Companies: 10,793     total market cap: $139.375 T
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TFS Financial
TFSL
#3465
Rank
$4.14 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$14.78
Share price
-1.00%
Change (1 day)
28.52%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. TFS Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q3

TFS Financial - 10-Q quarterly report FY2019 Q3


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-Q
________________________________
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
or 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from              to             
Commission File Number 001-33390
________________________________________
TFS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
________________________________________
United States of America
 
52-2054948
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
7007 Broadway Avenue
 
 
Cleveland,
Ohio
 
44105
(Address of Principal Executive Offices)
 
(Zip Code)
(216) 441-6000
Registrant’s telephone number, including area code:
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
________________________________________
Securities registered pursuant to Section 12(b) of the Act
Title of each class
 
Trading Symbol(s)
 
Name of each exchange in which registered
Common Stock, par value $0.01 per share
 
TFSL
 
The NASDAQ Stock Market, LLC

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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
  
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
o
 
  
Smaller Reporting Company
 
☐
 
 
 
 
 
 
 
 
Emerging Growth Company
 
☐
 
 
 
 
 
If an emerging company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐      No  x
As of August 5, 2019, there were 279,980,695 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 81.1% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.
 


TFS Financial Corporation
INDEX
 
 
Page
 
 
 
 
Glossary of Terms
3
 
 
 
PART l – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
Consolidated Statements of Condition
 
 
June 30, 2019 and September 30, 2018
4
 
 
 
 
Consolidated Statements of Income
 
 
Three and Nine Months Ended June 30, 2019 and 2018
5
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
Three and Nine Months Ended June 30, 2019 and 2018
6
 
 
 
 
Consolidated Statements of Shareholders’ Equity
 
 
Three and Nine Months Ended June 30, 2019 and 2018
7
 
 
 
 
Consolidated Statements of Cash Flows
 
 
Nine Months Ended June 30, 2019 and 2018
9
 
 
 
 
Notes to Unaudited Interim Consolidated Financial Statements
10
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
68
 
 
 
Item 4.
Controls and Procedures
72
 
 
Part II — OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
72
 
 
 
Item 1A.
Risk Factors
72
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
73
 
 
 
Item 3.
Defaults Upon Senior Securities
73
 
 
 
Item 4.
Mine Safety Disclosures
73
 
 
 
Item 5.
Other Information
73
 
 
 
Item 6.
Exhibits
74
 
 
SIGNATURES
75


2

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




3

Item 1. Financial Statements
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
 
June 30,
2019
 
September 30,
2018
ASSETS
 
 
 
Cash and due from banks
$
28,749

 
$
29,056

Interest-earning cash equivalents
242,599

 
240,719

Cash and cash equivalents
271,348

 
269,775

Investment securities available for sale (amortized cost $566,228 and $549,211, respectively)
564,945

 
531,965

Mortgage loans held for sale, at lower of cost or market (none measured at fair value)
2,635

 
659

Loans held for investment, net:
 
 
 
Mortgage loans
13,023,209

 
12,872,125

Other consumer loans
2,878

 
3,021

Deferred loan expenses, net
41,724

 
38,566

Allowance for loan losses
(39,313
)
 
(42,418
)
Loans, net
13,028,498

 
12,871,294

Mortgage loan servicing rights, net
8,289

 
8,840

Federal Home Loan Bank stock, at cost
99,647

 
93,544

Real estate owned
2,120

 
2,794

Premises, equipment, and software, net
61,916

 
63,399

Accrued interest receivable
40,998

 
38,696

Bank owned life insurance contracts
215,909

 
212,021

Other assets
75,434

 
44,344

TOTAL ASSETS
$
14,371,739

 
$
14,137,331

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
$
8,714,469

 
$
8,491,583

Borrowed funds
3,833,600

 
3,721,699

Borrowers’ advances for insurance and taxes
57,531

 
103,005

Principal, interest, and related escrow owed on loans serviced
19,180

 
31,490

Accrued expenses and other liabilities
36,477

 
31,150

Total liabilities
12,661,257

 
12,378,927

Commitments and contingent liabilities


 


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

 
—

Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 279,989,323 and 280,311,070 outstanding at June 30, 2019 and September 30, 2018, respectively
3,323

 
3,323

Paid-in capital
1,731,329

 
1,726,992

Treasury stock, at cost; 52,329,427 and 52,007,680 shares at June 30, 2019 and September 30, 2018, respectively
(762,200
)
 
(754,272
)
Unallocated ESOP shares
(45,501
)
 
(48,751
)
Retained earnings—substantially restricted
829,508

 
807,890

Accumulated other comprehensive income (loss)
(45,977
)
 
23,222

Total shareholders’ equity
1,710,482

 
1,758,404

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
14,371,739

 
$
14,137,331

See accompanying notes to unaudited interim consolidated financial statements.

4

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share and per share data)
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
115,129

 
$
105,956

 
$
341,926

 
$
313,821

Investment securities available for sale
3,389

 
2,891

 
10,007

 
8,239

Other interest and dividend earning assets
2,525

 
2,271

 
7,841

 
6,467

Total interest and dividend income
121,043

 
111,118

 
359,774

 
328,527

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits
37,159

 
26,310

 
104,998

 
72,934

Borrowed funds
18,366

 
14,535

 
53,685

 
43,634

Total interest expense
55,525

 
40,845

 
158,683

 
116,568

NET INTEREST INCOME
65,518

 
70,273

 
201,091

 
211,959

PROVISION (CREDIT) FOR LOAN LOSSES

(2,000
)
 
(2,000
)
 
(8,000
)
 
(9,000
)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES
67,518

 
72,273

 
209,091

 
220,959

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Fees and service charges, net of amortization
1,773

 
2,018

 
5,344

 
5,577

Net gain on the sale of loans
543

 
2,529

 
1,105

 
3,072

Increase in and death benefits from bank owned life insurance contracts
1,703

 
1,538

 
5,124

 
4,601

Other
1,064

 
1,106

 
3,092

 
3,401

Total non-interest income
5,083

 
7,191

 
14,665

 
16,651

NON-INTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
26,149

 
27,199

 
77,665

 
76,509

Marketing services
6,063

 
5,284

 
17,579

 
16,338

Office property, equipment and software
6,806

 
7,135

 
20,053

 
20,514

Federal insurance premium and assessments
2,669

 
2,800

 
7,805

 
8,526

State franchise tax
1,265

 
1,176

 
3,809

 
3,586

Other expenses
6,916

 
7,835

 
21,664

 
21,420

Total non-interest expense
49,868

 
51,429

 
148,575

 
146,893

INCOME BEFORE INCOME TAXES
22,733

 
28,035

 
75,181

 
90,717

INCOME TAX EXPENSE
4,476

 
7,160

 
16,461

 
26,915

NET INCOME
$
18,257

 
$
20,875

 
$
58,720

 
$
63,802

Earnings per share - basic and diluted
$
0.06

 
$
0.07

 
$
0.21

 
$
0.23

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
275,384,635

 
275,468,237

 
275,373,426

 
275,647,589

Diluted
277,398,486

 
277,200,873

 
277,269,555

 
277,346,709


See accompanying notes to unaudited interim consolidated financial statements.

5

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
 
For the Three Months Ended
 
For the Nine Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
18,257

 
$
20,875

 
$
58,720

 
$
63,802

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in unrealized loss on securities available for sale
4,133

 
(1,301
)
 
12,611

 
(7,560
)
Net change in cash flow hedges
(36,844
)
 
5,675

 
(82,602
)
 
33,487

Change in pension obligation
264

 
316

 
792

 
910

Total other comprehensive income (loss)
(32,447
)
 
4,690

 
(69,199
)
 
26,837

Total comprehensive income
$
(14,190
)
 
$
25,565

 
$
(10,479
)
 
$
90,639

See accompanying notes to unaudited interim consolidated financial statements.

6


TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(In thousands, except share and per share data)
 
 
For the Three Months Ended June 30, 2018
 
 
Common
stock
 
Paid-in
capital
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Retained
earnings
 
Accumulated other
comprehensive
income (loss)
 
Total
shareholders’
equity
Balance at March 31, 2018
 
$
3,323

 
$
1,723,254

 
$
(746,645
)
 
$
(50,917
)
 
$
786,167

 
$
14,613

 
$
1,729,795

Net income
 
—

 
—

 
—

 
—

 
20,875

 
—

 
20,875

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
4,690

 
4,690

ESOP shares allocated or committed to be released
 
—

 
591

 
—

 
1,083

 
—

 
—

 
1,674

Compensation costs for equity incentive plans
 
—

 
1,104

 
—

 
—

 
—

 
—

 
1,104

Purchase of treasury stock (255,911 shares)
 
—

 
—

 
(3,960
)
 
—

 
—

 
—

 
(3,960
)
Treasury stock allocated to equity incentive plan
 
—

 
100

 
(568
)
 
—

 
—

 
—

 
(468
)
Dividends paid to common shareholders ($0.17 per common share)
 
—

 
—

 
—

 
—

 
(8,416
)
 
—

 
(8,416
)
Balance at June 30, 2018
 
$
3,323

 
$
1,725,049

 
$
(751,173
)
 
$
(49,834
)
 
$
798,626

 
$
19,303

 
$
1,745,294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2019
 
 
Common
stock
 
Paid-in
capital
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Retained
earnings
 
Accumulated other
comprehensive
income (loss)
 
Total
shareholders’
equity
Balance at March 31, 2019
 
$
3,323

 
$
1,729,499

 
$
(760,367
)
 
$
(46,584
)
 
$
823,644

 
$
(13,530
)
 
$
1,735,985

Net income
 
—

 
—

 
—

 
—

 
18,257

 
—

 
18,257

Other comprehensive income (loss), net of tax
 
—

 
—

 
—

 
—

 
—

 
(32,447
)
 
(32,447
)
ESOP shares allocated or committed to be released
 
—

 
766

 
—

 
1,083

 
—

 
—

 
1,849

Compensation costs for equity incentive plans
 
—

 
1,116

 
—

 
—

 
—

 
—

 
1,116

Purchase of treasury stock (102,900 shares)
 
—

 
—

 
(1,707
)
 
—

 
—

 
—

 
(1,707
)
Treasury stock allocated to equity incentive plan
 
—

 
(52
)
 
(126
)
 
—

 
—

 
—

 
(178
)
Dividends paid to common shareholders ($0.25 per common share)
 
—

 
—

 
—

 
—

 
(12,393
)
 
—

 
(12,393
)
Balance at June 30, 2019
 
$
3,323

 
$
1,731,329

 
$
(762,200
)
 
$
(45,501
)
 
$
829,508

 
$
(45,977
)
 
$
1,710,482

 

7

 
 
For the Nine Months Ended June 30, 2018
 
 
Common
stock
 
Paid-in
capital
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Retained
earnings
 
Accumulated other
comprehensive
income (loss)
 
Total
shareholders’
equity
Balance at September 30, 2017
 
$
3,323

 
$
1,722,672

 
$
(735,530
)
 
$
(53,084
)
 
$
760,070

 
$
(7,492
)
 
$
1,689,959

Net income
 
—

 
—

 
—

 
—

 
63,802

 
—

 
63,802

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
42

 
26,795

 
26,837

ESOP shares allocated or committed to be released
 
—

 
1,697

 
—

 
3,250

 
—

 
—

 
4,947

Compensation costs for equity incentive plans
 
—

 
3,629

 
—

 
—

 
—

 
—

 
3,629

Purchase of treasury stock (1,113,911 shares)
 
—

 
—

 
(16,994
)
 
—

 
—

 
—

 
(16,994
)
Treasury stock allocated to equity incentive plan
 
—

 
(2,949
)
 
1,351

 
—

 
—

 
—

 
(1,598
)
Dividends paid to common shareholders ($0.51 per common share)
 
—

 
—

 
—

 
—

 
(25,288
)
 
—

 
(25,288
)
Balance at June 30, 2018
 
$
3,323

 
$
1,725,049

 
$
(751,173
)
 
$
(49,834
)
 
$
798,626

 
$
19,303

 
$
1,745,294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30, 2019
 
 
Common
stock
 
Paid-in
capital
 
Treasury
stock
 
Unallocated
common stock
held by ESOP
 
Retained
earnings
 
Accumulated other
comprehensive
income (loss)
 
Total
shareholders’
equity
Balance at September 30, 2018
 
$
3,323

 
$
1,726,992

 
$
(754,272
)
 
$
(48,751
)
 
$
807,890

 
$
23,222

 
$
1,758,404

Net income
 
—

 
—

 
—

 
—

 
58,720

 
—

 
58,720

Other comprehensive income (loss), net of tax
 
—

 
—

 
—

 
—

 
—

 
(69,199
)
 
(69,199
)
ESOP shares allocated or committed to be released
 
—

 
2,076

 
—

 
3,250

 
—

 
—

 
5,326

Compensation costs for equity incentive plans
 
—

 
3,343

 
—

 
—

 
—

 
—

 
3,343

Purchase of treasury stock (491,400 shares)
 
—

 
—

 
(7,915
)
 
—

 
—

 
—

 
(7,915
)
Treasury stock allocated to equity incentive plan
 
—

 
(1,082
)
 
(13
)
 
—

 
—

 
—

 
(1,095
)
Dividends paid to common shareholders ($0.75 per common share)
 
—

 
—

 
—

 
—

 
(37,102
)
 
—

 
(37,102
)
Balance at June 30, 2019
 
$
3,323

 
$
1,731,329

 
$
(762,200
)
 
$
(45,501
)
 
$
829,508

 
$
(45,977
)
 
$
1,710,482

See accompanying notes to unaudited interim consolidated financial statements.


8

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
 
 
For the Nine Months Ended June 30,
 
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
58,720

 
$
63,802

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
ESOP and stock-based compensation expense
 
8,669

 
8,576

Depreciation and amortization
 
16,773

 
19,517

Deferred income taxes
 
514

 
4,565

Provision (credit) for loan losses
 
(8,000
)
 
(9,000
)
Net gain on the sale of loans
 
(1,105
)
 
(3,072
)
Other net losses
 
192

 
411

Principal repayments on and proceeds from sales of loans held for sale
 
29,786

 
15,697

Loans originated for sale
 
(31,550
)
 
(17,032
)
Increase in bank owned life insurance contracts
 
(4,619
)
 
(4,590
)
Net increase in interest receivable and other assets
 
(3,102
)
 
(4,774
)
Net increase (decrease) in accrued expenses and other liabilities
 
6,353

 
(6,029
)
Net cash provided by operating activities
 
72,631

 
68,071

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Loans originated
 
(2,166,159
)
 
(2,473,615
)
Principal repayments on loans
 
1,950,189

 
1,861,161

Proceeds from principal repayments and maturities of:
 
 
 
 
Securities available for sale
 
101,867

 
102,843

Proceeds from sale of:
 
 
 
 
Loans
 
55,710

 
356,350

Real estate owned
 
3,239

 
5,500

Purchases of:
 
 
 
 
FHLB stock
 
(6,103
)
 
(3,554
)
Securities available for sale
 
(121,752
)
 
(121,113
)
Premises and equipment
 
(2,888
)
 
(6,716
)
Other
 
369

 
—

Net cash used in investing activities
 
(185,528
)
 
(279,144
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net increase in deposits
 
222,886

 
256,663

Net decrease in borrowers' advances for insurance and taxes
 
(45,474
)
 
(39,950
)
Net decrease in principal and interest owed on loans serviced
 
(12,310
)
 
(13,078
)
Net increase in short-term borrowed funds
 
411,308

 
173,557

Proceeds from long-term borrowed funds
 
—

 
15,088

Repayment of long-term borrowed funds
 
(299,407
)
 
(195,261
)
Cash collateral/settlements received from (provided to) derivative counterparties (1)
 
(116,396
)
 
48,265

Purchase of treasury shares
 
(7,940
)
 
(16,996
)
Acquisition of treasury shares through net settlement of stock benefit plans compensation
 
(1,095
)
 
(1,598
)
Dividends paid to common shareholders
 
(37,102
)
 
(25,288
)
Net cash provided by financing activities
 
114,470

 
201,402

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
1,573

 
(9,671
)
CASH AND CASH EQUIVALENTS—Beginning of period
 
269,775

 
268,218

CASH AND CASH EQUIVALENTS—End of period
 
$
271,348

 
$
258,547

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid for interest on deposits
 
$
103,999

 
$
71,507

Cash paid for interest on borrowed funds
 
59,468

 
42,850

Cash paid for income taxes
 
9,686

 
25,092

SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Transfer of loans to real estate owned
 
2,925

 
3,414

Transfer of loans from held for sale to held for investment
 
—

 
149

Transfer of loans from held for investment to held for sale
 
55,364

 
356,562

Treasury stock issued for stock benefit plans
 
1,121

 
2,949

(1) In accordance with ASC 230-10-45-27, cash flows from derivative instruments may be classified in the same category as items hedged. For the nine months ended June 30, 2018, $48,265 of cash collateral and settlement payments received from derivative counterparties were reclassified from Operating to Financing Activities to conform to this presentation.
See accompanying notes to unaudited interim consolidated financial statements.

9

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

1.
BASIS OF PRESENTATION
TFS Financial Corporation, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering, and, to a much lesser extent, other financial services. As of June 30, 2019, approximately 81% of the Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC. The thrift subsidiary of TFS Financial Corporation is Third Federal Savings and Loan Association of Cleveland.
The accounting and reporting policies followed by the Company conform in all material respects to U.S. GAAP and to general practices in the financial services industry. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the valuation of deferred tax assets, and the determination of pension obligations are particularly subject to change.
The unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of the Company at June 30, 2019, and its results of operations and cash flows for the periods presented. Such adjustments are the only adjustments reflected in the unaudited interim financial statements.
In accordance with SEC Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018 contains audited consolidated financial statements and related notes, which should be read in conjunction with the accompanying interim consolidated financial statements. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2019 or for any other period.
2.
EARNINGS PER SHARE
Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted and performance stock units with a dilutive impact. Unvested shares awarded pursuant to the Company's restricted stock plans are treated as participating securities in the computation of EPS pursuant to the two-class method as they contain nonforfeitable rights to dividends. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. At June 30, 2019 and 2018, respectively, the ESOP held 4,550,066 and 4,983,406 shares, respectively, that were neither allocated to participants nor committed to be released to participants.


