Investing to Strengthen Communities
a letter from our
chairman and
chief executive officer
excellence ·· u fun fun
respect ·· e celle ce
trust ·· espect
love ·· t usts
excellence
respect
sp
trust
lo e
love
On the cover:
Top: Third Federal associates, civic and business leaders join Chairman and CEO Marc A. Stefanski to celebrate the opening of the new 5,800 sq. ft. Mayfield Heights branch.
Middle: Third Federal is a proud developer of Trailside Slavic Village, a public/private collaboration with the City of Cleveland and Slavic Village Development Corporation,
bringing new, affordable housing to Cleveland’s redeveloping inner city. Phase I of the development features 10 energy efficient, single-family homes that meet or exceed
Cleveland’s Green Energy Standards. Located adjacent to Third Federal’s headquarters, Trailside offers urban living at an affordable price in close proximity to Downtown
Cleveland. Phase II is targeted to break ground in 2018.
Bottom: Marc and Third Federal Foundation President Kurt Karakul with representatives from United Way of Greater Cleveland after announcing a $500,000 donation to help
support United Way-backed causes, including literacy, education and neighborhood revitalization.
Dear Stockholders,
Third Federal was founded on the premise of giving back to the community. In fact, even before my
parents started Third Federal in 1938, my grandfather and a crew of teamsters dug basements by
hand for homes in the very same Cleveland neighborhood where Third Federal would eventually open
its doors. For many families during this time, the addition of a basement expanded their living space,
further enriching their lives and their dream of homeownership.
My parents Ben and Gerome Stefanski continued this tradition of giving back as they started and
grew Third Federal, expanded into new neighborhoods, and supported the livelihoods of many
residents and organizations in and around the bank.
Today, we are proud that our legacy of giving back and investing in our communities is stronger
than ever. Whether it’s a gift to support after-school programs, building a new branch or working to
enhance literacy in our neighborhoods, we hope our efforts are making a difference for today and
tomorrow.
As stockholders, you will be pleased to know our financial performance has never been stronger as
we had our second consecutive year of record earnings. We enjoyed record profits in 2017, and our
focus remains on providing shareholder value by growing the company, paying you dividends and
buying back stock.
The role and impact of a corporation, however, can be greater than simply making money. Earning
a profit is important, and we work hard every day to do that by serving our customers and offering
products they want and need. But making the community a better place for everyone is a legacy that
will live on for years to come. Through investing to strengthen our communities, our hope is that
residents will live healthier, longer, more prosperous lives. That’s a great return on our investment,
and a legacy that all of us can be proud of.
Love,
Marc A. Stefanski
Chairman and CEO
(cid:55)(cid:43)(cid:44)(cid:54)(cid:3)(cid:51)(cid:36)(cid:42)(cid:40)(cid:3)(cid:44)(cid:49)(cid:55)(cid:40)(cid:49)(cid:55)(cid:44)(cid:50)(cid:49)(cid:36)(cid:47)(cid:47)(cid:60)(cid:3)(cid:47)(cid:40)(cid:41)(cid:55)(cid:3)(cid:37)(cid:47)(cid:36)(cid:49)(cid:46)
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, 2017
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
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
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
No
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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer", "accelerated filer,” "smaller reporting company," and
"emerging growth company" Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
(do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2017, as reported by the NASDAQ Global Select Market, was approximately $909.1 million.
At November 20, 2017, there were 281,071,072 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which
227,119,132 shares, or 80.80% 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 2018 Annual Meeting of Shareholders are incorporated by reference in Part III hereof to
DOCUMENTS INCORPORATED BY REFERENCE
the extent indicated therein.
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.
Item 16.
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
Form 10-K Summary
4
42
47
47
48
48
48
50
54
71
75
75
76
78
78
79
79
79
79
80
80
2
TFS Financial Corporation provides the following list of acronyms and other terms as a tool for the reader. The acronyms and
other terms identified below are used throughout the document.
GLOSSARY OF TERMS
AOCI: Accumulated Other Comprehensive Income
FRB-Cleveland: Federal Reserve Bank of Cleveland
ARM: Adjustable Rate Mortgage
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
Association: Third Federal Savings and Loan
Association of Cleveland
BOLI: Bank Owned Life Insurance
CDs: Certificates of Deposit
CFPB: Consumer Financial Protection Bureau
CLTV: Combined Loan-to-Value
Company: TFS Financial Corporation and its
subsidiaries
FRS: Board of Governors of the Federal Reserve System
GAAP: Generally Accepted Accounting Principles
Ginnie Mae: Government National Mortgage Association
GVA: General Valuation Allowances
HARP: Home Affordable Refinance Program
HPI: Home Price Index
IRR: Interest Rate Risk
IRS: Internal Revenue Service
IVA: Individual Valuation Allowance
LIHTC: Low Income Housing Tax Credit
LIP: Loans-in-Process
DFA: Dodd-Frank Wall Street Reform and Consumer
LTV: Loan-to-Value
Protection Act of 2010
EaR: Earnings at Risk
EPS: Earnings per Share
ESOP: Third Federal Employee (Associate) Stock
Ownership Plan
EVE: Economic Value of Equity
MGIC: Mortgage Guaranty Insurance Corporation
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income
OTS: Office of Thrift Supervision
PMI: Private Mortgage Insurance
PMIC: PMI Mortgage Insurance Co.
FASB: Financial Accounting Standards Board
QTL: Qualified Thrift Lender
FICO: Financing Corporation
REMICs: Real Estate Mortgage Investment Conduits
FDIC: Federal Deposit Insurance Corporation
FHFA: Federal Housing Finance Agency
SEC: United States Securities and Exchange
Commission
FHLB: Federal Home Loan Bank
Fannie Mae: Federal National Mortgage Association
TDR: Troubled Debt Restructuring
Third Federal Savings, MHC: Third Federal Savings
Freddie Mac: Federal Home Loan Mortgage Corporation
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 or the Public Company Accounting Oversight Board;
• future adverse developments concerning Fannie Mae or Freddie Mac;
• changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the FRS
and changes in the level of government support of housing finance;
• changes in policy and/or assessment rates of taxing authorities that adversely affect us;
• changes in our organization, or compensation and benefit plans and changes in expense trends (including, but not
limited to trends affecting non-performing assets, charge-offs and provisions for loan losses);
• the continuing governmental efforts to restructure the U.S. financial and regulatory system;
• 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, 2017, Third Capital, Inc. had consolidated assets of $81.5 million, and for the fiscal year ended September 30,
2017, Third Capital, Inc. had consolidated net income of $1.0 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. The following is a
description of the entities 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 net income of $0.1 million during the fiscal year ended September 30, 2017.
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 and Florida, primarily to customers of the Association. For the fiscal year ended
September 30, 2017, Third Cap Associates, Inc. recorded net income of $0.7 million.
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
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 as well as shorter-term advances from the FHLB of Cincinnati, hedged to longer effective
5
durations by interest rate exchange contracts, have also been used as 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. Since 2013, loans that the Association sells consist primarily of long-term, fixed-rate residential real
estate mortgage loans. 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
and dividends from FHLB of Cincinnati stock. 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,
without charge, 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.
The Association also provides savings products in all 50 states and first mortgage refinance loans and home equity lines
of credit in 21 states and the District of Columbia. First mortgage loans and bridge loans to purchase homes are provided in 13
states while other equity loan products are provided in eight states. These products are provided through its branch network for
customers in its core markets of Ohio, Florida, Kentucky and selected counties in Indiana as well as its customer service call
center and its internet site for all customers not served by its branch network.
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, 2017
(the latest date for which information is publicly available), the Association had $4.6 billion of deposits in Cuyahoga County,
and ranked fifth among all financial institutions with offices in the county in terms of deposits, with a market share of 8.85%.
As of that date, the Association had $6.0 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 1.77%. As of June 30, 2017, the Association had $2.3 billion
of deposits in the State of Florida, and ranked 33rd among all financial institutions in terms of deposits, with a market share of
0.41%. This market share data excludes deposits held by credit unions, whose deposits are not insured by the FDIC.
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
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 2016 through September 30, 2017, per data furnished by MarketTrac®, the Association had the largest
market share of conventional purchase mortgage loans originated in Cuyahoga County, Ohio. For the same period, it also had
the 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
6
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 almost 80-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, 2017, our ratio of shareholders’ equity to total assets was 12.3%. 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, 2017, our liquidity ratio averaged 5.65% (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 $41.0 million from the FHLB of Cincinnati under existing
credit arrangements along with $72.3 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, 2017 was $4.87 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 $97.4 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 in its core markets in Ohio, Florida and Kentucky. Adjustable-rate and 10-year fixed
rate first mortgage loans to refinance real estate are offered in a total of 22 states including its core markets and the District of
Columbia. Also, the Association offers adjustable-rate and 10-year fixed rate first mortgage loans to purchase real estate in a
total of 13 states including its core markets. Further, the Association originates residential construction loans to individuals (for
the construction of their personal residences by a qualified builder) in Ohio and Florida. The Association also offers home equity
lines of credit in a total of 22 states including its core markets and the District of Columbia and home equity loans in a total of 8
states including its core markets. Between 2010 and 2015, the Association, in various steps, modified its home equity lending
products and the markets they were offered in response to the 2008 financial crisis. 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, 2017, residential real estate, fixed-rate and
adjustable-rate, first mortgage loans totaled $10.86 billion, or 87.1% of our loan portfolio, home equity loans and lines of credit
totaled $1.55 billion, or 12.4% of our loan portfolio, and residential construction loans totaled $61.0 million, or 0.5% of our loan
portfolio. At September 30, 2017, adjustable-rate, residential real estate, first mortgage loans totaled $4.82 billion and
comprised 38.6% of our loan portfolio.
7
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.
2017
2016
September 30,
2015
2014
2013
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real estate loans:
Residential Core (1)
Ohio
Florida
Other
$ 6,061,515
$ 5,937,114
$ 5,903,051
$ 5,986,801
$ 5,947,791
1,739,098
2,945,591
1,678,798
2,453,740
1,621,763
1,938,125
1,570,087
1,271,951
1,465,907
704,813
Total
10,746,204
86.2% 10,069,652
85.5%
9,462,939
83.9%
8,828,839
82.2%
8,118,511
79.4%
Residential Home
Today (1)
Ohio
Florida
Other
103,803
4,924
237
116,253
5,414
271
129,416
6,050
280
146,974
6,909
313
170,206
7,826
321
Total
108,964
0.9
121,938
1.0
135,746
1.2
154,196
1.5
178,353
1.7
Home equity loans and
lines of credit
Ohio
Florida
California
Other
Total
Construction
Other consumer loans
606,301
340,530
205,157
400,327
1,552,315
60,956
3,050
597,735
370,111
210,004
353,432
641,321
421,904
216,233
345,781
675,911
475,375
213,309
332,334
721,890
539,152
227,841
369,515
12.4
0.5
—
1,531,282
13.0
1,625,239
14.4
1,696,929
15.8
1,858,398
18.2
61,382
3,116
0.5
—
55,421
3,468
0.5
—
57,104
4,721
0.5
—
72,430
4,100
0.7
—
Total loans receivable
12,471,489
100.0% 11,787,370
100.0% 11,282,813
100.0% 10,741,789
100.0% 10,231,792
100.0%
Deferred loan expenses
(fees), net
Loans in process
Allowance for loan
losses
30,865
(34,100)
(48,948)
19,384
(36,155)
(61,795)
10,112
(33,788)
(71,554)
(1,155)
(28,585)
(81,362)
(13,171)
(42,018)
(92,537)
Total loans receivable, net
$ 12,419,306
$ 11,708,804
$ 11,187,583
$ 10,630,687
$ 10,084,066
______________________
(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, 2017, 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, 2018. 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,
2018
2019
2020
2021 to 2022
2023 to 2027
2028 to 2032
2033 and beyond
Total
Residential Real Estate
Core
Home
Today
Home Equity
Loans
and Lines of
Credit
Construction
Loans
Other
Consumer
Loans
Total
(In thousands)
$
2,697
$
131
$
9,691
$
— $ 3,050
$
15,569
8,801
14,180
148,770
2,405,323
795,228
7,371,205
159
104
327
1,133
3,823
103,287
8,024
1,377
14,626
215,597
478,813
824,187
—
1,130
—
—
6,640
53,186
16,984
—
16,791
—
—
163,723
— 2,622,053
— 1,284,504
— 8,351,865
$10,746,204
$
108,964
$ 1,552,315
$
60,956
$ 3,050
$12,471,489
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2017 that are
contractually due after September 30, 2018.
Real estate loans:
Residential Core
Residential Home Today
Home Equity Loans and Lines of Credit
Construction
Total
Due After September 30, 2018
Fixed
Adjustable
Total
(In thousands)
$ 5,924,820
108,627
$ 4,818,688
207
$ 10,743,508
108,834
79,416
39,472
1,463,207
1,542,623
21,484
60,956
$ 6,152,335
$ 6,303,586
$ 12,455,921
Residential Real Estate Mortgage Loans. The Association’s primary lending activity is the origination of residential real
estate mortgage loans. A comparison of 2017 data to the corresponding 2016 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, subject to rate reset options as discussed later in this section. At September 30, 2017, 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 FHFA, which is currently $424,100 and $636,150, 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. During the latter portion of fiscal 2016, the Association began to market its HomeReady mortgage loan product for
low- and moderate-income homeowners. Third Federal’s HomeReady product is designed to be salable to FannieMae under its
HomeReady program. Previously, the Association’s primary program was referred to as "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 were not charged higher fees or interest rates than our Core (non-Home Today) borrowers. Home
Today loans were not "interest only" or negative amortizing and contain no low initial payment features or adjustable interest
9
rates, which are features often associated with sub-prime lending. While the credit risk profiles of the Association’s borrowers in
the Home Today program were generally higher risk than the credit risk profiles of its Core borrowers, the Association attempted
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.
Coinciding with the Association's marketing of the HomeReady mortgage loan product in 2016, the Association no longer
originates loans under its Home Today program. Between March 27, 2009 and 2016, borrowers under the Home Today program
were subject to substantially the same underwriting requirements as Core borrowers and borrowers must have completed 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. The Association
originated 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 have met 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 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, 2017, the Association had $109.0 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, 2017, of
the loans that were originated under the Home Today program, 11.5% were delinquent 30 days or more compared to 0.2% for
the portfolio of Core loans as of that date. At September 30, 2017, $6.9 million, or 6.4%, of loans originated under the Home
Today program were delinquent 90 days and over and $18.1 million of Home Today loans were non-accruing loans, representing
22.9% 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, 2017, the Association had $55.8 million of loans outstanding that were originated
through its High LTV program, $47.9 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 85% but equal to or less than 95%, the Association requires private mortgage
insurance. LTV ratios in excess of 80% are not available for refinance transactions except for adjustable-rate, first mortgage
loans. The new HomeReady product will require private mortgage insurance on purchase transactions in excess of 80% to 97%
LTV and refinance transactions in excess of 80% to 95% LTV.
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, 2017 and 2016, the Association recognized servicing fees, net of amortization,
related to these servicing rights of $4.3 million and $4.7 million, respectively. As of September 30, 2017 and September 30,
2016, the principal balance of loans serviced for others totaled $1.85 billion and $1.96 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
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
10
31, 2008 and delivered to Fannie Mae prior to January 1, 2009. At September 30, 2017, 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 $0.6 million has been maintained for
potential repurchase or loss reimbursement requests at September 30, 2017.
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, which allow the borrower to re-lock the rate an unlimited number
of times at the Association’s then current lending rates, for another three or five years (which must be the same as the original
lock period). 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.
All adjustable-rate mortgage loans with initial fixed-rate periods of 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 Traditional ARMs 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, 2017, "Smart Rate" adjustable-rate mortgage loans totaled $4.75
billion, or 97.9% of the adjustable-rate mortgage loan portfolio and Traditional ARMs totaled $103.1 million, or 2.1% 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. Home equity products offered by the Association
varied significantly between June 28, 2010 and September 30, 2016. 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 directive from our primary federal banking
regulator, 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. Beginning March 20, 2012, we again offered new home equity lines of credit
to qualifying existing home equity customers. In 2013, we further modified the product design and 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 include 21 states and the District of
Columbia. Home equity lines of credit originated since 2013 contain a provision for amortizing loan payments during the draw
period. 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,
2017 and 2016, home equity loans totaled $307.5 million, or 2.5%, and $223.6 million, or 1.9%, respectively, of total loans
receivable (which included $217.8 million and $182.6 million, respectively, of home equity lines of credit which were in the
amortization period and no longer eligible to be drawn upon and $17.3 million and $2.0 million of bridge loans), and home
equity lines of credit totaled $1.24 billion, or 10.0%, and $1.31 billion, or 11.1%, 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
11
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, 2017 and 2016, the unadvanced amounts of home equity
lines of credit totaled $1.43 billion and $1.25 billion, respectively.
Prior to June 28, 2010, the underwriting standards for home equity loans and home equity lines of credit were less
restrictive than current underwriting standards, which impacted acceptable LTV ratios, minimum credit scores, income and
employment verification and line amounts. 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. Between 2007 and 2010 the home equity
lending parameters became increasingly restrictive. 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, 2017. 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)
$1,177,766
$ 469,137
420,071
335,930
736,536
227,093
182,641
365,992
2,670,303
1,244,863
307,452
307,452
$2,977,755
$1,552,315
Percent
Delinquent
90 days or more
Mean CLTV
Percent at
Origination(2)
Current
Mean
CLTV
Percent(3)
0.06%
0.25%
0.12%
0.07%
0.11%
1.41%
0.35%
60%
58%
64%
64%
61%
67%
62%
54%
52%
56%
61%
56%
54%
55%
(1) No individual other state has a committed or drawn balance greater than 10% of total loans and 5% of equity products.
(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, 2017. 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, 2017, 45.0% of our home equity lending portfolio was either in first lien position (26.5%) or was in a
subordinate (second) lien position behind a first lien that we held (13.2%) or behind a first lien that was held by a loan that we
originated, sold and now service for others (5.3%). At September 30, 2017, 15.8% 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, 2017. 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:
2007 and Prior
$
270,725
$
141,511
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total home equity lines of credit in
draw period
Home equity lines in repayment, home equity
loans and bridge loans
Total
______________________
465,906
189,863
16,134
—
4,632
49,669
200,541
286,645
507,144
679,044
256,555
78,588
5,943
—
1,201
18,391
80,912
129,569
234,496
297,697
2,670,303
1,244,863
307,452
$ 2,977,755
307,452
$ 1,552,315
0.36%
0.20%
0.34%
—%
—%
—%
—%
—%
0.02%
—%
—%
0.11%
1.41%
0.35%
65%
63%
55%
57%
—%
53%
59%
60%
60%
62%
60%
61%
67%
62%
55%
57%
51%
47%
—%
43%
45%
49%
53%
59%
60%
56%
54%
55%
(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, 2017. Property
values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in
the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the
repayment period is calculated using the principal balance.
In general, the home equity line of credit product originated prior to June 2010 (when new home equity lending was
temporarily suspended) was characterized by a ten year draw period followed by a ten year repayment period; however, there
were two types of transactions that could result in a draw period that extended beyond ten years. The first transaction involved
customer requests for increases in the amount of their home equity line of credit. When the customer’s credit performance and
profile supported the increase, the draw period term was reset for the ten year period following the date of the increase in the
home equity line of credit amount. A second transaction that impacted the draw period involved extensions. For a period of time
prior to June 2008, the Association had a program that evaluated home equity lines of credit that were nearing the end of their
draw period and made a determination as to whether or not the customer should be offered an additional ten year draw period. If
the account and customer met certain pre-established criteria, an offer was made to extend the otherwise expiring draw period by
ten years from the date of the offer. If the customer chose to accept the extension, the origination date of the account remained
unchanged but the account would have a revised draw period that was extended by ten years. As a result of these two programs,
the reported draw periods for certain home equity line of credit accounts exceed ten years.
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, 2017, 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
2018 (1)
2019 (1)
2020 (1)
2021 (1)
2022
2023
Post 2023
Total
$254,747
212,853
140,767
49,391
58
22
$35,569
8,696
547
135
36
—
(Dollars in thousands)
$13,390
1,783
$11,103
1,301
11
9
—
—
62
—
—
—
$5,262
4,080
1,773
172
—
—
$320,071
228,713
143,160
49,707
94
22
487,901
$1,145,739
12,852
$57,835
50
$15,243
113
$12,579
2,180
$13,467
503,096
$1,244,863
______________________
(1) Home equity lines of credit whose draw period ends in fiscal years 2018, 2019, 2020 and 2021 include $17.7 million, $62.9
million, $126.5 million and $49.6 million respectively, of lines where the customer has an amortizing payment during the
draw period. All home equity lines of credit whose draw period ends in fiscal years after 2021 have 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 percentage of loans delinquent 90
days or more (seriously delinquent) originated during the years 2009 and earlier are comparatively higher than the years
following 2009. Those years saw rapidly increasing housing prices, especially in our Florida market. As 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. However, recent increases in home values have reversed the trend
of the general decrease in housing values from the aftermath of the 2008 financial crisis, resulting in current mean CLTV
percentages becoming lower than the mean CLTV percentages at origination, which was not the case for a number of years.
Increased home values have also allowed customers to refinance their home equity lines of credit approaching the end of draw
period. The combination of the principal balance of all home equity products no longer in the draw period, plus those lines
originated in 2009 and earlier, is $784.1 million, a reduction of $322.2 million during the current fiscal year. In addition, as
shown in the table below, the principal balance of home equity lines of credit in the draw period that have a current mean CLTV
over 80% or unknown is $99.1 million at September 30, 2017, a reduction of $108.1 million during the current fiscal year.
While there have been recent improvements, the previous past weakness in the housing market and the uncertainty with
respect to future employment levels and economic prospects, causes us to continue to conduct an expanded loan level evaluation
of our home equity lines of credit which are delinquent 90 days or more.
14
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, 2017.
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
(Dollars in thousands)
Percent
of Total
Principal
Balance
Percent
Delinquent
90 days or
More
Mean
CLTV
Percent at
Origination(2)
Current
Mean
CLTV
Percent(3)
$ 2,513,063
95,905
18,509
14,269
28,557
$ 2,670,303
$1,145,813
57,834
15,243
12,579
13,394
$1,244,863
92.1%
4.6%
1.2%
1.0%
1.1%
100.0%
0.08%
0.49%
0.16%
0.67%
—%
0.11%
60%
80%
82%
78%
57%
61%
54%
83%
94%
128%
(1)
56%
(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, 2017. 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.
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 85%. At September 30,
2017, construction loans totaled $61.0 million, or 0.5% of total loans receivable. At September 30, 2017, the unadvanced portion
of these construction loans totaled $34.1 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 non-commissioned associates) 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 consistent with the ability to repay guidance provided by the CFPB. A small number
of loans originated with the intent to sell and certain other long-term, fixed rate loans, as described below, are originated using
Fannie Mae underwriting guidelines. The majority of loans however, are originated using guidelines that are similar, but not
identical to Fannie Mae underwriting guidelines. 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.
Except for loans originated in accordance with the guidelines of Fannie Mae's HARP II and HomeReady programs, which
loans are originated with the intent to sell, the Association decides whether to retain, sell or securitize the loans that it originates,
15
after evaluating current and projected market interest rates, its interest rate risk objectives, its liquidity needs and other factors.
During the fiscal year ended September 30, 2017, the Association sold to Fannie Mae, in either whole loan or security form,
$211.0 million of long-term, fixed-rate residential real estate mortgage loans and to the FHLB of Cincinnati, $38.4 million of
long-term, fixed-rate residential real estate mortgage loans, all on a servicing retained basis. In addition to sales of long-term,
fixed-rate residential real estate mortgage loans, 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. Those fiscal
2013 sales evidenced the saleability of our loans that are not originated in accordance with agency specified procedures,
including adjustable-rate loans. 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 small 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 $0.4 million at September 30, 2017, which were
originated pursuant to the guidelines of Fannie Mae's HARP II and HomeReady programs.
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, 2017, the Association serviced loans owned by others with
a principal balance of $1.85 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, 2017 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
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 require the approval of one individual
with designated underwriting authority.
The Association requires independent third-party valuations of real property. Appraisals are performed by independent
licensed appraisers.
16
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; therefore, it was not segregated by geography.
September 30, 2017
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
Total
September 30, 2016
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
Total
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Amount
Number
(Dollars in thousands)
Number
Amount
82
12
1
95
123
4
—
127
117
48
7
22
194
—
416
$
6,850
1,671
149
8,670
5,244
319
—
5,563
3,037
1,884
590
859
6,370
—
$ 20,603
114
26
4
144
193
5
—
198
133
99
9
44
285
—
627
$
8,756
2,507
712
11,975
6,678
173
—
6,851
2,134
2,345
354
575
5,408
—
$ 24,234
196
38
5
239
316
9
—
325
$ 15,606
4,178
861
20,645
11,922
492
—
12,414
250
147
16
66
479
—
1,043
5,171
4,229
944
1,434
11,778
—
$ 44,837
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
155
39
4
198
203
10
1
214
172
122
5
40
339
—
751
$ 10,957
4,055
581
15,593
6,954
378
24
7,356
2,216
2,257
130
329
4,932
—
$ 27,881
248
44
5
297
336
15
2
353
$ 19,858
4,845
700
25,403
14,410
776
24
15,210
266
156
13
72
507
—
1,157
4,723
4,391
692
1,542
11,348
—
$ 51,961
$
8,901
790
119
9,810
7,456
398
—
7,854
2,507
2,134
562
1,213
6,416
—
$ 24,080
93
5
1
99
133
5
1
139
94
34
8
32
168
—
406
17
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
Total
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
Total
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
111
10
2
123
147
5
—
152
128
36
9
30
203
—
478
$ 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
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
$ 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
108
14
3
125
168
9
177
123
36
11
21
191
1
494
18
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
Total
Loans Delinquent For
30-89 Days
90 Days or Over
Total
Number
Amount
Number
Amount
(Dollars in thousands)
Number
Amount
165
17
3
185
213
6
219
151
56
9
30
246
—
650
$ 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
Total loans seriously delinquent (i.e. delinquent 90 days or over) decreased five basis points to 0.19% of total net loans at
September 30, 2017, from 0.24% at September 30, 2016. The percentage of seriously delinquent loans to total net loans
decreased in the residential Core portfolio from 0.13% to 0.10%. Such loans in the residential Home Today portfolio decreased
from 0.06% to 0.05%; and in the home equity loans and lines of credit portfolio the percentage was 0.04% as of both dates.
