:
NOW
Savings
Certificates of deposit
995,736
1,636,093
5,836,053
11.8%
19.3%
68.9%
0.14% $1,019,909
0.19% 1,756,608
1.53% 5,695,063
12.1%
20.7%
67.2%
0.14% $1,023,442
0.19% 1,804,127
1.55% 5,877,695
11.8%
20.7%
67.5%
Total deposits
$8,467,882
100.0%
1.11% $8,471,580
100.0%
1.10% $8,705,264
100.0%
0.22%
0.31%
1.76%
1.28%
As of September 30, 2015, the aggregate amount of the Association’s outstanding CDs in amounts greater than or equal
to $100,000 was approximately $2.53 billion. The following table sets forth the maturity of those CDs as of September 30,
2015.
Three months or less
Over three months through six months
Over six months through one year
Over one year to three years
Over three years
Total
At September 30, 2015
(In thousands)
$
$
225,205
129,064
174,489
1,285,617
715,656
2,530,031
The following table sets forth, by interest rate ranges, information concerning the Association’s CDs at September 30,
2015.
Interest Rate Range:
0.99% and below
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% and above
Total
Period to Maturity
Less Than or
Equal to
One Year
More
Than One
to Two
Years
More
Than Two
to Three
Years
More Than
Three Years
Total
Percent
of Total
(Dollars in thousands)
$ 1,128,895
137,333
129,899
148,682
12,546
$ 1,557,355
$ 440,650
945,002
261,062
767
14,148
$ 1,661,629
$
53,633
947,358
129,522
534
4,017
$ 1,135,064
$
18,660
1,264,271
32,419
8,521
699
$ 1,324,570
$ 1,641,838
3,293,964
552,902
158,504
31,410
$ 5,678,618
28.91%
58.01%
9.74%
2.79%
0.55%
100.00%
32
The following table sets forth the Association’s CDs classified by interest rate at the dates indicated.
Interest Rate
0.99% and below
1.00% to 1.99%
2.00% to 2.99%
3.00% to 3.99%
4.00% and above
Total
2015
At September 30,
2014
(Dollars in thousands)
2013
$ 1,641,838
3,293,964
552,902
158,504
31,410
$ 5,678,618
$ 2,075,835
2,674,079
665,508
517,449
67,345
$ 6,000,216
$ 2,276,511
1,790,363
732,648
623,032
205,295
$ 5,627,849
Borrowings. At September 30, 2015, the Association had $2.17 billion of borrowings from the FHLB of Cincinnati.
During the fiscal year ended September 30, 2015, the Association’s only third party borrowings consisted of loans, commonly
referred to as “advances,” from the FHLB of Cincinnati. Borrowings from the FHLB of Cincinnati are secured by the
Association’s investment in the common stock of the FHLB of Cincinnati as well as by a blanket pledge of its mortgage
portfolio not otherwise pledged. Our current, immediate additional borrowing capacity with the FHLB of Cincinnati is $584.5
million as limited by the amount of FHLB of Cincinnati common stock that we own. Based on the amount of collateral that is
subject to the blanket pledge that secures advances, in addition to the existing available capacity, our capacity limit for
additional borrowings from the FHLB of Cincinnati at September 30, 2015 was $3.64 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 $72.9 million. The ability to borrow
from the FRB-Cleveland Discount Window is also available to the Association and is secured by a pledge of specific loans in
the Association’s mortgage portfolio. At September 30, 2015, the Association had the capacity to borrow up to $116.8 million
from the FRB-Cleveland and had no amount outstanding as of that date.
The following table sets forth information concerning balances and interest rates on the Association’s borrowings at and
for the periods shown:
Balance at end of year
Average balance during year
Maximum outstanding at any month end
Weighted average interest rate at end of year
Average interest rate during year
At or For The Fiscal Years
Ended September 30,
2015
2014
2013
$ 2,168,627
(Dollars in thousands)
$
$ 1,138,639
$ 2,312,977
$
974,644
$ 2,745,262
$ 1,138,639
$
$
1.14%
0.86%
1.16%
1.03%
745,117
435,342
745,117
0.90%
0.92%
Since September 30, 2010, when the level of the loan securitizations with Fannie Mae was substantially reduced and the
proceeds from loan sales no longer provided a significant source of recurring liquidity, the Association has utilized borrowings
from the FHLB of Cincinnati to manage its on-balance sheet liquidity. Beginning in September 2012, the Association began to
more actively utilize borrowings from the FHLB of Cincinnati to replace maturing, high rate CDs at a lower cost.
Effective October 1, 2014, the Association implemented a strategy to increase net income which involved 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, were
deposited at the Federal Reserve. As a result of this strategy, during a portion of the 2015 fiscal year, the Association had
borrowings for which the average short-term balance outstanding during the period was at least 30% of shareholders' equity.
There were no short-term borrowings outstanding during fiscal years 2014 and 2013 that were at least 30% of shareholders'
equity. The strategy was not utilized at September 30, 2015, however, dependent upon market rates, remains an option in the
future.
33
The following table sets forth information concerning balances and interest rates on the Association’s short-term
borrowings at and for fiscal year ended September 30, 2015.
Balance at end of year
Maximum outstanding at any month-end
Average balance during year
Average interest rate during the fiscal year
Weighted average interest rate at end of year
At or For The Fiscal Year
Ended September 30, 2015
(Dollars in thousands)
755,000
1,535,000
1,242,380
0.15%
0.18%
Federal Taxation
General. The Company and the Association are subject to federal income taxation in the same general manner as other
corporations, with certain exceptions. Prior to the completion of our initial public stock offering on April 20, 2007, the
Company and the Association were included as part of Third Federal Savings, MHC’s consolidated tax group. However, upon
completion of the offering, the Company and the Association are no longer a part of Third Federal Savings, MHC’s
consolidated tax group because Third Federal Savings, MHC no longer owns at least 80% of the common stock of the
Company. At September 30, 2015, Third Federal Savings, MHC, owned 78.08% of the common stock of the Company.
Beginning on September 30, 2007 and for each subsequent fiscal year thereafter, the Company has filed consolidated tax
returns with the Association and Third Capital Inc., its wholly-owned subsidiaries. On November 27, 2012, the IRS completed
an audit of the federal tax returns of the Company and its subsidiaries for fiscal years ended September 30, 2008, 2009 and
2010.
The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters
and is not a comprehensive description of the tax rules applicable to the Company or its subsidiaries.
Bad Debt Reserves. Historically, the Third Federal Savings, MHC consolidated group used the specific charge off
method to account for bad debt deductions for income tax purposes, and the Company has used and intends to use the specific
charge off method to account for tax bad debt deductions in the future.
Taxable Distributions and Recapture. Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture
into taxable income if the Association failed to meet certain thrift asset and definitional tests or made certain distributions. Tax
law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves
remain subject to recapture if the Association makes certain non-dividend distributions, repurchases any of its common stock,
pays dividends in excess of earnings and profits, or fails to qualify as a bank for tax purposes.
At September 30, 2015, the total federal pre-base year bad debt reserve of the Association was approximately $105.0
million.
State Taxation
Following its initial public stock offering in 2007, the Company converted from a qualified passive investment company
domiciled in the State of Delaware to a qualified holding company in Ohio. Through 2013, the Company was subject to Ohio
tax levied on income and a significant majority of state taxes paid by the remaining entities in our corporate structure were also
paid to the State of Ohio. The Association was subject to Ohio franchise tax based on equity capital reduced by certain
exempted assets taxed at a rate of 1.3%. The other Ohio subsidiaries of the Company were taxed on the greater of a tax based
on net income or net worth.
Effective January 1, 2014 for Ohio tax filings based on 2013 financial results, the Third Federal Savings, MHC
consolidated group is subject to the Ohio Financial Institutions Tax. The Financial Institutions Tax is based on total equity
capital apportioned to Ohio using a single gross receipts factor. Ohio equity capital is taxed at a three-tiered rate of 0.8% on the
first $200 million, 0.4% on amounts greater than $200 million and less than or equal to $1.3 billion, and 0.25% on amounts
greater than $1.3 billion.
On April 29, 2013, the State of Ohio Department of Taxation completed an audit of the Association's Ohio Franchise Tax
Returns for fiscal years ended September 30, 2009, 2010 and 2011, which resulted in no adjustments.
34
SUPERVISION AND REGULATION
General
The Company is a savings and loan holding company, and is required to file certain reports with, is subject to
examination by, and otherwise must comply with the rules and regulations of, the FRS. The Company is also subject to the
rules and regulations of the Securities and Exchange Commission under the federal securities laws.
The Association is a federal savings association that is currently examined and supervised by the OCC and the CFPB, and
is subject to examination by the FDIC. This regulation and supervision establishes a comprehensive framework of activities in
which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and
depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy
applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market
interest rates. Following completion of its examination, the federal agency critiques the institution’s operations and assigns its
rating (known as an institution’s CAMELS rating). Under federal law, an institution may not disclose its CAMELS rating to the
public. The Association also is a member of and owns stock in the FHLB of Cincinnati, which is one of the twelve regional
banks in the FHLB System. The Association is also regulated to a lesser extent by the FRS, governing reserves to be
maintained against deposits and other matters. The OCC will examine the Association and prepare reports for the consideration
of the Association’s Board of Directors on any operating deficiencies. The CFPB, which is discussed further in the Federal
Legislation section that follows, has examination and enforcement authority over the Association. The Association’s
relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent,
state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Association’s
mortgage documents.
Any change in these laws or regulations, whether by the FDIC, OCC, FRS, CFPB or Congress, could have a material
adverse impact on the Company, the Association and their operations.
Certain statutes and regulations of the regulatory requirements that are applicable to the Association and the Company are
described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and
regulations and their effects on the Association and the Company, and is qualified in its entirety by reference to the actual
statutes and regulations.
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted on July 21, 2010, has changed bank
regulation and the lending, investment, trading and operating activities of depository institutions and their holding companies.
The DFA eliminated our former primary federal regulator, the OTS, and required the Association to be regulated by the OCC
(the primary federal regulator for national banks). The DFA also authorized the FRS to supervise and regulate all savings and
loan holding companies, including mutual holding companies and their mid-tier holding companies, like Third Federal
Savings, MHC and the Company, in addition to bank holding companies that the FRS already regulated. Third Federal Savings,
MHC will require the non-objection of the FRS before it may waive the receipt of any dividends from the Company under the
standards specified in the DFA and implementing FRS regulations. The DFA also required the FRS to set minimum capital
levels for depository institution holding companies that are as stringent as those required for the insured depository subsidiaries
with the components of Tier 1 capital restricted to capital instruments that are currently considered to be Tier 1 capital for
insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot
be lower than the standards in effect on July 21, 2010, and directed the federal banking regulators to implement new leverage
and capital requirements within 18 months from the enactment of the DFA that take into account off-balance sheet activities
and other risks, including risks relating to securitized products and derivatives. A final rule implementing these requirements
was effective January 1, 2015.
The DFA also created the CFPB with substantial power to supervise and enforce consumer protection laws. The CFPB
has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions
such as the Association, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has
examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and
savings institutions with $10 billion or less in assets are examined by their applicable federal bank regulators. The banking
agencies used June 30, 2011 financial information for purposes of initially determining CFPB authority. Since the Association
had more than $10 billion of total assets on that date, it is subject to CFPB examination and enforcement authority. The
legislation also weakened the federal preemption available for national banks and federal savings associations, and gives state
attorneys general the ability to enforce applicable federal consumer protection laws.
The legislation broadened the base for FDIC insurance assessments. Assessments are now based on the average
consolidated total assets less tangible equity capital of a financial institution. The DFA also permanently increased the
35
maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive
to January 1, 2008, and non-interest bearing transaction accounts had unlimited deposit insurance through December 31, 2012.
The DFA increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding
vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the FRS to
promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the
company is publicly traded. The DFA provided for originators of certain securitized loans to retain a percentage of the risk for
transferred loans, directed the FRS to regulate pricing of certain debit card interchange fees and contained a number of reforms
related to mortgage origination. Many of the provisions of the DFA have delayed effective dates and the legislation requires
various federal agencies to promulgate numerous and extensive implementing regulations. Although the full impact of these
regulations cannot be completely determined at this time, it is expected that the legislation and implementing regulations has
and will continue to increase our operating and compliance costs.
Federal Banking Regulation
Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’
Loan Act, as amended, and federal regulations. Under these laws and regulations, the Association may invest in mortgage loans
secured by residential real estate without limitations as a percentage of assets, and may invest in non-residential real estate
loans up to 400% of capital in the aggregate. The Association may also invest in commercial business loans up to 20% of assets
in the aggregate and consumer loans up to 35% of assets in the aggregate, and in certain types of debt securities and certain
other assets. An association may also establish subsidiaries that may engage in certain activities not otherwise permissible for
an association, including real estate investment and securities and insurance brokerage. The DFA authorized depository
institutions to commence paying interest on business checking accounts, effective July 21, 2011.
Capital Requirements. Federal regulations require FDIC insured depository institutions to meet several minimum capital
standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%,
a total capital to risk-based assets ratio of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital
requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on
recommendations of the Basel Committee on Banking Supervision and certain requirements of the DFA.
As noted, the capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to
risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common
equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally
defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total
capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is
comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred
stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated
debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted
assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other
Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common
equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). The Association exercised its opt-
out election during the first quarter of calendar 2015. Calculation of all types of regulatory capital is subject to deductions and
adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets,
including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied
by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of
capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash
and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-
family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is
assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests,
depending on certain specified factors.
Federal savings associations must also meet a statutory “tangible capital” standard of 1.5% of total adjusted assets.
Tangible capital is generally defined as Tier 1 capital less intangible assets other than certain mortgage servicing rights.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and
certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting
of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based
36
capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of
risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. In assessing an institution’s
capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the
authority to establish higher capital requirements for individual institutions where deemed necessary.
Prior to January 1, 2015, the risk-based capital standards for savings associations required the maintenance of Tier 1 core
and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4.0% and 8.0%,
respectively. The previous leverage ratio required 4.0% (3% for savings associations receiving the highest rating on the
CAMELS rating system and meeting certain other requirements) and was calculated based on Tier 1 capital divided by total
assets at the end of the quarter. In determining the amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the applicable regulatory agency, based on the
risks believed inherent in the type of asset. Core capital is defined as common shareholders’ equity (including retained
earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of
consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of the
total capital cannot exceed 100% of core capital. Additionally, a savings association that retains credit risk in connection with
an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings association.
As presented in Note 3: Regulatory Matters, at September 30, 2014, the Association exceeded all regulatory capital
requirements to be considered “Well Capitalized”.
Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to
10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include
real estate. As of September 30, 2015, the Association was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, the Association must satisfy the qualified thrift lender test.
Under the QTL test, the Association must maintain at least 65% of its “portfolio assets” in “qualified thrift
investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine
months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum
of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the
conduct of the savings association’s business.
The Association also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in
the Internal Revenue Code.
A savings association that fails the qualified thrift lender test must operate under specified restrictions. Under the DFA,
non-compliance with the QTL test may subject the Association to agency enforcement action for a violation of law. At
September 30, 2015, the Association satisfied the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include
cash dividends, stock repurchases and other transactions charged to the capital account. A federal savings association must file
an application with the OCC and the FRS for approval of a capital distribution if:
•
•
•
•
the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income
for that year to date plus the savings association’s retained net income for the preceding two years;
the savings association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or condition imposed by a regulator; or
the savings association is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every savings association that is a subsidiary of a holding company must
still file a notice with the FRS at least 30 days before the board of directors declares a dividend or approves a capital
distribution.
The OCC and the FRS have established similar criteria for approving an application or notice, and may disapprove an
application or notice if:
•
the savings association would be undercapitalized following the distribution;
37
•
•
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital
distribution, if the institution would be undercapitalized after the distribution.
The Association, in compliance with the preceding requirements, paid a $66 million and an $85 million cash dividend to
the Company during the fiscal years ending September 30, 2015 and 2014, respectively. There were no dividends paid to the
Company by the Association during the fiscal year ended September 30, 2013 and there were no dividends paid to the
Company by Third Capital during the fiscal years ended September 30, 2015, 2014 or 2013. 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. On November 6, 2015, the Association paid $50,000 of this special dividend to the Company. It is expected that
payment of the remaining $100,000 special dividend will be made later in the fiscal year ended September 30, 2016.
On April 1, 2014, the FRS terminated the February 7, 2011 memorandum of understanding that was issued by the OTS,
the Company’s former regulator, and that, among other things, placed restrictions on the Company's ability to pay any cash
dividend or repurchase any of its equity stock. During the quarter ended December 31, 2013, the Company, after receiving the
non-objection of its current regulator, completed the repurchase of 2,156,250 shares of its common stock, which remained
outstanding in its fourth stock repurchase program that was announced in March 2009. The fifth stock repurchase program, for
5,000,000 shares, was announced on April 4, 2014 and completed September 17, 2014. The sixth stock repurchase program for
10,000,000 shares was announced on September 9, 2014 and completed August 3, 2015. The seventh stock repurchase program
for 10,000,000 shares was announced on July 30, 2015 and commenced when the sixth stock repurchase program was
completed.
Under current FRS regulations, Third Federal Savings, MHC is required to obtain the approval of its members (depositors
and certain loan customers of the Association) every 12 months to enable Third Federal Savings, MHC to waive its right to
receive dividends on the Company’s common stock that Third Federal Savings, MHC owns. As a result of an August 5, 2015
member vote, Third Federal Savings, MHC has the approval to waive the receipt of up to a total of $0.40 per share of dividends
from the Company over the four quarterly periods ending June 30, 2016. Third Federal Savings, MHC waived its right to
receive a $0.10 per share dividend payment on September 22, 2015. Third Federal Savings, MHC previously received the
approval of its members at a July 31, 2014 meeting to waive receipt of dividends up to $0.28 per share during the 12 months
ending July 31, 2015. Third Federal Savings, MHC waived its right to receive four separate $0.07 per share dividend payments
between September 26, 2014 and June 26, 2015.
Liquidity. A federal savings association is required to maintain a sufficient amount of liquid assets to ensure its safe and
sound operation.
Community Reinvestment Act and Fair Lending Laws. All savings associations have a responsibility under the
Community Reinvestment Act and federal regulations to help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In connection with its examination of a federal savings association, the OCC is required to
assess the savings association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. A savings association’s failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in
restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result
in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Association received a satisfactory Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is
limited by FRS regulations and by Sections 23A and 23B of the FRS Act and its implementing Regulation W. An affiliate is a
company that controls, is controlled by, or is under common control with an insured depository institution such as the
Association. Third Federal Savings, MHC and the Company are affiliates of the Association. In general, loan transactions
between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this
regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s
unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and
unimpaired surplus for transactions in the aggregate with all affiliates. Collateral in specified amounts ranging from 100% to
130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings
association. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged
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in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a
subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-
quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Savings
associations are required to maintain detailed records of all transactions with affiliates.
The Association’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities
controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRS Act and
Regulation O of the FRS. Among other things, these provisions require that extensions of credit to insiders:
(i) are subject to certain exceptions for loan programs made available to all employees, be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing
for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment
or present other unfavorable features; and
(ii) do not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of the Association’s capital.
In addition, extensions of credit in excess of certain limits must be approved by the Association’s Board of Directors.
Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to
bring enforcement action against all “institution-affiliated parties,” including shareholders, attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order,
to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover
a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in
which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or to
recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken
by the OCC, the FDIC has authority to take action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for
all insured depository institutions. These standards relate to, among other things, internal controls, information systems, audit
systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other
operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency
Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under
federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to
submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards,
the appropriate federal banking agency may require the institution to submit a compliance plan. On June 11, 2010, the OTS, the
Association’s former regulator, notified the Company that it had failed to develop appropriate credit administration and account
management procedures and acceptable loss mitigation processes to correspond with the growth in its home equity line of
credit portfolio. The OTS concluded that these procedural deficiencies constituted an unsafe and unsound condition and
directed the Company, as well as the Association and Third Federal Savings, MHC, not to declare or pay any cash dividends or
other capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase or redeem any of the
Company’s equity stock without providing 45 days prior written notice to the Regional Director of the OTS and receiving the
Regional Director’s written non-objection. Further, the OTS advised the Company that until the Association satisfactorily
addressed the problems associated with the home equity line of credit portfolio, the OTS would remove the Association from
the FDIC’s prospective bidders list. Effective April 1, 2014 the last of the regulator's concerns have been resolved, and the
restrictions related to capital deployments by the Company, as described above, have been terminated.
Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is required and
authorized to take supervisory actions against undercapitalized savings associations. For this purpose, a savings association is
placed in one of the following five categories based on the savings association’s capital:
• well-capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total risk-based capital, and 6.5%
common equity Tier 1 ratios and is not subject to any written agreement, order, capital directive or prompt corrective
action directive issued under certain statutes and regulations, to maintain a specific capital level for any capital
measure);
• adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital and 4.5%
common equity Tier 1 ratios);
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• undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital, or 4.5%
common equity Tier 1 ratios);
• significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital, 6% total risk-based capital
or 3% common equity Tier 1 ratios); and
• critically undercapitalized (less than 2% tangible capital to total assets).
The final rule that strengthened regulatory capital requirements adjusted the prompt corrective actions categories to
incorporate the new standards, as reflected above.
Generally, the banking regulator is required to appoint a receiver or conservator for a savings association that is “critically
undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the
OCC within 45 days of the date a savings association receives notice that it is “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” The criteria for an acceptable capital restoration plan include, among other
things, the establishment of the methodology and assumptions for attaining adequately capitalized status on an annual basis,
procedures for ensuring compliance with restrictions imposed by applicable federal regulations, the identification of the types
and levels of activities the savings association will engage in while the capital restoration plan is in effect, and assurances that
the capital restoration plan will not appreciably increase the current risk profile of the savings association. Any holding
company for a savings association required to submit a capital restoration plan must guarantee the lesser of an amount equal to
5% of the savings association’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount
necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC
notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar
quarters, and the OCC has the authority to require payment and collect payment under the guarantee. Failure by a holding
company to provide the required guarantee will result in certain operating restrictions on the savings association, such as
restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets
or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against
undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and
directors.
As of September 30, 2015 the Association exceeded all regulatory requirements to be considered “Well Capitalized” as
presented in the table below (dollar amounts in thousands).
Total Capital to Risk Weighted Assets
Tier 1 (Leverage) Capital to Net Average Assets
Tier I Capital to Risk-Weighted Assets
Common Equity Tier I to Risk-Weighted Assets
Actual
Required
(Well Capitalized)
Amount
$ 1,677,809
Ratio
22.92% $
Amount
731,900
1,606,251
1,606,251
12.78%
21.95%
1,606,237
21.95%
628,230
585,520
475,735
Ratio
10.00%
5.00%
8.00%
6.50%
Insurance of Deposit Accounts. The DFA permanently increased the maximum amount of deposit insurance for banks,
savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008. Also, under the DFA,
noninterest-bearing checking accounts had unlimited deposit insurance through December 31, 2012.
Effective April 1, 2011, the FDIC implemented a requirement of the DFA to revise its assessment system to base the
assessments on each institution’s total assets less Tier 1 capital, instead of deposits. The FDIC also revised its assessment
schedule so that it ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest. Institutions with
over $10 billion of total assets, such as the Association, are classified for assessment purposes as "Large Institutions", and
unless otherwise classified, are subjected to a large institution pricing system that includes a separate “scorecard” methodology,
also adopted in 2011.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The Association does not believe that it is taking, or is subject to, any action, condition or
violation that could lead to termination of its deposit insurance.
All FDIC-insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the
Financing Corporation (“FICO”) for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in
the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature
in 2017 through 2019. For the quarter ended September 30, 2015, the annualized FICO assessment was equal to 0.62 basis
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points of total assets less Tier 1 capital. The DFA increased the minimum target ratio for the Deposit Insurance Fund from
1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio
by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The DFA
eliminated the 1.5% maximum fund ratio, instead leaving the ratio to be set at the discretion of the FDIC. The FDIC has
exercised that discretion by establishing a long-term fund ratio of 2%.
For the fiscal year ended September 30, 2015, the Association paid $605 thousand related to the FICO bonds and $8.0
million, applicable to deposit insurance assessments. The deposit insurance payments are assessed on an arrears basis. At
September 30, 2015, the balance of the Association's accrued deposit insurance assessment was $2.0 million.
Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a
competitor of the institution.
Federal Home Loan Bank System. The Association is a member of the FHLB System, which consists of 11 regional
FHLBs. The FHLB System provides a central credit facility primarily for member institutions. As a member of the FHLB of
Cincinnati, the Association is required to acquire and hold shares of capital stock in the FHLB.
As of September 30, 2015, outstanding borrowings (including accrued interest) from the FHLB of Cincinnati were $2.17
billion and the Association was in compliance with the stock investment requirement.
Other Regulations
Interest and other charges collected or contracted for by the Association are subject to state usury laws and federal laws
concerning interest rates. The Association’s operations are also subject to federal laws applicable to credit transactions, such as
the:
• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
• Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the
community it serves;
• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
• Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
• rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of the Association also are subject to:
• The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
• The Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services;
• The Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as
digital check images and copies made from those images, the same legal standing as the original paper check;
• Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expanded the responsibilities of
financial institutions, including savings associations, in preventing the use of the U.S. financial system to fund terrorist
activities. Among other provisions, the USA PATRIOT Act and the related regulations of the OCC require savings
associations operating in the United States to develop new anti-money laundering compliance programs, due diligence
policies and controls to ensure the detection and reporting of money laundering. Such compliance programs are
intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank
Secrecy Act and the Office of Foreign Assets Control Regulations; and
• The Gramm-Leach-Bliley Act, which placed limitations on the sharing of consumer financial information by financial
institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions
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offering financial products or services to retail customers to provide such customers with the financial institution’s
privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial
information with unaffiliated third parties.
Holding Company Regulation
General. Third Federal Savings, MHC, and the Company are non-diversified savings and loan holding companies within
the meaning of the Home Owners’ Loan Act. As such, Third Federal Savings, MHC and the Company are registered with the
FRS and subject to FRS regulations, examinations, supervision and reporting requirements. In addition, the FRS has
enforcement authority over Third Federal Savings, MHC, the Company and the Association. Among other things, this authority
permits the FRS to restrict or prohibit activities that are determined to be a serious risk to the Association. As federal
corporations, Third Federal Savings, MHC and the Company are generally not subject to state business organization laws.