10

The following is a summary of the Company's earnings per share calculations.
 
 
For the Three Months Ended June 30,
 
 
2019
 
2018
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
18,257

 
 
 
 
 
$
20,875

 
 
 
 
Less: income allocated to restricted stock units
 
362

 
 
 
 
 
287

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
17,895

 
275,384,635

 
$
0.06

 
$
20,588

 
275,468,237

 
$
0.07

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
2,013,851

 
 
 
 
 
1,732,636

 
 
Income available to common shareholders
 
$
17,895

 
277,398,486

 
$
0.06

 
$
20,588

 
277,200,873

 
$
0.07

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30,
 
 
2019
 
2018
 
 
Income
 
Shares
 
Per share
amount
 
Income
 
Shares
 
Per share
amount
 
 
(Dollars in thousands, except per share data)
Net income
 
$
58,720

 
 
 
 
 
$
63,802

 
 
 
 
Less: income allocated to restricted stock units
 
1,124

 
 
 
 
 
829

 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common shareholders
 
$
57,596

 
275,373,426

 
$
0.21

 
$
62,973

 
275,647,589

 
$
0.23

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive potential common shares
 
 
 
1,896,129

 
 
 
 
 
1,699,120

 
 
Income available to common shareholders
 
$
57,596

 
277,269,555

 
$
0.21

 
$
62,973

 
277,346,709

 
$
0.23

 
 
 
 
 
 
 
 
 
 
 
 
 
    
The following is a summary of outstanding stock options and restricted and performance stock units that are excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.
 
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Options to purchase shares
710,100

 
2,111,540

 
710,100

 
2,148,840

Restricted and performance stock units
—

 
—

 
—

 
11,001



3.INVESTMENT SECURITIES
Investments available for sale are summarized as follows:
 
 
June 30, 2019
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
REMICs
 
$
554,854

 
$
2,206

 
$
(3,742
)
 
$
553,318

Fannie Mae certificates
 
7,377

 
252

 
—

 
7,629

U.S. government and agency obligations
 
3,997

 
1

 
—

 
3,998

Total
 
$
566,228

 
$
2,459

 
$
(3,742
)
 
$
564,945


11

 
 
September 30, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
REMICs
 
$
537,330

 
$
7

 
$
(17,338
)
 
$
519,999

Fannie Mae certificates
 
7,906

 
237

 
(145
)
 
7,998

U.S. government and agency obligations
 
3,975

 
—

 
(7
)
 
3,968

Total
 
$
549,211

 
$
244

 
$
(17,490
)
 
$
531,965


Gross unrealized losses on available for sale securities and the estimated fair value of the related securities, aggregated by the length of time the securities have been in a continuous loss position, at June 30, 2019 and September 30, 2018, were as follows:
 
June 30, 2019
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Available for sale—
 
 
 
 
 
 
 
 
 
 
 
  REMICs
$
19,317

 
$
23

 
$
340,121

 
$
3,719

 
$
359,438

 
$
3,742

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
 
Estimated Fair Value
 
Unrealized Loss
Available for sale—
 
 
 
 
 
 
 
 

 

  REMICs
$
113,111

 
$
1,799

 
$
400,558

 
$
15,539

 
$
513,669

 
$
17,338

Fannie Mae certificates
—

 
—

 
4,337

 
145

 
4,337

 
145

  U.S. government and agency obligations
3,968

 
7

 
—

 
—

 
3,968

 
7

Total
$
117,079

 
$
1,806

 
$
404,895

 
$
15,684

 
$
521,974

 
$
17,490


 
 
 
 
 
 
 
 
 
 
 

We believe the unrealized losses on investment securities were attributable to interest rate increases. The contractual terms of U.S. government and agency obligations do not permit the issuer to settle the security at a price less than the par value of the investment. The contractual cash flows of mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. REMICs are issued by or backed by securities issued by these governmental agencies. It is expected that the securities would not be settled at a price substantially less than the amortized cost of the investment. The U.S. Treasury Department established financing agreements in 2008 to ensure Fannie Mae and Freddie Mac meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.
Since the decline in value is attributable to changes in interest rates and not credit quality and because the Company has neither the intent to sell the securities nor is it more likely than not the Company will be required to sell the securities for the time periods necessary to recover the amortized cost, these investments are not considered other-than-temporarily impaired. At June 30, 2019, the amortized cost and fair value of U.S. government obligations, categorized as due in less than one year are $3,997 and $3,998, respectively.

12

4.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans held for investment consist of the following:
 
 
June 30,
2019
 
September 30,
2018
Real estate loans:
 
 
 
 
Residential Core
 
$
10,826,777

 
$
10,930,811

Residential Home Today
 
87,785

 
94,933

Home equity loans and lines of credit
 
2,085,853

 
1,818,918

Construction
 
47,650

 
64,012

Real estate loans
 
13,048,065

 
12,908,674

Other consumer loans
 
2,878

 
3,021

Add (deduct):
 
 
 
 
Deferred loan expenses, net
 
41,724

 
38,566

Loans in process ("LIP")
 
(24,856
)
 
(36,549
)
Allowance for loan losses
 
(39,313
)
 
(42,418
)
Loans held for investment, net
 
$
13,028,498

 
$
12,871,294
At June 30, 2019 and September 30, 2018, respectively, $2,635 and $659 of loans were classified as mortgage loans held for sale.
A large concentration of the Company’s lending is in Ohio and Florida. As of June 30, 2019 and September 30, 2018, the percentage of aggregate Residential Core, Home Today and Construction loans held in Ohio was 57% and 56% respectively, and the percentage held in Florida was 16% as of both dates. As of June 30, 2019 and September 30, 2018, home equity loans and lines of credit were concentrated in Ohio (32% and 36%), Florida (19% and 20%), and California (16% and 15%).
Home Today was an affordable housing program targeted to benefit low- and moderate-income home buyers and most loans under the program were originated prior to 2009. No new loans were originated under the Home Today program after September 30, 2016. Through this program the Association provided the majority of loans to borrowers who would not otherwise qualify for the Association’s loan products, generally because of low credit scores. Although the credit profiles of borrowers in the Home Today program might be described as sub-prime, Home Today loans generally contained the same features as loans offered to our Residential Core borrowers. Borrowers with a Home Today loan completed financial management education and counseling and were referred to the Association by a sponsoring organization with which the Association partnered as part of the program. Because the Association applied less stringent underwriting and credit standards to the majority of Home Today loans, loans originated under the program have greater credit risk than its traditional residential real estate mortgage loans in the Residential Core portfolio. As of June 30, 2019 and September 30, 2018, the principal balance of Home Today loans originated prior to March 27, 2009 was $84,604 and $91,805, respectively. Since loans are no longer originated under the Home Today program, the Home Today portfolio will continue to decline in balance, primarily due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of customers and the communities served, since fiscal 2016 the Association has offered Fannie Mae eligible, Home Ready loans. These loans are originated in accordance with Fannie Mae's underwriting standards. While the Association retains the servicing to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae. The Association does not offer, and has not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, a LTV ratio greater than 100%, or pay-option adjustable-rate mortgages.

13

An aging analysis of the recorded investment in loan receivables that are past due at June 30, 2019 and September 30, 2018 is summarized in the following tables. When a loan is more than one month past due on its scheduled payments, the loan is considered 30 days or more past due. Balances are adjusted for deferred loan fees, expenses and any applicable loans-in-process.
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
$
5,139

 
$
1,908

 
$
10,881

 
$
17,928

 
$
10,824,632

 
$
10,842,560

Residential Home Today
2,874

 
1,498

 
3,309

 
7,681

 
79,788

 
87,469

Home equity loans and lines of credit
3,844

 
1,450

 
6,773

 
12,067

 
2,100,315

 
2,112,382

Construction
—

 
—

 
—

 
—

 
22,522

 
22,522

Total real estate loans
11,857

 
4,856

 
20,963

 
37,676

 
13,027,257

 
13,064,933

Other consumer loans
—

 
—

 
—

 
—

 
2,878

 
2,878

Total
$
11,857

 
$
4,856

 
$
20,963

 
$
37,676

 
$
13,030,135

 
$
13,067,811

 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
90 Days or
More Past
Due
 
Total Past
Due
 
Current
 
Total
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Core
$
7,539

 
$
2,335

 
$
10,807

 
$
20,681

 
$
10,926,294

 
$
10,946,975

Residential Home Today
2,787

 
1,765

 
3,814

 
8,366

 
86,383

 
94,749

Home equity loans and lines of credit
4,152

 
2,315

 
5,933

 
12,400

 
1,829,427

 
1,841,827

Construction
—

 
—

 
—

 
—

 
27,140

 
27,140

Total real estate loans
14,478

 
6,415

 
20,554

 
41,447

 
12,869,244

 
12,910,691

Other consumer loans
—

 
—

 
—

 
—

 
3,021

 
3,021

Total
$
14,478

 
$
6,415

 
$
20,554

 
$
41,447

 
$
12,872,265

 
$
12,913,712


At June 30, 2019 and September 30, 2018, real estate loans include $8,923 and $8,501, respectively, of loans that were in the process of foreclosure.
Loans are placed in non-accrual status when they are contractually 90 days or more past due. Loans with a partial charge-off are placed in non-accrual and will remain in non-accrual status until, at a minimum, the impairment is recovered. Loans restructured in TDRs that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months after restructuring. Loans restructured in TDRs with a high debt-to-income ratio at the time of modification are placed in non-accrual status for a minimum of 12 months. Additionally, home equity loans and lines of credit where the customer has a severely delinquent first mortgage loan and loans in Chapter 7 bankruptcy status where all borrowers have filed, and not reaffirmed or been dismissed, are placed in non-accrual status.
The recorded investment of loan receivables in non-accrual status is summarized in the following table. Balances are adjusted for deferred loan fees and expenses.
 
June 30,
2019
 
September 30,
2018
Real estate loans:
 
 
 
Residential Core
$
38,696

 
$
41,628

Residential Home Today
13,085

 
14,641

Home equity loans and lines of credit
22,055

 
21,483

Total non-accrual loans

73,836

 
77,752



14

At June 30, 2019 and September 30, 2018, respectively, the recorded investment in non-accrual loans includes $52,874 and $57,197, which are performing according to the terms of their agreement, of which $26,410 and $29,439 are loans in Chapter 7 bankruptcy status, primarily where all borrowers have filed, and have not reaffirmed or been dismissed.
Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are first applied to the oldest scheduled, unpaid payment first. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. A non-accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in non-accrual status when collectability is uncertain, such as a TDR that has not met minimum payment requirements, a loan with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days past due, or a loan in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. The number of days past due is determined by the number of scheduled payments that remain unpaid, assuming a period of 30 days between each scheduled payment.
The recorded investment in loan receivables at June 30, 2019 and September 30, 2018 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans not individually evaluated. Balances of recorded investments are adjusted for deferred loan fees, expenses and any applicable loans-in-process.
 
 
June 30, 2019
 
September 30, 2018
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
89,147

 
$
10,753,413

 
$
10,842,560

 
$
91,360

 
$
10,855,615

 
$
10,946,975

Residential Home Today
 
38,213

 
49,256

 
87,469

 
41,523

 
53,226

 
94,749

Home equity loans and lines of credit
 
48,141

 
2,064,241

 
2,112,382

 
47,911

 
1,793,916

 
1,841,827

Construction
 
—

 
22,522

 
22,522

 
—

 
27,140

 
27,140

Total real estate loans
 
175,501

 
12,889,432

 
13,064,933

 
180,794

 
12,729,897

 
12,910,691

Other consumer loans
 
—

 
2,878

 
2,878

 
—

 
3,021

 
3,021

Total
 
$
175,501

 
$
12,892,310

 
$
13,067,811

 
$
180,794

 
$
12,732,918

 
$
12,913,712


An analysis of the allowance for loan losses at June 30, 2019 and September 30, 2018 is summarized in the following table. The analysis provides details of the allowance for loan losses according to the method of evaluation, distinguishing between allowances for loan losses determined by evaluating individual loans and allowances for loan losses determined by evaluating groups of loans collectively.
 
 
June 30, 2019
 
September 30, 2018
 
 
Individually
 
Collectively
 
Total
 
Individually
 
Collectively
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
6,799

 
$
11,921

 
$
18,720

 
$
6,934

 
$
11,354

 
$
18,288

Residential Home Today
 
2,435

 
943

 
3,378

 
2,139

 
1,065

 
3,204

Home equity loans and lines of credit
 
3,667

 
13,544

 
17,211

 
3,014

 
17,907

 
20,921

Construction
 
—

 
4

 
4

 
—

 
5

 
5

Total real estate loans
 
$
12,901

 
$
26,412

 
$
39,313

 
$
12,087

 
$
30,331

 
$
42,418


At June 30, 2019 and September 30, 2018, individually evaluated loans that required an allowance were comprised only of loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, and loans with a further deterioration in the fair value of collateral not yet identified as uncollectible. All other individually evaluated loans received a charge-off, if applicable.

15

Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. At June 30, 2019 and September 30, 2018, respectively, allowances on individually reviewed loans evaluated for impairment based on the present value of cash flows, such as performing TDRs, were $12,648 and $12,002; and allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible were $253 and $85.
Residential Core mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay-option adjustable-rate mortgages). The portfolio contains adjustable-rate mortgage loans whereby the interest rate is locked initially for mainly three or five years then resets annually, subject to various re-lock options available to the borrower. Although the borrower is qualified for its loan at a higher rate than the initial one, the adjustable-rate feature may impact a borrower's ability to afford the higher payments upon rate reset during periods of rising interest rates. The principal amount of loans in the portfolio that are adjustable-rate mortgage loans was $5,086,776 and $5,166,282 at June 30, 2019 and September 30, 2018, respectively.
As described earlier in this footnote, Home Today loans have greater credit risk than traditional residential real estate mortgage loans. At June 30, 2019 and September 30, 2018, respectively, approximately 15% and 18% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co., which was seized by the Arizona Department of Insurance in 2011 and currently pays all claim payments at 74.5%. Appropriate adjustments have been made to the Association’s affected valuation allowances and charge-offs, and estimated loss severity factors were adjusted accordingly for loans evaluated collectively. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided by PMIC as of June 30, 2019 and September 30, 2018, respectively, was $29,669 and $39,367, of which $27,259 and $36,075 was current. The amount of loans in the Association's total owned residential portfolio covered by mortgage insurance provided by Mortgage Guaranty Insurance Corporation as of June 30, 2019 and September 30, 2018, respectively, was $18,182 and $20,912, of which $18,022 and $20,792 was current. As of June 30, 2019, MGIC's long-term debt rating, as published by the major credit rating agencies, did not meet the requirements to qualify as "high credit quality"; however, MGIC continues to make claims payments in accordance with its contractual obligations and the Association has not increased its estimated loss severity factors related to MGIC's claim paying ability. No other loans were covered by mortgage insurers that were deferring claim payments or which were assessed as being non-investment grade.
Home equity loans and lines of credit, which are comprised primarily of home equity lines of credit, represent a significant portion of the residential real estate portfolio. Post-origination deterioration in economic and housing market conditions may impact a borrower's ability to afford the higher payments required during the end of draw repayment period that follows the period of interest only payments on home equity lines of credit originated prior to 2012 or the ability to secure alternative financing. Beginning in February 2013, the terms on new home equity lines of credit included monthly principal and interest payments throughout the entire term to minimize the potential payment differential between the draw and after draw periods.
The Association originates construction loans to individuals for the construction of their personal single-family residence by a qualified builder (construction/permanent loans). The Association’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Association offers construction/permanent loans with fixed or adjustable-rates, and a current maximum loan-to-completed-appraised value ratio of 85%.
Other consumer loans are comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment, and forgivable down payment assistance loans, which are unsecured loans used as down payment assistance to borrowers qualified through partner housing agencies. The Company records a liability for the loans which are forgiven in equal increments over a pre-determined term, subject to residency requirements.
For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Association will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered in determining that a loan is impaired may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan.

16

The recorded investment and the unpaid principal balance of impaired loans, including those reported as TDRs, as of June 30, 2019 and September 30, 2018 are summarized as follows. Balances of recorded investments are adjusted for deferred loan fees and expenses.
 
 
June 30, 2019
 
September 30, 2018
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
With no related IVA recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
50,735

 
$
67,958

 
$
—

 
$
53,656

 
$
69,516

 
$
—

Residential Home Today
 
13,917

 
38,919

 
—

 
16,006

 
35,532

 
—

Home equity loans and lines of credit
 
20,366

 
25,733

 
—

 
22,423

 
28,504

 
—

Total
 
$
85,018

 
$
132,610

 
$
—

 
$
92,085

 
$
133,552

 
$
—

With an IVA recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
38,412

 
$
38,479

 
$
6,799

 
$
37,704

 
$
37,774

 
$
6,934

Residential Home Today
 
24,296

 
24,258

 
2,435

 
25,517

 
25,492

 
2,139

Home equity loans and lines of credit
 
27,775

 
27,800

 
3,667

 
25,488

 
25,519

 
3,014

Total
 
$
90,483

 
$
90,537

 
$
12,901

 
$
88,709

 
$
88,785

 
$
12,087

Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
89,147

 
$
106,437

 
$
6,799

 
$
91,360

 
$
107,290

 
$
6,934

Residential Home Today
 
38,213

 
63,177

 
2,435

 
41,523

 
61,024

 
2,139

Home equity loans and lines of credit
 
48,141

 
53,533

 
3,667

 
47,911

 
54,023

 
3,014

Total
 
$
175,501

 
$
223,147

 
12,901

 
$
180,794

 
$
222,337

 
$
12,087


At June 30, 2019 and September 30, 2018, respectively, the recorded investment in impaired loans includes $160,658 and $165,391 of loans restructured in TDRs of which $10,694 and $10,468 were 90 days or more past due.

The average recorded investment in impaired loans and the amount of interest income recognized during the period that the loans were impaired are summarized below.
 