Although regional employment levels have improved, we expect some borrowers who are current on their loans at
September 30, 2017 to experience payment problems in the future. In addition, Hurricane Irma affected much of our Florida
markets when it made landfall in September, 2017. There was minimal damage to our branch office operations and to the best of
our knowledge, little damage to properties securing our mortgage loans. However we have offered homeowners in the affected
areas an option to defer three months of mortgage payments to lessen any financial strain related to the storm. We expect there
may be a related increase in short term delinquencies subsequent to September 30, 2017 as these payment deferrals are resolved
through repayment plans, term extensions or other loan modifications, but we do not expect a material increase in loan losses as
a result of these payment deferrals.
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. 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. Loans in Chapter 7 bankruptcy status where all
borrowers have been discharged from their mortgage obligation are placed in non-accrual status. Beginning in 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
Total non-accrual loans(2)(3)
Real estate owned
Total non-performing assets
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
______________________
September 30,
2017
2016
2015
2014
2013
(Dollars in thousands)
$ 43,797
$ 51,304
$ 62,293
$ 79,388
$ 91,048
18,109
17,185
—
19,451
19,206
—
22,556
21,514
427
29,960
26,189
—
34,813
29,943
41
79,091
5,521
$ 84,612
89,961
6,803
$ 96,764
106,790
17,492
$ 124,282
135,537
21,768
$ 157,305
155,845
22,666
$ 178,511
0.63%
0.58%
0.62%
0.76%
0.70%
0.75%
0.95%
0.86%
1.00%
1.27%
1.15%
1.33%
1.53%
1.38%
1.58%
$ 53,511
$ 57,942
$ 60,175
$ 59,630
$ 63,045
28,751
20,864
—
32,401
16,528
—
35,674
11,904
—
39,148
8,117
—
46,435
7,092
259
$ 103,126
$ 106,871
$ 107,753
$ 106,895
$ 116,831
(1) The totals at September 30, 2017, 2016, 2015, 2014 and 2013 include $0.5 million, $1.3 million, $1.8 million, $2.5 million
and $5.3 million of performing home equity lines of credit, pursuant to regulatory guidance regarding senior lien
delinquency issued in January 2012.
(2) At September 30, 2017, 2016, 2015, 2014 and 2013 the totals include $47.0 million, $51.4 million, $55.5 million, $58.7
million and $54.3 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, 2017, 2016, 2015, 2014, and 2013 the totals include $11.9 million, $12.4 million, $15.0 million, $20.9
million and $$30.6 million in TDRs that are 90 days or more past due respectively.
The gross interest income that would have been recorded during the year ended September 30, 2017 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 $10.2 million. The interest income recognized on those loans included in net income
for the year ended September 30, 2017 was $6.8 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.
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.
20
At or For the Years Ended September 30,
2017
2016
2015
2014
2013
(Dollars in thousands)
Balance of Non-Accrual Loans
$
79,091
$
89,961
$
106,790
$
135,537
$
Accruing TDRs
Performing Impaired Loans
103,126
3,607
Less Loans Collectively Evaluated
Balance of Total Impaired loans
(5,264)
180,560
$
$
106,871
4,022
(6,004)
194,850
$
107,753
5,276
(7,647)
212,172
$
106,895
5,389
(14,435)
233,386
$
155,845
116,831
7,761
(17,396)
263,041
The balance of total (accrual and non-accrual) TDRs was $162.0 million at September 30, 2017, $8.6 million decrease
from September 30, 2016. Of the $162.0 million of TDRs recorded at September 30, 2017, $86.6 million is in the Residential
Core portfolio, $44.0 million is in the Home Today portfolio and $31.4 million is in the Home equity loans and lines of credit
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. For discussion on impairment measurement, see Note 5.
LOANS AND ALLOWANCE FOR LOAN LOSSES.
The following table sets forth the recorded investments of accrual and non-accrual TDRs, by the types of concessions
granted as of September 30, 2017.
Reduction in
Interest Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings
Bankruptcy
Total
(Dollars in thousands)
Accrual
Residential Core
$
10,847
$
498
$
6,483
$ 17,891
$
10,710
$
7,082
$
53,511
Residential Home Today
4,217
—
3,177
9,450
10,977
930
28,751
Home equity loans and lines of
credit
Total
Non-Accrual, Performing
Residential Core
Residential Home Today
Home equity loans and lines of
credit
Total
Non-Accrual, Non-Performing
Residential Core
Residential Home Today
Home equity loans and lines of
credit
Total
Total TDRs
Residential Core
Residential Home Today
Home equity loans and lines of
credit
Total
$
$
$
$
$
$
$
106
15,170
1,006
688
—
1,694
632
536
—
1,168
12,485
5,441
106
18,032
$
$
$
$
$
$
$
5,551
236
12,241
226
2,504
20,864
6,049
$
9,896
$ 39,582
— $
—
272
272
23
—
210
233
521
—
$
$
$
$
485
838
54
1,377
1,208
796
83
2,087
$
2,715
866
2,202
5,783
672
222
218
1,112
$
$
$
8,176
4,811
$ 21,278
10,538
6,033
6,554
373
$ 13,360
14,661
$ 46,477
$
$
$
$
$
$
$
21,913
$ 10,516
$ 103,126
8,161
$ 15,039
$
27,406
5,358
2,562
10,312
1,202
5,562
14,721
$ 23,163
1,588
2,543
43
4,174
$
$
1,548
845
717
3,110
20,459
18,877
$ 23,670
4,337
$
$
$
$
9,292
47,010
5,671
4,942
1,271
11,884
86,589
44,004
1,471
40,807
8,783
$ 36,790
31,427
$ 162,020
21
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 to not accrue interest and is performing according to the terms
of the restructuring, but has not been current for at least six consecutive months since its restructuring; has a partial charge-off;
or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status, where all borrowers have
filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest
because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring.
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, 2017, we had $5.5 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 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, 2017, the recorded investment of classified assets consists of substandard assets of $96.8 million,
including $5.5 million of real estate owned, and $3.8 million of assets designated special mention. As of September 30, 2017,
there were no individual assets with balances exceeding $1 million that were classified as substandard. Substandard assets at
September 30, 2017 include $24.2 million of loans 90 or more days past due and $67.1 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.
(2) general valuation allowances (GVAs), 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.
We evaluate the allowance for loan losses based upon the combined total of the quantitative and qualitative GVAs and
IVAs. 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,
22
delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the
delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the
determination of qualitative GVAs include:
•
•
•
•
•
•
•
•
•
changes in lending policies and procedures including underwriting standards, collection, charge-off or recovery
practices;
changes in national, regional, and local economic and business conditions and trends including housing market factors
and trends, such as the status of loans in foreclosure, real estate in judgment and real estate owned, and unemployment
statistics and trends;
changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw
period;
changes in the experience, ability or depth of lending management;
changes in the volume or severity of past due loans, volume of nonaccrual loans, or the volume and severity of
adversely classified loans including the trending of delinquency statistics (both current and historical), historical loan
loss experience and trends, the frequency and magnitude of multiple restructurings of loans previously the subject of
TDRs, and uncertainty surrounding borrowers’ ability to recover from temporary hardships for which short-term loan
restructurings are granted;
changes in the quality of the loan review system;
changes in the value of the underlying collateral including asset disposition loss statistics (both current and historical)
and the trending of those statistics, and additional charge-offs on individually reviewed loans;
existence of any concentrations of credit;
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, 2017, the balance of
such IVAs was $11.1 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.
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. We 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 and recoveries have actually
exceeded gross charge-offs, our home equity loans and lines of credit portfolio continued to comprise a significant portion of our
gross charge-offs during the current year. At September 30, 2017, we had a recorded investment of $1.57 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.
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
23
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 Operations.”
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,
2017
2016
2015
2014
2013
Allowance balance (beginning of the year)
Charge-offs:
$ 61,795
$ 71,554
(Dollars in thousands)
$ 81,362
$ 92,537
Real estate loans:
Residential Core
Ohio
Florida
Other
Total Residential Core
Residential Home Today
Ohio
Florida
Other
Total Residential Home Today
Home equity loans and lines of credit
Ohio
Florida
California
Other
Total Home equity loans and lines of credit
Construction
Total charge-offs
Recoveries:
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total recoveries
Net recoveries (charge-offs)
Provision (credit) for loan losses
Allowance balance (end of the year)
Ratios:
Net charge-offs (recoveries) 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
1,728
1,272
29
3,029
2,172
83
21
2,276
2,707
2,560
199
707
6,173
—
11,478
3,214
981
99
4,294
2,649
112
—
2,761
3,095
2,885
76
1,790
7,846
—
14,901
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
$ 100,464
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
5,458
1,311
8,862
—
15,631
4,153
(17,000)
$ 48,948
3,708
1,433
7,969
32
13,142
(1,759)
(8,000)
$ 61,795
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
(0.03)%
0.02%
0.06%
0.29%
0.44%
61.89 %
68.69%
67.00%
60.03%
59.38%
0.39 %
0.52%
0.64%
0.76%
0.91%
Charge-offs decreased during the year ended September 30, 2017 in all portfolios when compared to the year ended
September 30, 2016, reflecting the improving market conditions. We continue to evaluate loans becoming delinquent for
potential losses and record provisions for the estimate of those losses.
24
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.
2017
At September 30,
2016
2015
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans Amount
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans Amount
Percent of
Allowance
to Total
Allowance
Percent of
Loans in
Category to
Total Loans
Amount
(Dollars in thousands)
$14,186
29.0%
86.2% $15,068
24.4%
85.5% $22,596
31.6%
83.9%
4,508
30,249
5
9.2
61.8
—
0.9
7,416
12.4
0.5
39,304
7
12.0
63.6
—
1.0
9,997
13.0
0.5
38,926
35
14.0
54.4
—
1.2
14.4
0.5
Real estate loans:
Residential Core
Residential Home
Today
Home equity loans
and lines of credit
Construction
Total allowance
$48,948
100.0%
100.0% $61,795
100.0%
100.0% $71,554
100.0%
100.0%
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total allowance
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
Amount
(Dollars in thousands)
$ 31,080
38.2%
82.2% $ 35,427
38.3%
79.4%
16,424
33,831
27
20.2
41.6
—
1.5
15.8
0.5
24,112
32,818
180
26.0
35.5
0.2
1.7
18.2
0.7
$ 81,362
100.0%
100.0% $ 92,537
100.0%
100.0%
During the year ended September 30, 2017, the total allowance for loan losses decreased $12.9 million, to $48.9 million
from $61.8 million at September 30, 2016, as we recorded a negative $17.0 million provision for loan losses, which offset the
impact to the allowance of recorded net recoveries of $4.2 million for the year. The allowance for loan losses related to loans
evaluated collectively decreased by $11.3 million during the year ended September 30, 2017, and the allowance for loan losses
related to loans evaluated individually decreased by $1.6 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 Consolidated Financial Statements for more
information. Other than the less significant construction and other consumer loans segments, changes during the year ended
September 30, 2017 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 6.8% or $681.4 million while the
total allowance for loan losses for this segment decreased 5.2% or $0.8 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), increased $0.8 million, or 13.0%, from $6.1 million at September 30, 2016 to $6.9 million at
September 30, 2017. 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, was 0.06% as of both dates. 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 18.7% to $20.6 million at September 30, 2017 from $25.4 million at
September 30, 2016. Loans 90 or more days delinquent decreased 23.2% to $12.0 million at September 30, 2017 from
$15.6 million at September 30, 2016. There were net recoveries during the current year of $2.4 million as compared to
25
$0.6 million of net charge-offs during the year ended September 30, 2016. As there continues to be a consistent
improving trend in asset quality of this portfolio, additional reductions in the allowance may be warranted, offset by
any increase that may be warranted from the overall rise in the portfolio balance.
• Residential Home Today – The total balance of this segment of the loan portfolio decreased 10.6% or $12.8 million
as new loans are no longer being originated in this portfolio. The total allowance for loan losses for this segment
decreased by $2.9 million or 39.2%. 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 49.1%
from $4.4 million at September 30, 2016 to $2.3 million at September 30, 2017. Similarly, the ratio of this portion of
the allowance to the total balance of loans in this loan segment that were evaluated collectively, decreased 2.7% to
3.7% at September 30, 2017 from 6.4% at September 30, 2016. Total delinquencies decreased from $15.2 million at
September 30, 2016 to $12.4 million at September 30, 2017. Delinquencies greater than 90 days decreased from $7.4
million to $6.9 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 $1.0 million during the year ended September 30, 2017
as compared to $1.3 million during the year ended September 30, 2016. Despite the improving trends, there still
remains concern surrounding the overall credit profile of 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 increased 1.8% or
$27.5 million from $1.54 billion at September 30, 2016 to $1.57 billion at September 30, 2017. The total allowance
for loan losses for this segment decreased 23.0% to $30.2 million from $39.3 million at September 30, 2016. 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 $9.8 million, or 25.4%, from $38.6 million to
$28.8 million during the year ended September 30, 2017. The ratio of this portion of the allowance to the total balance
of loans in this loan segment that were evaluated collectively also decreased to 1.9% at September 30, 2017 from 2.6%
at September 30, 2016. Net charge-offs for this loan segment during the current year were less due to a decrease in
gross charge-offs and an increase in loan recoveries, resulting in net recoveries of $2.7 million for the current year as
compared to net recoveries of $123 thousand for the year ended September 30, 2016. Total delinquencies for this
portfolio segment increased 3.8% to $11.8 million at September 30, 2017 as compared to $11.3 million at
September 30, 2016. Delinquencies greater than 90 days increased 9.7% to $5.4 million at September 30, 2017 from
$4.9 million at September 30, 2016. The credit metrics of this loan segment were mixed as recoveries exceeded
charge-offs, while total delinquencies slightly increased during the current year, but the overall downward shift of risk
level in the portfolio led to the reduction of the total allowance. The reduction in the allowance is also supported by a
reduction of the principal balance of home equity lines of credit coming to the end of the draw period. In recent years,
a large portion of the overall allowance has been allocated to the home equity loans and lines of credit portfolio to
address exposure from customers whose lines of credit were originated without amortizing payments during the draw
period and who could face potential increased payment shock at the end of the draw period. In general, home equity
lines of credit originated prior to June 2010 were characterized by a ten-year draw period, with interest only payments,
followed by a ten-year repayment period. However, a large number of those lines of credit approaching the end of
draw period have been paid off or refinanced without significant loss. The principal balance of home equity lines of
credit originated prior to 2010 without amortizing payments during the draw period that are coming to the end of the
draw period through fiscal 2020 is $482.4 million at September 30, 2017, compared to $891.2 million at September
30, 2016. As this exposure decreases without incurring significant loss, the portion of the overall allowance allocated
to the home equity loans and lines of credit category can be decreased. Generally, there were minimal home equity
lines of credit originated between June 2010 and February 2013 and those originated after February 2013 require an
amortizing payment during the draw period and do not face the same end-of-draw increased payment shock risk.
However, the balance and ratio of this loan segment's allowance for loan losses continue to 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 gross charge-offs for 2017 and are expected to continue to represent a large portion of our
charge-offs 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 years
ended September 30, 2017, 2016, 2015, 2014 and 2013 no material changes were made to the allowance or allowance
methodology.
26
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 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 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, 2017, 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 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. As a result of previous
guidance from the Company's primary regulator that indicated that the Company's reported balance of liquid assets could not
include any investment security not classified as available for sale, 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, 2017, consisted of $8.5 million in primarily fixed-rate securities guaranteed by
Fannie Mae, and $533.4 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 investment options authorized in the Association's and Company's investment policies, 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. 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
27
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.
2017
At September 30,
2016
2015
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
REMICs
Fannie Mae certificates
$
— $
— $
— $
— $
533,427
8,537
528,536
8,943
508,044
9,184
507,997
9,869
2,000
570,194
9,897
$
2,002
572,451
10,600
Total investment securities available for sale
$ 541,964
$ 537,479
$517,228
$ 517,866
$ 582,091
$ 585,053
Portfolio Maturities and Yields. The composition and maturities of our securities portfolio at September 30, 2017 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, 2017 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:
REMICs
Fannie Mae
certificates
Total investment
securities
available-for-sale $
—
—
—
Sources of Funds
—%
5
2.68%
90,890
1.69%
442,532
1.82%
533,427
528,536
1.80%
—%
5,345
2.35%
604
7.90%
2,588
6.19%
8,537
8,943
3.91%
—% $
5,350
2.35% $ 91,494
1.73% $ 445,120
1.84% $ 541,964
$ 537,479
1.83%
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 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 from brokered CDs. It relies on its competitive pricing,
28
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), 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, 2017, deposits totaled $8.15 billion. Checking accounts totaled $987.0 million (including $911.6
million of high-yield checking accounts) and savings accounts totaled $1.47 billion (including $1.36 billion of high-yield
savings accounts). At September 30, 2017, the Association had a total of $5.69 billion in CDs (including $620.7 million of
brokered CDs), of which $2.13 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.
The following table sets forth the distribution of the Association’s average total deposit accounts, by account type, for the
fiscal years indicated.
2017
2016
2015
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:
Checking
Savings
Certificates of deposit
992,042
1,514,275
5,672,212
12.1%
18.5%
69.4%
0.09% $ 990,592
0.14% 1,563,448
1.49% 5,756,861
11.9%
18.8%
69.3%
0.13% $ 995,736
0.18% 1,636,093
1.49% 5,836,053
11.8%
19.3%
68.9%
Total deposits
$8,178,529
100.0%
1.07% $8,310,901
100.0%
1.08% $8,467,882
100.0%
0.14%
0.19%
1.53%
1.12%
As of September 30, 2017, the aggregate amount of the Association’s outstanding CDs in amounts greater than or equal
to $100,000 was approximately $2.69 billion. The following table sets forth the maturity of those CDs as of September 30,
2017.
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, 2017
(In thousands)
$
$
323,026
141,048
485,879
1,294,243
441,466
2,685,662
29
The following table sets forth the Association's CDs, by interest rate range and length of time until maturity, at
September 30, 2017.
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)
$ 531,640
$ 254,524
$
43,597
$
47,923
$ 877,684
1,473,180
122,270
1,229,516
356
1,062,747
27,132
583,475
299,600
4,348,918
449,358
515
3,960
4,977
668
3,156
—
—
—
8,648
4,628
15.43%
76.44%
7.90%
0.15%
0.08%
$ 2,131,565
$ 1,490,041
$ 1,136,632
$ 930,998
$ 5,689,236
100.00%
The following table sets forth the Association’s CDs classified by interest rate range 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
2017
At September 30,
2016
(Dollars in thousands)
2015
$
877,684
4,348,918
449,358
8,648
4,628
$ 5,689,236
$ 1,164,802
4,214,976
411,229
9,487
19,148
$ 5,819,642
$ 1,641,838
3,293,964
552,902
158,504
31,410
$ 5,678,618
Borrowings. At September 30, 2017, the Association had $3.67 billion of borrowings from the FHLB of Cincinnati.
During the fiscal year ended September 30, 2017, 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 $41.0
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, 2017 was $4.87 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 $97.4 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, 2017, the Association had the capacity to borrow up to $72.3 million
from the FRB-Cleveland and had no amount outstanding as of that date.
30
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,
2017
2016
2015
$ 3,671,377
(Dollars in thousands)
$2,718,795
$ 2,168,627
$ 3,231,709
$2,284,881
$ 2,312,977
$ 3,679,225
$2,720,903
$ 2,745,262
1.36%
1.32%
1.01%
1.23%
1.14%
0.86%
The Association has utilized borrowings from the FHLB of Cincinnati to manage its on-balance sheet liquidity, to replace
maturing, high rate CDs at a lower cost and to lengthen the maturity of our funding through the use of interest rate swaps
discussed in Note 17. Derivative Instruments of the Notes to Consolidated Financial Statements.
The following table sets forth information relating to a category of short-term borrowings for which the average balance
outstanding during the period was at least 30% of shareholders' equity at the end of each period shown.
At or For the Fiscal Years Ended
September 30,
2016
2017
2015
FHLB borrowings (30 days and under):
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
(Dollars in thousands)
$ 1,110,000
$ 1,234,000
970,733
$
$
$
$
851,000
851,000
678,883
$
755,000
$ 1,535,000
$ 1,242,380
0.81%
1.17%
0.36%
0.40%
0.15%
0.18%
During the 2015 fiscal year, 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 overnight borrowings, net of the required investment in FHLB
stock, were deposited at the Federal Reserve. The strategy was not utilized at or during the fiscal years ended September 30,
2017, 2016, or 2015, however, dependent upon market rates, remains an option in the future.
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 were no longer a part of Third Federal Savings, MHC’s
consolidated tax group because Third Federal Savings, MHC no longer owned at least 80% of the common stock of the
Company. As a result of the Company's stock repurchase program over the past few years, which reduced the number of
outstanding shares of the Company, at September 30, 2017, Third Federal Savings, MHC, owned 80.74% of the common stock
of the Company and it is possible in the future for the Company and the Association, to once again, be a part of Third Federal
Savings, MHC’s consolidated tax group. 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.
31
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, 2017, 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.
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
risk. 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 eleven 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 Dodd-Frank
Act 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
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, 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
32
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 requires 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
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.
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, a Tier 1 capital to risk-based assets ratio, a total capital to
risk-based assets ratio, and a 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.
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-
33
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% in addition to the minimum 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. At September 30, 2017, the Association exceeded the fully phased in regulatory requirement for the "capital
conservation buffer". 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. As presented in Note 3. Regulatory Matters, at September 30, 2017, 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, 2017, 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, 2017, 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.
34
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;
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 an $81 million, a $60 million and a $66 million
cash dividend to the Company during the fiscal years ending September 30, 2017, 2016 and 2015, respectively. There were no
dividends paid to the Company by Third Capital during the fiscal years ended September 30, 2017, 2016 or 2015. Additionally,
the Association paid a special dividend of $150 million to the Company in the fiscal year ended September 30, 2016. This
amount was equal to the voluntary contribution of capital that the Company made to the Association in October 2010.
The Company's sixth stock repurchase program, for the repurchase of 10,000,000 shares of its equity stock, 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 completed January 6, 2017. The eighth stock repurchase program, also for
10,000,000 shares, was announced on October 27, 2016 and began on January 6, 2017.
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. Third Federal Savings, MHC has
received this approval of its members at meetings held July 19, 2017, July 26, 2016, August 5, 2015 and July 31, 2014. Third
Federal Savings, MHC has the approval to waive the receipt of up to a total of $0.68 per share of dividends from the Company
over the four quarterly periods ending June 30, 2018. Third Federal Savings, MHC waived its right to receive a $0.17 per share
dividend payment on September 25, 2017. As a result of the 2016, 2015 and 2014 approvals, Third Federal Savings, MHC
previously waived its right to receive four separate $0.125 per share dividend payments during the four quarterly periods
ending June 30, 2017, four separate $0.10 per share dividend payments during the four quarterly periods ending June 30, 2016
and four separate $0.07 per share dividend payments during the four quarterly periods ending June 30, 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 be provided by affiliates in order to receive loans from the savings association. In
35
addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged 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.
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);
• 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.
36
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, 2017 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
$ 1,555,903
Ratio
21.37% $
Amount
728,192
1,506,952
1,506,952
11.16%
20.69%
1,506,938
20.69%
675,242
582,553
473,325
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.
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 ranged 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. In conjunction with the FDIC Deposit Insurance Fund’s reserve ratio reaching 1.15%, the assessment
range was lowered to 1.5 to 40 basis points, effective July 1, 2016. In addition, “Large Institutions” (those with assets of $10
billion or more) will now be assessed a surcharge required by the DFA until the earlier of the Deposit Insurance Fund reaching
1.35% or December 31, 2018. The surcharge is 4.5 basis points of the Large Institution’s “surcharge base,” which is generally
its regular assessment base reduced by $10 billion. The FDIC has indicated that it expects that the surcharges will be sufficient
to achieve the 1.35% ratio by December 31, 2018. However, in the event that ratio is not achieved by that date, Large
Institutions will be required to pay a short-fall assessment during the first half of 2019.
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 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, 2017, the annualized FICO assessment was equal to 0.54 basis points of total assets less Tier 1
capital.
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For the fiscal year ended September 30, 2017, the Association paid $629 thousand related to the FICO bonds and $7.2
million, applicable to deposit insurance assessments. The deposit insurance payments are assessed on an arrears basis. At
September 30, 2017, the balance of the Association's accrued deposit insurance assessment was $1.9 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, 2017, outstanding borrowings (including accrued interest) from the FHLB of Cincinnati were $3.67
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
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.
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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 FRS, 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 FRS. 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
(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.
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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
the 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 July 19, 2017, 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 a total of $0.68 per share during the four quarterly periods ending June 30, 2018. Third Federal Savings, MHC
previously received the approval of its members at: (1) a July 26, 2016 meeting to waive receipt of dividends up to a total of
$0.50 per share during the four quarterly periods ending June 30, 2017: (2) an August 5, 2015 meeting to waive receipt of
dividends up to $0.40 per share during the four quarterly periods ending June 30, 2016; and (3) a July 31, 2014 meeting to
waive receipt of dividends up to $0.28 per share during the four quarterly periods ending June 30, 2015.
