10-K 1 d225982d10k.htm 10-K 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

          For the fiscal year ended September 30, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For transition period from              to             

Commission File Number 001-33390

 

 

TFS FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

United States of America   52-2054948

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

7007 Broadway Avenue  
Cleveland, Ohio   44105
(Address of Principal Executive Offices)   (Zip Code)

(216) 441-6000

(Registrant’s telephone number, including area code)

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  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  x

   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨
     (do not check if a smaller reporting company)  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on March 31, 2011, as reported by the NASDAQ Global Select Market, was approximately $849.7 million.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date.

At November 17, 2011 there were 308,915,893 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 73.52% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

DOCUMENTS INCORPORATED BY REFERENCE (to the Extent Indicated Herein)

Portions of the registrant’s Proxy Statement for the 2012 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.


TFS Financial Corporation

INDEX

 

Part I

     

Item 1.

  

Business

  

3

Item 1A.

  

Risk Factors

  

50

Item 1B.

  

Unresolved Staff Comments

  

58

Item 2.

  

Properties

  

58

Item 3.

  

Legal Proceedings

  

58

Item 4.

  

[Removed and Reserved]

  

58

Part II

     

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

59

Item 6.

  

Selected Financial Data

  

62

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

  

64

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk.

  

87

Item 8.

  

Financial Statements and Supplementary Data

  

90

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  

90

Item 9A.

  

Controls and Procedures

  

90

Item 9B.

  

Other Information

  

93

Part III

     

Item 10.

  

Directors, Executive Officers and Corporate Governance

  

93

Item 11.

  

Executive Compensation

  

94

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

94

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

  

94

Item 14.

  

Principal Accounting Fees and Services

  

95

Part IV

     

Item 15.

  

Exhibits and Financial Statement Schedules

  

95

 

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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:

 

   

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 asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

 

   

significantly increased competition among depository and other financial institutions;

 

   

inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

 

   

general economic conditions, either nationally or in our market areas, including employment prospects 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;

 

   

adverse changes and volatility in credit 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 and Loan Association of Cleveland, MHC to waive dividends;

 

   

our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;

 

   

changes in consumer spending, borrowing and savings habits;

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board;

 

   

future adverse developments concerning Fannie Mae or Freddie Mac;

 

   

changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

 

   

changes in policy and/or assessment rates of taxing authorities that adversely affect us;

 

   

changes in expense trends (including, but not limited to trends affecting non-performing assets, charge-offs and provisions for loan losses);

 

   

the impact of the current governmental effort to restructure the U.S. financial and regulatory system;

 

   

inability of third-party providers to perform their obligations to us;

 

   

adverse changes and volatility in real estate markets;

 

3


   

a slowing or failure of the moderate economic recovery;

 

   

the extensive reforms enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which will impact us;

 

   

the adoption of implementing regulations by a number of different regulatory bodies under the Dodd-Frank Act, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us,

 

   

the impact of our coming under the jurisdiction of new federal regulators;

 

   

changes in our organization, or compensation and benefit plans;

 

   

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. Federal 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 these forward-looking statements. Please see Item 1A. Risk Factors, for a discussion of certain risks related to our business.

TFS FINANCIAL CORPORATION

TFS Financial Corporation (“we,” “us,” “our,” or the “Company”) was organized in 1997 as the mid-tier stock holding company for Third Federal Savings and Loan Association of Cleveland (“Third Federal Savings and Loan” or 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 (the “Foundation”). Third Federal Savings and Loan Association of Cleveland, MHC (“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 Third Federal Employee Stock Ownership Plan 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.

As the holding company of Third Federal Savings and Loan, 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 Third Federal Savings and Loan 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, 2011, Third Capital, Inc. had consolidated assets of $79.9 million, and for the fiscal year ended September 30, 2011, Third Capital, Inc. had consolidated net income of $3.9 million. Third Capital, Inc. has no separate operations other than as the holding company for its operating subsidiaries, and as a minority investor or

 

4


partner in other entities including minority investments in private equity funds. The following is a description of the entities, other than the private equity funds, in which Third Capital, Inc. is the owner, an investor or a partner.

Hazelmere Investment Group I, Ltd. This entity engages in net lease transactions of commercial buildings in targeted markets. Third Capital, Inc. is a partner of this entity, receives a preferred return on amounts contributed to acquire investment properties and has a 70% ownership interest in remaining earnings. A former director of the Company indirectly owns or controls the majority of the remaining 30% ownership interest of this entity. Hazelmere Investment Group I, Ltd. had pre-tax income of $1.4 million during fiscal 2011.

Third Cap Associates, Inc. This Ohio corporation also maintains minority investments in private equity funds, and owns 49% and 60%, respectively, of two title agencies that provide escrow and settlement services in the State of Ohio, primarily to customers of Third Federal Savings and Loan. For the fiscal year ended September 30, 2011, Third Cap Associates, Inc. recorded net income of $2.2 million.

Third Capital Mortgage Insurance Company. This Vermont corporation reinsures private mortgage insurance on residential mortgage loans originated by Third Federal Savings and Loan. For the fiscal year ended September 30, 2011, Third Capital Mortgage Insurance Company recorded net income of $1.1 million.

THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND

General

Third Federal Savings and Loan 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 it to earn the highest rates of interest on loans it offers or 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.

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 and its customer service call center to generate loan applications and attract retail deposits. In addition to residential real estate mortgage loans, the Association originates residential construction loans. Prior to June 28, 2010, the Association also actively originated home equity loans and lines of credit. In connection with its home equity risk reduction program, in June 2010, originations of home equity loans and lines of credit were suspended. The Association retains in its portfolio a large portion of the loans that it originates. Loans that the Association sells consist primarily of long-term, fixed-rate residential real estate mortgage loans. Since June 2010, the volume of loan sales has decreased significantly as, to date, the Association has not adopted certain loan origination requirement changes affecting loan eligibility for sale as promulgated by Fannie Mae, effective July 1, 2010. The Association retains the servicing rights on all loans that it sells. The Association’s revenues are derived primarily from interest on loans and, to a lesser extent, interest on interest-bearing deposits in other financial institutions, deposits maintained at the Federal Reserve, federal funds sold, and investment securities, including mortgage-backed securities. The Association also generates revenues from fees and service charges. The Association’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and securities and proceeds from loan sales.

The Association’s website address is www.thirdfederal.com. Filings of the Company made with the Securities and Exchange Commission are available for free on the Association’s website. Information on that website is not and should not be considered a part of this document.

 

5


Market Area

Third Federal Savings and Loan conducts its operations from its main office in Cleveland, Ohio, and from 39 additional, full-service branches and eight loan production offices located throughout the states of Ohio and Florida. In Ohio, the Association’s 22 full-service offices are located in the northeast Ohio counties of Cuyahoga, Lake, Lorain, Medina and Summit, four loan production offices are located in the central Ohio county of Franklin (Columbus, Ohio) and four loan production offices are located in the southern Ohio counties of Butler and Hamilton (Cincinnati, Ohio). In Florida, 17 full-service branches are located in the counties of Pasco, Pinellas, Hillsborough, Sarasota, Lee, Collier, Palm Beach and Broward. The economies and housing markets in Ohio and Florida have been negatively impacted by the current economic situation. Both states have experienced dramatic increases in foreclosures and reductions in employment rates and housing values. The depressed housing market and employment uncertainties have created consumer pessimism and apprehension, which is manifested in suppressed consumer housing demand.

The Association also provides savings products in all 50 states and first mortgage refinance loans in ten selected states outside of its branch footprint through its customer service call center and its internet site.

Competition

The Association faces intense competition in its market areas both in making loans and attracting deposits. Its market areas have a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions, and it faces additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Some of its competitors offer products and services that the Association currently does not offer, such as commercial business loans, trust services and private banking.

The majority of the Association’s deposits are held in its offices located in Cuyahoga County, Ohio. As of June 30, 2011 (the latest date for which information is publicly available), the Association had $4.88 billion of deposits in Cuyahoga County, and ranked second among all financial institutions with offices in the county in terms of deposits, with a market share of 12.96%. As of that date, the Association had $6.16 billion of deposits in the State of Ohio, and ranked 9th among all financial institutions in the state in terms of deposits, with a market share of 2.64%. As of June 30, 2011, the Association had $2.73 billion of deposits in the State of Florida, and ranked 22nd among all financial institutions in terms of deposits, with a market share of 0.66%.

During calendar 2009 and 2010 and extending into the current calendar year, the Federal Deposit Insurance Corporation (“FDIC”) administered the resolution of hundreds of troubled financial institutions and the Depository Insurance Fund (“DIF”) incurred significant losses and the reserves of the DIF were substantially depleted. This depletion has prompted re-examination of the method of assessing insured institutions and rebuilding the fund. Further, the Dodd-Frank Act, which was signed into law in July 2010, required that the FDIC amend its regulations to define “assessment base” as an insured institution’s average total assets minus average tangible equity during the assessment period. This revision had the effect of eliminating 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 by borrowers and more competition with respect to rates paid to depositors has created an increasingly difficult marketplace for attracting deposits, which could adversely affect future operating results.

From October 2010 through September 2011, 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 consistently been one of the six largest lenders in Franklin County (Columbus, Ohio) and Hamilton County (Cincinnati, Ohio) since it entered those markets in 1999.

 

6


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 Association’s more than 70-year history of serving its customers and the communities in which it operates, the Association’s high capital levels, and liquidity alternatives 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, 2011, our ratio of shareholders’ equity to total assets was 16.3%. 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. At September 30, 2011, our liquidity ratio was 6.81% (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 $814.4 million from the Federal Home Loan Bank of Cincinnati (“FHLB of Cincinnati”) under existing credit arrangements along with $293.0 million from the Federal Reserve Bank of Cleveland (“Federal Reserve”). 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 Third Federal Savings and Loan its highest rating.