Permitted Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and FRS regulations, a mutual holding
company, such as Third Federal Savings, MHC and its mid-tier companies, such as the Company, may, with appropriate
regulatory approval, engage in the following activities:
(i)
(ii)
investing in the stock of a savings association;
acquiring a mutual association through the merger of such association into a savings association subsidiary of such
holding company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association;
(iv)
investing in a corporation, the capital stock of which is available for purchase by a savings association under federal
law or under the law of any state where the subsidiary savings association has its home offices;
(v)
furnishing or performing management services for a savings association subsidiary of such company;
(vi)
holding, managing or liquidating assets owned or acquired from a savings association subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust;
(ix)
any other activity:
(A) that the FRS, by regulation, has determined to be permissible for bank holding companies under Section 4(c)
of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such
activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987;
(x) if the savings and loan holding company meets the criteria to qualify as a financial holding company, any activity
permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including
securities and insurance underwriting; and
(xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of
such stock by such savings and loan holding company is approved by the Director. If a mutual holding company
acquires or merges with another holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (x) above,
and has a period of two years to cease any nonconforming activities and divest any nonconforming investments.
The Home Owners’ Loan Act prohibits a savings and loan holding company, including the Company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company
thereof, without prior written approval of the FRS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act or
acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the FRS must consider the financial and managerial resources, future prospects of the company
and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and
needs of the community and competitive factors.
The FRS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two exceptions:
(i) the approval of interstate supervisory acquisitions by savings and loan holding companies; and
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(ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution
specifically permit such acquisition.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital. Savings and loan holding companies were historically not subject to specific regulatory capital requirements.
The DFA, however, required the FRS to promulgate consolidated capital requirements for depository institution holding
companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to
depository institutions themselves. Instruments such as cumulative preferred stock and trust preferred securities can no longer
be included as Tier 1 capital, as was previously permitted for bank holding companies.
The previously discussed final rule regarding regulatory capital requirements implements the DFA’s directive as to
savings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the
subsidiary depository institutions generally applied to savings and loan holding companies as of January 1, 2015. As is the
case with institutions themselves, the capital conservation buffer is being phased in between 2016 and 2019.
Dividends and Repurchases. The FRS has issued a policy statement regarding the payment of dividends and the
repurchase of shares of common stock by bank holding companies that it has made applicable to savings and loan holding
companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the
prospective rate of earnings retention by the holding company appears consistent with the organization's capital needs, asset
quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in
certain circumstances such as where the company's net income for the past four quarters, net of dividends previously paid over
that period, is insufficient to fully fund the dividend or the company's overall rate of earnings retention is inconsistent with the
company's capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted
if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory review prior to a holding
company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial
weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of
the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which
the redemption or repurchase occurred. These regulatory policies could affect the ability of the Company to pay dividends,
repurchase shares of common stock or otherwise engage in capital distributions.
Source of Strength. The DFA extended the “source of strength” doctrine, which has traditionally been applicable to bank
holding companies, to savings and loan holding companies as well. The FRS has issued regulations requiring that all savings
and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital,
liquidity and other support in times of financial stress.
Waivers of Dividends by Third Federal Savings, MHC. Federal regulations require Third Federal Savings, MHC to
notify the FRS of any proposed waiver of its receipt of dividends from the Company. The OTS, the previous regulator for Third
Federal Savings, MHC, allowed dividend waivers provided the mutual holding company’s Board of Directors determined that
the waiver was consistent with its fiduciary duties and the waiver would not be detrimental to the safety and soundness of its
subsidiary institution. In February 2008, the Company declared its first quarterly dividend and continued to declare and pay
quarterly dividends through May 2010, when the Company suspended future dividend payments until concerns expressed by
OTS regarding the Association’s home equity line of credit portfolio were satisfactorily resolved. Prior to the suspension of the
dividends, Third Federal Savings, MHC waived its right to receive each dividend paid by the Company. Section 625(a) of DFA
preserved, for mutual holding companies, including Third Federal Savings, MHC, that had reorganized into mutual holding
company form, issued minority stock and waived dividends prior to December 1, 2009, the right to waive dividends if the
waiver was not detrimental to the safe and sound operation of the savings association and the board of directors expressly
determines that the waiver is consistent with the fiduciary duties of the board to the mutual members of the mutual holding
company. However, on August 12, 2011, the FRS issued an interim final rule that added a requirement that a majority of the
mutual holding company’s members eligible to vote must approve a dividend waiver by a mutual holding company within 12
months prior to the declaration of the dividend being waived. The FRS is reviewing comments on the interim final rule, which
were required to be submitted by November 1, 2011, as part of its rulemaking process, and there can be no assurance that the
final rule will not require such a member vote. On August 5, 2015, Third Federal Savings, MHC 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 the MHC
owns up to $0.40 per share during the four quarterly periods ending June 30, 2016. Third Federal Savings, MHC previously
received the approval of its members at a July 31, 2014 meeting to waive receipt of dividends up to $0.28 per share during the
12 months ending July 31, 2015.
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Conversion of Third Federal Savings, MHC to Stock Form. Federal regulations permit Third Federal Savings, MHC to
convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). There can
be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current intention or plan
to undertake a Conversion Transaction. In a Conversion Transaction, a new stock holding company would be formed as the
successor to the Company, Third Federal Savings, MHC’s corporate existence would end, and certain depositors of the
Association would receive the right to subscribe for additional shares of common stock of the new holding company. In a
Conversion Transaction, each share of common stock held by stockholders other than Third Federal Savings, MHC (“Minority
Stockholders”) would be automatically converted into a number of shares of common stock of the new holding company
determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock in
the new holding company as they owned in the Company immediately prior to the Conversion Transaction. Under a provision
of the DFA applicable to Third Federal Savings, MHC, Minority Stockholders should not be diluted because of any dividends
waived by Third Federal Savings, MHC (and waived dividends should not be considered in determining an appropriate
exchange ratio), in the event Third Federal Savings, MHC converts to stock form. Any such Conversion Transaction would
require various member and stockholder approvals, as well as regulatory approval.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 and related regulations address, among other issues, corporate governance, auditing and
accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies,
procedures and systems designed to ensure compliance with these regulations.
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Item 1A.
Risk Factors
Future changes in interest rates could reduce our net income.
Our net income largely depends on our net interest income, which could be negatively affected by changes in interest
rates. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and
securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings.
The vast majority of our assets and liabilities are financial in nature, and as a result, changes in market and competitive
interest rates can impact our customers’ actions as well as the types and amount of business opportunities that are available to
us. In general, when changes occur in interest rates that prompt our existing customers to pursue strategies that are beneficial to
them, the results are generally unfavorable for us.
For example, in a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the
interest paid on our liabilities because, like many savings institutions, our liabilities generally have shorter contractual
maturities than our assets. However, if mortgage interest rates decline, our customers may seek to refinance, without penalty,
their mortgage loans with us or repay their mortgage loans with us and borrow from another lender. When that happens, either
the yield that we earn on the customer’s loan is reduced (if the customer refinances with us) or the mortgage is paid off and we
are faced with the challenge of reinvesting the cash received to repay the mortgage in a lower interest rate environment. This is
frequently referred to as reinvestment risk, which is the risk that we may not be able to reinvest the proceeds of loan
prepayments at rates that are comparable to the rates we earned on the loans prior to receipt of the repayment. Reinvestment
risk also exists with the securities in our investment portfolio that are backed by mortgage loans.
Another example of changes in interest rates that can have an unfavorable impact on our net interest income occurs in
situations where interest rates paid on certificates of deposit experience a significant increase. In this circumstance, a CD
customer may determine that it is in his/her best interest to incur the existing penalty for early withdrawal, tender the certificate
for cash and either reinvest the proceeds in a new CD with us, or withdraw the funds and leave us. As a result, we either
establish a new, higher rate certificate (if the customer stays with us) or we must fund the customer’s withdrawal by:
(1) reducing our cash reserves; (2) selling assets to generate cash to fund the withdrawal; (3) attracting deposits from another
customer at the then-higher interest rate; or (4) borrowing from a wholesale lender like the FHLB of Cincinnati, again at the
then-higher interest rate. Each of these alternatives can have an unfavorable impact on us.
Our net interest income can also be negatively impacted when assets and funding sources with seemingly similar, but not
identical re-pricing characteristics react differently to changing interest rates. An example is our home equity lines of credit
loan portfolio and our high yield checking and high yield savings deposit products. Interest rates charged on our home equity
lines of credit loans are linked to the prime rate of interest, which generally adjusts in a direct relationship to changes in the
FRS’s Federal Funds target rate. Similarly, our High Yield Checking and High Yield Savings deposit products are generally
expected to adjust when changes are made to the Federal Funds target rate. However, to the extent that increases or decreases
are made to the Federal Funds target rate, and those increases or decreases translate into increases or decreases of the prime rate
and the rate charged on our home equity lines of credit loans, but do not extend to equivalent adjustments to our High Yield
Checking and High Yield Savings deposit products, we can experience a reduction in our net interest income. At September 30,
2015, we held $1.63 billion of home equity lines of credit loans and $2.42 billion of High Yield Checking and High Yield
Savings deposits.
Our net income can also be reduced by the impact that changes in interest rates can have on the value of our capitalized
mortgage servicing rights. As of September 30, 2015, we serviced $2.18 billion of loans sold to third parties, and the mortgage
servicing rights associated with such loans had an amortized cost of $10.0 million and an estimated fair value, at that date, of
$21.1 million. Because the estimated life and estimated income to be derived from servicing the underlying mortgage loans
generally increase with rising interest rates and decrease with falling interest rates, the value of mortgage servicing rights
generally increases as interest rates rise and decreases as interest rates fall. If interest rates fall and the value of our capitalized
servicing rights decrease, we may be required to recognize an additional impairment charge against income for the amount by
which amortized cost exceeds estimated fair market value.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other
comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower
market prices for securities and limited investor demand. Changes in interest rates can also have an adverse effect on our
financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by
fluctuations in interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair
45
value of the available-for-sale securities, net of taxes. The declines in market value could result in other-than-temporary
impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net
income and capital levels
In general, changes in market and competitive interest rates result from events that we do not control and over which we
generally have little or no influence. As a result, mitigation of the adverse affects of changing interest rates is generally limited
to controlling the composition of the assets and liabilities that we hold. To monitor our positions, we maintain an interest rate
risk modeling system which is designed to measure our interest rate risk sensitivity. 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) 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. At September 30, 2015, in the event of an immediate 200 basis
point increase in all interest rates, our model projects that we would experience a $324.6 million, or 14.61%, decrease in EVE.
Our calculations further project that, at September 30, 2015, in the event of an immediate 200 basis point increase in all interest
rates, we would expect our projected net interest income for the twelve months ended September 30, 2016 to decrease by 2.6%.
See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”
A continuation of historically low interest rates may adversely affect our net interest income and profitability.
During the past several years it has been the policy of the Board of Governors of the FRS to maintain interest rates at
historically low levels through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities.
As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower
levels than available prior to 2008. This has been a significant factor in the decrease in the amount of our interest income to
$383.5 million for the fiscal year ended September 30, 2015 from $550.2 million for the fiscal year ended September 30, 2008
while the average balance of total interest earning assets increased to $12.44 billion for the fiscal year ended September 30,
2015 from $10.10 million for the fiscal year ended September 30, 2008. As a general matter, our interest-bearing liabilities
reprice or mature more quickly than our interest-earning assets, which, as interest rates declined, has generally resulted in
progressive increases in net interest income since 2008. However, because interest rates have been low for so long, our ability
to further lower our interest expense may become increasingly difficult while the average yield on our interest-earning assets
may continue to decrease. Accordingly, our net interest income (the difference between interest income earned on assets and
interest expense paid on liabilities) may be adversely affected which may have an adverse effect on our profitability.
Difficult market conditions, geographic concentration and heightened regulatory scrutiny have already affected us and
our industry and may continue to do so.
Our performance is significantly impacted by the general economic conditions in our primary markets in the states of
Ohio and Florida, and surrounding areas, which were severely affected during the 2008 financial crisis and its aftermath. A
recurrence of those or similar difficult market conditions is likely to again result in high levels of unemployment, which will
further weaken recently, and in some cases, continuing distressed local economies and could result in additional defaults of
mortgage loans. Most of the loans in our loan portfolio are secured by real estate located in our primary market areas. Negative
conditions, such as layoffs, in the markets where collateral for a mortgage loan is located could adversely affect a borrower’s
ability to repay the loan and the value of the collateral securing the loan. Declines in the U.S. housing market during and in the
aftermath of the 2008 financial crisis, as manifested by falling home prices and increasing foreclosures, as well as
unemployment and under-employment, all negatively impacted the credit performance of mortgage loans and resulted in
significant write-downs of asset values by financial institutions.
In response to the financial crisis of 2008, many lenders and institutional investors reduced or ceased providing funding to
borrowers, including other financial institutions. This market turmoil and tightening of credit led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of
business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets
adversely affect our business, financial condition and results of operations. While the economy has progressed on a tenuous
road to recovery and we have experienced significant improvements in the credit metrics in our mortgage portfolio, a relapse or
worsening of the conditions associated with the 2008 financial crisis would likely exacerbate the adverse effects that those
difficult market conditions had on us and others in the financial industry. In particular, we already face and would expect to
continue to face the following risks in connection with these events:
•
Increased regulation of our industry, heightened supervisory scrutiny related to the USA Patriot Act, Bank Secrecy
Act, Fair Lending and other laws and regulations, including those still contemplated by the DFA, along with enhanced
monitoring of compliance with such regulation, including, as an institution with assets in excess of $10 billion, direct
supervision by the CFPB. Each aspect of amplified supervision and regulation will in all likelihood increase our costs,
46
may be accompanied by the risk of unexpected fines, sanctions, penalties, litigation and corresponding management
diversion and may limit our ability to pursue business opportunities.
• Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to
select, manage, and underwrite our customers become less predictive of future behaviors.
• The processes we use to estimate losses inherent in our credit exposure require difficult, subjective, and complex
judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of
our borrowers to repay their loans, which may no longer be capable of viable estimation and which may, in turn,
impact the reliability of our evaluation processes, the comfort of our regulators with respect to the adequacy of our
allowance for loan losses and who may require adjustments thereto, and ultimately could result in increased provisions
for loan losses and reduced levels of earnings and capital.
• Our ability to engage in sales of mortgage loans to third parties (including mortgage loan securitization transactions
with governmental entities) on favorable terms or at all could be adversely affected by further disruptions in the capital
markets or other events, including deteriorating investor expectations.
• Competition in our industry could intensify as a result of increasing consolidation of financial services companies in
connection with current market conditions.
Changes in laws and regulations and the cost of compliance with new laws and regulations may adversely affect our
operations and our income.
We are subject to extensive regulation, supervision and examination by the FRS, the OCC, the CFPB and the
FDIC. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities,
including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s
allowance for loan losses and determine the level of deposit insurance premiums assessed. Because our business is highly
regulated, the laws and applicable regulations are subject to frequent change. Any change in these regulations and oversight,
whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a
material impact on our operations.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting lending and
funding practices and liquidity standards. Moreover, bank regulatory agencies have been active in responding to concerns and
trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of
regulatory requirements. Bank regulatory agencies, such as the FRS, the OCC, the CFPB and the FDIC, govern the activities in
which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In
addition, new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect
our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and
value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial
banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, money market funds,
insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors
have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we
do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do.
Troubled financial institutions may significantly increase the interest rates paid to depositors in pursuit of retail deposits when
wholesale funding sources are not available to them. Our profitability depends upon our continued ability to successfully
compete in our market areas. For additional information see PART 1 Item 1. Business-THIRD FEDERAL SAVINGS AND
LOAN ASSOCIATION OF CLEVELAND-Competition.
Certain aspects of our corporate structure related to dividend payment ability and governance could adversely affect
the value of our common stock.
The value of the Company’s common stock is significantly affected by our ability to pay dividends to our public
stockholders. The Company’s ability to pay dividends to our stockholders is subject to the availability of cash at the holding
company and, in the event earnings are not sufficient to fund the dividends, eventually, the ability of the Association to make
capital distributions to the Company. Moreover, our ability to pay dividends and the amount of such dividends is affected by the
ability of Third Federal Savings, MHC, our mutual holding company, to waive the receipt of dividends declared by the
Company.
Federal regulations require Third Federal Savings, MHC to notify the FRS of any proposed waiver of its receipt of
dividends from the Company. In August 2011, the FRS issued an interim final rule pursuant to the DFA, providing that the FRS
“may not” object to dividend waivers by grandfathered mutual holding companies, such as Third Federal Savings, MHC, under
47
standards substantially similar to those previously required by the OTS. However, the interim final rule added a requirement
that a majority of the mutual holding company’s members eligible to vote must approve a dividend waiver by a mutual holding
company within 12 months prior to the declaration of the dividend being waived. As part of its rulemaking process, the FRS is
reviewing comments on the interim final rule and there can be no assurance that the final rule will not require such a member
vote. Third Federal Savings, MHC has twice received the approval of its members (in July 2014 and August 2015) to waive the
receipt of dividends for a twelve-month period, and the FRS has twice “non-objected” to Third Federal Savings, MHC’s
waiver. However, future approvals of members and non-objections from the FRS are not assured and if not obtained, the
discontinuance of dividend payments would adversely affect the value of our common stock.
Third Federal Savings, MHC, as our majority shareholder, is able to control the outcome of virtually all matters presented
to our shareholders for their approval, including any proposal to acquire us. Accordingly, Third Federal Savings, MHC may
prevent the sale of control or merger of the Company or its subsidiaries even if such a transaction were favored by a majority of
the public shareholders of the Company.
Cyber-attacks, other security breaches or failure or interruption of information systems could adversely affect our
operations, net income or reputation.
We rely heavily on communications and information systems to conduct our business . We regularly collect, process,
transmit and store significant amounts of data and confidential information regarding our customers, employees and others and
concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is
collected, compiled, processed, transmitted or stored by third parties on our behalf.
Information security risks have generally increased in recent years because of the proliferation of new technologies, the
use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased
sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves
to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the
customers of popular financial entities. A failure in or breach of our operational or information security systems, or those of our
third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error,
malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or
proprietary information, damage our reputation, increase our costs and/or cause losses.
If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant
regulatory consequences, reputational damage, civil litigation and financial loss.
Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and
proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling,
misuse or loss of the information will not occur, and that if mishandling, misuse or loss of the information did occur, those
events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled,
processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to
maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the
confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. As
information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue
to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.
We have experienced no known material breaches.
Hurricanes or other adverse weather events could negatively affect the economy in our Florida market area or cause
disruptions to our branch office locations, which could have an adverse effect on our business or results of operations.
A significant portion of our operations are conducted in the State of Florida, a geographic region with coastal areas that
are susceptible to hurricanes and tropical storms. Such weather events can disrupt our operations, result in damage to our
branch office locations and negatively affect the local economy in which we operate. We cannot predict whether or to what
extent damage caused by future hurricanes or tropical storms will affect our operations or the economy in our market area, but
such weather events could result in fewer loan originations and greater delinquencies, foreclosures or loan losses. These and
other negative effects of future hurricanes or tropical storms may adversely affect our business or results of operations.
Item 1B.
Unresolved Staff Comments
None.
48
Item 2.
Properties
We operate from our main office in Cleveland, Ohio, our 38 full-service branch offices located in Ohio and Florida and
our eight loan production offices located in Ohio. Our branch offices are located in the Ohio counties of Cuyahoga, Lake,
Lorain, Medina and Summit and in the Florida counties of Broward, Collier, Hillsborough, Lee, Palm Beach, Pasco, Pinellas
and Sarasota. Our loan production offices are located in the Ohio counties of Franklin, Butler, Delaware and Hamilton. The
Company owns the building in which its home office and executive offices are located, and five other office locations. The net
book value of our land, premises, equipment and software was $57.2 million at September 30, 2015. Included in the net book
value are two commercial buildings located in Canton, Massachusetts, valued at $17.5 million, which are owned by our
Hazelmere entity and leased to third parties in net lease transactions.
Item 3.
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, results of operation, or statements of cash flows.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is listed and traded on the NASDAQ Global Select Market under the symbol “TFSL”. As of
November 23, 2015, we had 7,674 shareholders of record, which number does not include persons or entities holding shares in
“nominee” or “street” name through brokerage firms. Shares of our common stock began trading on April 23, 2007 following
the completion of our initial public offering. Quarterly trading information for the periods indicated is provided by NASDAQ
and included in the following table.
Quarter ended December 31, 2013
Quarter ended March 31, 2014
Quarter ended June 30, 2014
Quarter ended September 30, 2014
Quarter ended December 31, 2014
Quarter ended March 31, 2015
Quarter ended June 30, 2015
Quarter ended September 30, 2015
Traded Market Prices
High
$ 12.38
Low
$ 11.48
Dividends
—
12.47
14.48
14.60
15.28
14.73
16.98
17.68
11.38
12.07
13.32
13.87
14.02
14.39
16.09
—
—
0.07
0.07
0.07
0.07
0.10
Payment of dividends is subject to declaration by our Board of Directors and is dependent on a number of factors,
including:
• our capital requirements and, to the extent that funds for any such dividend are provided by the Association, the
regulatory capital requirements imposed on the Association by the OCC;
• our financial position and results of operations;
•
tax considerations;
• our alternative uses of funds;
• statutory and regulatory limitations; and
49
• general economic conditions.
Pursuant to IRS regulations, any payment of dividends by the Association to the Company that would be deemed to be
drawn from the Association’s bad debt reserves would require a payment of taxes at the then-current tax rate by the Association
on the amount of earnings deemed to be removed from the reserves for such distribution. The Association does not intend to
make any distribution to the Company that would create such a federal tax liability.
Through September 30, 2010, Third Federal Savings, MHC, waived its right to receive dividends. The waivers complied
with regulatory authorizations (in the form of non-objection) obtained by Third Federal Savings, MHC. Requests for future
regulatory authorizations to waive receipts of dividends will be submitted to the FRS. Please refer to the preceding discussion
of dividend waivers presented in Part I, Item 1. Business, SUPERVISION AND REGULATION, Holding Company
Regulation, sections—Dividends and Waivers of Dividends by Third Federal Savings, MHC. Regulatory non-objection is
subject to periodic regulatory review and no assurances can be given regarding future regulatory non-objection. In addition,
interim final rules issued by the FRS on August 12, 2011 require that a majority of the mutual holding company's members
eligible to vote must approve a dividend waiver by a mutual holding company within 12 months prior to the declaration of the
dividend being waived. There can be no assurance that a final rule will not require such a member vote.
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 four
quarters ending June 30, 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 78% 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 subsequently received the non-objection of the FRB-Cleveland, to waive receipt of dividends on the
Company’s common stock. Third Federal Savings, MHC owns up to $0.40 per share during the four quarters ending June 30,
2016.
50
In the table and graph that follow, we have provided summary information regarding the performance of the cumulative
total return of our common stock from September 30, 2010 through September 30, 2015, relative to the cumulative total return
on stocks included in the SNL Bank and Thrift Index, SNL Thrift Index and NASDAQ Composite, in each case for the same
period. The cumulative return data is presented in dollars, based on starting investments of $100 and assuming the reinvestment
of dividends.
Index (with base price at 9/30/2010)
TFS Financial Corporation
SNL Bank and Thrift Index
SNL Thrift Index
NASDAQ Composite
9/30/2010
100.00
100.00
100.00
100.00
9/30/2011
88.47
79.24
84.79
103.00
Measurement Date
9/30/2012
98.69
111.97
110.19
134.56
9/30/2013
130.25
145.67
132.66
165.51
9/30/2014
156.57
171.68
146.32
199.72
9/30/2015
192.44
175.27
174.75
208.01
Source: SNL Financial LC, Charlottesville, VA
______________________
We did not sell any securities during the quarter ended September 30, 2015.
51
The following table summarizes our stock repurchase activity during the three months ended September 30, 2015 and the stock
repurchase plans approved by our Board of Directors.
Period
July 1, 2015 through July 31, 2015
August 1, 2015 through August 31, 2015
September 1, 2015 through September 30, 2015
Total Number
of Shares
Purchased
880,000
1,285,450
630,000
2,795,450
Average
Price
Paid per
Share
$ 16.70
17.08
17.05
16.95
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans (1)(2)
880,000
1,285,450
630,000
2,795,450
Maximum Number
of Shares that May
Yet be Purchased
Under the Plans
10,025,450
8,740,000
8,110,000
(1) On September 9, 2014, the Company announced its sixth stock repurchase plan of 10,000,000 shares. The repurchase plan
commenced on September 17, 2014 and was completed on August 3, 2015.
(2) On July 30, 2015, the Company announced its seventh 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, alternative
uses of capital, and our financial performance. Repurchased shares will be held as treasury stock and be available for
general corporate use. The program has 8,110,000 shares yet to be purchased as of September 30, 2015.
Item 6.
Selected Financial Data
Selected Financial Condition Data:
Total assets
Cash and cash equivalents
Investment securities:
Available for sale
Held to maturity
Loans held for sale
Loans, net
Bank owned life insurance
Prepaid expenses and other assets(1)
Deposits
Borrowed funds
Shareholders’ equity
2015
2014
At September 30,
2013
(In thousands)
2012
2011
$12,368,886
$11,803,195
$11,269,346
$11,518,125
$10,892,948
155,369
181,403
285,996
308,262
294,846
585,053
568,868
477,376
421,430
—
116
—
4,962
—
4,179
—
124,528
15,899
392,527
—
11,187,583
10,630,687
10,084,066
10,224,989
9,750,943
195,861
58,277
8,285,858
2,168,627
1,729,370
190,152
64,880
8,653,878
1,138,639
1,839,457
183,724
71,639
177,279
90,720
170,845
88,853
8,464,499
8,981,419
8,715,910
745,117
488,191
139,856
1,871,477
1,806,850
1,773,924
______________________
(1) Prepaid expenses and other assets include the remaining balance in prepaid FDIC assessments of $12.1 million at
September 30, 2012 and $23.4 million at September 30, 2011.