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
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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.
Generally, 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. An example of this occurs when, 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.
As another example of changes in interest rates that can have an unfavorable impact on our net interest income, 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.
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,
2017, we held $1.46 billion of home equity lines of credit loans and $2.27 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, 2017, we serviced $1.85 billion of loans sold to third parties, and the mortgage
servicing rights associated with such loans had an amortized cost of $8.4 million and an estimated fair value, at that date, of
$16.1 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
value of the available-for-sale securities, net of taxes. The declines in market value could result in other-than-temporary
42
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, 2017, in the event of an immediate 200 basis point
increase in all interest rates, our model projects that we would experience a $386.6 million, or 18.33%, decrease in EVE. Our
calculations further project that, at September 30, 2017, in the event that market interest rates used in the simulation were
adjusted in equal monthly amounts (termed a "ramped" format) during the 12 month measurement period to an aggregate
increase in 200 basis points, we would expect our projected net interest income for the twelve months ended September 30,
2018 to decrease by 1.63%. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”
A continuation of historically low interest rates and the possibility that we may access higher-cost funds to support our
growth 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
$409.0 million for the fiscal year ended September 30, 2017 from $550.2 million for the fiscal year ended September 30, 2008
while the average balance of total interest earning assets increased to $12.93 billion for the fiscal year ended September 30,
2017 from $10.10 billion 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, and our interest expense may increase as we access non-core funding sources or increase deposit
rates to fund our operations.
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 affected 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:
43
•
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,
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 and return capital to our shareholders.
• 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. Furthermore, the wide acceptance of Internet-based commerce has
resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles.
Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without
the direct assistance of banks. 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.
We continually encounter technological change, and may have fewer resources than many of our larger competitors to
continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-
driven products and services. The effective use of technology increases efficiency and enables financial institutions to better
44
serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as
to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in
technological improvements. We also may not be able to effectively implement new technology-driven products and services or
be successful in marketing these products and services to our customers.
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
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 received the approval of its members in four separate meetings (in July 2014, August
2015, July 2016 and July 2017) to waive the receipt of dividends for a twelve-month period, and the FRS has “non-objected” to
Third Federal Savings, MHC’s waiver each time 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
45
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.
Our operations rely on numerous external vendors.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the
contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the
contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial
condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our
operations, which in turn could have a material negative impact on our financial condition and results of operations. We also
could be adversely affected to the extent such an agreement is not renewed by the third-party vendor or is renewed on terms
less favorable to us.
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 branch 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.
A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse
effect on our financial condition and results of operations.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company
for our fiscal year beginning October 1, 2020. This standard, referred to as Current Expected Credit Loss, or CECL, will
require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the
expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan
losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of
data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in
our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have
a material adverse effect on our financial condition and results of operations.
If we are required to repurchase mortgage loans that we have previously sold, it would negatively affect our earnings.
We sell mortgage loans in the secondary market under agreements that contain representations and warranties related to,
among other things, the origination, characteristics of the mortgage loans and subsequent servicing. We may be required to
repurchase mortgage loans that we have sold in cases of borrower default or breaches of these representations and warranties,
and we would be subject to increased risk of disputes and repurchase demands as our volume of loan sales increases. If we are
required to repurchase mortgage loans or provide indemnification or other recourse, this could significantly increase our costs
and thereby affect our future earnings.
Recently adopted final regulations could restrict our ability to originate and sell loans.
The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal
liability under the Dodd-Frank Act, which holds lenders accountable for ensuring a borrower’s ability to repay a mortgage.
Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard.
Under the rule, a “qualified mortgage” loan must not contain certain specified features, including:
•
•
•
•
excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime
loans);
interest-only payments;
negative amortization; and
terms of longer than 30 years.
46
Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio
does not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the
borrower on the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during
the first five years, taking into account all applicable taxes, insurance and assessments.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to
retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies
have issued a final rule to implement this requirement. The final rule provides that the definition of “qualified residential
mortgage” includes loans that meet the definition of qualified mortgage issued by the Consumer Financial Protection Bureau.
The final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and
restrict our ability to make loans. Similarly, the Consumer Financial Protection Bureau’s rule on qualified mortgages could
limit our ability or desire to make certain types of loans or loans to certain borrowers, which could limit our growth or
profitability.
Any future action by the U.S. Congress lowering the federal corporate income tax rate and/or eliminating the federal
corporate alternative minimum tax could result in the need to establish a deferred tax assets valuation allowance and a
corresponding charge against earnings.
Deferred tax assets are reported as assets on the Company’s balance sheet and represent the decrease in taxes expected to
be paid in the future because of future reversals of temporary differences in the bases of assets and liabilities as measured by
enacted tax laws and their bases as reported in the financial statements. As of September 30, 2017, the Company’s net federal
deferred tax asset was $15.5 million. The Company did not have a federal net operating loss carryforward, a federal tax credit
carryforward, an alternative minimum tax credit carryforward or a federal alternative minimum tax net operating loss
carryforward that impacted the deferred tax asset as of September 30, 2017. The President of the U.S. and the majority political
party in the U.S. Congress have announced plans to lower the federal corporate income tax rate from its current level of 35%. If
enacted, this reduction could result in a decrease in the value of our deferred tax assets and a reduction to our net income and
total equity during the period in which a tax rate change is enacted. The reduction in corporate income tax rate could also
reduce our income tax provision expense in future periods.
Our sources of funds are limited because of our holding company structure.
The Company is a separate legal entity from its subsidiaries and does not have significant operations of its own.
Dividends from the Association provide a significant source of cash for the Company. The availability of dividends from the
Association is limited by various statutes and regulations. Under these statutes and regulations, the Association is not permitted
to pay dividends on its capital stock to the Company, its sole stockholder, if the dividend would reduce the stockholders' equity
of the Association below the amount of the liquidation account established in connection with the mutual-to-stock conversion.
Federal savings associations may pay dividends without the approval of its primary federal regulator only if they meet
applicable regulatory capital requirements before and after the payment of the dividends and total dividends do not exceed net
income to date over the calendar year plus its retained net income over the preceding two years. If in the future, the Company
utilizes its available cash and the Bank is unable to pay dividends to the Company, the Company may not have sufficient funds
to pay dividends or fund stock repurchases.
Item 1B.
Unresolved Staff Comments
None.
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 six other office locations. The net
book value of our land, premises, equipment and software was $60.9 million at September 30, 2017. Included in the net book
value are two commercial buildings located in Canton, Massachusetts, valued at $18.2 million, which are owned by our
Hazelmere entity and leased to third parties in net lease transactions.
47
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
consolidated 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 20, 2017, we had 7,180 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, 2015
Quarter ended March 31, 2016
Quarter ended June 30, 2016
Quarter ended September 30, 2016
Quarter ended December 31, 2016
Quarter ended March 31, 2017
Quarter ended June 30, 2017
Quarter ended September 30, 2017
Traded Market Prices
High
$ 19.23
Low
$ 17.05
Dividends
0.10
$
18.53
18.50
18.67
19.83
17.38
16.07
16.13
15.60
16.43
16.92
18.61
16.40
15.30
14.84
0.10
0.10
0.125
0.125
0.125
0.125
0.17
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;
tax considerations;
• our financial position and results of operations;
•
• our alternative uses of funds;
• statutory and regulatory limitations; and
• 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. Any 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
48
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 July 19, 2017, 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 $0.68 per share, to be declared on the Company’s common stock during the four
quarterly periods ending June 30, 2018. The members approved the waiver by casting 64% 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 81% majority shareholder of
the Company.
Following the receipt of the members’ approval at the July 19, 2017 special meeting, Third Federal Savings, MHC filed a
notice with, and subsequently received the non-objection of, the FRB-Cleveland for the proposed dividend waivers.
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, 2012 through September 30, 2017, 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 9/30/2012)
TFS Financial Corporation
SNL Bank and Thrift Index
SNL Thrift Index
NASDAQ Composite
Source: S&P Global Market Intelligence
______________________
Measurement Date
9/30/2012
100.00
9/30/2013
131.97
9/30/2014
158.65
9/30/2015
194.98
9/30/2016
206.11
9/30/2017
193.01
100.00
100.00
100.00
130.10
120.39
122.77
153.33
132.79
148.08
156.54
158.59
153.99
161.85
165.85
179.29
227.64
192.83
221.75
49
We did not sell any securities during the quarter ended September 30, 2017.
The following table summarizes our stock repurchase activity during the three months ended September 30, 2017 and the
stock repurchase plans approved by our Board of Directors.
Period
July 1, 2017 through July 31, 2017
August 1, 2017 through August 31, 2017
September 1, 2017 through September 30, 2017
Total Number
of Shares
Purchased
398,900
108,000
80,000
586,900
Average
Price
Paid per
Share
$ 15.79
15.48
15.38
15.68
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans (1)
Maximum Number
of Shares that May
Yet be Purchased
Under the Plans
398,900
108,000
80,000
586,900
7,938,890
7,830,890
7,750,890
(1) On October 27, 2016, the Company announced that the Board of Directors approved the Company's eighth stock
repurchase program, which authorizes the repurchase of up to 10,000,000 shares of the Company's outstanding common
stock, which commenced upon the completion of the Company's seventh stock repurchase program on January 7, 2017.
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 7,750,890 shares yet to be
purchased as of September 30, 2017.
Item 6.
Selected Financial Data
Selected Financial Condition Data:
Total assets
Cash and cash equivalents
Investment securities - available for sale
Loans held for sale
Loans, net
Bank owned life insurance
Prepaid expenses and other assets
Deposits
Borrowed funds
Shareholders’ equity
2017
2016
At September 30,
2015
(In thousands)
2014
2013
$13,692,563
$12,906,062
$12,368,886
$11,803,195
$11,269,346
268,218
537,479
231,239
517,866
155,369
585,053
181,403
568,868
285,996
477,376
351
12,419,306
4,686
11,708,804
116
11,187,583
4,962
10,630,687
4,179
10,084,066
205,883
61,086
8,151,625
3,671,377
1,689,959
200,144
63,994
8,331,368
2,718,795
1,660,458
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
8,464,499
745,117
1,871,477
50
2017
For the Years Ended September 30,
2015
2016
2014
2013
Selected Operating Data:
Interest income
Interest expense
Net interest income
Provision (credit) for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Earnings before income tax
Income tax expense
Net earnings after income tax expense
Earnings per share—basic and fully diluted
Cash dividends declared per share
(In thousands, except per share amounts)
$ 408,995
$ 388,441
$ 383,477
$ 374,684
$ 383,972
130,099
278,896
(17,000)
295,896
19,849
182,404
133,341
44,464
$ 88,877
0.32
$
0.545
$
118,026
270,415
(8,000)
278,415
24,952
181,004
122,363
41,810
$ 80,553
0.28
$
0.425
$
113,350
270,127
(3,000)
273,127
24,260
187,992
109,395
36,804
$ 72,591
0.25
$
0.31
$
103,251
271,433
19,000
252,433
21,900
175,476
98,857
32,966
$ 65,891
0.22
$
0.07
$
115,419
268,553
37,000
231,553
28,468
177,660
82,361
26,402
$ 55,959
0.18
$
—
$
51
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:
Non-performing assets as a percent of total assets
Non-accruing loans as a percent of total loans
Allowance for loan losses as a percent of non-accruing loans
Allowance for loan losses as a percent of total loans
Capital Ratios:
Association
At or For The Years Ended September 30,
2017
2016
2015
2014
2013
0.67%
5.28%
2.02%
2.16%
61.06%
1.37%
0.65%
4.73%
2.09%
2.23%
61.28%
1.45%
0.57%
4.04%
2.03%
2.17%
63.86%
1.47%
0.57%
3.52%
2.26%
2.42%
59.82%
1.53%
0.50%
3.05%
2.25%
2.46%
59.81%
1.58%
113.29% 114.67% 115.43% 118.51% 119.58%
—%
170.31% 151.79% 124.00%
31.82%
0.62%
0.63%
61.89%
0.39%
0.75%
0.76%
68.69%
0.52%
1.00%
0.95%
67.00%
0.64%
1.33%
1.27%
60.03%
0.76%
1.58%
1.53%
59.38%
0.91%
Total risk-based capital to risk weighted assets(5)
NA
NA
NA
25.25%
26.16%
Total capital to risk-weighted assets(6)
21.37%
22.24%
22.92%
NA
NA
Tier 1 core capital to adjusted tangible assets(5)
NA
NA
NA
13.47%
14.18%
Tier 1 (leverage) capital to net average assets(6)(7)
11.16%
11.73%
12.78%
NA
NA
Tier 1 risk-based capital to risk weighted assets(5)
Tier 1 capital to risk-weighted assets(6)
Common equity tier 1 capital to risk-weighted assets(6)
TFS Financial Corporation
Total risk-based capital to risk weighted assets(5)
Total capital to risk-weighted assets(6)
Tier 1 core capital to adjusted tangible assets(5)
Tier 1 (leverage) capital to net average assets(6)(7)
Tier 1 risk-based capital to risk weighted assets(5)
Tier 1 capital to risk-weighted assets(6)
Common equity tier 1 capital to risk-weighted assets(6)
Average equity to average total assets
Other Data:
Association
Number of full service offices
Loan production offices
NA
20.69%
20.69%
NA
23.63%
NA
12.41%
NA
22.96%
22.96%
12.67%
NA
21.36%
21.36%
NA
24.62%
NA
13.07%
NA
23.74%
23.74%
13.64%
NA
24.02%
24.91%
21.95%
21.95%
NA
24.54%
NA
13.76%
NA
23.57%
23.57%
14.09%
NA
NA
NA
NA
29.00%
NA
15.60%
NA
27.77%
NA
NA
16.28%
29.11%
NA
16.59%
NA
30.36%
NA
NA
16.38%
38
8
38
8
38
8
38
8
38
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) Calculated using the regulatory capital methodology applicable to the Association prior to January 1, 2015.
52
(6) 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.
(7) Tier 1 (leverage) capital to net average assets ratio disclosures were based on net average assets beginning quarter end
September 30, 2015.
53
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, as described below. Our values are further reflected in 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.
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, that
experience made a lasting impression on our risk awareness, 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 rising interest rates. 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 the levels of regulatory capital
required to be well capitalized, by promoting adjustable-rate loans and shorter-term, fixed-rate loans, and by opportunistically
extending the duration of our funding sources.
Levels of Regulatory Capital
At September 30, 2017, the Company’s Tier 1 (leverage) capital totaled $1.68 billion, or 12.41% of net average assets and
22.96% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.51 billion, or 11.16% of net average
assets and 20.69% of risk-weighted assets. Each of these measures was more than twice the 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 section
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 that provides us with improved interest rate risk
characteristics when compared to a 30-year, fixed-rate mortgage loan. Our “Smart Rate” adjustable rate mortgage offers
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. 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.
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.
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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
For the Years Ended September 30,
2017
2016
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
1,342,801
49.7% $
1,134,159
43.8%
417,182
941,634
1,358,816
15.4
34.9
50.3
608,786
848,538
1,457,324
23.5
32.7
56.2
Total First Mortgage Loan Originations:
$
2,701,617
100.0% $
2,591,483
100.0%
September 30, 2017
September 30, 2016
Amount
Percent
Amount
Percent
Balances of Residential Mortgage Loans Held For Investment:
(Dollars in thousands)
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
$
4,816,567
44.4% $
4,253,531
41.7%
2,051,529
3,987,072
6,038,601
18.9
36.7
55.6
2,078,561
3,859,498
5,938,059
20.4
37.9
58.3
Total Residential Mortgage Loans Held For Investment:
$ 10,855,168
100.0% $ 10,191,590
100.0%
The following table sets forth the balances as of September 30, 2017 for all ARM loans segregated by the next scheduled
interest rate reset date.
During the Fiscal Years Ending September 30,
2018
2019
2020
2021
2022
2023
Total
Current Balance of
ARM Loans
Scheduled for
Interest Rate Reset
(in thousands)
$
$
405,426
569,254
807,754
1,223,347
1,621,812
188,974
4,816,567
At September 30, 2017 and September 30, 2016, 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 $0.4 million and $4.7 million, respectively.
Extending the Duration of Funding Sources
As a complement to our strategies to shorten the duration of our interest earning assets, as described above, we also seek
to lengthen the duration of our interest bearing funding sources. These efforts include monitoring the relative costs of
alternative funding sources such as retail deposits, brokered certificates of deposit, longer-term (e.g. four to six years) fixed rate
advances from the FHLB of Cincinnati, and shorter-term (e.g. three months) advances from the FHLB of Cincinnati, the
durations of which are extended by correlated interest rate exchange contracts. Each funding alternative is monitored and
evaluated based on its effective interest payment rate, options exercisable by the creditor (early withdrawal, right to call, etc.),
and collateral requirements. The interest payment rate is a function of market influences that are specific to the nuances and
market competitiveness/breadth of each funding source. Generally, early withdrawal options are available to our retail CD
customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB of
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Cincinnati; and we are not subject to early termination options with respect to our interest rate exchange contracts. Additionally,
collateral pledges are not provided with respect to our retail CDs or our brokered CDs; but are required for our advances from
the FHLB of Cincinnati as well as for our interest rate exchange contracts.
During the year ended September 30, 2017, the composition of our duration-extending funding sources changed as
follows: the balance of retail CDs decreased $211.7 million while the balance of brokered CDs (which is inclusive of
acquisition costs and subsequent amortization) increased $81.3 million. Additionally during the year ended September 30,
2017, we increased the balance of our short-term advances from the FHLB of Cincinnati by $259.0 million; and we added
$900.0 million of new, shorter-term advances from the FHLB of Cincinnati that were matched/correlated to interest rate
exchange contracts that extended the effective durations of those shorter-term advances to approximately five years at
inception. These funding source modifications facilitated asset growth of $786.5 million and funded stock repurchases of $52.5
million and stock dividends of $27.7 million.
Other Interest Rate Risk Management Tools
In addition to maintaining the levels of regulatory capital required to be well capitalized, since 2016, we have actively
marketed home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate which provides
interest rate sensitivity to that portion of our assets. Prior to 2010, home equity lending also represented a meaningful strategy
to manage our interest rate risk profile. Between 2010 and 2015, the Association, in various steps, restricted and modified its
home equity lending products and the markets they were offered in response to the 2008 financial crisis and the resulting
regulatory environments that existed during that time. Through redesigned home equity products, we hope to have re-
established home equity line of credit lending as a meaningful strategy to manage our interest rate risk profile. At
September 30, 2017, the principal balance of home equity lines of credit totaled $1.24 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.
We also manage interest rate risk by selectively selling a small portion of our long-term, fixed-rate mortgage loans in the
secondary market. Prior to fiscal 2010, this strategy was used to a greater extent to manage our interest rate risk. At
September 30, 2017, we serviced $1.85 billion of loans for others, of which $1.04 billion were sold in the secondary market
prior to fiscal 2010. While the sales of first mortgage loans remain strategically important for us, since fiscal 2010, they have
played only a minor role 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.
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, 2017, 91% 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 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, 2017, $33.0 million of loans in Chapter 7 bankruptcy status were
included in total TDRs. At September 30, 2017, the recorded investment in non-accrual status loans included $34.1 million of
performing loans in Chapter 7 bankruptcy status, of which $33.0 million were also reported as TDRs.
In response to the unfavorable regional and macro-economic environment that arose beginning in 2008, and in an effort
to limit our credit risk exposure and improve the credit performance of new customers, we tightened our credit eligibility
criteria in evaluating a borrower’s ability to successfully fulfill his or her repayment obligation and we revised the design of
many of our loan products to require higher borrower down-payments, limited the products available for condominiums,
eliminated certain product features (such as interest-only adjustable-rate loans and loans above certain LTV ratios), and we
previously suspended home equity lending products with the exception of bridge loans between June 2010 and March 2012.
The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflect the higher
credit standards to which we have subjected all new originations. As of September 30, 2017, loans originated prior to 2009 had
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a balance of $1.48 billion, of which $37.0 million, or 2.5%, were delinquent, while loans originated in 2009 and after had a
balance of $10.99 billion, of which $7.9 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, particularly Ohio and Florida, 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, 2017, approximately 56.7% and 16.1% of the
combined total of our residential Core and construction loans held for investment and approximately 39.1% and 21.9% of our
home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively. 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 in Ohio and Florida 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 home equity originations for the years ended September 30,
2017 and 2016, 34.7% and 33.1%, respectively, are secured by properties in states other than Ohio or Florida.
Our residential Home Today loans are another area of credit risk concern. Although we no longer originate loans under
this program and the principal balance in these loans constituted only 0.9% of our total “held for investment” loan portfolio
balance, they comprised 28.3% and 27.7% of our 90 days or greater delinquencies and our total delinquencies, respectively, at
that date. At September 30, 2017, approximately 95.3% and 4.5% of our residential Home Today loans were secured by
properties in Ohio and Florida, respectively. At September 30, 2017, the percentages of those loans delinquent 30 days or more
in Ohio and Florida were 11.6% and 10.1%, respectively. The disparity between the portfolio composition ratio and
delinquency composition ratio reflects the nature of the Home Today loans. We do not offer, and have not offered, loan
products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher
rates, negative amortization, or low initial payment features with adjustable interest rates. Our Home Today loans, the majority
of which were entered into with borrowers that had credit profiles that would not have otherwise qualified for our loan products
due to deficient credit scores, generally contained the same features as loans offered to our Core borrowers. The overriding
objective of our Home Today lending, just as it is with our Core lending, was the creation of successful homeowners. We have
attempted to manage our Home Today credit risk by requiring that borrowers attend pre- and post-borrowing financial
management education and counseling and that the borrowers be referred to us by a sponsoring organization with which we
have partnered. Further, to manage the credit aspect of these loans, inasmuch as the majority of these buyers did not have
sufficient funds for required down payments, many loans included private mortgage insurance. At September 30, 2017, 21.6%
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 $107.7 million at September 30,
2017. 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, 2017, the recorded investment in Home Today loans originated subsequent to March 27, 2009 was $3.3 million.
Since we are no longer originating loans under our Home Today program,the Home Today portfolio will continue to decline in
balance due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of our
customers and the communities that we serve, during fiscal 2016 we began to offer Fannie Mae eligible, HomeReady loans.
These loans are originated in accordance with Fannie Mae's underwriting standards. While we retain the servicing rights related
to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae.
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
manner. We believe that a well capitalized institution 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, 2017, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry
measure that deems 5.00% or above to represent a “well capitalized” status) was 11.16%. The Association's current Tier 1
(leverage) capital ratio is lower than its ratio at September 30, 2016, which was 11.73%, due primarily to an $81 million cash
dividend payment that the Association made to the Company, its sole shareholder, in December 2016 that reduced the
Association's Tier 1 (leverage) capital ratio by an estimated 63 basis points. Because of its intercompany nature, this dividend
payment did not impact the Company's consolidated capital ratios which are reported in the Liquidity and Capital Resources
section of this Item 7. 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, 2017, deposits totaled $8.15 billion (including $620.7 million of brokered CDs), while borrowings totaled
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$3.67 billion and borrowers’ advances and servicing escrows totaled $0.14 billion, combined. In evaluating funding sources, we
consider many factors, including cost, collateral, duration and optionality, 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, 2017, these collateral pledge support arrangements provide the Association with the ability to immediately
borrow an additional $41.0 million from the FHLB of Cincinnati and $72.3 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 outstanding balance at September 30, 2017 was $4.87 billion, subject to satisfaction of the FHLB of Cincinnati
common stock ownership requirement. To satisfy the common stock ownership requirement for the maximum limit of
borrowing we would need to increase our ownership of FHLB of Cincinnati common stock by an additional $97.4 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, 2017,
our investment securities portfolio totaled $537.5 million. Finally, cash flows from operating activities have been a regular
source of funds. During the fiscal years ended September 30, 2017 and 2016, cash flows from operations totaled $108.7 million
and $84.9 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 as a
result of the 2008 financial crisis, effective July 1, 2010, that was no longer an available source of liquidity for the Company.
We have since implemented certain loan origination changes for a small portion of our loan production, which resulted in our
November 15, 2013 reinstatement as an approved seller to Fannie Mae, which elevates the level of liquidity available for those
loans. In addition, we have completed non-agency eligible, whole loan sales, all on a servicing retained basis, of both fixed-rate
and Smart Rate loans, demonstrating that with adequate lead time, the majority of our residential first mortgage loan portfolio
could be available for liquidity management purposes. At September 30, 2017, $0.4 million of agency eligible, long-term,
fixed-rate first mortgage loans were classified as “held for sale”. During the fiscal year ended September 30, 2017, $13.7
million of agency-compliant HARP II loans and $197.3 million of long-term, fixed-rate, agency-compliant, non-HARP II first
mortgage loans were sold to Fannie Mae. In addition to the loan sales to Fannie Mae, during the fiscal year ended
September 30, 2017, $38.4 million of long-term, fixed-rate loans were sold to the FHLB of Cincinnati, under their Mortgage
Purchase Program.
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 1.37% for the fiscal year ended September 30, 2017 and 1.45% for the fiscal year
ended September 30, 2016. As of September 30, 2017, our average assets per full-time employee and our average deposits per
full-time employee were $13.5 million and $8.0 million, respectively. We believe that each of these measures compares
favorably with industry averages. Our relatively high average deposits (exclusive of brokered CDs) held at our branch offices
($198.2 million per branch office as of September 30, 2017) 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
58
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, 2017, the allowance for loan losses was $48.9 million or 0.39% of total
loans. An increase or decrease of 10% in the allowance at September 30, 2017 would result in a $4.9 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. 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.