Lending Activities

The Association’s principal lending activity is the origination of first mortgage loans to purchase or refinance residential real estate. Its current policies generally provide that it will maintain between 40% and 70% of its assets in fixed-rate, residential real estate, first mortgage loans and up to 20% of its assets in adjustable-rate, residential real estate, first mortgage loans, subject to its liquidity levels and the credit demand of its customers. At September 30, 2011 adjustable-rate, residential real estate, first mortgage loans comprised 17% of total assets. We anticipate that the current 20% limit will be increased to reflect our desire to originate and hold more adjustable-rate mortgage loans in order to reduce interest rate risk. The Association also originates residential construction loans and prior to June 28, 2010 originated a significant amount of home equity loans and lines of credit. Refer to Monitoring and Limiting Our Credit Risk section in Item 7 for additional information regarding home equity loans and lines of credit. At September 30, 2011, residential real estate mortgage loans totaled $7.38 billion, or 74.1% of our loan portfolio, home equity loans and lines of credit totaled $2.49 billion, or 25.0% of our loan portfolio, and residential construction loans totaled $82.0 million, or 0.8% of our loan portfolio.

 

7


Loan Portfolio Composition. The following table sets forth the composition of the loan portfolio, by type of loan segregated by geographic location at the dates indicated, excluding loans held for sale. Construction loans are on properties located in Ohio and the balances of consumer loans are immaterial. Therefore, neither was segregated by geographic location.

 

    September 30,  
    2011     2010     2009     2008     2007  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  

Real estate loans:

                   

Residential non-Home Today(1)

                   

Ohio

  $ 5,691,614        $ 4,843,804        $ 4,582,542        $ 5,133,689        $ 4,732,374     

Florida

    1,269,242          1,168,701          1,285,426          1,105,836          970,936     

Other

    159,933          125,949          122,315          159,967          139,517     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    7,120,789        71.5     6,138,454        65.4     5,990,283        64.0     6,399,492        68.7     5,842,827        71.5

Residential Home Today

                   

Ohio

    252,879          268,983          279,835          291,386          292,642     

Florida

    10,784          10,940          11,128          11,070          10,695     

Other

    356          610          729          697          709     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    264,019        2.6        280,533        3.0        291,692        3.1        303,153        3.3        304,046        3.7   

Home equity loans and lines of credit(2)

                   

Ohio

    982,591          1,145,819          1,192,498          1,098,912          1,008,716     

Florida

    712,087          797,658          831,979          731,538          481,605     

California

    293,307          324,778          343,432          292,100          109,440     

Other

    503,213          580,435          615,094          365,504          268,138     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    2,491,198        25.0        2,848,690        30.4        2,983,003        31.8        2,488,054        26.7        1,867,899        22.8   

Construction

    82,048        0.8        100,404        1.1        94,287        1.0        115,323        1.2        150,695        1.8   

Consumer loans:

                   

Automobile

    0        0.0        1        0.0        35        0.0        1,044        0.0        5,627        0.1   

Other loans

    6,868        0.1        7,198        0.1        7,072        0.1        6,555        0.1        9,065        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans receivable

    9,964,922        100.0     9,375,280        100.0     9,366,372        100.0     9,313,621        100.0     8,180,159        100.0
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Deferred loan fees, net

    (19,854       (15,283       (10,463       (14,596       (19,174  

Loans in process

    (37,147       (45,008       (41,076       (46,493       (62,167  

Allowance for loan losses

    (156,978       (133,240       (95,248       (43,796       (25,111  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total loans receivable, net

  $ 9,750,943        $ 9,181,749        $ 9,219,585        $ 9,208,736          8,073,707     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) See the Residential Real Estate Mortgage Loans section which follows for a description of Home Today and non-Home Today loans.
(2) Includes 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).

 

8


Loan Portfolio Maturities. The following table summarizes the scheduled repayments of the loan portfolio at September 30, 2011. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the fiscal year ending September 30, 2012. 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,

   Residential Real Estate      Home  Equity
Loans
and Lines of
Credit(1)
     Construction
Loans
     Consumer
And  Other
Loans
     Total  
   Non-Home
Today
     Home
Today
             
     (In thousands)  

2012

   $ 9,516       $ 0       $ 5,505       $ 15,269       $ 5,580       $ 35,870   

2013

     8,293         0         2,469         6,278         0         17,040   

2014

     13,073         16         3,159         0         207         16,455   

2015 to 2016

     24,361         54         13,425         0         0         37,840   

2017 to 2021

     321,038         3,115         72,222         0         1,081         397,456   

2022 to 2026

     1,190,973         3,817         592,515         6,333         0         1,793,638   

2027 and beyond

     5,553,535         257,017         1,801,903         54,168         0         7,666,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,120,789       $ 264,019       $ 2,491,198       $ 82,048       $ 6,868       $ 9,964,922   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes 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).

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2011 that are contractually due after September 30, 2012.

 

     Due After September 30, 2012  
     Fixed      Adjustable      Total  
     (In thousands)  

Real estate loans:

        

Residential non-Home Today

   $ 5,282,138       $ 1,829,135       $ 7,111,273   

Residential Home Today

     263,788         231         264,019   

Home Equity Loans and Lines of Credit(1)

     75,815         2,409,878         2,485,693   

Construction

     43,638         23,141         66,779   

Consumer Loans:

        

Other

     1,288         0         1,288   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,666,667       $ 4,262,385       $ 9,929,052   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes 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).

Residential Real Estate Mortgage Loans. The Association’s primary lending activity is the origination of residential real estate mortgage loans. A comparison of 2011 data to the corresponding 2010 data and the Company’s expectations for 2012 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 10 to 30 years 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. Effective March 11, 2009, the Association discontinued offering “interest only” residential real estate mortgage loans, where the borrower pays interest for an initial period (one, three or five years), after which the loan converts to a fully amortizing loan. At September 30, 2011, “interest only” residential real estate mortgage loans totaled $43.9 million.

Historically, residential real estate mortgage loans were generally underwritten according to Fannie Mae’s dollar limit requirements, and the Association referred to these loans that conform to such limits as “conforming loans.” Effective July 1, 2010, Fannie Mae, the Association’s primary loan investor, implemented certain loan origination requirement changes affecting loan eligibility that we did not adopt, which is explained below. The

 

9


Association generally originates both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which is currently $417,000 and $625,000, respectively, for single-family homes in most of our lending markets. The Association also originates loans above 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. During periods of high market activity, these jumbo loans are generally eligible for sale to various firms that specialize in purchasing non-conforming loans although, since the beginning of the 2008 recessionary period, there has been very limited activity with respect to the sale of non-conforming loans. The Association has not sold any jumbo loans since June 2005.

The Association has always considered the promotion of home ownership a primary goal. In that regard, it has historically offered affordable housing programs in all of its market areas. These programs are targeted toward low- and moderate-income home buyers. The Association’s primary program is called Home Today and is described in detail below. Prior to March 27, 2009, loans originated under the Home Today program had higher risk characteristics. The Association did not classify it 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 Office of Thrift Supervision and the Office of the Comptroller of the Currency. During the last several years, attention has focused on sub-prime lending and its negative effect on borrowers and financial markets. Borrowers in the Home Today program are not charged higher fees or interest rates than non-Home Today borrowers. These loans are not interest only or negative amortizing and contain no low initial payment features or adjustable interest rates, which are features often associated with sub-prime lending. While the credit risk profiles of the Association’s borrowers in the Home Today program are generally higher risk than the credit risk profiles of its non-Home Today borrowers, the Association attempts to mitigate that higher risk through the use of private mortgage insurance and continued pre- and post-purchase counseling. The Association’s philosophy has been to provide borrowers the opportunity for home ownership within their financial means. Effective March 27, 2009, the Home Today underwriting guidelines were revised so as to be substantially the same as for the Association’s traditional first mortgage product.

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. After March 27, 2009 borrowers under the Home Today program are subject to substantially the same qualification requirements as non-Home Today borrowers. To qualify for the Association’s Home Today program, a borrower must complete financial management education and counseling and must be referred to the Association by a sponsoring organization with which the Association has partnered as part of the program. Borrowers must meet a minimum credit score threshold. The Association will originate loans with a loan-to-value ratio of up to 90% through its Home Today program, provided that any loan originated through this program with a loan-to-value ratio in excess of 80% must meet the underwriting criteria mandated by its private mortgage insurance carrier. Because the Association previously applied less stringent underwriting and credit standards to these loans, the vast majority of loans originated under the Home Today program generally have greater credit risk than our traditional residential real estate mortgage loans. Effective October 2007, the private mortgage insurance carrier that provides coverage for the Home Today loans with loan-to-value ratios in excess of 80% imposed more restrictive lending requirements that have decreased the volume of Home Today lending, which decrease we expect will continue. As of September 30, 2011, the Association had $264.0 million of loans outstanding that were originated through its Home Today program. Originations under the Home Today program have effectively stopped as a result of these new requirements. Home Today loans have a greater credit risk than traditional residential real estate mortgage loans. At September 30, 2011, of the loans that were originated under the Home Today program, 30.1% of which were delinquent 30 days or more in repayments, compared to 2.1% for the portfolio of non-Home Today loans as of that date. At September 30, 2011, $60.0 million of loans originated under the Home Today program were delinquent 90 days and over and $69.6 million of Home Today loans were non-accruing loans, representing 29.6% of total non-accruing loans as of that date. See “—Non-performing and Problem Assets—Delinquent Loans” for a discussion of the asset quality of this portion of the Association’s loan portfolio.

 

10


Prior to November 25, 2008 the Association also originated loans under its High loan-to-value (“High LTV”) program. These loans had initial loan-to-value 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, 2011, the Association had $269.7 million of loans outstanding that were originated through its High LTV program, $232.5 million of which the Association has insured through a mortgage insurance carrier. The High LTV program was suspended November 25, 2008.