 
For the Three Months Ended June 30,
 
 
2019
 
2018
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
49,397

 
$
430

 
$
53,559

 
$
609

Residential Home Today
 
14,487

 
50

 
16,927

 
154

Home equity loans and lines of credit
 
21,060

 
118

 
21,853

 
117

Total
 
$
84,944

 
$
598

 
$
92,339

 
$
880

With an IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
41,861

 
$
306

 
$
38,952

 
$
313

Residential Home Today
 
24,378

 
295

 
26,830

 
324

Home equity loans and lines of credit
 
27,583

 
168

 
22,849

 
150

Total
 
$
93,822

 
$
769

 
$
88,631

 
$
787

Total impaired loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
91,258

 
$
736

 
$
92,511

 
$
922

Residential Home Today
 
38,865

 
345

 
43,757

 
478

Home equity loans and lines of credit
 
48,643

 
286

 
44,702

 
267

Total
 
$
178,766

 
$
1,367

 
$
180,970

 
$
1,667

 
 
 
 
 
 
 
 
 


17

 
 
For the Nine Months Ended June 30,
 
 
2019
 
2018
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
52,196

 
$
1,231

 
$
50,348

 
$
2,369

Residential Home Today
 
14,962

 
174

 
17,583

 
1,126

Home equity loans and lines of credit
 
21,395

 
342

 
20,588

 
290

Total
 
$
88,553

 
$
1,747

 
$
88,519

 
$
3,785

With an IVA recorded:
 
 
 
 
 
 
 
 
Residential Core
 
$
38,058

 
$
1,008

 
$
43,388

 
$
1,268

Residential Home Today
 
24,907

 
888

 
27,307

 
1,280

Home equity loans and lines of credit
 
26,632

 
499

 
21,899

 
425

Total
 
$
89,597

 
$
2,395

 
$
92,594

 
$
2,973

Total impaired loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
90,254

 
$
2,239

 
$
93,736

 
$
3,637

Residential Home Today
 
39,869

 
1,062

 
44,890

 
2,406

Home equity loans and lines of credit
 
48,027

 
841

 
42,487

 
715

Total
 
$
178,150

 
$
4,142

 
$
181,113

 
$
6,758

 
 
 
 
 
 
 
 
 

Interest on loans in non-accrual status is recognized on a cash basis. The amount of interest income on impaired loans recognized using a cash basis method was $343 and $1,082 for the three and nine months ended June 30, 2019 and $565 and $1,773 for the three and nine months ended June 30, 2018. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized, except cash payments may be applied to interest capitalized in a restructuring when collection of remaining amounts due is considered probable. Interest income on the remaining impaired loans is recognized on an accrual basis.
Charge-offs on residential mortgage loans, home equity loans and lines of credit, and construction loans are recognized when triggering events, such as foreclosure actions, short sales, or deeds accepted in lieu of repayment, result in less than full repayment of the recorded investment in the loans.
Partial or full charge-offs are also recognized for the amount of impairment on loans considered collateral dependent that meet the conditions described below.

•
For residential mortgage loans, payments are greater than 180 days delinquent;
•
For home equity lines of credit, equity loans, and residential loans restructured in a TDR, payments are greater than 90 days delinquent;
•
For all classes of loans restructured in a TDR with a high debt-to-income ratio at time of modification;
•
For all classes of loans, a sheriff sale is scheduled within 60 days to sell the collateral securing the loan;
•
For all classes of loans, all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy;
•
For all classes of loans, within 60 days of notification, all borrowers obligated on the loan have filed Chapter 7 bankruptcy and have not reaffirmed or been dismissed;
•
For all classes of loans, a borrower obligated on a loan has filed bankruptcy and the loan is greater than 30 days delinquent; and
•
For all classes of loans, it becomes evident that a loss is probable.
Collateral dependent residential mortgage loans and construction loans are charged off to the extent the recorded investment in a loan, net of anticipated mortgage insurance claims, exceeds the fair value, less estimated costs to dispose of the underlying property. Management can determine if the loan is uncollectible for reasons such as foreclosures exceeding a reasonable time frame and recommend a full charge-off. Home equity loans or lines of credit are charged off to the extent the recorded investment in the loan plus the balance of any senior liens exceeds the fair value, less estimated costs to dispose of the underlying property, or management determines the collateral is not sufficient to satisfy the loan. A loan in any portfolio that is identified as collateral dependent will continue to be reported as impaired until it is no longer considered collateral dependent, is less than 30 days past due and does not have a prior charge-off. A loan in any portfolio that has a partial charge-off

18

consequent to impairment evaluation will continue to be individually evaluated for impairment until, at a minimum, the impairment has been recovered.
Loans restructured in TDRs that are not evaluated based on collateral are separately evaluated for impairment on a loan by loan basis at the time of restructuring and at each subsequent reporting date for as long as they are reported as TDRs. The impairment evaluation is based on the present value of expected future cash flows discounted at the effective interest rate of the original loan. Expected future cash flows include a discount factor representing a potential for default. Valuation allowances are recorded for the excess of the recorded investments over the result of the cash flow analysis. Loans discharged in Chapter 7 bankruptcy are reported as TDRs and also evaluated based on the present value of expected future cash flows unless evaluated based on collateral. We evaluate these loans using the expected future cash flows because we expect the borrower, not liquidation of the collateral, to be the source of repayment for the loan. Other consumer loans are not considered for restructuring. A loan restructured in a TDR is classified as an impaired loan for a minimum of one year. After one year, that loan may be reclassified out of the balance of impaired loans if the loan was restructured to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is not impaired based on the terms of the restructuring agreement. No loans whose terms were restructured in TDRs were reclassified from impaired loans during the nine months ended June 30, 2019 and June 30, 2018.
Initial concessions granted by loans restructured as TDRs can include reduction of interest rate, extension of amortization period, forbearance or other actions. Some TDRs have experienced a combination of concessions. TDRs also can occur as a result of bankruptcy proceedings. Loans discharged in Chapter 7 bankruptcy are classified as multiple restructurings if the loan's original terms had also been restructured by the Association. The recorded investment in TDRs by category as of June 30, 2019 and September 30, 2018 is shown in the tables below.    
June 30, 2019
 
Initial Restructuring
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
36,953

 
$
24,612

 
$
20,237

 
$
81,802

Residential Home Today
 
16,809

 
17,212

 
3,475

 
37,496

Home equity loans and lines of credit
 
34,970

 
2,886

 
3,504

 
41,360

Total
 
$
88,732

 
$
44,710

 
$
27,216

 
$
160,658


September 30, 2018
 
Initial Restructuring
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
39,265

 
$
23,116

 
$
21,832

 
$
84,213

Residential Home Today
 
18,243

 
18,483

 
3,683

 
40,409

Home equity loans and lines of credit
 
33,768

 
2,563

 
4,438

 
40,769

Total
 
$
91,276

 
$
44,162

 
$
29,953

 
$
165,391


TDRs may be restructured more than once. Among other requirements, a subsequent restructuring may be available for a borrower upon the expiration of temporary restructuring terms if the borrower cannot return to regular loan payments. If the borrower is experiencing an income curtailment that temporarily has reduced their capacity to repay, such as loss of employment, reduction of hours, non-paid leave or short-term disability, a temporary restructuring is considered. If the borrower lacks the capacity to repay the loan at the current terms due to a permanent condition, a permanent restructuring is considered. In evaluating the need for a subsequent restructuring, the borrower’s ability to repay is generally assessed utilizing a debt to income and cash flow analysis.
For all loans restructured during the three and nine months ended June 30, 2019 and June 30, 2018 (set forth in the tables below), the pre-restructured outstanding recorded investment was not materially different from the post-restructured outstanding recorded investment.

19

The following tables set forth the recorded investment in TDRs restructured during the periods presented.
 
 
For the Three Months Ended June 30, 2019
 
 
Initial Restructuring
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
1,822

 
$
2,334

 
$
174

 
$
4,330

Residential Home Today
 
109

 
878

 
113

 
1,100

Home equity loans and lines of credit
 
974

 
299

 
81

 
1,354

Total
 
$
2,905

 
$
3,511

 
$
368

 
$
6,784

 
 
 
 
 
 
 
 
 

 
 
For the Three Months Ended June 30, 2018
 
 
Initial Restructuring
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
2,318

 
$
1,591

 
$
633

 
$
4,542

Residential Home Today
 
277

 
1,469

 
154

 
1,900

Home equity loans and lines of credit
 
4,226

 
317

 
172

 
4,715

Total
 
$
6,821

 
$
3,377

 
$
959

 
$
11,157

 
 
 
 
 
 
 
 
 


 
 
For the Nine Months Ended June 30, 2019
 
 
Initial Restructuring
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
5,521

 
$
4,893

 
$
1,678

 
$
12,092

Residential Home Today
 
427

 
2,105

 
384

 
2,916

Home equity loans and lines of credit
 
6,194

 
933

 
352

 
7,479

Total
 
$
12,142

 
$
7,931

 
$
2,414

 
$
22,487

 
 
 
 
 
 
 
 
 

 
 
For the Nine Months Ended June 30, 2018
 
 
Initial Restructuring
 
Multiple
Restructurings
 
Bankruptcy
 
Total
Residential Core
 
$
3,433

 
$
3,676

 
$
2,361

 
$
9,470

Residential Home Today
 
724

 
2,818

 
582

 
4,124

Home equity loans and lines of credit
 
10,961

 
915

 
367

 
12,243

Total
 
$
15,118

 
$
7,409

 
$
3,310

 
$
25,837

 
 
 
 
 
 
 
 
 



20

Below summarizes the information on TDRs restructured within 12 months of the period presented for which there was a subsequent payment default, at least 30 days past due on one scheduled payment, during the period presented.
 
 
For the Three Months Ended June 30,
 
 
2019
 
2018
TDRs That Subsequently Defaulted
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
Residential Core
 
11

 
$
1,841

 
10

 
$
1,234

Residential Home Today
 
16

 
604

 
18

 
643

Home equity loans and lines of credit
 
10

 
861

 
6

 
393

Total
 
37

 
$
3,306

 
34

 
$
2,270

 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended June 30,
 
 
2019
 
2018
TDRs That Subsequently Defaulted
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
Residential Core
 
15

 
$
2,355

 
13

 
$
1,815

Residential Home Today
 
20

 
767

 
19

 
701

Home equity loans and lines of credit
 
11

 
890

 
11

 
418

Total
 
46

 
$
4,012

 
43

 
$
2,934

 
 
 
 
 
 
 
 
 

Residential loans are internally assigned a grade that complies with the guidelines outlined in the OCC’s Handbook for Rating Credit Risk. Pass loans are assets well protected by the current paying capacity of the borrower. Special Mention loans have a potential weakness, as evaluated based on delinquency status or nature of the product, that the Association feels deserve management’s attention and may result in further deterioration in their repayment prospects and/or the Association’s credit position. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Also included in Substandard are performing home equity loans and lines of credit where the customer has a severely delinquent first mortgage to which the performing home equity loan or line of credit is subordinate and loans in Chapter 7 bankruptcy status where all borrowers have filed, and have not reaffirmed or been dismissed. Loss loans are considered uncollectible and are charged off when identified. Loss loans are of such little value that their continuance as bankable assets is not warranted even though partial recovery may be effected in the future.
The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade. Balances are adjusted for deferred loan fees, expenses and any applicable loans-in-process.
 
 
Pass
 
Special
Mention
 
Substandard
 
Loss
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
10,791,432

 
$
4,449

 
$
46,679

 
$
—

 
$
10,842,560

Residential Home Today
 
73,124

 
—

 
14,345

 
—

 
87,469

Home equity loans and lines of credit
 
2,083,851

 
3,429

 
25,102

 
—

 
2,112,382

Construction
 
22,522

 
—

 
—

 
—

 
22,522

Total real estate loans

 
$
12,970,929

 
$
7,878

 
$
86,126

 
$
—

 
$
13,064,933


21

 
 
Pass
 
Special
Mention
 
Substandard
 
Loss
 
Total
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
Residential Core
 
$
10,898,725

 
$
—

 
$
48,250

 
$
—

 
$
10,946,975

Residential Home Today
 
78,180

 
—

 
16,569

 
—

 
94,749

Home equity loans and lines of credit
 
1,813,502

 
4,216

 
24,109

 
—

 
1,841,827

Construction
 
27,140

 
—

 
—

 
—

 
27,140

Total real estate loans

 
$
12,817,547

 
$
4,216

 
$
88,928

 
$
—

 
$
12,910,691


At June 30, 2019 and September 30, 2018, respectively, the recorded investment of impaired loans includes $93,094 and $95,916 of TDRs individually evaluated for impairment that have adequately performed under the terms of the restructuring and are classified as Pass loans. At June 30, 2019 and September 30, 2018, respectively, there were $3,720 and $4,051 of loans classified Substandard and $7,878 and $4,216 of loans designated Special Mention that are not included in the recorded investment of impaired loans; rather, they are included in loans collectively evaluated for impairment. Of the $7,878 of loans classified Special Mention at June 30, 2019, $4,449 are residential mortgage loans purchased during the quarter ended December 31, 2018. The purchased loans were current and performing at the time of purchase, but are classified Special Mention due to the absence of mortgage insurance coverage and potentially weaker repayment prospects when compared with the Company's originated residential Core Portfolio.

Other consumer loans are internally assigned a grade of non-performing when they become 90 days or more past due. At June 30, 2019 and September 30, 2018, no consumer loans were graded as non-performing.

Activity in the allowance for loan losses is summarized as follows:
 
For the Three Months Ended June 30, 2019
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
19,587

 
$
(865
)
 
$
(500
)
 
$
498

 
$
18,720

Residential Home Today
3,275

 
(25
)
 
(257
)
 
385

 
3,378

Home equity loans and lines of credit
17,420

 
(1,110
)
 
(760
)
 
1,661

 
17,211

Construction
4

 
—

 
—

 
—

 
4

Total real estate loans
$
40,286

 
$
(2,000
)
 
$
(1,517
)
 
$
2,544

 
$
39,313

 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2018
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
14,080

 
$
4,053

 
$
(156
)
 
$
506

 
$
18,483

Residential Home Today
3,740

 
(709
)
 
(214
)
 
555

 
3,372

Home equity loans and lines of credit
25,282

 
(5,344
)
 
(1,176
)
 
2,350

 
21,112

Construction
4

 
—

 
—

 
—

 
4

Total real estate loans

$
43,106

 
$
(2,000
)
 
$
(1,546
)
 
$
3,411

 
$
42,971

 
 
 
 
 
 
 
 
 
 

22

 
For the Nine Months Ended June 30, 2019
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
18,288

 
$
(1
)
 
$
(1,042
)
 
$
1,475

 
$
18,720

Residential Home Today
3,204

 
(720
)
 
(583
)
 
1,477

 
3,378

Home equity loans and lines of credit
20,921

 
(7,278
)
 
(2,078
)
 
5,646

 
17,211

Construction
5

 
(1
)
 
—

 
—

 
4

Total real estate loans

$
42,418

 
$
(8,000
)
 
$
(3,703
)
 
$
8,598

 
$
39,313

 
 
 
 
 
 
 
 
 
 

 
For the Nine Months Ended June 30, 2018
 
Beginning
Balance
 
Provisions
 
Charge-offs
 
Recoveries
 
Ending
Balance
Real estate loans:
 
 
 
 
 
 
 
 
 
Residential Core
$
14,186

 
$
3,154

 
$
(743
)
 
$
1,886

 
$
18,483

Residential Home Today
4,508

 
(1,515
)
 
(1,177
)
 
1,556

 
3,372

Home equity loans and lines of credit
30,249

 
(10,638
)
 
(4,331
)
 
5,832

 
21,112

Construction
5

 
(1
)
 
—

 
—

 
4

Total real estate loans
$
48,948

 
$
(9,000
)
 
$
(6,251
)
 
$
9,274

 
$
42,971

 
 
 
 
 
 
 
 
 
 

5.
DEPOSITS
Deposit account balances are summarized as follows:
 
 
June 30,
2019
 
September 30,
2018
Checking accounts
 
$
888,728

 
$
913,525

Savings accounts
 
1,426,623

 
1,256,054

Certificates of deposit
 
6,394,396

 
6,318,281

 
 
8,709,747

 
8,487,860

Accrued interest
 
4,722

 
3,723

Total deposits
 
$
8,714,469

 
$
8,491,583


Brokered certificates of deposit (exclusive of acquisition costs and subsequent amortization), which are used as a cost effective funding alternative, totaled $518,752 at June 30, 2019 and $670,081 at September 30, 2018. The FDIC places restrictions on banks with regard to issuing brokered deposits based on the bank's capital classification. As a well-capitalized institution at June 30, 2019 and September 30, 2018, the Association may accept brokered deposits without FDIC restrictions.

23

6.    BORROWED FUNDS
Federal Home Loan Bank borrowings at June 30, 2019 are summarized in the table below. The amount and weighted average rates of certain FHLB Advances maturing in 24 months or less reflect the net impact of deferred penalties discussed below: 
 
Amount
 
Weighted
Average
Rate
Maturing in:
 
 
 
12 months or less
$
3,723,797

 
2.39
%
13 to 24 months
60,113

 
1.91
%
25 to 36 months
528

 
1.49
%
37 to 48 months
17,382

 
2.71
%
49 to 60 months
—

 
—
%
Over 60 months
23,663

 
1.66
%
Total FHLB Advances
3,825,483

 
2.38
%
Accrued interest
8,117

 
 
     Total
$
3,833,600

 
 

For the periods ending June 30, 2019 and June 30, 2018 net interest expense related to Federal Home Loan Bank short-term borrowings was $44,589 and $30,644, respectively.
Through the use of interest rate swaps discussed in Note 13. Derivative Instruments, $2,400,000 of FHLB advances included in the table above as maturing in 12 months or less, have effective maturities, assuming no early terminations of the swap contracts, as shown below:
 
Amount
 
Swap Adjusted Weighted
Average
Rate
Effective maturity:
 
 
 
12 months or less
$
50,000

 
1.23
%
13 to 24 months
400,000

 
1.21
%
25 to 36 months
825,000

 
1.79
%
37 to 48 months
400,000

 
2.12
%
49 to 60 months
175,000

 
2.25
%
Over 60 months
550,000

 
2.72
%
Total FHLB Advances under swap contracts
$
2,400,000

 
1.99
%

During fiscal year 2016, $150,000 fixed-rate FHLB advances with remaining terms of approximately four years were prepaid and replaced with new four- and five-year interest rate swap arrangements. The unamortized deferred repayment penalties of $674 related to the $150,000 of restructuring are being recognized in interest expense over the remaining term of the swap contracts.