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, 2017, no valuation allowances were
outstanding. Even though we have determined a valuation allowance is not required for deferred tax assets at September 30,
2017, 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, 2017 and 2016
Total assets increased $786.5 million, or 6%, to $13.69 billion at September 30, 2017 from $12.91 billion at
September 30, 2016. This increase was primarily the result of increases in the balances of loans held for investment and, to a
lesser extent, cash and cash equivalents and investment securities.
Cash and cash equivalents increased $37.0 million, or 16%, to $268.2 million at September 30, 2017 from $231.2 million
at September 30, 2016, as we hold cash to maintain the level of liquidity described in the Liquidity and Capital Resources
section of the Overview.
Investment securities increased $19.6 million, or 4%, to $537.5 million at September 30, 2017 from $517.9 million at
September 30, 2016. Investment securities increased as $183.5 million in purchases exceeded the combination of $153.3
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million in principal paydowns, $5.5 million of net acquisition premium amortization and $5.1 million in net unrealized losses
that occurred in the mortgage-backed securities portfolio during the fiscal year ended September 30, 2017. There were no sales
of investment securities during the fiscal year ended September 30, 2017.
Loans held for investment, net, increased $710.5 million, or 6%, to $12.42 billion at September 30, 2017 from $11.71
billion at September 30, 2016. Residential mortgage loans increased $663.6 million, or 7%, to $10.86 billion at September 30,
2017 from $10.19 billion at September 30, 2016 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 $5.3 million in gross
charge-offs during the year ended September 30, 2017. During the year ended September 30, 2017, $1.34 billion of three- and
five-year “SmartRate” loans were originated while $1.36 billion of 10-, 15-, and 30-year fixed-rate first mortgage loans were
originated. During the year ended September 30, 2017 the total fixed-rate portion of our first mortgage loan portfolio increased
$100.5 million and was comprised of a decrease of $27.1 million in the balance of fixed-rate loans with original terms of 10
years or less, and an increase of $127.6 million in the balance of fixed-rate loans with original terms greater than 10 years.
During the fiscal year ended September 30, 2017, we completed $249.4 million in loan sales, which included $13.7 million of
agency-compliant HARP II loans and $197.3 million of long-term, fixed-rate, agency-compliant, non-HARP II first mortgage
loans to Fannie Mae, and $38.4 million of long-term fixed-rate loans to the FHLB of Cincinnati.
Augmenting the increase in residential mortgage loans was a $21.0 million, or 1%, increase in the balance of home
equity loans and lines of credit during the current year as new originations and additional draws on existing accounts exceeded
repayments and charge-offs. This increase reversed a downward trend over the past few years and signals a new focus on the
origination of home equity loans and lines of credit. Commitments originated for home equity loans and lines of credit and
bridge loans were $1.00 billion for the twelve months ended September 30, 2017 and $438.3 million for the twelve months
ended September 30, 2016. Between 2010 and 2015, the Association, in various steps, suspended and then modified its home
equity lending products and the markets where they were offered in response to the 2008 financial crisis. At September 30,
2017, the recorded investment related to home equity lines of credit originated subsequent to March 2012, totaled $780.2
million. At September 30, 2017, pending commitments to extend new home equity lines of credit totaled $97.9 million. Refer
to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.
The total allowance for loan losses decreased $12.9 million, or 21%, to $48.9 million at September 30, 2017 from $61.8
million at September 30, 2016, primarily reflecting improved credit metrics, including reduced net charge-offs and lower loan
delinquencies. Refer to Note 4. Loans and Allowance for Loan Losses for additional discussion.
Deposits decreased $179.7 million, or 2%, to $8.15 billion at September 30, 2017 from $8.33 billion at September 30,
2016. The decrease in deposits was the result of a $130.4 million decrease in our CDs, a $39.2 million decrease in our high-
yield savings accounts (a subcategory of our savings accounts) and a $9.7 million decrease in our high-yield checking accounts
(a subcategory of our checking accounts) during the fiscal year ended September 30, 2017. The change in CDs is attributed to a
$211.7 million net decrease in the balance of CDs generated through our retail operations, partially offset by an $81.3 million
increase (net of premium and maturities) in brokered CDs acquired during the current fiscal year which had original terms of
33 to 48 months. The balance of CDs at September 30, 2017 included $620.7 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 and high yield checking 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 $952.6 million, or 35%, to $3.67 billion at September 30,
2017 from $2.72 billion at September 30, 2016. This increase reflects an additional $900.0 million of new, short-term advances
hedged by interest rate swaps with original terms of five years, combined with a $259.0 million increase in the balance of other
short-term advances and partially offset by other principal repayments, as a combination of loan growth, share repurchases and
dividend payments led to increased cash demands. The total balance of borrowed funds at September 30, 2017 consisted of
short-term advances of $1.11 billion, long-term advances of $1.06 billion with a remaining weighted average maturity of
approximately 1.6 years and short-term advances of $1.50 billion aligned with interest rate swap contracts with a remaining
weighted average effective maturity of approximately 4.1 years. Interest rate swaps were used during the current fiscal year to
extend the duration of short-term borrowings to approximately five years by paying a fixed rate of interest and receiving the
variable rate. Refer to the Extending the Duration of Funding Sources section of the Overview for additional discussion
regarding short-term borrowings and interest-rate exchange contracts.
Shareholders’ equity increased $29.5 million, or 2%, to $1.69 billion at September 30, 2017 from $1.66 billion at
September 30, 2016. This net increase primarily reflected the effect of $88.9 million of net income, the positive impact related
to awards under the stock-based compensation plan, the allocation of shares held by the ESOP and the increase in other
comprehensive income, partially offset by $52.5 million of repurchases of outstanding common stock and $27.7 million of
dividend payments. Refer to Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
60
Purchases of Equity Securities for additional details regarding the repurchase of shares of common stock and the payment of
dividends. As a result of July 19, 2017 and July 26, 2016 mutual member votes, Third Federal Savings, MHC, the mutual
holding company that owns 81% of the outstanding stock of the Company, waived the receipt of its share of the dividends paid.
61
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,
2017
Interest
Income/
Expense
Average
Balance
Yield/
Cost
Average
Balance
2016
Interest
Income/
Expense
Yield/
Cost
Average
Balance
2015
Interest
Income/
Expense
Yield/
Cost
(Dollars in thousands)
Interest-earning assets:
Interest-earning cash equivalents
$
214,465
$
1,961
0.91% $
143,079
$
641
0.45% $
851,047
$
2,206
Investment securities
—
—
—%
162
Mortgage-backed securities
526,610
9,041
1.72%
555,996
2
9,388
1.23 %
1.69%
2,015
572,232
25
9,546
Loans
12,104,277
394,447
3.26% 11,380,798
375,624
3.30 % 10,951,984
369,302
Federal Home Loan Bank stock
81,105
3,546
4.37%
69,658
2,786
4.00%
67,360
2,398
Total interest-earning assets
12,926,457
408,995
3.16% 12,149,693
388,441
3.20% 12,444,638
383,477
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Checking accounts
Savings accounts
Certificates of deposit
Borrowed funds
358,213
$13,284,670
337,083
$12,486,776
319,063
$12,763,701
$
992,042
918
0.09% $
990,592
1,514,275
5,672,212
3,231,709
2,093
84,410
42,678
0.14%
1.49%
1.32%
1,563,448
5,756,861
2,284,881
1,289
2,811
85,900
28,026
0.13% $
995,736
0.18 %
1.49 %
1.23 %
1,636,093
5,836,053
2,312,977
1,371
3,045
89,110
19,824
Total interest-bearing liabilities
11,410,238
130,099
1.14% 10,595,782
118,026
1.11 % 10,780,859
113,350
0.26%
1.24%
1.67%
3.37%
3.56%
3.08%
0.14%
0.19%
1.53%
0.86%
1.05%
Noninterest-bearing liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income
Interest rate spread(1)
190,873
11,601,111
1,683,559
$13,284,670
187,417
10,783,199
1,703,577
$12,486,776
184,587
10,965,446
1,798,255
$12,763,701
$278,896
$270,415
$270,127
2.02%
2.09%
2.03%
Net interest-earning assets(2)
$ 1,516,219
$ 1,553,911
$ 1,663,779
Net interest margin(3)
2.16%
2.23%
2.17%
Average interest-earning assets to
average interest-bearing liabilities
113.29%
114.67%
115.43%
______________________
(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.
62
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, 2017 vs. 2016
For the Fiscal Years Ended
September 30, 2016 vs. 2015
Increase (Decrease)
Due to
Increase (Decrease)
Due to
Volume
Rate
Net
Volume
Rate
Net
(In thousands)
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:
Checking accounts
Passbook savings
Certificates of deposit
Borrowed funds
$
428
(1)
(503)
23,627
486
24,037
2
(86)
(1,260)
12,365
$
892
(1)
156
(4,804)
274
(3,483)
$ 1,320
(2)
(347)
18,823
760
20,554
(373)
(632)
(230)
2,287
(371)
(718)
(1,490)
14,652
Total interest-bearing liabilities
Net change in net interest income
11,021
$ 13,016
1,052
12,073
$ (4,535) $ 8,481
$ (2,548) $
(23)
(273)
14,261
84
11,501
(7)
(133)
(1,199)
(243)
(1,582)
$ 13,083
983
—
115
(7,939)
304
(6,537)
(75)
(101)
(2,011)
8,445
$ (1,565)
(23)
(158)
6,322
388
4,964
(82)
(234)
(3,210)
8,202
6,258
$(12,795) $
4,676
288
Comparison of Operating Results for the Fiscal Years Ended September 30, 2017 and 2016
General. Net income increased $8.3 million, or 10%, to $88.9 million for the fiscal year ended September 30, 2017
compared to $80.6 million for the fiscal year ended September 30, 2016. This change was attributed to a $9.0 million decrease
in the provision for loan losses and an increase of $8.5 million in net interest income, partially offset by an increase of $1.4
million in non-interest expense and a decrease of $5.2 million in non-interest income.
Interest and Dividend Income. Total interest income increased $20.6 million, or 5%, to $409.0 million for the fiscal year
ended September 30, 2017 compared to $388.4 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, partially offset by a decrease in interest income from investment securities
available for sale.
Interest income on loans increased $18.8 million, or 5%, to $394.4 million compared to $375.6 million for the prior fiscal
year. This increase was attributed to a $723.5 million increase in the average balance of loans to $12.10 billion in the current
fiscal year compared to $11.38 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 a four basis point decrease in the average
yield on loans to 3.26% from 3.30% 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, 2017, 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, 2017, loan sales totaled $249.4 million
while during the fiscal year ended September 30, 2016, loan sales totaled $200.3 million.
Interest income on interest-earning cash equivalents increased $1.4 million, or 233%, to $2.0 million compared to $0.6
million for the prior fiscal year. As a result of the additional required investment in FHLB stock and an increase in the dividend
yield, dividend income on FHLB stock increased $0.7 million, or 25%, to $3.5 million compared to $2.8 million during the
prior fiscal year.
63
Interest Expense. Interest expense increased $12.1 million, or 10%, to $130.1 million for the fiscal year ended
September 30, 2017 from $118.0 million for the 2016 fiscal year. The change resulted primarily from a $14.7 million increase
in interest expense on borrowed funds partially offset by modest decreases in interest expense on checking accounts, savings
accounts and CDs.
Interest expense on CDs decreased $1.5 million, or 2%, to $84.4 million compared to $85.9 million for fiscal 2016. The
change was attributed to an $84.7 million, or 1%, decrease in the average balance of CDs to $5.67 billion from $5.76 billion, as
the average rate we paid on CDs was 1.49% for both years. 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 $14.7 million, or 53%, to $42.7 million compared to $28.0 million for
fiscal 2016. The increase was attributed to a nine basis point increase in the average rate paid for these funds, to 1.32% from
1.23% during fiscal 2016, combined with the impact of a $946.8 million, or 41%, increase in the average balance of borrowed
funds to $3.23 billion during the current fiscal year from $2.28 billion during fiscal 2016. The increase in the average balance
of borrowed funds was used to fund our balance sheet growth and our capital management activities, including share
repurchases and dividend payments. The increases in borrowed funds were in overnight and short-term advances and longer-
term advances with initial effective durations of approximately five years as hedged by interest rate swaps. Refer to the
Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further
discussion.
Net Interest Income. Net interest income increased $8.5 million, or 3%, to $278.9 million for the fiscal year ended
September 30, 2017 compared to $270.4 million for the prior fiscal year. Average interest-earning assets increased during the
current fiscal year by $776.8 million, or 6%, when compared to the prior fiscal year. The increase in average assets was
attributed primarily to the growth of our loan portfolio and to a lesser extent other interest-earning cash equivalents and FHLB
stock, partially offset by a decrease in mortgage-backed securities. Partially offsetting the increase in average interest earning
assets was a four basis point decrease in the yield on those assets to 3.16% from 3.20%. Our interest rate spread decreased
seven basis points to 2.02% compared to 2.09% for the prior fiscal year. Our net interest margin was 2.16% for the current
fiscal year and 2.23% for the prior fiscal year. Our interest rate spread and net interest margin narrowed as our asset yields
decreased while our overall funding costs increased as we extended the effective duration of our borrowed funds through the
use of interest rate swaps.
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. Refer to
Critical Accounting Policies - Allowance for Loan Losses section of the Overview for further discussion.
Based on our evaluation, we recorded a credit for loan losses of $17.0 million for the fiscal year ended September 30,
2017 and a credit of $8.0 million for the fiscal year ended September 30, 2016. The current credit for loan losses reflects
reduced levels of loan delinquencies and net charge-offs, but we continue our awareness of the relative values of residential
properties in comparison to their cyclical peaks as well as the uncertainty that persists in the current economic environment,
which continues to challenge many of our loan customers. As delinquencies in the portfolio have been resolved through pay-
off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan, uncollected balances
have been charged against the allowance for loan losses previously provided. The level of net charge-offs decreased during
fiscal year 2017 to $4.2 million of net recoveries as compared to $1.8 million of net charge-offs during the fiscal year ended
September 30, 2016. Net recoveries combined with the $17.0 million credit 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 $1.8 million and a credit for loan losses
of $8.0 million were recorded for the fiscal year ended September 30, 2016. The allowance for loan losses was $48.9 million,
or 0.39% of the total recorded investment in loans receivable, at September 30, 2017, compared to $61.8 million, or 0.52% of
the total recorded investment in loans receivable, at September 30, 2016. Balances of recorded investments are net of deferred
fees/expenses and any applicable loans-in-process.
64
The total recorded investment in non-accrual loans decreased $10.9 million during the fiscal year ended September 30,
2017 compared to a $16.8 million decrease during the fiscal year ended September 30, 2016.
The recorded investment in non-accrual loans in our residential Core portfolio decreased $7.5 million, or 15%, during the
current fiscal year, to $43.8 million at September 30, 2017, compared to an $11.0 million decrease during the fiscal year ended
September 30, 2016. At September 30, 2017, the recorded investment in our Core portfolio was $10.76 billion, compared to
$10.08 billion at September 30, 2016. During the current fiscal year, Core portfolio net recoveries were $2.4 million, as
compared to net charge-offs of $0.6 million during the fiscal year ended September 30, 2016. The $43.8 million balance in
Core portfolio non-accrual loans at September 30, 2017 includes $27.4 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 $1.3 million, or 7%
during the current fiscal year, to $18.1 million at September 30, 2017 compared to a $3.1 million decrease during the fiscal year
ended September 30, 2016. At September 30, 2017, the recorded investment in our Home Today portfolio was $107.7 million,
compared to $120.4 million at September 30, 2016. During the current fiscal year, Home Today net charge-offs were $1.0
million as compared to net charge-offs of $1.3 million during the fiscal year ended September 30, 2016. The $18.1 million
balance in Home Today non-accrual loans includes $10.3 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 $2.0 million, or 11%, during the
current fiscal year, to $17.2 million at September 30, 2017 compared to a $2.3 million decrease during the fiscal year ended
September 30, 2016. The recorded investment in our home equity loans and lines of credit portfolio at September 30, 2017 was
$1.57 billion, compared to $1.54 billion at September 30, 2016. During the current fiscal year, home equity loans and lines of
credit net recoveries were $2.7 million as compared to net recoveries of $0.1 million during the fiscal year ended September 30,
2016. 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 $5.4 million, or less than 1%, of the home equity
loans and lines of credit portfolio at September 30, 2017 compared to $4.9 million, or less than 1%, at September 30, 2016.
At September 30, 2017 and 2016, 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, 2017 and 2016, respectively.
Refer to Lending Activities in Item 1. Business for additional discussion and disclosure related to our provisions for loan
losses.
Non-Interest Income. Non-interest income decreased $5.2 million, or 21%, to $19.8 million during the fiscal year ended
September 30, 2017 compared to $25.0 million for the prior fiscal year mainly as a result of lower gains on the sale of loans
and a decrease in death benefits from BOLI contracts during the current fiscal year. Gains on the sales of loans in the current
fiscal year decreased $4.0 million from the prior fiscal year as market interest rate movements contributed to lower percentage
gains on $249.4 million in sales during the current fiscal year as compared to the gains realized on $200.3 million in sales
during the fiscal year ending September 30, 2016.
Non-Interest Expense. Non-interest expense increased $1.4 million, or 1%, to $182.4 million during the fiscal year
ended September 30, 2017 compared to $181.0 million for fiscal 2016. This increase resulted primarily from a combination of
higher marketing expenses and other expenses, partially offset by a combination of lower real estate owned expenses and
compensation related expenses. The $2.6 million decrease in real estate owned expenses (which includes associated legal and
maintenance expenses as well as gains (losses) on the disposal of properties) was driven in part by the decrease in real estate
owned assets since September 30, 2016. The $2.8 million increase in marketing expenditures can be attributed to the timing of
media campaigns supporting our lending activities. Other operating expenses increased $1.7 million, which consisted primarily
of a $1.1 million increase in professional services expenses. Salaries and employee benefits decreased $0.6 million during the
current fiscal year compared to the fiscal year ended September 30, 2016. This decrease was primarily due to a combination of
a $2.2 million decrease in stock based compensation and a $1.9 million increase in the deferral of salary compensation related
to direct loan origination costs, partially offset by a $3.6 million increase in associate compensation costs.
Income Tax Expense. The provision for income taxes was $44.5 million for the fiscal year ended September 30, 2017
compared to $41.8 million for the fiscal year ended September 30, 2016. The provision for fiscal year 2017 included $43.4
million of federal income tax provision and $1.1 million of state income tax provision. The provision for fiscal year ended
September 30, 2016 included $40.9 million of federal income tax provision and $0.9 million of state income tax provision. The
increase in state income tax between the current and prior fiscal years is reflective of the growth in our expansion states. Our
federal effective tax rate decreased to 32.8% during fiscal 2017 from 33.7% during fiscal year 2016, mainly as a result of
65
recognizing $1.1 million of excess tax benefits in the current year related to our adoption, effective October 1, 2016, of ASU
2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.
Under this standard, excess tax benefits and tax deficiencies related to stock-based compensation are recognized in the
provision for income taxes. Previously the amounts were recognized as part of paid-in capital in shareholders' equity. 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
2017 and $7.4 million during fiscal 2016.
Comparison of Operating Results for the Fiscal Years Ended September 30, 2016 and 2015
General. Net income increased $8.0 million, or 11%, to $80.6 million for the fiscal year ended September 30, 2016
compared to $72.6 million for the fiscal year ended September 30, 2015. This change was attributed to a $5.0 million decrease
in the provision for loan losses and a $7.0 million decrease in non-interest expenses. Net interest income was relatively
unchanged during fiscal 2016 compared to fiscal 2015.
Interest and Dividend Income. Total interest income increased $4.9 million, or 1%, to $388.4 million for the fiscal year
ended September 30, 2016 compared to $383.5 million for fiscal 2015. The increase in interest income resulted primarily from
an increase in interest income from loans partially offset by a decrease in interest income from other interest-earning cash
equivalents.
Interest income on loans for fiscal 2016 increased $6.3 million, or 2%, to $375.6 million compared to $369.3 million for
fiscal 2015. This increase was attributed to a $428.8 million increase in the average balance of loans to $11.38 billion in fiscal
2016 compared to $10.95 billion during fiscal 2015 as new loan production exceeded repayments and loan sales. The impact
from the increase in the average balance of loans was partially offset by a seven basis point decrease in the average yield on
loans to 3.30% from 3.37% as historically low interest rates 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, 2016, 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, 2016, loan sales totaled $200.3 million while during the fiscal
year ended September 30, 2015, loan sales totaled $160.1 million.
Interest income on interest-earning cash equivalents for fiscal 2016 decreased $1.6 million, or 73%, to $0.6 million
compared to $2.2 million for fiscal 2015. The decrease in interest income can be attributed to utilizing a strategy during fiscal
2015 to increase income. The strategy 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. Because of increases in
the interest rates charged by the FHLB, the strategy was not utilized during fiscal 2016. As a result of the additional required
investment in FHLB stock, dividend income on FHLB stock for fiscal 2016 increased $0.4 million, or 17%, to $2.8 million
compared to $2.4 million during fiscal 2015. Although the strategy's borrowings component was not utilized during fiscal
2016, the FHLB stock component remained in place and the receipt of increased FHLB stock dividends continued.
Interest Expense. Interest expense increased $4.6 million, or 4%, to $118.0 million for the fiscal year ended
September 30, 2016 from $113.4 million for the 2015 fiscal year. The change resulted primarily from an $8.2 million increase
in interest expense on borrowed funds partially offset by a decrease in interest expense on CDs.
Interest expense on CDs for fiscal 2016 decreased $3.2 million, or 4%, to $85.9 million compared to $89.1 million for
fiscal 2015. The change was attributed to a four basis point decrease in the average rate we paid on CDs to 1.49% from 1.53%
combined with a $79.2 million, or 1%, decrease in the average balance of CDs to $5.76 billion from $5.84 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 fiscal 2016, 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 for fiscal 2016 increased $8.2 million, or 41%, to $28.0 million compared to $19.8
million for fiscal 2015. The increase was attributed to a 37 basis point increase in the average rate paid for these funds during
fiscal 2016, to 1.23% from 0.86% during fiscal 2015. Partially offsetting the impact of the increase in the average rate paid was
a $28.1 million, or 1%, decrease in the average balance of borrowed funds to $2.28 billion during fiscal 2016 from $2.31
billion during fiscal 2015. The net decrease in the average balance was attributed to utilizing the strategy to increase income in
fiscal 2015, as discussed earlier. The strategy was not utilized in fiscal 2016. Partially offsetting the decrease in the average
balance resulting from discontinuing this strategy was an increase in FHLB of Cincinnati borrowings as part of our efforts to
lengthen the duration of our interest bearing funding sources. Refer to the Extending the Duration of Funding Sources section
66
of the Overview for further discussion. To better manage funding costs, longer term borrowed funds from the FHLB of
Cincinnati were also used to fund mortgage loan originations.
Net Interest Income. Net interest income increased $0.3 million, or less than 1%, to $270.4 million for the fiscal year
ended September 30, 2016 compared to $270.1 million for fiscal 2015. Average interest-earning assets decreased during fiscal
2016 by $294.9 million, or 2%, when compared to fiscal 2015. The decrease in average assets was attributed primarily to the
use of the strategy, discussed earlier, in fiscal 2015, which was not utilized in fiscal 2016, partially offset by the growth of our
loan portfolio. Our interest rate spread increased six basis points to 2.09% for fiscal 2016 compared to 2.03% for fiscal 2015.
Our net interest margin was 2.23% for fiscal 2016 and 2.17% for fiscal 2015. The change in these performance ratios was
impacted by the net income strategy utilized in fiscal 2015. The strategy, which served to increase net income slightly also
negatively impacted the interest rate spread and net interest margin due to the increase in the average balance of low-yield,
interest-earning cash equivalents.
Provision for Loan Losses. Based on our evaluation, we recorded a negative provision for loan losses of $8.0 million for
the fiscal year ended September 30, 2016 and a negative provision of $3.0 million for the fiscal year ended September 30,
2015. The fiscal 2016 negative provision for loan loss reflected reduced levels of loan delinquencies and net charge-offs, but
we continued our awareness of the relative values of residential properties in comparison to their cyclical peaks as well as the
uncertainty that persisted in the economic environment, which continued to challenge many of our loan customers. As
delinquencies in the portfolio were resolved through pay-off, short sale or foreclosure, or management determined the collateral
was not sufficient to satisfy the loan, uncollected balances were charged against the allowance for loan losses previously
provided. The level of net charge-offs decreased during fiscal 2016 to $1.8 million as compared to $6.8 million during fiscal
2015. Net charge-offs combined with the $8.0 million negative provision for loan losses recorded for fiscal 2016 resulted in a
decrease in the balance of the allowance for loan losses. Net charge-offs of $6.8 million and a negative provision for loan losses
of $3.0 million were recorded for fiscal 2015. The allowance for loan losses was $61.8 million, or 0.52% of the total recorded
investment in loans receivable, at September 30, 2016, compared to $71.6 million, or 0.64% of the total recorded investment in
loans receivable, at September 30, 2015. Balances of recorded investments were net of deferred fees and any applicable loans-
in-process.
The total recorded investment in non-accrual loans decreased $16.8 million during the fiscal year ended September 30,
2016 compared to a $28.7 million decrease during the fiscal year ended September 30, 2015.
The recorded investment in non-accrual loans in our residential Core portfolio decreased $11.0 million, or 18%, during
fiscal 2016, to $51.3 million at September 30, 2016, compared to a $17.1 million decrease during fiscal 2015. At September 30,
2016, the recorded investment in our Core portfolio was $10.08 billion, compared to $9.47 billion at September 30, 2015.