52
Selected Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Earnings before income tax expense
Income tax expense
Net earnings after income tax expense
Earnings per share—basic and fully diluted
Cash dividends declared per share
For the Years Ended September 30,
2015
2014
2013
2012
2011
(In thousands, except per share amounts)
$ 383,477
$ 374,684
$ 383,972
$ 417,853
$ 427,493
113,350
270,127
(3,000)
273,127
24,260
187,992
109,395
36,804
103,251
271,433
19,000
115,419
268,553
37,000
252,433
231,553
21,900
28,468
155,646
262,207
102,000
160,207
24,463
179,845
247,648
98,500
149,148
30,982
175,476
177,660
171,058
168,055
98,857
32,966
82,361
26,402
13,612
2,133
$ 72,591
$ 65,891
$ 55,959
$ 11,479
12,075
2,735
9,340
0.03
—
$
$
0.18
$
0.04
— $
— $
$
$
0.25
0.31
$
$
0.22
0.07
$
$
53
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets
Return on average equity
Interest rate spread(1)
Net interest margin(2)
Efficiency ratio(3)
Noninterest expense to average total assets
Average interest-earning assets to average interest-bearing
liabilities
Dividend payout ratio(4)
Asset Quality Ratios:
At or For The Years Ended September 30,
2015
2014
2013
2012
2011
0.57%
4.04%
2.03%
2.17%
0.57%
3.52%
2.26%
2.42%
0.50%
3.05%
2.25%
2.46%
0.10%
0.64%
2.11%
2.39%
0.09%
0.53%
1.97%
2.32%
63.86%
59.82%
59.81%
59.67%
60.31%
1.47%
1.53%
1.58%
1.52%
1.54%
115.43% 118.51% 119.58% 119.60% 120.39%
124.00%
31.82%
—%
—%
—%
Non-performing assets as a percent of total assets(5)
Non-accruing loans as a percent of total loans(5)
1.00%
0.95%
1.33%
1.27%
1.58%
1.53%
1.76%
1.77%
2.34%
2.37%
Allowance for loan losses as a percent of non-accruing loans(5)
67.00%
60.03%
59.38%
55.03%
66.73%
Allowance for loan losses as a percent of total loans(5)
0.64%
0.76%
0.91%
0.97%
1.58%
Capital Ratios:
Association
Total risk-based capital to risk weighted assets(6)
NA
25.25%
26.16%
22.19%
22.29%
Total capital to risk-weighted assets(7)
22.92%
NA
NA
NA
NA
Tier 1 core capital to adjusted tangible assets(6)
NA
13.47%
14.18%
13.31%
13.90%
Tier 1 (leverage) capital to net average assets(7)(8)
12.78%
NA
NA
NA
NA
Tier 1 risk-based capital to risk weighted assets(6)
NA
24.02%
24.91%
20.94%
21.04%
NA
NA
NA
NA
NA
NA
NA
NA
NA
16.07%
Tier 1 capital to risk-weighted assets(7)
Common equity tier 1 capital to risk-weighted assets(7)
21.95%
21.95%
NA
NA
NA
NA
NA
NA
TFS Financial Corporation(9)
Total risk-based capital to risk weighted assets(6)
NA
29.00%
29.11%
25.03%
Total capital to risk-weighted assets(7)
24.54%
NA
NA
NA
Tier 1 core capital to adjusted tangible assets(6)
NA
15.60%
16.59%
15.33%
Tier 1 (leverage) capital to net average assets(7)(8)
13.76%
NA
NA
NA
Tier 1 risk-based capital to risk weighted assets(6)
NA
27.77%
30.36%
23.78%
Tier 1 capital to risk-weighted assets(7)
Common equity tier 1 capital to risk-weighted assets(7)
Average equity to average total assets
Other Data:
Association
Number of full service offices
Loan production offices
23.57%
23.57%
14.09%
NA
NA
16.28%
NA
NA
16.38%
NA
NA
16.00%
38
8
38
8
38
8
39
8
39
8
______________________
(1) Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities for the year.
(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the year.
(3) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.
(4) Represents dividends paid per share divided by diluted earnings per share. Receipt of dividends on shares owned by Third
Federal Savings, MHC has been waived and dividends paid on unallocated shares of the ESOP are used to pay down the
loan to the ESOP.
(5) The SVA was eliminated during fiscal year 2012.
54
(6) Calculated using the regulatory capital methodology applicable to the Association prior to January 1, 2015.
(7) Calculated using the regulatory capital methodology applicable to the Association beginning January 1, 2015. Please refer
to Part I, Item 1, Business, Federal Banking Regulation, Capital Requirements for a detailed discussion of the new Basel
III rules.
(8) Tier 1 (leverage) capital to net average assets ratio disclosures were based on net average assets for the quarter end
September 30, 2015.
(9) TFS Financial Corporation capital ratios were not calculated prior to 2012.
55
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
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 Capital
At September 30, 2015, as computed in accordance with the revised capital requirements and computational
methodologies promulgated by the federal banking agencies, that were effective January 1, 2015, the Company’s Tier 1
(leverage) capital totaled $1.73 billion or 13.76% of net average assets and 23.57% of risk-weighted assets, while the
Association’s Tier 1(leverage) capital totaled $1.61 billion or 12.78% of net average assets and 21.95% 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 7 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 (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 a 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.
First Mortgage Loan Originations:
ARM (all Smart Rate) production
Fixed-rate production:
Terms less than or equal to 10 years
Terms greater than 10 years
Total fixed-rate production
Total First Mortgage Loan Originations:
For the Years Ended September 30,
2015
2014
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
1,025,453
43.8% $
834,262
39.3%
650,861
662,368
1,313,229
27.8
28.4
56.2
841,036
449,356
1,290,392
39.6
21.1
60.7
$
2,338,682
100.0% $
2,124,654
100.0%
September 30, 2015
September 30, 2014
Amount
Percent
Amount
Percent
Balances of Residential Mortgage Loans Held For Investment:
(Dollars in thousands)
$
3,855,890
40.2% $
3,453,067
38.4%
ARM (primarily Smart Rate) Loans
Fixed-rate Loans:
Terms less than or equal to 10 years
Terms greater than 10 years
Total fixed-rate loans
1,859,516
3,883,279
5,742,795
19.4
40.4
59.8
1,494,206
4,035,762
5,529,968
16.6
45.0
61.6
100.0%
Total Residential Mortgage Loans Held For Investment:
$
9,598,685
100.0% $
8,983,035
The following table sets forth the balances as of September 30, 2015 for all ARM loans segregated by the next scheduled
interest rate reset date.
During the Fiscal Years Ending September 30,
2016
2017
2018
2019
2020
2021
Total
Current Balance of
ARM Loans
Scheduled for
Interest Rate Reset
(in thousands)
$
$
219,557
803,365
1,017,616
742,741
889,169
183,442
3,855,890
At September 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 $0.1 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
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to modulate the amount of long-term, fixed-rate loans held in our portfolio. At September 30, 2015, we service $2.18 billion of
loans for others. 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 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 to manage our interest rate risk
profile. At September 30, 2015, home equity lines of credit totaled $1.46 billion. Our home equity lending is discussed in the
preceding Lending Activities section of Item 1. Business in Part I.—THIRD FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CLEVELAND.
While 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 I1, Item 7. under the heading Liquidity and Capital Resources, and in Part I1, Item 7A. 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 September 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 September 30, 2015, $48.0 million of loans in Chapter 7 bankruptcy status were
included in total TDRs. At September 30, 2015, the recorded investment in non-accrual status loans included $45.6 million of
performing loans in Chapter 7 bankruptcy status, of which $43.3 million are 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 LTV ratios), and we
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 September 30, 2015, loans originated prior to 2009 had a
balance of $2.55 billion, of which $58.5 million, or 2.3%, were delinquent, while loans originated in 2009 and after had a
balance of $8.71 billion, of which $7.0 million, or 0.1%, were delinquent.
One aspect of our credit risk concern relates to high concentrations of our loans that are secured by residential real estate
in specific 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 September 30, 2015, approximately 62.6% and
17.0% 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 September 30,
2015 were 0.4% and 0.6%, respectively. Our 30 or more days delinquency ratio for the Core portfolio as a whole was 0.4% at
September 30, 2015. Also, at September 30, 2015, approximately 39.5% and 26.0% 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 September 30, 2015 were 0.84% and 0.83%, respectively. Our 30 or more days delinquency ratio for the home
equity loans and lines of credit portfolio as a whole at September 30, 2015 was 0.7%. 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
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properties in Florida. The “Allowance for Loan Losses” portion in the preceding Lending Activities section of Item 1. Business
in Part I.—THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND, provides extensive details
regarding our loan 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 years ended September 30, 2015 and 2014,
37.6% and 31.9%, respectively, 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 $135.7 million at September 30, 2015, and constituted only 1.2% of our total “held for investment” loan portfolio
balance, these loans comprised 23.6% and 26.6% of our 90 days or greater delinquencies and our total delinquencies,
respectively, at that date. At September 30, 2015, approximately 95.3% and 4.5% of our residential, Home Today loans were
secured by properties in Ohio and Florida, respectively. At September 30, 2015, the percentages of those loans delinquent 30
days or more in Ohio and Florida were 12.8% and 17.2%, 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 prior to March 27, 2009, 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 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 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 September 30, 2015, 34.3% 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 $134.0 million at September 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
September 30, 2015, the recorded investment in Home Today loans originated subsequent to March 27, 2009 was $2.7 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 September 30, 2015, the Association’s ratio of Tier 1 (leverage) capital to net average
assets (a basic industry measure under which 5.00% or above is deemed to represent a “well capitalized” status) was 12.78%.
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 II, Item 7. under the heading
Comparison of Financial Condition at September 30, 2015 and 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
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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. 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), borrowing 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 September 30, 2015, deposits totaled $8.29 billion (including $520.1 million of brokered CDs), while borrowings totaled
$2.17 billion and borrowers’ advances and servicing escrows totaled $135.8 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 September 30, 2015 these collateral pledge support arrangements provide the Association with the ability to immediately
borrow an additional $584.5 million from the FHLB of Cincinnati and $116.8 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 September 30, 2015 was $3.64 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 $72.9 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 September 30, 2015, our investment securities
portfolio totaled $585.1 million. Finally, cash flows from operating activities have been a regular source of funds. During the
fiscal years ended September 30, 2015 and 2014, cash flows from operations totaled $102.1 million and $103.5 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
$279.6 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 September 30, 2015, one agency eligible, long-term,
fixed-rate HARP II first mortgage loan was classified as “held for sale”. During the fiscal year ended September 30, 2015,
$27.5 million of agency-compliant HARP II loans and $132.6 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 our liquidity is
adequate and that we have adequate access to 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 1.47% for the fiscal year ended September 30, 2015 and 1.53% for the fiscal year
ended September 30, 2014. As of September 30, 2015, our average assets per full-time employee and our average deposits per
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full-time employee were $12.5 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
($204.4 million per branch office as of September 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.
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, income taxes and pension
benefits.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to
absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. The
amount of the allowance is based on significant estimates and the ultimate losses may vary from such estimates as more
information becomes available or conditions change. The methodology for determining the allowance for loan losses is
considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the
assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the
recorded allowance for loan losses. At September 30, 2015, the allowance for loan losses was $71.6 million or 0.63% of total
loans. An increase or decrease of 10% in the allowance at September 30, 2014 would result in a $7.2 million charge or credit,
respectively, to income before income taxes.
As a substantial percentage of our loan portfolio is collateralized by real estate, appraisals of the underlying value of
property securing loans are critical in determining the charge-offs for specific loans. Assumptions are instrumental in
determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly
affect the valuation of a property securing a loan and the related allowance determined. Management carefully reviews the
assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the
related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of
factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics,
geographic concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal
loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management
that may be susceptible to significant change based on changes in economic and real estate market conditions.
Historically, the evaluation has been comprised of a specific component and a general component. The specific
component relates to loans that are delinquent or otherwise identified as a problem loan through the application of our loan
review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the
value of the collateral securing the loan. Through September 30, 2011, SVAs were established as required by this analysis and
charge-offs, when necessary, were recorded when the loan was resolved through deed in lieu, foreclosure or short sales. In
September 2011, a portion of the SVA was reclassified as IVA. This portion represented the allowance on individually reviewed
loans dependent on cash flows, such as performing TDRs, and a portion of the allowance on loans that represented further
deterioration in the fair value not supported by an appraisal. During the quarter ended December 31, 2011, the SVA (exclusive
of the reclassified IVA) was charged-off. This one-time charge-off of SVAs, which was $55.5 million at September 30, 2011,
was recorded by the Company in connection with the adoption of the OCC's prescribed methodology regarding loan
impairments. Refer to the Allowance for Loan Losses section in PART I, Item 1, Business—THIRD FEDERAL SAVINGS
AND LOAN ASSOCIATION OF CLEVELAND—Lending Activities, for additional details. Additionally, effective September
30, 2012, pursuant to OCC issued guidance, $15.8 million of performing loans, where all borrowers have been discharged of
their obligation through Chapter 7 bankruptcy procedures, were charged-off. The general component of the evaluation is
determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also
analyze historical loss experience, delinquency trends, general economic conditions and geographic concentrations.
Quantitative loss factors used in determining an appropriate allowance level are supplemented by more qualitative factors that
impact potential losses. Qualitative factors include various market conditions, such as collateral values and unemployment
rates. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of
the allowance for loan losses.
Actual loan losses may be significantly more than the allowances we have established, which would have a material
adverse effect on our financial results.
61
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 September 30, 2015, no valuation allowances were
outstanding and even though we have determined a valuation allowance is not required for deferred tax assets at September 30,
2015, there is no guarantee that those assets will be recognizable in the future.
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.
Comparison of Financial Condition at September 30, 2015 and 2014
Total assets increased $565.7 million, or 5%, to $12.37 billion at September 30, 2015 from $11.80 billion at
September 30, 2014. This increase was mainly the result of increases in the balances of our loans held for investment portfolio,
FHLB stock, and investment securities available for sale portfolio, partially offset by a decrease in the balance of cash and cash
equivalents.
Cash and cash equivalents decreased $26.0 million, or 14%, to $155.4 million at September 30, 2015 from $181.4 million
at September 30, 2014, as our most liquid assets have been reinvested into investment securities and loans, which increased our
interest income. However, the average balance of interest-earning cash equivalents for the fiscal year ended September 30,
2015 was $851.0 million, compared to $217.9 million for the fiscal year ended September 30, 2014, reflecting the larger
investment balance maintained part of the year in connection with the strategy to increase net income discussed later in this
section.
Investment securities increased $16.2 million, or 3%, to $585.1 million at September 30, 2015 from $568.9 million at
September 30, 2014. During the fiscal year ended September 30, 2015 there were $171.1 million in purchases of investment
securities, which were partially offset by $153.9 million in principal paydowns and $5.6 million of net acquisition premium
amortization which occurred in the mortgage-backed securities portfolio. There were no sales of investment securities during
the fiscal year ended September 30, 2015.
Loans held for investment, net, increased $556.9 million, or 5%, to $11.19 billion at September 30, 2015 from $10.63
billion at September 30, 2014. Residential mortgage loans increased $615.7 million, or 7%, to $9.60 billion at September 30,
2015 from $8.98 billion at September 30, 2014 as new originations exceeded the combination of principal repayments, loan
sales and net charge-offs. The increase in residential mortgage loans reflected the negative impact of $3.4 million in net charge-
offs during the year ended September 30, 2015. The total allowance for loan losses decreased $9.8 million, or 12%, to $71.6
million from $81.4 million at September 30, 2014, primarily reflecting improved credit metrics, including reduced net charge-
offs and lower loan delinquencies. During the year ended September 30, 2015, $1.03 billion of three- and five-year
“SmartRate” loans were originated while $1.31 billion of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated.
During the year ended September 30, 2015 the total fixed-rate portion of our first mortgage loan portfolio increased $212.8
million and was comprised of an increase of $365.3 million in the balance of fixed-rate loans with original terms of 10 years or
less, and a decrease of $152.5 million in the balance of fixed-rate loans with original terms greater than 10 years. During the
fiscal year ended September 30, 2015, we completed $160.1 million in loan sales to Fannie Mae, which included $27.5 million
of agency-compliant HARP II loans and $132.6 million of long-term, fixed-rate, agency-compliant, non-HARP II first
mortgage loans. The volume of long-term, fixed-rate first mortgage loan sales reflected 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. 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 $71.7 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 2010 and March 2012, we suspended the acceptance of new home equity loan and line of credit applications with
62
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 September 30, 2015, the recorded investment related to home equity lines of
credit originated subsequent to March 2012, totaled $282.9 million. At September 30, 2015, pending commitments to extend
new home equity lines of credit totaled $29.2 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 September 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 used opportunistically during
the year and was not utilized at September 30, 2015. However, dependent upon market rates, this strategy remains an option in
the future.
Deposits decreased $368.0 million, or 4%, to $8.29 billion at September 30, 2015 from $8.65 billion at September 30,
2014. The decrease in deposits was the result of a $321.6 million decrease in our CDs combined with a $46.4 million decrease
in our high-yield savings accounts (a subcategory of our savings accounts) partially offset by a $4.3 million increase in our
high-yield checking accounts (a subcategory of our negotiable order of withdrawal accounts) during the fiscal year ended
September 30, 2015. The change in CDs is attributed to a $484.7 million net decrease in our traditional CDs which was
partially offset by a $163.1 million increase (net of premium) in brokered CDs acquired during the current fiscal year which
had original terms of 42 to 60 months. The balance of CDs at September 30, 2015 included $520.1 million in brokered CDs.
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 equity loan products, and, therefore,
assist us in managing interest rate risk.
Borrowed funds, all from the FHLB of Cincinnati, increased $1.03 billion, or 90%, to $2.17 billion at September 30,
2015 from $1.14 billion at September 30, 2014. The increase reflects an additional $600.3 million of mainly four- to five- year
term advances and a $444.0 million increase in lower cost, short-term borrowings, offset by principal repayments on maturing
term advances. The increases in advances, as well as brokered CDs, were used to fund loan growth and the purchase of
investment securities. To facilitate the increase in FHLB borrowings, an additional $29.1 million of FHLB stock was purchased
during the fiscal year ended September 30, 2015.
Shareholders’ equity decreased $110.1 million, or 6%, to $1.73 billion at September 30, 2015 from $1.84 billion at
September 30, 2014. This net decrease primarily reflected the effect of $172.4 million of repurchases of outstanding common
stock and $19.5 million of dividend payments, which were partially offset by $72.6 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
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for
additional details regarding the repurchase of shares of common stock and the payment of dividends.
63
Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on our interest-earning assets and the expense
we pay on our interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-
bearing liabilities and the rates earned on such assets and the rates paid on such liabilities.
Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other
information at and for the fiscal years indicated. No tax-equivalent yield adjustments were made, as the effect thereof was 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.
For the Fiscal Years Ended September 30,
2015
Interest
Income/
Expense
Average
Balance
Yield/
Cost
Average
Balance
2014
Interest
Income/
Expense
Yield/
Cost
Average
Balance
2013
Interest
Income/
Expense
Yield/
Cost
(Dollars in thousands)
Interest-earning assets:
Interest-earning cash equivalents
$
851,047
$
2,206
0.26% $
217,928
$
Investment securities
Mortgage-backed securities
2,015
572,232
25
9,546
1.24 %
1.67 %
3,759
499,083
554
28
9,184
0.25% $
243,538
$
0.74%
1.84%
8,980
441,907
635
36
4,905
Loans
10,951,984
369,302
3.37% 10,435,065
363,409
3.48% 10,200,360
376,840
Federal Home Loan Bank stock
67,360
2,398
3.56 %
38,951
1,509
3.87%
35,620
1,556
Total interest-earning assets
12,444,638
383,477
3.08% 11,194,786
374,684
3.35 % 10,930,405
383,972
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
NOW accounts
Savings accounts
Certificates of deposit
Borrowed funds
319,063
$12,763,701
$
995,736
1,636,093
5,836,053
2,312,977
1,371
3,045
89,110
19,824
Total interest-bearing liabilities
10,780,859
113,350
311,078
$11,505,864
0.14% $ 1,019,909
1,756,608
5,695,063
974,644
0.19%
1.53%
0.86 %
1.05%
286,993
$11,217,398
0.14% $ 1,023,442
1,804,127
1,442
3,420
88,316
10,073
0.19%
1.55%
1.03%
1.09%
2,273
5,669
5,877,695
103,466
435,342
4,011
9,140,606
115,419
239,702
9,380,308
1,837,090
9,446,224
103,251
186,777
9,633,001
1,872,863
0.26%
0.40%
1.11%
3.69%
4.37%
3.51%
0.22%
0.31%
1.76%
0.92%
1.26%
Noninterest-bearing liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income
Interest rate spread(1)
184,587
10,965,446
1,798,255
$12,763,701
$11,505,864
$11,217,398
$270,127
$271,433
$268,553
2.03 %
2.26%
2.25%
Net interest-earning assets(2)
$ 1,663,779
$ 1,748,562
$ 1,789,799
Net interest margin(3)
2.17%
2.42%
2.46%
Average interest-earning assets to
average interest-bearing liabilities
115.43%
118.51%
119.58%
______________________
(1)
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by total interest-earning assets.
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
64
Rate/Volume Analysis. The following table presents the effects of changing rates (yields) and volumes (average balances)
on our net interest income for the fiscal years indicated. The rate column shows the effects attributable to changes in rate
(changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes
due to rate and the changes due to volume.
For the Fiscal Years Ended
September 30, 2015 vs. 2014
For the Fiscal Years Ended
September 30, 2014 vs. 2013
Increase (Decrease)
Due to
Increase (Decrease)
Due to
Volume
Rate
Net
Volume
Rate
Net
Interest-earning assets:
Interest-earning cash equivalents
Investment securities
Mortgage-backed securities
Loans
Federal Home Loan Bank stock
Total interest-earning assets
Interest-bearing liabilities:
NOW accounts
Passbook savings
Certificates of deposit
Borrowed funds
Total interest-bearing liabilities
Net change in net interest income
$ 1,641
(17)
999
16,411
1,000
20,034
$
11
14
(637)
(10,518)
(111)
(11,241)
(34)
(228)
2,098
11,135
12,971
$ 7,063
(37)
(147)
(1,304)
(1,384)
(2,872)
(In thousands)
$
$ 1,652
(3)
362
(65) $
(28)
703
5,893
889
8,793
(71)
(375)
794
9,751
8,529
138
9,277
(8)
(146)
(3,136)
5,520
2,230
$ 7,047
(16) $
20
3,576
(21,960)
(185)
(18,565)
(81)
(8)
4,279
(13,431)
(47)
(9,288)
(823)
(831)
(2,103)
(2,249)
(12,014)
(15,150)
542
6,062
(12,168)
(14,398)
$ (4,167) $ 2,880
10,099
$ (8,369) $ (1,306)
Comparison of Operating Results for the Fiscal Years Ended September 30, 2015 and 2014
General. Net income increased $6.7 million, or 10%, to $72.6 million for the fiscal year ended September 30, 2015
compared to $65.9 million for the fiscal year ended September 30, 2014. This change was attributed to a $22.0 million,
decrease in the provision for loan losses and a $2.4 million increase in non-interest income, partially offset by an increase of
$12.5 million in non-interest expense and a decrease in net interest income of $1.3 million.
Interest and Dividend Income. Total interest income increased $8.8 million, or 2%, to $383.5 million for the fiscal year
ended September 30, 2015 compared to $374.7 million for the prior fiscal year. The increase in interest income resulted
primarily from an increase in interest income from loans combined with increases in interest income from other interest-earning
cash equivalents, and to a lesser extent, FHLB stock and mortgage-backed securities.
Interest income on loans increased $5.9 million, or 2%, to $369.3 million compared to $363.4 million for the prior fiscal
year. This increase was attributed to a $516.9 million increase in the average balance of loans to $10.95 billion in the current
fiscal year compared to $10.44 billion during the prior fiscal 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 an 11 basis point decrease in the average
yield on loans to 3.37% from 3.48% 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 fiscal year ended
September 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 fiscal year ended September 30, 2015, loan sales totaled $160.1 million
while during the fiscal year ended September 30, 2014, loan sales totaled $76.0 million. No loan sales were made to private
investors in fiscal years 2015 and 2014.
Interest income on interest-earning cash equivalents increased $1.6 million, or 267%, to $2.2 million compared to $0.6
million for the prior fiscal year. The increase can be attributed to implementing a strategy to increase income as discussed
earlier in the paragraph describing the increase in our investment in FHLB stock included 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 $0.9 million, or 60%, to $2.4 million compared to $1.5 million during the prior fiscal year.
65
Interest Expense. Interest expense increased $10.1 million, or 10%, to $113.4 million for the fiscal year ended
September 30, 2015 from $103.3 million for the 2014 fiscal year. The change resulted primarily from a $9.7 million increase in
interest expense on borrowed funds combined with an increase in interest expense on CDs partially offset by modest decreases
in interest expense on NOW accounts and savings accounts.
Interest expense on CDs increased $0.8 million, or 1%, to $89.1 million compared to $88.3 million for fiscal 2014. The
change was attributed to a $141.0 million, or 2%, increase in the average balance of CDs to $5.84 billion from $5.70 billion
partially offset by a two basis point decrease in the average rate we paid on CDs to 1.53% from 1.55%. 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 fiscal year, many maturing, higher rate CDs that
were not renewed were replaced with with longer-term brokered CDs or lower rate borrowed funds.
Interest expense on borrowed funds increased $9.7 million, or 96%, to $19.8 million compared to $10.1 million for fiscal
2014. The increase was attributed to a $1.3 billion increase in the average balance of borrowed funds to $2.3 billion from
$974.6 million during fiscal 2014. Partially offsetting the impact of the increased volume in borrowed funds is a 17 basis point
decrease in the average rate paid for these funds, to 0.86% from 1.03% for fiscal 2014. The increase in FHLB of Cincinnati
borrowings and the lower average rate paid can be attributed to implementing the strategy to increase income, 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.
Net Interest Income. Net interest income decreased $1.3 million, or less than 1%, to $270.1 million for the fiscal year
ended September 30, 2015 compared to $271.4 million for the prior fiscal year. Average interest-earning assets increased
during the current fiscal year by $1.25 billion or 11% when compared to the prior fiscal year. However, due to a greater
increase in average interest-bearing liabilities, average net interest-earning assets decreased $84.8 million, to $1.66 billion
during the current fiscal year from $1.75 billion during the prior fiscal year. The change in average assets can be attributed
primarily to the implementation of the strategy to increase income 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 23 basis points to 2.03% compared to 2.26% for the prior fiscal year. Our net interest margin decreased 25 basis
points to 2.17% compared to 2.42% for the prior fiscal year.
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 necessary 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
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 we recorded a negative provision for loan losses of $3.0 million for the fiscal year ended
September 30, 2015 and a provision of $19.0 million for the fiscal year ended September 30, 2014. The current negative loan
loss provision reflected reduced levels of loan delinquencies and charge-offs and increased levels of recoveries of previously
charged off loans, 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 reduced level of net charge-offs during the 2015 fiscal year, $6.8 million as compared to
$30.2 million during the fiscal year ended September 30, 2014 occurred throughout the entire loan portfolio. The net charge-
offs of $30.2 million during the prior fiscal year included $5.3 million of loans charged-off due to a new practice, instituted in
fiscal year 2014, of fully charging off loans that have not been resolved due to prolonged foreclosure proceedings and have
remained delinquent for more than 1,500 days. In addition, Net charge-offs in fiscal year 2014 included $1.3 million in
recoveries that were recorded during the March 2014 quarter, representing the cumulative one-time payment received as a
66
result of PMIC increasing the cash percentage of the partial claim payment plan. See Note 5 to the Consolidated Financial
Statements: LOANS AND ALLOWANCE FOR LOAN LOSSES for further discussion. Net charge-offs combined with the $3.0
million negative provision for loan losses recorded for the current fiscal year resulted in a decrease in the balance of the
allowance for loan losses. Net charge-offs of $30.2 million recorded for the fiscal year ended September 30, 2014 exceeded the
loan loss provision of $19.0 million. The allowance for loan losses was $71.6 million, or 0.64% of the total recorded
investment in loans receivable, at September 30, 2015, compared to $81.4 million, or 0.76% of the total recorded investment in
loans receivable, at September 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 $28.7 million during the fiscal year ended September 30,
2015 compared to a $20.3 million decrease during the fiscal year ended September 30, 2014.
