10-K 1 tfslmaster9-30x201410xk.htm 10-K TFSL MASTER 9-30-2014 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2014
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 o
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  o    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  o
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 o
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.  x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company o
 
 
 
 
(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  o    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, 2014, as reported by the NASDAQ Global Select Market, was approximately $979.9 million.

At November 24, 2014 there were 300,224,689 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 75.65% 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 2015 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.



TFS Financial Corporation
INDEX
 
Part I
 
 
 
 
 
 
Item 1.
 
 
 
 
Item 1A.
 
 
 
 
Item 1B.
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
Part II
 
 
 
 
 
 
Item 5.
 
 
 
 
Item 6.
 
 
 
 
Item 7.
 
 
 
 
Item 7A.
 
 
 
 
Item 8.
 
 
 
 
Item 9.
 
 
 
 
Item 9A.
 
 
 
 
Item 9B.
 
 
 
 
Part III
 
 
 
 
 
 
Item 10.
 
 
 
 
Item 11.
 
 
 
 
Item 12.
 
 
 
 
Item 13.
 
 
 
 
Item 14.
 
 
 
 
Part IV
 
 
 
 
 
 
Item 15.
 


2


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


3


PART I

Item 1.
Business

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

4


TFS FINANCIAL CORPORATION
TFS Financial Corporation (“we,” “us,” or “our”) was organized in 1997 as the mid-tier stock holding company for the Association. We completed our initial public stock offering on April 20, 2007 and issued 100,199,618 shares of common stock, or 30.16% of our post-offering outstanding common stock, to subscribers in the offering. Additionally, at the time of the public offering, 5,000,000 shares of our common stock, or 1.50% of our outstanding shares, were issued to the newly formed charitable foundation, Third Federal Foundation. Third Federal Savings, MHC, our mutual holding company parent, holds the remainder of our outstanding common stock (227,119,132 shares). Net proceeds from our initial public stock offering were approximately $886 million and reflected the costs we incurred in completing the offering as well as a $106.5 million loan to the ESOP related to its acquisition of shares in the initial public stock offering.
Our ownership of the Association remains our primary business activity.
We also operate Third Capital, Inc. as a wholly-owned subsidiary. See Third Capital, Inc. below.
As the holding company of the Association, we are authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan holding companies, which include making equity investments and the acquisition of banking and financial services companies.
Our cash flow depends primarily on earnings from the investment of the portion of the net offering proceeds we retained, and any dividends we receive from the Association and Third Capital, Inc. All of our officers are also officers of the Association. In addition, we use the services of the support staff of the Association from time to time. We may hire additional employees, as needed, to the extent we expand our business in the future.
THIRD CAPITAL, INC.
Third Capital, Inc. is a Delaware corporation that was organized in 1998 as our wholly-owned subsidiary. At September 30, 2014, Third Capital, Inc. had consolidated assets of $79.2 million, and for the fiscal year ended September 30, 2014, Third Capital, Inc. had consolidated net income of $0.3 million. Third Capital, Inc. has no separate operations other than as the holding company for its operating subsidiaries, and as a minority investor or partner in other entities including minority investments in private equity funds. The following is a description of the entities, other than the private equity funds, in which Third Capital, Inc. is the owner, an investor or a partner.
Hazelmere Investment Group I, Ltd. This Ohio limited liability company engages in net lease transactions of commercial buildings in targeted markets. Third Capital, Inc. is a partner of this entity, receives a priority return on amounts contributed to acquire investment properties and has a 70% ownership interest in remaining earnings. Hazelmere Investment Group I, Ltd. incurred a net loss of $0.2 million during the fiscal year ended September 30, 2014.
Third Cap Associates, Inc. This Ohio corporation maintains minority investments in private equity funds, and owns 49% and 60% of two title agencies that provide escrow and settlement services in the State of Ohio, primarily to customers of the Association. For the fiscal year ended September 30, 2014, Third Cap Associates, Inc. recorded net income of $0.5 million.
Third Capital Mortgage Insurance Company. Through March 31, 2014, this Vermont corporation reinsured (on a second tier, excess loss basis) private mortgage insurance on residential mortgage loans originated by the Association. Effective March 31, 2014, all remaining contracts for reinsurance were terminated. For the fiscal year ended September 30, 2014, Third Capital Mortgage Insurance Company recorded net income of $0.1 million.
THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND
General
The Association is a federally chartered savings and loan association headquartered in Cleveland, Ohio, that was organized in 1938. In May 1997, the Association reorganized into its current two-tier mutual holding company structure. The Association’s principal business consists of originating and servicing residential real estate mortgage loans and attracting retail savings deposits.
The Association’s business strategy is to originate mortgage loans with interest rates that are competitive with those of similar products offered by other financial institutions in its markets. Similarly, the Association offers high-yield checking accounts and high-yield savings accounts and certificate of deposit accounts, each bearing interest rates that are competitive with similar products offered by other financial institutions in its markets. The Association expects to continue to pursue this business philosophy. While this strategy does not enable the Association to earn the highest rates of interest on loans that it