For loans with loan-to-value ratios in excess of 80% but equal to or less than 90% (which are available only for purchase transactions), the Association requires private mortgage insurance, except that for adjustable-rate, first mortgage loans that meet enhanced credit qualification parameters, loan-to-value ratios of up to 85% may be obtained without private mortgage insurance. Loan-to-value ratios in excess of 80% are not available for refinance transactions except that for adjustable-rate, first mortgage loans that meet enhanced credit qualification parameters, loan-to-value ratios of up to 85% may be obtained without private mortgage insurance.

The Association actively monitors its interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Prior to July 2010, depending primarily on market interest rates and its capital and liquidity positions, the Association elected to: (1) retain all of its newly originated longer-term fixed-rate residential mortgage loans, (2) sell all or a portion of such loans in the secondary mortgage market to governmental entities such as Fannie Mae or other purchasers; or (3) securitize such loans by selling the loans in exchange for mortgage-backed securities. Securitized loans can be sold more readily to meet liquidity or interest rate risk management needs, and have a lower risk-weight than the underlying loans, which reduces the Association’s regulatory capital requirements. All of the loans that the Association sold or securitized during the five fiscal years ended September 30, 2011 were fixed-rate mortgage loans.

Effective July 1, 2010, Fannie Mae, historically the Association’s primary loan investor, implemented certain loan origination requirement changes affecting loan eligibility that, to date, we have not adopted. In reaching our current decision regarding implementation of the changes necessary to comply with Fannie Mae’s revised requirements, we considered that since 1991, the Association, employing only non-commissioned loan originators and utilizing a centralized underwriting process, had sold loans to Fannie Mae under a series of proprietary variances, or contract waivers, that were negotiated between us and Fannie Mae during the term of our relationship. These proprietary concessions related to certain loan file documentation and quality control procedures that, in our opinion, did not diminish in any way the credit quality of the loans that we delivered to Fannie Mae, but facilitated the efficiency and effectiveness of our operations and the quality and value of the loan products that we were able to offer to our borrowers. The credit quality of the loans that we delivered to Fannie Mae was consistently evidenced by the superior delinquency profile of our portfolio in peer performance comparisons prepared by Fannie Mae throughout the term of our relationship. In response to the tumult of the housing crisis that commenced in 2008, and with the objective of improving the credit profile its loan portfolio, Fannie Mae enacted many credit tightening measures, culminating in the effective elimination of proprietary variances and waivers, accompanied by the imposition of additional file documentation requirements and expanded quality control procedures. In addition to substantively changing Fannie Mae’s operating environment, effects of the housing crisis spread throughout the secondary residential mortgage market and resulted in a significantly altered operating framework for all secondary market participants. We believe that this dramatically altered operating framework offers opportunities for business process innovators to create new secondary market solutions especially as such opportunities pertain to high credit quality residential loans similar to those that we have traditionally originated. With the current uncertainty as to how the secondary market might be structured in

 

11


the future, the Association has concluded that it is premature to incur the costs of the infrastructural changes to our operations (file documentation collection and additive quality control procedures) that would be necessary to fully comply with current Fannie Mae loan eligibility standards. In the near term, the Association expects to monitor secondary market developments and will continue to assess the merits of implementing the changes required to comply with Fannie Mae’s loan eligibility standards. As a result, the Association’s ability to reduce interest rate risk via our traditional loan sales of newly originated longer-term fixed rate residential loans is limited until the Association either changes its loan origination processes or Fannie Mae, Freddie Mac or other market participants revise their loan eligibility standards. In response to this situation, the Association developed, and on July 21, 2010, began marketing a new adjustable-rate mortgage loan product that provides the Association with improved interest rate risk characteristics when compared to a long-term, fixed-rate mortgage.

The Association currently retains the servicing rights on all loans sold in order to generate fee income and reinforce its commitment to customer service. These one- to four-family residential mortgage real estate loans 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 for 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, 2011 and 2010, the Association recognized servicing fees, net of amortization, related to these servicing rights of $11.4 million and $16.9 million, respectively. As of September 30, 2011 and 2010, the principal balance of loans serviced for others totaled $5.43 billion and $7.04 billion, respectively. At September 30, 2011, 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. During the fiscal years ended September 30, 2011 and 2010, the Association repurchased $1.4 million and $25.0 million, respectively of loans previously sold to Fannie Mae and others. Of these repurchases, $0.1 million and $0.9 million, respectively, were non-recourse loans that were not performing in accordance with the terms of their agreements, while $0.3 million and $0.3 million, respectively were loans sold to Fannie Mae with recourse. The remaining repurchases, $1.0 million and $23.8 million, respectively, were performing loans (all current) that were identified as ineligible, due primarily to debt-to-income ratio exceptions, during post-sale loan file reviews. Additionally, during the fiscal years ended September 30, 2011 and 2010, we provided loss reimbursement to Fannie Mae, pursuant to post-disposition file reviews, on five loans and one loan, respectively, realizing losses of $448 thousand and $75 thousand, respectively.

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 mortgages provide the borrower with an attractive rate reset option, based on the Association’s then current lending rates. 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 Federal Reserve Board (“Traditional ARM”). All of the Association’s adjustable-rate mortgage loans are subject to periodic and lifetime limitations on interest rate changes. Prior to March 11, 2009, the Association offered mortgage loans where the borrower paid only interest for a portion of the loan term (“Interest-only ARM”). All of its adjustable-rate mortgage loans with initial fixed-rate periods of one, three or five years have initial and periodic caps of two percentage points on interest rate changes, with a cap of six percentage points for the life of the loan for Traditional ARM and Interest-only ARM loans 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 an initial cap of five percentage points on the changes 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

 

12


of the borrowers who select adjustable-rate mortgage loans have shorter-term credit needs than those who select long-term, fixed-rate mortgage loans. The Association will permit borrowers to convert non-”Smart Rate” adjustable-rate mortgage loans into fixed-rate mortgage loans at no cost to the borrower. The Association has never offered “Option ARM” loans, where borrowers can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan.

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. Interest-only loans present different credit risks than fully amortizing loans, as the principal balance of the loan does not decrease during the interest-only period. As a result, the Association’s exposure to loss of principal in the event of default does not decrease during this period. Adjustable rate, interest-only, loans comprise less than 2% of our residential loans.

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 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. Prior to June 28, 2010, the Association offered home equity loans and home equity lines of credit, which were primarily secured by a second mortgage on residences. 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. Following a series of progressively restrictive modifications with respect to geography, qualification requirements and features, effective June 28, 2010 and except for bridge loans as described later in this paragraph, the Association discontinued offering home equity loans and home equity lines of credit and initiated a home equity lending reduction plan (“Reduction Plan”), the objective of which is to reduce the Association’s exposure (measured against tier 1 capital plus allowance for loan losses) to the credit risk inherent in home equity lending products. The Reduction Plan was accepted by the Association’s primary regulator. The Reduction Plan’s performance period is June 30, 2010 through December 31, 2011. In May 2011 the Reduction Plan’s December 31, 2011 targets were met. At September 30, 2011 and 2010, home equity loans totaled $206.2 million, or 2.1% and $250.8 million, or 2.7%, respectively, of total loans receivable (which includes $122.9 million, and $130.2 million respectively, of home equity lines of credit which are in the amortization period and no longer eligible to be drawn upon), and home equity lines of credit totaled $2.28 billion, or 22.8%, and $2.59 billion, or 27.6%, respectively, of total loans receivable. Additionally, at September 30, 2011 and 2010, the unadvanced amounts of home equity lines of credit totaled $1.46 billion and $2.12 billion, respectively. The only home equity lending products that the Association continues to offer are bridge loans, where a borrower can utilize the existing equity in their current home to fund the purchase of a new home before the current home is sold. As of September 30, 2011, bridge loans totaled $4.6 million, or 0.1% of total loans receivable.

When offered, the underwriting standards for home equity loans and home equity lines of credit included an evaluation of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Prior to June 28, 2010, through a series of modifications and program adjustments, the home equity lending parameters became increasingly restrictive and included the additional evaluation of the applicant’s employment and income verification. From a geographic perspective, product offerings peaked in 2008 when offers were extended (primarily via direct mail) to targeted borrowers in 18 states. Generally, the least restrictive qualification and the most attractive product features from a borrower’s perspective were in place during portions of fiscal 2006 and 2007, when combined loan-to-value ratios of up to 89.99% were permitted, minimum credit scores extended to 620, maximum loan amounts reached $250,000 and pricing for lines of credit reached Prime minus 1.01% when

 

13


drawn balances exceeded $50,000. The Association originated its home equity loans and home equity lines of credit without application fees (except for bridge loans) or borrower-paid closing costs. Home equity loans were offered with fixed interest rates, were fully amortizing and had terms of up to 15 years. The Association’s home equity lines of credit were offered with adjustable rates of interest indexed to the prime rate, as reported in The Wall Street Journal. The Association’s Lowest Rate Guarantee program provided that, subject to the terms and conditions of the guarantee program, if a loan applicant or current home equity line of credit borrower found and qualified for a better interest rate on a similar product with another lender, the Association would offer a lower rate or, if the borrower closed under the rate and terms presented with respect to the other lender, the Association paid the loan applicant or borrower $1,000.

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% loan-to-value ratio (first and second mortgage liens). The Association charges a closing fee with respect to bridge loans.