24

7.    OTHER COMPREHENSIVE INCOME (LOSS)
The change in accumulated other comprehensive income (loss) by component is as follows:
 
For the Three Months Ended
 
For the Three Months Ended
 
June 30, 2019
 
June 30, 2018
 
Unrealized Gains (Losses) on Securities Available for Sale
 
Cash flow hedges
 
Defined Benefit Plan
 
Total
 
Unrealized Gains (Losses) on Securities Available for Sale
 
Cash flow hedges
 
Defined Benefit Plan
 
Total
Balance at beginning of period
$
(5,146
)
 
$
6,156

 
$
(14,540
)
 
$
(13,530
)
 
$
(10,447
)
 
$
42,386

 
$
(17,326
)
 
$
14,613

Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $(7,956) and $1,679
4,133

 
(34,055
)
 
—

 
(29,922
)
 
(1,301
)
 
7,266

 
—

 
5,965

Amounts reclassified, net of tax expense (benefit) of $(671) and $(413)
—

 
(2,789
)
 
264

 
(2,525
)
 
—

 
(1,591
)
 
316

 
(1,275
)
Other comprehensive income (loss)
4,133

 
(36,844
)
 
264

 
(32,447
)
 
(1,301
)
 
5,675

 
316

 
4,690

Balance at end of period
$
(1,013
)
 
$
(30,688
)
 
$
(14,276
)
 
$
(45,977
)
 
$
(11,748
)
 
$
48,061

 
$
(17,010
)
 
$
19,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended
 
For the Nine Months Ended
 
June 30, 2019
 
June 30, 2018
 
Unrealized Gains (Losses) on Securities Available for Sale
 
Cash flow hedges
 
Defined Benefit Plan
 
Total
 
Unrealized Gains (Losses) on Securities Available for Sale
 
Cash flow hedges
 
Defined Benefit Plan
 
Total
Accumulated other comprehensive income (loss) at beginning of period
$
(13,624
)
 
$
51,914

 
$
(15,068
)
 
$
23,222

 
$
(2,915
)
 
$
10,249

 
$
(14,826
)
 
$
(7,492
)
Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $(16,396) and $9,040
12,611

 
(74,286
)
 
—

 
(61,675
)
 
(7,560
)
 
34,365

 
—

 
26,805

Amounts reclassified, net of tax expense (benefit) of $(2,000) and $64
—

 
(8,316
)
 
792

 
(7,524
)
 
—

 
(878
)
 
910

 
32

Other comprehensive income (loss)
12,611

 
(82,602
)
 
792

 
(69,199
)
 
(7,560
)
 
33,487

 
910

 
26,837

Adoption of ASU 2018-02
—

 
—

 
—

 
—

 
(1,273
)
 
4,325

 
(3,094
)
 
(42
)
Balance at end of period
$
(1,013
)
 
$
(30,688
)
 
$
(14,276
)
 
$
(45,977
)
 
$
(11,748
)
 
$
48,061

 
$
(17,010
)
 
$
19,303

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

25

The following table presents the reclassification adjustment out of accumulated other comprehensive income included in net income and the corresponding line item on the consolidated statements of income for the periods indicated:
 
 Amounts Reclassified from Accumulated
 Other Comprehensive Income
 
 
Details about Accumulated Other Comprehensive Income Components
For the Three Months Ended June 30,
 
For the Nine Months Ended June 30,
 
Line Item in the Statement of Income
2019
 
2018
 
2019
 
2018
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest (income) expense
$
(3,530
)
 
$
(2,108
)
 
$
(10,526
)
 
$
(1,164
)
 
 Interest expense
Net income tax effect
741

 
517

 
2,210

 
286

 
 Income tax expense
Net of income tax expense (benefit)
(2,789
)
 
(1,591
)
 
(8,316
)
 
(878
)
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of pension plan:
 
 
 
 
 
 
 
 
 
Actuarial loss
334

 
420

 
1,002

 
1,259

 
 (a)
Net income tax effect
(70
)
 
(104
)
 
(210
)
 
(349
)
 
 Income tax expense
Net of income tax expense (benefit)
264

 
316

 
792

 
910

 
 
 
 
 
 
 
 
 
 
 
 
Adoption of ASU 2018-02
—

 
—

 
—

 
(42
)
 
 (b)
Total reclassifications for the period
$
(2,525
)
 
$
(1,275
)
 
$
(7,524
)
 
$
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
(a) This item is included in the computation of net periodic pension cost. See Note 9. Defined Benefit Plan for additional disclosure.
(b) This item is a reclassification between Accumulated Other Comprehensive Income and Retained Earnings due to the adoption of ASU 2018-02 in fiscal year 2018.

8.    INCOME TAXES
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various state and city jurisdictions. The Company is no longer subject to income tax examinations in its major jurisdictions for tax years prior to 2015.
The Company recognizes interest and penalties on income tax assessments or income tax refunds, where applicable, in the financial statements as a component of its provision for income taxes.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. Among its numerous changes to the Internal Revenue Code, the Act reduced the federal corporate tax rate to 21% from 35% effective January 1, 2018. Because of the Company's September 30 fiscal year end, a blended federal tax rate of 24.53% was applied to the fiscal year ended September 30, 2018. The federal statutory rate of 21% is effective for the Company beginning with the fiscal year ending September 30, 2019.
The Company’s combined federal and state effective income tax rate was 21.9% and 29.7% for the nine months ended June 30, 2019 and June 30, 2018, respectively. The decrease in the effective tax rate is primarily due to a lower federal statutory rate in the recent fiscal year period, and $34 and $4,644 of additional tax expense related to the re-measurement of the Company's deferred tax asset during the nine months ended June 30, 2019 and June 30, 2018, respectively, as a result of the Act.
The Company makes certain investments in limited partnerships which invest in affordable housing projects that qualify for the Low Income Housing Tax Credit (LIHTC). The Company acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnership. The Company accounts for its interests in LIHTCs using the proportional amortization method. The impact of the Company's investments in tax credit entities on the provision for income taxes was not material during the nine months ended June 30, 2019 and June 30, 2018.

26

9.    DEFINED BENEFIT PLAN
The Third Federal Savings Retirement Plan (the “Plan”) is a defined benefit pension plan. Effective December 31, 2002, the Plan was amended to limit participation to employees who met the Plan’s eligibility requirements on that date. Effective December 31, 2011, the Plan was amended to freeze future benefit accruals for participants in the Plan. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, and those eligible participants who no longer receive service credits under the Plan, participate in a separate tier of the Company’s defined contribution 401(k) Savings Plan. Benefits under the Plan are based on years of service and the employee’s average annual compensation (as defined in the Plan) through December 31, 2011. The funding policy of the Plan is consistent with the funding requirements of U.S. federal and other governmental laws and regulations.
The components of net periodic cost recognized in other non-interest expense in the unaudited Consolidated Statements of Income are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
Interest cost
 
$
808

 
$
774

 
$
2,422

 
$
2,322

Expected return on plan assets
 
(1,146
)
 
(1,036
)
 
(3,438
)
 
(3,107
)
Amortization of net loss
 
334

 
420

 
1,002

 
1,259

     Net periodic cost (benefit)
 
$
(4
)
 
$
158

 
$
(14
)
 
$
474


There were no required minimum employer contributions during the nine months ended June 30, 2019. However, the Company made a voluntary contribution of $2,000 during the three months ended June 30, 2019. There are no other employer contributions, voluntary or required, expected during the remainder of the fiscal year ending September 30, 2019.
10.    EQUITY INCENTIVE PLAN
In December 2018, 138,400 restricted stock units were granted to certain directors and officers of the Company and 64,500 performance stock units were granted to certain officers of the Company. The awards were made pursuant to the Amended and Restated 2008 Equity Incentive Plan, which was approved at the annual meeting of shareholders held on February 22, 2018.
The performance stock units vest in the form of Company common stock issued at the end of a three-year period, based on the pro-rata achievement of performance based metrics over a two-year period. The Company recognizes compensation expense for the fair value of performance stock units on a straight-line basis over the requisite service period.
The following table presents share-based compensation expense recognized during the periods presented.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock option expense
$
198

 
$
309

 
$
635

 
$
966

Restricted and performance stock units expense
918

 
795

 
2,708

 
2,663

Total stock-based compensation expense
$
1,116

 
$
1,104

 
$
3,343

 
$
3,629


At June 30, 2019, 4,640,179 shares were subject to options, with a weighted average exercise price of $13.83 per share and a weighted average grant date fair value of $2.64 per share. Expected future expense related to the 857,714 non-vested options outstanding as of June 30, 2019 is $808 over a weighted average period of 1.2 years. At June 30, 2019, 631,073 restricted stock units and performance stock units with a weighted average grant date fair value of $15.15 per unit, are unvested. Expected future compensation expense relating to the 1,396,821 restricted stock units and performance stock units outstanding as of June 30, 2019 is $4,970 over a weighted average period of 1.9 years. Each unit is equivalent to one share of common stock.
11.    COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of

27

any condition established in the contract. Commitments to originate loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire from five to 10 years following the date that the line of credit was established, subject to various conditions, including compliance with payment obligations, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated statements of condition. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The
Company generally uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made.
At June 30, 2019, the Company had commitments to originate loans as follows:
Fixed-rate mortgage loans
$
170,388

Adjustable-rate mortgage loans
246,588

Equity loans and lines of credit
190,964

Total
$
607,940


At June 30, 2019, the Company had unfunded commitments outstanding as follows:
Equity lines of credit
$
2,109,213

Construction loans
24,856

Limited partner investments
11,541

Total
$
2,145,610


At June 30, 2019, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity, is $2,121,902.
The above commitments are expected to be funded through normal operations.
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial condition, results of operation, or statements of cash flows.
12.    FAIR VALUE
Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. A fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. The Company’s policy is to recognize transfers between levels of the hierarchy as of the end of the reporting period in which the transfer occurs. The three levels of inputs are defined as follows:
Level 1 –
  
quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 –
  
quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with few transactions, or model-based valuation techniques using assumptions that are observable in the market.
Level 3 –
  
a company’s own assumptions about how market participants would price an asset or liability.


As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending agency contracts to securitize and sell loans. This election is expected to reduce volatility in earnings related to market fluctuations between the contract trade and settlement dates. At June 30, 2019 and September 30, 2018, there were no loans held for sale subject to pending agency contracts for which the fair value option was elected.

28

Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value.
Investment Securities Available for Sale—Investment securities available for sale are recorded at fair value on a recurring basis. At June 30, 2019 and September 30, 2018, respectively, this includes $564,945 and $531,965 of investments in U.S. government obligations including U.S. Treasury notes and highly liquid collateralized mortgage obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae. Both are measured using the market approach. The fair values of investment securities represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. Third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities.
Mortgage Loans Held for Sale—The fair value of mortgage loans held for sale is estimated on an aggregate basis using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. At June 30, 2019 and September 30, 2018, there were $2,635 and $659, respectively, of loans held for sale carried at cost.
Impaired Loans—Impaired loans represent certain loans held for investment that are subject to a fair value measurement under U.S. GAAP because they are individually evaluated for impairment and that impairment is measured using a fair value measurement, such as the fair value of the underlying collateral. Impairment is measured using a market approach based on the fair value of the collateral, less estimated costs to dispose, for loans the Company considers to be collateral-dependent due to a delinquency status or other adverse condition severe enough to indicate that the borrower can no longer be relied upon as the continued source of repayment. These conditions are described more fully in Note 4. Loans and Allowance for Loan Losses. To calculate impairment of collateral-dependent loans, the fair market values of the collateral, estimated using exterior appraisals in the majority of instances, are reduced by calculated costs to dispose, derived from historical experience and recent market conditions. Any indicated impairment is recognized by a charge to the allowance for loan losses. Subsequent increases in collateral values or principal pay downs on loans with recognized impairment could result in an impaired loan being carried below its fair value. When no impairment loss is indicated, the carrying amount is considered to approximate the fair value of that loan to the Company because contractually that is the maximum recovery the Company can expect. The recorded investment of loans individually evaluated for impairment based on the fair value of the collateral are included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The range and weighted average impact of estimated costs to dispose on fair values is determined at the time of impairment or when additional impairment is recognized and is included in quantitative information about significant unobservable inputs later in this note.
Loans held for investment that have been restructured in TDRs and are performing according to the restructured terms of the loan agreement are individually evaluated for impairment using the present value of future cash flows based on the loan’s effective interest rate, which is not a fair value measurement. At June 30, 2019 and September 30, 2018, respectively, this included $98,584 and $98,459 in recorded investment of TDRs with related allowances for loss of $12,648 and $12,002.
Real Estate Owned—Real estate owned includes real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of the cost basis or fair value, less estimated costs to dispose. The carrying amounts of real estate owned at June 30, 2019 and September 30, 2018 were $2,120 and $2,794, respectively. Fair value is estimated under the market approach using independent third party appraisals. As these properties are actively marketed, estimated fair values may be adjusted by management to reflect current economic and market conditions. At June 30, 2019 and September 30, 2018, these adjustments were not significant to reported fair values. At June 30, 2019 and September 30, 2018, respectively, $760 and $1,238 of real estate owned is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis where the cost basis equals or exceeds the estimate of fair values, less estimated costs to dispose of these properties. Real estate owned, included in other assets in the Consolidated Statements of Condition, includes estimated costs to dispose of $106 and $132 related to properties measured at fair value and $1,466 and $1,688 of properties carried at their original or adjusted cost basis at June 30, 2019 and September 30, 2018, respectively.
Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio, forward commitments on contracts to deliver mortgage loans, and interest rate swaps designated as cash flow hedges. Derivatives not designated as cash flow hedges are reported at fair value in other assets or other liabilities on the Consolidated Statement of Condition with changes in value recorded in current earnings. Derivatives qualifying as cash flow hedges, when highly effective, are reported in other assets or other liabilities on the Consolidated Statement of Condition with changes in value recorded in OCI. The fair value of interest rate lock commitments is adjusted by a closure rate based on the estimated percentage of commitments that will result in closed loans. The range and weighted average impact of the closure rate is included in quantitative information about significant unobservable inputs later in this note. A significant change in the closure

29

rate may result in a significant change in the ending fair value measurement of these derivatives relative to their total fair value. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Fair value of forward commitments is estimated using a market approach based on quoted secondary market pricing for loan portfolios with characteristics similar to loans underlying the derivative contracts. Forward commitments on contracts to deliver mortgage loans are included in Level 2 of the hierarchy.
Assets and liabilities carried at fair value on a recurring basis in the Consolidated Statements of Condition at June 30, 2019 and September 30, 2018 are summarized below. There were no liabilities carried at fair value on a recurring basis at June 30, 2019.
 
 
 
Recurring Fair Value Measurements at Reporting Date Using
 
June 30, 2019
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
REMICs
$
553,318

 
$
—

 
$
553,318

 
$
—

Fannie Mae certificates
7,629

 
—

 
7,629

 
—

U.S. government and agency obligations
3,998

 
—

 
3,998

 
—

Derivatives:
 
 
 
 
 
 
 
Interest rate lock commitments
211

 
—

 
—

 
211

Total
$
565,156

 
$
—

 
$
564,945

 
$
211

 
 
 
Recurring Fair Value Measurements at Reporting Date Using
 
September 30, 2018
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Investment securities available for sale:
 
 
 
 
 
 
 
REMICs
$
519,999

 
$
—

 
$
519,999

 
$
—

Fannie Mae certificates
7,998

 
—

 
7,998

 
—

U.S. government and agency obligations

3,968

 
—

 
3,968

 
—

Total
$
531,965

 
$
—

 
$
531,965

 
$
—

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Interest rate lock commitments
$
2

 
$
—

 
$
—

 
$
2

Total
$
2

 
$
—

 
$
—

 
$
2


30

The table below presents a reconciliation of the beginning and ending balances and the location within the Consolidated Statements of Income where gains (losses) due to changes in fair value are recognized on interest rate lock commitments which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
141

 
$
(2
)
 
$
(2
)
 
$
58

Gain (loss) during the period due to changes in fair value:
 
 
 
 
 
 
 
Included in other non-interest income
70

 
9

 
213

 
(51
)
Ending balance
$
211

 
$
7

 
$
211

 
$
7

Change in unrealized gains for the period included in earnings for assets held at end of the reporting date
$
211

 
$
7

 
$
211

 
$
7


Summarized in the tables below are those assets measured at fair value on a nonrecurring basis.
 
 
 
Nonrecurring Fair Value Measurements at Reporting Date Using
 
June 30,
2019
 
Quoted Prices in
Active Markets for
Identical Assets
 
                       Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans, net of allowance
$
76,664

 
$
—

 
$
—

 
$
76,664

Real estate owned(1)
760

 
—

 
—

 
760

Total
$
77,424

 
$
—

 
$
—

 
$
77,424

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

 
 
 
Nonrecurring Fair Value Measurements at Reporting Date Using
 
September 30,
2018
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans, net of allowance
$
82,250

 
$
—

 
$
—

 
$
82,250

Real estate owned(1)
1,238

 
—

 
—

 
1,238

Total
$
83,488

 
$
—

 
$
—

 
$
83,488

(1) 
Amounts represent fair value measurements of properties before deducting estimated costs to dispose.
The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy. The interest rate lock commitments at June 30, 2019 include both mortgage origination applications and preapprovals. Preapprovals have a much lower closure rate than origination applications as reflected in the weighted average closure rate.
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
Valuation Technique(s)
 
Unobservable Input
 
Range
 
Weighted Average
Impaired loans, net of allowance
 
$76,664
 
Market comparables of collateral discounted to estimated net proceeds
 
Discount appraised value to estimated net proceeds based on historical experience:
 
 
 
 
 
 
 
 
• Residential Properties
 
0
-
28%
 
6.1%
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
$211
 
Quoted Secondary Market pricing
 
Closure rate
 
0
-
100%
 
60.6%

31

 
 
Fair Value
 
 
 
 
 
 
 
 
 

 
 
September 30, 2018
 
Valuation Technique(s)
 
Unobservable Input
 
Range
 
Weighted Average
Impaired loans, net of allowance
 
$82,250
 
Market comparables of collateral discounted to estimated net proceeds
 
Discount appraised value to estimated net proceeds based on historical experience:
 
 
 
 
 
 
 
 
• Residential Properties
 
0
-
28%
 
6.4%
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
$(2)
 
Quoted Secondary Market pricing
 
Closure rate
 
0
-
100%
 
50.0%

The following tables present the estimated fair value of the Company’s financial instruments and their carrying amounts as reported in the Statement of Condition.
 