The recorded investment in non-accrual loans in our residential, Core portfolio decreased $17.1 million, or 22%, during
the current fiscal year, to $62.3 million at September 30, 2015, compared to an $11.7 million decrease during the fiscal year
ended September 30, 2014. At September 30, 2015, the recorded investment in our Core portfolio was $9.47 billion, compared
to $8.82 billion at September 30, 2014. During the current fiscal year, Core portfolio net charge-offs were $1.5 million, as
compared to net charge-offs of $13.5 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 fiscal year ended
September 30, 2014. The $62.3 million balance at September 30, 2015 includes $33.9 million in TDRs which are current but
included with non-accrual loans for a minimum period of six months from their restructuring date. The recorded investment in
non-accrual loans in our residential, Home Today portfolio decreased $7.4 million, or 25% during the current fiscal year, to
$22.6 million at September 30, 2015 compared to a $4.9 million decrease during the fiscal year ended September 30, 2014. At
September 30, 2015, the recorded investment in our Home Today portfolio was $134.0 million, compared to $152.0 million at
September 30, 2014. During the current fiscal year, Home Today net charge-offs were $1.9 million as compared to net charge-
offs of $5.7 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 fiscal year ended September 30, 2014. The
$22.6 million balance in Home Today non-accrual loans includes $11.6 million in TDRs which are current but included with
non-accrual loans for a minimum period of six months from their restructuring date.
The recorded investment in non-accrual home equity loans and lines of credit decreased $4.7 million, or 18%, during the
current fiscal year, to $21.5 million at September 30, 2015 compared to a $3.8 million decrease during the fiscal year ended
September 30, 2014. The recorded investment in our home equity loans and lines of credit portfolio at September 30, 2015, was
$1.63 billion, compared to $1.70 billion at September 30, 2014. During the current fiscal year, home equity loans and lines of
credit net charge-offs were $3.6 million as compared to net charge-offs of $11.0 million, of which there were no charge-offs
related to loans delinquent more than 1,500 days, during the fiscal year ended September 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 lien positions. The seriously delinquent balances of
home equity loans and lines of credit were $5.6 million, or less than 1%, of the home equity loans and lines of credit portfolio
at September 30, 2015 compared to $9.0 million, or less than 1%, at September 30, 2014.
At September 30, 2015 and 2014, we believe we had recorded an allowance for loan losses that provides for all losses
that are both probable and reasonable to estimate at September 30, 2015 and 2014.
Refer to Item 1. Business for additional discussion and disclosure related to our provisions for loan losses.
Non-Interest Income. Non-interest income increased $2.4 million, or 11%, to $24.3 million during the fiscal year ended
September 30, 2015 compared to $21.9 million for the prior fiscal year mainly as a result of net gain on the sale of loans
combined with an increase in bank owned life insurance contracts, 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 fiscal
year, $160.1 million, as compared to $76.0 million during the prior fiscal year. 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 $12.5 million, or 7%, to $188.0 million for fiscal 2015 when
compared to $175.5 million for fiscal 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 services increased $5.6 million, or 40%, to $19.9 million during
the current fiscal year compared to $14.3 million during the prior fiscal year as a result of expenditures incurred in support of
our lending activities. Salaries and employee benefits increased $5.3 million, or 6%, to $95.6 million for the fiscal year ended
September 30, 2015 compared to $90.3 million for the prior fiscal year. This increase was primarily due to a $3.0 million
increase in associate compensation costs, a $1.6 million increase in expenses related to the ESOP and stock-based
67
compensation incurred as the market price of the Company's common stock rose, and a $1.1 million increase in compensation
costs related to health insurance partially offset by a $0.7 million decrease in expenses related to the pension plan.
Income Tax Expense. The provision for income taxes was $36.8 million for the fiscal year ended September 30, 2015
compared to $33.0 million for the fiscal year ended September 30, 2014. The provision for fiscal 2015 included $36.7 million
of federal income tax provision and $143 thousand of state income tax provision. The provision for fiscal 2014 included $32.6
million of federal income tax provision and $324 thousand of state income tax provision. Our federal effective tax rate
increased to 33.6% during fiscal 2015 from 33.1% during fiscal year 2014. Our expected federal effective income tax rate is
less than the federal statutory rate of 35.0%, primarily because of our ownership of bank owned life insurance contracts. Non-
taxable income on bank owned insurance contracts was $7.3 million during fiscal 2015 and $6.4 million during fiscal 2014.
Comparison of Operating Results for the Fiscal Years Ended September 30, 2014 and 2013
General. Net income increased $9.9 million, or 18%, to $65.9 million for the fiscal year ended September 30, 2014
compared to $56.0 million for the fiscal year ended September 30, 2013. This change was attributed to an $18.0 million,
decrease in the provision for loan losses and further impacted by an increase in net interest income of $2.8 million and a
decrease of $2.2 million in non-interest expense partially offset by a $6.3 million decrease in gain on sale of loans.
Interest Income. Gross interest income decreased $9.3 million, or 2%, to $374.7 million for the fiscal year ended
September 30, 2014 compared to $384.0 million for the prior fiscal year. The decrease in interest income resulted primarily
from a decrease in interest income from loans that was partially offset by an increase in interest income from mortgage-backed
securities.
Interest income on mortgage-backed securities increased $4.3 million, or 88%, to $9.2 million from $4.9 million for the
prior fiscal year. The average yield on mortgage-backed securities increased 73 basis points to 1.84% compared to 1.11% in the
prior fiscal year. The increase in market interest rates during the year provided higher yields on newly purchased securities and
extended the expected durations for the securities held in portfolio, most of which had been purchased at a premium, which, in
turn, increased our expected yields as the purchase premiums will be amortized over longer periods of time. The average
balance of mortgage-backed securities increased $57.2 million to $499.1 million compared to $441.9 million for the prior fiscal
year. There were $250.8 million in purchases which occurred in the current fiscal year which was partially offset by $157.4
million in sales, principal paydowns and maturities.
Interest income on loans decreased $13.4 million, or 4%, to $363.4 million compared to $376.8 million for the prior
fiscal year. This change was attributed to a 21 basis point decrease in the yield to 3.48% from 3.69% as historically low interest
rates have kept the amount of refinance activity high, or approximately 74% of total originations, resulting in new originations
at rates that are lower compared to the rest of the portfolio. Additionally, both our “Smart Rate” adjustable-rate first mortgage
loan and our 10-year, fixed-rate first mortgage loan originations for the fiscal year ended September 30, 2014, 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. The decrease in interest income on loans during fiscal 2014 was partially offset by a $234.7 million increase in the
average balance of loans to $10.44 billion for fiscal 2014 compared to $10.20 billion for the prior fiscal year. During the fiscal
year ended September 30, 2014, loan sales, which did not include any sales to private investors, totaled $76.0 million while
during the fiscal year ended September 30, 2013, loan sales, including $276.9 million of sales to private investors, totaled
$349.2 million.
Interest Expense. Interest expense decreased $12.1 million, or 10%, to $103.3 million for the 2014 fiscal year from
$115.4 million for the 2013 fiscal year. The change resulted primarily from a decrease in interest expense on CDs combined
with modest decreases in interest expense on NOW accounts and savings accounts partially offset by a $6.1 million increase in
interest expense on borrowed funds.
Interest expense on CDs decreased $15.2 million, or 15%, to $88.3 million compared to $103.5 million for fiscal 2013.
The change was attributed to a 21 basis point decrease in the average rate we paid on CDs to 1.55% from 1.76% combined with
a $182.6 million, or 3%, decrease in the average balance to $5.70 billion from $5.88 billion. 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 fiscal year, many maturing, higher rate CDs were
replaced with lower rate borrowed funds.
Interest expense on borrowed funds increased $6.1 million, or 153%, to $10.1 million compared to $4.0 million for fiscal
2013. The increase was attributed to a $539.3 million increase in the average balance of borrowed funds to $974.6 million from
$435.3 million during fiscal 2013. In addition, the average rate paid on borrowed funds increased 11 basis points to 1.03% from
68
0.92% for fiscal 2013. To better manage funding costs, longer term borrowed funds from the FHLB of Cincinnati were used to
replace maturing higher rate CDs.
Net Interest Income. Net interest income increased approximately $2.8 million, or 1%, to $271.4 million compared to
$268.6 million for the prior fiscal year. Our interest rate spread increased one basis point to 2.26% compared to 2.25% for the
prior fiscal year. Our net interest margin decreased four basis points to 2.42% compared to 2.46% for the prior fiscal year. Our
average net interest-earning assets decreased $41.2 million, to $1.75 billion for the current fiscal year compared to $1.79 billion
for the prior fiscal year.
Provision for Loan Losses. Based on our evaluation we recorded a provision for loan losses of $19.0 million for the
fiscal year ended September 30, 2014 and a provision of $37.0 million for the fiscal year ended September 30, 2013. 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. The reduced level of net charge-offs during the 2014
fiscal year, $30.2 million as compared to $44.9 million during the fiscal year ended September 30, 2013, was attributable to the
improvement in credit quality in the current fiscal year. 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 $30.2 million during the fiscal
year ended September 30, 2014 included $5.3 million of loans charged-off due to a new practice, instituted this year, of fully
charging off loans that have not been resolved due to prolonged foreclosure proceedings and have 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 also included $1.3 million in recoveries that were recorded during the March 2014 quarter,
representing the cumulative one-time payment received as a result of PMIC increasing the cash percentage of the partial claim
payment plan as discussed in Note 5 to the Consolidated Financial Statements: LOANS AND ALLOWANCE FOR LOAN
LOSSES. Net charge-offs exceeded the $19.0 million loan loss provision recorded for the current fiscal year and resulted in a
decrease in the balance of the allowance for loan losses. Net charge-offs of $44.9 million recorded for the fiscal year ended
September 30, 2013 exceeded the loan loss provision of $37.0 million. The allowance for loan losses was $81.4 million, or
0.76% of the total recorded investment in loans receivable, at September 30, 2014, compared to $92.5 million, or 0.91% of the
total recorded investment in loans receivable, at September 30, 2013. Balances of recorded investments are net of deferred fees
and any applicable loans-in-process.
The total recorded investment in non-accrual loans decreased $20.3 million during the fiscal year ended September 30,
2014 compared to a $26.8 million decrease during the fiscal year ended September 30, 2013.
The recorded investment in non-accrual loans in our residential, Core portfolio decreased $11.7 million, or 13%, during
the current fiscal year, to $79.4 million at September 30, 2014, compared to a $14.7 million decrease during the fiscal year
ended September 30, 2013. At September 30, 2014, the recorded investment in our Core portfolio was $8.82 billion, compared
to $8.10 billion at September 30, 2013. During fiscal 2014, Core portfolio net charge-offs were $13.5 million, inclusive of $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, as compared to net charge-offs of $14.7 million during the fiscal year ended September 30,
2013. The $79.4 million balance at September 30, 2014 includes $35.5 million in troubled debt restructurings which are current
but included with non-accrual loans for a minimum period of six months from their restructuring date.
The recorded investment in non-accrual loans in our residential, Home Today portfolio decreased $4.9 million, or 14%
during fiscal 2014, to $30.0 million at September 30, 2014 compared to a $6.3 million decrease during the fiscal year ended
September 30, 2013. At September 30, 2014, the recorded investment in our Home Today portfolio was $152.0 million,
compared to $175.6 million at September 30, 2013. During fiscal 2014, Home Today net charge-offs were $5.7 million,
inclusive of $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, as compared to net charge-offs of $11.5 million during the fiscal year ended
September 30, 2013. The $30.0 million balance in Home Today non-accrual loans includes $12.0 million in troubled debt
restructurings which are current but included with non-accrual loans for a minimum period of six months from their
restructuring date.
The recorded investment in non-accrual home equity loans and lines of credit decreased $3.8 million, or 13%, during
fiscal 2014, to $26.2 million at September 30, 2014 compared to a $5.4 million decrease during the fiscal year ended
September 30, 2013. The recorded investment in our home equity loans and lines of credit portfolio at September 30, 2014, was
$1.70 billion, compared to $1.87 billion at September 30, 2013. During fiscal 2014, home equity loans and lines of credit net
charge-offs were $11.0 million as compared to net charge-offs of $18.6 million during the fiscal year ended September 30,
2013. There were no charge-offs related to loans delinquent more than 1,500 days or recoveries due to PMIC claim payments.
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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 credit 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 $9.0 million, or less than 1%, of the
home equity loans and lines of credit portfolio at September 30, 2014 compared to $12.0 million, also less than 1%, at
September 30, 2013.
At September 30, 2014 and 2013, we believe we had recorded an allowance for loan losses at September 30, 2014 and
2013, that provides for all losses that are both probable and reasonable to estimate at September 30, 2014 and 2013.
Refer to Item1. Business for additional discussion and disclosure related to our provisions for loan losses.
Non-Interest Income. Non-interest income decreased $6.6 million, or 23%, to $21.9 million for the fiscal year ended
September 30, 2014 compared to $28.5 million for the prior fiscal year mainly as a result of net gain on the sale of loans.
Net gain on the sale of loans decreased $6.3 million, to $2.0 million during the fiscal year ended September 30, 2014
from $8.3 million during the 2013 fiscal year as a result of $76.0 million in loan sales during the fiscal year ended September
30, 2014 as compared to $349.2 million (which included $276.9 million in fixed- and adjustable-rate first mortgage loans to
four private investors) in the fiscal year ended September 30, 2013. There were no sales to private investors in the fiscal year
ended September 30, 2014.
Non-Interest Expense. Non-interest expense decreased $2.2 million, or 1%, to $175.5 million for fiscal 2014 when
compared to $177.7 million for fiscal 2013. This net reduction occurred as decreases in other operating expenses and federal
insurance premiums and assessments exceeded increases in salaries and employee benefits, marketing and real estate owned
expense (which includes associated legal and maintenance expenses and the amount of net gains/losses on the disposal of
properties). The decrease in other operating expenses primarily reflected lower costs (including loss reimbursements and the
cost of negotiated settlements) during fiscal year ended September 30, 2014 related to our portfolio of loans serviced for others.
Salaries and employee benefits increased $3.8 million, or 4%, to $90.3 million for the fiscal year ended September 30, 2014
compared to $86.5 million during fiscal year 2013, reflecting normal annual salary merit and cost of living adjustments, higher
health care costs and increased expense recognition related to our employee stock ownership plan that occurred as the market
price of the Company's common stock rose. Increased real estate owned expense resulted primarily from net losses that were
recognized on property disposals in the fiscal year ended September 30, 2014 as compared to net gains in fiscal 2013.
Income Tax Expense. The provision for income taxes was $33.0 million for the fiscal year ended September 30, 2014
compared to $26.4 million for the fiscal year ended September 30, 2013. The provision for fiscal 2014 included $32.6 million
of federal income tax provision and $324 thousand of state income tax provision. The provision for fiscal 2013 included $26.2
million of federal income tax provision and $165 thousand of state income tax provision. Our federal effective tax rate
increased to 33.0% during fiscal 2014 from 31.9% during fiscal year 2013. Our expected federal effective income tax rate is
less than the federal statutory rate of 35.0%, primarily because of our ownership of bank-owned life insurance contracts. Non-
taxable income on bank owned insurance contracts was $6.4 million during fiscal 2014 and $6.5 million during fiscal 2013.
The impact it has on the federal effective tax rate has decreased in the 2014 fiscal year as a result of increased pre-tax income.
Income before income taxes was $98.9 million and $82.4 million during the fiscal years ended 2014 and 2013, respectively.
On September 13, 2013 and August 18, 2014, the IRS released final tangible property regulations under Sections 162 and
263 and Section 168, respectively, of the Internal Revenue Code. These regulations generally apply to taxable years beginning
after January 1, 2014 and will affect all taxpayers that acquire, produce or improve tangible property. We do not expect the
adoption of these regulations to have a material impact on the Company's consolidated financial statements.
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.
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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 unencumbered investment securities for which ready markets exist, divided by total
assets). For the year ended September 30, 2015, our liquidity ratio averaged 9.56% and was favorably impacted by the strategy
to increase income as discussed earlier in the paragraph describing the increase in our investment in FHLB stock included in
the Comparison of Financial Condition section. We believe that we had sufficient sources of liquidity to satisfy our short- and
long-term liquidity needs as of September 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 September 30, 2015, cash and cash equivalents totaled $155.4
million which represented a decrease of 14% from September 30, 2014. The decrease reflects the reinvestment of our most
liquid assets into higher yield investment securities and loans.
Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $585.1 million
at September 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 year ended September 30, 2015, loan sales totaled $160.1 million, which included $27.5 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
September 30, 2015, one $0.1 million long-term, fixed-rate residential first mortgage loan was classified as “held for sale”,
which qualified under Fannie Mae's HARP II initiative. There were no loan sale commitments outstanding at September 30,
2015.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our
Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
At September 30, 2015, we had $415.9 million in loan commitments outstanding. In addition to commitments to originate
loans, we had $1.20 billion in undisbursed home equity lines of credit to borrowers. CDs due within one year of September 30,
2015 totaled $1.56 billion, or 18.8% 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 September 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.
71
Our primary investing activities are originating residential mortgage loans and purchasing investments. During the year
ended September 30, 2015, we originated $2.34 billion of residential mortgage loans, and during the year ended September 30,
2014, we originated $2.12 billion of residential mortgage loans. We purchased $171.1 million of securities during the year
ended September 30, 2015, and $250.8 million during the year ended September 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 $368.0 million during the year ended September 30, 2015, which reflected the
active management of the offered rates on maturing CDs, compared to a net increase of $189.4 million during the year ended
September 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 year ended September 30, 2015,
was partially offset 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 year ended September 30, 2014 the balance of brokered CDs increased by $343.7 million.
Principal and interest owed on loans serviced for others decreased $5.2 million to $49.5 million during the year ended
September 30, 2015 compared to a net decrease of $21.1 million to $54.7 million during the year ended September 30, 2014.
During the year ended September 30, 2015, we increased our advances from the FHLB of Cincinnati by $1.03 billion, as we
replaced our net savings outflow, funded new loan originations and actively managed our liquidity ratio. During the year ended
September 30, 2014, our advances from the FHLB of Cincinnati increased by $393.5 million.
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 September 30, 2015 we had $2.17 billion of FHLB of Cincinnati advances and no
outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at September 30, 2015 we had $520.1
million of brokered CDs. During the year ended September 30, 2015, we had average outstanding advances from the FHLB of
Cincinnati of $2.31 billion as compared to average outstanding advances of $974.6 million during the year ended
September 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 September 30, 2015 we had the ability to immediately
borrow an additional $584.5 million from the FHLB of Cincinnati and $116.8 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 September 30, 2015 was $3.64 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 $72.9 million. During the 2015 fiscal
year, 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.
72
As of September 30, 2015, the Association exceeded all regulatory capital requirements to be considered "Well
Capitalized".
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. The sixth stock repurchase plan was completed on August 3, 2015. Repurchases under the seventh stock repurchase
authorization, covering 10,000,000 shares and which was announced on July 30, 2015, began on August 4, 2015. There were
1,890,000 shares repurchased under the seventh authorized program between its start date and September 30, 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 year ended September 30, 2015 the
Company received a $66 million dividend from the Association and repurchased $172.5 million of common stock. During each
of the four quarters ending June 30, 2015, the Company's Board of Directors declared and paid $0.07 per share dividends.
Third Federal Savings, MHC received, on July 31, 2014, 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 year ended September 30, 2015, common stock dividends paid by the Company totaled
$19.5 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 four quarters ending June 30, 2016. Following the receipt of the members’ approval at the
August 5, 2015 special meeting, Third Federal Savings, MHC filed a notice with, and subsequently received the non-objection
of the FRB-Cleveland, to waive receipt of dividends on the Company’s common stock. Third Federal Savings, MHC waived its
right to receive a $0.10 per share dividend payment on September 22, 2015.
At September 30, 2015, the Company had, in the form of cash and a demand loan from the Association, $35.8 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 $150.0 million to the Company. This amount is equal to the
voluntary contribution of capital that the Company made to the Association in October 2010. On November 6, 2015, the
Association paid $50.0 million of this special dividend to the Company. It is expected that payment of the remaining $100.0
million special dividend will be made later in the fiscal year ended September 30, 2016. 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.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-
balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations
represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn
upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition,
73
we routinely enter into commitments to securitize and sell mortgage loans. For additional information, see Note 15 of the Notes
to our Consolidated Financial Statements.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such
obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit
liabilities and agreements with respect to investments.
The following table summarizes our significant fixed and determinable contractual obligations and other funding needs
by payment date at September 30, 2015. The payment amounts represent those amounts due to the recipient and do not include
any unamortized premiums or discounts or other similar carrying amount adjustments.
Contractual Obligations
FHLB advances(1)
Operating leases
Certificates of deposit(1)
Private equity investments
Less than
One year
One to
Three years
Three to
Five years
More than
Five years
Total
Payments due by period
(In thousands)
$
780,960
$
475,000
$
805,294
$
107,373
$ 2,168,627
5,058
9,306
5,642
1,559,149
2,796,693
1,231,096
12,941
—
—
5,058
93,474
—
25,064
5,680,412
12,941
Total
$ 2,358,108
$ 3,280,999
$ 2,042,032
$
205,905
$ 7,887,044
Commitments to extend credit
$ 1,807,957 (2)
$
— $
— $
— $ 1,807,957
______________________
(1) Includes accrued interest payable, computed on an actual days outstanding basis, at September 30, 2015.
(2) Includes the unused portion (including commitments for accounts suspended as a result of material default or a decline in
equity) of home equity lines of credit of $1.36 billion.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in accordance with GAAP. GAAP generally
requires the measurement of financial position and operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a
result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Recent Accounting Pronouncements
Pending as of September 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.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) Amendments to the Consolidation Analysis.
This amendment modifies the consolidation model for reporting legal entities under both the variable interest model and the
voting interest model. This ASU will require all legal entities to reevaluate previous consolidation conclusions under the
revised model and will be effective for annual periods beginning after December 15, 2015. Early adoption is permitted. A
reporting entity may apply the ASU by using a modified retrospective approach (by recording a cumulative-effect adjustment to
equity as of the beginning of the year of adoption) or a full retrospective approach (by restating all periods presented). The
Company is currently evaluating the impact of adopting the amendments on its consolidated financial statements.
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
74
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 an additional disclosure in the Loan and Allowance for
Loan Losses footnote. The Company's timing for derecognition of the receivable and the recognition of the real estate property
clarified in these amendments will not change as a result of this amendment.
Adopted in fiscal year ended September 30, 2015
FASB ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, which was issued in January
2014, permits entities to make an accounting policy election to account for investments in qualified affordable housing projects
using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity
amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net
investment performance in the income statements as a component of income tax expense or benefit. The company early
adopted the amendments in ASC 323-740 related to investments in Qualified Affordable Housing Projects for quarter ended
March 31, 2015, to utilize the proportional amortization method for a recent tax credit investment. The adoption of ASU
2014-1 did not have a material impact on the Company's consolidated financial statements. Related disclosures are included in
Note 7. Income Taxes.
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.
Item 7A.
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/
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 fiscal year ended September 30, 2015, $160.1 million of agency-compliant, long-term, fixed-rate mortgage
loans were sold on a servicing retained basis, and, at September 30, 2015, $0.1 million of agency-compliant, long-term, fixed-
rate residential first mortgage loans were classified as “held for sale”. Of the loan sales during fiscal 2015, $27.5 million was
75
comprised of long-term, (15 to 30 years), fixed-rate first mortgage loans which were sold under Fannie Mae's HARP II
program, and $132.6 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 September 30, 2015, we had no 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 are originated under the revised procedures are 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 beginning in 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 maturity 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
rates 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 September 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.
Change in
Interest Rates
(basis points) (1)
Estimated
EVE (2)
Estimated Increase
(Decrease) in EVE
Amount
Percent
(Dollars in thousands)
+300
+200
+100
0
-100
_________________
$ 1,658,638
1,897,224
2,099,033
2,221,833
2,160,918
$ (563,195)
(324,609)
(122,800)
—
(60,915)
(25.35)%
(14.61)%
(5.53)%
— %
(2.74)%
EVE as a Percentage
of Present Value of
Assets (3)
EVE
Ratio (4)
Increase
(Decrease)
(basis points)
14.40%
15.86%
16.93%
17.37%
16.59%
(297)
(151)
(44)
—
(78)
(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.
76
The table above indicates that at September 30, 2015, in the event of an increase of 200 basis points in all interest rates,
the Association would experience a 14.61% decrease in EVE. In the event of a 100 basis point decrease in interest rates, the
Association would experience a 2.74% decrease 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 September 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 bp Rate Shock)
Pre-Shock EVE Ratio
Post-Shock EVE Ratio
Sensitivity Measure in basis points
Percentage Change in EVE Ratio
At September 30,
2015
17.37 %
15.86 %
(151)
(14.61)%
2014
18.46 %
16.37 %
(209)
(17.36)%
Certain shortcomings are inherent in the methodologies used in measuring interest rate risk through changes in EVE.
Modeling changes in EVE requires 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 2.75% improvement in the Percentage Change in EVE measure at September 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 six basis points
for the two year term to a decrease of 40 basis points for the five year term and a decrease of 45 basis points for the ten-year
term. The changes in interest rates resulted in an improvement of 3.47% 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 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 1.28%. 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.
77
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 September 30, 2015, we estimated that our EaR for the 12 months ending September 30, 2016 would
decrease by 2.6% 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.
As of September 30, 2015, we also estimated that our EaR for a second 12 month period ending September 30, 2017, would
decrease by 3.1% in the event of an instantaneous 200 basis point increase in market interest rates. At September 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 year 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
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 September 30, 2015 the IRR profile as disclosed above did not breach our internal
limits.
Item 8.
Financial Statements and Supplementary Data
The Financial Statements are included in Part IV, Item 15 of this Form 10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
78
Item 9A.
Controls and Procedures
Disclosure 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) and 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.
Changes in Internal Control Over Financial Reporting
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.
Management’s Report Regarding Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting as such terms are defined in Rule 13a-15(f) of the Exchange Act of 1934. Our system of internal controls is designed
to provide reasonable assurance that the financial statements that we provide to the public are fairly presented.
Our internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets, (ii) provide reasonable
assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America and that receipts and expenditures are being made
only in accordance with authorizations of management and the directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Accordingly, absolute assurance cannot be provided that the effectiveness of the internal control systems may not
become inadequate in future periods because of changes in conditions, or because the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30,
2015. In making this assessment, the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework (2013) was utilized. Based on this assessment, management believes
that, as of September 30, 2015, the Company’s internal control over financial reporting is effective at the reasonable assurance
level.
The Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal
control over financial reporting.
The Sarbanes-Oxley Act Section 302 Certifications have been filed as Exhibit 31.1 and Exhibit 31.2 to this Annual
Report on Form 10-K.
79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
TFS Financial Corporation
Cleveland, OH
We have audited the internal control over financial reporting of TFS Financial Corporation and subsidiaries (the
"Company") as of September 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report Regarding Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the
company's Board of Directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of September 30, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended September 30, 2015 of the Company and
our report dated November 25, 2015, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Cleveland, OH
November 25, 2015
80
Item 9B.
Other Information
Not applicable.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Incorporated by reference from the Notice of Annual Meeting and Proxy Statement for the 2016 Annual Meeting of
Shareholders (the “Proxy Statement”) sections entitled “Proposal One: Election of Directors,” “Executive Compensation,”
“Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance.” Such information will be filed with
the SEC no later than 120 days after the end of the fiscal year covered by this report.
The table below sets forth information, as of September 30, 2015, regarding our executive officers other than Mr.
Stefanski and Ms. Weil.
Name
David S. Huffman
Paul J. Huml
Anna Maria P. Motta
Judith Z. Adam
Cathy W. Zbanek
Title
Chief Financial Officer
Chief Accounting Officer
Chief Operating Officer, the Company
Chief Information Officer, the Association
Chief Risk Officer
Chief Marketing and Human Resources Officer, the
Association
Age
63
56
56
60
42
The executive officers of the Company and the Association are elected annually and hold office until their respective
successors are elected or until death, resignation, retirement or removal by the Board of Directors.
The Business Background of Our Executive Officers
The business experience for the past five years of each of our executive officers other than Mr. Stefanski and Ms. Weil is
set forth below. Unless otherwise indicated, executive officers have held their positions for the past five years.
David S. Huffman joined the Association in 1993, and has served as its Chief Financial Officer since 2000. He has also
served as Chief Financial Officer of the Company since 2004. Mr. Huffman has more than 30 years of experience in the
financial institutions industry, including serving as Chief Financial Officer of First American Savings Bank of Canton, Ohio,
from 1989 to 1993.
Paul J. Huml joined the Association as a Vice President in 1998 and was appointed Chief Operating Officer of the
Company in 2002 and Chief Accounting Officer in June 2009. Prior to joining the Association, Mr. Huml spent 10 years in the
hotel industry, focusing on the areas of finance, real estate development and risk management. Mr. Huml is a certified public
accountant in the state of Ohio.
Anna Maria P. Motta joined the Association in 1989 and was named Chief Information Officer in 2014. During her time
with the Association, Ms. Motta has managed a number of different operational areas including Northeast Ohio Retail
Operations, Customer Service, Internet Services, Loan Servicing, Default Servicing, Deposit Operations, and Information
Services. Ms. Motta’s more than 30 years in the banking industry also included serving as Treasurer of ParkView Federal
Savings and Loan, in Cleveland, Ohio, from 1987 to 1989.
Judith Z. Adam joined the Association in 2000 and was named Chief Risk Officer in 2015. During her time with the
Association, Ms. Adam has managed the Accounting, Internet Services and Loan Production teams. Ms. Adam’s 29 years in the
banking industry have included serving in various accounting roles at TransOhio Savings Bank and Metropolitan Bank & Trust.
Cathy W. Zbanek joined the Association in 2001 and was named the Chief Marketing Officer in January 2013 and also
serves as the Human Resource Officer for the Association. Prior to her current role, she directed several key strategic business
projects as well as systems design and development. She also managed several departments, including Customer Service.
Before joining the Association, Ms. Zbanek served as a senior consultant with Waterstone Consulting, working in their
Management Consulting Group. Her experience also includes working with the consulting group, Price Waterhouse Coopers.
81
The Company has adopted a policy statement entitled CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS that
applies to our chief executive officer and our senior financial officers. A copy of the CODE OF ETHICS FOR SENIOR
FINANCIAL OFFICERS is available on our website, www.thirdfederal.com.
Item 11.
Executive Compensation
Incorporated by reference from the sections of the Proxy Statement entitled “Executive Compensation,” “Compensation
Committee Report,” and “Director Compensation.” Such information will be filed with the SEC no later than 120 days after the
end of the fiscal year covered by this report.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial
Owners and Management.” Such information will be filed with the SEC no later than 120 days after the end of the fiscal year
covered by this report.
The Company’s only equity compensation program that was not approved by shareholders is its employee stock
ownership plan, which was established in conjunction with our initial stock offering completed in April 2007.
The following table provides information as of September 30, 2015 regarding our 2008 Equity Incentive Plan that was
approved by shareholders on May 29, 2008:
Plan Category
Equity Compensation Plans
Approved by Stockholders
Equity Compensation Plans
Not Approved by Stockholders
Total
______________________
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Rights and Warrants
Weighted-Average
Exercise Price of
Outstanding Options,
Rights and Warrants
Number of Shares
Remaining Available
for Future Issuance
Under the Plan
8,208,395
$ 10.07 (1)
11,815,024
N/A
8,208,395
N/A
N/A
$ 10.07 (1)
11,815,024
(1) Weighted-Average Exercise Price of Outstanding Options, Rights and Warrants is calculated using 1,264,625 shares of
restricted stock awards at $0.00 and 6,943,770 shares of stock option awards at $11.91.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference from the sections of the Proxy Statement entitled “Certain Relationships and Related
Transactions” and “Corporate Governance.” Such information will be filed with the SEC no later than 120 days after the end of
the fiscal year covered by this report.
Item 14.
Principal Accounting Fees and Services
Incorporated by reference from the section of the Proxy Statement entitled “Fees Paid to Deloitte & Touche LLP.” Such
information will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following documents are filed as part of this Annual Report on Form 10-K:
82
a. The consolidated financial statements of TFS Financial Corporation and subsidiaries contained in Part II, Item 8 of
this Annual Report on Form 10-K:
• Consolidated Statements of Condition as of September 30, 2015 and 2014;
• Consolidated Statements of Income for the years ended September 30, 2015, 2014 and 2013;
• Consolidated Statements of Comprehensive Income for the years ended September 30, 2015, 2014 and 2013;
• Consolidated Statements of Shareholders' Equity for the years ended September 30, 2015, 2014 and 2013,
• Consolidated Statements of Cash Flows for the years ended September 30, 2015, 2014 and 2013; and
• Notes to the Consolidated Financial Statements
b. The exhibits listed in the Exhibits Index beginning on Page 132 of this Annual Report on Form 10-K.
83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
TFS Financial Corporation
Cleveland, OH
We have audited the accompanying consolidated statements of condition of TFS Financial Corporation and subsidiaries
(the "Company") as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive
income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2015. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
TFS Financial Corporation and subsidiaries as of September 30, 2015 and 2014, and the results of their operations and
their cash flows for each of the three years in the period ended September 30, 2015, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of September 30, 2015, based on the criteria
established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated November 25, 2015 expressed an unqualified opinion on the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Cleveland, OH
November 25, 2015
84
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
As of September 30, 2015 and 2014
(In thousands, except share data)
ASSETS
Cash and due from banks
Other interest-earning cash equivalents
Cash and cash equivalents
Investment securities available for sale (amortized cost $582,091 and $570,549, respectively)
Mortgage loans held for sale, at lower of cost or market ($0 and $4,570 measured at fair value,
respectively)
Loans held for investment, net:
Mortgage loans
Other loans
Deferred loan expenses (fees), net
Allowance for loan losses
Loans, net
Mortgage loan servicing assets, net
Federal Home Loan Bank stock, at cost
Real estate owned, net
Premises, equipment, and software, net
Accrued interest receivable
Bank owned life insurance contracts
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Borrowed funds
Borrowers’ advances for insurance and taxes
Principal, interest, and related escrow owed on loans serviced
Accrued expenses and other liabilities
Total liabilities
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;
290,882,379 and 301,654,581 outstanding at September 30, 2015 and September 30, 2014,
respectively
Paid-in capital
Treasury stock, at cost; 41,436,371 and 30,664,169 shares at September 30, 2015 and
September 30, 2014, respectively
Unallocated ESOP shares
Retained earnings—substantially restricted
Accumulated other comprehensive loss
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
85
2015
2014
$
22,428
132,941
155,369
585,053
$
26,886
154,517
181,403
568,868
116
4,962
11,245,557
3,468
10,112
(71,554)
11,187,583
9,988
69,470
17,492
57,187
32,490
195,861
58,277
$12,368,886
$ 8,285,858
2,168,627
86,292
49,493
49,246
10,639,516
10,708,483
4,721
(1,155)
(81,362)
10,630,687
11,669
40,411
21,768
56,443
31,952
190,152
64,880
$11,803,195
$ 8,653,878
1,138,639
76,266
54,670
40,285
9,963,738
—
—
3,323
1,707,629
3,323
1,702,441
(548,557)
(61,751)
641,791
(13,065)
1,729,370
$12,368,886
(379,109)
(66,084)
589,678
(10,792)
1,839,457
$11,803,195
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For each of the three years in the period ended September 30, 2015
(In thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME:
Loans, including fees
Investment securities available for sale
Other interest and dividend earning assets
Total interest and dividend income
INTEREST EXPENSE:
Deposits
Borrowed funds
Total interest expense
NET INTEREST INCOME
PROVISION FOR LOAN LOSSES
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
NON-INTEREST INCOME:
Fees and service charges, net of amortization
Net gain on the sale of loans
Increase in and death benefits from bank owned life insurance contracts
Other
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Marketing services
Office property, equipment, and software
Federal insurance premium and assessments
State franchise tax
Real estate owned expense, net
Other operating expenses
Total non-interest expense
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET INCOME
Earnings per share—basic and diluted
Weighted average shares outstanding
Basic
Diluted
2015
2014
2013
$
369,302
$
363,409
$
376,840
9,571
4,604
9,212
2,063
4,941
2,191
383,477
374,684
383,972
93,526
19,824
113,350
270,127
(3,000)
273,127
7,972
4,519
7,324
4,445
93,178
10,073
103,251
271,433
19,000
252,433
9,266
2,031
6,439
4,164
111,408
4,011
115,419
268,553
37,000
231,553
8,921
8,267
6,464
4,816
24,260
21,900
28,468
95,638
19,904
22,048
11,135
5,914
9,705
23,648
187,992
109,395
36,804
72,591
0.25
$
$
90,333
14,256
20,694
9,911
6,503
9,337
24,442
175,476
98,857
32,966
65,891
0.22
$
$
86,471
12,983
21,009
13,019
6,627
6,724
30,827
177,660
82,361
26,402
55,959
0.18
$
$
289,935,861
292,210,417
298,974,062
300,556,767
301,832,758
302,746,766
See accompanying notes to consolidated financial statements.
86
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For each of the three years in the period ended September 30, 2015
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss) on securities available for sale
Change in pension obligation
Total other comprehensive loss
Total comprehensive income
2015
2014
2013
$
72,591
$
65,891
$
55,959
3,018
(5,291)
(2,273)
70,318
$
1,044
(3,232)
(2,188)
63,703
$
(4,746)
2,058
(2,688)
53,271
$
See accompanying notes to consolidated financial statements.
87
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For each of the three years in the period ended September 30, 2015
(In thousands, except share and per share data)
Balance at September 30, 2012
Comprehensive income
Net income
Other comprehensive loss, net of tax
ESOP shares allocated or committed to
be released
Compensation costs for stock-based
plans
Treasury stock allocated to restricted
stock plan
Balance at September 30, 2013
Comprehensive income
Net income
Other comprehensive loss, net of tax
ESOP shares allocated or committed to
be released
Compensation costs for stock-based
plans
Excess tax benefit from stock-based
compensation
Purchase of treasury stock (7,770,300
shares)
Treasury stock allocated to restricted
stock plan
Dividends paid to common shareholders
($0.07 per common share)
Balance at September 30, 2014
Comprehensive income
Net income
Other comprehensive loss, net of tax
ESOP shares allocated or committed to
be released
Compensation costs for stock-based
plans
Excess tax benefit from stock-based
compensation
Purchase of treasury stock (11,275,950
shares)
Treasury stock allocated to restricted
stock plan
Dividends paid to common shareholders
($0.31 per common share)
Balance at September 30, 2015
Common
stock
$ 3,323
Paid-in
capital
1,691,884
Treasury
stock
(280,937)
Unallocated
common stock
held by ESOP
(74,751)
Retained
earnings
473,247
Accumulated
other
comprehensive
income (loss)
Total
shareholders’
equity
(5,916) $ 1,806,850
—
—
—
—
—
—
166
6,703
—
—
—
—
— 55,959
—
—
4,333
—
—
—
—
(2,688)
—
—
55,959
(2,688)
4,499
6,703
—
$ 3,323
(2,383)
1,696,370
2,722
(278,215)
—
(70,418)
(185)
529,021
—
154
(8,604) $ 1,871,477
—
—
—
—
—
—
—
—
—
1,221
6,862
91
—
—
—
—
—
— (103,085)
(2,103)
2,191
— 65,891
—
—
—
(2,188)
65,891
(2,188)
4,334
—
—
—
—
—
—
—
—
(348)
—
—
—
—
5,555
6,862
91
(103,085)
(260)
—
$ 3,323
—
1,702,441
—
(379,109)
— (4,886)
589,678
(66,084)
—
(4,886)
(10,792) $ 1,839,457
—
—
—
—
—
—
—
—
—
2,284
7,363
1,582
—
—
—
—
—
— (172,366)
(6,041)
2,918
— 72,591
—
—
—
(2,273)
72,591
(2,273)
4,333
—
—
—
—
—
—
—
—
(988)
—
—
—
—
—
6,617
7,363
1,582
(172,366)
(4,111)
—
$ 3,323
—
1,707,629
—
(548,557)
— (19,490)
641,791
(61,751)
—
(19,490)
(13,065) $ 1,729,370
See accompanying notes to consolidated financial statements.
88
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the three years in the period ended September 30, 2015
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
ESOP and stock-based compensation expense
Depreciation and amortization
Deferred income taxes
Provision for loan losses
Net gain on the sale of loans
Net gain on the sale of securities
Other net losses (gains)
Principal repayments on and proceeds from sales of loans held for sale
Loans originated for sale
Increase in and death benefits for bank owned life insurance contracts
Net (increase) decrease in interest receivable and other assets
Net increase (decrease) in accrued expenses and other liabilities
Other
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated
Principal repayments on loans
Proceeds from sales, principal repayments and maturities of:
Securities available for sale
Proceeds from sale of:
Loans
Real estate owned
Purchases of:
FHLB Stock
Securities available for sale
Premises and equipment
Other
Net cash (used in) provided by in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits
Net increase in borrowers' advances for insurance and taxes
Net decrease in principal and interest owed on loans serviced
Net increase (decrease) in short-term borrowed funds
Proceeds from long-term borrowed funds
Repayment of long-term borrowed funds
Purchase of treasury shares
Excess tax benefit related to stock-based compensation
Acquisition of treasury shares through net settlement
Dividends paid to common shareholders
Net cash provided by (used in) in financing activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits
Cash paid for interest on borrowed funds
Cash paid for income taxes
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Transfer of loans to real estate owned
Transfer of loans from held for investment to held for sale
Transfer of loans from held for sale to held for investment
Treasury stock issued for stock benefit plans
2015
2014
2013
$
72,591
$
65,891
$
55,959
13,980
17,453
9,185
(3,000)
(4,519)
—
2,962
27,815
(27,011)
(6,491)
(2,173)
1,014
296
102,102
12,157
13,285
9,659
19,000
(2,031)
(276)
2,529
27,475
(27,907)
(6,449)
(2,392)
(7,537)
104
103,508
11,356
21,315
6,486
37,000
(8,267)
—
(756)
74,170
(65,545)
(6,468)
16,908
(1,739)
391
140,810
(2,760,277)
2,052,276
(2,425,032)
1,783,108
(2,459,635)
2,369,786
153,945
157,389
206,388
133,456
25,134
(29,059)
(171,125)
(5,522)
784
(600,388)
(368,020)
10,026
(5,177)
444,830
600,294
(15,136)
(172,546)
1,582
(4,111)
(19,490)
472,252
(26,034)
181,403
155,369
93,093
18,994
22,533
23,761
127,066
—
7,041
48,564
25,738
282,221
25,817
(4,791)
(250,832)
(2,816)
25
(668,647)
189,379
4,878
(21,075)
(5,430)
450,000
(51,048)
(101,363)
91
—
(4,886)
460,546
(104,593)
285,996
181,403
92,143
9,503
25,100
27,000
48,088
—
—
$
$
—
(276,454)
(2,819)
(116)
145,188
(516,920)
3,524
(51,794)
(52,732)
320,000
(10,342)
—
—
—
—
(308,264)
(22,266)
308,262
285,996
111,707
3,743
19,642
27,741
337,009
155,028
—
$
$
$
$
See accompanying notes to consolidated financial statements.
89
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the years ended September 30, 2015, 2014, and 2013
(Dollars in thousands unless otherwise indicated)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business—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 other insignificant financial services. Third Federal Savings and Loan Association of
Cleveland, MHC, its federally chartered mutual holding company parent, owned 78.08% of the outstanding shares of common
stock of the Company at September 30, 2015.
The Company’s primary operating subsidiaries include the Association and Third Capital, Inc. The Association is a
federal savings association, which provides retail loan and savings products to its customers in Ohio and Florida, through its 38
full-service branches, eight loan production offices, customer service call center and internet site. The Association also provides
savings products and first mortgage refinance loans and home equity lines of credit in states outside of its branch footprint.
Third Capital, Inc. was formed to hold non-thrift investments and subsidiaries, which include a limited liability company that
acquires and manages commercial real estate.
The accounting and reporting policies of TFS Financial Corporation and its subsidiaries conform to accounting principles
generally accepted in the United States of America and to general practices within the thrift industry.
In preparing the accompanying consolidated financial statements, subsequent events were evaluated through the time the
consolidated financial statements were issued. Other than as disclosed in Note 3, no material subsequent events have occurred
requiring recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
The following is a description of the significant accounting and reporting policies, which the Company follows in
preparing and presenting its consolidated financial statements.
Principles of Consolidation—The consolidated financial statements of the Company include the accounts of TFS
Financial Corporation and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents—Cash and cash equivalents consist of working cash on hand, and demand and interest
bearing deposits at other financial institutions with maturities of three months or less. For purposes of reporting cash flows,
cash and cash equivalents also includes federal funds sold. The Company has acknowledged informal agreements with banks
where it maintains deposits. Under these agreements, service fees charged to the Company are waived provided certain average
compensating balances are maintained throughout each month.
Investment Securities—Securities are all classified as available for sale. Securities held as available for sale are reported
at fair value, with unrealized gains and losses, net of tax, reported as a component of AOCI. Management determines the
appropriate classification of securities based on the intent and ability at the time of purchase.
Gains and losses on the sale of investment and mortgage-backed securities available for sale are computed on a specific
identification basis. Purchases and sales of securities are accounted for on a trade-date or settlement-date basis, depending on
the settlement terms.
A decline in the fair value of any available for sale security, below cost, that is deemed to be other than temporary, results
in a reduction in the carrying amount to fair value. The impairment loss is bifurcated between that related to credit loss which is
recognized in non-interest income and that related to all other factors which is recognized in other comprehensive income. To
determine whether an impairment is other than temporary, the Company considers, among other things, the duration and extent
to which the fair value of an investment is less than its cost, changes in value subsequent to year end, forecast performance of
the issuer, and whether the Company has the intent to hold the investment until market price recovery, or, for debt securities,
whether the Company has the intent to sell the security or more likely than not will be required to sell the debt security before
its anticipated recovery.
Premiums and discounts are amortized using the level-yield method.
90
Mortgage Banking Activity—Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of cost or estimated fair value in the aggregate. Mortgage loans included in pending agency contracts to sell and
securitize loans are carried at fair value. Fair value is based on quoted secondary market pricing for loan portfolios with similar
characteristics and includes consideration of deferred fees (costs). Net unrealized losses, or net unrealized gains and losses on
loans carried at fair value, are recognized in a valuation allowance by charges to income.
The Company retains servicing on loans that are sold and initially recognizes an asset for mortgage loan servicing rights
based on the fair value of the servicing rights. Residential mortgage loans represent the single class of servicing rights and are
measured at the lower of cost or fair value on a recurring basis. Mortgage loan servicing rights are reported net of accumulated
amortization, which is recorded in proportion to, and over the period of, estimated net servicing revenues. The Company
monitors prepayments and changes amortization of mortgage servicing rights accordingly. Fair values are estimated using
discounted cash flows based on current interest rates and prepayment assumptions, and impairment is monitored each quarterly
reporting period. The impairment analysis is based on predominant risk characteristics of the loans serviced, such as type, fixed
and adjustable rate loans, original terms and interest rates. The amount of impairment recognized is the amount by which the
mortgage loan servicing assets exceed their fair value.
Servicing fee income net of amortization and other loan fees collected on loans serviced for others are included in Fees
and service charges, net of amortization on the consolidated financial statements.
Derivative Instruments—The Company enters into certain transactions, referred to as forward commitments, for the sale
of mortgage loans principally to protect against the risk of adverse interest rate movements on the value of those assets. The
Company recognizes the fair value of the 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.
The Company enters into commitments to originate loans which, when funded, will be 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.
Loans and Related Fees—Loans originated with the intent to hold into the foreseeable future are carried at unpaid
principal balances adjusted for partial charge-offs, the allowance for loan losses and net deferred origination fees. Interest on
loans is accrued and credited to income as earned. Interest is not accrued on loans when collectability is uncertain.
Loan fees and certain direct loan origination costs are deferred and recognized as an adjustment to interest income using
the level-yield method over the contractual lives of related loans, if the loans are held for investment. If the loans are held for
sale, net deferred fees (costs) are not amortized, but rather are recognized when the related loans are sold.
Loans are classified as TDRs when the original contractual terms are restructured to provide a concession to a borrower
experiencing financial difficulty under terms that would not otherwise be available and the restructuring is the result of an
agreements between the Company and the borrower or is imposed by a court or law. Concessions granted in TDRs may include
a reduction of the stated interest rate, a reduction or forbearance of principal, an extension of the maturity date, a significant
delay in payments, the removal of one or more borrowers from the obligation, or any combination of these.
Allowance for Loan Losses—The allowance for loan losses is assessed on a quarterly basis and provisions for loan
losses are made in order to maintain the allowance at a level sufficient to absorb credit losses in the portfolio. Impairment
evaluations are performed on loans segregated into homogeneous pools based on similarities in credit profile, product and
property types. Through the evaluation, general allowances for loan losses are assessed based on historical loan loss experience
for each homogeneous pool. General allowances are adjusted to address other factors that affect estimated probable losses
including the size of the portion of the portfolio that is not subjected to individual review; current delinquency statistics; the
status of loans in foreclosure, real estate in judgment and real estate owned; national, regional and local economic factors and
trends; asset disposition loss statistics (both current and historical); and the relative level of individually allocated valuation
allowances to the balances of loans individually reviewed. The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management believes the allowance is adequate.
For further discussion on the allowance for loan losses, non-accrual, impairment, and TDRs, see Note 5. Loans and
Allowance for Loan Losses.
Real Estate Owned, net—Real estate owned, net represents real estate acquired through foreclosure or deed in lieu of
foreclosure and is initially recorded at fair value less estimated costs to sell. Subsequent to acquisition, real estate owned is
carried at the lower of cost or fair value less estimated selling costs. Management performs periodic valuations and a valuation
allowance is established by a charge to income for any excess of the carrying value over the fair value less estimated costs to
91
sell the property. Recoveries in fair value during the holding period are recognized until the valuation allowance is reduced to
zero. Costs related to holding and maintaining the property are charged to expense.
Premises, Equipment, and Software—Depreciation and amortization of premises, equipment and software is computed
on a straight-line basis over the estimated useful lives of the related assets. Estimated lives are 31.5 years for office facilities
and three to 10 years for equipment and software. Amortization of leasehold improvements is computed on a straight-line basis
over 10 years.
Bank Owned Life Insurance—Life insurance is provided under both whole and split dollar life insurance agreements.
Policy premiums were prepaid and the Company will recover the premiums paid from the proceeds of the policies. The
Company recognizes death benefits and growth in the cash surrender value of the policies in other non-interest income.
Goodwill—The excess of purchase price over the fair value of net assets of acquired companies is classified as goodwill
and reported in Other Assets. Goodwill was $9,732 at September 30, 2015 and 2014. Goodwill is reviewed for impairment on
an annual basis as of September 30. No impairment was identified as of September 30, 2015 or 2014.
Taxes on Income—Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. Additional information about policies
related to income taxes is included in Note 12. Income Taxes.
Deposits—Interest on deposits is accrued and charged to expense monthly and is paid or credited in accordance with the
terms of the accounts.
Treasury Stock—Acquisitions of treasury stock are recorded at cost using the cost method of accounting. Repurchases
may be made through open market purchases, block trades and in negotiated private transactions, subject to the availability of
stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial
performance. Repurchased shares will be available for general corporate purposes.
Accumulated Other Comprehensive Loss—Accumulated other comprehensive loss consists of pension liability
adjustments and gains (losses) on securities available for sale, net of the related tax effects.
Share-Based Compensation—Compensation expense for awards of equity instruments is recognized on a straight-line
basis over the requisite service period based on the grant date fair value estimated in accordance with the provisions of FASB
ASC 718 “Compensation—Stock Compensation”. Share-based compensation expense is included in Salaries and employee
benefits in the consolidated statements of income.
The grant date fair value of stock options is estimated using the Black-Scholes option-pricing model using assumptions
for the expected option term, expected stock price volatility, risk-free interest rate, and expected dividend yield. Due to limited
historical data on exercise of share options, the simplified method is used to estimate expected option term.
Marketing Costs—Marketing costs are expensed as incurred.
Earnings per Share—Basic earnings per share is computed by dividing net income by the weighted-average number of
shares of common stock outstanding. Outstanding shares include shares sold to subscribers, shares held by the Third Federal
Foundation, shares of the Employee Stock Ownership Plan which have been allocated or committed to be released for
allocation to participants, and shares held by Third Federal Savings, MHC. Unvested shares awarded in the Company's
restricted stock plans are treated as participating securities as they contain nonforfeitable rights to dividends and are not
included in the number of shares in the computation of EPS. The two-class method is an earnings allocation that determines
EPS for each class of common stock and participating security.
Diluted earnings per share is computed using the same method as basic earnings per share, but the weighted-average
number of shares reflects the potential dilution, if any, of unexercised stock options and unvested shares of restricted stock units
that could occur if stock options were exercised and restricted stock units were issued and converted into common stock. These
potentially dilutive shares would then be included in the number of weighted-average number of shares outstanding for the
period using the treasury stock method. At September 30, 2015, 2014 and 2013, potentially dilutive shares include stock
options and restricted stock units issued through stock-based compensation plans.