The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean combined loan-to-value (“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, 2011. Home equity lines of credit in the draw period are by geographical distribution:

 

    Credit
Exposure
    Principal
Balance
    Percent
Delinquent
90 days or more
    Mean CLTV
Percent at
Origination(2)
    Current  Mean
CLTV

Percent(3)
 
    (Dollars in thousands)                    

Home equity lines of credit in draw period (by state):

         

Ohio

  $ 1,697,314      $ 878,867        0.71     62     73

Florida

    971,309        697,069        2.13     63     97

California

    374,936        272,957        0.47     68     85

Other(1)

    693,438        431,489        0.66     64     73
 

 

 

   

 

 

       

Total home equity lines of credit in draw period

    3,736,997        2,280,382        1.11     63     79

Home equity lines in repayment, home equity loans and bridge loans

    210,816        210,816        5.26     66     69
 

 

 

   

 

 

       

Total

  $ 3,947,813      $ 2,491,198        1.47     63     78
 

 

 

   

 

 

       

 

(1) No individual state has a committed or drawn balance greater than 5% of the total.
(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, 2011. 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, 2011, 43% of our home equity lending portfolio was either in first lien position (24%) or was in a subordinate (second) lien position behind a first lien that we held (6%) or behind a first lien that was held by a loan that we serviced for others (13%). In addition, at September 30, 2011, 20% of our home equity line of credit portfolio makes only the minimum payment on their outstanding line balance.

 

14


The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of September 30, 2011. Home equity lines of credit in the draw period are by the year originated:

 

     Credit
Exposure
     Principal
Balance
     Percent
Delinquent
90 days or more
    Mean CLTV
Percent at
Origination(1)
    Current Mean
CLTV
Percent(2)
 
     (Dollars in thousands)                     

Home equity lines of credit in draw period:

            

2000 and prior

   $ 392,517       $ 186,534         0.85     48     64

2001

     86,032         49,442         1.29     67     70

2002

     212,546         109,605         1.72     64     68

2003

     316,248         169,753         1.47     68     73

2004

     198,205         114,146         2.14     68     79

2005

     140,227         87,357         2.41     68     88

2006

     329,438         221,218         2.01     66     96

2007

     507,248         368,448         1.42     68     96

2008

     1,047,128         703,176         0.54     64     80

2009

     464,949         250,818         0.22     56     67

2010

     42,377         19,881         0.36     59     65

2011(3)

     82         4         0.00     78     79
  

 

 

    

 

 

        

Total home equity lines of credit in draw period

     3,736,997         2,280,382         1.11     63     79

Home equity lines in repayment, home equity loans and bridge loans

     210,816         210,816         5.26     66     69
  

 

 

    

 

 

        

Total

   $ 3,947,813       $ 2,491,198         1.47     63     78
  

 

 

    

 

 

        

 

(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, 2011. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
(3) Amounts represent a home equity line of credit that was originated in 2009, and that was closed in error and subsequently reopened in 2011.

In general, the home equity line of credit product is characterized by a ten year draw period followed by a ten year repayment period, however, prior to June 2010 (when we suspended new home equity lending), 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, Third Federal Savings and Loan 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.

 

15


As shown in the table above, the percent of seriously delinquent loans originated in calendar years 2004 through 2006 is comparatively higher than the others. Those years saw rapidly increasing housing prices, especially in our Florida market. As the housing prices have declined along with the general economic downturn coupled with higher unemployment, we see that reflected in those years. Equity lines of credit originated during those years also saw higher loan amounts, higher permitted loan-to-value ratios, and lower credit scores. Reflective of the general decrease in housing values since 2006, Current Mean CLTV percentages are higher than the Mean CLTV percentages at Origination,

In light of the weak housing market, the current level of delinquencies and the instability in employment and economic prospects, we currently conduct an expanded loan level evaluation of our equity lines of credit which are delinquent 90 days or more.

The following table sets forth the breakdown of current mean CLTV percentages for our home equity lines of credit in the draw period as of September 30, 2011.

 

     Credit
Exposure
     Principal
Balance
     % of
Total
    Percent
Delinquent
90 days or
more
    Mean
CLTV
Percent at
Origination
    Current
Mean
CLTV
Percent
 
     (Dollars in thousands)                           

Home equity lines of credit in draw period (by current mean CLTV):

              

< 80%

   $ 1,927,209       $ 956,573         42.0     0.59     52     54

80 - 89.9%

     536,908         320,215         14.0     0.70     73     85

90 - 100%

     317,951         234,936         10.3     1.15     76     95

> 100%

     746,848         645,776         28.3     2.27     78     133

Unknown

     208,081         122,882         5.4     0.01     62     (1
  

 

 

    

 

 

    

 

 

       
   $ 3,736,997       $ 2,280,382         100.0     1.11     63     79
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) —Market data necessary for stratification is not readily available.

Construction Loans. The Association originates construction loans for the purchase of developed lots and for the construction of single-family residences. Construction loans are offered to individuals for the construction of their personal residences by a qualified builder (construction/permanent loans), and to qualified builders (builder loans). At September 30, 2011, construction loans totaled $82.0 million, or 0.8% of total loans receivable. At September 30, 2011, the unadvanced portion of these construction loans totaled $37.1 million.

The Association’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Association offers construction/permanent loans with fixed or adjustable rates, and a current maximum loan-to-completed-appraised value ratio of 80%. At September 30, 2011, the Association’s construction/permanent loans totaled $60.5 million, or 0.6% of total loans receivable.

The Association’s builder loans consist of loans for homes that have been pre-sold as well as loans to developers that build homes before a buyer has been identified. The Association does not make land loans to developers for the acquisition and development of raw land. Construction loans to developers are currently limited to an 80% loan-to-completed-appraised value ratio for homes that are under contract for purchase and a 70% loan-to-completed-appraised value ratio for loans where no buyer has been identified. The interest rates are based on and adjust with the prime rate of interest, and are for terms of up to two years. Effective August 30, 2011, the Association made the strategic decision to exit the commercial construction business and ceased accepting new builder relationships. Existing builder commitments will be honored for a period not longer than

 

16


1 year, giving our customers the ability to secure new borrowing relationships. The builder loan portfolio as of September 30, 2011 is $15.4 million, which represents a 28% decrease from September 30, 2010. The portfolio is now considered to be in runoff.

Prior to exiting the commercial construction business, before making a commitment to fund a construction loan, the Association required an appraisal of the property by an independent licensed appraiser. The Association generally reviewed and inspected each property before disbursement of funds during the term of the construction loan.

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, like our current economic environment.

Loan Originations, Purchases, Sales, Participations and Servicing. Lending activities are conducted primarily by the Association’s loan personnel (all of whom are salaried employees) operating at our main and branch office locations and at our loan production offices. All loans that the Association originates are underwritten pursuant to its policies and procedures, which are generally consistent with Fannie Mae underwriting guidelines to the extent applicable, subject to the discussion below. The Association originates both adjustable-rate and fixed-rate loans and advertises extensively throughout its market area. Its ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer 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. Most of the Association’s residential real estate mortgage loan originations are generated by its in-house loan representatives, 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. From 2005 to October 2010, the Association maintained a relationship with one mortgage broker, which is affiliated with a national builder. During the fiscal year ended September 30, 2010, the Association originated $26.3 million of loans through that relationship. All such loans were underwritten to conform to the Association’s loan underwriting policies and procedures. In October 2010, this relationship was suspended due to limited activity.

The Association decides whether to retain the loans that it originates, sell loans in the secondary market or securitize loans after evaluating current and projected market interest rates, its interest rate risk objectives, its liquidity needs and other factors. The Association sold $33.6 million of residential real estate mortgage loans (all fixed-rate loans, with 15 to 30-year terms) during the fiscal year ended September 30, 2011. As described in the preceding Residential Real Estate Mortgage Loans section, effective July 1, 2010, Fannie Mae, historically the Association’s primary loan investor, implemented certain loan origination requirement changes affecting loan eligibility that, to date, we have not adopted. Accordingly, the Association’s ability to reduce interest rate risk via our traditional loan sales of newly originated longer-term fixed rate residential loans is limited until either the Association changes its loan origination processes or Fannie Mae, Freddie Mac or other market participants revise their loan eligibility standards. Inasmuch as we have not changed our traditional underwriting standards, the Association had no loans committed for sale in the secondary market at September 30, 2011. The fixed-rate mortgage loans that the Association originated and retained during the fiscal year ended September 30, 2011 consisted primarily of loans with 30-year terms.

 

17


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 in the future. At September 30, 2011, the Association serviced loans owned by others with a principal balance of $5.43 billion, of which $6.9 million of loans sold to Fannie Mae remain 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, 2011 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 in amounts above $625,000 require the approval of two individuals with designated underwriting authority. Loans in amounts below $625,000 require the approval of one individual with designated underwriting authority.

The Association also maintains automated underwriting systems for point-of-sale approvals of residential real estate mortgage loans. Applications for loans that meet certain credit and income criteria may receive a credit approval subject to an appraisal of the subject property.

The Association requires independent third-party appraisals of real property. Appraisals are performed by independent licensed appraisers.

Non-performing Assets and Restructured Loans. 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, information is updated or confirmed and the property securing the loan is re-evaluated. A summary report of all loans 30 days or more past due is provided to the Association’s board of directors.

Loans are automatically placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt or if prior to the loan being restructured, it was in non-accrual status. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if unpaid principal and interest are repaid so that the loan is less than 90 days delinquent or it shows performance according to the terms of the restructuring agreement for a period of at least six months after modification.

 

18


The table below sets forth the recorded investments and categories of our non-performing assets and troubled debt restructurings at the dates indicated.