5


offers or to pay the lowest rates on its deposit accounts, the Association believes that this strategy is the primary reason for its successful growth in the past and will continue to be a successful strategy in the future.
The Association attracts retail deposits from the general public in the areas surrounding its main office and its branch offices. It also utilizes its internet website, direct mail solicitation and its customer service call center to generate loan applications and attract retail deposits. Brokered CDs have also been used as a cost effective funding alternative since September, 2013. In addition to residential real estate mortgage loans, the Association originates residential construction loans. Currently, the Association offers home equity lines of credit subject to certain property and credit performance conditions. The Association retains in its portfolio a large portion of the loans that it originates. Loans that the Association sells consist primarily of long-term, fixed-rate residential real estate mortgage loans. However, in March 2013, the Association sold a pool of long-term, adjustable-rate residential real estate mortgage loans to a private investor. Between June 2010 and May 2013, the volume of loan sales decreased significantly because, until May 2013, the Association had not adopted certain loan origination requirements for the sale of loans to Fannie Mae that became effective on July 1, 2010. The Association retains the servicing rights on all loans that it sells. The Association’s revenues are derived primarily from interest on loans and, to a lesser extent, interest on interest-bearing deposits in other financial institutions, deposits maintained at the FRS, federal funds sold, and investment securities, including mortgage-backed securities. The Association also generates revenues from fees and service charges. The Association’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and securities and proceeds from loan sales.
The Association’s website address is www.thirdfederal.com. Filings of the Company made with the SEC are available for free on the Association’s website. Information on that website is not and should not be considered a part of this document.
Market Area
The Association conducts its operations from its main office in Cleveland, Ohio, and from 38 additional, full-service branches and eight loan production offices located throughout the states of Ohio and Florida. In Ohio, the Association maintains 21 full-service offices located in the northeast Ohio counties of Cuyahoga, Lake, Lorain, Medina and Summit, four loan production offices located in the central Ohio counties of Franklin and Delaware (Columbus, Ohio) and four loan production offices located in the southern Ohio counties of Butler and Hamilton (Cincinnati, Ohio). In Florida, the Association maintains 17 full-service branches located in the counties of Pasco, Pinellas, Hillsborough, Sarasota, Lee, Collier, Palm Beach and Broward. While the economies and housing markets in Ohio and Florida were negatively impacted by the 2008 financial crisis and its aftermath, more recently, signs of improvement have begun to surface and are reflected in improving credit metrics (delinquencies, charge-offs). During the past year, the trend in employment has been stable in Ohio and positive in Florida and the trend in housing prices has also generally been increasing in both regions. However, the strength and sustainability of the recovery is not assured as, on an absolute basis, unemployment remains high and the economy's fragility persists.
The Association also provides savings products in all 50 states and first mortgage refinance loans and home equity loan products in 21 selected states and the District of Columbia through its customer service call center and its internet site.
Competition
The Association faces intense competition in its market areas both in making loans and attracting deposits. Its market areas have a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions, and it faces additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Some of its competitors offer products and services that the Association currently does not offer, such as commercial business loans, trust services and private banking.
The majority of the Association’s deposits are held in its offices located in Cuyahoga County, Ohio. As of June 30, 2014 (the latest date for which information is publicly available), the Association had $4.7 billion of deposits in Cuyahoga County, and ranked third among all financial institutions with offices in the county in terms of deposits, with a market share of 11.02%. As of that date, the Association had $6.1 billion of deposits in the State of Ohio, and ranked ninth among all financial institutions in the state in terms of deposits, with a market share of 2.25%. As of June 30, 2014, the Association had $2.7 billion of deposits in the State of Florida, and ranked 24th among all financial institutions in terms of deposits, with a market share of 0.58%.
The DFA, which was signed into law in July 2010, required that the FDIC amend its regulations on assessing insured institutions in order to fund the DIF. The resulting change effectively eliminated the funding cost advantage that borrowed funds generally had when compared to the funding cost associated with deposits. As a result, many financial institutions, including institutions that compete in our markets, have targeted retail deposit gathering as a more attractive funding source than borrowings, and have become more active and more competitive in their deposit product pricing. The combination of

6


reduced demand for borrowed funds 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 2013 through September 30, 2014, per data furnished by MarketTrac®, the Association had the third largest market share of conventional purchase mortgage loans originated in Cuyahoga County, Ohio. For the same period, it also had the third largest market share of conventional purchase mortgage loans originated in the seven northeast Ohio counties which comprise the Cleveland and Akron metropolitan statistical areas. In addition, based on the same statistics, the Association has consistently been one of the ten largest lenders in both Franklin County (Columbus, Ohio) and Hamilton County (Cincinnati, Ohio) since it entered those markets in 1999.
The Association’s primary strategy for increasing and retaining its customer base is to offer competitive deposit and loan rates and other product features, delivered with exceptional customer service, in each of the markets it serves.
We rely on the Association’s over 75-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, 2014, our ratio of shareholders’ equity to total assets was 15.6%. Our liquidity alternatives include management and monitoring of the level of liquid assets held in our portfolio as well as the maintenance of alternative wholesale funding sources. For the year ended September 30, 2014, our liquidity ratio averaged 6.25% (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 $32.1 million from the FHLB of Cincinnati under existing credit arrangements along with $147.6 million from the Federal Reserve Bank of Cleveland. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the immediately available limit at September 30, 2014 was $4.70 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement we would have to increase our ownership of FHLB of Cincinnati common stock by an additional $94.1 million. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.”
We continue to utilize a multi-faceted approach to support our efforts to instill customer and marketplace confidence. First, we provide thorough and timely information to all of our associates so as to prepare them for their day-to-day interactions with customers and other individuals who are not part of the Company. We believe that it is important that our customers and others sense the comfort level and confidence of our associates throughout their dealings. Second, we encourage our management team to maintain a presence and to be available in our branches and other areas of customer contact, so as to provide more opportunities for informal contact and interaction with our customers and community members. Third, our CEO remains accessible to both local and national media, as a spokesman for our institution as well as an observer and interpreter of financial marketplace situations and events. Fourth, we periodically include advertisements in local newspapers that display our strong capital levels and history of service. We also continue to emphasize our traditional tagline—“STRONG * STABLE * SAFE”—in our advertisements and branch displays. Finally, for customers who adhere to the old adage of trust but verify, we refer them to the safety/security rankings of a nationally recognized, independent rating organization that specializes in the evaluation of financial institutions, which has awarded the Association its highest rating for more than one hundred consecutive quarters.
Lending Activities
The Association’s principal lending activity is the origination of fixed-rate and adjustable-rate, first mortgage loans to purchase or refinance residential real estate. The Association also originates residential construction loans to individuals (for the construction of their personal residences by a qualified builder). The Association has also resumed its origination of home equity loans and lines of credit in Ohio and Florida.  We are also offering home equity lines of credit in 20 additional states. Between June 28, 2010 and March 20, 2012 the Association suspended the acceptance of new home equity line of credit applications. Effective March 20, 2012, the Association began offering new home equity lines of credit to qualifying existing home equity customers. In February 2013 we modified the product design and offered the product to all customers in Ohio, Florida and selected counties in Kentucky and in April 2013 we extended the offer to both existing home equity customers and new consumers in Ohio, Florida and selected counties in Kentucky. Over the course of the fiscal year ended September 30, 2014, we expanded the product offering to now include 21 states and the District of Columbia. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Monitoring and Limiting Our Credit Risk for additional information regarding home equity loans and lines of credit. At September 30, 2014, residential real estate, fixed-rate and adjustable-rate, first mortgage loans totaled $8.98 billion, or 83.7% of our loan portfolio, home equity loans and lines of credit totaled $1.70 billion, or 15.8% of our loan portfolio, and residential construction loans totaled $57.1 million, or 0.5% of our loan portfolio. At September 30, 2014 adjustable-rate, residential real estate, first mortgage loans totaled $3.45 billion and comprised 32.1% of our loan portfolio.