92
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
2. STOCK TRANSACTIONS
TFS Financial Corporation completed its initial public stock offering on April 20, 2007 and sold 100,199,618 shares, or
30.16% of its post-offering outstanding common stock, to subscribers in the offering. Third Federal Savings, MHC, the
Company’s mutual holding company parent, holds 227,119,132 shares of TFS Financial Corporation’s outstanding common
stock. TFS Financial Corporation issued 5,000,000 shares of common stock, or 1.50% of its post-offering outstanding common
stock, to Third Federal Foundation.
In August, 2015 the sixth repurchase program allowing the repurchase of up to 10,000,000 shares of TFS Financial
Corporation's outstanding common stock, which was originally authorized by the Board of Directors in September, 2014, was
completed. The Board of Directors authorized a seventh repurchase program for the repurchase of 10,000,000 shares in July,
2015. A total of 11,275,950 shares were repurchased during the year ended September 30, 2015. 7,770,300 shares were
repurchased during the year ended September 30, 2014. At September 30, 2015, there were 8,110,000 shares remaining to be
purchased under the seventh repurchase program. The Company previously repurchased 31,300,000 shares of the Company’s
common stock as part of the first five previous Board of Directors-approved share repurchase programs. In total, the Company
has repurchased 43,190,000 shares of the Company's common stock as of September 30, 2015.
3. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the financial statements of the Association. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum
amounts and ratios (set forth in table below) of common equity Tier 1, Tier 1, and Total capital (as defined in the regulations) to
risk-weighted assets (as defined) and Tier 1 capital (as defined) to net average assets (as defined). The risk-based capital
guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet
assets and off-balance sheet assets to broad risk categories. At September 30, 2015, the Association exceeded all regulatory
capital requirements and is considered “well capitalized” under regulatory guidelines.
The following table summarizes the actual capital amounts and ratios of the Association as of September 30, 2015 and
2014, compared to the minimum capital adequacy requirements and the requirements for classification as a well capitalized
institution.
September 30, 2015
Total Capital to Risk-Weighted Assets
Tier 1 (Leverage) Capital to Net Average Assets
Tier 1 Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital to Risk-Weighted
Assets
September 30, 2014
Minimum Requirements
Actual
For Capital
Adequacy Purposes
To be “Well Capitalized”
Under Prompt Corrective
Action Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
$1,677,809
1,606,251
1,606,251
22.92% $ 585,520
502,584
12.78%
439,140
21.95%
8.00% $ 731,900
628,230
4.00%
585,520
6.00%
10.00%
5.00%
8.00%
1,606,237
21.95%
329,355
4.50%
475,735
6.50%
Total Capital to Risk-Weighted Assets
$1,665,477
25.25% $ 527,702
8.00% $ 659,627
10.00%
Core Capital to Adjusted Tangible Assets
1,584,115
13.47%
470,513
4.00%
Tier 1 Capital to Risk-Weighted Assets
1,584,115
24.02%
N/A
N/A
588,141
395,776
5.00%
6.00%
93
The following table reconciles the Association’s total capital under GAAP to reported regulatory capital amounts as of
September 30, 2015 and 2014.
Total capital as reported under GAAP
Goodwill and intangible software (1)
AOCI related to pension obligation
Other (1)
Total common equity tier 1 capital (1)
Includable minority interest (1)
Total tier 1 and core capital (1)
Includable minority interest (1)
Allowable allowance for loan losses
Total capital (1)
2015
$ 1,597,791
(4,619)
14,991
(1,926)
1,606,237
14
2014
$ 1,579,573
(6,250)
9,699
1,093
N/A
—
1,606,251
1,584,115
4
71,554
—
81,362
$ 1,677,809
$ 1,665,477
(1) As of September 30, 2014, capital was calculated using the regulatory capital methodology applicable to the
Association prior to January 1, 2015. As of September 30, 2015, capital was calculated using the regulatory capital
methodology applicable to the Association beginning January 1, 2015. Please refer to Part I, Item 1, Business, Federal
Banking Regulation, Capital Requirements for a detailed discussion of the new Basel III rules.
The Association paid a dividend of $66,000 and $85,000 to the Company during the years ended September 30, 2015 and
September 30, 2014, respectively. Additionally, the Company has received the non-objection of its regulators for the
Association to pay a special dividend of $150,000 to the Company. This amount is equal to the voluntary contribution of capital
that the Company made to the Association in October 2010. On November 6, 2015, the Association paid $50,000 of this special
dividend to the Company. It is expected that payment of the remaining $100,000 special dividend will be made later in the
fiscal year ended September 30, 2016.
On August 5, 2015, as dictated under interim final rules issued by the FRS on August 12, 2011, a majority of Third
Federal Savings, MHC's members eligible to vote, approved Third Federal Savings, MHC waiving its right to receive dividends
on the Company's stock that Third Federal Savings, MHC owns, up to $0.40 per share during the four quarters ending June 30,
2016. Unless the FRS amends its interim rule, a member vote will be required for Third Federal Savings, MHC to waive its
right to receive dividends beyond June 30, 2016.
4. INVESTMENT SECURITIES
Investments available for sale are summarized as follows:
U.S. government and agency obligations
REMICs
Fannie Mae certificates
U.S. government and agency obligations
REMICs
Fannie Mae certificates
$
Amortized
Cost
2,000
570,194
9,897
$ 582,091
Amortized
Cost
2,000
557,895
$
10,654
September 30, 2015
Gross
Unrealized
Gains
Losses
Fair
Value
$
2
3,135
703
$ 3,840
$ — $
(878)
—
(878)
2,002
572,451
10,600
$ 585,053
$
September 30, 2014
Gross
Unrealized
Gains
Losses
$
23
1,896
749
Fair
Value
2,023
555,607
11,238
$ 568,868
$ — $
(4,184)
(165)
$ (4,349)
$ 570,549
$ 2,668
94
Over the last three fiscal years the only sales from the investment securities available for sale portfolio occurred in the
year ended September 30, 2014, which resulted in $38,725 of proceeds and a net realized gain of $276..
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 September 30, 2015 and 2014,
were as follows:
Available for sale—
REMICs
Fannie Mae certificates
Total
Available for sale—
REMICs
Fannie Mae certificates
Total
September 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
$ 86,754
—
$ 86,754
$
$
299
$ 80,639
—
—
299
$ 80,639
$
$
579
$ 167,393
—
—
579
$ 167,393
$
$
878
—
878
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
$ 182,151
—
$ 182,151
$
$
947
$162,321
—
4,826
947
$167,147
$
$
3,237
$ 344,472
165
4,826
3,402
$ 349,298
$
$
4,184
165
4,349
The unrealized losses on investment securities were attributable to market 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 or 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.
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
September 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 $2,002, 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.
95
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans held for investment consist of the following:
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Real estate loans
Other consumer loans
Deferred loan fees—net
Loans-in-process (“LIP”)
Allowance for loan losses
Loans held for investment, net
September 30,
2015
2014
$ 9,462,939
135,746
1,625,239
55,421
11,279,345
3,468
$ 8,828,839
154,196
1,696,929
57,104
10,737,068
4,721
10,112
(33,788)
(71,554)
$ 11,187,583
(1,155)
(28,585)
(81,362)
$ 10,630,687
At September 30, 2015 and 2014, respectively, $116 and $4,962 of long-term, fixed-rate loans were classified as
mortgage loans held for sale.
A large concentration of the Company’s lending is in Ohio and Florida. As of September 30, 2015 and 2014, the
percentage of total Residential Core and Home Today loans held in Ohio were 63% and 68%, respectively, and the percentage
held in Florida was 17% as of both dates. As of September 30, 2015 and 2014, equity loans and lines of credit were
concentrated in the states of Ohio (39% and 40%), Florida (26% and 28%) and California (13% as of both dates). The
economic conditions and market for real estate in Ohio and Florida have impacted the ability of borrowers in those areas to
repay their loans.
Home Today is an affordable housing program targeted to benefit low- and moderate-income home buyers. 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.
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 have completed financial management education and counseling
and must have been referred to the Association by a sponsoring organization with which the Association 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. As of September 30, 2015 and 2014, the principal balance of
Home Today loans originated prior to March 27, 2009 was $132,762 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 LTV ratio greater than 100%, or pay option adjustable-rate mortgages.
The Association currently offers home equity lines of credit that include monthly principal and interest payments
throughout the entire term. Prior to March 11, 2009, the Association offered residential mortgage loan products where the
borrower pays only interest for a portion of the loan term. Between June 28, 2010 and March 20, 2012, due to the deterioration
in overall housing conditions including concerns for loans and lines in a second lien position, home equity lines of credit and
home equity loans were not offered by the Association. The recorded investment in interest only loans is comprised of equity
lines of credit with balances of $1,465,385 and $1,542,020 for the years ending September 30, 2015 and 2014, respectively.
Home equity lines of credit prior to February 2013 require interest only payments for a maximum of 10 years and convert
to fully amortizing for the remaining term, up to 20 years, at which time they are included in the home equity loan balance.
Residential loans were interest only for a maximum of 5 years and converted to fully amortizing for the remaining term of up to
30 years.
96
An age analysis of the recorded investment in loan receivables that are past due at September 30, 2015 and 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
September 30, 2015
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
Other consumer loans
Total
September 30, 2014
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
Other consumer loans
Total
$
8,242
$
4,323
$
23,306
$
35,871
$ 9,430,189
$ 9,466,060
5,866
5,012
—
19,120
—
2,507
1,162
—
7,992
—
9,068
5,575
427
17,441
11,749
427
116,535
133,976
1,622,683
1,634,432
20,774
21,201
38,376
65,488
11,190,181
11,255,669
—
—
3,468
3,468
$
19,120
$
7,992
$
38,376
$
65,488
$11,193,649
$11,259,137
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total Past
Due
Current
Total
$
9,067
$
3,899
$
37,451
$
50,417
$ 8,772,180
$ 8,822,597
7,887
6,044
200
23,198
—
2,553
1,785
—
8,237
—
15,105
9,037
—
25,545
16,866
200
126,417
151,962
1,687,349
1,704,215
28,354
28,554
61,593
93,028
10,614,300
10,707,328
—
—
4,721
4,721
$
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.
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total non-accrual loans
September 30,
2015
2014
$
62,293
$
79,388
22,556
21,514
427
$ 106,790
29,960
26,189
—
$ 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. Prior to June 30, 2014, loans in Chapter 7 bankruptcy status where all borrowers filed were only placed in
non-accrual status upon discharge. At September 30, 2015 and September 30, 2014, respectively, the recorded investment in
non-accrual loans includes $68,415 and $73,946 which are performing according to the terms of their agreement, of which
$45,575 and $49,019 are loans in Chapter 7 bankruptcy status, primarily where all borrowers have filed, and have not
reaffirmed or been dismissed.
97
Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest
income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income
and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual
status are applied to the oldest scheduled, unpaid payment first. Cash payments on loans with a partial charge-off are applied
fully to principal, then to recovery of the charged off amount prior to interest income being recognized. A non-accrual loan is
generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in
nonaccrual 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 September 30, 2015 and 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.
September 30,
2015
2014
Individually
Collectively
Total
Individually
Collectively
Total
Real estate loans:
Residential Core
$ 119,588
$
9,346,472
$ 9,466,060
$ 131,719
$ 8,690,878
$ 8,822,597
Residential Home Today
Home equity loans and lines of
credit
Construction
58,046
34,112
426
75,930
133,976
67,177
84,785
151,962
1,600,320
1,634,432
34,490
1,669,725
1,704,215
20,775
21,201
—
28,554
28,554
Total real estate loans
212,172
11,043,497
11,255,669
233,386
10,473,942
10,707,328
Other consumer loans
—
3,468
3,468
—
4,721
4,721
Total
$ 212,172
$ 11,046,965
$ 11,259,137
$ 233,386
$10,478,663
$10,712,049
An analysis of the allowance for loan losses at September 30, 2015 and 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 not individually evaluated.
September 30,
2015
2014
Individually
Collectively
Total
Individually
Collectively
Total
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
$
$
9,354
4,166
772
26
14,318
$
$
13,242
5,831
38,154
9
57,236
$
$
22,596
9,997
38,926
35
71,554
$
$
8,889
6,366
532
—
15,787
$
$
22,191
10,058
33,299
27
65,575
$
$
31,080
16,424
33,831
27
81,362
At September 30, 2015 and 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 September 30, 2015 and 2014, respectively, allowances on individually reviewed loans
evaluated for impairment based on the present value of cash flows, such as performing TDRs were $14,117 and $15,787; and
98
allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $201 and
$0.
Residential Core mortgage loans represent the largest piece of the residential real estate portfolio. The Company believes
the allowance aligns with the overall credit risk based on the nature, composition, collateral, products, lien position and
performance of the portfolio. The portfolio does not include loan types or structures that have recently experienced severe
performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable rate mortgages).
As described earlier in this note, Home Today loans have greater credit risk than traditional residential real estate
mortgage loans. At September 30, 2015 and 2014, respectively, approximately 34% 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 the Arizona Department of Insurance seized in 2011 and indicated that all claims payments would be reduced by
50%. In March 2013, PMIC notified the Association that all payments would be paid at 55% of the claim with the remainder
deferred. In March 2014, PMIC notified the Association that the cash percentage of the partial claim payment plan would
increase further to 67% of the claim. 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 all of the Association’s affected
valuation allowances and charge-offs, as well as the estimated loss severity factors that are used for loans evaluated
collectively. The amount of loans in our owned portfolio covered by mortgage insurance provided by PMIC as of
September 30, 2015 and 2014, respectively, was $132,857 and $186,233 of which $122,025 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 September 30, 2015 and 2014, respectively, was $56,898 and $74,254 of which $56,295 and $73,616 was current. As of
September 30, 2015, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the
requirements to qualify as "investment grade"; however, MGIC continues to make claims payments in accordance with its
contractual obligations and the Association has not increased its estimated loss given default factors related to MGIC's claim
paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which we assessed as
being non-investment grade.
Home equity lines of credit represent a significant portion of the residential real estate portfolio. The state of the economy
and low housing prices in certain segments of the markets that we serve, 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. When the Association began to offer new home equity lines of credit again, the
product was designed with prudent property and credit performance conditions to reduce future risk. 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%.
Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the
event of non-payment.
99
The recorded investment and the unpaid principal balance of impaired loans, including those whose terms have been
restructured in TDRs, as of September 30, 2015 and 2014 are summarized as follows. Balances of recorded investments are net
of deferred fees.
With no related IVA recorded:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total
With an IVA recorded:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total
Total impaired loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total
September 30,
2015
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
2014
Unpaid
Principal
Balance
Related
Allowance
$ 62,177
$ 80,622
$
— $ 72,840
$ 94,419
$
23,038
23,046
—
50,256
32,312
—
$ 108,261
$ 163,190
$ 57,411
$ 58,224
35,008
11,066
426
35,479
11,034
572
$
$
—
—
—
28,045
26,618
—
57,854
38,046
—
— $ 127,503
$ 190,319
9,354
$ 58,879
$ 59,842
4,166
772
26
39,132
7,872
—
39,749
7,909
—
$
$
—
—
—
—
—
8,889
6,366
532
—
$ 103,911
$ 105,309
$ 14,318
$ 105,883
$ 107,500
$ 15,787
$ 119,588
$ 138,846
$
9,354
$ 131,719
$ 154,261
$
58,046
34,112
426
85,735
43,346
572
4,166
772
26
67,177
34,490
—
97,603
45,955
—
8,889
6,366
532
—
$ 212,172
$ 268,499
$ 14,318
$ 233,386
$ 297,819
$ 15,787
At September 30, 2015 and 2014, respectively, the recorded investment in impaired loans includes $178,259 and
$186,428 of loans restructured in TDRs of which $14,971 and $20,851 are 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 Company 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;
• For all classes of loans, it becomes evident that a loss is probable.
100
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)
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
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
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
All
All
All
(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 fiscal year ending September 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.
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 years ended September 30,
2015, 2014 and 2013.
101
The average recorded investment in impaired loans and the amount of interest income recognized during the time within
the period that the loans were impaired are summarized below.
With no related IVA recorded:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total
With an IVA recorded:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total
Total impaired loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total
For the Years Ended September 30,
2015
2014
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$ 67,509
$
1,464
$ 79,440
$
1,125
$ 91,134
$
1,169
25,542
24,832
—
$ 117,883
$ 58,145
37,070
9,469
213
$ 104,897
$ 125,654
62,612
34,301
213
$
$
$
$
271
299
—
30,604
27,056
211
2,034
$ 137,311
2,570
$ 60,971
1,877
271
10
42,517
7,383
33
4,728
$ 110,904
4,034
$ 140,411
2,148
570
10
73,121
34,439
244
$
$
$
$
261
357
6
34,871
25,946
696
1,749
$ 152,647
2,792
$ 65,978
2,110
52,340
245
—
9,756
237
5,147
$ 128,311
3,917
$ 157,112
2,371
602
6
87,211
35,702
933
$
$
$
$
234
467
18
1,888
3,198
2,487
266
10
5,961
4,367
2,721
733
28
$ 222,780
$
6,762
$ 248,215
$
6,896
$ 280,958
$
7,849
Interest on loans in non-accrual status is recognized on a cash-basis. The amount of interest income on impaired loans
recognized using a cash-basis method is $1,347, $1,213 and $1,463 for the years ended September 30, 2015, 2014 and 2013,
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 as of September 30, 2015 and September 30, 2014 is shown in the tables below.
September 30, 2015
Reduction
in Interest
Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings
Bankruptcy
Total
Residential Core
$
15,743
$
934
$
8,252
$
22,211
$
22,594
$
32,215
$ 101,949
Residential Home Today
7,734
12
5,643
12,302
21,928
6,272
53,891
Home equity loans and lines of
credit
96
3,253
509
4,214
909
13,438
22,419
Total
$
23,573
$
4,199
$
14,404
$
38,727
$
45,431
$
51,925
$ 178,259
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
TDRs may be restructured more than once. Among other requirements, a subsequent restructuring may be available for a
borrower upon the expiration of temporary restructured terms if the borrower cannot return to regular loan payments. If the
102
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 years ended September 30, 2015, 2014 and 2013 (set forth in the tables below), the
pre-restructured outstanding recorded investment was not materially different from the post-restructured outstanding recorded
investment.
The following tables set forth the recorded investment in TDRs restructured during the years presented, according to the
types of concessions granted.
For the Year Ended September 30, 2015
Reduction
in Interest
Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings Bankruptcy
Total
Residential Core
Residential Home Today
Home equity loans and lines of credit
$ 2,490
$
— $
(Dollars in thousands)
4,464
$
$
745
80
—
—
1,800
758
88
301
3,079
4,437
$
6,720
$ 18,856
5,306
290
2,096
1,634
8,541
6,891
Total
$ 2,570
$ 1,800
$
1,591
$
7,844
$
10,033
$ 10,450
$ 34,288
For the Year Ended September 30, 2014
Reduction
in Interest
Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings
Bankruptcy
Total
Residential Core
Residential Home Today
Home equity loans and lines of credit
$ 3,330
$
— $
(Dollars in thousands)
5,316
$
$
890
340
—
—
1,442
542
211
443
1,013
6,716
$
5,084
$ 21,336
4,016
401
761
2,282
6,102
5,349
Total
$ 3,670
$
1,442
$
1,643
$
6,772
$
11,133
$
8,127
$ 32,787
For the Year Ended September 30, 2013
Reduction
in Interest
Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings Bankruptcy
Total
$
(Dollars in thousands)
5,108
693
67
5,868
— $
—
—
— $
$
4,957
8,433
117
13,507
$
8,156
1,517
3,673
$ 13,346
$ 21,691
11,052
3,999
$ 36,742
Residential Core
Residential Home Today
Home equity loans and lines of credit
Total
$ 3,470
409
13
$ 3,892
$
$
— $
—
129
129
$
103
The following table provides 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.
TDRs That Subsequently Defaulted
Residential Core
Residential Home Today
Home equity loans and lines of credit
Total
For the Year Ended
September 30, 2015
For the Year Ended
September 30, 2014
For the Year Ended
September 30, 2013
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(Dollars in thousands)
(Dollars in thousands)
(Dollars in thousands)
$
34
26
44
3,296
1,179
689
$
35
46
53
104
$
5,164
134
$
3,384
2,073
1,078
6,535
$
61
70
68
6,709
3,368
1,277
199
$ 11,354
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.
September 30, 2015
Real Estate Loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Pass
Special
Mention
Substandard
Loss
Total
$ 9,399,409
$
— $
66,651
$
— $ 9,466,060
110,105
—
1,604,226
4,279
20,774
—
23,871
25,927
427
—
—
—
133,976
1,634,432
21,201
Total real estate loans
$ 11,134,514
$ 4,279
$
116,876
$
— $ 11,255,669
September 30, 2014
Real Estate Loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
Pass
Special
Mention
Substandard
Loss
Total
$ 8,739,183
$
— $
83,414
$
— $ 8,822,597
120,827
—
1,667,939
6,084
28,554
—
31,135
30,192
—
—
—
—
151,962
1,704,215
28,554
$ 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
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 September 30, 2015 and 2014, respectively, the recorded investment of impaired loans includes $103,390 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 September 30, 2015 and 2014, respectively, there are $8,094 and $14,814 of
loans classified substandard and $4,279 and $6,084 of loans classified special mention that are not included in the recorded
investment of impaired loans; rather, they are included in loans collectively evaluated for impairment.
Consumer loans are internally assigned a grade of nonperforming when they are considered 90 days or more past due. At
September 30, 2015 and September 30, 2014, no consumer loans were graded as nonperforming.
104
During the years ended September 30, 2015 and 2014, respectively, $415 and $1,300 in recoveries were recorded
representing payments received as a result of PMIC increasing the cash percentage of the partial claim payment plan as
discussed earlier in this note. During the quarter 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:
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
For the Year Ended September 30, 2015
Beginning
Balance
Provisions
Charge-offs
Recoveries
Ending
Balance
$
31,080
$
16,424
33,831
27
$
81,362
$
(6,987) $
(4,508)
8,661
(166)
(3,000) $
(6,866) $
(3,452)
(11,034)
—
(21,352) $
5,369
$
22,596
1,533
7,468
174
9,997
38,926
35
14,544
$
71,554
For the Year Ended September 30, 2014
Beginning
Balance
Provisions
Charge-offs
Recoveries
Ending
Balance
$
35,427
$
24,112
32,818
180
$
92,537
$
9,131
(1,975)
12,038
(194)
19,000
$
$
(16,220) $
(7,622)
(15,943)
(192)
(39,977) $
2,742
$
31,080
1,909
4,918
233
16,424
33,831
27
9,802
$
81,362
For the Year Ended September 30, 2013
Beginning
Balance
Provisions
Charge-offs
Recoveries
Ending
Balance
$
31,618
$
18,467
$
22,588
45,508
750
$ 100,464
$
13,051
5,889
(407)
37,000
$
(16,719) $
(12,302)
(23,543)
(294)
(52,858) $
2,061
$
35,427
775
4,964
131
7,931
$
24,112
32,818
180
92,537
6. MORTGAGE LOAN SERVICING RIGHTS
The Company sells certain types of loans through whole loan sales and through securitizations. In each case, the
Company retains a servicing interest in the loans or securitized loans. Certain assumptions and estimates are used to determine
the fair value allocated to these retained interests at the date of transfer and at subsequent measurement dates. These
assumptions and estimates include loan repayment rates and discount rates.
Changes in interest rates can affect the average life of loans and mortgage-backed securities and the related servicing
rights. A reduction in interest rates normally results in increased prepayments, as borrowers refinance their debt in order to
reduce their borrowing costs. This creates reinvestment risk, which is the risk that the Company may not be able to reinvest the
proceeds of loan and securities prepayments at rates that are comparable to the rates earned on the loans or securities prior to
receipt of the repayment.
105
During 2015, 2014 and 2013, $160,052, $76,039 and $349,192, respectively, of mortgage loans were securitized and/or
sold including accrued interest thereon. In these transactions, the Company retained residual interests in the form of mortgage
loan servicing rights. Primary economic assumptions used to measure the value of the Company’s retained interests at the date
of sale resulting from the completed transactions were as follows (per annum):
Primary prepayment speed assumptions (weighted average annual rate)
Weighted average life (years)
Amortized cost to service loans (weighted average)
Weighted average discount rate
2015
8.4%
22.7
0.12%
12%
2014
10.5%
21.0
0.12%
12%
Key economic assumptions and the sensitivity of the current fair value of mortgage loan servicing rights to immediate
10% and 20% adverse changes in those assumptions are as presented in the following table. The three key economic
assumptions that impact the valuation of the mortgage loan servicing rights are: (1) the prepayment speed, or how long the
mortgage servicing right will be outstanding; (2) the estimate of servicing costs that will be incurred in fulfilling the mortgage
servicing right responsibilities; and (3) the discount factor applied to future net cash flows to convert them to present value.
The Company established these factors based on independent analysis of our portfolio and reviews these assumptions
periodically to ensure that they reasonably reflect current market conditions and our loan portfolio experience. Additionally, to
confirm the appropriateness of the Company's mortgage loan servicing rights valuation, an independent third party is engaged
at least annually, and more frequently if warranted by market volatility, to value our mortgage loan servicing rights portfolio.
The results of the third party valuation are compared and reconciled to the Company's valuation, thereby validating the
Company's approach and assumptions.
Fair value of mortgage loan servicing rights
Prepayment speed assumptions (weighted average annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Estimated prospective annual cost to service loans (weighted average)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Discount rate
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
September 30,
2015
$
$
$
$
$
$
$
21,084
19.4%
(824)
(1,572)
0.12%
(2,032)
(4,064)
12.0%
(727)
(1,400)
These sensitivities are hypothetical and should be used with caution. As indicated in the table above, changes in fair value
based on a 10% variation in assumptions generally cannot be extrapolated because the relationship in the change in assumption
to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result in lower prepayments), which could magnify or counteract
the sensitivities.
Servicing rights are evaluated periodically for impairment based on the fair value of those rights. Nineteen risk tranches
are used in evaluating servicing rights for impairment, segregated primarily by interest rate stratum within original term to
maturity categories with additional strata for less uniform account types.
106
Activity in mortgage servicing rights is summarized as follows:
Balance—beginning of year
Additions from loan securitizations/sales
Amortization
Net change in valuation allowance
Balance—end of year
Fair value of capitalized amounts
Year Ended September 30,
2015
$ 11,669
2014
$ 14,074
2013
$ 19,613
907
(2,588)
—
396
(2,801)
—
1,089
(6,628)
—
$
9,988
$ 11,669
$ 14,074
$ 21,084
$ 27,417
$ 28,784
The Company receives annual servicing fees ranging from 0.02% to 0.98% of the outstanding loan balances. Servicing
income, net of amortization of capitalized servicing rights, included in Non-interest income, amounted to $5,444 in 2015,
$6,759 in 2014 and $5,435 in 2013. The unpaid principal balance of mortgage loans serviced for others was approximately
$2,181,436, $2,511,864 and $2,971,909 at September 30, 2015, 2014 and 2013, respectively. The ratio of capitalized servicing
rights to the unpaid principal balance of mortgage loans serviced for others was 0.46%, 0.46%, and 0.47% at September 30,
2015, 2014 and 2013, respectively.