 

     September 30,  
     2011     2010     2009     2008     2007  
     (Dollars in thousands)  

Non-accrual loans:

          

Real estate loans:

          

Residential non-Home Today

   $ 125,014      $ 135,109      $ 99,576      $ 43,717      $ 21,627   

Residential Home Today

     69,602        91,985        84,284        63,362        55,347   

Home equity loans and lines of credit(1)

     36,872        54,481        59,762        54,856        31,728   

Construction

     3,770        4,994        11,553        10,773        4,631   

Consumer and other loans

     0        1        1        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans(2)(3)

     235,258        286,570        255,176        172,708        113,333   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate owned

     19,155        15,912        17,697        14,108        9,903   

Other non-performing assets

     0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 254,413      $ 302,482      $ 272,873      $ 186,816      $ 123,236   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Total non-accrual loans to total loans

     2.37     3.08     2.74     1.87     1.40

Total non-accrual loans to total assets

     2.16     2.59     2.41     1.60     1.10

Total non-performing assets to total assets

     2.34     2.73     2.57     1.73     1.20

Troubled debt restructurings: (not included in non-accrual loans above)

          

Real estate loans:

          

Residential non-Home Today

   $ 50,841      $ 39,167      $ 21,278      $ 640      $ 0   

Residential Home Today

     67,240        47,601        20,817        225        0   

Home equity loans and lines of credit(1)

     2,171        3,430        2,301        0        0   

Construction

     863        0        0        0        0   

Consumer and other loans

     0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 121,115      $ 90,198      $ 44,396      $ 865      $ 0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes 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).
(2) At September 30, 2011 and 2010 includes $16.5 million and $32.2 million, respectively, in troubled debt restructurings which are current 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. At the fiscal year ends prior to September 30, 2010, troubled debt restructurings that would have remained in non-accrual due to their accrual status prior to restructuring were not material and therefore were not included with non-accrual loans at those reporting dates.
(3) Includes $28.6 million, $12.3 million, $1.9 million and $260 thousand in troubled debt restructurings that are 90 days or more past due as of September 30, 2011, 2010, 2009 and 2008, respectively.

The gross interest income that would have been recorded during the year ended September 30, 2011 on nonaccrual loans if they had been accruing during the entire period and troubled debt restructurings if they had been current and performing in accordance with their original terms during the entire period would have been $19.5 million. The interest income recognized on those loans included in net income for the year ended September 30, 2011 was $9.3 million.

At September 30, 2011, 2010, 2009 and 2008 respectively, the recorded investment of impaired loans includes $129.1 million, $98.8 million, $50.8 million, and $5.2 million of accruing loans of which $121.1 million, $90.2 million, $44.4 million, and $0 are troubled debt restructurings and $8.0 million, $8.6 million, $6.4 million, and $5.2 million of loans that are returned to accrual status when contractual payments are less than 90 days past due and continue to be individually evaluated for impairment until contractual payments are less than 30 days past due. At September 30, 2011, 2010, 2009 and 2008, respectively, the recorded investment of non-accrual loans includes

 

19


$24.6 million, $44.7 million, $87.2 million, and $61.6 million that are not included in the recorded investment of impaired loans because they are included in loans collectively evaluated for impairment.

In response to the economic challenges facing many borrowers, the level of loan modifications has increased, resulting in $166.2 million of total (accrual and non-accrual) troubled debt restructurings recorded at September 30, 2011, a $31.5 million increase from September 30, 2010. Of the $166.2 million of troubled debt restructurings recorded at September 30, 2011, $68.1 million is in the residential, non-Home Today portfolio and $93.8 million is in the Home Today portfolio.

Debt restructuring is a method being increasingly used to help families keep their homes and preserve our neighborhoods. This involves making changes to the borrowers’ loan terms through capitalization of delinquent payments; interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions including beyond that provided in the original agreement; or some combination of the above. These loans are measured for impairment based on the present value of expected future cash flows discounted at the effective interest rate of the original loan contract. Any shortfall is recorded as an individually evaluated general valuation reserve as part of the allowance for loan losses. We evaluate these loans using the expected future cash flows because we expect the borrower, and not liquidation of the collateral, to be the source of repayment for the loan. A loan modified as a troubled debt restructuring is reported as a troubled debt restructuring for a minimum of one year. After one year, a loan may no longer be included in the balance of troubled debt restructurings if the loan was modified to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is not impaired based on the terms of restructuring agreement. The majority of our modifications do not meet these criteria.

The following table sets forth the recorded investments of accrual and non-accrual troubled debt restructured loans, by the types of concessions granted as of September 30, 2011.

 

    Reduction in
Interest Rates
    Payment
Extensions
    Forbearance
or Other
Actions
    Multiple
Concessions
    Multiple
Modifications
    Total  
    (In thousands)  

Accrual

           

Residential non-Home Today

  $ 14,710      $ 2,340      $ 15,452      $ 10,408      $ 7,931      $ 50,841   

Residential Home Today

    19,281        192        10,273        28,072        9,422        67,240   

Home equity loans and lines of credit

    33        959        858        218        103        2,171   

Construction

    0        863        0        0        0        863   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 34,024      $ 4,354      $ 26,583      $ 38,698      $ 17,456      $ 121,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Accrual, Performing

           

Residential non-Home Today

  $ 1,941      $ 12      $ 2,119      $ 2,424      $ 0      $ 6,496   

Residential Home Today

    4,992        109        3,583        823        110        9,617   

Home equity loans and lines of credit

    90        0        0        99        163        352   

Construction

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 7,023      $ 121      $ 5,702      $ 3,346      $ 273      $ 16,465   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Accrual, Non-Performing

           

Residential non-Home Today

  $ 2,989      $ 1,720      $ 1,689      $ 2,121      $ 2,237      $ 10,756   

Residential Home Today

    6,196        703        7,094        2,683        239        16,915   

Home equity loans and lines of credit

    0        610        336        0        0        946   

Construction

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 9,185      $ 3,033      $ 9,119      $ 4,804      $ 2,476      $ 28,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Troubled Debt Restructurings

           

Residential non-Home Today

  $ 19,640      $ 4,072      $ 19,260      $ 14,953      $ 10,168      $ 68,093   

Residential Home Today

    30,469        1,004        20,950        31,578        9,771        93,772   

Home equity loans and lines of credit

    123        1,569        1,194        317        266        3,469   

Construction

    0        863        0        0        0        863   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 50,232      $ 7,508      $ 41,404      $ 46,848      $ 20,205      $ 166,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Troubled debt restructurings in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan was not accruing interest at the time of modification, continues to not accrue interest and is performing according to the terms of the restructuring, but has not been current for at least six months since its modification. 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.

During the last 37 months, 43% of loans modified through our restructuring program are for borrowers who are current on their loans but who request a modification due to a recent or impending event that has caused or will cause a temporary financial strain and who receive concessions that would otherwise not be considered.

The recorded investment of loans in accrual status as of September 30, 2011 are set forth in the following table as having a modification agreement date less than one year old or greater than or equal to one year old.

 

    Reduction in
Interest Rates
    Payment
Extensions
    Forbearance
or Other
Actions
    Multiple
Concessions
    Multiple
Modifications
    Total  
    (In thousands)  

Accruing Modifications Less Than One Year Old

           

Residential non-Home Today

  $ 5,689      $ 658      $ 3,929      $ 1,079      $ 4,602      $ 15,957   

Residential Home Today

    4,454        91        2,614        3,906        7,897        18,962   

Home equity loans and lines of credit

    33        0        427        70        103        633   

Construction

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 10,176      $ 749      $ 6,970      $ 5,055      $ 12,602      $ 35,552   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accruing Modifications Greater Than or Equal to One Year Old

           

Residential non-Home Today

  $ 9,021      $ 1,682      $ 11,523      $ 9,330      $ 3,329      $ 34,885   

Residential Home Today

    14,827        101        7,659        24,166        1,525        48,278   

Home equity loans and lines of credit

    0        959        431        147        0        1,537   

Construction

    0        863        0        0        0        863   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 23,848      $ 3,605      $ 19,613      $ 33,643      $ 4,854      $ 85,563   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Delinquent Loans. The following tables set forth the number and recorded investment in loan delinquencies by type, segregated by geographic location and by severity of delinquency at the dates indicated. Construction loans are on properties located in Ohio and the balances of consumer and other loans are immaterial; therefore neither was segregated.

 

    Loans Delinquent For     Total  
    30-89 Days     90 Days or Over    
    Number     Amount     Number     Amount     Number     Amount  
    (Dollars in thousands)  

At September 30, 2011

           

Real estate loans:

           

Residential non-Home Today

           

Ohio

    204      $ 20,315        529      $ 62,340        733      $ 82,655   

Florida

    37        8,438        272        55,700        309        64,138   

Other

    3        574        4        477        7        1,051   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Residential non-Home Today

    244        29,327        805        118,517        1,049        147,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential Home Today

           

Ohio

    213        18,395        634        57,664        847        76,059   

Florida

    11        1,135        25        2,321        36        3,456   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Residential Home Today

    224        19,530        659        59,985        883        79,515   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home equity loans and lines of credit(1)

           

Ohio

    158        5,457        227        10,553        385        16,010   

Florida

    103        7,408        149        16,211        252        23,619   

California

    18        1,789        20        2,207        38        3,996   

Other

    36        2,771        81        7,550        117        10,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Home equity loans and lines of credit

    315        17,425        477        36,521        792        53,946   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Construction

    1        72        20        3,770        21        3,842   

Other loans

    0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    784      $ 66,354        1,961      $ 218,793        2,745      $ 285,147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Loans Delinquent For     Total  
    30-89 Days     90 Days or Over    
    Number     Amount     Number     Amount     Number     Amount  
    (Dollars in thousands)  

At September 30, 2010

           

Real estate loans:

           

Residential non-Home Today

           

Ohio

    215      $ 21,182        582      $ 68,845        797      $ 90,027   

Florida

    42        8,597        244        51,765        286        60,362   

Other

    5        902        4        991        9        1,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Residential non-Home Today

    262        30,681        830        121,601        1,092        152,282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential Home Today

           

Ohio

    230        20,879        807        72,265        1,037        93,144   

Florida

    9        927        26        2,566        35        3,493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Residential Home Today

    239        21,806        833        74,831        1,072        96,637   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home equity loans and lines of credit(1)