7


Loan Portfolio Composition. The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location for the periods indicated, excluding loans held for sale. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of consumer loans are immaterial. Therefore, neither was segregated by geographic location.
 
September 30,
 
2014
 
2013
 
2012
 
2011
 
2010
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
$
5,986,801

 
 
 
$
5,947,791

 
 
 
$
6,088,264

 
 
 
$
5,691,614

 
 
 
$
4,843,804

 
 
Florida
1,570,087

 
 
 
1,465,907

 
 
 
1,396,612

 
 
 
1,269,242

 
 
 
1,168,701

 
 
Other
1,271,951

 
 
 
704,813

 
 
 
458,289

 
 
 
159,933

 
 
 
125,949

 
 
Total
8,828,839

 
82.2
%
 
8,118,511

 
79.4
%
 
7,943,165

 
76.5
%
 
7,120,789

 
71.5
%
 
6,138,454

 
65.4
%
Residential Home
    Today(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
146,974

 
 
 
170,206

 
 
 
199,456

 
 
 
252,879

 
 
 
268,983

 
 
Florida
6,909

 
 
 
7,826

 
 
 
8,540

 
 
 
10,784

 
 
 
10,940

 
 
Other
313

 
 
 
321

 
 
 
329

 
 
 
356

 
 
 
610

 
 
Total
154,196

 
1.5

 
178,353

 
1.7

 
208,325

 
2.0

 
264,019

 
2.6

 
280,533

 
3.0

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
675,911

 
 
 
721,890

 
 
 
838,492

 
 
 
982,591

 
 
 
1,145,819

 
 
Florida
475,375

 
 
 
539,152

 
 
 
628,554

 
 
 
712,087

 
 
 
797,658

 
 
California
213,309

 
 
 
227,841

 
 
 
256,900

 
 
 
293,307

 
 
 
324,778

 
 
Other
332,334

 
 
 
369,515

 
 
 
431,550

 
 
 
503,213

 
 
 
580,435

 
 
Total
1,696,929

 
15.8

 
1,858,398

 
18.2

 
2,155,496

 
20.8

 
2,491,198

 
25.0

 
2,848,690

 
30.4

Construction
57,104

 
0.5
 
72,430

 
0.7

 
69,152

 
0.7

 
82,048

 
0.8

 
100,404

 
1.1

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automobile

 

 

 

 

 

 

 

 
1

 

Other loans
4,721

 

 
4,100

 

 
4,612

 

 
6,868

 
0.1

 
7,198

 
0.1

Total loans receivable
10,741,789

 
100.0
%
 
10,231,792

 
100.0
%
 
10,380,750

 
100.0
%
 
9,964,922

 
100.0
%
 
9,375,280

 
100.0
%
Deferred loan fees, net
(1,155
)
 
 
 
(13,171
)
 
 
 
(18,561
)
 
 
 
(19,854
)
 
 
 
(15,283
)
 
 
Loans in process
(28,585
)
 
 
 
(42,018
)
 
 
 
(36,736
)
 
 
 
(37,147
)
 
 
 
(45,008
)
 
 
Allowance for loan
    losses
(81,362
)
 
 
 
(92,537
)
 
 
 
(100,464
)
 
 
 
(156,978
)
 
 
 
(133,240
)
 
 
Total loans receivable, net
$
10,630,687

 
 
 
$
10,084,066

 
 
 
$
10,224,989

 
 
 
$
9,750,943

 
 
 
$
9,181,749

 
 
 ______________________
(1)
Residential Core and Home Today loans are primarily one- to four-family residential mortgage loans. See the Residential Real Estate Mortgage Loans section which follows for a further description of Home Today and Core loans.

8


Loan Portfolio Maturities. The following table summarizes the scheduled repayments of the loan portfolio at September 30, 2014, according to each loan's final due date. Demand loans, loans having no stated repayment schedule or maturity, are reported as being due in the fiscal year ending September 30, 2015. 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
 
Construction
Loans
 
Other Consumer Loans
 
Total
Core
 
Home
Today
 
 
(In thousands)
2015
$
619

 
$
1

 
$
1,942

 
$

 
$
4,721

 
$
7,283

2016
3,612

 
15

 
1,654

 

 

 
5,281

2017
15,500

 
52

 
2,016

 

 

 
17,568

2018 to 2019
88,711

 
968

 
4,940

 

 

 
94,619

2020 to 2024
1,635,360

 
2,585

 
102,397

 
100

 

 
1,740,442

2025 to 2029
1,429,446

 
716

 
1,427,888

 
8,203

 

 
2,866,253

2030 and beyond
5,655,591

 
149,859

 
156,092

 
48,801

 

 
6,010,343

Total
$
8,828,839

 
$
154,196

 
$
1,696,929

 
$
57,104

 
$
4,721

 
$
10,741,789

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2014 that are contractually due after September 30, 2015.
 