June 30, 2019
 
Carrying
 
Fair
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Value
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
  Cash and due from banks
$
28,749

 
$
28,749

 
$
28,749

 
$
—

 
$
—

  Interest earning cash equivalents
242,599

 
242,599

 
242,599

 
—

 
—

Investment securities available for sale
564,945

 
564,945

 
—

 
564,945

 
—

  Mortgage loans held for sale
2,635

 
2,710

 
—

 
2,710

 
—

  Loans, net:
 
 
 
 
 
 
 
 
 
Mortgage loans held for investment
13,025,620

 
13,460,209

 
—

 
—

 
13,460,209

Other loans
2,878

 
2,966

 
—

 
—

 
2,966

  Federal Home Loan Bank stock
99,647

 
99,647

 
N/A

 
—

 
—

  Accrued interest receivable
40,998

 
40,998

 
—

 
40,998

 
—

Cash collateral received from or held by counterparty
26,736

 
26,736

 
26,736

 
—

 
—

Derivatives
211

 
211

 
—

 
—

 
211

Liabilities:
 
 
 
 
 
 
 
 
 
  Checking and passbook accounts
$
2,315,351

 
$
2,315,351

 
$
—

 
$
2,315,351

 
$
—

  Certificates of deposit
6,399,118

 
6,466,179

 
—

 
6,466,179

 
—

  Borrowed funds
3,833,600

 
3,837,423

 
—

 
3,837,423

 
—

  Borrowers’ advances for insurance and taxes
57,531

 
57,531

 
—

 
57,531

 
—

Principal, interest and escrow owed on loans serviced
19,180

 
19,180

 
—

 
19,180

 
—


32

 
September 30, 2018
 
Carrying
 
Fair
 
Level 1
 
Level 2
 
Level 3
 
Amount
 
Value
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
  Cash and due from banks
$
29,056

 
$
29,056

 
$
29,056

 
$
—

 
$
—

  Interest earning cash equivalents
240,719

 
240,719

 
240,719

 
—

 
—

Investment securities available for sale
531,965

 
531,965

 
—

 
531,965

 
—

  Mortgage loans held for sale
659

 
661

 
—

 
661

 
—

  Loans, net:
 
 
 
 
 
 
 
 
 
Mortgage loans held for investment
12,868,273

 
12,908,729

 
—

 
—

 
12,908,729

Other loans
3,021

 
3,045

 
—

 
—

 
3,045

  Federal Home Loan Bank stock
93,544

 
93,544

 
N/A

 
—

 
—

  Accrued interest receivable
38,696

 
38,696

 
—

 
38,696

 
—

Cash collateral received from or held by counterparty
13,794

 
13,794

 
13,794

 
—

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
  Checking and passbook accounts
$
2,169,579

 
$
2,169,579

 
$
—

 
$
2,169,579

 
$
—

  Certificates of deposit
6,322,004

 
6,006,951

 
—

 
6,006,951

 
—

  Borrowed funds
3,721,699

 
3,724,020

 
—

 
3,724,020

 
—

  Borrowers’ advances for insurance and taxes
103,005

 
103,005

 
—

 
103,005

 
—

Principal, interest and escrow owed on loans serviced
31,490

 
31,490

 
—

 
31,490

 
—

Derivatives
2

 
2

 
—

 
—

 
2


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

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

33

Accrued Interest Receivable, Borrowers’ Advances for Insurance and Taxes, and Principal, Interest and Related Escrow Owed on Loans Serviced— The carrying amount is a reasonable estimate of fair value.
Derivatives— Fair value is estimated based on the valuation techniques and inputs described earlier in this footnote.
13.    DERIVATIVE INSTRUMENTS
The Company enters into interest rate swaps to add stability to interest expense and manage exposure to interest rate movements as part of an overall risk management strategy. For hedges of the Company's borrowing program, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments. These derivatives are used to hedge the forecasted cash outflows associated with the Company's FHLB borrowings. At June 30, 2019 and September 30, 2018, the interest rate swaps used in the Company's asset/liability management strategy have weighted average terms of 3.7 years and 3.3 years and weighted average fixed-rate interest payments of 1.99% and 1.75%, respectively.
Cash flow hedges are initially assessed for effectiveness using regression analysis. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Quarterly, a qualitative analysis is performed to monitor the ongoing effectiveness of the hedging instrument. All derivative positions were initially and continue to be highly effective at June 30, 2019.
The Company enters into forward commitments for the sale of mortgage loans principally to protect against the risk of adverse interest rate movements on net income. The Company recognizes the fair value of such contracts when the characteristics of those contracts meet the definition of a derivative. These derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income. There were no forward commitments for the sale of mortgage loans at June 30, 2019 or September 30, 2018.
In addition, the Company is party to derivative instruments when it enters into commitments to originate a portion of its loans, which when funded, are classified as held for sale. Such commitments are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income.
The following tables provide the locations within the Consolidated Statements of Condition, notional values and fair values, at the reporting dates, for all derivative instruments.
 
 
June 30, 2019
 
September 30, 2018
 
 
Notional Value
 
Fair Value
 
Notional Value
 
Fair Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Cash flow hedges: Interest rate swaps
 
 
 
 
 
 
 
 
Other Assets
 
$
675,000

 
$
—

 
$
1,725,000

 
$
—

Other Liabilities
 
$
1,725,000

 
$
—

 
$
—

 
$
—

Total cash flow hedges: Interest rate swaps
 
$
2,400,000

 
$
—

 
$
1,725,000

 
$
—

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
 
 
 
 
 
 
 
Other Assets
 
$
11,951

 
$
211

 
$
—

 
$
—

Other Liabilities
 
$
—

 
$
—

 
$
4,248

 
$
2

Total interest rate lock commitments
 
$
11,951

 
$
211

 
$
4,248

 
$
(2
)



34

The following tables present the net gains and losses recorded within the Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income relating to derivative instruments.
 
 
 
Three Months Ended
 
Nine Months Ended
 
Location of Gain or (Loss)
 
June 30,
 
June 30,
 
Recognized in Income
 
2019
 
2018
 
2019
 
2018
Cash flow hedges
 
 
 
 
 
 
 
 
 
Amount of gain/(loss) recognized
Other comprehensive income
 
$
(43,108
)
 
$
9,292

 
$
(94,033
)
 
$
46,233

Amount of gain/(loss) reclassified from AOCI
Interest expense: Borrowed funds
 
3,530

 
2,108

 
10,526

 
1,164

 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
Other non-interest income
 
$
70

 
$
9

 
$
213

 
$
(51
)
 
 
 
 
 
 
 
 
 
 

The Company estimates that $175 of the amounts reported in AOCI will be reclassified as a debit to interest expense during the twelve months ending June 30, 2020.
Derivatives contain an element of credit risk which arises from the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. The Company's exposure is limited to the replacement value of the contracts rather than the notional or principal amounts. Credit risk is minimized through counterparty margin payments, transaction limits and monitoring procedures. All of the Company's swap transactions are cleared through a registered clearing broker to a central clearing organization. The clearing organization establishes daily cash and upfront cash or securities margin requirements to cover potential exposure in the event of default. This process shifts the risk away from the counterparty, since the clearing organization acts as the middleman on each cleared transaction. For derivative transactions cleared through certain clearing parties, variation margin payments are recognized as settlements. The fair value of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements.
14.    RECENT ACCOUNTING PRONOUNCEMENTS

Adopted during the nine months ended June 30, 2019
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. The amendments include a five step process for consideration of the core principle, guidance on the accounting treatment for costs associated with a contract, and disclosure requirements related to the revenue process. The FASB issued several additional ASU's to clarify guidance and provide implementation support for ASU 2014-09. Topic 606 does not apply to revenue within the scope of other standards, such as revenue associated with financial instruments.
Effective October 1, 2018, the Company adopted ASU 2014-09 and all subsequent amendments related to the ASU (collectively, “Topic 606”). We elected to adopt this guidance utilizing the modified retrospective approach. The adoption did not have a significant impact to the Company's consolidated financial statements, as such, a cumulative effect adjustment to beginning retained earnings was not necessary. Neither the new standard, nor any of the related amendments, resulted in a material change from our current accounting for revenue because a significant amount of the Company’s revenue streams such as interest income, are not within the scope of Topic 606. Our services that fall within the scope of Topic 606 are recognized as revenue as we satisfy our performance obligation to the customer. The disaggregation of our revenue from contracts with customers in scope of Topic 606 is provided below:

35

 
 
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
Location of Revenue
 
2019
 
2018
 
2019
 
2018
Net Gain/(Loss) from Sales of REO
 
Non-Interest Expense (1)
 
$
(333
)
 
$
(12
)
 
$
(359
)
 
$
(245
)
Deposit Account and Other Banking Income
 
Non-Interest Income
 
235

 
221

 
678

 
677

Total
 
 
 
$
(98
)
 
$
209

 
$
319

 
$
432

____________________________
(1) Net gain/(loss) from sales of real estate owned (REO) is located in non-interest expense in the consolidated statements of income because the gains and losses from the sales of REO assets are netted together with real estate owned expenses (which includes associated legal and maintenance expenses).

Sales of REO: The Company derecognizes the REO asset and fully recognizes a gain or loss from the REO sale when control of the property transfers to the buyer, which generally occurs at closing. Topic 606 does not significantly change the pattern of revenue recognition unless the Company finances the sale. When the Company finances the REO sale, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the Company will collect substantially all of the consideration to which it is entitled in exchange for the property. Once these criteria are met, the REO asset is derecognized and the Company fully recognizes the gain or loss upon transfer of control of the property to the buyer. There are no instances of the Company financing the sale of one of its REO properties during the nine months ended June 30, 2019.
Deposit Account and Other Banking Income: The Company charges depositors transaction-based service fees, which includes services such as stop-payments, wire transfers, check and checking account charges. The performance obligation of the transaction-based fees is satisfied, and related revenue is recognized, at the point in time we perform the requested service.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU changes the accounting for certain equity investments, financial liabilities under the fair value option and presentation and disclosure requirements for financial instruments. Equity investments not accounted for under the equity method of accounting will be measured at fair value with changes recognized in net income. If there are no readily determinable fair values, the guidance allows entities to measure investments at cost less impairment, whereby impairment is based on a qualitative assessment. The guidance eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value of financial instruments measured at amortized cost. The guidance also requires financial assets and financial liabilities to be presented separately in the footnotes, grouped by measurement category (fair value, amortized cost) and form of financial assets. If an entity has elected the fair value option to measure liabilities, the new accounting guidance requires the portion of the change in fair value of a liability resulting from credit risk to be presented in OCI. ASU 2018-03 was issued in February 2018 as technical guidance to ASU 2016-01 to aid in clarification and presentation requirements. Both accounting and disclosure guidance are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years on a prospective basis, with a cumulative-effect adjustment to the balance sheet at the beginning of the fiscal year adopted. Early adoption is not permitted. The Company adopted this guidance effective October 1, 2018 utilizing the modified-retrospective transition method. The Company did not recognize a cumulative adjustment to equity upon implementation of the standard. The guidance solely impacted the Company's disclosures, and did not have a material impact on the Company's consolidated financial condition or results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update address eight specific cash flow issues with the objective of reducing the existing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and Other Topics. Current guidance is either unclear or does not include specific guidance on these issues. Additionally, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, which requires restricted cash or restricted cash equivalents be included in beginning-of-period and end-of-period cash totals and changes in this classification be explained separately. The amendments in both these Updates are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied using a retrospective transition method. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The Company adopted the guidance effective October 1, 2018. Adoption of this accounting guidance did not have a material impact on the presentation of the Consolidated Statements of Cash Flows.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. This Update clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value (or calculated intrinsic value,

36

if those amounts are being used to measure the award under ASC 718), the vesting conditions, or the classification of the award (as equity or liability) change as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The Company adopted the guidance effective October 1, 2018. The Update did not have a material impact on the Company's consolidated financial condition or results of operations.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This Update is intended to more closely align financial reporting of hedging relationships with risk management activities. This amendment expands hedge accounting for both nonfinancial and financial risk components, modifies the presentation of certain hedging relationships in the financial statements and eases hedge effectiveness testing requirements. The amendments are effective for fiscal years beginning after December 15, 2018. Early adoption is permissible in any interim period after the issuance of this Update. The Company early adopted the amendments effective October 1, 2018 and revised the disclosures included in footnote 13. Derivative Instruments, accordingly. In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index SWAP (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit use of the Overnight Index Swap Rate (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the UST, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate. Third Federal adopted ASU 2018-16 concurrently with ASU 2017-12. The Updates did not have a material impact on the Company's consolidated financial condition or results of operations.

Issued but not yet adopted as of June 30, 2019
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance changes the accounting treatment of leases by requiring lessees to recognize operating leases on the balance sheet as lease assets (a right-to-use asset) and lease liabilities (a liability to make lease payments), measured on a discounted basis and will require both quantitative and qualitative disclosure regarding key information about the leasing arrangements. An accounting policy election to not recognize operating leases with terms of 12 months or less as assets and liabilities is permitted. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 required entities to adopt the new lease standard using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides entities with an additional (and optional) transition method to adopt the new lease standard. Under this new method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company intends to adopt this guidance effective October 1, 2019 utilizing the transition method described in ASU 2018-11. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient, which allows entities to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entity's adoption of Topic 842. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842) Narrow-Scope Improvements, which addresses lessor stakeholder questions regarding sales tax, certain lessor costs and the recognition of variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU 2019-01, Leases Codification Improvements, which addresses stakeholder questions regarding presentation of cash flows for sales type and direct financing leases, determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, and transition disclosures related to Topic 250. An implementation team has been created to identify all leases, determine which, if any, practical expedients to utilize, and gather data required to comply. All leases have been identified. The Company selected a third-party vendor to assist in the implementation and subsequent accounting for leases under the ASUs. The Company expects to recognize a right-to-use asset and a lease liability for its operating lease commitments on the Consolidated Statements of Condition and is assessing any additional impact this new standard may have on its consolidated financial condition and results of operations. The Company also anticipates additional disclosures to be provided at adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update replace the existing incurred loss impairment methodology with a methodology that reflects the expected credit losses for the remaining life of the asset. This will require consideration of a broader range of information, including reasonably supportable forecasts, in the measurement of expected credit losses. The amendments expand disclosures of credit quality indicators, requiring disaggregation by year of origination (vintage). Additionally, credit losses on available for sale debt securities will be recognized as an allowance rather than a write-down, with reversals permitted as credit loss estimates decline. An entity will apply the amendments in this Update through a modified-retrospective approach, resulting in a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. For public business entities that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company intends to adopt this guidance effective October 1, 2020. In May 2019, the FASB issued ASU

37

2019-05, Financial Instruments - Credit Losses (Topic 326) Targeted Transition Relief, which addresses stakeholders' concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. Management has formed a working group comprised of associates from across the Company including accounting, risk management, and finance. This group has begun assessing the required changes to our credit loss estimation methodologies and systems, as well as additional data and resources that may be required to comply with this standard. The Company is currently evaluating the impact that this accounting guidance may have on its consolidated financial condition or results of operations. The actual effect on our allowance for loan losses at the adoption date will be dependent upon the nature of the characteristics of the portfolio as well as the macroeconomic conditions and forecasts at that date.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update add, remove and modify the disclosure requirements on fair value measurements in Topic 820. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this Update. The Company intends to adopt the amendments effective October 1, 2020. The Update is not expected to have a material impact on the Company's consolidated financial condition, results of operations, or disclosures.
In August 2018, the FASB issued ASU 2018-15, Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. Current GAAP does not specifically address the accounting for implementation costs of a hosting arrangement that is a service contract. Accordingly, the amendments in this Update improve current GAAP because they clarify that accounting and align the accounting for implementation costs for hosting arrangements, regardless of whether they convey a license to the hosted software. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, for all entities. The Company intends to adopt the amendments effective October 1, 2020. Management is currently assessing the impact the Update will have on the Company's disclosures.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Updates 2016-13, 2017-12 and 2016-01. The amendments related to Update 2016-13 clarify the scope of the credit losses standard and address issues related to accrued interest and recoveries. The Company intends to adopt the credit loss standard amendments concurrently with Update 2016-13 on October 1, 2020. The amendments related to Update 2017-12 address partial-term fair value hedges, fair value hedge basis adjustments and certain transition requirements. The amendments related to Update 2016-01 address the scope of financial instrument recognition and measurement guidance, the requirement for re-measurement under ASC 820 when using the measurement alternative and certain disclosure requirements. The Company intends to early adopt the amendments related to hedging and financial instruments effective July 1, 2019. ASU 2019-04 is not expected to have a material impact on the Company’s consolidated financial condition, results of operation, or disclosures.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company's consolidated financial statements or do not apply to its operations.


38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
        This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include, among other things:
●
statements of our goals, intentions and expectations;
●
statements regarding our business plans and prospects and growth and operating strategies;
●
statements concerning trends in our provision for loan losses and charge-offs;
●
statements regarding the trends in factors affecting our financial condition and results of operations, including asset quality of our loan and investment portfolios; and
●
estimates of our risks and future costs and benefits.
 
 
        These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:
●
significantly increased competition among depository and other financial institutions;
●
inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;
●
general economic conditions, either globally, nationally or in our market areas, including employment prospects, real estate values and conditions that are worse than expected;
●
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;
●
decreased demand for our products and services and lower revenue and earnings because of a recession or other events;
●
changes in consumer spending, borrowing and savings habits;
●
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;
●
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board;
●
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;
●
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;
●
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;
●
the continuing governmental efforts to restructure the U.S. financial and regulatory system;
●
the ability of the U.S. Government to remain open, function properly and manage federal debt limits;
●
changes in policy and/or assessment rates of taxing authorities that adversely affect us or our customers;
●
changes in accounting and tax estimates;
●
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 inability of third-party providers to perform their obligations to us;
●
a slowing or failure of the prevailing economic recovery; and
●
cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems.
 