           

Ohio

    223        6,830        354        16,255        577        23,085   

Florida

    118        9,979        233        23,277        351        33,256   

California

    16        1,401        27        3,584        43        4,985   

Other

    49        3,167        111        10,832        160        13,999   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Home equity loans and lines of credit

    406        21,377        725        53,948        1,131        75,325   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Construction

    2        558        31        3,980        33        4,538   

Other loans

    0        0        2        1        2        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    909      $ 74,422        2,421      $ 254,361        3,330      $ 328,783   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


     Loans Delinquent For      Total  
     30-89 Days      90 Days or Over     
     Number      Amount      Number      Amount      Number      Amount  
     (Dollars in thousands)  

At September 30, 2009

                 

Real estate loans:

                 

Residential non-Home Today

                 

Ohio

     212       $ 22,064         564       $ 59,146         776       $ 81,210   

Florida

     40         8,545         177         39,493         217         48,038   

Other

     1         181         4         937         5         1,118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential non-Home Today

     253         30,790         745         99,576         998         130,366   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Residential Home Today

                 

Ohio

     288         24,865         888         81,777         1,176         106,642   

Florida

     8         841         25         2,507         33         3,348   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential Home Today

     296         25,706         913         84,284         1,209         109,990   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity loans and lines of credit(1)

                 

Ohio

     289         9,261         406         20,167         695         29,428   

Florida

     127         10,704         224         23,118         351         33,822   

California

     21         2,007         37         4,325         58         6,332   

Other

     54         4,281         126         12,152         180         16,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Home equity loans and lines of credit

     491         26,253         793         59,762         1,284         86,015   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction

     7         1,454         56         11,553         63         13,007   

Other loans

     2         0         3         1         5         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,049       $ 84,203         2,510       $ 255,176         3,559       $ 339,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Loans Delinquent For      Total  
     30-89 Days      90 Days or Over     
     Number      Amount      Number      Amount      Number      Amount  
     (Dollars in thousands)  

At September 30, 2008

                 

Real estate loans:

                 

Residential non-Home Today

                 

Ohio

     250       $ 22,836         375       $ 33,636         625       $ 56,472   

Florida

     33         7,499         46         9,762         79         17,261   

Other

     4         895         1         318         5         1,213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential non-Home Today

     287         31,230         422         43,716         709         74,946   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Residential Home Today

                 

Ohio

     320         28,751         673         61,950         993         90,701   

Florida

     10         1,117         15         1,412         25         2,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential Home Today

     330         29,868         688         63,362         1,018         93,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity loans and lines of credit(1)

                 

Ohio

     357         12,431         420         20,302         777         32,733   

Florida

     128         9,718         242         23,023         370         32,741   

California

     12         1,078         17         1,968         29         3,046   

Other

     49         3,685         117         9,563         166         13,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Home equity loans and lines of credit

     546         26,912         796         54,856         1,342         81,768   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction

     4         753         57         10,773         61         11,526   

Other loans

     4         0         0         1         4         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,171       $ 88,763         1,963       $ 172,708         3,134       $ 261,471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


     Loans Delinquent For      Total  
     30-89 Days      90 Days or Over     
     Number      Amount      Number      Amount      Number      Amount  
     (Dollars in thousands)  

At September 30, 2007

                 

Real estate loans:

                 

Residential non-Home Today

                 

Ohio

     266       $ 20,686         233       $ 19,367         499       $ 40,053   

Florida

     11         2,365         11         2,260         22         4,625   

Other

     1         97         0         0         1         97   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential non-Home Today

     278         23,148         244         21,627         522         44,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Residential Home Today

                 

Ohio

     285         25,988         593         54,778         878         80,766   

Florida

     7         639         7         569         14         1,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Residential Home Today

     292         26,627         600         55,347         892         81,794   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity loans and lines of credit(1)

                 

Ohio

     374         13,518         311         15,438         685         28,956   

Florida

     102         7,586         61         5,144         163         12,730   

California

     8         768         19         1,920         27         2,688   

Other

     52         3,128         109         9,226         161         12,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Home equity loans and lines of credit

     536         25,000         500         31,728         1,036         56,728   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction

     5         591         30         4,631         35         5,222   

Other loans

     20         0         0         1         20         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,131       $ 75,366         1,374       $ 113,334         2,505       $ 188,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes 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).

Total loans delinquent 90 days and over (seriously delinquent) have decreased 14% to $218.8 million at September 30, 2011, from $254.4 million at September 30, 2010. Seriously delinquent loans decreased in all portfolios: residential non-Home Today portfolio $3.1 million, or 2.5%; residential Home Today portfolio $14.8 million, or 19.8%; home equity loans and lines of credit portfolio $17.4, or 32.3%; and construction portfolio $210 thousand, or 5.3%. The inability of borrowers to repay their loans is primarily a result of high unemployment and uncertain economic prospects in our primary lending markets. Inasmuch as job losses and unemployment levels both remain at elevated levels, we expect some borrowers who are current on their loans at September 30, 2011 to experience payment problems in the future. The excess number of housing units available for sale in the market today also may limit their ability to sell a home they can no longer afford. In Florida, housing values continue to remain depressed due to prior rapid building and speculation, which is now resulting in considerable inventory on the market and may limit a borrower’s ability to sell a home. As a result, we expect the level of loans delinquent 90 days and over will remain elevated in the foreseeable future.

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 lower of cost or estimated fair market value at the date of foreclosure, 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. Holding costs and declines in estimated fair market value result in charges to expense after acquisition. At September 30, 2011, we had $19.2 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

 

24


is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. 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 and 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 our close attention, 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 provide a specific reserve for 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 our primary federal regulator, the Office of the Comptroller of the Currency (“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, 2011, the recorded investment of classified assets consists of substandard assets of $207.0 million, including $19.2 million of real estate owned, loss assets, fully reserved, of $55.4 million, and $13.6 million of assets designated special mention. As of September 30, 2011, there were no individual assets classified as substandard with balances exceeding $1 million. Substandard and loss assets at September 30, 2011 include $218.8 million of loans 90 or more days past due and $24.4 million of loans less than 90 days past due displaying a weakness sufficient to warrant an adverse classification, the majority of which are troubled debt restructurings.

Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. During the year ended September 30, 2008, the Company changed the population of loans that it individually evaluates for impairment to include real estate secured loans 180 days or more past due, except home equity lines of credit, which it evaluates at 90 or more days past due. During the year ended September 30, 2011, the Company included equity loans, bridge loans and troubled debt restructurings with loans evaluated at 90 or more days past due. Large groups of smaller balance homogeneous loans are combined and collectively evaluated by portfolio for impairment. For a collateral dependent loan, impairment is measured based on the fair value of the collateral. For a loan whose terms are modified in a troubled debt restructuring, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, where the loan’s effective interest rate is based on the contractual rate of the original loan, not the terms of the restructuring. When the recorded investment of an impaired loan exceeds the fair value of the collateral (or the present value of its expected future cash flows), a valuation allowance is established for the excess. For additional information regarding impaired loans, see Note 5 of the Notes to the Consolidated Financial Statements.

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. The allowance for loan losses consists of three components:

 

  (1) specific allowances established for any impaired loans for which the recorded investment in the loan exceeds the measured value of the collateral (“specific valuation allowances” or “SVAs”);

 

  (2)

general allowances for loan losses for each loan type based on historical loan loss experience and allowance on individually reviewed loans dependent on cash flows, including troubled debt

 

25


  restructurings, and a portion of the allowance on loans that represents further deterioration in the fair value not supported by an appraisal (“general valuation allowances” or “GVAs”); and

 

  (3) adjustments, which we describe as a market valuation adjustment, to historical loss experience (general allowances), maintained to cover uncertainties that affect our estimate of incurred probable losses for each loan type (“market valuation allowances” or “MVAs”).

The market valuation allowances are based on our evaluation of several factors, including:

 

   

delinquency statistics (both current and historical) and the factors behind delinquency trends;

 

   

the status of loans in foreclosure, real estate in judgment and real estate owned;

 

   

the uncertainty with respect to the status of home equity loans and lines of credit borrowers’ performance on first lien obligations when the Association is not in the first lien position;

 

   

the composition of the loan portfolio;

 

   

historical loan loss experience and trends;

 

   

national, regional and local economic factors and trends;

 

   

national, regional and local housing market factors and trends;

 

   

the frequency and magnitude of re-modifications of loans previously the subject of a troubled debt restructuring;

 

   

asset disposition loss statistics (both current and historical);

 

   

the current status of all assets classified during the immediately preceding meeting of the Asset Classification Committee; and

 

   

the industry.

Additionally, when loan modifications qualify as troubled debt restructurings, we record an individually evaluated, general valuation allowance for impairment 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 re-modifications as borrowers who default are not eligible for re-modification. At September 30, 2011, the balance of such general valuation allowances was $7.0 million. In instances when loans require re-modification, additional valuation allowances may be required. The new valuation allowance on a re-modified loan 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 modification agreement. Due to the immaterial amount of this exposure to date, we continue to capture this exposure as a component of our MVA 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 future re-modifications) that will be assessed against all loans reviewed collectively. If new default factors are implemented, the MVA methodology will be adjusted to preclude duplicative loss consideration.

We evaluate the allowance for loan losses based upon the combined total of the specific, historical loss and general components. Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

Equity loans and equity 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 loan-to-value ratios. In a stressed housing market with high delinquencies and

 

26


low housing prices, such as currently exists, these higher loan-to-value ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has a vested interest in keeping the loan current compared to a borrower with little or no equity in the property. In light of the weak housing market, the current level of delinquencies and the current instability in employment and economic prospects, we currently conduct an expanded loan level evaluation of our equity loans and lines of credit, including bridge loans, which are delinquent 90 days or more. This expanded evaluation supplements, and is in addition to, our traditional evaluation procedures. As delinquencies in our portfolios are resolved, we are realizing an increase in net charge-offs related to equity lines of credit which are being applied against the allowance for loan loss. At September 30, 2011, we had a recorded investment of $2.50 billion in equity loans and equity lines of credit outstanding, 1.5% of which were delinquent 90 days or more in repayments.