Due After September 30, 2015
 
Fixed
 
Adjustable
 
Total
 
(In thousands)
Real estate loans:
 
 
 
 
 
Residential Core
$
5,375,300

 
$
3,452,920

 
$
8,828,220

Residential Home Today
154,097

 
98

 
154,195

Home Equity Loans and Lines of Credit(1)
22,837

 
1,672,150

 
1,694,987

Construction
37,747

 
19,357

 
57,104

Total
$
5,589,981

 
$
5,144,525

 
$
10,734,506

Residential Real Estate Mortgage Loans. The Association’s primary lending activity is the origination of residential real estate mortgage loans. A comparison of 2014 data to the corresponding 2013 data can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” The Association currently offers fixed-rate conventional mortgage loans with terms of 30 years or less that are fully amortizing with monthly loan payments, and adjustable-rate mortgage loans that amortize over a period of up to 30 years, provide an initial fixed interest rate for three or five years and then adjust annually. Effective March 11, 2009, the Association discontinued offering adjustable-rate, “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, 2014, there were no longer any “interest only” residential real estate mortgage loans held in the Association's portfolio.
Historically, residential real estate mortgage loans were generally underwritten according to Fannie Mae’s dollar limit requirements, and the Association referred to loans that conformed 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 sale eligibility that, prior to May 2013, we had not fully adopted, as explained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Controlling Our Interest Rate Risk Exposure. The Association generally originates both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which is currently $417,000 and $625,000, respectively, for single-family homes in most of our lending markets. The Association also originates loans in amounts that exceed the lending limit for conforming loans, which the Association refers to as “jumbo loans.” The Association generally underwrites jumbo loans in a manner similar to conforming loans. Jumbo loans are not uncommon in the Association’s market areas. 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.

9


The Association has always considered the promotion of home ownership a primary goal. In that regard, it has historically offered affordable housing programs in all of its market areas. These programs are targeted toward low- and moderate-income home buyers. The Association’s primary program is called Home Today and is described in detail below. Prior to March 27, 2009, loans originated under the Home Today program had higher risk characteristics. The Association did not classify Home Today as a sub-prime lending program based on the exclusion provided to community development loans in the Expanded Guidance for Sub-prime Lending issued by the OTS and the OCC. In the aftermath of the 2008 financial crisis, a great deal of attention was focused on sub-prime lending and its negative effect on borrowers and financial markets. Borrowers in our Home Today program are not charged higher fees or interest rates than our Core (non-Home Today) borrowers. Home Today loans are not "interest only" or negative amortizing and contain no low initial payment features or adjustable interest rates, which are features often associated with sub-prime lending. While the credit risk profiles of the Association’s borrowers in the Home Today program are generally higher risk than the credit risk profiles of its Core borrowers, the Association attempts to mitigate that higher risk through the use of private mortgage insurance and continued pre- and post-purchase counseling. The Association’s philosophy has been to provide borrowers the opportunity for home ownership within their financial means.
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 Core 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 the Association's private mortgage insurance carrier. Because the Association previously applied less stringent underwriting and credit standards to these loans, the vast majority of loans originated under the Home Today program generally has greater credit risk than our Core residential real estate mortgage loans. Effective October 2007, the private mortgage insurance carrier that provides coverage for the Home Today loans with loan-to-value ratios in excess of 80% imposed more restrictive lending requirements that decreased the volume of Home Today lending, a decrease we expect will continue. As of September 30, 2014, the Association had $154.2 million of loans outstanding that were originated through its Home Today program, most of which were originated prior to March 27, 2009. Originations under the Home Today program have decreased significantly as a result of these new requirements. At September 30, 2014, of the loans that were originated under the Home Today program, 16.8% were delinquent 30 days or more in repayments, compared to 0.6% for the portfolio of Core loans as of that date. At September 30, 2014, $15.1 million, or 9.9%, of loans originated under the Home Today program were delinquent 90 days and over and $30.0 million of Home Today loans were non-accruing loans, representing 22.1% of total non-accruing loans as of that date. See “—Non-performing Assets and Restructured Loans—Delinquent Loans” for a discussion of the asset quality of this portion of the Association’s loan portfolio.
Prior to November 25, 2008 the Association also originated loans under its high loan-to-value 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, 2014, the Association had $131.8 million of loans outstanding that were originated through its High LTV program, $115.4 million of which the Association has insured through the private mortgage insurance carrier. The High LTV program was suspended on 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 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

10


interest rate risk management needs, and have a lower risk-weight than the underlying loans, which reduces the Association’s regulatory capital requirements. While the sales of first mortgage loans remain strategically important for us, since fiscal 2010, they have played only a minor role in our management of interest rate risk.
The Association currently retains the servicing rights on all loans sold in order to generate fee income and reinforce its commitment to customer service. One- to four-family residential mortgage real estate loans that have been sold were underwritten generally to Fannie Mae guidelines and comply with applicable federal, state and local laws. At the time of the closing of these loans the Association owned the loans and subsequently sold them to Fannie Mae and others providing normal and customary representations and warranties, including representations and warranties related to compliance, generally with Fannie Mae underwriting standards. At the time of sale, the loans were free from encumbrances except for the mortgages filed by the Association which, with other underwriting documents, were subsequently assigned and delivered to Fannie Mae and others. For the fiscal years ended September 30, 2014 and 2013, the Association recognized servicing fees, net of amortization, related to these servicing rights of $6.8 million and $5.4 million, respectively. As of September 30, 2014 and 2013, the principal balance of loans serviced for others totaled $2.51 billion and $2.97 billion, respectively. On November 7, 2013, the Association entered into a resolution agreement with Fannie Mae pursuant to which, on November 14, 2013, the Association remitted $3.1 million to Fannie Mae. The remittance amount included $0.4 million related to outstanding mortgage insurance claim payments on 42 loans. Under the terms of the resolution agreement, Fannie Mae withdrew all outstanding repurchase and make-whole demands and generally waived its right to enforce future repurchase obligations with respect to all mortgage loans (approximately 23,400 active loans or loans with a remaining balance) that were originated by the Association between January 1, 2000 and December 31, 2008 and delivered to Fannie Mae prior to January 1, 2009. At September 30, 2014, substantially all of the loans serviced for Fannie Mae and others were performing in accordance with their contractual terms and management believes that it has no material repurchase obligations associated with these loans. However, an accrual for $1.1 million has been maintained for potential repurchase or loss reimbursement requests at September 30, 2014. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies: Mortgage Servicing Rights for further discussion.
The Association currently offers “Smart Rate” adjustable-rate mortgage loan products secured by residential properties with interest rates that are fixed for an initial period of three or five years, after which the interest rate generally resets every year based upon a contractual spread or margin above the Prime Rate as published in the Wall Street Journal. These adjustable-rate loans provide the borrower with an attractive rate reset option, based on the Association’s then current lending rates. Prior to July 2010, the Association’s adjustable-rate mortgage loan products secured by residential properties offered interest rates that were fixed for an initial period ranging from one year to five years, after which the interest rate generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the FRS (“Traditional ARM”). All of the Association’s adjustable-rate mortgage loans are subject to periodic and lifetime limitations on interest rate changes. 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 a cap of five percentage points on the initial change in interest rate, with a two percentage point cap on subsequent changes and a cap of five percentage points for the life of the loan. Many of the borrowers who select adjustable-rate mortgage loans have shorter-term credit needs than those who select long-term, fixed-rate mortgage loans. The Association will permit borrowers to convert non-“Smart Rate” adjustable-rate mortgage loans into fixed-rate mortgage loans at no cost to the borrower. The Association has never offered “Option ARM” loans, where borrowers can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. At September 30, 2014, "Smart Rate" adjustable-rate mortgage loans totaled $3.29 billion, or 94.6% of the adjustable-rate mortgage loan portfolio and Traditional ARMs totaled $189.4 million, or 5.4% of the adjustable-rate mortgage loan portfolio.
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. At September 30, 2014, there were no longer any “interest only” residential real estate mortgage loans held in the Association's portfolio.
The Association requires title insurance on all of its residential real estate mortgage loans. The Association also requires that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance up to $250 thousand) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. A majority of its residential real estate mortgage loans have a mortgage escrow account from which disbursements are made for real estate