During fiscal 2016, Core portfolio net charge-offs were $0.6 million, as compared to net charge-offs of $1.5 million during
fiscal 2015. The $51.3 million balance in non-accrual loans at September 30, 2016 included $31.1 million in TDRs which were
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 $3.1 million, or 14%
during fiscal 2016, to $19.5 million at September 30, 2016 compared to a $7.4 million decrease during fiscal 2015. At
September 30, 2016, the recorded investment in our Home Today portfolio was $120.4 million, compared to $134.0 million at
September 30, 2015. During fiscal 2016, Home Today net charge-offs were $1.3 million as compared to net charge-offs of $1.9
million during fiscal 2015. The $19.5 million balance in Home Today non-accrual loans included $10.7 million in TDRs which
were 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 $2.3 million, or 11%, during
fiscal 2016, to $19.2 million at September 30, 2016 compared to a $4.7 million decrease during fiscal 2015. The recorded
investment in our home equity loans and lines of credit portfolio at September 30, 2016, was $1.54 billion, compared to $1.63
billion at September 30, 2015. During fiscal 2016, home equity loans and lines of credit net recoveries were $0.1 million as
compared to net charge-offs of $3.6 million during fiscal 2015. We believe that non-performing home equity loans and lines of
credit, on a relative basis, represented 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 $4.9
million, or less than 1%, of the home equity loans and lines of credit portfolio at September 30, 2016 compared to $5.6 million,
or less than 1%, at September 30, 2015.
At September 30, 2016 and 2015, 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, 2016 and 2015, respectively.
Refer to Lending Activities in Item 1. Business for additional discussion and disclosure related to our provisions for loan
losses.
67
Non-Interest Income. Non-interest income increased $0.7 million, or 3%, to $25.0 million during fiscal 2016 compared
to $24.3 million for fiscal 2015 mainly as a result of increased net gains on the sale of loans partially offset by a decrease in
loan fees and service charges and other. The increase in the net gain on sales of loans primarily reflected a higher volume of
loan sales in fiscal 2016, $200.3 million, as compared to $160.1 million during fiscal 2015. 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 included in
loan fees and service charges and a decrease in income received in connection with reduced real estate owned activity included
in other.
Non-Interest Expense. Non-interest expense decreased $7.0 million, or 4%, to $181.0 million during fiscal 2016
compared to $188.0 million for fiscal 2015. This decrease resulted primarily from lower real estate owned expense, marketing
expenses, and other operating expenses partially offset by higher data processing expenses. The $3.9 million decrease in real
estate owned expenses (which includes associated legal and maintenance expenses as well as gains (losses) on the disposal of
properties) was driven in part by the decrease in real estate owned assets since September 30, 2015. The $2.9 million decrease
in marketing expenditures can be attributed to the timing of media campaigns supporting our lending activities. Other operating
expenses decreased $1.4 million, which consisted primarily of a $1.0 million decrease in professional services expenses, and a
$0.6 million decrease in postage/courier fees partially offset by a $0.7 increase in expenses associated with originating loans.
Salaries and employee benefits increased $0.6 million during fiscal 2016 compared to fiscal 2015. This increase was primarily
due to a $1.2 million increase in pension costs partially offset by a $0.6 million decrease in stock based compensation.
Income Tax Expense. The provision for income taxes was $41.8 million for fiscal 2016 compared to $36.8 million for
fiscal 2015. The provision for fiscal 2016 included $40.9 million of federal income tax provision and $932 thousand of state
income tax provision. The provision for fiscal 2015 included $36.7 million of federal income tax provision and $143 thousand
of state income tax provision. The increase in state income tax between fiscal 2016 and 2015 was reflective of the growth in
our expansion states. Our federal effective tax rate increased to 33.7% during fiscal 2016 from 33.6% during fiscal year 2015.
Our expected federal effective income tax rate was 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 $7.4 million
during fiscal 2016 and $7.3 million during fiscal 2015.
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.
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 conversion (second step) transaction remain as other potential sources of
liquidity, although these channels generally require six to nine months of lead time.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Association’s
Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in
order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as
well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the
sum of cash and cash equivalents plus unencumbered investment securities for which ready markets exist, divided by total
assets). For the year ended September 30, 2017, our liquidity ratio averaged 5.65%. We believe that we had sufficient sources
of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2017.
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, 2017, cash and cash equivalents totaled $268.2
million which represented an increase of 16% from September 30, 2016.
Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $537.5 million
at September 30, 2017.
68
During the year ended September 30, 2017, loan sales to Fannie Mae totaled $211.0 million, which included $13.7
million of loans that qualified under Fannie Mae's HARP II initiative and $15.3 million of loans that qualified under Fannie
Mae's HomeReady initiative. Loans originated under the HARP II an HomeReady initiatives are classified as “held for sale” at
origination. Loans originated under Fannie Mae compliant procedures other than HARP II and HomeReady are classified as
“held for investment” until they are specifically identified for sale.
In addition to the loan sales to Fannie Mae, during the year ended September 30, 2017, loan sales to the FHLB of
Cincinnati, under their Mortgage Purchase Program, totaled $38.4 million. Loans that qualify under the FHLB Mortgage
Purchase Program are classified as “held for investment” until they are specifically identified for sale.
At September 30, 2017, $0.4 million of long-term, fixed-rate residential first mortgage loans were classified as “held for
sale,” all of which qualified under Fannie Mae's HARP II or HomeReady initiatives. There were no loan sale commitments
outstanding at September 30, 2017.
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, 2017, we had $548.9 million in loan commitments outstanding. In addition to commitments to originate
loans, we had $1.43 billion in undisbursed home equity lines of credit to borrowers. CDs due within one year of September 30,
2017 totaled $2.13 billion, or 26.1% 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, 2018. We believe, however, based on past experience, that a significant portion of such
deposits will remain with us. Generally, we have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating residential mortgage loans and purchasing investments. During the year
ended September 30, 2017, we originated $2.70 billion of residential mortgage loans, and during the year ended September 30,
2016, we originated $2.59 billion of residential mortgage loans. We purchased $183.5 million of securities during the year
ended September 30, 2017, and $95.2 million during the year ended September 30, 2016.
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 $179.7 million during the year ended September 30, 2017, which reflected the
active management of the overall cost of funding between maturing CDs and wholesale borrowings, compared to a net increase
of $45.5 million during the year ended September 30, 2016. 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, 2017, was partially offset by the $80.9 million increase in the balance of brokered CDs, to
$620.7 million, from $539.8 million at September 30, 2016. During the year ended September 30, 2016 the balance of brokered
CDs increased by $19.7 million. Principal and interest owed on loans serviced for others experienced a net decrease of $13.6
million to $35.8 million during the year ended September 30, 2017 compared to a net decrease of $0.1 million to $49.4 million
during the year ended September 30, 2016. During the year ended September 30, 2017, we increased our advances from the
FHLB of Cincinnati by $952.6 million, as we funded new loan originations and actively managed our liquidity ratio. During
the year ended September 30, 2016, our advances from the FHLB of Cincinnati increased by $550.2 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, 2017, we had $3.67 billion of FHLB of Cincinnati advances and no
outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at September 30, 2017, we had $620.7
million of brokered CDs. During the year ended September 30, 2017, we had average outstanding advances from the FHLB of
Cincinnati of $3.23 billion as compared to average outstanding advances of $2.28 billion during the year ended September 30,
2016. The increase in net average balance in the current year reflects an increase in FHLB of Cincinnati borrowings as part of
our efforts to lengthen the duration of our interest bearing funding sources as well as increases in the balance of our short-term
borrowings used to fund: balance sheet growth; our net savings outflow; our capital initiatives; and to manage our on-balance
sheet liquidity. Refer to the Extending the Duration of Funding Sources section of the Overview and the General section of
Item 7A. Quantitative and Qualitative Disclosures About Market Risk for further discussion. At September 30, 2017, we had the
ability to immediately borrow an additional $41.0 million from the FHLB of Cincinnati and $72.3 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, 2017 was $4.87 billion, subject to
69
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 $97.4 million.
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. Effective January 1, 2015, the OCC and the other federal bank regulatory agencies 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 computed based on the average of daily asset balances
during the quarter). 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 rule also requires unrealized gains and losses on certain "available-for-sale" security holdings and change
in defined benefit plan obligations 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. Effective January 1, 2015, the Association implemented the new capital requirements for the
standardized approach to the Basel III Rules, subject to transitional provisions extending through the end of 2018. The final
rule also implemented consolidated capital requirements for savings and loan holding companies effective January 1, 2015.
As of September 30, 2017, the Association exceeded all regulatory capital requirements to be considered "Well
Capitalized".
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. In December 2016, the Company received an
$81.0 million cash dividend from the Association. Because of its intercompany nature, this dividend payment had no impact on
the Company's capital ratios or its consolidated statement of condition but reduced the Association's reported capital ratios.
The Company's seventh stock repurchase program, covering 10,000,000 shares, which began on August 4, 2015, was
completed on January 6, 2017. On October 27, 2016, the Company announced that the Board of Directors approved the
Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s
outstanding common stock. Repurchases under the eighth stock repurchase authorization began on January 6, 2017. There were
2,249,110 shares repurchased under that program between its start date and September 30, 2017. During the year ended
September 30, 2017, the Company repurchased $54.0 million of its common stock.
On July 26, 2016, 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 a total of $0.50 per share
during the four quarterly periods ended June 30, 2017. Third Federal Savings, MHC waived its right to receive a $0.125 per
share dividend payment on September 19, 2016, December 12, 2016, March 20, 2017 and June 23, 2017.
On July 19, 2017, Third Federal Savings, MHC received the approval of its members 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 a total of $0.68 per share, to be declared on the Company’s common stock during the
twelve months subsequent to the members’ approval (i.e., through July 19, 2018). The members approved the waiver by casting
64% of the eligible votes in favor of the waiver. Of the votes cast, 97% were in favor of the proposal. Third Federal Savings,
MHC waived its right to receive a $0.17 per share dividend payment on September 25, 2017.
While stock repurchases are planned to continue in the future, the payment of dividends and support of asset growth will
likely represent a larger focus for future capital deployment activities.
At September 30, 2017, the Company had, in the form of cash and a demand loan from the Association, $94.4 million of
funds readily available to support its stand-alone operations.
70
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,
we routinely enter into commitments to securitize and sell mortgage loans. For additional information, see Note 15 of the Notes
to 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, 2017. 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)(2)
Operating leases
Certificates of deposit(1)
Limited partner investments
Less than
One year
One to
Three years
Three to
Five years
More than
Five years
Total
Payments due by period
(In thousands)
$ 2,888,245
6,697
$
$
744,294
11,125
$
1,290
6,732
37,548
6,264
$ 3,671,377
30,818
2,133,538
2,626,673
728,409
202,589
5,691,209
11,541
—
—
—
11,541
Total
$ 5,040,021
$ 3,382,092
$
736,431
$
246,401
$ 9,404,945
Commitments to extend credit
$ 2,084,599 (3)
$
— $
— $
— $ 2,084,599
______________________
(1) Includes accrued interest payable, computed on an actual days outstanding basis, at September 30, 2017.
(2) Reflect the net impact of deferred penalties discussed in Note 10. Borrowed Funds.
(3) 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 $1.50 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
Refer to Note 21. Recent Accounting Pronouncements for pending and adopted accounting guidance.
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 and advances from the FHLB of Cincinnati. As a result, a
fundamental component 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 authorized the formation of an Asset/Liability Management Committee comprised of key operating
personnel, which is responsible for managing this risk in a matter that is 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
71
capital to changes in interest rates. As part of our ongoing asset-liability management, we use 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 (or shorter-term advances converted to longer-term durations via the use of
interest rate exchange contracts that qualify as cash flow hedges) and longer-term brokered certificates of deposit;
(iii) investing in shorter- to medium-term investments and mortgage-backed securities;
(iv) maintaining the levels of capital required for "well capitalized" designation; and
(v) securitizing and/or selling long-term, fixed-rate residential real estate mortgage loans.
During the fiscal year ended September 30, 2017, $211.0 million of agency-compliant, long-term, fixed-rate mortgage
loans were sold to Fannie Mae, and $38.4 million of long-term, fixed-rate mortgage loans, which were also agency-compliant,
were sold to the FHLB of Cincinnati. All loans were sold on a servicing retained basis. At September 30, 2017, $0.4 million of
agency-compliant, long-term, fixed-rate residential first mortgage loans that qualified under Fannie Mae's HARP II or
HomeReady programs, were classified as "held for sale". Of the Fannie Mae loan sales completed during fiscal 2017, $13.7
million was comprised of long-term, (15 to 30 years), fixed-rate first mortgage loans which were sold under Fannie Mae's
HARP II, $15.3 million was comprised of long-term, (15 to 30 years), fixed-rate first mortgage loans which were sold under
Fannie Mae's HomeReady program, and $182.0 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage
loans which had been originated under our revised procedures and were sold to Fannie Mae under our re-instated seller
contract, as described in the next paragraph. The loans that were sold to the FHLB of Cincinnati were sold under the FHLB's
Mortgage Purchase Program. Loans that qualify under the FHLB Mortgage Purchase Program are classified as “held for
investment” until they are specifically identified for sale. At September 30, 2017, 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, and more recently HomeReady, 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 not be originated under the
revised (Fannie Mae) procedures and accordingly, the Association’s ability to reduce interest rate risk via loan sales for such
loans 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 the FHLB's Mortgage Purchase Program or of private third-party
investors.
In response to impact that the 2008 financial crisis had on housing and more particularly on the operation of the
secondary mortgage market, we have actively marketed an adjustable-rate mortgage loan product since 2010 and a 10-year
fixed-rate mortgage loan product since 2012. 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.
The Association evaluates funding source alternatives as it seeks to extend its liability duration. Extended duration
funding sources that are currently considered include: retail certificates of deposit (which, subject to a fee, generally provide
depositors with an early withdrawal option, but do not require pledged collateral); brokered certificates of deposit (which
generally do not provide an early withdrawal option and do not require collateral pledges); collateralized borrowings which are
not subject to creditor call options (generally advances from the FHLB of Cincinnati); and interest rate exchange contracts
("swaps") which are subject to collateral pledges and which require specific structural features to qualify for hedge accounting
treatment (hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive
income (loss) in the equity section of the balance sheet rather than being included in operating results of the income statement).
The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment. The
Association is generally opportunistic in the timing of its funding duration deliberations and when evaluating alternative
funding sources, compares effective interest rates, early withdrawal/call options and collateral requirements.
72
In December 2015, the Association entered into its first interest rate swap agreements in over ten years. Each of the
Association's swap agreements is registered on the Chicago Mercantile Exchange and involves the exchange of interest
payment amounts based on a notional principal balance. No exchange of principal amounts occurs and the notional principal
amount does not appear on our balance sheet. The Association uses swaps to extend the duration of its funding sources. In each
of the Association's agreements, interest paid is based on a fixed rate of interest throughout the term of each agreement while
interest received is based on an interest rate that resets at a specified interval (generally three months) throughout the term of
each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that
point in time. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the
conditions of the agreement. The notional amount of the Association's swap portfolio at September 30, 2017 was $1.50 billion.
The swap portfolio's weighted average fixed pay rate was 1.62% and the weighted average remaining term was 4.1 years.
Concurrent with the execution of each swap, the Association entered into a short-term borrowing from the FHLB of Cincinnati
in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap.
For $1.35 billion of our outstanding swaps, the borrowing proceeds represented new monies which were generally used to fund
loans and investment securities. During the fiscal year ended September 30, 2016, swaps totaling $150.0 million were
contracted to restructure existing longer-term FHLB borrowings. These restructuring transactions lowered our effective cost of
funding but did not involve the receipt of new monies. Each individual swap agreement has been designated as a cash flow
hedge of interest rate risk associated with the Company's variable rate borrowings from the FHLB of Cincinnati.
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,
2017 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
$ 1,461,909
1,722,441
1,951,186
2,109,019
2,103,755
$ (647,110)
(386,578)
(157,833)
—
(5,264)
(30.68)%
(18.33)%
(7.48)%
— %
(0.25)%
EVE as a Percentage
of Present Value of
Assets (3)
EVE
Ratio (4)
Increase
(Decrease)
(basis points)
11.57%
13.13%
14.36%
15.05%
14.69%
(348)
(192)
(69)
—
(36)
_________________
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
The preceding table indicates that at September 30, 2017, in the event of an increase of 200 basis points in all interest
rates, the Association would experience a 18.33% decrease in EVE. In the event of a 100 basis point decrease in interest rates,
the Association would experience a 0.25% decrease in EVE.
73
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, 2017, with comparative information as of September 30, 2016. 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,
2017
15.05 %
13.13 %
(192)
(18.33)%
2016
14.98 %
13.72 %
(126)
(13.55)%
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. While 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) are intended to have a favorable impact on our IRR profile, the net impact of three other items resulted in the 4.78%
deterioration in the Percentage Change in EVE measure at September 30, 2017, when compared to the measure at
September 30, 2016. The most significant factor contributing to the overall deterioration was the change in market interest
rates, which included an increase of 72 basis points for the two-year term, an increase of 79 basis points for the five-year term
and an increase of 74 basis points for the ten-year term, and which resulted in a decrease of 9.14% in the Percentage Change in
EVE. Combined with this deterioration was the impact of an $81.0 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 0.86%. Partially offsetting the unfavorable impact of
the two preceding factors, numerous modifications and enhancements to our modeling assumptions and methodologies, which
are continually challenged and evaluated, on a net basis, positively impacted the Association's Percentage Change in EVE by
2.83%. These changes primarily involved factors used in the modeling of prepayment rates for our fixed-rate, first mortgage
loans and attempt to more closely align the model’s projections with our historical experience for those products. Finally, our
core business activities, as described at the beginning of this paragraph, resulted in 2.39% of improvement to our Percentage
Change in EVE. The IRR simulation results presented above were in line with management's expectations and were within the
risk limits established by our Board of Directors.
Our simulation model possesses random patterning capabilities and accommodates extensive regression analytics
applicable to the prepayment and decay profiles of our borrower and depositor portfolios. The model facilitates the generation
of alternative modeling scenarios and provides us with timely decision making data that is integral to our IRR management
processes. Modeling our IRR profile and measuring our IRR exposure are processes that are subject to continuous revision,
refinement, modification, enhancement, back testing and validation. We continually evaluate, challenge and update the
methodology and assumptions used in our IRR model, including behavioral equations that have been derived based on third-
party studies of our customer historical performance patterns. Changes to the methodology and/or assumptions used in the
model will result in reported IRR profiles and reported IRR exposures that will be different, and perhaps significantly, from the
results reported above.
Earnings at Risk. In addition to EVE calculations, we use our simulation model to analyze the sensitivity of our net
interest income to changes in interest rates (the institution’s EaR). Net interest income is the difference between the interest
income that we earn on our interest-earning assets, such as loans and securities, and the interest that we pay on our interest-
bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for
74
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 estimated net interest income would be for the same
period under numerous interest rate scenarios. 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, 2017, we estimated that our EaR for the 12 months ending September 30, 2018 would decrease by 1.63% in
the event that market interest rates used in the simulation were adjusted in equal monthly amounts (termed a "ramped" format)
during the 12 month measurement period to an aggregate increase in 200 basis points. This assumption differs from the
assumption used to report our EaR estimates in reporting periods prior to March 31, 2017, when our EaR disclosures were
determined under assumed instantaneous changes in market interest rates. During the March 31, 2017 quarter, based on a
survey of the predominate practices disclosed by other similarly profiled financial institutions, the Association adopted the
"ramped" assumption in preparing the EaR simulation estimates for use in its public disclosures. In addition to conforming to
predominate industry practice, the Association also believes that the ramped assumption provides a more probable/plausible
scenario for net interest income simulations than instantaneous shocks which provide a theoretical analysis but a much less
credible economic scenario. The Association continues to calculate instantaneous scenarios, and as of September 30, 2017, we
estimated that our EaR for the 12 month period ending September 30, 2018, would decrease by 5.14% in the event of an
instantaneous 200 basis point increase in market interest rates. At September 30, 2017, 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 100 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 that extends beyond two consecutive quarter end measurement periods, 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,
2017 the IRR profile as disclosed above was within 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.
75
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,
2017. 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, 2017, 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.
76
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, 2017, 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, 2017, 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, 2016 of the Company and our report dated November
22, 2017 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Cleveland, OH
November 22, 2017
77
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 2018 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, 2017, regarding our executive officers other than Mr.
Stefanski and Ms. Weil.
Name
Judith Z. Adam
David S. Huffman
Paul J. Huml
Anna Maria P. Motta
Cathy W. Zbanek
Title
Chief Risk Officer
Chief Financial Officer and Secretary
Chief Accounting Officer
Chief Operating Officer, the Company
Chief Information Officer, the Association
Chief Marketing and Human Resources Officer, the
Association
Age
62
65
58
58
44
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.
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 more than 30
years in the banking industry have included serving in various accounting roles at TransOhio Savings Bank and Metropolitan
Bank & Trust.
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 and as Secretary since 2011. 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.
78
Cathy W. Zbanek joined the Association in 2001 and was named the Chief Marketing Officer in January 2013 and also
serves as the Human Resources 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.
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,” “Report of the
Compensation Committee,” 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, 2017 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
5,685,500
$ 10.53 (1)
11,011,124
N/A
5,685,500
N/A
$ 10.53 (1)
N/A
11,011,124
(1) Weighted-Average Exercise Price of Outstanding Options, Rights and Warrants is calculated using 1,169,068 shares of
restricted stock awards at $0.00 and 4,516,432 shares of stock option awards at $13.26.
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.
79
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:
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, 2017 and 2016;
• Consolidated Statements of Income for the years ended September 30, 2017, 2016 and 2015;
• Consolidated Statements of Comprehensive Income for the years ended September 30, 2017, 2016 and 2015;
• Consolidated Statements of Shareholders' Equity for the years ended September 30, 2017, 2016 and 2015;
• Consolidated Statements of Cash Flows for the years ended September 30, 2017, 2016 and 2015; and
• Notes to the Consolidated Financial Statements
b. The exhibits listed in the Exhibits Index beginning on Page 131 of this Annual Report on Form 10-K.
Item 16.
Form 10-K Summary
Not applicable.
80
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, 2017 and 2016, 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, 2017. 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, 2017 and 2016, and the results of their
operations and their cash flows for each of the three years in the period ended September 30, 2017, 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, 2017, 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 22, 2017 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Cleveland, OH
November 22, 2017
81
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
As of September 30, 2017 and 2016
(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 $541,964 and $517,228, respectively)
Mortgage loans held for sale, at lower of cost or market (none measured at fair value)
Loans held for investment, net:
Mortgage loans
Other loans
Deferred loan expenses, 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;
281,291,750 and 284,219,019 outstanding at September 30, 2017 and September 30, 2016,
respectively
Paid-in capital
Treasury stock, at cost; 51,027,000 and 48,099,731 shares at September 30, 2017 and
September 30, 2016, 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.
82
2017
2016
$
35,243
232,975
268,218
537,479
351
$
27,914
203,325
231,239
517,866
4,686
12,434,339
3,050
30,865
(48,948)
12,419,306
8,375
89,990
5,521
60,875
35,479
205,883
61,086
$13,692,563
$ 8,151,625
3,671,377
100,446
35,766
43,390
12,002,604
11,748,099
3,116
19,384
(61,795)
11,708,804
8,852
69,853
6,803
61,003
32,818
200,144
63,994
$12,906,062
$ 8,331,368
2,718,795
92,313
49,401
53,727
11,245,604
—
—
3,323
1,722,672
3,323
1,716,818
(735,530)
(53,084)
760,070
(7,492)
1,689,959
$13,692,563
(681,569)
(57,418)
698,930
(19,626)
1,660,458
$12,906,062
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For each of the three years in the period ended September 30, 2017
(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 (CREDIT) 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 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
2017
2016
2015
$
$
394,447
9,041
5,507
408,995
$
375,624
9,390
3,427
388,441
369,302
9,571
4,604
383,477
87,421
42,678
130,099
278,896
(17,000)
295,896
6,896
2,183
6,449
4,321
90,000
28,026
118,026
270,415
(8,000)
278,415
7,423
6,161
7,409
3,959
93,526
19,824
113,350
270,127
(3,000)
273,127
7,972
4,519
7,324
4,445
19,849
24,952
24,260
95,682
19,713
24,531
10,055
5,235
3,185
24,003
182,404
133,341
44,464
88,877
0.32
$
$
96,281
16,956
23,862
10,377
5,459
5,772
22,297
181,004
122,363
41,810
80,553
0.28
$
$
95,638
19,904
22,048
11,135
5,914
9,705
23,648
187,992
109,395
36,804
72,591
0.25
$
$
277,213,258
279,268,768
281,566,648
283,785,713
289,935,861
292,210,417
See accompanying notes to consolidated financial statements.
83
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For each of the three years in the period ended September 30, 2017
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on securities available for sale
Net change in cash flow hedges
Change in pension obligation
Total other comprehensive income (loss)
Total comprehensive income
2017
2016
2015
$
88,877
$
80,553
$
72,591
(3,331)
11,620
3,845
12,134
$
101,011
$
(1,510)
(1,371)
(3,680)
(6,561)
73,992
$
3,018
—
(5,291)
(2,273)
70,318
See accompanying notes to consolidated financial statements.