7. PREMISES, EQUIPMENT AND SOFTWARE, NET
Premises, equipment and software at cost are summarized as follows:
Land
Office buildings
Furniture, fixtures and equipment
Software
Leasehold improvements
Less accumulated depreciation and amortization
Total
September 30,
2015
$ 11,050
2014
$ 11,050
71,860
30,990
16,010
11,939
69,381
35,759
15,348
11,864
141,849
(84,662)
$ 57,187
143,402
(86,959)
$ 56,443
During the years ended September 30, 2015, 2014 and 2013, depreciation and amortization expense on premises,
equipment, and software was $4,798, $4,621 and $5,392, respectively.
The Company leases certain of its branches under renewable operating lease agreements. Future minimum payments
under non-cancelable operating leases with initial or remaining terms of one year or more consisted of the following at
September 30, 2015:
Years Ended September 30,
2016
2017
2018
2019
2020
Thereafter
$
5,058
4,922
4,384
3,344
2,298
5,058
During the years ended September 30, 2015, 2014 and 2013, rental expense was $6,421, $6,363 and $6,187, respectively,
and appears in office property, equipment, and software in the accompanying statements.
107
The Company, as lessor, leases certain commercial office buildings. The Company anticipates receiving future minimum
payments of the following as of September 30, 2015:
Years Ended September 30,
2016
2017
2018
2019
2020
Thereafter
$
1,551
1,368
1,294
964
303
303
During each of the years ended September 30, 2015, 2014, and 2013, rental income was $1,414, $1,290 and $1,254
respectively, and appears in other non-interest income in the accompanying statements.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
Investment securities
Loans
Total
9. DEPOSITS
Deposit account balances are summarized by interest rate as follows:
September 30,
2015
2014
$
1,320
31,170
$ 32,490
$
1,285
30,667
$ 31,952
Negotiable order of withdrawal accounts
Savings accounts
Subtotal
Certificates of deposit
Subtotal
Accrued interest
Total deposits
Stated
Interest
Rate
0.00–0.30%
0.00–0.55
0.00–0.99
1.00–1.99
2.00–2.99
3.00–3.99
4.00 and above
September 30,
2015
2014
Amount
$ 994,447
1,610,944
2,605,391
1,641,838
3,293,964
552,902
158,504
31,410
5,678,618
8,284,009
1,849
$ 8,285,858
Percent
Amount
12.0% $ 990,326
1,661,920
19.4
2,652,246
31.4
2,075,835
19.8
2,674,079
39.8
665,508
6.7
517,449
1.9
67,345
0.4
6,000,216
68.6
8,652,462
100.0
1,416
—
100.0% $8,653,878
Percent
11.4%
19.2
30.6
24.0
30.9
7.7
6.0
0.8
69.4
100.0
—
100.0%
At September 30, 2015 and 2014, the weighted average interest rate was 0.18% and 0.19% on savings accounts,
respectively; 0.14% and 0.14% on negotiable order of withdrawal accounts, respectively; 1.50% and 1.58% on certificates of
deposit, respectively; and 1.08% and 1.15% on total deposits, respectively.
The aggregate amount of certificates of deposit in denominations of $100 or more totaled approximately $2,530,031 and
$2,542,222 at September 30, 2015 and 2014, respectively. On July 21, 2010, the DFA was signed into law, which, in part,
permanently increased the maximum amount of deposit insurance to $250 per depositor, retroactive to January 1, 2008.
Brokered certificates of deposit, which are used as a cost effective funding alternative, totaled $520,110 and $356,685 at
September 30, 2015 and September 30, 2014, respectively. The FDIC places restrictions on banks with regard to issuing
108
brokered deposits based on the bank's capital classification. A well-capitalized institution may accept brokered deposits
without FDIC restrictions. An adequately capitalized institution must obtain a waiver from the FDIC in order to accept
brokered deposits, while an undercapitalized institution is prohibited by the FDIC from accepting brokered deposits.
The scheduled maturity of certificates of deposit is as follows:
12 months or less
13 to 24 months
25 to 36 months
37 to 48 months
49 to 60 months
Over 60 months
Total
Interest expense on deposits is summarized as follows:
Certificates of deposit
Negotiable order of withdrawal accounts
Savings accounts
Total
10. BORROWED FUNDS
September 30, 2015
Amount
$ 1,557,355
Percent
27.4%
1,661,629
1,135,064
751,537
479,559
93,474
29.3%
20.0%
13.2%
8.5%
1.6%
$ 5,678,618
100.0%
Year Ended September 30,
2015
2014
$
89,110
$
88,316
1,371
3,045
1,442
3,420
$
93,526
$
93,178
Federal Home Loan Bank borrowings at September 30, 2015 are summarized in the table below:
Maturing in:
2016
2017
2018
2019
2020
thereafter
Total FHLB Advances
Accrued interest
Total
Amount
Weighted
Average
Rate
0.24%
1.16%
1.53%
1.79%
1.81%
1.71%
1.14%
$
779,104
200,000
275,000
415,000
390,294
107,373
2,166,771
1,856
$ 2,168,627
At September 30, 2015, the Association had $755,000 in short-term advances with a weighted average interest rate of
0.18%. During fiscal year 2015, the average balance of short-term advances was $1,242,380 with a weighted average rate of
0.15%. At September 30, 2014, the Association had $311,000 in short-term advances with a weighted average interest rate of
0.11%. During fiscal year 2014, the average balance of short-term advances was $344,643 with a weighted average rate of
0.10%. The interest expense generated on the short-term borrowings was $1,811 and $352 for fiscal years 2015 and 2014,
respectively. The Association implemented a strategy in the current fiscal year to increase net income, which involved
borrowing, on an overnight basis, approximately 1,000,000 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, were deposited at the Federal Reserve. The strategy was not utilized at September 30, 2015, however, dependent upon
market rates, remains an option in the future.
The Association’s maximum borrowing capacity at the FHLB, under the most restrictive measure, was an additional
$584,519 at September 30, 2015. Pursuant to collateral agreements with FHLB of Cincinnati, advances are secured by a
109
blanket lien on qualifying first mortgage loans. In addition to the existing available capacity, the Association’s capacity limit for
additional borrowings from the FHLB of Cincinnati was $3,644,043 at September 30, 2015, 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 $72,881. The terms of the advances include
various restrictive covenants including limitations on the acquisition of additional debt in excess of specified levels. As of
September 30, 2015, the Association was in compliance with all such covenants. The Association’s borrowing capacity at the
FRB-Cleveland Discount Window was $116,776 at September 30, 2015.
11. OTHER COMPREHENSIVE INCOME (LOSS)
The change in accumulated other comprehensive income (loss) by component is as follows:
Fiscal year 2013 activity
Balance at September 30, 2012
Other comprehensive income (loss) before reclassifications, net of tax benefit
of $1,916
Amounts reclassified from accumulated other comprehensive income (loss),
net of tax expense of $468
Other comprehensive income (loss)
Balance at September 30, 2013
Fiscal year 2014 activity
Other comprehensive income (loss) before reclassifications, net of tax benefit
of $1,504
Amounts reclassified from accumulated other comprehensive income (loss),
net of tax expense of $326
Other comprehensive income (loss)
Balance at September 30, 2014
Fiscal year 2015 activity
Unrealized gains
(losses) on
securities
available for sale
Defined
Benefit Plan
Total
$
$
$
2,610
$
(8,526) $
(5,916)
(4,746)
1,188
(3,558)
—
(4,746)
(2,136) $
870
2,058
(6,468) $
870
(2,688)
(8,604)
1,223
(4,017)
(2,794)
(179)
1,044
(1,092) $
785
(3,232)
(9,700) $
606
(2,188)
(10,792)
Other comprehensive income (loss) before reclassifications, net of tax benefit
of $1,490
Amounts reclassified from accumulated other comprehensive income (loss),
net of tax expense of $265
Other comprehensive income (loss)
Balance at September 30, 2015
3,018
(5,785)
(2,767)
—
3,018
$
1,926
$
494
(5,291)
(14,991) $
494
(2,273)
(13,065)
110
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:
Details about Accumulated Other Comprehensive Income
Components
Securities available for sale:
Net realized gain on securities available for sale
Income tax
Net of income tax
Amortization of pension plan:
Actuarial loss
Realized loss due to settlement
Income tax
Net of income tax
Total reclassifications for the period
For the Years Ended September 30,
2014
2015
2013
Line Item in the
Statement of Income
$
$
$
$
— $
—
— $
(276) $
97
(179) $
$
759
—
(265)
494
296
912
(423)
785
494
$
606
$
— Other
— Income tax expense
—
556
782
(468)
870
870
(a)
(a)
Income tax expense
(a) These items are included in the computation of net period pension cost. See Note 13. Employee Benefit Plans for additional
disclosure.
12. INCOME TAXES
The components of the income tax provision are as follows:
Current tax expense:
Federal
State
Deferred tax expense (benefit):
Federal
State
Income tax provision
Reconciliation from tax at the statutory rate to the income tax provision is as follows:
Tax at statutory rate
State tax, net
Non-taxable income from bank owned life insurance contracts
Other, net
Income tax provision
Year Ended September 30,
2015
2014
2013
$ 27,056
$ 22,983
$ 19,751
564
324
165
9,605
(421)
$ 36,804
9,659
—
6,486
—
$ 32,966
$ 26,402
Year Ended September 30,
2015
35.0%
0.1
(2.4)
0.9
33.6%
2014
35.0%
0.2
(2.3)
0.4
33.3%
2013
35.0%
0.1
(2.7)
(0.3)
32.1%
111
Temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that gave
rise to significant portions of net deferred taxes relate to the following:
Deferred tax assets:
Loan loss reserve
Deferred compensation
Pension
Property, equipment and software basis difference
Other
Total deferred tax assets
Deferred tax liabilities:
FHLB stock basis difference
Mortgage servicing rights
Goodwill
Deferred loan costs, net of fees
Other
Total deferred tax liabilities
Net deferred tax asset
September 30,
2015
2014
$ 33,767
$ 39,745
12,536
12,843
4,931
2,466
3,158
56,858
7,808
1,194
3,431
8,095
2,690
2,895
2,460
2,453
60,396
7,696
1,110
3,406
4,470
2,114
23,218
18,796
$ 33,640
$ 41,600
In the accompanying statement of condition the net deferred tax asset is included in Other assets.
A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. There was no valuation allowance required at
September 30, 2015 or 2014.
Retained earnings at September 30, 2015 and 2014 included approximately $104,861 for which no provision for federal or
state income tax has been made. This amount represents allocations of income during years prior to 1988 to bad debt deductions
for tax purposes only. These qualifying and nonqualifying base year reserves and supplemental reserves will be recaptured into
income in the event of certain distributions and redemptions. Such recapture would create income for tax purposes only, which
would be subject to the then current corporate income tax rate. However, recapture would not occur upon the reorganization,
merger, or acquisition of the Association, nor if the Association is merged or liquidated tax-free into a bank or undergoes a
charter change. If the Association fails to qualify as a bank or merges into a nonbank entity, these reserves will be recaptured into
income.
The provisions of Accounting for Uncertainty in Income Taxes, codified within FASB ASC 740 “Income Taxes,” prescribe
a recognition threshold and measurement attribute for the financial statement recognition and measurement for a tax position
taken or expected to be taken in a tax return. FASB ASC 740 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. Tax positions must meet a more-likely-than-not recognition
threshold in order for the related tax benefit to be recognized or continue to be recognized. As of September 30, 2015, 2014 and
2013, the Company had no unrecognized tax benefits. The Company does not anticipate the total amount of unrecognized tax
benefits to significantly change within the next 12 months.
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 recognized interest expense (benefit) of $0,
$1 and $(186), net of tax, during the years ended September 30, 2015, 2014 and 2013, respectively. Total interest accrued was
$0 at September 30, 2015 and 2014.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and city
jurisdictions. With few exceptions, the Company is no longer subject to income tax examinations in its major jurisdictions for
tax years prior to 2012.
112
13. EMPLOYEE BENEFIT PLANS
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 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. In fiscal year 2014, a
settlement adjustment was recognized as a result of lump sum payments exceeding the sum of interest and service costs for the
year.
The following table sets forth the change in projected benefit obligation for the defined benefit plan:
Projected benefit obligation at beginning of year
Interest cost
Actuarial loss and other
Settlement
Benefits paid
Projected benefit obligation at end of year
September 30,
2015
$ 73,482
2014
$ 68,044
3,130
3,926
—
(3,803)
$ 76,735
3,204
7,527
(4,491)
(802)
$ 73,482
The following table reconciles the beginning and ending balances of the fair value of Plan assets and presents the funded
status of the Plan recognized in the statement of condition at the September 30 measurement dates:
Fair value of plan assets at beginning of the year
Actual return on plan assets
Employer contributions
Benefits paid
Settlement
Fair value of plan assets at end of year
Funded status of the plan—asset (liability)
September 30,
2015
$ 63,212
(560)
2,000
(3,803)
—
$ 60,849
2014
$ 60,937
5,568
2,000
(802)
(4,491)
$ 63,212
$ (15,886) $ (10,270)
The components of net periodic benefit cost recognized in the statement of income are as follows:
Interest Cost
Expected return on plan assets
Amortization of net loss and other
Recognized net loss due to settlement
Net periodic benefit (income) cost
Year Ended September 30,
2015
3,130
(4,414)
759
—
(525) $
2014
3,204
(4,221)
296
912
191
$
2013
2,938
(4,116)
556
782
160
$
There were no required minimum employer contributions during the twelve months ended September 30, 2015. The
Company made a voluntary contribution of $2,000 during the fiscal year.
Plan assets carried at fair value are classified into one of the three levels of the fair value hierarchy based on an
assessment of inputs used in the valuation techniques. See Note. 16 Fair Value for additional information about fair value
measurements, the fair value hierarchy, and a description of the inputs used within each level of the hierarchy.
113
Plan assets consist of investments in pooled separate accounts that invest in mutual funds, equity securities, debt
securities, or real estate investments. Pooled separate accounts are valued at net asset value of shares held by the Plan at the
reporting date. Net asset value is categorized as a level 2 fair value measurement except when the investment so measured
could not have been redeemed at net asset value as of the measurement date. At September 30, 2015 and 2014, there were no
such restrictions on Plan assets. Unless otherwise restricted, pooled separate accounts can be redeemed on a daily basis.
The following tables present the fair value of Plan assets by asset category at the measurement date.
Recurring Fair Value Measurements at Reporting Date Using
September 30,
2015
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Asset Category:
U.S. large cap equity portfolios
$
18,339
$
— $
18,339
$
U.S. small/mid cap equity portfolios
International equity portfolios
Debt securities(1)
Balanced/asset allocation portfolios
Real estate investments portfolios
4,555
6,938
24,608
2,872
3,537
—
—
—
—
—
4,555
6,938
24,608
2,872
3,537
Total
$
60,849
$
— $
60,849
$
—
—
—
—
—
—
—
Recurring Fair Value Measurements at Reporting Date Using
September 30,
2014
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Asset Category:
U.S. large cap equity portfolios
$
18,830
$
— $
18,830
$
U.S. small/mid cap equity portfolios
International equity portfolios
Debt securities(1)
Balanced/asset allocation portfolios
Real estate investments portfolios
Total
______________________
4,762
7,798
25,455
3,174
3,193
—
—
—
—
—
4,762
7,798
25,455
3,174
3,193
$
63,212
$
— $
63,212
$
—
—
—
—
—
—
—
(1) Includes pooled separate accounts that invest mainly in fixed income securities such as corporate bonds, asset backed
securities, commercial mortgage backed securities or in a single mutual fund.
Asset allocation ranges have been established by broad asset categories to build an efficient, well-diversified portfolio.
The ranges are designed to provide an appropriate balance between risk and return, while positioning Plan assets, over
extended economic cycles, in a manner consistent with the long-term return assumptions used in measurements and valuations.
For equity securities the target is 50% to 60% while the target for debt and real estate securities (including cash equivalents) is
40% to 50%.
114
The following additional information is provided with respect to the Plan:
Assumptions and dates used to determine benefit obligations:
Discount rate
Rate of compensation increase
Census date
Assumptions used to determine net periodic benefit cost:
Discount rate
Long-term rate of return on plan assets
Rate of compensation increase (graded scale)
2015
September 30,
2014
2013
4.40%
n/a
1/1/2015
4.40%
n/a
1/1/2014
4.90%
n/a
1/1/2013
4.40%
7.50%
n/a
4.90%
7.50%
n/a
4.30%
7.50%
n/a
The expected long-term return on assets assumption has been derived based upon the average rates of earnings expected
on the funds invested to provide for Plan benefits. Management evaluates the historical performance of the various asset
categories, as well as current expectations in determining the adequacy of the assumed rates of return in meeting Plan
obligations. If warranted, the assumption is modified.
The following table provides estimates of expected future benefit payments during each of the next five fiscal years, as
well as in the aggregate for years six through ten. Additionally, the table includes the minimum employer contributions
expected during the next fiscal year.
Expected Benefit Payments During the Fiscal Years Ending September 30:
2016
2017
2018
2019
2020
Aggregate expected benefit payments during the five fiscal year period beginning October 1, 2021, and ending
September 30, 2025
Minimum employer contributions expected to be paid during the fiscal year ending September 30, 2016
$
4,030
3,640
3,270
3,820
4,010
$ 21,690
$
—
Effective September 30, 2006, the Company adopted the provisions of FASB ASC 715 “Compensation – Retirement
Benefits” which requires an employer to recognize the funded status of its Plan in the statement of financial condition by a
charge to AOCI. For the fiscal years ended September 30, 2015, 2014, and 2013, AOCI includes $23,063, $14,922, and $9,950,
respectively, of net actuarial losses, which have not been recognized as components of net periodic benefit costs as of the
measurement date (there was no transition obligation at any date).
The Company expects that $1,542 of net actuarial losses will be recognized as AOCI components of net periodic benefit
cost during the fiscal year ended September 30, 2016.
401(k) Savings Plan—The Company maintains a 401(k) savings plan that is comprised of three tiers. The first tier allows
eligible employees to contribute up to 75% of their compensation to the plan, subject to limitations established by the Internal
Revenue Service, with the Company matching 100% of up to 4% on funds contributed. The second tier permits the Company to
make a profit-sharing contribution at its discretion. The first and second tiers cover substantially all employees who have
reached age 21 and have worked 1,000 hours in one year of service. The third tier permits the Company to make discretionary
contributions allocable to eligible employees including those eligible employees who are participants, but no longer receiving
service credits, under the Company’s defined benefit pension plan. Voluntary contributions made by employees are vested at all
times whereas Company contributions and Company matching contributions are subject to various vesting periods which range
from immediately vested to fully vesting upon five years of service.
The total of the Company’s matching and discretionary contributions related to the 401(k) savings plan for the years
ended September 30, 2015, 2014 and 2013 was $3,204, $2,907 and $2,972, respectively.
115
Employee (Associate) Stock Ownership Plan—The Company established an ESOP for its employees effective January 1,
2006. The ESOP is a tax-qualified plan designed to invest primarily in the Company’s common stock and provides employees
with an opportunity to receive a funded retirement benefit, based primarily on the value of the Company’s common stock. The
ESOP covers all eligible employees of the Company and its wholly-owned subsidiaries. Employees are eligible to participate in
the ESOP after attainment of age 18, completion of 1,000 hours of service, and employment on the last day of the plan’s
calendar year. Company contributions to the plan are at the discretion of the Board of Directors. The ESOP is accounted for in
accordance with the provisions for stock compensation in FASB ASC 718. Compensation expense for the ESOP is based on the
market price of the Company’s stock and is recognized as shares are committed to be released to participants. The total
compensation expense related to this plan in the 2015, 2014 and 2013 fiscal years was $6,617, $5,554 and $4,499, respectively.
The ESOP was authorized to purchase, and did purchase, 11,605,824 shares of the Company’s common stock at a price of
$10 per share with a 2006 plan year cash contribution and the proceeds of a loan from the Company to the ESOP. The
outstanding loan principal balance as of September 30, 2015 and 2014 was $69,110 and $72,644, respectively. Shares of the
Company’s common stock pledged as collateral for the loan are released from the pledge for allocation to participants as loan
payments are made. At September 30, 2015, 5,105,728 shares have been allocated to participants and 325,005 shares were
committed to be released. Shares that are committed to be released will be allocated to participants at the end of the plan year
(December 31). ESOP shares that are unallocated or not yet committed to be released totaled 6,175,091 at September 30, 2015,
and had a fair market value of $106,520. Participants have the option to receive dividends on allocated shares in cash or leave
the dividend in the ESOP. Dividends are reinvested in Company stock for those participants who choose to leave their
dividends in the ESOP or who do not make an election. The purchase of Company stock for reinvestment of dividends is made
in the open market on or about the date of the cash disbursement to the participants who opt to take dividends in cash.
Dividends on unallocated shares held in the Employer Stock fund were paid to the trustee to be used to make payments on the
outstanding loan obligation.
14. EQUITY INCENTIVE PLAN
At a special meeting of shareholders held on May 29, 2008, shareholders of the Company approved the TFS Financial
Corporation 2008 Equity Incentive Plan (the "Equity Plan”). The Company adopted the provisions related to share-based
compensation in FASB ASC 718 and FASB ASC 505, upon approval of the Equity Plan, and began to expense the fair value of
all share-based compensation granted over the requisite service periods.
During the year ended September 30, 2015, the Compensation Committee of the Company’s Board of Directors approved
the issuance of an additional 1,394,400 stock options and 377,100 restricted stock units to certain directors, officers and
employees of the Company. The awards were made pursuant to the Equity Plan.
FASB ASC 718 requires the Company to report as a financing cash flow the benefits of realized tax deductions in excess
of the deferred tax benefits previously recognized for compensation expense. The Company recorded an excess tax benefit of
$1,582, $91, and $0 for 2015, 2014 and 2013, respectively.
The stock options have a contractual term of 10 years and vest over a one to seven year service period. The Company
recognizes compensation expense for the fair values of these awards, which have installment vesting, on a straight-line basis
over the requisite service period of the awards.
Restricted stock units vest over a one to ten year service period. The product of the number of units granted and the grant
date market price of the Company’s common stock determines the fair value of restricted stock units under the Equity Plan. The
Company recognizes compensation expense for the fair value of restricted stock units on a straight-line basis over the requisite
service period.
During the years ended September 30, 2015, 2014 and 2013, the Company recorded $7,363, $6,862 and $6,703,
respectively, of share-based compensation expense, comprised of stock option expense of $3,391, $3,195 and $3,303,
respectively and restricted stock units expense of $3,972, $3,667 and $3,400, respectively. The tax benefit recognized in net
income related to share-based compensation expense was $2,505, $2,342 and $2,099, respectively.
116
The following is a summary of the status of the Company’s restricted stock units as of September 30, 2015 and changes
therein during the year then ended:
Outstanding at September 30, 2014
Granted
Exercised
Forfeited
Outstanding at September 30, 2015
Vested and exercisable, at September 30, 2015
Vested and expected to vest, at September 30, 2015
Number of
Shares
Awarded
1,352,777
377,100
(454,768)
(10,484)
1,264,625
438,703
1,257,462
Weighted
Average
Grant Date
Fair Value
10.90
$
14.98
9.32
13.12
12.67
11.98
12.65
$
$
$
The weighted average grant date fair value of restricted stock units granted during the years ended September 30, 2015,
2014 and 2013 was $14.98, $11.73 and $9.43 per share, respectively. The total fair value of restricted stock units vested during
the years ended September 30, 2015, 2014 and 2013 was $5,042, $2,235, and $2,921, respectively. Expected future
compensation expense relating to the non-vested restricted stock units at September 30, 2015 is $4,595 over a weighted average
period of 2.34 years.
The following is a summary of the Company’s stock option activity and related information for the Equity Plan for the
year ended September 30, 2015:
Outstanding at September 30, 2014
Granted
Exercised
Forfeited
Outstanding at September 30, 2015
Vested and exercisable, at September 30, 2015
Vested or expected to vest, at September 30, 2015
Weighted
Average
Exercise
Price
$ 11.13
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
5.23 $ 21,457
Number of
Stock Options
6,734,075
1,394,400
$ 14.91
(1,093,671) $ 11.02
(91,034) $ 11.48
$ 11.91
6,943,770
5,147,768
$ 11.19
6,935,006
$ 11.90
$
$
4,977
353
5.35 $ 37,110
4.08 $ 31,181
5.34 $ 37,091
The fair value of the option grants was estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions.
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected option term (in years)
2015
1.88%
23.99%
1.79%
6.16
2014
—%
26.12%
1.77%
5.98
The expected dividend yield for 2015 was estimated based on the then current annualized dividend payout of $0.28 per
share which was not expected to change. The expected dividend yield for 2014 was assumed to be 0% since, at the date the
award was granted, no dividends had been paid since May 2010. Volatility of the company’s stock was used in the estimation of
fair value. Management estimated the expected life of the options using the simplified method allowed under SEC Staff
Accounting Bulletin 110, which expresses the views of the SEC regarding the use of a “simplified” method, as discussed in
Staff Accounting Bulletin No. 107. The five and seven year Treasury yield in effect at the time of the grant provides the risk-
free rate of return for periods within the expected term of the options.
The weighted average grant date fair value of options granted during the years ended September 30, 2015, 2014 and 2013
was $3.08, $3.39, and $2.64 per share, respectively. Expected future compensation expense relating to the non-vested options
outstanding as of September 30, 2015 is $3,240 over a weighted average period of 2.68 years. Upon exercise of vested options,
management expects to draw on treasury stock as the source of the shares. At September 30, 2015, the number of common
117
shares authorized for award under the Equity Plan was 23,000,000, of which 11,815,024 shares remain available for future
award.
15. 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.
At September 30, 2015, the Company had commitments to originate loans as follows:
Fixed-rate mortgage loans
Adjustable-rate mortgage loans
Equity loans and lines of credit including bridge loans
Total
At September 30, 2015, the Company had unfunded commitments outstanding as follows:
Equity lines of credit
Construction loans
Private equity investments
Total
$
174,971
209,017
31,936
$
415,924
$ 1,197,420
33,788
12,941
$ 1,244,149
At September 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 $1,358,245.
At September 30, 2015 and 2014, the Company had $0 and $4,570, respectively, in commitments to securitize and sell
mortgage loans.
In management’s opinion, 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.