11


taxes and to a lesser extent for hazard insurance and flood insurance. The Association does not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan.
Home Equity Loans and Home Equity Lines of Credit. The Association offers home equity loans and home equity lines of credit, which are primarily secured by a second mortgage on residences. The level of home equity products varied significantly between June 28, 2010 and September 30, 2014. Prior to June 28, 2010, the Association offered home equity loans and home equity lines of credit. The Association also offered a home equity lending product that was secured by a third mortgage, although the Association only originated this loan to borrowers where the Association also held the second mortgage. Between June 28, 2010 and March 19, 2012, we suspended the acceptance of new home equity credit applications with the exception of bridge loans and, in accordance with a reduction plan that was accepted by our primary federal banking regulator in December 2010, we actively pursued strategies to decrease the outstanding balance of our home equity lending portfolio as well as our exposure to undrawn home equity lines of credit. During the quarter ended June 30, 2011, we achieved the balance and exposure reduction targets included in the home equity lending reduction plan. Beginning March 20, 2012, we again offered new home equity lines of credit to qualifying existing home equity customers. In February 2013 we further modified the product design and in April 2013 we extended the offer to both existing home equity customers and new consumers in Ohio, Florida and selected counties in Kentucky. Over the course of the fiscal year ended September 30, 2014, we expanded the home equity product offering to now include 21 states and the District of Columbia. These offers were, and are, subject to certain property and credit performance conditions which, among other items, related to CLTV, geography, borrower income verification, minimum credit scores and draw period duration. At September 30, 2014 and 2013, home equity loans totaled $162.1 million, or 1.5%, and $167.0 million, or 1.6%, respectively, of total loans receivable (which included $135.9 million and $128.9 million respectively, of home equity lines of credit which were in the amortization period and no longer eligible to be drawn upon and $1.1 million and $1.5 million of bridge loans), and home equity lines of credit totaled $1.53 billion, or 14.3%, and $1.69 billion, or 16.5%, respectively, of total loans receivable. A bridge loan permits a borrower to utilize the existing equity in their current home to fund the purchase of a new home before the current home is sold. Bridge loans are originated for a one-year term, with no prepayment penalties. These loans have fixed interest rates, and are currently limited to a combined 80% loan-to-value ratio (first and second mortgage liens). The Association charges a closing fee with respect to bridge loans. Additionally, at September 30, 2014 and 2013, the unadvanced amounts of home equity lines of credit totaled $1.13 billion and $1.14 billion, respectively.
Prior to June 28, 2010, the underwriting standards for home equity loans and home equity lines of credit included an evaluation of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. In addition, prior to June 28, 2010, through a series of modifications and program adjustments, the home equity lending parameters became increasingly restrictive and included the additional evaluation of the applicant’s employment and income verification. From a geographic perspective, product offerings peaked in 2008 when offers were extended (primarily via direct mail) to targeted borrowers in 18 states. Generally, the least restrictive 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 reduced to 620, maximum loan amounts reached $250,000 and pricing for lines of credit reached Prime minus 1.01% when drawn balances exceeded $50,000. The Association originated its home equity loans and home equity lines of credit without application fees (except for bridge loans) or borrower-paid closing costs. Home equity loans were offered with fixed interest rates, were fully amortizing and had terms of up to 15 years. The Association’s home equity lines of credit were offered with adjustable rates of interest indexed to the Prime Rate, as reported in The Wall Street Journal.


12


The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of September 30, 2014. Home equity lines of credit in the draw period are reported according to 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
$
1,226,533

 
$
578,484

 
0.18
%
 
59
%
 
61
%
Florida
637,856

 
455,730

 
0.52
%
 
62
%
 
75
%
California
297,030

 
203,798

 
0.11
%
 
67
%
 
65
%
Other(1)
501,662

 
296,804

 
0.30
%
 
63
%
 
66
%
Total home equity lines of credit in draw
     period
2,663,081

 
1,534,816

 
0.29
%
 
61
%
 
65
%
Home equity lines in repayment, home equity
     loans and bridge loans
162,113

 
162,113

 
2.79
%
 
67
%
 
52
%
Total
$
2,825,194

 
$
1,696,929

 
0.53
%
 
62
%
 
63
%
______________________
(1)
No individual other state has a committed or drawn balance greater than 10% of total loans and 5% of equities.
(2)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)
Current Mean CLTV is based on best available first mortgage and property values as of September 30, 2014. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
At September 30, 2014, 42.8% of our home equity lending portfolio was either in first lien position (25.4%) or was in a subordinate (second) lien position behind a first lien that we held (8.2%) or behind a first lien that was held by a loan that we originated, sold and now service for others (9.2%). At September 30, 2014, 19.0% of our home equity line of credit portfolio in the draw period was making only the minimum payment on their outstanding line balance.