Construction loans generally have greater credit risk than traditional residential real estate mortgage loans. The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make a loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions. For more on loan losses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

27


The following table sets forth activity in our allowance for loan losses segregated by geographic location for the periods indicated. All construction loans are on properties located in Ohio.

 

    At or For the Years Ended September 30,  
    2011     2010     2009     2008     2007  
    (Dollars in thousands)  

Allowance balance (beginning of the period)

  $ 133,240      $ 95,248      $ 43,796      $ 25,111      $ 20,705   

Charge-offs:

         

Real estate loans:

         

Residential non-Home Today

         

Ohio

    8,915        5,081        4,507        3,884        974   

Florida

    8,889        7,425        2,319        787        15   

Other

    0        72        69        328        259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Residential non-Home Today

    17,804        12,578        6,895        4,999        1,248   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential Home Today

         

Ohio

    6,852        4,574        3,904        4,283        1,118   

Florida

    99        104        106        0        0   

Other

    0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Residential Home Today

    6,951        4,678        4,010        4,283        1,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home equity loans and lines of credit(1)

         

Ohio

    10,564        7,471        5,893        1,343        874   

Florida

    30,319        33,589        35,939        3,678        201   

California

    4,895        4,002        4,890        0        255   

Other

    5,636        5,146        4,901        1,166        1,509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Home equity loans and lines of credit

    51,414        50,208        51,623        6,187        2,839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Construction

    994        2,491        1,442        598        0   

Commercial

    0        0        0        0        517   

Consumer and other loans

    1        0        0        8        16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

    77,164        69,955        63,970        16,075        5,738   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

         

Real estate loans:

         

Residential non-Home Today

    338        523        195        128        271   

Residential Home Today

    108        23        0        117        251   

Home equity loans and lines of credit(1)

    1,921        1,390        225        8        22   

Construction

    35        11        0        0        0   

Commercial

    0        0        0        0        0   

Consumer and other loans

    0        0        2        7        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

    2,402        1,947        422        260        544   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    (74,762     (68,008     (63,548     (15,815     (5,194

Provision for loan losses

    98,500        106,000        115,000        34,500        9,600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance balance (end of the period)

  $ 156,978      $ 133,240      $ 95,248      $ 43,796      $ 25,111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

         

Net charge-offs to average loans outstanding

    0.76     0.73     0.66     0.18     0.07

Allowance for loan losses to non-performing loans at end of the year

    71.75     52.38     37.24     25.33     22.12

Allowance for loan losses to the total recorded investment in loans at end of the year

    1.58     1.43     1.02     0.47     0.31

 

(1) Includes 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).

 

28


Charge-offs in our residential non-Home Today portfolio increased $5.2 million, or 41.5% during the fiscal year ended September 30, 2011 when compared to fiscal 2010. The level of charge-offs increased, due to declining home prices, as the higher level of delinquent loans in the residential mortgage loan category decreased.

In response to progressive housing market deterioration and the instability in the employment and economic prospects in our primary lending markets, in June 2008 we began conducting expanded loan level reviews of home equity lines of credit and as a result provided for increased losses. As delinquencies have been resolved through pay-off, short sale or foreclosure, or when 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 in the home equity loans and lines of credit portfolio remains at an elevated level. In the fiscal year ended September 30, 2011, $49.5 million in charge-offs for home equity loans and lines of credit have been recorded compared to $48.8 million for fiscal 2010. We continue to evaluate loans becoming delinquent for potential loss and record provisions for our estimate of those losses. We expect an elevated level of charge-offs to continue as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.

As previously disclosed, on July 21, 2011, the Association’s primary regulator, the Office of Thrift Supervision (“OTS”), was merged into the OCC at which time supervision of the Association transferred to the OCC. Traditionally, instead of establishing SVAs, many OCC-regulated institutions have either charged off, or charged down, loan impairments, particularly with respect to residential mortgage loan portfolios like ours. As a result, many OCC-regulated institutions do not report significant amounts of SVAs associated with residential mortgage loan portfolios. In an October 2011 directive, the OCC required all SVAs maintained by savings institutions to be charged off by March 31, 2012. The Company expects to adopt the OCC methodology effective December 31, 2011. As a result, reported loan charge-offs for the quarter ending December 31, 2011 will be inflated by the $55.5 million SVA recorded at September 30, 2011. This one time charge-off will not impact the provision for loan losses reported in the Consolidated Statements of Income. However, in the quarter ended December 31, 2011, reported loan charge-offs will increase and the balance of the allowance for loan losses will decrease by that same amount. Additionally, reported balances of delinquent/nonperforming loans will decrease by that same amount.

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the percent of allowance in each category to the total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

    At September 30,  
    2011     2010     2009  
    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     Percent of
Allowance
to Total
Allowance
    Percent of
Loans in
Category to
Total Loans
 
    (Dollars in thousands)  

Real estate loans:

                 

Residential non-Home Today

  $ 49,484        31.5     71.5   $ 41,246        31.0     65.4   $ 22,678        23.8     64.0

Residential Home Today

    31,025        19.8        2.6        13,331        10.0        3.0        9,232        9.7        3.1   

Home equity loans and lines of credit(1)

    74,071        47.2        25.0        73,780        55.4        30.4        57,594        60.5        31.8   

Construction

    2,398        1.5        0.8        4,882        3.6        1.1        5,743        6.0        1.0   

Other loans

    0        0.0        0.1        1        0.0        0.1        1        0.0        0.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance

  $ 156,978        100.0     100.0   $ 133,240        100.0     100.0   $ 95,248        100.0     100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


     At September 30,  
     2008     2007  
     Amount      Percent of
Allowance
to Total
Allowance
    Percent of
Loans in
Category to
Total Loans
    Amount      Percent of
Allowance
to Total
Allowance
    Percent of
Loans in
Category to
Total Loans
 
     (Dollars in thousands)  

Real estate loans:

              

Residential non-Home Today

   $ 7,873         18.0     68.7   $ 4,781         19.1     71.5

Residential Home

     5,883         13.4        3.3        6,361         25.3        3.7   

Today Home equity loans and

     28,118         64.2        26.7        13,141         52.3        22.8   

lines of credit(1)

     1,922         4.4        1.2        778         3.1        1.8   

Construction

     0         0.0        0.0        23         0.1        0.0   

Other loans

     0         0.0        0.1        27         0.1        0.2   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance

   $ 43,796         100.0     100.0   $ 25,111         100.0     100.0
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes 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).

The following table provides detailed information with respect to the composition of the allowance for loan losses, by loan segment and by method of determination as of September 30, 2011, 2010 and 2009. The total balance of the MVA is determined for the portfolio as a whole and is allocated to the individual loan segments based on loss experience, credit metrics, and loan segment characteristics.

 

     September 30, 2011  
     Individually Evaluated      Collectively Evaluated      Total  
     Specific
Valuation
     General
Valuation
     General
Valuation
     Market
Valuation
    
     (In thousands)  

Real estate loans:

              

Residential non-Home Today

   $ 22,492       $ 2,903       $ 10,760       $ 13,329       $ 49,484   

Residential Home Today

     18,213         3,725         3,027         6,060         31,025   

Home equity loans and lines of credit

     13,687         636         16,568         43,180         74,071   

Construction

     1,115         141         724         418         2,398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     55,507         7,405         31,079         62,987         156,978   

Consumer and other loans

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,507       $ 7,405       $ 31,079       $ 62,987       $ 156,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


     September 30, 2010  
       Individually Evaluated          Collectively Evaluated        Total  
     Specific
Valuation
     General
Valuation
     General
Valuation
     Market
Valuation
    
     (In thousands)  

Real estate loans:

              

Residential non-Home Today

   $ 14,734       $ 1,056       $ 10,385       $ 15,071       $ 41,246   

Residential Home Today

     6,715         3,037         1,281         2,298         13,331   

Home equity loans and lines of credit

     17,692         816         18,532         36,740         73,780   

Construction

     1,721         267         1,036         1,858         4,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     40,862         5,176         31,234         55,967         133,239   

Consumer and other loans

     1         0         0         0         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,863       $ 5,176       $ 31,234       $ 55,967       $ 133,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2009  
       Individually Evaluated          Collectively Evaluated        Total  
     Specific
Valuation
     General
Valuation
     General
Valuation
     Market
Valuation
    
     (In thousands)  

Real estate loans:

              

Residential non-Home Today

   $ 7,726       $ 650       $ 11,003       $ 3,299       $ 22,678   

Residential Home Today

     3,397         1,128         2,428         2,279         9,232   

Home equity loans and lines of credit

     13,945         57         18,875         24,717         57,594   

Construction

     0         0         2,962         2,781         5,743   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     25,068         1,835         35,268         33,076         95,247   

Consumer and other loans

     1         0         0         0         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,069       $ 1,835       $ 35,268       $ 33,076       $   95,248   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the fiscal year ended September 30, 2011, the total allowance for loan losses increased $23.7 million to $157.0 million, from $133.2 million at September 30, 2010, with $16.9 million, or 71%, of the increase attributable to additional allowances established for loans reviewed individually. In all cases the change in the balance of each loan segment’s individually evaluated allowances corresponded to the change in the balance of loans in each loan segment that were evaluated individually. In addition, specific valuation allowances increased due to declining home values and the impact of reduced mortgage insurance claims reimbursement for loans subject to private mortgage insurance issued by PMI Mortgage Insurance Company subsequent to its seizure by the Arizona Department of Insurance on October 22, 2011. Changes in the balances of GVAs and MVAs for the individual loan segments varied based on the particular circumstances most relevant to the individual loan segment. 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 the Consolidated Financial Statements for more information. Setting aside the changes related to the insignificant construction/consumer/other loans segments, changes in the balances of the GVAs and MVAs for the loans evaluated collectively related to the significant loan segments are described as follows:

 

   

Residential non-Home Today—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 reviewed individually), decreased $1.4 million during the fiscal year ended September 30, 2011. The ratio of this portion of the allowance for loan losses to the total balances of loans in this loan segment that were evaluated collectively, also decreased to 0.35% at September 30, 2011, from 0.43% at September 30, 2010, reflecting the improving credit profile of this loan segment due to the addition of $1.18 billion of high credit quality, adjustable-rate, residential, first-mortgage loans during the current fiscal year.