 
        Because of these and other uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Please see Part II - Other Information Item 1A. Risk Factors for a discussion of certain risks related to our business.

39

Overview
Our business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to our customers.
Since being organized in 1938, we grew to become, at the time of our initial public offering of stock in April 2007, the nation’s largest mutually-owned savings and loan association based on total assets. We credit our success to our continued emphasis on our primary values: “Love, Trust, Respect, and a Commitment to Excellence, along with Having Fun.” Our values are reflected in the design and pricing of our loan and deposit products, as described below. Our values are further reflected in a long-term revitalization program encompassing the three-mile corridor of the Broadway-Slavic Village neighborhood in Cleveland, Ohio where our main office was established and continues to be located and where the educational programs we have established and/or supported are located. We intend to continue to adhere to our primary values and to support our customers and the communities in which we operate.
Management believes that the following matters are those most critical to our success: (1) controlling our interest rate risk exposure; (2) monitoring and limiting our credit risk; (3) maintaining access to adequate liquidity and diverse funding sources; and (4) monitoring and controlling our operating expenses.
Controlling Our Interest Rate Risk Exposure. Although the significant housing and credit quality issues that arose in connection with the 2008 financial crisis had a distinctly negative effect on our operating results and, as described below, that experience made a lasting impression on our risk awareness, historically, our greatest risk has been our exposure to changes in interest rates. When we hold longer-term, fixed-rate assets, funded by liabilities with shorter re-pricing characteristics, we are exposed to potentially adverse impacts from changing interest rates, and most notably rising interest rates. Generally, and particularly over extended periods of time that encompass full economic cycles, interest rates associated with longer-term assets, like fixed-rate mortgages, have been higher than interest rates associated with shorter-term funding sources, like deposits. This difference has been an important component of our net interest income and is fundamental to our operations. We manage the risk of holding longer-term, fixed-rate mortgage assets primarily by maintaining regulatory capital in excess of levels required to be well capitalized, by promoting adjustable-rate loans and shorter-term, fixed-rate loans, by marketing home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate and by opportunistically extending the duration of our funding sources.
Levels of Regulatory Capital
At June 30, 2019, the Company’s Tier 1 (leverage) capital totaled $1.73 billion, or 12.18% of net average assets and 21.97% of risk-weighted assets, while the Association’s Tier 1 (leverage) capital totaled $1.50 billion, or 10.54% of net average assets and 19.05% of risk-weighted assets. Each of these measures was more than twice the requirements currently in effect for the Association for designation as “well capitalized” under regulatory prompt corrective action provisions, which set minimum levels of 5.00% of net average assets and 8.00% of risk-weighted assets. Refer to the Liquidity and Capital Resources section of this Item 2 for additional discussion regarding regulatory capital requirements.
Promotion of Adjustable-Rate Loans and Shorter-Term, Fixed-Rate Loans
We market an adjustable-rate mortgage loan that provides us with improved interest rate risk characteristics when compared to a 30-year, fixed-rate mortgage loan. Our “Smart Rate” adjustable-rate mortgage offers borrowers an interest rate lower than that of a 30-year, fixed-rate loan. The interest rate of the Smart Rate mortgage is locked for three or five years then resets annually. The Smart Rate mortgage contains a feature to re-lock the rate an unlimited number of times at our then-current interest rate and fee schedule, for another three or five years (which must be the same as the original lock period) without having to complete a full refinance transaction. Re-lock eligibility is subject to a satisfactory payment performance history by the borrower (current at the time of re-lock, and no foreclosures or bankruptcies since the Smart Rate application was taken). In addition to a satisfactory payment history, re-lock eligibility requires that the property continues to be the borrower’s primary residence. The loan term cannot be extended in connection with a re-lock nor can new funds be advanced. All interest rate caps and floors remain as originated.
We also offer a ten-year, fully amortizing fixed-rate, first mortgage loan. The ten-year, fixed-rate loan has a more desirable interest rate risk profile when compared to loans with fixed-rate terms of 15 to 30 years and can help to more effectively manage interest rate risk exposure, yet provides our borrowers with the certainty of a fixed interest rate throughout the life of the obligation.

40

The following tables set forth our first mortgage loan production and balances segregated by loan structure at origination.
 
For the Nine Months Ended June 30, 2019
 
For the Nine Months Ended June 30, 2018
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
First Mortgage Loan Originations:
 
 
 
 
 
 
 
ARM (all Smart Rate) production
$
523,078

 
44.8
%
 
$
840,504

 
49.0
%
Fixed-rate production:
 
 
 
 
 
 
 
    Terms less than or equal to 10 years
60,468

 
5.2

 
192,960

 
11.2

    Terms greater than 10 years
583,617

 
50.0

 
681,969

 
39.8

        Total fixed-rate production
644,085

 
55.2

 
874,929

 
51.0

Total First Mortgage Loan Originations
$
1,167,163

 
100.0
%
 
$
1,715,433

 
100.0
%
 
June 30, 2019
 
September 30, 2018
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Balance of Residential Mortgage Loans Held For Investment:
 
 
 
 
 
 
 
ARMs
$
5,086,776

 
46.6
%
 
$
5,166,282

 
46.9
%
Fixed-rate:
 
 
 
 
 
 
 
    Terms less than or equal to 10 years
1,558,540

 
14.3

 
1,822,918

 
16.5

    Terms greater than 10 years
4,269,246

 
39.1

 
4,036,544

 
36.6

        Total fixed-rate
5,827,786

 
53.4

 
5,859,462

 
53.1

Total Residential Mortgage Loans Held For Investment
$
10,914,562

 
100.0
%
 
$
11,025,744

 
100.0
%
The following table sets forth the balances as of June 30, 2019 for all ARM loans segregated by the next scheduled interest rate reset date.
 
Current Balance of ARM Loans Scheduled for Interest Rate Reset
During the Fiscal Years Ending September 30,
(In thousands)
2019
$
62

2020
650,068

2021
1,214,370

2022
1,593,569

2023
1,043,261

2024
585,446

     Total
$
5,086,776

At June 30, 2019 and September 30, 2018, mortgage loans held for sale, all of which were long-term, fixed-rate first mortgage loans and all of which were held for sale to Fannie Mae, totaled $2.6 million and $0.7 million, respectively.


41

Loan Portfolio Yield
The following tables set forth the interest yield as of June 30, 2019 for the portfolio of loans held for investment, by type of loan, structure and geographic location.
 
 
June 30, 2019
 
 
Balance
 
Percent
 
Yield
 
 
(Dollars in thousands)
Real Estate Loans:
 
 
 
 
 
 
Fixed Rate
 
 
 
 
 
 
      Terms less than or equal to 10 years
 
$
1,558,540

 
11.9
%
 
2.94
%
      Terms greater than 10 years
 
4,269,246

 
32.7
%
 
4.09
%
Total Fixed-Rate loans
 
5,827,786

 
44.6
%
 
3.78
%
 
 
 
 
 
 
 
ARMs
 
5,086,776

 
39.0
%
 
3.16
%
Home Equity Loans and Lines of Credit
 
2,085,853

 
16.0
%
 
4.69
%
Construction and Consumer
 
50,528

 
0.4
%
 
4.01
%
Total Loans Receivable, net
 
$
13,050,943

 
100.0
%
 
3.68
%
 
 
June 30, 2019
 
 
Balance
 
Fixed Rate Balance
 
Percent
 
Yield
 
 
(Dollars in thousands)
Residential Mortgage Loans
 
 
 
 
 
 
 
 
Ohio
 
$
6,167,810

 
$
4,276,870

 
47.3
%
 
3.70
%
Florida
 
1,752,059

 
699,425

 
13.4
%
 
3.48
%
Other
 
2,994,693

 
851,491

 
22.9
%
 
3.07
%
     Total Residential Mortgage Loans
 
10,914,562

 
5,827,786

 
83.6
%
 
3.49
%
Home Equity Loans and Lines of Credit
 
 
 
 
 
 
 
 
Ohio
 
668,755

 
60,620

 
5.1
%
 
4.69
%
Florida
 
403,551

 
34,793

 
3.1
%
 
4.57
%
California
 
338,952

 
23,000

 
2.6
%
 
4.75
%
Other
 
674,595

 
17,779

 
5.2
%
 
4.73
%
     Total Home Equity Loans and Lines of Credit
 
2,085,853

 
136,192

 
16.0
%
 
4.69
%
Construction and Consumer
 
50,528

 
50,528

 
0.4
%
 
4.01
%
Total Loans Receivable, net
 
$
13,050,943

 
$
6,014,506

 
100.0
%
 
3.68
%

Marketing Home Equity Lines of Credit
Since 2016, we have actively marketed home equity lines of credit, which carry an adjustable-rate of interest indexed to the prime rate which provides interest rate sensitivity to that portion of our assets. Prior to 2010, home equity lending also represented a meaningful strategy to manage our interest rate risk profile. Between 2010 and 2015, the Association, in various steps, restricted and modified its home equity lending products and the markets where they were offered, in response to the 2008 financial crisis and the resulting regulatory environments that existed during that time. Through redesigned home equity products, we believe we have re-established home equity line of credit lending as a meaningful strategy to manage our interest rate risk profile. At June 30, 2019, the principal balance of home equity lines of credit totaled $1.64 billion. Our home equity lending is discussed in the Allowance for Loan Losses section of the Critical Accounting Policies that follows this Overview.


42

Extending the Duration of Funding Sources
As a complement to our strategies to shorten the duration of our interest earning assets, as described above, we also seek to lengthen the duration of our interest bearing funding sources. These efforts include monitoring the relative costs of alternative funding sources such as retail deposits, brokered certificates of deposit, longer-term (e.g. four to six years) fixed rate advances from the FHLB of Cincinnati, and shorter-term (e.g. three months) advances from the FHLB of Cincinnati, the durations of which are extended by correlated interest rate exchange contracts. Each funding alternative is monitored and evaluated based on its effective interest payment rate, options exercisable by the creditor (early withdrawal, right to call, etc.), and collateral requirements. The interest payment rate is a function of market influences that are specific to the nuances and market competitiveness/breadth of each funding source. Generally, early withdrawal options are available to our retail CD customers but not to holders of brokered CDs; issuer call options are not provided on our advances from the FHLB of Cincinnati; and we are not subject to early termination options with respect to our interest rate exchange contracts. Additionally, collateral pledges are not provided with respect to our retail CDs or our brokered CDs, but are required for our advances from the FHLB of Cincinnati as well as for our interest rate exchange contracts.
During the nine months ended June 30, 2019, the balance of deposits increased $222.9 million, which was comprised of a $373.9 million increase in the balance of customer retail deposits, partially offset by a $151.0 million decrease in the balance of brokered CDs (which is inclusive of acquisition costs and subsequent amortization). Additionally, during the nine months ended June 30, 2019, we decreased the balance of our short-term advances from the FHLB of Cincinnati by $266 million; and we added $675 million of new, shorter-term advances from the FHLB of Cincinnati that were matched/correlated to interest rate exchange contracts that extended the effective durations of those shorter-term advances to approximately five to eight years at inception. Interest rate swaps are discussed later in Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
These funding source modifications facilitated asset growth of $234.4 million and funded stock repurchases of $7.9 million, dividends of $37.1 million and scheduled repayments of long-term borrowed funds of $299.4 million.
Other Interest Rate Risk Management Tools
We also manage interest rate risk by selectively selling a small portion of our long-term, fixed-rate mortgage loans in the secondary market. Prior to fiscal 2010, this strategy was used to a greater extent to manage our interest rate risk. At June 30, 2019, we serviced $1.83 billion of loans for others, of which $934 million were sold in the secondary market prior to fiscal 2010. While the sales of first mortgage loans remain strategically important for us, since fiscal 2010, they have played only a minor role in our management of interest rate risk. We can also manage interest rate risk by selling non-Fannie Mae compliant mortgage loans to private investors, although those transactions are dependent upon favorable market conditions, including motivated private investors, and involve more complicated negotiations and longer settlement timelines. Loan sales are discussed later in this Part 1, Item 2. under the heading Liquidity and Capital Resources, and in Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Notwithstanding our efforts to manage interest rate risk, should a rapid and substantial increase occur in general market interest rates, or an extended period of a flat yield curve market persists, it is expected that, prospectively and particularly over a multi-year time horizon, the level of our net interest income would be adversely impacted.
Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the confluence of unfavorable regional and macro-economic events that culminated in the 2008 housing market collapse and financial crisis, coupled with our pre-2010 expanded participation in the second lien mortgage lending markets, significantly refocused our attention with respect to credit risk. In response to the evolving economic landscape, we continuously revise and update our quarterly analysis and evaluation procedures, as needed, for each category of our lending with the objective of identifying and recognizing all appropriate credit impairments. At June 30, 2019, 91% of our assets consisted of residential real estate loans (both “held for sale” and “held for investment”) and home equity loans and lines of credit, which were originated predominantly to borrowers in Ohio and Florida. Our analytic procedures and evaluations include specific reviews of all home equity loans and lines of credit that become 90 or more days past due, as well as specific reviews of all first mortgage loans that become 180 or more days past due. We transfer performing home equity lines of credit subordinate to first mortgages delinquent greater than 90 days to non-accrual status. We also charge-off performing loans to collateral value and classify those loans as non-accrual within 60 days of notification of all borrowers filing Chapter 7 bankruptcy, that have not reaffirmed or been dismissed, regardless of how long the loans have been performing. Loans where at least one borrower has been discharged of their obligation in Chapter 7 bankruptcy, are classified as TDRs. At June 30, 2019, $23.9 million of loans in Chapter 7 bankruptcy status with no other modification to terms were included in total TDRs. At June 30, 2019, the recorded investment in non-accrual status loans included $26.4 million of performing loans in Chapter 7 bankruptcy status, of which $25.8 million were also reported as TDRs.

43

In response to the unfavorable regional and macro-economic environment that arose beginning in 2008, and in an effort to limit our credit risk exposure and improve the credit performance of new customers, we tightened our credit eligibility criteria in evaluating a borrower’s ability to successfully fulfill its repayment obligation, revised the design of many of our loan products to require higher borrower down-payments, limited the products available for condominiums, eliminated certain product features (such as interest-only adjustable-rate loans and loans above certain LTV ratios), and suspended home equity lending products with the exception of bridge loans between 2010 and 2012. The delinquency level related to loan originations prior to 2009, compared to originations in 2009 and after, reflect the higher credit standards to which we have subjected all new originations. As of June 30, 2019, loans originated prior to 2009 had a balance of $876.9 million, of which $27.4 million, or 3.1%, were delinquent, while loans originated in 2009 and after had a balance of $12.19 billion, of which $10.3 million, or 0.1%, were delinquent.
One aspect of our credit risk concern relates to high concentrations of our loans that are secured by residential real estate in specific states, particularly Ohio and Florida, in light of the difficulties that arose in connection with the 2008 housing crisis with respect to the real estate markets in those two states. At June 30, 2019, approximately 56.4% and 16.1% of the combined total of our residential Core and construction loans held for investment and approximately 32.1% and 19.4% of our home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively. In an effort to moderate the concentration of our credit risk exposure in individual states, particularly Ohio and Florida, we have utilized direct mail marketing, our internet site and our customer service call center to extend our lending activities to other attractive geographic locations. Currently, in addition to Ohio and Florida, we are actively lending in 23 other states and the District of Columbia, and as a result of that activity, the concentration ratios of the combined total of our residential, Core and construction loans held for investment in Ohio and Florida have trended downward from their September 30, 2010 levels when the concentrations were 79.1% in Ohio and 19.0% in Florida. Of the total mortgage and equity loan originations for the nine months ended June 30, 2019, 21.0% are secured by properties in states other than Ohio or Florida.
Our residential Home Today loans are another area of credit risk concern. Although we no longer originate loans under this program and the principal balance in these loans had declined to $87.8 million at June 30, 2019, and constituted only 0.6% of our total “held for investment” loan portfolio balance, they comprised 15.8% and 20.4% of our 90 days or greater delinquencies and our total delinquencies, respectively, at that date. At June 30, 2019, approximately 95.4% and 4.4% of our residential Home Today loans were secured by properties in Ohio and Florida, respectively. At June 30, 2019, the percentages of those loans delinquent 30 days or more in Ohio and Florida were 8.8% and 8.2%, respectively. The disparity between the portfolio composition ratio and delinquency composition ratio reflects the nature of the Home Today loans. We do not offer, and have not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher interest rates, negative amortization, or low initial payment features with adjustable interest rates. Our Home Today loans, the majority of which were entered into with borrowers that had credit profiles that would not have otherwise qualified for our loan products due to deficient credit scores, generally contained the same features as loans offered to our Core borrowers. The overriding objective of our Home Today lending, just as it is with our Core lending, was the creation of successful homeowners. We have attempted to manage our Home Today credit risk by requiring that borrowers attend pre- and post-borrowing financial management education and counseling and that the borrowers be referred to us by a sponsoring organization with which we have partnered. Further, to manage the credit aspect of these loans, inasmuch as the majority of these buyers did not have sufficient funds for required down payments, many loans included private mortgage insurance. At June 30, 2019, 15.0% of Home Today loans included private mortgage insurance coverage. From a peak recorded investment of $306.6 million at December 31, 2007, the total recorded investment of the Home Today portfolio has declined to $87.5 million at June 30, 2019. Since the vast majority of Home Today loans were originated prior to March 2009 and we are no longer originating loans under our Home Today program, the Home Today portfolio will continue to decline in balance, primarily due to contractual amortization. To supplant the Home Today product and to continue to meet the credit needs of our customers and the communities that we serve, we have offered Fannie Mae eligible, Home Ready loans since fiscal 2016. These loans are originated in accordance with Fannie Mae's underwriting standards. While we retain the servicing rights related to these loans, the loans, along with the credit risk associated therewith, are securitized/sold to Fannie Mae.
Maintaining Access to Adequate Liquidity and Diverse Funding Sources. For most insured depositories, customer and community confidence are critical to their ability to maintain access to adequate liquidity and to conduct business in an orderly manner. We believe that a well capitalized institution is one of the most important factors in nurturing customer and community confidence. Accordingly, we have managed the pace of our growth in a manner that reflects our emphasis on high capital levels. At June 30, 2019, the Association’s ratio of Tier 1 (leverage) capital to net average assets (a basic industry measure that deems 5.00% or above to represent a “well capitalized” status) was 10.54%. The Association's Tier 1 (leverage) capital ratio is lower at June 30, 2019 than its ratio at September 30, 2018, which was 10.87%, due primarily to an $85 million cash dividend payment that the Association made to the Company, its sole shareholder, in December 2018 that reduced the Association's Tier 1 (leverage) capital ratio by an estimated 60 basis points. Because of its intercompany nature, this dividend payment did not