13


The following table sets forth by calendar year, the credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of September 30, 2014. Home equity lines of credit in the draw period are included in 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:
 
 
 
 
 
 
 
 
 
2004 and prior
$
560,936

 
$
295,239

 
0.42
%
 
55
%
 
57
%
2005
95,205

 
56,841

 
0.59
%
 
67
%
 
69
%
2006
233,814

 
150,815

 
0.47
%
 
65
%
 
75
%
2007
363,680

 
254,066

 
0.39
%
 
67
%
 
77
%
2008
768,840

 
491,409

 
0.23
%
 
63
%
 
66
%
2009
310,301

 
154,589

 
0.06
%
 
55
%
 
59
%
2010
27,234

 
12,303

 
%
 
57
%
 
55
%
2011 (3)
232

 
160

 
%
 
39
%
 
53
%
2012
27,641

 
12,291

 
%
 
51
%
 
48
%
2013
82,649

 
37,651

 
%
 
59
%
 
55
%
2014
192,549

 
69,452

 
%
 
60
%
 
59
%
Total home equity lines of credit in
     draw period
2,663,081

 
1,534,816

 
0.29
%
 
61
%
 
65
%
Home equity lines in repayment, home equity
     loans and bridge loans
162,113

 
162,113

 
2.79
%
 
67
%
 
52
%
Total
$
2,825,194

 
$
1,696,929

 
0.53
%
 
62
%
 
63
%
______________________
(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, 2014. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
(3)
Amounts represent home equity lines of credit that were previously originated, and that were closed and subsequently replaced in 2011.
In general, the home equity line of credit product originated prior to June 2010 (when new home equity lending was temporarily suspended) was characterized by a ten year draw period followed by a ten year repayment period; however, there were two types of transactions that could result in a draw period that extended beyond ten years. The first transaction involved customer requests for increases in the amount of their home equity line of credit. When the customer’s credit performance and profile supported the increase, the draw period term was reset for the ten year period following the date of the increase in the home equity line of credit amount. A second transaction that impacted the draw period involved extensions. For a period of time prior to June 2008, the Association had a program that evaluated home equity lines of credit that were nearing the end of their draw period and made a determination as to whether or not the customer should be offered an additional ten year draw period. If the account and customer met certain pre-established criteria, an offer was made to extend the otherwise expiring draw period by ten years from the date of the offer. If the customer chose to accept the extension, the origination date of the account remained unchanged but the account would have a revised draw period that was extended by ten years. As a result of these two programs, the reported draw periods for certain home equity line of credit accounts exceed ten years.

14


The following table sets forth by fiscal year that the draw period expires, the principal balance of home equity lines of credit in the draw period as of September 30, 2014, segregated by the current combined LTV range.
 
Current CLTV Category
Home equity lines of credit in draw period (by End of Draw Fiscal Year):
< 80%
 
80 - 89.9%
 
90 - 100%
 
>100%
 
Unknown (2)
 
Total
 
(Dollars in thousands)
2015
$51,497
 
$8,882
 
$8,153
 
$5,872
 
$1,073
 
$75,477
2016
81,562

 
20,460

 
19,030

 
39,256

 
818

 
161,126

2017
127,045

 
35,683

 
29,427

 
68,788

 
4,235

 
265,178

2018 (1)
380,331

 
85,249

 
64,022

 
68,265

 
8,094

 
605,961

2019 (1)
321,392

 
48,931

 
12,543

 
5,555

 
5,918

 
394,339

2020
28,449

 
3,017

 
528

 
314

 
214

 
32,522

Post 2020
113

 
6

 
44

 

 
50

 
213

   Total
$990,389
 
$202,228
 
$133,747
 
$188,050
 
$20,402
 
$1,534,816
______________________
(1)
Home equity lines of credit whose draw period ends in fiscal years 2018 and 2019, include $19,446 and $82,812, respectively, of lines where the customer has an amortizing payment during the draw period.
(2)
Market data necessary for stratification is not readily available.
As shown in the origination by year table,which is the second preceding table above, the percents of loans delinquent 90 days or more (seriously delinquent) originated during the years preceding the 2008 financial and housing crisis are comparatively higher than the years following 2008. Those years saw rapidly increasing housing prices, especially in our Florida market. As the housing prices declined along with the general economic downturn and higher levels of unemployment that accompanied the 2008 financial crisis, we see that reflected in delinquencies for those years. Home equity lines of credit originated during those years also saw higher loan amounts, higher permitted loan-to-value ratios, and lower credit scores. Reflective of the general decrease in housing values since 2006 and through the aftermath of the 2008 financial crisis, current mean CLTV percentages remain higher than the mean CLTV percentages at origination.
In light of the past weakness in the housing market, the current level of delinquencies and the uncertainty with respect to future employment levels and economic prospects, we currently conduct an expanded loan level evaluation of our home equity lines of credit which are delinquent 90 days or more.
The following table sets forth the breakdown of current mean CLTV percentages for our home equity lines of credit in the draw period as of September 30, 2014.
 
Credit
Exposure
 
Principal
Balance
 
Percent
of Total
 
Percent
Delinquent
90 days or
More
 
Mean
CLTV
Percent at
Origination(2)
 
Current
Mean
CLTV
Percent(3)
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Home equity lines of credit in draw period (by current mean CLTV):
 
 
 
 
 
 
 
 
 
 
 
< 80%
$
1,950,752

 
$
990,389

 
64.5
%
 
0.26
%
 
55
%
 
54
%
80 - 89.9%
300,706

 
202,228

 
13.2
%
 
0.48
%
 
77
%
 
85
%
90 - 100%
170,726

 
133,747

 
8.7
%
 
0.26
%
 
79
%
 
94
%
> 100%
205,313

 
188,050

 
12.3
%
 
0.31
%
 
80
%
 
120
%
Unknown (1)
35,584

 
20,402

 
1.3
%
 
%
 
55
%
 
(1
)
 
$
2,663,081

 
$
1,534,816

 
100.0
%
 
0.29
%
 
61
%
 
65
%
______________________
(1)
Market data necessary for stratification is not readily available.
(2)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)
Current Mean CLTV is based on best available first mortgage and property values as of September 30, 2014. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in