118
16. 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 –
Level 2 –
quoted prices (unadjusted) for identical assets or liabilities in active markets.
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 September 30,
2015 and 2014, respectively, there were $0 and $4,570 of loans held for sale, with unpaid principal balances of $0 and $4,491,
subject to pending agency contracts for which the fair value option was elected. For the years ended September 30, 2015, 2014
and 2013, net gain (loss) on the sale of loans includes $(111), $14 and $(113), 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 September 30, 2015 and 2014, respectively, this includes $585,053 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. The fair values of investment securities are
measured using the market approach and represent price estimates obtained from third party independent nationally recognized
pricing services using pricing models or quoted prices of securities with similar characteristics. They are included in Level 2 of
the hierarchy. At the time of initial measurement and, subsequently, when changes in methodologies occur, management
obtains and reviews documentation of pricing methodologies used by third party pricing services to verify that prices are
determined in accordance with fair value guidance in U.S. GAAP and to ensure that assets are properly classified in the fair
value hierarchy. Additionally, third party pricing is reviewed on a monthly basis for 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 September 30, 2015 and 2014, respectively, there were $0 and $4,570 of loans held for
sale measured at fair value and $116 and $392 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 fair value of the underlying collateral. Impairment is measured using a 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 5. Loans and Allowance for Loan Losses.
Fair value of the collateral is estimated using exterior appraisals in the majority of instances. Costs to dispose, derived from
historical experience and recent market conditions, are considered unobservable inputs. The range and weighted average impact
of these costs on the fair value of impaired loans can be found later in this note in the table that describes quantitative
information about significant unobservable inputs. The excess of the recorded investment of the loan over the fair value of the
collateral less costs to dispose is considered impairment loss and is recognized by a charge to the allowance for loan losses.
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 is included in Level 3 of the hierarchy with assets
measured at fair value on a non-recurring basis.
119
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 September 30, 2015 and 2014, respectively, this included
$103,777 and $105,954 in recorded investment of TDRs with related allowances for loss of $14,117 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 September 30, 2015 and 2014,
these adjustments were not significant to reported fair values. At September 30, 2015 and 2014, respectively, $15,094 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 $1,756 and $1,667 related to
properties measured at fair value. Also included in real estate owned are $4,154 and $5,465 of properties carried at their
original or adjusted cost basis at September 30, 2015 and 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.
Assets and liabilities carried at fair value on a recurring basis in the Consolidated Statements of Condition at
September 30, 2015 and 2014 are summarized below. There were no liabilities carried at fair value on a recurring basis at
September 30, 2015.
Recurring Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
September 30,
2015
Assets
Investment securities available for sale:
U.S. government and agency obligations
$
2,002
$
— $
2,002
$
REMIC’s
Fannie Mae certificates
Derivatives:
572,451
10,600
—
—
572,451
10,600
Interest rate lock commitments
Total
79
585,132
$
$
—
— $
—
585,053
$
—
—
—
79
79
120
Recurring Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
September 30,
2014
Assets
Investment securities available for sale:
U.S. government and agency obligations
$
2,023
$
— $
2,023
$
REMIC’s
Fannie Mae certificates
Mortgage loans held for sale
Derivatives:
Interest rate lock commitments
Total
Liabilities
Derivatives:
555,607
11,238
4,570
59
—
—
—
—
555,607
11,238
4,570
—
$
573,497
$
— $
573,438
$
Forward commitments for the sale of
mortgage loans
Total
14
14
$
$
—
— $
14
14
$
—
—
—
—
59
59
—
—
The table below presents a reconciliation of the beginning and ending balances and the location within the Consolidated
Statements of Income where gains 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).
Beginning balance
Gain (loss) during the period due to changes in fair value:
Included in other non-interest income
Ending balance
Change in unrealized gains for the period included in earnings for
assets held at end of the reporting date
Interest Rate Lock Commitments
Year Ended September 30,
2015
2014
2013
$
$
$
59
20
79
79
$
$
$
158
(99)
59
59
$
$
$
404
(246)
158
158
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.
Impaired loans, net of allowance
Real estate owned(1)
Total
Nonrecurring Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
— $
—
— $
— $
—
— $
108,194
15,094
123,288
$
September 30,
2015
108,194
15,094
123,288
$
______________________
(1) Amounts represent fair value measurements of properties before deducting estimated costs to dispose.
121
Impaired loans, net of allowance
Real estate owned(1)
Total
______________________
Nonrecurring Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
— $
—
— $
— $
127,432
—
17,970
— $
145,402
September 30,
2014
127,432
$
17,970
$
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
9/30/2015
Valuation Technique(s)
Unobservable Input
Range
Weighted
Average
Impaired
loans, net of
allowance
Interest rate
lock
commitments
Impaired
loans, net of
allowance
Interest rate
lock
commitments
$108,194
Market comparables of
collateral discounted to
estimated net proceeds
Discount appraised value to estimated net
proceeds based on historical experience:
• Residential Properties
0 - 24%
8.0%
$79
Quoted Secondary
Market pricing
Closure rate
0 - 100%
78.7%
Fair Value
9/30/2014
$127,432
Valuation Technique(s)
Unobservable Input
Range
Weighted
Average
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%
$59
Quoted Secondary
Market pricing
Closure rate
0 - 100%
76.0%
122
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.
Carrying
Amount
September 30, 2015
Estimated Fair Value
Total
Level 1
Level 2
Level 3
Assets:
Cash and due from banks
Interest earning cash equivalents
Investment securities available for sale
Mortgage loans held for sale
Loans-net:
$
22,428
$
22,428
$
22,428
$
132,941
585,053
116
132,941
585,053
119
Mortgage loans held for investment
11,184,115
11,650,701
Other loans
Federal Home Loan Bank stock
Private equity investments
Accrued interest receivable
Derivatives
Liabilities:
3,468
69,470
255
32,490
79
3,645
69,470
255
32,490
79
132,941
—
—
—
—
N/A
—
—
—
— $
—
585,053
119
—
—
—
—
— 11,650,701
—
—
—
32,490
—
NOW and passbook accounts
$ 2,605,391
$ 2,605,391
$
— $ 2,605,391
$
Certificates of deposit
Borrowed funds
Borrowers’ advances for taxes and insurance
Principal, interest and escrow owed on loans
serviced
5,680,467
5,634,860
2,168,627
2,196,476
86,292
86,292
49,493
49,493
— 5,634,860
— 2,196,476
—
—
86,292
49,493
123
3,645
—
255
—
79
—
—
—
—
—
Carrying
Amount
September 30, 2014
Estimated Fair Value
Total
Level 1
Level 2
Level 3
Assets:
Cash and due from banks
$
26,886
$
26,886
$
26,886
$
Interest earning cash equivalents
Investment securities available for sale
Mortgage loans held for sale
Loans-net:
154,517
568,868
4,962
154,517
568,868
4,974
Mortgage loans held for investment
10,625,966
10,876,564
Other loans
Federal Home Loan Bank stock
Private equity investments
Accrued interest receivable
Derivatives
Liabilities:
4,721
40,411
551
31,952
59
4,894
40,411
551
31,952
59
154,517
—
—
—
—
N/A
—
—
—
— $
—
568,868
4,974
—
—
—
—
— 10,876,564
—
—
—
31,952
—
NOW and passbook accounts
$ 2,652,246
$ 2,652,246
$
— $ 2,652,246
$
Certificates of deposit
Borrowed funds
Borrowers’ advances for taxes and insurance
Principal, interest and escrow owed on loans
serviced
Derivatives
6,001,632
5,875,499
1,138,639
1,139,647
76,266
76,266
54,670
14
54,670
14
— 5,875,499
— 1,139,647
—
—
—
76,266
54,670
14
4,894
—
551
—
59
—
—
—
—
—
—
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.
124
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.
17. DERIVATIVE INSTRUMENTS
The Company has entered 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 the 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 September 30, 2015 or 2014.
The following tables provide the locations within the Consolidated Statements of Condition and the fair values for
derivatives not designated as hedging instruments.
Interest rate lock commitments
Forward commitments for the sale of mortgage loans
Asset Derivatives
At September 30, 2015
At September 30, 2014
Location
Other Assets
Fair Value
Location
79 Other Assets
$
Fair Value
59
$
Liability Derivatives
At September 30, 2015
At September 30, 2014
Location
Other Liabilities
$
Fair Value
Location
— Other Liabilities
Fair Value
14
$
The following table summarizes the location and amount of the gains and losses recognized within the Consolidated
Statements of Income on derivative instruments not designated as hedging instruments.
Interest rate lock commitments
Forward commitments for the sale of mortgage loans
Total
Location of Gain or (Loss)
Recognized in Income
Other non-interest income
Net gain (loss)
on the sale of loans
Amount of Gain or (Loss) Recognized
in Income on Derivative
Year Ended September 30,
2015
2014
2013
$
$
20
$
(99) $
(246)
14
34
$
(8)
(107) $
237
(9)
125
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for TFS Financial Corporation (parent company only) reflect the
investments in, and transactions with, its wholly-owned subsidiaries. Intercompany activity is eliminated in the consolidated
financial statements.
Statements of Condition
Assets:
Cash and due from banks
Other loans:
Demand loan due from Third Federal Savings and Loan
Employee Stock Ownership Plan (ESOP) loan receivable
Accrued interest receivable
Investments in:
Third Federal Savings and Loan
Non-thrift subsidiaries
Prepaid federal and state taxes
Deferred income taxes
Other assets
Total assets
Liabilities and shareholders’ equity:
Line of credit due non-thrift subsidiary
Accrued expenses and other liabilities
Total 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;
290,882,379 and 301,654,581 outstanding at September 30, 2015 and September 30, 2014,
respectively
Paid-in capital
Treasury stock, at cost; 41,436,371 and 30,664,169 shares at September 30, 2015 and
September 30, 2014, respectively
Unallocated ESOP shares
Retained earnings—substantially restricted
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
September 30,
2015
2014
$
2,099
$
2,099
33,651
69,110
120
155,908
72,644
1,281
1,597,791
1,579,414
78,679
78,347
58
3,246
6,577
2,177
2,985
5,463
$ 1,791,331
$ 1,900,318
$
58,361
$
57,188
3,600
61,961
3,673
60,861
—
—
3,323
3,323
1,707,629
1,702,441
(548,557)
(61,751)
641,791
(13,065)
1,729,370
$ 1,791,331
(379,109)
(66,084)
589,678
(10,792)
1,839,457
$ 1,900,318
126
Years Ended September 30,
2014
2013
2015
$
$
139
2,276
2,415
253
253
2,162
218
66,000
66,218
6,216
997
13
255
7,481
60,899
(2,583)
63,482
166
2,388
2,554
168
168
2,386
600
85,000
85,600
5,921
1,014
13
380
7,328
80,658
(1,870)
82,528
203
2,499
2,702
116
116
2,586
600
—
600
6,015
904
13
40
6,972
(3,786)
(1,715)
(2,071)
8,777
332
72,591
3,018
(5,291)
(2,273)
$ 70,318
(16,974)
337
65,891
1,044
(3,232)
(2,188)
$ 63,703
57,516
514
55,959
(4,746)
2,058
(2,688)
$ 53,271
Interest income:
Statements of Comprehensive Income
Demand loan due from Third Federal Savings and Loan
ESOP loan
$
Total interest income
Interest expense:
Borrowed funds from non-thrift subsidiaries
Total interest expense
Net interest income
Non-interest income:
Intercompany service charges
Dividend from Third Federal Savings and Loan
Total other income
Non-interest expenses:
Salaries and employee benefits
Professional services
Office property and equipment
Other operating expenses
Total non-interest expenses
Income (loss) before income taxes
Income tax benefit
Income (loss) before undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries (dividend in excess of earnings):
Third Federal Savings and Loan
Non-thrift subsidiaries
Net income
Change in net unrealized gains (losses) on securities available for sale
Change in pension obligation
Total other comprehensive (loss) income
Total comprehensive income
127
Cash flows from operating activities:
Statements of Cash Flows
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
(Equity in undistributed earnings of subsidiaries) dividend in
excess of earnings:
Third Federal Savings and Loan
Non-thrift subsidiaries
Deferred income taxes
ESOP and Stock-based compensation expense
Net decrease (increase) in interest receivable and other assets
Net increase (decrease) in accrued expenses and other liabilities
Other
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from principal repayments and maturities of securities
available for sale
Decrease (increase) in balances lent to Third Federal Savings and Loan
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Principal reduction of ESOP loan
Purchase of treasury shares
Dividends paid to common shareholders
Excess tax benefit related to stock-based compensation
Acquisition of treasury shares through net settlement for taxes
Net increase in borrowings from non-thrift subsidiaries
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents—beginning of year
Cash and cash equivalents—end of year
Years Ended September 30,
2015
2014
2013
$
72,591
$
65,891
$
55,959
(8,777)
(332)
(261)
2,107
2,166
107
—
67,601
—
122,257
122,257
3,534
(172,546)
(19,490)
1,582
(4,111)
1,173
(189,858)
—
2,099
16,974
(337)
(491)
2,879
(215)
(193)
—
84,508
—
14,160
14,160
3,422
(101,363)
(4,886)
91
—
4,068
(98,668)
—
2,099
$
2,099
$
2,099
$
(57,516)
(514)
(960)
3,010
(561)
874
6
298
385
(5,553)
(5,168)
3,315
—
—
—
—
1,948
5,263
393
1,706
2,099
19. EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the
reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding
during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing
earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been
allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal
Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a
dilutive impact. Unvested shares awarded pursuant to the Company's restricted stock plans are treated as participating securities
in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class
method is an earnings allocation that determines EPS for each class of common stock and participating security. At
September 30, 2015 and 2014, respectively, the ESOP held 6,175,091 and 6,608,430 shares that were neither allocated to
participants nor committed to be released to participants.
128
The following is a summary of the Company’s earnings per share calculations.
Net income
Less: income allocated to restricted stock units
Basic earnings per share:
Income available to common shareholders
Diluted earnings per share:
Effect of dilutive potential common shares
Income available to common shareholders
Net income
Less: income allocated to restricted stock units
Basic earnings per share:
Income available to common shareholders
Diluted earnings per share:
Effect of dilutive potential common shares
Income available to common shareholders
Net income
Less: income allocated to restricted stock units
Basic earnings per share:
Income available to common shareholders
Diluted earnings per share:
Effect of dilutive potential common shares
Income available to common shareholders
For the Year Ended September 30, 2015
Income
Shares
Per share
amount
(Dollars in thousands, except per share data)
$ 72,591
626
71,965
289,935,861
$
0.25
2,274,556
$ 71,965
292,210,417
$
0.25
For the Year Ended September 30, 2014
Income
Shares
Per share
amount
(Dollars in thousands, except per share data)
$ 65,891
384
65,507
298,974,062
$
0.22
$ 65,507
1,582,705
300,556,767
$
0.22
For the Year Ended September 30, 2013
Income
Shares
Per share
amount
(Dollars in thousands, except per share data)
$ 55,959
286
55,673
301,832,758
$
0.18
914,008
$ 55,673
302,746,766
$
0.18
The following is a summary of outstanding stock options and restricted stock units that are excluded from the
computation of diluted earnings per share because their inclusion would be anti-dilutive.
Options to purchase shares
Restricted stock units
20. RELATED PARTY TRANSACTIONS
For the Year Ended September 30,
2015
1,382,900
—
2014
829,300
—
2013
5,297,050
20,000
The Company has made loans and extensions of credit, in the ordinary course of business, to certain Directors. These
loans were under normal credit terms, including interest rate and collateralization, and do not represent more than the normal
risk of collection. The aggregate amount of loans to such related parties at September 30, 2015 and 2014 was $189 and $197,
respectively. None of these loans were past due, considered impaired or on nonaccrual at September 30, 2015.
129
21. RECENT ACCOUNTING PRONOUNCEMENTS
Pending as of September 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. Entities
will continue to provide information helpful to understanding the nature and risks of these investments and whether the
investments, if sold, are probable of being sold at amounts different from net asset value. 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 adoption of ASU 2015-07 is not expected to have a material impact on the Company's
consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) Amendments to the Consolidation Analysis.
This amendment modifies the consolidation model for reporting legal entities under both the variable interest model and the
voting interest model. This ASU will require all legal entities to reevaluate previous consolidation conclusions under the
revised model and will be effective for annual periods beginning after December 15, 2015. Early adoption is permitted. A
reporting entity may apply the ASU by using a modified retrospective approach (by recording a cumulative-effect adjustment to
equity as of the beginning of the year of adoption) or a full retrospective approach (by restating all periods presented). The
Company is currently evaluating the impact of adopting the amendments on its consolidated financial statements.
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. In August, 2015, the FASB issued ASU 2015-14 which deferred the effective dates of ASU 2014-09
by one year, permitting public entities to apply this guidance to annual reporting periods and interim period within those annual
periods beginning after December 15, 2017. 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 will be adopted by the Company on October 1,
2015. The only impact of these amendments on the Company's consolidated financial statements will be an additional
disclosure in the Loan and Allowance for Loan Losses footnote. The Company's timing for derecognition of the receivable and
the recognition of the real estate property clarified in these amendments will not change as a result of this amendment.
Adopted in fiscal year ended September 30, 2015
FASB ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, which was issued in January
2014, permits entities to make an accounting policy election to account for investments in qualified affordable housing projects
using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity
amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net
investment performance in the income statements as a component of income tax expense or benefit. The company early
adopted the amendments in ASC 323-740 related to investments in Qualified Affordable Housing Projects for the quarter ended
March 31, 2015, to utilize the proportional amortization method for a recent tax credit investment. The adoption of ASU
2014-1 did not have a material impact on the Company's consolidated financial statements. Related disclosures are included in
Note 7. Income Taxes.
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.
130
22. SELECTED QUARTERLY DATA (UNAUDITED)
The following tables are a summary of certain quarterly financial data for the fiscal years ended September 30, 2015 and
2014.
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income tax
Income tax expense
Net income
Earnings per share—basic and diluted
December 31
Fiscal 2015 Quarter Ended
June 30
March 31
September 30
$
$
$
95,736
28,600
67,136
2,000
65,136
5,953
45,973
25,116
8,472
16,644
0.06
(In thousands, except per share data)
$
95,672
95,647
$
$
28,225
67,422
1,000
66,422
5,895
48,829
23,488
7,822
15,666
0.05
$
$
28,083
67,589
—
67,589
6,126
47,819
25,896
8,638
17,258
0.06
$
$
$
$
96,422
28,442
67,980
(6,000)
73,980
6,286
45,371
34,895
11,872
23,023
0.08
Fiscal 2014 Quarter Ended
December 31
March 31
June 30
September 30
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income tax
Income tax expense
Net income
Earnings per share—basic and diluted
$
$
$
(In thousands, except per share data)
$
93,345
93,756
$
$
93,019
25,224
67,795
6,000
61,795
5,078
42,859
24,014
7,990
16,024
0.05
$
$
24,311
69,034
5,000
64,034
5,534
44,931
24,637
8,252
16,385
0.05
$
$
25,884
67,872
4,000
63,872
5,710
42,849
26,733
9,102
17,631
0.06
$
$
94,564
27,832
66,732
4,000
62,732
5,578
44,837
23,473
7,622
15,851
0.05
Per share amounts for the full fiscal year, as reported in the Consolidated Statements of Income may differ from the totals
of the four fiscal quarters as presented above, due to rounding.
131
FORM 10-K EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
If Incorporated by Reference, Documents with
Which Exhibit was Previous Filed with SEC
2.1
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
TFS Financial Corporation Stock Issuance Plan,
dated May 25, 2006
Amended and Restated Charter of TFS Financial
Corporation, dated January 16, 2007
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit 2
therein)
Amendment No. 2 to Registration Statement on
Form S-1 No. 333-139295 (filed with the SEC on
February 9, 2006; Exhibit 3.2 therein)
Amended and Restated Bylaws of TFS Financial
Corporation
Current Report on Form 8-K No. 001-33390 (filed
with the SEC on April 28, 2008; Exhibit 3.2 therein)
Form of Common Stock Certificate of TFS Financial
Corporation
Employee Stock Ownership Plan, dated January 1,
2006
Financial, Retirement & Estate Planning Program as
amended and restated January 1, 2006
Resolution Regarding Executive Physical Program,
dated May 16, 2002
Company Car Program, dated February 24, 1995
Executive Retirement Benefit Plan I, dated January
1, 2006
Benefit Equalization Plan, dated January 1, 2005
Split Dollar Agreement, dated January 29, 2002
Resolution Regarding Supplemental Split Dollar Life
Insurance Plan, dated August 22, 2002
Amendment No. 1 to Employee Stock Ownership
Plan, dated February 22, 2007
2008 Equity Incentive Plan
Management Incentive Compensation Plan
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit 4
therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.1 therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.2 therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.3 therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.4 therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.5 therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.6 therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.7 therein)
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
10.8 therein)
Quarterly Report on Form 10-Q No. 001-33390
(filed with the SEC on May 15, 2007; Exhibit 10.9
therein)
Current Report on Form 8-K No. 001-33390 (filed
with the SEC on May 30, 2008; Exhibit 10.1 therein)
Current Report on Form 8-K No. 001-33390 (filed
with the SEC on May 30, 2008; Exhibit 10.2 therein)
First Amendment to the Restricted Stock Unit Award
Agreement (August 11, 2008 award), dated August
9, 2012
Current Report on Form 8-K No. 001-33390 (filed
with the SEC on August 9, 2012; Exhibit 10.1
therein)
132
Exhibit
Number
10.13
10.14
14
21.1
23.1
31.1
31.2
32
Description of Exhibit
If Incorporated by Reference, Documents with
Which Exhibit was Previous Filed with SEC
First Amendment to the Restricted Stock Unit Award
Agreement (May 12, 2009 award), dated August 9,
2012
Current Report on Form 8K No. 001-33390 (filed
with the SEC on August 9, 2012; Exhibit 10.2
therein)
First Amendment to the Restricted Stock Unit Award
Agreement (May 14, 2010 award), dated August 9,
2012
Current Report on Form 8K No. 001-33390 (filed
with the SEC on August 9, 2012; Exhibit 10.3
therein)
Code of Ethics
Subsidiaries of Registrant
Available on our website, www.thirdfederal.com
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit
21 therein)
Consent of Independent Registered Public
Accounting Firm
Certification of chief executive officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934
Certification of chief financial officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of
1934
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
Filed herewith
Filed herewith
Filed herewith
Filed herewith
100
XBRL related documents
101.INS
Interactive datafile
101.SCH
Interactive datafile
101.CAL
Interactive datafile
101.DEF
Interactive datafile
101.LAB
Interactive datafile
101.PRE
Interactive datafile
The following financial statements from TFS
Financial Corporation’s Annual Report on Form 10-
K for the year ended September 30, 2015 filed on
November 25, 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.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase
Document
XBRL Taxonomy Extension Label Linkbase
Document
XBRL Taxonomy Extension Presentation Linkbase
Document
133
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: November 25, 2015
/S/ MARC A. STEFANSKI
Marc A. Stefanski
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
Dated: November 25, 2015
/S/ MARC A. STEFANSKI
Marc A. Stefanski
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
/S/ DAVID S. HUFFMAN
David S. Huffman
Chief Financial Officer and Secretary
(Principal Financial Officer)
/S/ PAUL J. HUML
Paul J. Huml
Chief Accounting Officer
(Principal Accounting Officer)
/S/ ANTHONY J. ASHER
Anthony J. Asher, Director
/S/ MARTIN J. COHEN
Martin J. Cohen, Director
/S/ ROBERT A. FIALA
Robert A. Fiala, Director
/S/ ROBERT B. HEISLER JR.
Robert B. Heisler Jr., Director
/S/ WILLIAM C. MULLIGAN
William C. Mulligan, Director
/S/ TERRENCE R. OZAN
Terrence R. Ozan, Director
/S/ JOHN P. RINGENBACH
John P. Ringenbach, Director
/S/ PAUL W. STEFANIK
Paul W. Stefanik, Director
/S/ BEN S. STEFANSKI III
Ben S. Stefanski III, Director
/S/ MEREDITH S. WEIL
Meredith S. Weil, Director
134
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third federal management teamINVESTOR RELATIONSPaul J. HumlChief Operating Officer/ Chief Accounting OfficerTFS Financial Corporation7007 Broadway AvenueCleveland, Ohio 44105-1441(216) 429-5325(877) 513-2318 toll freepaul.huml@thirdfederal.comCORPORATE HEADQUARTERSThird Federal Savings and Loan Association7007 Broadway AvenueCleveland, Ohio 44105-1441(216) 441-6000(800) 844-7333 toll freewww.thirdfederal.comCONTACT INFORMATIONTFS Financial Corporation7007 Broadway AvenueCleveland, Ohio 44105-1441(877) 513-2318 toll freeTRANSFER AGENTBroadridge Corporate Issuer SolutionsP.O. Box 1342Brentwood, NY 11717Phone: (888)-314-4808www.shareholder.broadridge.com/tfsMANAGEMENT TEAMMarc A. StefanskiChairman and Chief Executive OfficerJudy Z. AdamChief Risk OfficerDavid S. HuffmanChief Financial Officer/SecretaryPaul J. HumlChief Operating Officer/Chief Accounting OfficerTFS Financial CorporationAnna Maria MottaChief Information OfficerMeredith S. WeilChief Operating OfficerCathy W. ZbanekChief Marketing and Human Resources OfficerBOARD OF DIRECTORSMarc A. StefanskiChairmanAnthony J. AsherMartin J. CohenRobert A. FialaRobert B. Heisler, Jr.William C. MulliganTerrence R. OzanJohn P. RingenbachPaul W. StefanikBen S. Stefanski III Meredith S. WeilIn Loving Memory of Bernard S. Kobak.Officer of Third FederalDirector EmeritusBernard S. Kobak joined Third Federal in 1958 as executive vice president and served on the Board of Directors from 1963 to 2015. We thank him for his more than 57 years of dedication and loyalty. A Shared Sense of Community.
Third Federal announces a $5 million
donation to Cleveland Clinic and
Case Western University to build
The Rhonda and Marc Stefanski Center
for Community Health Education.
(L-R): Toby Cosgrove, CEO and President,
Cleveland Clinic; Jim Young, Dean of the
Lerner College of Medicine; Barbara
Snyder, President, Case Western Reserve
University; Marc; Kurt Karakul,
President, Third Federal Foundation;
Pam Davis, Dean of the Case Western
Reserve University School of Medicine.
(L-R): Alex, Marc, Kyle,
Melissa and Brad Stefanski;
and Ashley and Jamie Williams
at the inaugural
Rhonda’s Kiss event at
the Rock-N-Roll Hall of Fame,
Cleveland, OH.
The Rhonda’s Kiss event in
Cleveland raised money to
pay for medical supplies and
services to help cancer patients
in the inner city maintain their
dignity during treatment.
a letter from our
chairman and
chief executive officer
Third Federal Associates Volunteering
at the Cleveland Food Bank.