 

   

Residential Home Today—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 reviewed individually), increased by $5.5 million during the fiscal year ended September 30, 2011. The ratio of

 

31


 

this portion of the allowance for loan losses to the total balances of loans in this loan segment that were evaluated collectively, also increased to 7.07 % at September 30, 2011, from 2.40% at September 30, 2010, reflecting: (1) increased net charge-offs ($6.8 million during the fiscal year ended September 30, 2011 as compared to $4.7 million for the fiscal year ended September 30, 2010); (2) higher percentage of individually allocated allowances in relation to the balances of loans individually reviewed (16.3% at September 30, 2011 as compared to 7.52% at September 30, 2010) which indicates an increase in the level of losses that is expected when credits are resolved and is reflective of the continued decline that has occurred in housing values; and (3) the disproportionate impact on this loan segment that resulted when the Arizona Department of Insurance seized PMI Mortgage Insurance Co. (“PMIC”) and indicated that all claims payments would be reduced by 50%. As previously described, a majority of the loans in our Home Today portfolio required private mortgage insurance, most of which was provided by PMIC. Appropriate adjustments have been made to all of our affected SVAs, and our estimated loss severity factors were increased for loans evaluated collectively.

 

   

Home equity loans and lines of credit—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 reviewed individually), increased by $4.5 million during the fiscal year ended September 30, 2011. The ratio of this portion of the allowance for loan losses to the total balances of loans in this loan segment that were evaluated collectively, also increased to 2.42 % at September 30, 2011, from 1.97% at September 30, 2010, reflecting: (1) a slightly increased level of net charge-offs ($49.5 million for the fiscal year ended September 30, 2011 as compared to $48.8 million for the fiscal year ended September 30, 2010) which indicates an increase in the level of losses that is expected when credits are resolved and is reflective of the continued decline that has occurred in housing values; and (2) a slightly higher percentage of individually allocated allowances in relation to the balances of loans individually reviewed (36.1% at September 30, 2011 as compared to 33.0% at September 30, 2010). Additionally, the higher ratio was influenced by the declining balance of the portfolio as we have suspended offering this product to customers which tends to result in a remaining portfolio that is comprised more heavily of customers with limited ability to pursue financing alternatives.

Provisions for loan losses on home equity loans and lines of credit continue to comprise the majority of our losses and are expected to continue to do so for the foreseeable future, especially if non-performing loan balances and charge-offs remain at elevated levels. Additional discussion of non-performing home equity loan and lines of credit as well as charge-offs appears in “Management’s Discussion and Analysis of Financial Conditions and Operating Results.”

Our analysis for evaluating the adequacy of and the appropriateness of our loan loss provision and allowance for loan losses is continually refined as new information becomes available and actual loss experience is acquired. During the last several years, numerous modifications to our procedures have been made including the following:

 

   

as of June 30, 2008, in light of the weak housing market, the then current level of delinquencies and the instability in employment and economic prospects, our loan evaluation methodology related to home equity line of credit loans was expanded to include an accelerated individual loan loss review framework that evaluated all home equity lines of credit that were 90 days or more past due, and added $12 million to our provision for loan losses and the total allowance for loan losses carried on our balance sheet;

 

   

as of September 30, 2008, an expanded individual loan loss review framework was implemented for our residential real estate and home equity loans delinquent 180 days or more;

 

   

as of March 31, 2009 and as a precursor to the qualitative MVA that was subsequently added in September 2009, an additional $10 million was added to our traditional general valuation allowance which correspondingly increased our loan loss provision and the total allowance for loan losses carried on our balance sheet;

 

32


   

as of September 30, 2009, the qualitative MVA was formally added to our procedures to provide consideration of factors that may not be directly derived from historical portfolio performance. With its orientation aligned more closely with contemporaneous qualitative factors, as opposed to the more historically-oriented loss experience factors, the MVA ensures that the provision for loan losses recognized in our income statement, as well as the balance of the allowance for loan losses carried on our balance sheet, remain consistent with not only our experience, but also with our expectations, which are influenced by the then-current status of the economy and housing markets and how those conditions may impact the performance of loans held on our balance sheet on the reporting date. The MVA supplement to the “general” component of our overall allowance for loan losses added approximately $33 million to the provision for loan losses and the total allowance for loan losses carried on our balance sheet as of and for the quarter ended September 30, 2009;

 

   

as of September 30, 2010, the individual loan loss review methodology for home equity loans and lines of credit was enhanced to include updated individual reviews for all home equity loans and lines of credit that were 90 days or more past due. Previously, updated individual reviews were not performed if the previous review had been performed within the last 12 months; and

 

   

As of September 30, 2011, a portion of the SVA was reclassified as individually allocated GVA. This portion represents the allowance on individually reviewed loans dependent on cash flows, such as performing troubled debt restructurings, and a portion of the allowance on loans that represents further deterioration in the fair value not supported by an appraisal. Reclassifications have also been made to the SVA balances as of September 30, 2010 and 2009.

Additionally, as more delinquent loans have been subjected to individual evaluation, the portion of the allowance for loan losses identified as specific reserves increased, and, as a result, the loss experience factors used to evaluate the adequacy of the general loss reserve applicable to loans not evaluated for specific reserves decreased between March 31, 2008 and September 30, 2008. Adjustments to the historical loss experience factors continue to be made in response to weak housing values compounded by an excess of available housing units, particularly in the Florida market, unemployment concerns and uncertainties surrounding the future performance of restructured loans, and, as a result, the general loan loss allowance increased between September 30, 2010 and September 30, 2011.

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 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 by 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. In addition, all investment transactions are reviewed by the Executive Committee of the Association’s board of directors within 60 days of the transaction date to determine compliance with our investment policy. Any investment which, subsequent to its purchase, fails to meet the guidelines of the policy is reported to the Investment Committee, which decides whether to hold or sell the investment.

The Association’s current investment policy requires that it invest primarily in debt securities issued by the U.S. Government and agencies of the U.S. Government, which now include Fannie Mae and Freddie Mac. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and

 

33


guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICS”) issued or backed by securities issued by these governmental agencies. The investment policy also permits investments in asset-backed securities, banker’s acceptances, money market funds, term federal funds, repurchase agreements and reverse repurchase agreements.

The Association’s current investment policy does not permit investment in municipal bonds, corporate debt obligations, preferred or common stock of government agencies or equity securities other than its required investment in the common stock of the FHLB of Cincinnati. As of September 30, 2011, 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, Third Federal Savings and Loan is not permitted to invest in equity securities. This general restriction does not apply to the Company.

The Association’s current investment policy prohibits hedging through the use of such instruments as financial futures, interest rate options and swaps, without specific approval from its board of directors.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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. We do not have a trading portfolio.

Our investment portfolio at September 30, 2011, primarily consisted of $2.0 million of U.S. Government and federal agency obligations, $30.0 million in primarily fixed-rate securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, $367.7 million of REMICs and $8.5 million in money market accounts.

U.S. Government and Federal Agency Obligations. While U.S. Government and federal agency securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and as an interest rate risk hedge in the event of significant mortgage loan prepayments.

Mortgage-Backed Securities. We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. We invest in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae. During the financial market upheaval of 2008, concern arose about the financial health of Fannie Mae and Freddie Mac, the value of their guarantees and therefore, the continued existence of the secondary market for mortgage loans upon which the Company relies for liquidity and interest rate risk management. This market was preserved when, in September 2008, the Federal Housing Finance Agency placed Freddie Mac and Fannie Mae into conservatorship. The U.S. Treasury Department has established financing agreements to ensure that Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.

Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities (generally Ginnie Mae, Fannie Mae and Freddie Mac) pool and resell the participation interests in the form of securities to investors such as the Association, and guarantee the payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. While there has been significant disruption in the demand for private issuer mortgage-backed securities, the U.S. Treasury support for

 

34


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.

CMOs and 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.

 

     At September 30,  
     2011      2010      2009  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Investments available for sale:

                 

U.S. Government and agency obligations

   $ 2,000       $ 2,046       $ 7,000       $ 7,063       $ 9,000       $ 9,333   

REMICs

     5,244         5,337         8,718         8,794         5,017         5,053   

Money market accounts

     8,516         8,516         8,762         8,762         9,048         9,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available for sale

   $ 15,760       $ 15,899       $ 24,480       $ 24,619       $ 23,065       $ 23,434   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investments held to maturity:

                 

U.S. Government and agency obligations

                 

Freddie Mac certificates

   $ 2,724       $ 2,842       $ 4,441       $ 4,672       $ 8,023       $ 8,445   

Ginnie Mae certificates

     19,532         20,033         22,375         22,973         7,161         7,490   

REMICs

     362,489         367,268         611,000         619,486         552,792         560,408   

Fannie Mae certificates

     7,782         8,582         9,124         9,945         10,355         11,097   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 392,527       $ 398,725       $ 646,940       $ 657,076       $ 578,331       $ 587,440   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

35


Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio and the mortgage-backed securities portfolio at September 30, 2011 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, 2011 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)