15


the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
Construction Loans. The Association originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Association’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Association offers construction/permanent loans with fixed or adjustable rates, and a current maximum loan-to-completed-appraised value ratio of 80%. At September 30, 2014, construction loans totaled $57.1 million, or 0.5% of total loans receivable. At September 30, 2014, the unadvanced portion of these construction loans totaled $28.6 million.
The Association’s builder loans consisted of loans for homes that had been pre-sold as well as loans to developers that build homes before a buyer has been identified. Effective August 30, 2011, the Association made the strategic decision to exit the commercial construction loan business and ceased accepting new builder relationships. Builder commitments in place at that time were honored for a limited period, giving our customers the ability to secure new borrowing relationships. At September 30, 2014, no balances remain in the builder loan portfolio. The balance at September 30, 2013 was $1.4 million.
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Association may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. This is more likely to occur when home prices are falling.
Loan Originations, Purchases, Sales, Participations and Servicing. Lending activities are conducted primarily by the Association’s loan personnel (all of whom are salaried employees) operating at our main and branch office locations and at our loan production offices. All loans that the Association originates are underwritten pursuant to its policies and procedures, which are generally consistent with Fannie Mae underwriting guidelines, subject to the discussion below. The Association originates both adjustable-rate and fixed-rate loans and advertises extensively throughout its market area. Its ability to originate fixed- or adjustable-rate loans is dependent upon the relative consumer demand for such loans, which is affected by current market interest rates as well as anticipated future market interest rates. The Association’s loan origination and sales activity may be adversely affected by a rising interest rate environment or economic recession, which typically results in decreased loan demand. Most of the Association’s residential real estate mortgage loan originations are generated by its in-house loan representatives, by direct mail solicitations, by referrals from existing or past customers, by referrals from local builders and real estate brokers, from calls to its telephone call center and from the internet. From 2005 to October 2010, the Association maintained a relationship with one mortgage broker, which is affiliated with a national builder.
The Association decides whether to retain the loans that it originates, sell loans in the secondary market or securitize loans after evaluating current and projected market interest rates, its interest rate risk objectives, its liquidity needs and other factors. The Association sold to Fannie Mae, in either whole loan or security form, $76.0 million of long-term, fixed-rate residential real estate mortgage loans (all on a servicing retained basis) during the fiscal year ended September 30, 2014. In addition to sales to Fannie Mae, during the fiscal year ended September 30, 2013, the Association also sold to private parties, non-agency eligible, long-term fixed-rate and adjustable-rate loans on a servicing retained basis. As described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Controlling Our Interest Rate Risk Exposure, effective July 1, 2010, Fannie Mae, historically the Association’s primary loan investor, implemented certain loan origination requirement changes affecting loan eligibility that, prior to May 2013, we had not adopted. In May 2013, we implemented loan origination changes with respect to a portion of our loan originations, which were approved by Fannie Mae on November 15, 2013, which allow that portion of our first mortgage loan originations that were processed using the revised procedures to be eligible for securitization and sale in Fannie Mae mortgage backed security form. The balance of loans held for sale was $5.0 million at September 30, 2014 all of which were originated pursuant to the stipulations of Fannie Mae's HARP II.
Historically, the Association has retained the servicing rights on all residential real estate mortgage loans that it has sold, and intends to continue this practice into the future. At September 30, 2014, the Association serviced loans owned by others with a principal balance of $2.51 billion, including $4.8 million of loans sold to Fannie Mae subject to recourse. All recourse sales occurred prior to the year 2000. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. The

16


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, 2014 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.
Delinquent Loans. The following tables set forth the number and recorded investment in loan delinquencies by type, segregated by geographic location and severity of delinquency at the dates indicated. The construction loan portfolio is secured by properties located in Ohio and there were no delinquencies in the consumer and other loan portfolios; therefore, neither was segregated by geography. 
 
Loans Delinquent For
 
 
 
30-89 Days
 
90 Days or Over
 
Total
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
Ohio
108

 
$
10,416

 
263

 
$
22,218

 
371

 
$
32,634

Florida
14

 
2,006

 
141

 
14,291

 
155

 
16,297

Other
3

 
544

 
4

 
942

 
7

 
1,486

Total Residential Core
125

 
12,966

 
408

 
37,451

 
533

 
50,417

Residential Home Today
 
 
 
 
 
 
 
 
 
 
 
Ohio
168

 
9,797

 
328

 
14,256

 
496

 
24,053

Florida
9

 
643

 
18

 
849

 
27

 
1,492

Total Residential Home Today
177

 
10,440

 
346

 
15,105

 
523

 
25,545

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
Ohio
123

 
3,753

 
214

 
3,637

 
337

 
7,390

Florida
36

 
2,365

 
184

 
3,010

 
220

 
5,375

California
11

 
753

 
16

 
298

 
27

 
1,051

Other
21

 
958

 
59

 
2,092

 
80

 
3,050

Total Home equity loans and lines of credit
191

 
7,829

 
473

 
9,037

 
664

 
16,866

Construction
1

 
200

 

 

 
1

 
200

Other consumer loans

 

 

 

 

 

Total
494

 
$
31,435

 
1,227

 
$
61,593

 
1,721

 
$
93,028


17


 
 
Loans Delinquent For
 
 
 
 
 
30-89 Days
 
90 Days or Over
 
Total
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
Ohio
165

 
$
17,064

 
340

 
$
31,498

 
505

 
$
48,562

Florida
17

 
2,743

 
200

 
24,405

 
217

 
27,148

Other
3

 
465

 
3

 
581

 
6

 
1,046

Total Residential Core
185

 
20,272

 
543

 
56,484

 
728

 
76,756

Residential Home Today
 
 
 
 
 
 
 
 
 
 
 
Ohio
213

 
14,213

 
377

 
17,748

 
590

 
31,961

Florida
6

 
373

 
16

 
593

 
22

 
966

Total Residential Home Today
219

 
14,586

 
393

 
18,341

 
612

 
32,927

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
Ohio
151

 
5,304

 
200

 
5,132

 
351

 
10,436

Florida
56

 
4,228

 
170

 
3,589

 
226

 
7,817

California
9

 
749

 
27

 
1,479

 
36

 
2,228

Other
30

 
1,990

 
49

 
1,842

 
79

 
3,832

Total Home equity loans and lines of credit
246

 
12,271

 
446

 
12,042

 
692

 
24,313

Construction

 

 
2

 
41

 
2

 
41

Other consumer loans

 

 

 

 