44

impact the Company's consolidated capital ratios which are reported in the Liquidity and Capital Resources section of this Item 2. We expect to continue to remain a well capitalized institution.
In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits (including brokered CDs), borrowings from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. At June 30, 2019, deposits totaled $8.71 billion (including $518.8 million of brokered CDs), while borrowings totaled $3.83 billion and borrowers’ advances and servicing escrows totaled $76.7 million, combined. In evaluating funding sources, we consider many factors, including cost, collateral, duration and optionality, current availability, expected sustainability, impact on operations and capital levels.
To attract deposits, we offer our customers attractive rates of interest on our deposit products. Our deposit products typically offer rates that are highly competitive with the rates on similar products offered by other financial institutions. We intend to continue this practice, subject to market conditions.
We preserve the availability of alternative funding sources through various mechanisms. First, by maintaining high capital levels, we retain the flexibility to increase our balance sheet size without jeopardizing our capital adequacy. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. Second, we pledge available real estate mortgage loans and investment securities with the FHLB of Cincinnati and the FRB-Cleveland. At June 30, 2019, these collateral pledge support arrangements provided the Association with the ability to immediately borrow an additional $19.8 million from the FHLB of Cincinnati and $48.6 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the balance outstanding at June 30, 2019 was $4.61 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement for the maximum limit of borrowing, we would need to increase our ownership of FHLB of Cincinnati common stock by an additional $92.3 million. Third, we invest in high quality marketable securities that exhibit limited market price variability, and to the extent that they are not needed as collateral for borrowings, can be sold in the institutional market and converted to cash. At June 30, 2019, our investment securities portfolio totaled $564.9 million. Finally, cash flows from operating activities have been a regular source of funds. During the nine months ended June 30, 2019 and 2018, cash flows from operations provided $72.6 million and $68.1 million, respectively.
Fannie Mae, historically the Association’s primary loan investor, implemented, effective July 2010, certain loan origination requirement changes affecting loan eligibility that we chose not to adopt until fiscal 2013. Since then, first mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more and HARP II, and more recently Home Ready, loans) that are originated under the revised procedures are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. The HARP II program expired at December 31, 2018. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures. For loans that are not originated under the revised (Fannie Mae) procedures, the Association’s ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors. At June 30, 2019, $2.6 million of agency eligible, long-term, fixed-rate first mortgage loans were classified as “held for sale.” During the nine months ended June 30, 2019, $29.5 million of agency-compliant HARP II and Home Ready loans and $36.6 million of long-term, fixed-rate, agency-compliant, non-HARP II, non-Home Ready first mortgage loans were sold to Fannie Mae. Additionally, $19.0 million of fixed-rate loans were sold in a single bulk sale to a private investor.
Overall, while customer and community confidence can never be assured, the Company believes that its liquidity is adequate and that it has access to adequate alternative funding sources.
Monitoring and Controlling Our Operating Expenses. We continue to focus on managing operating expenses. Our ratio of annualized non-interest expense to average assets was 1.40% for the nine months ended June 30, 2019 and 1.42% for the nine months ended June 30, 2018. As of June 30, 2019, our average assets per full-time employee and our average deposits per full-time employee were $13.7 million and $8.3 million, respectively. We believe that each of these measures compares favorably with industry averages. Our relatively high average of deposits (exclusive of brokered CDs) held at our branch offices ($221.5 million per branch office as of June 30, 2019) contributes to our expense management efforts by limiting the overhead costs of serving our customers. We will continue our efforts to control operating expenses as we grow our business.

Critical Accounting Policies
Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially give rise to materially different results under different assumptions and conditions. We believe that the most critical

45

accounting policies upon which our financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are our policies with respect to our allowance for loan losses, income taxes and pension benefits.
Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to, and all recoveries are credited to, the related allowance. 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 (or recapture credits) for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. Our allowance for loan losses consists of two components:
(1)
individual valuation allowances (IVAs) established for any impaired loans dependent on cash flows, such as performing TDRs, and IVAs related to a portion of the allowance on loans individually reviewed that represents further deterioration in the fair value of the collateral not yet identified as uncollectible; and
(2)
general valuation allowances (GVAs), which are comprised of quantitative GVAs, which are general allowances for loan losses for each loan type based on historical loan loss experience and qualitative GVAs, which are adjustments to the quantitative GVAs, maintained to cover uncertainties that affect our estimate of incurred probable losses for each loan type.
The qualitative GVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of quantitative GVAs. For example, delinquency statistics (both current and historical) are used in developing the quantitative GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the qualitative GVAs. Factors impacting the determination of qualitative GVAs include:
•
changes in lending policies and procedures including underwriting standards, collection, charge-off or recovery practices;
•
changes in national, regional, and local economic and business conditions and trends including housing market factors and trends, such as the status of loans in foreclosure, real estate in judgment and real estate owned, and unemployment statistics and trends;
•
changes in the nature and volume of the portfolios including home equity lines of credit nearing the end of the draw period and adjustable-rate mortgage loans nearing a rate reset;
•
changes in the experience, ability or depth of lending management;
•
changes in the volume or severity of past due loans, volume of non-accrual loans, or the volume and severity of adversely classified loans including the trending of delinquency statistics (both current and historical), historical loan loss experience and trends, the frequency and magnitude of multiple restructurings of loans previously the subject of TDRs, and uncertainty surrounding borrowers’ ability to recover from temporary hardships for which short-term loan restructurings are granted;
•
changes in the quality of the loan review system;
•
changes in the value of the underlying collateral including asset disposition loss statistics (both current and historical) and the trending of those statistics, and additional charge-offs on individually reviewed loans;
•
existence of any concentrations of credit; and
•
effect of other external factors such as competition, market interest rate changes or legal and regulatory requirements including market conditions and regulatory directives that impact the entire financial services industry.
When loan restructurings qualify as TDRs and the loans are performing according to the terms of the restructuring, we record an IVA based on the present value of expected future cash flows, which includes a factor for potential subsequent defaults, discounted at the effective interest rate of the original loan contract. Potential defaults are distinguished from multiple restructurings as borrowers who default are generally not eligible for subsequent restructurings. At June 30, 2019, the balance of such individual valuation allowances was $12.6 million. In instances when loans require multiple restructurings, additional valuation allowances may be required. The new valuation allowance on a loan that has multiple restructurings is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the restructured agreement. Due to the immaterial amount of this exposure to date, we continue to capture this exposure as a component of our qualitative GVA evaluation. The significance of this exposure will be monitored and, if warranted, we will enhance our loan loss methodology to include a new default factor (developed to reflect the estimated impact to the balance of the allowance for loan losses that will occur as a result of subsequent future restructurings) that will be assessed against all loans reviewed collectively. If new default factors are implemented, the qualitative GVA methodology will be adjusted to preclude duplicative loss consideration.

46

Home equity loans and lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and credit lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and decreasing housing prices, as arose beginning in 2008, 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 when compared to a borrower with little or no equity in the property. In light of the past weakness in the housing market and uncertainty with respect to future employment levels and economic prospects, we conduct an expanded loan level evaluation of our home equity loans and lines of credit, including bridge loans, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. Our home equity loans and lines of credit portfolio continues to comprise a significant portion of our gross charge-offs. At June 30, 2019, we had a recorded investment of $2.11 billion in home equity loans and equity lines of credit outstanding, $6.8 million, or 0.3%, of which were 90 days or more past due.
We evaluate the allowance for loan losses based upon the combined total of the quantitative and qualitative GVAs and IVAs. We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions.
The following tables set forth the allowance for loan losses allocated by loan category, the percent of allowance in each category to the total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
 
 
June 30, 2019
 
March 31, 2019
 
 
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 Core
 
$
18,720

 
47.6
%
 
83.0
%
 
$
19,587

 
48.7
%
 
83.7
%
Residential Home Today
 
3,378

 
8.6

 
0.6

 
3,275

 
8.1

 
0.7

Home equity loans and lines of credit
 
17,211

 
43.8

 
16.0

 
17,420

 
43.2

 
15.2

Construction
 
4

 
—

 
0.4

 
4

 
—

 
0.4

Total allowance
 
$
39,313

 
100.0
%
 
100.0
%
 
$
40,286

 
100.0
%
 
100.0
%
 
 
September 30, 2018
 
June 30, 2018
 
 
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 Core
 
$
18,288

 
43.1
%
 
84.7
%
 
$
18,483

 
43.1
%
 
85.0
%
Residential Home Today
 
3,204

 
7.6

 
0.7

 
3,372

 
7.8

 
0.8

Home equity loans and lines of credit
 
20,921

 
49.3

 
14.1

 
21,112

 
49.1

 
13.7

Construction
 
5

 
—

 
0.5

 
4

 
—

 
0.5

Total allowance
 
$
42,418

 
100.0
%
 
100.0
%
 
$
42,971

 
100.0
%
 
100.0
%

47

The following table sets forth activity in our allowance for loan losses segregated by geographic location for the periods indicated. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of other consumer loans are considered immaterial, therefore neither was segregated.
 
As of and For the Three Months Ended June 30,
 
As of and For the Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Allowance balance (beginning of the period)
$
40,286

 
$
43,106

 
$
42,418

 
$
48,948

Charge-offs:

 
 
 
 
 
 
Real estate loans:

 
 
 
 
 
 
Residential Core

 
 
 
 
 
 
Ohio
342

 
134

 
713

 
665

Florida
158

 
22

 
244

 
51

Other
—

 
—

 
85

 
27

Total Residential Core
500

 
156

 
1,042

 
743

Residential Home Today

 
 
 
 
 
 
Ohio
257

 
214

 
583

 
1,120

Florida
—

 
—

 
—

 
57

Total Residential Home Today
257

 
214

 
583

 
1,177

Home equity loans and lines of credit

 
 
 
 
 
 
Ohio
389

 
339

 
908

 
1,932

Florida
144

 
837

 
644

 
1,936

California
—

 
—

 
22

 
—

Other
227

 
—

 
504

 
463

Total Home equity loans and lines of credit
760

 
1,176

 
2,078

 
4,331

Total charge-offs
1,517

 
1,546

 
3,703

 
6,251

Recoveries:
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Residential Core
498

 
506

 
1,475

 
1,886

Residential Home Today
385

 
555

 
1,477

 
1,556

Home equity loans and lines of credit
1,661

 
2,350

 
5,646

 
5,832

Total recoveries
2,544

 
3,411

 
8,598

 
9,274

Net recoveries (charge-offs)
1,027

 
1,865

 
4,895

 
3,023

Provision (Credit) for loan losses
(2,000
)
 
(2,000
)
 
(8,000
)
 
(9,000
)
Allowance balance (end of the period)
$
39,313

 
$
42,971

 
$
39,313

 
$
42,971

Ratios:
 
 
 
 
 
 
 
Net charge-offs (recoveries) to average loans outstanding (annualized)
0.03
%
 
0.06
%
 
0.05
%
 
0.02
%
Allowance for loan losses to non-accrual loans at end of the period
53.24
%
 
60.24
%
 
53.24
%
 
60.24
%
Allowance for loan losses to the total recorded investment in loans at end of the period
0.30
%
 
0.34
%
 
0.30
%
 
0.34
%
The net recoveries of $4.9 million during the nine months ended June 30, 2019 increased from $3.0 million for the nine months ended June 30, 2018, as credit quality continued to improve during the current fiscal year. With the exception of the Residential Core portfolio, charge-offs decreased during the nine months ended June 30, 2019 in all portfolios when compared to the nine months ended June 30, 2018, reflecting the improving market conditions. The Residential Core portfolio experienced a slight increase in gross charge-offs as a result of an administrative change in the current quarter to fully charge off the balance of any loan that remains delinquent for 700 days, shortened from the previous 1,500 day threshold. We continue to evaluate loans becoming delinquent for potential losses and record provisions for the estimate of potential losses

48

of those loans. We expect a moderate level of charge-offs to continue as delinquent loans are resolved in the future and uncollected balances are charged against the allowance.
During the three months ended June 30, 2019, the total allowance for loan losses decreased $1.0 million, to $39.3 million from $40.3 million at March 31, 2019, as we recorded a $2.0 million credit for loan losses, while recoveries exceeded loan charge-offs by $1.0 million. The allowance for loan losses related to loans evaluated collectively decreased by $1.0 million during the three months ended June 30, 2019, and the allowance for loan losses related to loans evaluated individually remained relatively flat. Refer to the "Activity in the Allowance for Loan Losses" and "Analysis of the Allowance for Loan Losses" tables in Note 4 of the Notes to the Unaudited Interim Consolidated Financial Statements for more information. Other than the less significant construction and other consumer loans segments, changes during the three months ended June 30, 2019 in the balances of the GVAs, excluding changes in IVAs, related to the significant loan segments are described as follows:

•
Residential Core – The recorded investment of this segment of the loan portfolio increased 0.2%, or $23.2 million, while the total allowance for loan losses for this segment decreased 4.4% or $0.9 million. The portion of this loan segment’s allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated), decreased $0.4 million, or 3.6%, from $12.4 million at March 31, 2019, to $11.9 million at June 30, 2019. The ratio of this portion of the allowance for loan losses to the total balance of loans in this loan segment that were evaluated collectively, decreased 0.01% to 0.11% at June 30, 2019 from 0.12% at March 31, 2019. Total delinquencies decreased 18.8% to $17.9 million at June 30, 2019 from $22.1 million at March 31, 2019. Loans 90 or more days delinquent increased 2.3% to $10.9 million at June 30, 2019 from $10.6 million at March 31, 2019. There were net charge-offs of $2 thousand for the quarter ended June 30, 2019 compared to net recoveries of $0.4 million during the quarter ended June 30, 2018. Improved delinquencies and continued recoveries warrant the decrease in the allowance.
•
Residential Home Today – The recorded investment of this segment of the loan portfolio decreased 2.9%, or $2.7 million, as we are no longer originating loans under the Home Today program. The total allowance for loan losses for this segment increased by $0.1 million or 3.1%. The portion of this loan segment’s allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated), decreased by 14.9% to $0.9 million at June 30, 2019 from $1.1 million at March 31, 2019. Similarly, the ratio of this portion of the allowance to the total balance of loans in this loan segment that were evaluated collectively, decreased 0.3% to 1.9% at June 30, 2019 from 2.2% at March 31, 2019. Total delinquencies decreased to $7.7 million at June 30, 2019 from $7.9 million at March 31, 2019. Delinquencies greater than 90 days decreased 14.7% to $3.3 million from $3.9 million at March 31, 2019. Net recoveries of $0.1 million were slightly less during the current quarter compared to $0.3 million during the quarter ended June 30, 2018. The allowance for this portfolio fluctuates based on not only the generally declining portfolio balance, but also on the credit profile trends in this portfolio. This portfolio's allowance increased slightly this quarter, even though there was a decrease in the Home Today balance, as we continue to be aware that risk remains based on the generally less stringent credit requirements that were in place at the time that these borrowers qualified for their loans and the continued depressed home values that remain in this portfolio.
•
Home Equity Loans and Lines of Credit – The recorded investment of this segment of the loan portfolio increased 6.1%, or $121.9 million, to $2.11 billion at June 30, 2019 from $1.99 billion at March 31, 2019. The total allowance for loan losses for this segment decreased 1.20% to $17.2 million from $17.4 million at March 31, 2019. During the quarter ended June 30, 2019, the portion of this loan segment's allowance for loan losses that was determined by evaluating groups of loans collectively (i.e. those loans that were not individually evaluated) decreased by $0.4 million, or 2.3%, from $13.9 million to $13.5 million during the quarter ended June 30, 2019. The ratio of this portion of the allowance to the total balance of loans in this loan segment that were evaluated collectively remained at 0.7% at June 30, 2019 and at March 31, 2019. Net recoveries for this loan segment during the current quarter were less at $0.9 million as compared to $1.2 million for the quarter ended June 30, 2018. Total delinquencies for this portfolio segment increased 3.0% to $12.1 million at June 30, 2019 as compared to $11.7 million at March 31, 2019. Delinquencies greater than 90 days increased 6.9% to $6.8 million at June 30, 2019 from $6.3 million at March 31, 2019. The reduction in the allowance is mainly supported by a reduction in the principal balance of home equity lines of credit coming to an end of the draw period. In recent years, a large portion of the overall allowance has been allocated to the home equity loans and lines of credit portfolio to address exposure from customers whose lines of credit were originated without amortizing payments during the draw period and who could face potential increased payment shock at the end of the draw period. In general, home equity lines of credit originated prior to June 2010 were characterized by a ten-year draw period, with interest only payments, followed by a ten-year repayment period. However, a large number of those lines of credit approaching the end of draw period have been paid off or refinanced without significant loss. The principal balance of home equity lines of credit originated without amortizing payments

49

during the draw period that are coming to the end of its draw period through fiscal 2020 is $16.7 million at June 30, 2019 as compared to $28.6 million at March 31, 2019. As this exposure decreases without incurring significant loss, the portion of the overall allowance allocated to the home equity loans and lines of credit category can be decreased. Originations after February 2013 require an amortizing payment during the draw period and do not face the same end-of-draw increased payment shock risk.
Loan Portfolio Composition
The following table sets forth the composition of the portfolio of loans held for investment, by type of loan segregated by geographic location at the indicated dates, excluding loans held for sale. The majority of our construction loan portfolio is secured by properties located in Ohio and the balances of other consumer loans are considered immaterial. Therefore, neither is segregated by geographic location. 
 