84
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For each of the three years in the period ended September 30, 2017
(In thousands, except share and per share data)
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
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 (7,210,500
shares)
Treasury stock allocated to restricted
stock plan
Dividends paid to common shareholders
($0.425 per common share)
Balance at September 30, 2016
Comprehensive income
Net income
Other comprehensive loss, net of tax
ESOP shares allocated or committed to
be released
Compensation costs for stock-based
plans
Purchase of treasury stock (3,148,610
shares)
Treasury stock allocated to restricted
stock plan
Dividends paid to common shareholders
($0.545 per common share)
Balance at September 30, 2017
Common
stock
$ 3,323
Paid-in
capital
1,702,441
Treasury
stock
(379,109)
Unallocated
common stock
held by ESOP
(66,084)
Retained
earnings
589,678
Accumulated
other
comprehensive
income (loss)
Total
shareholders’
equity
(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
—
—
—
—
—
—
—
—
—
3,380
5,723
3,198
—
—
—
—
—
— (128,427)
(3,112)
(4,585)
— 80,553
—
—
—
(6,561)
80,553
(6,561)
4,333
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,713
5,723
3,198
(128,427)
(7,697)
—
$ 3,323
—
1,716,818
—
(681,569)
— (23,414)
698,930
(57,418)
—
(23,414)
(19,626) $ 1,660,458
—
—
—
—
—
—
—
—
3,009
3,937
—
—
—
—
— (52,549)
(1,092)
(1,412)
— 88,877
—
—
—
12,134
4,334
—
—
—
—
(28)
—
—
—
—
—
—
88,877
12,134
7,343
3,909
(52,549)
(2,504)
—
$ 3,323
—
1,722,672
—
(735,530)
— (27,709)
760,070
(53,084)
—
(27,709)
(7,492) $ 1,689,959
See accompanying notes to consolidated financial statements.
85
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the three years in the period ended September 30, 2017
(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 (credit) for loan losses
Net gain on the sale of loans
Other net increase
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
Cash Collateral received from derivative counterparties
Net increase in interest receivable and other assets
Net (decrease) increase 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 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 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 financing activities
NET INCREASE (DECREASE) 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
2017
2016
2015
$
88,877
$
80,553
$
72,591
11,252
20,885
3,548
(17,000)
(2,183)
562
29,172
(24,947)
(6,320)
7,525
(1,383)
(1,295)
—
108,693
13,436
19,369
11,099
(8,000)
(6,161)
613
16,285
(20,466)
(4,854)
—
(13,087)
(4,128)
255
84,914
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
(3,422,896)
2,494,866
(3,024,260)
2,310,358
(2,760,277)
2,052,276
153,315
154,520
153,945
218,158
8,761
186,705
22,400
133,456
25,134
(20,137)
(183,518)
(4,150)
792
(754,809)
(179,743)
8,133
(13,635)
1,160,682
—
(208,100)
(54,029)
—
(2,504)
(27,709)
683,095
36,979
231,239
268,218
87,373
36,216
38,208
$
$
$
$
(383)
(95,176)
(9,125)
584
(454,377)
45,510
6,021
(92)
696,227
40,290
(186,349)
(128,361)
3,198
(7,697)
(23,414)
445,333
75,870
155,369
231,239
89,947
26,421
31,815
$
$
(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
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
Treasury stock issued for stock benefit plans
7,989
218,720
1,135
12,134
183,178
3,112
23,761
127,066
7,041
See accompanying notes to consolidated financial statements.
86
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the years ended September 30, 2017, 2016, and 2015
(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 80.74% of the outstanding shares of common
stock of the Company at September 30, 2017.
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, purchase mortgages, first mortgage refinance loans, home equity lines of credit, and home equity loans 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.
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.
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
87
characteristics and includes consideration of deferred fees (costs). Net unrealized losses or net unrealized gains 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—Derivative instruments are carried at fair value in the Company's financial statements. For
derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the
derivative instrument is reported as a component of other comprehensive income, net of tax, and reclassified into earnings in
the same period during which the hedged transaction affects earnings. Ineffectiveness is measured as the amount by which the
cumulative change in the fair value of the hedging instrument exceeds or is substantially less than the present value of the
cumulative change in the hedged item's expected cash flows attributable to the risk being hedged and, when present, is
recognized in current earnings during the period. At the inception of a hedge, the Company documents certain items, including
the relationship between the hedging instrument and the hedged item, the risk management objective and the nature of the risk
being hedged, a description of how effectiveness will be measured and an evaluation of hedge transaction effectiveness.
Hedge accounting is discontinued prospectively when (1) a derivative is no longer highly effective in offsetting changes
in the fair value or cash flow of a hedged item, (2) a derivative expires or is sold, (3) a derivative is de-designated as a hedge,
because it is unlikely that a forecasted transaction will occur, or (4) it is determined that designation of a derivative as a hedge
is no longer appropriate. When hedge accounting is discontinued, the Company would continue to carry the derivative on the
statement of condition at its fair value; however, changes in its fair value would be recorded in earnings instead of through OCI.
For derivative instruments not designated as hedging instruments, the Company recognizes gains and losses on the
derivative instrument in current earnings during the period of change.
Loans and Related Deferred Loan Expenses, net—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 loan
expenses. Interest on loans is accrued and credited to income as earned. Interest on loans is not recognized in income 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
agreement 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 (or
recaptures of) 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.
88
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
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, net—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 or building improvements is computed on
a straight-line basis over the lesser of the economic useful life of the improvement or term of the lease, typically 10 years.
Bank Owned Life Insurance Contracts—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, 2017 and 2016. Goodwill is reviewed for impairment on
an annual basis as of September 30. No impairment was identified as of September 30, 2017 or 2016.
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 changes in pension
obligations and changes in unrealized gains (losses) on securities available for sale and cash flow hedges, each of which is net
of the related income tax effects.
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.
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
89
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, 2017, 2016 and 2015, potentially dilutive shares include stock
options and restricted stock units issued through stock-based compensation plans.
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 January 2017, the seventh 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 July 2015, was
completed. The Board of Directors authorized an eighth repurchase program for the repurchase of 10,000,000 shares in October
2016 and repurchases under this program began in January, 2017. A total of 3,148,610 shares were repurchased during the year
ended September 30, 2017 and 7,210,500 shares were repurchased during the year ended September 30, 2016. At
September 30, 2017, there were 7,750,890 shares remaining to be purchased under the eighth repurchase program. The
Company previously repurchased 51,300,000 shares of the Company’s common stock as part of the previous seven Board of
Directors-approved share repurchase programs. In total, the Company has repurchased 53,549,110 shares of the Company's
common stock as of September 30, 2017.
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, 2017, the Association exceeded all regulatory
capital requirements and is considered “well capitalized” under regulatory guidelines.
The Association operates under the capital requirements for the standardized approach of the Basel III capital framework
for U.S. banking organizations (“Basel III Rules”), subject to transitional provisions extending through the end of calendar
2018. The requirement would limit capital distributions and certain discretionary bonus payments to management if the
institution does not hold a "capital conservation buffer" consisting of 2.5% in addition to the minimum capital requirements. At
September 30, 2017, the Association exceeded the fully phased-in regulatory requirement for the "capital conservation buffer".
90
The following table summarizes the actual capital amounts and ratios of the Association as of September 30, 2017 and
2016, compared to the minimum capital adequacy requirements and the requirements for classification as a well capitalized
institution.
Minimum Requirements
Actual
For Capital
Adequacy Purposes
To be “Well Capitalized”
Under Prompt Corrective
Action Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
September 30, 2017
Total Capital to Risk-Weighted Assets
$1,555,903
21.37% $ 582,553
8.00% $ 728,192
10.00%
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, 2016
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
1,506,952
1,506,952
11.16%
20.69%
540,193
436,915
4.00%
6.00%
675,242
582,553
5.00%
8.00%
1,506,938
20.69%
327,686
4.50%
473,325
6.50%
$1,551,502
1,489,704
1,489,704
22.24% $ 558,006
507,977
11.73%
418,505
21.36%
8.00% $ 697,508
634,972
4.00%
558,006
6.00%
10.00%
5.00%
8.00%
1,489,690
21.36%
313,879
4.50%
453,380
6.50%
The Association paid dividends of $81,000 and $60,000 to the Company during the years ended September 30, 2017 and
September 30, 2016, respectively. Additionally, the Association paid a special dividend of $150,000 to the Company in the
fiscal year ended September 30, 2016. The special dividend amount was equal to the voluntary contribution of capital that the
Company made to the Association in October 2010.
On July 19, 2017, 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 $0.68 per share during the four quarters ending June 30, 2018.
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, 2018.
4. INVESTMENT SECURITIES
Investments available for sale are summarized as follows:
REMICs
Fannie Mae certificates
Total
REMICs
Fannie Mae certificates
Total
Amortized
Cost
$ 533,427
8,537
$ 541,964
Amortized
Cost
$ 508,044
9,184
September 30, 2017
Gross
Unrealized
Gains
$
$
52
419
471
Losses
$ (4,943)
(13)
$ (4,956)
September 30, 2016
Gross
Unrealized
Gains
$ 1,447
685
Losses
$ (1,494)
—
$ (1,494)
Fair
Value
$ 528,536
8,943
$ 537,479
Fair
Value
$ 507,997
9,869
$ 517,866
$ 517,228
$ 2,132
91
Gross unrealized losses on available for sale securities and the estimated fair value of the related securities, aggregated by
the length of time the securities have been in a continuous loss position, at September 30, 2017 and 2016, were as follows:
Available for sale—
REMICs
Fannie Mae certificates
Total
September 30, 2017
Less Than 12 Months
12 Months or More
Total
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
$ 246,113
4,601
$ 250,714
$
$
1,508
13
1,521
$260,837
—
$260,837
$
$
3,435
—
3,435
$ 506,950
4,601
$ 511,551
$
$
4,943
13
4,956
September 30, 2016
Less Than 12 Months
12 Months or More
Total
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Available for sale—REMICs
$ 210,735
$
797
$ 73,361
$
697
$ 284,096
$
1,494
The unrealized losses on investment securities were attributable to interest rate increases. 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. The U.S. Treasury Department established financing agreements in 2008 to
ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or
guaranteed.
Since the decline in value is attributable to changes in interest rates and not credit quality and because the Association has
neither the intent to sell the securities nor is it more likely than not the Association will be required to sell the securities for the
time periods necessary to recover the amortized cost, these investments are not considered other-than-temporarily impaired.
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
Add (deduct):
Deferred loan expenses, net
Loans-in-process (“LIP”)
Allowance for loan losses
Loans held for investment, net
September 30,
2017
2016
$ 10,746,204
108,964
1,552,315
60,956
12,468,439
3,050
$ 10,069,652
121,938
1,531,282
61,382
11,784,254
3,116
30,865
(34,100)
(48,948)
$ 12,419,306
19,384
(36,155)
(61,795)
$ 11,708,804
At September 30, 2017 and 2016, respectively, $351 and $4,686 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, 2017 and 2016, the
percentage of total Residential Core, Home Today and Construction loans held in Ohio were 57% and 60%, respectively, and
92
the percentages held in Florida was 16% as of both dates. As of September 30, 2017 and 2016, home equity loans and lines of
credit were concentrated in Ohio (39% as of both dates), Florida (22% and 24%) and California (13% and 14%).
Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers and most
loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after
September 30, 2016. Through this program the Association provided the majority of loans to borrowers who would not
otherwise qualify for the Association’s loan products, generally because of low credit scores. Although the credit profiles of
borrowers in the Home Today program might be described as sub-prime, Home Today loans generally contained the same
features as loans offered to our Residential Core borrowers. Borrowers with a Home Today loan completed financial
management education and counseling and were referred to the Association by a sponsoring organization with which the
Association partnered as part of the program. Because the Association applied less stringent underwriting and credit standards
to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential
real estate mortgage loans in the Residential Core portfolio. As of September 30, 2017 and 2016, the principal balance of Home
Today loans originated prior to March 27, 2009 was $105,485 and $118,255 respectively. Since loans are no longer originated
under the Home Today program, the Home Today portfolio will continue to decline in balance due to contractual amortization.
To supplant the Home Today product and to continue to meet the credit needs of customers and the communities served, during
2016 the Association began to offer Fannie Mae eligible, HomeReady loans. These loans are originated in accordance with
Fannie Mae's underwriting standards. While the Association retains the servicing to these loans, the loans, along with the credit
risk associated therewith, are securitized/sold to Fannie Mae. The Association does not offer, and has not offered, loan products
frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates,
negative amortization, a LTV ratio greater than 100%, or pay-option, adjustable-rate mortgages.
The Association currently offers home equity lines of credit that include monthly principal and interest payments
throughout the entire term. Home equity lines of credit prior to June 28, 2010 require interest only payments for 10 years, with
an option to extend the interest only and draw period another 10 years, at which time they are included in the home equity loan
balance. The recorded investment in interest only loans is comprised solely of equity lines of credit with balances of $483,127
and $892,973 for the years ending September 30, 2017 and 2016, respectively.
An age analysis of the recorded investment in loan receivables that are past due at September 30, 2017 and 2016 is
summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is
considered 30 days or more past due. Balances are adjusted for deferred loan fees, expenses and any applicable loans-in-
process.
30-59 Days
Past Due
60-89 Days
Past Due
90 Days
or More
Past Due
Total Past
Due
Current
Total
September 30, 2017
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
Other consumer loans
Total
$
6,077
$
2,593
$
11,975
$
20,645
$10,740,398
$10,761,043
4,067
4,418
—
14,562
—
14,562
$
$
1,496
1,952
—
6,041
—
6,041
$
6,851
5,408
—
24,234
—
24,234
$
12,414
11,778
—
44,837
—
44,837
95,269
107,683
1,558,273
26,427
12,420,367
3,050
$12,423,417
1,570,051
26,427
12,465,204
3,050
$12,468,254
93
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total Past
Due
Current
Total
September 30, 2016
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
Other consumer loans
Total
$
6,653
$
3,157
$
15,593
$
25,403
$10,054,211
$10,079,614
5,271
4,605
—
16,529
—
16,529
$
$
2,583
1,811
—
7,551
—
7,551
$
7,356
4,932
—
27,881
—
27,881
$
15,210
11,348
—
51,961
—
51,961
105,225
1,531,242
24,844
11,715,522
120,435
1,542,590
24,844
11,767,483
3,116
$11,718,638
3,116
$11,770,599
At September 30, 2017 and 2016, real estate loans include $14,736 and $20,047, respectively, of loans that were in the
process of foreclosure.
Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans restructured in TDRs
that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after
restructuring. Loans where the borrowers' sustained ability to repay is not fully supported at the time of modification are placed
in non-accrual status for a minimum of twelve months. Additionally, home equity loans and lines of credit where the customer
has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not
reaffirmed or been dismissed, are placed in non-accrual status.
The recorded investment of loan receivables in non-accrual status is summarized in the following table. Balances are
adjusted for deferred loan fees and expenses.
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Total non-accrual loans
September 30,
2017
2016
$
43,797
$
51,304
18,109
17,185
79,091
$
19,451
19,206
89,961
$
At September 30, 2017 and September 30, 2016, respectively, the recorded investment in non-accrual loans includes
$54,858 and $62,081 which are performing according to the terms of their agreement, of which $34,142 and $40,546 are loans
in Chapter 7 bankruptcy status, primarily where all borrowers have filed, and have not reaffirmed or been dismissed.
Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest
income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income
and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual
status are applied to the oldest scheduled, unpaid payment first. Cash payments on loans with a partial charge-off are applied
fully to principal, then to recovery of the charged off amount prior to interest income being recognized. A non-accrual loan is
generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in
non-accrual status when collectability is uncertain, such as a TDR that has not met minimum payment requirements, a loan
with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days, or a loan in
Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. The number of days
past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each
scheduled payment.
94
The recorded investment in loan receivables at September 30, 2017 and 2016 is summarized in the following table. The
table provides details of the recorded balances according to the method of evaluation used for determining the allowance for
loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating
groups of loans not individually evaluated. Balances of recorded investments are adjusted for deferred loan fees, expenses and
any applicable loans-in-process.
September 30,
2017
2016
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
Other consumer loans
Total
$
94,747
46,641
$ 10,666,296
61,042
$ 10,761,043
107,683
$ 107,541
51,415
$ 9,972,073
69,020
$10,079,614
120,435
39,172
—
1,530,879
26,427
1,570,051
26,427
35,894
—
1,506,696
24,844
1,542,590
24,844
180,560
—
$ 180,560
12,284,644
3,050
$ 12,287,694
12,465,204
3,050
$ 12,468,254
194,850
—
$ 194,850
11,572,633
3,116
$11,575,749
11,767,483
3,116
$11,770,599
An analysis of the allowance for loan losses at September 30, 2017 and 2016 is summarized in the following table. The
analysis provides details of the allowance for loan losses according to the method of evaluation, distinguishing between
allowances for loan losses determined by evaluating individual loans and allowances for loan losses determined by evaluating
groups of loans collectively.
September 30,
2017
2016
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
$
$
$
7,336
2,250
1,475
—
6,850
2,258
28,774
5
$
14,186
4,508
30,249
5
$
8,927
2,979
722
—
$
6,141
4,437
38,582
7
15,068
7,416
39,304
7
$
11,061
$
37,887
$
48,948
$
12,628
$
49,167
$
61,795
At September 30, 2017 and 2016, 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, 2017 and 2016, respectively, allowances on individually reviewed loans
evaluated for impairment based on the present value of cash flows, such as performing TDRs were $11,061 and $12,432; and
allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $0 and
$196.
Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company
believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the
portfolio. The portfolio does not include loan types or structures that have recently experienced severe performance problems at
other financial institutions (sub-prime, no documentation or pay-option adjustable-rate mortgages).
As described earlier in this note, Home Today loans have greater credit risk than traditional residential real estate
mortgage loans. At September 30, 2017 and 2016, respectively, approximately 22% and 27% 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
95
50%. Between March 2013 and June 2016, PMIC gradually increased the cash percentage of the partial claim payment from
55% to 71.5% of the claim with the remainder deferred. Appropriate adjustments have been made to the Association’s affected
valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated
collectively. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided
by PMIC as of September 30, 2017 and 2016, respectively, was $61,470 and $91,784 of which $56,511 and $84,007 was
current. The amount of loans in our owned portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance
Corporation as of September 30, 2017 and 2016, respectively, was $28,946 and $40,578 of which $28,870 and $40,190 was
current. As of September 30, 2017, MGIC's long-term debt rating, as published by the major credit rating agencies, did not
meet the requirements to qualify as "high credit quality"; however, MGIC continues to make claims payments in accordance
with its contractual obligations and the Association has not increased its estimated loss severity factors related to MGIC's claim
paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which we assessed as
being non-investment grade.
Home equity loans and lines of credit, which are comprised primarily of home equity lines of credit, represent a
significant portion of the residential real estate portfolio. Post-origination deterioration in economic and housing market
conditions may impact a borrower's ability to afford the higher payments required during the end of draw repayment period that
follows the period of interest only payments on home equity lines of credit originated prior to 2012 or the ability to secure
alternative financing. Beginning in February 2013, the terms on new home equity lines of credit included monthly principal and
interest payments throughout the entire term to minimize the potential payment differential between the 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 85%.
Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the
event of non-payment.
For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that
the Association will be unable to collect the scheduled payments of principal and interest according to the contractual terms of
the loan agreement. Factors considered in determining that a loan is impaired may include the deteriorating financial condition
of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the
absence of adequate security for the loan.
96
The recorded investment and the unpaid principal balance of impaired loans, including those reported as TDRs, as of
September 30, 2017 and 2016 are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees
and expenses.
2017
Unpaid
Principal
Balance
Recorded
Investment
September 30,
Related
Allowance
Recorded
Investment
2016
Unpaid
Principal
Balance
Related
Allowance
$ 47,507
$ 65,132
$
— $ 53,560
$ 72,693
$
With no related IVA recorded:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Total
With an IVA recorded:
18,780
18,793
41,064
25,991
$ 85,080
$ 132,187
Residential Core
Residential Home Today
Home equity loans and lines of credit
$ 47,240
27,861
20,379
$ 47,747
28,210
20,389
$
$
—
—
20,108
20,549
44,914
30,216
— $ 94,217
$ 147,823
7,336
2,250
1,475
$ 53,981
31,307
15,345
$ 54,717
31,725
15,357
$
$
—
—
—
—
8,927
2,979
722
$ 95,480
$ 96,346
$ 11,061
$ 100,633
$ 101,799
$ 12,628
Total
Total impaired loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
39,172
46,380
$ 94,747
46,641
$ 112,879
69,274
$
7,336
2,250
1,475
$ 107,541
51,415
$ 127,410
76,639
$
35,894
45,573
8,927
2,979
722
Total
$ 180,560
$ 228,533
$ 11,061
$ 194,850
$ 249,622
$ 12,628
At September 30, 2017 and 2016, respectively, the recorded investment in impaired loans includes $162,020 and
$170,602 of loans restructured in TDRs of which $11,884 and $12,368 are 90 days or more past due.
The average recorded investment in impaired loans and the amount of interest income recognized during 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
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,
2017
2016
2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$ 50,534
$
1,411
$ 57,869
$
1,288
$ 67,509
$
19,444
19,671
$ 89,649
$ 50,611
29,584
17,862
—
$ 98,057
$ 101,145
49,028
37,533
—
$
$
$
$
337
293
2,041
21,573
21,798
$ 101,240
1,891
1,445
849
—
4,185
$ 55,696
33,158
13,206
213
$ 102,273
3,302
$ 113,565
1,782
1,142
—
54,731
35,004
213
$
$
$
$
352
282
1,922
25,542
24,832
$ 117,883
2,228
1,756
255
—
4,239
$ 58,145
37,070
9,469
213
$ 104,897
3,516
$ 125,654
2,108
537
—
62,612
34,301
213
$
$
$
$
1,464
271
299
2,034
2,570
1,877
271
10
4,728
4,034
2,148
570
10
$ 187,706
$
6,226
$ 203,513
$
6,161
$ 222,780
$
6,762
97
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 $1,443, $1,400 and $1,347 for the years ended September 30, 2017, 2016 and 2015,
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.
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.
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
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)
Portfolio(s)
Affected
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.
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
98
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,
2017, 2016 and 2015.
The recorded investment in TDRs by type of concession as of September 30, 2017 and September 30, 2016 is shown in
the tables below.
September 30, 2017
Reduction
in Interest
Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings
Bankruptcy
Total
Residential Core
$
12,485
$
521
$
8,176
$
21,278
$
20,459
$
23,670
$ 86,589
Residential Home Today
5,441
—
4,811
10,538
18,877
4,337
44,004
Home equity loans and lines of
credit
106
6,033
373
14,661
1,471
8,783
31,427
Total
$
18,032
$
6,554
$
13,360
$
46,477
$
40,807
$
36,790
$ 162,020
September 30, 2016
Reduction
in Interest
Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings
Bankruptcy
Total
Residential Core
$
13,456
$
748
$
8,595
$
22,641
$
21,517
$
28,263
$ 95,220
Residential Home Today
6,338
—
5,198
11,330
20,497
5,241
48,604
Home equity loans and lines of
credit
120
4,135
401
9,354
1,166
11,602
26,778
Total
$
19,914
$
4,883
$
14,194
$
43,325
$
43,180
$
45,106
$ 170,602
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
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 has improved, the need for multiple restructurings has begun to abate.
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, 2017, 2016 and 2015 (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, 2017
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
Total
$
$
818
147
—
965
$
— $
—
2,282
$ 2,282
$
$
$
(Dollars in thousands)
1,654
458
6,834
8,946
$
$
1,340
456
32
1,828
2,176
2,734
694
5,604
$
$
2,621
469
1,042
4,132
$ 8,609
4,264
10,884
$ 23,757
99
For the Year Ended September 30, 2016
Reduction
in Interest
Rates
Payment
Extensions
Forbearance
or Other
Actions
Multiple
Concessions
Multiple
Restructurings
Bankruptcy
Total
Residential Core
$ 1,342
$
— $
(Dollars in thousands)
4,444
$
$
1,154
Residential Home Today
Home equity loans and lines of credit
169
58
—
1,371
489
33
542
5,842
2,902
$
4,929
$ 14,771
3,487
459
469
1,360
5,156
9,123
Total
$ 1,569
$
1,371
$
1,676
$ 10,828
$
6,848
$
6,758
$ 29,050
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
$ 2,490
$
— $
(Dollars in thousands)
4,464
$
$
745
Residential Home Today
Home equity loans and lines of credit
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
Below summarizes the information on TDRs restructured within the previous 12 months of the period presented 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, 2017
For the Year Ended
September 30, 2016
For the Year Ended
September 30, 2015
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
(Dollars in thousands)
(Dollars in thousands)
(Dollars in thousands)
17
25
16
58
$
1,462
1,126
667
$
3,255
32
26
28
86
$
2,282
1,088
886
$
34
26
44
3,296
1,179
689
$
4,256
104
$
5,164
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, as evaluated based on delinquency status, 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.
100
The following tables provide information about the credit quality of residential loan receivables by an internally assigned
grade. Balances are adjusted for deferred loan fees, expenses and any applicable LIP.
September 30, 2017
Real Estate Loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Pass
Special
Mention
Substandard
Loss
Total
$ 10,709,739
$
— $
51,304
$
— $ 10,761,043
88,247
1,545,658
26,427
—
3,837
—
19,436
20,556
—
—
—
—
107,683
1,570,051
26,427
Total real estate loans
$ 12,370,071
$ 3,837
$
91,296
$
— $ 12,465,204
September 30, 2016
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
$ 10,022,555
$
— $
57,059
$
— $ 10,079,614
99,442
—
1,516,551
4,122
24,844
—
20,993
21,917
—
—
—
—
120,435
1,542,590
24,844
$ 11,663,392
$ 4,122
$
99,969
$
— $ 11,767,483
At September 30, 2017 and 2016, respectively, the recorded investment of impaired loans includes $94,104 and $101,227
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, 2017 and 2016, respectively, there were $4,840 and $6,346 of loans classified
substandard and $3,837 and $4,122 of loans designated special mention that are not included in the recorded investment of
impaired loans; rather, they are included in loans collectively evaluated for impairment.