 

Total
650

 
$
47,129

 
1,384

 
$
86,908

 
2,034

 
$
134,037


 
Loans Delinquent For
 
 
 
 
 
30-89 Days
 
90 Days or Over
 
Total
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
Ohio
181

 
$
19,301

 
436

 
$
43,871

 
617

 
$
63,172

Florida
32

 
5,974

 
258

 
30,873

 
290

 
36,847

Other
2

 
401

 
1

 
63

 
3

 
464

Total Residential Core
215

 
25,676

 
695

 
74,807

 
910

 
100,483

Residential Home Today
 
 
 
 
 
 
 
 
 
 
 
Ohio
208

 
15,068

 
519

 
26,604

 
727

 
41,672

Florida
7

 
542

 
21

 
913

 
28

 
1,455

Total Residential Home Today
215

 
15,610

 
540

 
27,517

 
755

 
43,127

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
Ohio
133

 
4,572

 
145

 
5,994

 
278

 
10,566

Florida
58

 
3,657

 
94

 
6,210

 
152

 
9,867

California
16

 
1,637

 
20

 
1,863

 
36

 
3,500

Other
27

 
2,020

 
43

 
2,520

 
70

 
4,540

Total Home equity loans and lines of credit
234

 
11,886

 
302

 
16,587

 
536

 
28,473

Construction

 

 
8

 
377

 
8

 
377

Other consumer loans

 

 

 

 

 

Total
664

 
$
53,172

 
1,545

 
$
119,288

 
2,209

 
$
172,460

 

18


 
Loans Delinquent For
 
 
 
 
 
30-89 Days
 
90 Days or Over
 
Total
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
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 Core
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
 
 
 
 
 
 
 
 
 
 
 
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 consumer loans

 

 

 

 

 

Total
784

 
$
66,354

 
1,961

 
$
218,793

 
2,745

 
$
285,147

 
Loans Delinquent For
 
 
 
 
 
30-89 Days
 
90 Days or Over
 
Total
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
September 30, 2010
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
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 Core
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
 
 
 
 
 
 
 
 
 
 
 
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 consumer loans

 

 
2

 
1

 
2

 
1

Total
909

 
$
74,422

 
2,421

 
$
254,361

 
3,330

 
$
328,783

Total loans seriously delinquent (i.e. delinquent 90 days or over) decreased 0.28% to 0.57% of total net loans at September 30, 2014, from 0.85% at September 30, 2013. Seriously delinquent loans to total net loans decreased in the residential Core portfolio from 0.56% to 0.35%. Such loans in the residential Home Today portfolio decreased from 0.18% to 0.14%; and in the home equity loans and lines of credit portfolio decreased from 0.10% to 0.08%. The SVA charge-off that was recorded during the quarter ended December 31, 2011 contributed to the decrease in the reported balances of delinquent and nonperforming loans during fiscal 2012. The balance of the SVA at September 30, 2011 was $55.5 million. During the last

19


several years, the inability of borrowers to repay their loans is primarily a result of high unemployment and uncertain economic prospects in our primary lending markets. Although regional employment levels have improved, the breadth and sustainability of the economic recovery remains tenuous and accordingly, we expect some borrowers who are current on their loans at September 30, 2014 to experience payment problems in the future. The excess number of housing units available for sale in certain markets today also may limit a borrower's ability to sell a home he or she can no longer afford. In many Florida areas, housing values continue to remain depressed due to prior rapid building and speculation, which has resulted in considerable inventory on the market and may limit a borrower’s ability to sell a home. As a result, we expect the level of loans delinquent 90 days or more will remain elevated in the foreseeable future.
Non-performing Assets and Restructured Loans; Collection Procedures. Within 15 days of a borrower’s delinquency, the Association attempts personal, direct contact with the borrower to determine the reason for the delinquency, to ensure that the borrower correctly understands the terms of the loan and to emphasize the importance of making payments on or before the due date. If necessary, subsequent late charges and delinquent notices are issued and the borrower’s account will be monitored on a regular basis thereafter. The Association also mails system-generated reminder notices on a monthly basis. When a loan is more than 30 days past due, the Association attempts to contact the borrower and develop a plan of repayment. By the 90th day of delinquency, the Association may recommend foreclosure. By this date, if a repayment agreement has not been established, or if an agreement is established but is subsequently broken, the borrower’s credit file is reviewed and, if considered necessary, the loan will be evaluated for impairment. For further discussion on evaluating loans for impairment, see Note 5. LOANS AND ALLOWANCE FOR LOAN LOSSES. A summary report of all loans 30 days or more past due is provided to the Association’s Board of Directors.
Loans are placed in non-accrual status when they are contractually 90 days or more past due or if collection of principal or interest in full is in doubt. Loans modified in troubled debt restructurings that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months. Beginning with the quarter ended March 31, 2012, home equity loans and lines of credit which are subordinate to a first mortgage lien where the customer is seriously delinquent, are placed in non-accrual status. Beginning in the quarter ended September 30, 2012, loans in Chapter 7 bankruptcy status where all borrowers have been discharged from their mortgage obligation are placed in non-accrual status. Beginning in the quarter ended June 30, 2014, loans in Chapter 7 bankruptcy status where all borrowers had filed, and had not reaffirmed or been dismissed, are also placed in non-accrual status. For discussion on interest recognition, see Note 5. LOANS AND ALLOWANCE FOR LOAN LOSSES.

20


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,
 
2014
 
2013
 
2012
 
2011
 
2010
 
(Dollars in thousands)
Non-accrual loans:
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
79,388

 
$
91,048

 
$
105,780

 
$
125,014

 
$
135,109

Residential Home Today
29,960

 
34,813

 
41,087

 
69,602

 
91,985

Home equity loans and lines of credit(1)
26,189

 
29,943

 
35,316

 
36,872

 
54,481

Construction

 
41

 
377

 
3,770

 
4,994

Other consumer loans

 

 

 

 
1

Total non-accrual loans(2)(3)(4)
135,537

 
155,845

 
182,560

 
235,258

 
286,570

Real estate owned
21,768

 
22,666

 
19,647

 
19,155

 
15,912

Other non-performing assets

 

 

 

 

Total non-performing assets
$
157,305

 
$
178,511

 
$