Other consumer loans are internally assigned a grade of nonperforming when they are considered 90 days or more past
due. At September 30, 2017 and September 30, 2016, no consumer loans were graded as nonperforming.
During the years ended September 30, 2017 and 2016, respectively, $0 and $244 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.
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
For the Year Ended September 30, 2017
Beginning
Balance
Provisions
Charge-offs
Recoveries
Ending
Balance
$
15,068
7,416
39,304
7
$
(3,311) $
(1,943)
(11,744)
(2)
$
61,795
$ (17,000) $
(3,029) $
(2,276)
(6,173)
—
(11,478) $
$
5,458
1,311
8,862
—
14,186
4,508
30,249
5
15,631
$
48,948
101
$
$
7,416
39,304
7
61,795
Ending
Balance
22,596
9,997
38,926
35
For the Year Ended September 30, 2016
Beginning
Balance
Provisions
Charge-offs
Recoveries
Ending
Balance
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
$
22,596
$
9,997
38,926
35
71,554
$
$
(6,942) $
(1,253)
255
(60)
(8,000) $
(4,294) $
(2,761)
(7,846)
—
(14,901) $
1,433
7,969
32
13,142
3,708
$
15,068
For the Year Ended September 30, 2015
Beginning
Balance
Provisions
Charge-offs
Recoveries
Real estate loans:
Residential Core
Residential Home Today
Home equity loans and lines of credit
Construction
Total real estate loans
$
$
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
1,533
7,468
174
14,544
$
71,554
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.
During 2017, 2016 and 2015, $249,426, $200,298 and $160,052, 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
2017
9.9%
22.2
0.12%
12%
2016
11.3%
23.0
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.
102
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,
2017
$
$
$
$
$
$
$
16,102
18.0%
(568)
(1,085)
0.12%
(1,493)
(2,987)
12.0%
(570)
(1,096)
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. Twenty-one 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.
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,
2017
8,852
$
2016
9,988
$
2015
$ 11,669
1,347
(1,824)
—
1,044
(2,180)
—
907
(2,588)
—
$
8,375
$
8,852
$
9,988
$ 16,102
$ 16,428
$ 21,084
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 $4,257 in 2017,
$4,696 in 2016 and $5,444 in 2015. The unpaid principal balance of mortgage loans serviced for others was approximately
$1,849,653, $1,959,467 and $2,181,436 at September 30, 2017, 2016 and 2015, respectively. The ratio of capitalized servicing
rights to the unpaid principal balance of mortgage loans serviced for others was 0.45%, 0.45%, and 0.46% at September 30,
2017, 2016 and 2015, respectively.
103
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,
2017
$ 12,183
76,003
33,313
17,432
15,224
154,155
(93,280)
$ 60,875
2016
$ 12,183
73,235
32,513
17,061
13,820
148,812
(87,809)
$ 61,003
During the years ended September 30, 2017, 2016 and 2015, depreciation and amortization expense on premises,
equipment, and software was $5,633, $5,507 and $4,798, 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, 2017:
Years Ending September 30,
2018
2019
2020
2021
2022
Thereafter
$
6,697
6,138
4,987
3,989
2,743
6,264
During the years ended September 30, 2017, 2016 and 2015, rental expense was $6,929, $6,711 and $6,421, respectively,
and appears in office property, equipment, and software in the accompanying statements.
The Company, as lessor, leases certain commercial office buildings. The Company anticipates receiving future minimum
payments of the following as of September 30, 2017:
Years Ending September 30,
2018
2019
2020
2021
2022
Thereafter
$
2,154
1,991
1,124
1,072
998
824
During each of the years ended September 30, 2017, 2016 and 2015, rental income was $1,857, $1,556 and $1,414
respectively, and appears in other non-interest income in the accompanying statements.
104
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,
2017
2016
$
1,270
34,209
$ 35,479
$
1,179
31,639
$ 32,818
Checking accounts
Savings accounts
Subtotal
Certificates of deposit
Subtotal
Accrued interest
Total deposits
Stated
Interest
Rate
0.00–0.10%
0.00–0.15
0.00–0.99
1.00–1.99
2.00–2.99
3.00–3.99
4.00 and above
September 30,
2017
2016
Amount
$ 987,001
1,473,415
2,460,416
877,684
4,348,918
449,358
8,648
4,628
5,689,236
8,149,652
1,973
$ 8,151,625
Percent
Amount
12.1% $ 995,372
1,514,428
18.1
2,509,800
30.2
1,164,802
10.8
4,214,976
53.3
411,229
5.5
9,487
0.1
19,148
0.1
5,819,642
69.8
8,329,442
100.0
1,926
—
100.0% $8,331,368
Percent
12.0%
18.2
30.2
14.0
50.6
4.9
0.1
0.2
69.8
100.0
—
100.0%
At September 30, 2017 and 2016, the weighted average interest rate was 0.14% on savings accounts; 0.09% on checking
accounts; 1.52% and 1.48% on certificates of deposit, respectively; and 1.10% and 1.07% on total deposits, respectively.
The aggregate amount of certificates of deposit in denominations of $100 or more totaled approximately $2,685,662 and
$2,668,391 at September 30, 2017 and 2016, respectively. In accordance with the DFA, the maximum amount of deposit
insurance is $250 per depositor.
Brokered certificates of deposit, which are used as a cost effective funding alternative, totaled $620,705 and $539,775 at
September 30, 2017 and 2016, respectively. The FDIC places restrictions on banks with regard to issuing 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
Percent
September 30, 2017
Amount
$ 2,131,565
1,490,041
1,136,632
491,055
37.4%
26.2%
20.0%
8.6%
237,354
202,589
$ 5,689,236
4.2%
3.6%
100.0%
105
Interest expense on deposits is summarized as follows:
Certificates of deposit
Checking accounts
Savings accounts
Total
10. BORROWED FUNDS
Year Ended September 30,
2017
2016
$
$
84,410
918
2,093
87,421
$
$
85,900
1,289
2,811
90,000
Federal Home Loan Bank borrowings at September 30, 2017 are summarized in the table below. The amount and
weighted average rates of certain FHLB Advances maturing in years 2018 through 2021 reflect the net impact of deferred
penalties discussed below:
Maturing in:
2018
2019
2020
2021
thereafter
Total FHLB Advances
Accrued interest
Total
Amount
Weighted
Average
Rate
1.25%
1.79%
1.82%
1.54%
1.56%
1.36%
$ 2,884,479
414,478
329,816
1,290
37,548
3,667,611
3,766
$ 3,671,377
Through the use of interest rate swaps discussed in Note 17. Derivative Instruments, $1,500,000 of FHLB advances
included in the table above as maturing in 2018, have effective maturities, assuming no early terminations of the swap
contracts, as shown below:
Effective Maturity:
2020
2021
2022
2023
Total FHLB Advances under swap contracts
Swap
Adjusted
Weighted
Average
Rate
1.23%
1.19%
1.90%
1.67%
1.62%
Amount
$
50,000
525,000
900,000
25,000
$ 1,500,000
During fiscal year 2016, $150,000 fixed-rate FHLB advances with remaining terms of approximately four years were
prepaid and replaced with new four- and five-year interest rate swap arrangements. The deferred repayment penalties of $2,408
related to the $150,000 of restructuring are being recognized in interest expense over the remaining term of the swap contracts.
106
The following table sets forth certain information relating to Federal Home Loan Bank short-term borrowings at or for
the periods indicated.
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
Interest expense
At or For the Fiscal Years Ended September 30,
2017
2016
2015
$ 2,610,000
$ 2,610,000
$ 1,976,281
(dollars in thousands)
$
$ 1,451,000
755,000
$ 1,535,000
$ 1,451,000
$ 1,242,380
934,689
$
0.89%
1.22%
0.42%
0.47%
0.15%
0.18%
$
17,826
$
3,984
$
1,811
The Association implemented a strategy in fiscal year 2015 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, 2017, 2016 or 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
$40,979 at September 30, 2017. Pursuant to collateral agreements with FHLB of Cincinnati, advances are secured by a 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 $4,867,936 at September 30, 2017, subject to satisfaction of the FHLB
of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement, the Association
would have to increase its ownership of FHLB of Cincinnati common stock by an additional $97,359. 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, 2017, the Association was in compliance with all such covenants. The Association’s borrowing
capacity at the FRB-Cleveland Discount Window was $72,295 at September 30, 2017.
107
11. OTHER COMPREHENSIVE INCOME (LOSS)
The change in accumulated other comprehensive income (loss) by component is as follows:
Fiscal year 2015 activity
Balance at September 30, 2014
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
Fiscal year 2016 activity
Other comprehensive loss before reclassifications, net of tax
benefit of $4,621
Amounts reclassified from accumulated other comprehensive
loss, net of tax expense of $1,089
Other comprehensive loss
Balance at September 30, 2016
Fiscal year 2017 activity
Other comprehensive income (loss) before reclassifications, net
of tax expense of $4,479
Amounts reclassified from accumulated other comprehensive
income (loss), net of tax expense of $2,055
Other comprehensive (loss) income
Balance at September 30, 2017
Unrealized
Gains (Losses)
on Securities
Available for
Sale
Cash Flow
Hedges
Defined
Benefit
Plan
Total
$
(1,092) $
— $
(9,700) $
(10,792)
3,018
—
3,018
1,926
$
—
—
—
— $
(5,785)
(2,767)
494
(5,291)
(14,991) $
494
(2,273)
(13,065)
(1,510)
(2,389)
(4,682)
(8,581)
—
(1,510)
416
$
1,018
(1,371)
(1,371) $
1,002
(3,680)
(18,671) $
2,020
(6,561)
(19,626)
(3,331)
9,186
—
(3,331)
(2,915) $
2,434
11,620
10,249
$
2,463
1,382
3,845
(14,826) $
8,318
3,816
12,134
(7,492)
$
$
$
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
Cash flow hedges:
Interest expense, effective portion
Income tax
Net of income tax
Amortization of pension plan:
Actuarial loss
Income tax
Net of income tax
Total reclassifications for the period
For the Years Ended September 30,
2016
2017
2015
Line Item in the
Statement of Income
$
$
$
$
3,745
(1,311)
2,434
2,126
(744)
1,382
3,816
$
$
$
$
1,567
(549)
1,018
1,542
(540)
1,002
2,020
$
$
$
$
— Interest expense
— Income tax expense
—
(a)
Income tax expense
759
(265)
494
494
(a) These items are included in the computation of net period pension cost. See Note 13. Employee Benefit Plans for additional
disclosure.
108
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,
2017
2016
2015
$ 39,794
1,121
$ 29,833
878
$ 27,056
564
3,634
(85)
$ 44,464
11,045
54
$ 41,810
9,605
(421)
$ 36,804
Year Ended September 30,
2017
35.0%
0.5
(1.7)
(0.5)
33.3%
2016
35.0%
0.5
(2.1)
0.8
34.2%
2015
35.0%
0.1
(2.4)
0.9
33.6%
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,
2017
2016
$ 26,690
12,280
$ 30,240
11,796
2,696
2,180
2,482
46,328
5,790
1,759
3,234
52,819
7,999
1,583
3,473
15,288
1,994
30,337
$ 15,991
7,826
1,322
3,434
11,131
3,033
26,746
$ 26,073
In the accompanying Consolidated Statements 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, 2017 or 2016.
109
Retained earnings at September 30, 2017 and 2016 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, 2017, 2016 and
2015, 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 no interest expense or penalties
on income tax assessments during the years ended September 30, 2017, 2016 and 2015. Total interest accrued was $0 at
September 30, 2017 and 2016.
The Company’s effective income tax rate was 33.3%, 34.2% and 33.6% for the years ending September 30, 2017, 2016 and
2015, respectively. The decrease in the effective rate for the year ended September 30, 2017 compared to the same periods
during fiscal 2016 and 2015 is primarily due to how excess tax benefits on share-based payment awards are recognized pursuant
to the adoption of ASU 2016-09. This change is described more fully in Note 21, Recent Accounting Pronouncements.
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 2014.
The Company makes certain investments in limited partnerships which invest in affordable housing projects that qualify
for the Low Income Housing Tax Credit. The Company acts as a limited partner in these investments and does not exert control
over the operating or financial policies of the partnership. The Company accounts for its interests in LIHTCs using the
proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income
taxes was not material at September 30, 2017, 2016 and 2015.
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.
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
Benefits paid
Projected benefit obligation at end of year
110
September 30,
2017
$ 84,218
3,068
(955)
(4,113)
$ 82,218
2016
$ 76,735
3,288
7,464
(3,269)
$ 84,218
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 Consolidated Statements 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
Fair value of plan assets at end of year
Funded status of the plan—asset (liability)
September 30,
2017
$ 65,951
6,968
2016
$ 60,849
4,371
4,000
(4,113)
$ 72,806
4,000
(3,269)
$ 65,951
$ (9,412) $ (18,267)
The components of net periodic cost recognized in the Consolidated Statements of Income are as follows:
Interest Cost
Expected return on plan assets
Amortization of net loss and other
Net periodic benefit (income) cost
Year Ended September 30,
2017
3,068
(4,134)
2,126
$ 1,060
2016
3,288
(4,111)
1,542
719
$
2015
3,130
(4,414)
759
(525)
$
There were no required minimum employer contributions during the fiscal year ended September 30, 2017. The
Company made a voluntary contribution of $4,000 during the current fiscal year.
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 per share at the reporting date. The
fair values of the underlying investments used to determine net asset value of the pooled separate accounts are primarily
publicly quoted prices or quoted prices for similar assets in active or non-active markets. In accordance with Subtopic 820-10,
certain investments measured at fair value using the net asset value per share practical expedient are not classified in the fair
value hierarchy described in Note16. Fair Value.
111
The following table presents the fair value of Plan assets.
2017
2016
September 30,
Fair Value
(in
thousands)
Unfunded
Commitments
Redemption
Frequency
(if currently
eligible)
Redemption
Notice
Period
Fair Value
(in
thousands)
Unfunded
Commitments
Redemption
Frequency
(if currently
eligible)
Redemption
Notice
Period
Pooled Separate
Accounts
$ 72,806
N/A
Daily
7 Days
$ 65,951
N/A
Daily
7 Days
There are no redemption restrictions on Plan assets at September 30, 2017. Redemptions may be deferred for a longer
period if conditions do not permit an orderly transfer or for certain investments of an illiquid nature.
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
Assumptions used to determine net periodic benefit cost:
Discount rate
Long-term rate of return on plan assets
Rate of compensation increase (graded scale)
2017
September 30,
2016
2015
3.90%
n/a
3.75%
7.00%
n/a
3.75%
n/a
4.40%
7.50%
n/a
4.40%
n/a
4.40%
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:
2018
2019
2020
2021
2022
Aggregate expected benefit payments during the five fiscal year period beginning October 1, 2023, and ending
September 30, 2027
Minimum employer contributions expected to be paid during the fiscal year ending September 30, 2018
$
5,700
4,020
4,370
4,910
3,990
22,970
—
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, 2017, 2016, and 2015, AOCI includes pretax net actuarial losses of
$22,809, $28,725, and $23,063, respectively, 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 $1,679 of net actuarial losses will be recognized as AOCI components of net periodic benefit
cost during the fiscal year ended September 30, 2018.
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
112
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, 2017, 2016 and 2015 was $3,456, $3,412 and $3,204, respectively.
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 2017, 2016 and 2015 fiscal years was $7,342, $7,714 and $6,617, 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, 2017 and 2016 was $61,759 and $65,462, 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, 2017, 5,972,408 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 5,308,411 at September 30, 2017,
and had a fair market value of $85,625. 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, 2017, the Compensation Committee of the Company’s Board of Directors approved
the issuance of an additional 300,400 stock options and 72,900 restricted stock units to certain directors, officers and employees
of the Company. The awards were made pursuant to the Equity Plan.
Amendments to FASB ASC 718 requires the Company to report the benefits of realized tax deductions in excess of the
deferred tax benefits previously recognized for compensation expense as an operating cash flow. Prior to the year ended
September 30, 2017, excess tax benefits were reported as a financing cash flow. The Company recorded an excess tax benefit
of $1,058, $3,198, and $1,582 for 2017, 2016 and 2015, 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.
113
During the years ended September 30, 2017, 2016 and 2015, the Company recorded $3,893, $5,723 and $7,363,
respectively, of share-based compensation expense, comprised of stock option expense of $1,502, $2,473 and $3,391,
respectively and restricted stock units expense of $2,391, $3,250 and $3,972, respectively. The tax benefit recognized in net
income related to share-based compensation expense was $1,195, $1,776 and $2,505, respectively.
The following is a summary of the status of the Company’s restricted stock units as of September 30, 2017 and changes
therein during the year then ended:
Outstanding at September 30, 2016
Granted
Exercised
Forfeited
Outstanding at September 30, 2017
Vested and exercisable, at September 30, 2017
Vested and expected to vest, at September 30, 2017
Number of
Shares
Awarded
1,184,357
Weighted
Average
Grant Date
Fair Value
13.00
$
72,900
$
(82,489) $
(5,700) $
$
1,169,068
611,883
1,169,068
$
$
19.26
15.66
17.01
13.18
12.23
13.18
The weighted average grant date fair value of restricted stock units granted during the years ended September 30, 2017,
2016 and 2015 was $19.26, $19.06 and $14.98 per share, respectively. The total fair value of restricted stock units vested
during the years ended September 30, 2017, 2016 and 2015 was $2,655, $2,519, and $5,042, respectively. Expected future
compensation expense relating to the non-vested restricted stock units at September 30, 2017 is $1,364 over a weighted average
period of 1.77 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, 2017:
Outstanding at September 30, 2016
Granted
Exercised
Forfeited
Outstanding at September 30, 2017
Vested and exercisable, at September 30, 2017
Vested or expected to vest, at September 30, 2017
Weighted
Average
Exercise
Price
$ 12.62
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
5.76 $ 26,216
Number of
Stock Options
4,961,757
300,400
$ 19.28
(738,925) $ 11.41
(6,800) $ 15.45
$ 13.26
4,516,432
3,113,511
4,516,432
$ 11.74
$ 13.26
$
$
5,027
13
5.54 $ 15,057
4.48 $ 14,064
5.54 $ 15,057
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)
2017
2.59%
21.97%
1.86%
6.00
2016
2.10%
22.03%
1.86%
6.00
The expected dividend yield for 2017 was estimated on the then current annualized dividend payout of $0.50 per share
which was not expected to change. The expected dividend yield for 2016 was estimated based on the then current annualized
dividend payout of $0.40 per share which was not expected to change. 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.
114
The weighted average grant date fair value of options granted during the years ended September 30, 2017, 2016 and 2015
was $3.22, $3.48, and $3.08 per share, respectively. Expected future compensation expense relating to the non-vested options
outstanding as of September 30, 2017 is $1,587 over a weighted average period of 2.09 years. Upon exercise of vested options,
management expects to draw on treasury stock as the source of the shares. At September 30, 2017, the number of common
shares authorized for award under the Equity Plan was 23,000,000, of which 11,011,124 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, 2017, 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, 2017, the Company had unfunded commitments outstanding as follows:
Equity lines of credit
Construction loans
Limited partner investments
Total
$
211,351
214,065
123,492
$
548,908
$ 1,425,440
34,100
11,541
$ 1,471,081
At September 30, 2017, 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 $1,501,591.
The above commitments are expected to 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
consolidated financial condition, results of operation, or statements of cash flows.
115
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 under current market conditions 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 –
Level 3 –
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.
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,
2017 and 2016, respectively, there were no loans held for sale, subject to pending agency contracts for which the fair value
option was elected. For the years ended September 30, 2017, 2016 and 2015, net gain (loss) on the sale of loans includes $0, $0
and $(111), 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, 2017 and 2016, respectively, this includes $537,479 and $517,866 of investments in highly
liquid collateralized mortgage obligations issued by Fannie Mae, Freddie Mac, and Ginnie Mae. Values at both dates are
measured using the market approach. The fair values of collateralized mortgage obligations represent unadjusted price
estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of
securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly
basis for 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, 2017 and 2016, respectively, there were $351 and $4,686 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. To
calculate impairment of collateral-dependent loans, the fair market values of the collateral, estimated using exterior appraisals
in the majority of instances, are reduced by calculated costs to dispose, derived from historical experience and recent market
conditions. Any indicated impairment is recognized by a charge to the allowance for loan losses. Subsequent increases in
collateral values or principal pay downs on loans with recognized impairment could result in an impaired loan being carried
below its fair value. When no impairment loss is indicated, the carrying amount is considered to approximate the fair value of
that loan to the Company because contractually that is the maximum recovery the Company can expect. The recorded
investment of loans individually evaluated for impairment based on the fair value of the collateral are included in Level 3 of the
hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of costs to
dispose on fair values is determined at the time of impairment or when additional impairment is recognized and is included in
quantitative information about significant unobservable inputs later in this note.
Loans held for investment that have been restructured in TDRs and are performing according to the restructured terms of
the loan agreement are individually evaluated for impairment using the present value of future cash flows based on the loan’s
116
effective interest rate, which is not a fair value measurement. At September 30, 2017 and 2016, respectively, this included
$95,480 and $102,079 in recorded investment of TDRs with related allowances for loss of $11,061 and $12,432.
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, 2017 and 2016,
these adjustments were not significant to reported fair values. At September 30, 2017 and 2016, respectively, $3,479 and
$4,192 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 $401 and $521 related to
properties measured at fair value and $2,443 and $3,132 of properties carried at their original or adjusted cost basis at
September 30, 2017 and 2016, respectively.
Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale
portfolio, forward commitments on contracts to deliver mortgage loans, and interest rate swaps designated as cash flow hedges.
Derivatives not designated as cash flow hedges 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. Derivatives qualifying as cash flow hedges, when
highly effective, are reported at fair value in other assets or other liabilities on the Consolidated Statement of Condition with
changes in value recorded in OCI. Should the hedge no longer be considered effective, the ineffective portion of the change in
fair value is recorded directly in earnings in the period in which the change occurs. See Note 17. Derivative Instruments for
additional details. Fair value of forward commitments 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
swaps is estimated using a discounted cash flow method that incorporates current market interest rates and other market
parameters. The fair value of 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 and interest rate swaps 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, 2017 and 2016 are summarized below.
Assets
Investment securities available for sale:
REMIC’s
Fannie Mae certificates
Derivatives:
Interest rate lock commitments
Interest rate swaps
Total
Liabilities
Derivatives:
Interest rate swaps
Total
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)
$
$
$
— $
—
—
—
— $
528,536
8,943
—
17,001
554,480
—
— $
1,233
1,233
$
$
$
—
—
58
—
58
—
—
September 30,
2017
$
$
$
528,536
8,943
58
17,001
554,538
1,233
1,233
117
Assets
Investment securities available for sale:
REMIC’s
Fannie Mae certificates
Derivatives:
Interest rate lock commitments
Interest rate swaps
Total
Liabilities
Derivatives:
Interest rate swaps
Total
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)
—
—
—
—
— $
507,997
9,869
—
772
518,638
—
— $
2,880
2,880
$
$
—
—
99
—
99
—
—
$
$
September 30,
2016
507,997
9,869
99
772
518,737
2,880
2,880
$
$
The table below presents a reconciliation of the beginning and ending balances and the location within the Consolidated
Statements of Income where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which
are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
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,
2017
2016
2015
$
$
$
99
(41)
58
58
$
$
$
79
20
99
99
$
$
$
59
20
79
79
Summarized in the tables below are those assets measured at fair value on a nonrecurring basis.
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)
$
$
— $
—
— $
— $
—
— $
85,080
3,479
88,559
$
September 30,
2017
85,080
3,479
88,559
$
______________________
(1) Amounts represent fair value measurements of properties before deducting estimated costs to dispose.
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)
$
$
— $
—
— $
— $
—
— $
92,576
4,192
96,768
September 30,
2016
92,576
$
4,192
96,768
$
118
(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
9/30/2017
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
$85,080
Market comparables of
collateral discounted to
estimated net proceeds
Discount appraised value to estimated net
proceeds based on historical experience:
• Residential Properties
$58
Quoted Secondary
Market pricing
Closure rate
0 - 28%
7.6%
0 - 100%
93.0%
Fair Value
9/30/2016
$92,576
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 - 26%
8.2%
$99
Quoted Secondary
Market pricing
Closure rate
0 - 100%
93.0%
The following table presents the carrying amount and estimated fair value of the Company’s financial instruments.
Assets:
Cash and due from banks
$
35,243
$
35,243
$
35,243
$
— $
Carrying
Amount
September 30, 2017
Estimated Fair Value
Total
Level 1
Level 2
Level 3
Interest earning cash equivalents
Investment securities available for sale
Mortgage loans held for sale
Loans-net:
Mortgage loans held for investment
Other loans
Federal Home Loan Bank stock
Accrued interest receivable
Cash collateral held by counterparty
Derivatives
Liabilities:
Checking and passbook accounts
Certificates of deposit
Borrowed funds
Borrowers’ advances for taxes and insurance
Principal, interest and escrow owed on loans
serviced
Derivatives
232,975
537,479
351
232,975
537,479
355
232,975
—
—
—
537,479
355
—
—
—
—
12,416,256
3,050
89,990
35,479
2,955
17,059
12,758,951
3,143
89,990
35,479
2,955
17,059
—
—
N/A
—
2,955
—
— 12,758,951
3,143
—
—
—
—
35,479
—
—
58
17,001
$ 2,460,416
5,691,209
3,671,377
$ 2,460,416
5,550,162
3,677,256
$
100,446
100,446
35,766
35,766
1,233
1,233
119
$
— $ 2,460,416
— 5,550,162
— 3,677,256
—
—
—
100,446
35,766
1,233
—
—
—
—
—
—
Carrying
Amount
September 30, 2016
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:
$
27,914
203,325
517,866
4,686
$
27,914
203,325
517,866
4,839
Mortgage loans held for investment
Other loans
11,705,688
3,116
12,177,536
3,277
—
—
—
—
$
27,914
203,325
$
— $
—
517,866
4,839
—
—
—
—
— 12,177,536
3,277
—
Federal Home Loan Bank stock
Accrued interest receivable
Cash collateral held by counterparty
Derivatives
Liabilities:
69,853
32,818
10,480
871
69,853
32,818
10,480
871
N/A
—
10,480
—
—
32,818
—
772
Checking and passbook accounts
$ 2,509,800
$ 2,509,800
$
— $ 2,509,800
$
Certificates of deposit
Borrowed funds
Borrowers’ advances for taxes and insurance
Principal, interest and escrow owed on loans
serviced
Derivatives
5,821,568
2,718,795
92,313
5,832,958
2,740,565
92,313
49,401
2,880
49,401
2,880
— 5,832,958
— 2,740,565
92,313
—
—
—
49,401
2,880
—
—
—
99
—
—
—
—
—
—
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, Cash Collateral Received from or Held by
Counterparty—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.
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.
Borrowed Funds—Estimated fair value for borrowed funds is estimated using discounted cash flows and rates currently
charged for borrowings of similar remaining maturities.
120
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 enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate
movements as part of an overall risk management strategy. For hedges of the Company's borrowing program, interest rate
swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the
Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the
Company's FHLB borrowings.
Cash flow hedges are assessed for effectiveness using regression analysis. The effective portion of changes in the fair
value of derivatives designated and that qualify as cash flow hedges is recorded in OCI and is subsequently reclassified into
earnings in the period that the hedged forecasted transaction affects earnings. Ineffectiveness is generally measured as the
amount by which the cumulative change in the fair value of the hedging instrument exceeds or is substantially less than the
present value of the cumulative change in the hedged item's expected cash flows attributable to the risk being hedged. The
ineffective portion of the change in fair value of the derivatives is recognized directly in earnings for the period in which it
occurs.
The following table presents additional information about the interest rate swaps used in the Company's asset liability
management strategy.
Notional value
Fair value
Weighted-average rate receive
Weighted-average rate pay
Average maturity (in years)
Cash Flow Hedges
September 30, 2017
September 30, 2016
$
1,500,000
$
15,768
1.32%
1.62%
4.1
600,000
(2,108)
0.79%
1.21%
4.5
Amounts reported in AOCI related to derivatives are reclassified to interest expense during the same period in which the
hedged transaction affects earnings. During the next twelve months, the Company estimates that $665 of the amounts reported
in AOCI will be reclassified to interest expense.
The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of
adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the
characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging
relationship; therefore, gains and losses are recognized immediately in the statement of income. There were no forward
commitments for the sale of mortgage loans at September 30, 2017 or September 30, 2016.
In addition, the Company is party to derivative instruments when it enters into commitments to originate a portion of its
loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship;
therefore, gains and losses are recognized immediately in the statement of income.
121
The following tables provide the locations within the Consolidated Statements of Condition and the fair values for
derivative instruments.
Derivatives designated as hedging instruments
Cash flow hedges:
Interest rate swaps
Derivatives not designated as hedging instruments
Asset Derivatives
At September 30, 2017
At September 30, 2016
Location
Fair Value
Location
Fair Value
Other Assets
$ 17,001 Other Assets
$
772
Interest rate lock commitments
Other Assets
$
58 Other Assets
$
99
Derivatives designated as hedging instruments
Cash flow hedges:
Interest rate swaps
Liability Derivatives
At September 30, 2017
At September 30, 2016
Location
Fair Value
Location
Fair Value
Other Liabilities
$ 1,233 Other Liabilities
$ 2,880
The following tables present the net gains and losses recorded within the Consolidated Statements of Income and the
Consolidated Statements of Comprehensive Income relating to derivative instruments.
Location of Gain or (Loss)
Recognized in Income
Amount of Gain or (Loss) Recognized
in Income on Derivative
Year Ended September 30,
2017
2016
2015
Cash flow hedges
Amount of loss recognized, effective portion
Other comprehensive income
Amount of loss reclassified from AOCI
Interest expense
Amount of ineffectiveness recognized
Other non-interest income
$ 14,131
(3,745)
—
$ (3,676) $
(1,567)
—
Derivatives not designated as hedging instruments
Interest rate lock commitments
Other non-interest income
Forward commitments for the sale of mortgage loans Net gain on the sale of loans
Total
$
$
(41) $
20
$
—
(41) $
—
20
$
—
—
—
20
14
34
Derivatives contain an element of credit risk which arises from the possibility that the Company will incur a loss because
a counterparty fails to meet its contractual obligations. The Company's exposure is limited to the replacement value of the
contracts rather than the notional or principal amounts. Credit risk is minimized through counterparty collateral, transaction
limits and monitoring procedures. Swap transactions that are handled by a registered clearing broker are cleared through the
broker to a registered clearing organization. The clearing organization establishes daily cash and upfront cash or securities
margin requirements to cover potential exposure in the event of default. This process shifts the risk away from the counterparty,
since the clearing organization acts as the middleman on each cleared transaction. The fair values of derivative instruments are
presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Cash collateral
payables or receivables associated with the derivative instruments are not added to or netted against the fair value amounts. The
Company’s interest rate swaps are cleared through a registered clearing broker. At September 30, 2017 and September 30,
2016, respectively, the Company posted collateral of $2,955 and $10,480 related to the initial and daily margin requirements of
interest rate swaps.
122
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
ESOP loan receivable
Investments in:
Third Federal Savings and Loan
Non-thrift subsidiaries
Prepaid federal and state taxes
Deferred income taxes
Accrued receivables and 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;
281,291,750 and 284,219,019 outstanding at September 30, 2017 and September 30, 2016,
respectively
Paid-in capital
Treasury stock, at cost; 51,027,000 and 48,099,731 shares at September 30, 2017 and
September 30, 2016, respectively
Unallocated ESOP shares
Retained earnings—substantially restricted
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
September 30,
2017
2016
$
5,123
$
5,102
89,299
61,759
88,443
65,462
1,503,831
80,420
154
2,630
9,247
1,475,175
79,386
374
2,704
6,727
$ 1,752,463
$ 1,723,373
$
59,815
$
2,689
62,504
58,890
4,025
62,915
—
—
3,323
3,323
1,722,672
1,716,818
(735,530)
(53,084)
760,070
(7,492)
1,689,959
$ 1,752,463
(681,569)
(57,418)
698,930
(19,626)
1,660,458
$ 1,723,373
123
Years Ended September 30,
2016
2015
2017
Statements of Comprehensive Income
Interest income:
Demand loan due from Third Federal Savings and Loan
ESOP loan
Other interest income
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 before income taxes
Income tax benefit
Income 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 (loss) gain on securities available for sale
Change in cash flow hedges
Change in pension obligation
Total other comprehensive loss
Total comprehensive income
$
$
$
914
2,308
21
3,243
612
612
2,631
68
81,000
81,068
5,134
982
3
193
6,312
77,387
(3,747)
81,134
433
2,281
4
2,718
377
377
2,341
90
60,000
60,090
5,543
922
13
253
6,731
55,700
(2,915)
58,615
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
6,709
1,034
88,877
(3,331)
11,620
3,845
12,134
$ 101,011
21,231
707
80,553
(1,510)
(1,371)
(3,680)
(6,561)
$ 73,992
8,777
332
72,591
3,018
—
(5,291)
(2,273)
$ 70,318
124
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 (increase) decrease in interest receivable and other assets
Net increase (decrease) in accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
(Increase) decrease in balances lent to Third Federal Savings and Loan
Repayment of capital contribution from Third Federal Savings and
Loan
Net cash (used in) provided by 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 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,
2017
2016
2015
$
88,877
$
80,553
$
72,591
(6,709)
(1,034)
74
1,439
(2,300)
144
80,491
(856)
—
(856)
3,703
(54,029)
(27,709)
—
(2,504)
925
(79,614)
21
5,102
(21,231)
(707)
542
2,435
(346)
359
61,605
(8,777)
(332)
(261)
3,205
2,166
107
68,699
(54,792)
122,257
150,000
95,208
—
122,257
3,648
(128,361)
(23,414)
1,485
(7,697)
529
(153,810)
3,003
2,099
3,534
(172,546)
(19,490)
484
(4,111)
1,173
(190,956)
—
2,099
2,099
$
5,123
$
5,102
$
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, 2017 and 2016, respectively, the ESOP held 5,308,411 and 5,741,751 shares that were neither allocated to
participants nor committed to be released to participants.
125
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, 2017
Income
Shares
Per share
amount
(Dollars in thousands, except per share data)
$ 88,877
901
87,976
277,213,258
$
0.32
$ 87,976
2,055,510
279,268,768
$
0.32
For the Year Ended September 30, 2016
Income
Shares
Per share
amount
(Dollars in thousands, except per share data)
$ 80,553
761
79,792
281,566,648
$
0.28
$ 79,792
2,219,065
283,785,713
$
0.28
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
The following is a summary of outstanding stock options that are excluded from the computation of diluted earnings per
share because their inclusion would be anti-dilutive. No restricted stock units were anti-dilutive for the years ended September
30, 2017, 2016, and 2015.
Options to purchase shares
20. RELATED PARTY TRANSACTIONS
For the Year Ended September 30,
2017
779,740
2016
393,500
2015
1,382,900
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, 2017 and 2016 was $173 and $181,
respectively. None of these loans were past due, considered impaired or on nonaccrual at September 30, 2017.
126
21. RECENT ACCOUNTING PRONOUNCEMENTS
Pending as of September 30, 2017
In August 2017, The FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. This Update is intended to more closely align financial reporting of hedging relationships
with risk management activities. This amendment expands hedge accounting for both nonfinancial and financial risk
components, modifies the presentation of certain hedging relationships in the financial statements and eases hedge effectiveness
testing requirements. The amendments are effective for fiscal years beginning after December 15, 2018. Early adoption is
permissible in any interim period after the issuance of this update and is being considered by the Company. The update is not
expected to have a significant impact on the Company's consolidated financial condition or results of operations.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718), Scope of
Modification Accounting. This Update clarifies when to account for a change to the terms or conditions of a share-based
payment award as a modification. Under the new guidance, modification accounting is required only if the fair value (or
calculated intrinsic value, if those amounts are being used to measure the award under ASC 718), the vesting conditions, or the
classification of the award (as equity or liability) change as a result of the change in terms or conditions. The guidance is
effective prospectively for annual periods beginning on or after December 15, 2017, and interim periods within those annual
periods. Early adoption is permitted. The Company intends to adopt the guidance on the effective date and does not expect the
adoption to have a material impact on its consolidated financial condition or results of operations.
In March 2017, the FASB issued ASU 2017-07 Compensation - Retirement Benefits (Topic 715), Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This Update was issued to improve
the presentation of net periodic pension or benefit costs for employers that offer their employees defined benefit pension plans,
postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments prescribe where the
amount of net benefit cost should be presented in an employer’s income statement and require entities to disclose by line item
the amount of net benefit cost that is included in the income statement or capitalized in assets. The ASU is effective for annual
reporting periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is
permitted. Retrospective application is required for the change in income statement presentation, while the change in
capitalized benefit cost is to be applied prospectively. The Company plans to early adopt this guidance for the annual and
interim reporting periods beginning October 1, 2017. The only impact is a change to how certain items will be presented in the
Company’s Consolidated Statements of Condition and Statements of Income and the accompanying Notes.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. The amendments in this Update address eight specific cash flow issues with the objective of
reducing the existing diversity in how certain cash receipts and cash payments are presented and classified in the statement of
cash flows under Topic 230, Statement of Cash Flows, and Other Topics. Current guidance is either unclear or does not include
specific guidance on these issues. Additionally, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows
(Topic 230) Restricted Cash, which requires restricted cash or restricted cash equivalents be included in beginning-of-period
and end-of-period cash totals and changes in this classification be explained separately. The amendments in both these Updates
are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years and should be applied using a retrospective transition method. Early adoption is permitted, provided that all of the
amendments are adopted in the same period. The Company is reviewing the requirements with an implementation team and
currently does not expect to early adopt. Adoption of this accounting guidance may affect the presentation in the Company's
Consolidated Statements of Cash Flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit
Losses on Financial Instruments. The amendments in this Update replace the existing incurred loss impairment methodology
with a methodology that reflects expected credit losses for the remaining life of the asset. This will require consideration of a
broader range of information, including reasonably supportable forecasts, in the measurement of expected credit losses. The
amendments expand disclosures of credit quality indicators, requiring disaggregation by year of origination (vintage).
Additionally, credit losses on available for sale debt securities will be recognized as an allowance rather than a write-down,
with reversals permitted as credit loss estimates decline. An entity will apply the amendments in this Update through a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is
effective (that is, a modified-retrospective approach). For public business entities that are SEC filers, the amendments are
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption
is permitted. Management has formed a working group comprised of teams from across the association including accounting,
risk management, and finance. This group has begun assessing the required changes to our credit loss estimation
methodologies and systems, as well as additional data and resources that may be required to comply with this standard. The
127
Company is currently evaluating the impact that this accounting guidance may have on its consolidated financial condition or
results of operations. The actual effect on our allowance for loan losses at the adoption date will be dependent upon the nature
of the characteristics of the portfolio as well as the macroeconomic conditions and forecasts at that date.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance changes the accounting treatment of
leases by requiring lessees to recognize operating leases on the balance sheet as lease assets (a right-to-use asset) and lease
liabilities (a liability to make lease payments), measured on a discounted basis and will require both quantitative and qualitative
disclosure regarding key information about the leasing arrangements. An accounting policy election to not recognize operating
leases with terms of 12 months or less as assets and liabilities is permitted. This guidance will be effective for the fiscal year
beginning after December 15, 2018, with early adoption permitted. A modified retrospective approach is required that includes
a number of optional practical expedients to address leases that commenced before the effective date. An implementation team
has been created to identify all leases involved, which, if any, practical expedients to utilize, and all data gathering required to
comply. All leases have been identified. The Company expects to recognize a right-to-use asset and a lease liability for its
operating lease commitments on the Consolidated Statements of Condition and is assessing the impact this new standard will
have on its consolidated financial condition and results of operations.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and
Measurement of Financial Assets and Financial Liabilities. This ASU changes the accounting for certain equity investments,
financial liabilities under the fair value option and presentation and disclosure requirements for financial instruments. Equity
investments not accounted for under the equity method of accounting will be measured at fair value with changes recognized in
net income. If there are no readily determinable fair values, the guidance allows entities to measure investments at cost less
impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the
methods and significant assumptions used to estimate fair value of financial instruments measured at amortized cost. If an
entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in
fair value of a liability resulting from credit risk to be presented in OCI. This accounting and disclosure guidance is effective
for the fiscal year beginning after December 15, 2017, including interim periods within that fiscal year on a prospective basis,
with a cumulative-effect adjustment to the balance sheet at the beginning of the fiscal year adopted. Early adoption is not
permitted. The Company is currently evaluating the impact that this accounting guidance may have on its consolidated financial
condition or results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that revises the
criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. This
ASU affects 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. In August 2015, the FASB
issued ASU 2015-14 which defers the effective date of ASU 2014-09 to annual reporting periods and interim period within
those annual periods beginning after December 15, 2017. Early adoption is permitted but only for interim and annual reporting
periods beginning after December 15, 2016. During 2016 and 2017, the FASB also issued five separate ASUs which amend the
original guidance regarding principal versus agent considerations, identify performance obligations and licensing, address the
presentation of sales tax, noncash consideration, contract modifications at transition, and assessing collectability, gains and
losses from derecognition of nonfinancial assets and other minor technical corrections and improvements. The requirements
within 2014-09 and its subsequent amendments should be applied retrospectively or modified retrospectively with a
cumulative-effect adjustment. The Company's preliminary analysis suggests that the adoption of this accounting guidance is not
expected to have a material effect on its consolidated financial condition or results of operations.
Adopted in fiscal year ended September 30, 2017
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to
Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment
transactions, including accounting for income taxes, forfeitures, and classification in the statement of cash flows. Additionally,
the ASU expanded the threshold on statutory tax withholding requirements used to qualify for equity classification. This
accounting guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual
periods. Early adoption is permitted.
The Company early adopted the revised guidance on October 1, 2016. The impact of this adoption on the Company's
consolidated financial statements is described below.
• On a prospective basis, all excess tax benefits and deficiencies related to share-based payments are recognized as
income tax expense or benefit. For the fiscal year ended September 30, 2017, $1,058 was recognized as income tax
benefit rather than additional paid-in capital as a result of this adoption. Excess tax benefits and tax deficiencies are
128
considered discrete items in the reporting period they occur and are not included in the estimate of the Company's
annual effective tax rate in interim periods.
• On a prospective basis, excess tax benefits and deficiencies related to share-based payments are classified as operating
activities on the Statements of Cash Flows. No change was applied to prior periods.
• The Company elects to account for forfeitures as they occur, rather than estimate expected forfeitures. This election
was applied using a modified retrospective transition method. The cumulative-effect adjustment to equity recognized
as of October 1, 2016 was not material.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810), Amendments to the Consolidation
Analysis. This accounting guidance changes the analysis that a reporting entity must perform to determine whether it should
consolidate certain types of legal entities. The new guidance amends the current accounting guidance to address limited
partnerships and similar legal entities, certain investment funds, fees paid to a decision maker or service provider, and the
impact of fee arrangements and related parties on the primary beneficiary determination. In addition, the FASB issued ASU
2016-17, Consolidation (Topic 810), Interests Held through Related Parties that are under Common Control in October 2016,
amending the consolidation guidance on how a reporting entity that is the single decision maker of a Variable Interest Entity
(VIE) should treat indirect interests in the entity held through related parties that are under common control. Both accounting
guidances are effective for annual periods beginning after December 15, 2015. 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 adoption of this accounting guidance did not
have a material effect on the Company's consolidated financial condition or results and operations.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815), Effects of Derivative Contract
Novations on Existing Hedge Accounting Relationships. This amendment clarifies that a change in the counterparty to a
derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require
dedesignation of that hedging relationship provided that all other hedging accounting criteria continue to be met. This guidance
is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those
fiscal years. Early adoption is permitted. An entity has an option to apply the amendments in this Update on either a
prospective or a modified retrospective basis. The Company elected to early adopt this accounting guidance using a
prospective method and will consider opportunities provided by these amendments in future transactions. The adoption of this
accounting guidance does not currently affect the Company's consolidated financial condition and results of operations.
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. This guidance eliminates the requirement to categorize investments
measured at net value per share (or its equivalent) using the practical expedient in the fair value hierarchy table and eliminates
certain disclosures required for these investments. 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 retrospectively for fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years. This guidance was applied to the Company's disclosures
on pension assets presented in Note 13. Employee Benefit Plans.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. This Update simplifies how an entity is required to test goodwill impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measures a goodwill impairment loss by calculating the implied fair value of goodwill by
assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a
business combination. An entity will still perform its annual or interim goodwill impairment test by comparing the fair value of
the reporting unit with its carrying amount. Under this guidance, an entity would recognize an impairment charge for the
amount by which the carry amount exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting
unit. The entity still has the option to perform the qualitative assessment to determine if the quantitative impairment test is
necessary. An entity should apply the amendments in this Update on a prospective basis, with disclosure of the nature and
reason for a change in accounting principle upon transition. The amendments in this Update are effective for annual and
interim goodwill impairment testing in fiscal years beginning after December 15, 2019, with early adoption permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted and
considered this guidance for the fiscal year-end goodwill impairment test. The adoption of this disclosure guidance did not
materially affect the Company's consolidated financial condition or results of operations.
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.
129
22. SELECTED QUARTERLY DATA (UNAUDITED)
The following tables are a summary of certain quarterly financial data for the fiscal years ended September 30, 2017 and
2016.
Fiscal 2017 Quarter Ended
December 31
March 31
June 30
September 30
Interest income
Interest expense
Net interest income
Provision (credit) 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
$
$
$
98,214
29,984
68,230
—
68,230
5,368
45,262
28,336
8,726
19,610
0.07
(In thousands, except per share data)
$
103,721
101,083
$
$
30,797
70,286
(6,000)
76,286
4,552
45,294
35,544
12,083
23,461
0.08
$
$
33,449
70,272
(4,000)
74,272
4,804
44,669
34,407
11,619
22,788
0.08
$
$
$
$
105,977
35,869
70,108
(7,000)
77,108
5,125
47,179
35,054
12,036
23,018
0.08
Fiscal 2016 Quarter Ended
December 31
March 31
June 30
September 30
Interest income
Interest expense
Net interest income
Provision (credit) 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)
$
$
$
97,145
29,386
67,759
(1,000)
68,759
96,993
29,604
67,389
(3,000)
70,389
96,431
28,790
67,641
(1,000)
68,641
6,117
47,633
27,125
9,274
17,851
0.06
$
$
6,703
46,341
29,121
9,845
19,276
0.07
$
$
6,108
44,976
31,521
10,901
20,620
0.07
$
$
97,872
30,246
67,626
(3,000)
70,626
6,024
42,054
34,596
11,790
22,806
0.08
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.
130
FORM 10-K EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
Amended and Restated Charter of TFS Financial
Corporation, dated January 16, 2007
If Incorporated by Reference, Documents with
Which Exhibit was Previous Filed with SEC
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
Registration Statement on Form S-1 No. 333-139295
(filed with the SEC on December 13, 2006; Exhibit 4
therein)
[Intentionally omitted]
Financial, Retirement & Estate Planning Program as
amended and restated January 1, 2006
Resolution Regarding Executive Physical Program,
dated May 16, 2002
10.4
Company Car Program, dated February 24, 1995
10.5
Executive Retirement Benefit Plan I, dated January
1, 2006
10.6
Benefit Equalization Plan, dated January 1, 2005
10.7
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
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)
3.1
3.2
4.1
10.1
10.2
10.3
10.8
10.9
10.10
10.11
10.12
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)
131
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, 2017 filed on
November 22, 2017 formatted in XBRL: (i)
Consolidated Statements of Condition, (ii)
Consolidated Statements of Income, (iii)
Consolidated Statements of Comprehensive Income,
(iv) Consolidated Statements of Shareholders'
Equity, (v) Consolidated Statements of Cash Flows,
(vi) 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
132
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 22, 2017
/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 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
Dated: November 22, 2017
/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/ WILLIAM C. MULLIGAN
William C. Mulligan, Director
/S/ TERRENCE R. OZAN
Terrence R. Ozan, Director
/S/ JOHN P. RINGENBACH
John P. Ringenbach, Director
/S/ BEN S. STEFANSKI III
Ben S. Stefanski III, Director
/S/ MEREDITH S. WEIL
Meredith S. Weil, Director
133
THIRD FEDERAL MANAGEMENT TEAM
BOARD OF DIRECTORS
Marc A. Stefanski
Chairman
Anthony J. Asher
Martin J. Cohen
Robert A. Fiala
William C. Mulligan
Terrence R. Ozan
John P. Ringenbach
Ben S. Stefanski III
Meredith S. Weil
DIRECTOR EMERITUS
Paul W. Stefanik
MANAGEMENT TEAM
Marc A. Stefanski
Chairman and Chief Executive Officer
Judy Z. Adam
Chief Risk Officer
David S. Huffman
Chief Financial Officer/ Secretary
Paul J. Huml
Chief Operating Officer/
Chief Accounting Officer
TFS Financial Corporation
Anna Maria Motta
Chief Information Officer
Meredith S. Weil
Chief Operating Officer
Cathy W. Zbanek
Chief Marketing and
Human Resources Officer
In Memoriam:
Robert B. “Yank” Heisler Jr.
TFS Board of Directors Member
2011-2017
Robert B. “Yank” Heisler Jr. served on the
TFS Board of Directors with distinction for
six years. Sadly, Yank lost his battle with
cancer last year, but we are forever grateful
for his contributions to Third Federal.
INVESTOR RELATIONS
Paul J. Huml
Chief Operating Officer/
Chief Accounting Officer
TFS Financial Corporation
7007 Broadway Avenue
Cleveland, Ohio 44105-1441
(216) 429-5325
(877) 513-2318 toll free
paul.huml@thirdfederal.com
CORPORATE HEADQUARTERS
Third Federal Savings and Loan Association
7007 Broadway Avenue
Cleveland, Ohio 44105-1441
(216) 441-6000
(800) 844-7333 toll free
www.thirdfederal.com
CONTACT INFORMATION
TFS Financial Corporation
7007 Broadway Avenue
Cleveland, Ohio 44105-1441
(877) 513-2318 toll free
TRANSFER AGENT
Broadridge Corporate Issuer Solutions
P.O. Box 1342
Brentwood, NY 11717
Phone: (888)-314-4808
www.shareholder.broadridge.com/tfs
LOVE • TRUST • RESPECT • EXCELLENCE • FUN
Supporting education and literacy is a main focus of
our philanthropic efforts. The Third Federal Foundation
donates $1.5 million annually to programs that support
the Cleveland Metropolitan School District, including
AmericaSCORES, an after-school program that teaches
kids K-8th grade writing and soccer skills.
Eric Gordon, CEO of the Cleveland Metropolitan School
District, joined Kurt and Marc in a community town
hall discussion about Third Federal’s investment in
neighborhood schools. Gordon praised Third Federal’s
commitment to Cleveland’s Slavic Village neighborhood
and our long-term investment in Cleveland’s children.
Three generations of the Stefanski family, including Marc
(left center), prepare to serve a free Thanksgiving meal
to more than 225 residents of Cleveland’s Slavic Village
neighborhood. In addition, 200 carry out meals were
handed out. This annual tradition is one of the many ways
Third Federal gives back to the community.