June 30, 2019
 
March 31, 2019
 
September 30, 2018
 
June 30, 2018
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
$
6,084,087

 
 
 
$
6,026,509

 
 
 
$
6,052,208

 
 
 
$
5,972,632

 
 
Florida
1,748,170

 
 
 
1,741,571

 
 
 
1,758,762

 
 
 
1,739,779

 
 
Other
2,994,520

 
 
 
3,035,470

 
 
 
3,119,841

 
 
 
3,093,342

 
 
Total Residential Core
10,826,777

 
83.0
%
 
10,803,550

 
83.7
%
 
10,930,811

 
84.7
%
 
10,805,753

 
85.0
%
Residential Home Today

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
83,723

 
 
 
86,258

 
 
 
90,604

 
 
 
93,567

 
 
Florida
3,889

 
 
 
4,062

 
 
 
4,150

 
 
 
4,504

 
 
Other
173

 
 
 
175

 
 
 
179

 
 
 
181

 
 
Total Residential Home Today
87,785

 
0.6

 
90,495

 
0.7

 
94,933

 
0.7

 
98,252

 
0.8

Home equity loans and lines of credit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ohio
668,755

 
 
 
662,068

 
 
 
652,271

 
 
 
632,740

 
 
Florida
403,551

 
 
 
392,651

 
 
 
369,252

 
 
 
359,401

 
 
California
338,952

 
 
 
305,042

 
 
 
268,230

 
 
 
252,935

 
 
Other
674,595

 
 
 
605,819

 
 
 
529,165

 
 
 
502,787

 
 
Total Home equity loans and lines of credit
2,085,853

 
16.0

 
1,965,580

 
15.2

 
1,818,918

 
14.1

 
1,747,863

 
13.7

Total Construction
47,650

 
0.4

 
47,783

 
0.4

 
64,012

 
0.5

 
60,715

 
0.5

Other consumer loans
2,878

 
—

 
2,793

 
—

 
3,021

 
—

 
3,040

 
—

Total loans receivable
13,050,943

 
100.0
%
 
12,910,201

 
100.0
%
 
12,911,695

 
100.0
%
 
12,715,623

 
100.0
%
Deferred loan expenses, net
41,724

 
 
 
40,177

 
 
 
38,566

 
 
 
38,080

 
 
Loans in process
(24,856
)
 
 
 
(25,089
)
 
 
 
(36,549
)
 
 
 
(39,350
)
 
 
Allowance for loan losses
(39,313
)
 
 
 
(40,286
)
 
 
 
(42,418
)
 
 
 
(42,971
)
 
 
Total loans receivable, net
$
13,028,498

 
 
 
$
12,885,003

 
 
 
$
12,871,294

 
 
 
$
12,671,382

 
 

50

At June 30, 2019, the unpaid principal balance of our home equity loans and lines of credit portfolio consisted of $441.9 million in home equity loans (which included $287.8 million of home equity lines of credit, which are in the amortization period and no longer eligible to be drawn upon, and $28.5 million in bridge loans) and $1.64 billion in home equity lines of credit. The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of June 30, 2019. Home equity lines of credit in the draw period are reported according to geographic distribution.
 
 
Credit
Exposure
 
Principal
Balance
 
Percent
Delinquent
90 Days or More
 
Mean CLTV
Percent at
Origination (2)
 
Current Mean
CLTV Percent (3)
 
 
(Dollars in thousands)
 
 
 
 
 
 
Home equity lines of credit in draw period (by state)
 
 
 
 
 
 
 
 
 
 
Ohio
 
$
1,334,357

 
$
511,801

 
0.13
%
 
60
%
 
52
%
Florida
 
578,817

 
283,047

 
0.02
%
 
58
%
 
52
%
California
 
570,900

 
260,889

 
—
%
 
62
%
 
59
%
Other (1)
 
1,269,077

 
588,201

 
0.02
%
 
65
%
 
60
%
Total home equity lines of credit in draw period
 
3,753,151

 
1,643,938

 
0.05
%
 
61
%
 
55
%
Home equity lines in repayment, home equity loans and bridge loans
 
441,915

 
441,915

 
1.35
%
 
66
%
 
48
%
Total
 
$
4,195,066

 
$
2,085,853

 
0.32
%
 
62
%
 
54
%
_________________
(1)
No other individual state has a committed or drawn balance greater than 10% of our total equity lending portfolio nor 5% of total loans.
(2)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)
Current Mean CLTV is based on best available first mortgage and property values as of June 30, 2019. Property values are estimated using HPI data published by the FHFA. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.
At June 30, 2019, 35.3% of our home equity lending portfolio was either in a first lien position (19.0%), in a subordinate (second) lien position behind a first lien that we held (13.2%) or in a subordinate (second) lien position behind a first lien that was held by a loan that we serviced for others (3.1%). In addition, at June 30, 2019, 13.7% of our home equity line of credit portfolio in the draw period was making only the required minimum payment on the outstanding line balance.

51

The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of June 30, 2019. Home equity lines of credit in the draw period are stratified by the calendar year in which 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 (3)
 
 
 
 
 
 
 
 
 
 
2009 and Prior
 
$
40,599

 
$
13,363

 
0.56
%
 
59
%
 
45
%
2010
 
11,415

 
3,462

 
3.02
%
 
59
%
 
41
%
2013
 
40

 
18

 
—
%
 
79
%
 
56
%
2014
 
126,780

 
41,813

 
0.12
%
 
60
%
 
42
%
2015
 
221,962

 
86,435

 
0.05
%
 
60
%
 
45
%
2016
 
408,491

 
168,768

 
0.21
%
 
61
%
 
50
%
2017
 
883,490

 
404,251

 
0.03
%
 
60
%
 
54
%
2018
 
1,222,443

 
582,145

 
0.01
%
 
61
%
 
59
%
2019
 
837,931

 
343,683

 
—
%
 
63
%
 
63
%
Total home equity lines of credit in draw period
 
3,753,151

 
1,643,938

 
0.05
%
 
61
%
 
55
%
Home equity lines in repayment, home equity loans and bridge loans
 
441,915

 
441,915

 
1.35
%
 
66
%
 
48
%
Total
 
$
4,195,066

 
$
2,085,853

 
0.32
%
 
62
%
 
54
%
________________
(1)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(2)
Current Mean CLTV is based on best available first mortgage and property values as of June 30, 2019. 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)
There are no remaining principal balances of home equity lines of credit for years 2011 and 2012. Those years are excluded from the table above.
In general, the home equity line of credit product originated prior to June 2010 (at which point new home equity lending was temporarily suspended) was characterized by a ten-year draw period followed by a ten-year repayment period; however, there was one type of transaction that could result in a draw period that extended beyond ten years, which 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. As a result of this program, the reported draw periods for certain home equity line of credit accounts exceed ten years. In addition, as customers approach the end of the draw period and face the likelihood of an increased monthly payment during the amortization period, we continue to work with them to manage their loan payments, including the possibility of restructuring loans, in an attempt to help families keep their home.

52

The following table sets forth, as of June 30, 2019, the principal balance of home equity lines of credit in the draw period segregated by the current combined LTV range and by fiscal year in which the draw period expires.
 
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)
2019 (1)
$33,024
 
$341
 
$50
 
$0
 
$92
 
$33,507
2020 (1)
90,148

 
19

 
14

 
—

 
77

 
90,258

2021
32,988

 
—

 
—

 
—

 
—

 
32,988

2022
31

 
—

 
—

 
—

 
—

 
31

2023
18

 
—

 
—

 
—

 
—

 
18

2024
17,272

 
—

 
—

 
5

 
—

 
17,277

Post 2024
1,451,079

 
17,525

 
308

 
271

 
676

 
1,469,859

   Total
$1,624,560
 
$17,885
 
$372
 
$276
 
$845
 
$1,643,938
_________________
(1)
Home equity lines of credit whose draw period ends in fiscal years 2019 and 2020 include $7.5 million and $9.2 million, respectively, of lines where the customer has an interest only payment during the draw period. All other home equity lines of credit have an amortizing payment during the draw period.
(2)
Market data necessary for stratification is not readily available.
The following table sets forth the breakdown of current mean CLTV percentages for our home equity lines of credit in the draw period as of June 30, 2019.
 
 
Credit
Exposure
 
Principal
Balance
 
Percent
of Total 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 current mean CLTV)
 
 
 
 
 
 
 
 
 
 
 
 
< 80%
 
$
3,703,523

 
$
1,624,560

 
98.7
%
 
0.05
%
 
61
%
 
55
%
80 - 89.9%
 
46,245

 
17,885

 
1.1
%
 
0.42
%
 
80
%
 
81
%
90 - 100%
 
756

 
372

 
0.1
%
 
—
%
 
80
%
 
94
%
> 100%
 
720

 
276

 
—
%
 
—
%
 
77
%
 
121
%
Unknown (1)
 
1,907

 
845

 
0.1
%
 
—
%
 
44
%
 
(1
)
 
 
$
3,753,151

 
$
1,643,938

 
100.0
%
 
0.05
%
 
61
%
 
55
%
_________________
(1)
Market data necessary for stratification is not readily available.
(2)
Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.
(3)
Current Mean CLTV is based on best available first mortgage and property values as of June 30, 2019. 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.

53

Delinquent Loans
The following tables set forth the recorded investment in loan delinquencies by type, segregated by geographic location and severity of delinquency at the dates indicated.
 
 
Loans Delinquent for
 
 
 
 
30-89 Days
 
90 Days or More
 
Total
 
 
(Dollars in thousands)
June 30, 2019
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
Ohio
 
$
6,003

 
$
7,632

 
$
13,635

Florida
 
665

 
1,888

 
2,553

Other
 
379

 
1,361

 
1,740

Total Residential Core
 
7,047

 
10,881

 
17,928

Residential Home Today
 
 
 
 
 
 
Ohio
 
4,098

 
3,269

 
7,367

Florida
 
274

 
40

 
314

Total Residential Home Today
 
4,372

 
3,309

 
7,681

Home equity loans and lines of credit
 
 
 
 
 
 
Ohio
 
1,387

 
2,677

 
4,064

Florida
 
1,718

 
1,388

 
3,106

California
 
799

 
685

 
1,484

Other
 
1,390

 
2,023

 
3,413

Total Home equity loans and lines of credit
 
5,294

 
6,773

 
12,067

Total
 
$
16,713

 
$
20,963

 
$
37,676


 
 
Loans Delinquent for
 
 
 
 
30-89 Days
 
90 Days or More
 
Total
 
 
(Dollars in thousands)
March 31, 2019
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
Ohio
 
$
8,108

 
$
7,015

 
$
15,123

Florida
 
1,931

 
1,443

 
3,374

Other
 
1,407

 
2,174

 
3,581

Total Residential Core
 
11,446

 
10,632

 
22,078

Residential Home Today
 
 
 
 
 
 
Ohio
 
3,820

 
3,836

 
7,656

Florida
 
175

 
45

 
220

Total Residential Home Today
 
3,995

 
3,881

 
7,876

Home equity loans and lines of credit
 
 
 
 
 
 
Ohio
 
2,343

 
2,052

 
4,395

Florida
 
955

 
1,493

 
2,448

California
 
438

 
906

 
1,344

Other
 
1,644

 
1,885

 
3,529

Total Home equity loans and lines of credit
 
5,380

 
6,336

 
11,716

Total
 
$
20,821

 
$
20,849

 
$
41,670

 
 
 
 
 
 
 


54

 
 
Loans Delinquent for
 
 
 
 
30-89 Days
 
90 Days or More
 
Total
 
 
(Dollars in thousands)
September 30, 2018
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
Ohio
 
$
7,622

 
$
7,392

 
$
15,014

Florida
 
906

 
2,455

 
3,361

Other
 
1,346

 
960

 
2,306

Total Residential Core
 
9,874

 
10,807

 
20,681

Residential Home Today
 
 
 
 
 
 
Ohio
 
4,483

 
3,756

 
8,239

Florida
 
69

 
58

 
127

Total Residential Home Today
 
4,552

 
3,814

 
8,366

Home equity loans and lines of credit
 
 
 
 
 
 
Ohio
 
2,117

 
2,286

 
4,403

Florida
 
2,011

 
2,085

 
4,096

California
 
302

 
255

 
557

Other
 
2,037

 
1,307

 
3,344

Total Home equity loans and lines of credit
 
6,467

 
5,933

 
12,400

Total
 
$
20,893

 
$
20,554

 
$
41,447


 
 
Loans Delinquent for
 
 
 
 
30-89 Days
 
90 Days or More
 
Total
 
 
(Dollars in thousands)
June 30, 2018
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
Residential Core
 
 
 
 
 
 
Ohio
 
$
8,489

 
$
7,741

 
$
16,230

Florida
 
868

 
2,034

 
2,902

Other
 
1,258

 
148

 
1,406

Total Residential Core
 
10,615

 
9,923

 
20,538

Residential Home Today
 
 
 
 
 
 
Ohio
 
3,300

 
4,802

 
8,102

Florida
 
140

 
135

 
275

Total Residential Home Today
 
3,440

 
4,937

 
8,377

Home equity loans and lines of credit
 
 
 
 
 
 
Ohio
 
2,202

 
2,226

 
4,428

Florida
 
1,500

 
1,891

 
3,391

California
 
786

 
305

 
1,091

Other
 
1,408

 
1,491

 
2,899

Total Home equity loans and lines of credit
 
5,896

 
5,913

 
11,809

Total
 
$
19,951

 
$
20,773

 
$
40,724

Loans delinquent 90 days or more were 0.2% of total net loans at June 30, 2019, March 31, 2019, September 30, 2018 and June 30, 2018. Loans delinquent 30 to 89 days were 0.1% of total net loans at June 30, 2019 and 0.2% at March 31, 2019, September 30, 2018 and June 30, 2018.

55

Non-Performing Assets and Troubled Debt Restructurings
The following table sets forth the recorded investments and categories of our non-performing assets and TDRs at the dates indicated.
 
 
June 30,
2019
 
March 31,
2019
 
September 30,
2018
 
June 30,
2018
 
 
(Dollars in thousands)
Non-accrual loans:
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
38,696

 
$
41,126

 
$
41,628

 
$
39,618

Residential Home Today
 
13,085

 
14,202

 
14,641

 
14,799

Home equity loans and lines of credit
 
22,055

 
21,943

 
21,483

 
16,917

Total non-accrual loans (1)(2)
 
73,836

 
77,271


77,752

 
71,334

Real estate owned
 
2,120

 
2,898

 
2,794

 
3,191

Total non-performing assets
 
$
75,956

 
$
80,169


$
80,546

 
$
74,525

Ratios:
 
 
 
 
 
 
 
 
Total non-accrual loans to total loans
 
0.57
%
 
0.60
%
 
0.60
%
 
0.56
%
Total non-accrual loans to total assets
 
0.51
%
 
0.54
%
 
0.55
%
 
0.51
%
Total non-performing assets to total assets
 
0.53
%
 
0.56
%
 
0.57
%
 
0.53
%
TDRs: (not included in non-accrual loans above)
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
Residential Core
 
$
49,575

 
$
51,072

 
$
50,351

 
$
52,046

Residential Home Today
 
25,176

 
25,354

 
26,861

 
28,420

Home equity loans and lines of credit
 
25,444

 
26,005

 
25,604

 
27,299

Total
 
$
100,195

 
$
102,431


$
102,816

 
$
107,765

_________________
(1)
Totals at June 30, 2019, March 31, 2019, September 30, 2018, and June 30, 2018, include $49.8 million, $53.3 million, $52.1 million, and $45.4 million, respectively, in TDRs that are less than 90 days past due but included with non-accrual loans for a minimum period of six months from the restructuring date due to their non-accrual status prior to restructuring, because they have been partially charged off, or because all borrowers have been discharged of their obligation through a Chapter 7 bankruptcy.
(2)
Includes $10.7 million, $10.6 million, $10.5 million, and $10.9 million in TDRs that are 90 days or more past due at June 30, 2019, March 31, 2019, September 30, 2018, and June 30, 2018, respectively.
The gross interest income that would have been recorded during the nine months ended June 30, 2019 and June 30, 2018 on non-accrual loans if they had been accruing during the entire period and TDRs if they had been current and performing in accordance with their original terms during the entire period was $6.8 million and $7.1 million, respectively. The interest income recognized on those loans included in net income for the nine months ended June 30, 2019 and June 30, 2018 was $4.1 million and $6.9 million, respectfully.
At June 30, 2019, March 31, 2019, September 30, 2018 and June 30, 2018, the recorded investment of impaired loans includes accruing TDRs and loans that are returned to accrual status when contractual payments are less than 90 days past due. These loans continue to be individually evaluated for impairment until, at a minimum, contractual payments are less than 30 days past due. Also, the recorded investment of non-accrual loans includes loans that are not included in the recorded investment of impaired loans because they are included in loans collectively evaluated for impairment.

56

The table below sets forth the recorded investments and categories of loans representing the difference between non-accrual loans and impaired loans at the dates indicated.
 
 
June 30,
2019
 
March 31, 2019
 
September 30,
2018
 
June 30,
2018
 
 
(Dollars in thousands)
Non-Accrual Loans
 
$
73,836

 
$
77,271

 
$
77,752

 
$
71,334

Accruing TDRs
 
100,195

 
102,431

 
102,816

 
107,765

Performing Impaired
 
5,190

 
4,537

 
3,982

 
5,583

Collectively Evaluated
 
(3,720
)
 
(2,211
)
 
(3,756
)
 
(3,020
)
Total Impaired loans
 
$
175,501

 
$
182,028


$
180,794

 
$
181,662

In response to the economic challenges facing many borrowers, we continue to restructure loans, resulting in $160.7 million of TDRs (accrual and non-accrual) recorded at June 30, 2019. There was a $5.7 million decrease in the recorded investment of TDRs from March 31, 2019, a $4.7 million decrease from September 30, 2018 and a $3.5 million decrease from June 30, 2018.
Loan restructuring is a method used to help families keep their homes and preserve our neighborhoods. This may involve making changes to the borrowers’ loan terms through interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions including beyond that provided in the original agreement; principal forgiveness; capitalization of delinquent payments; or some combination of the above. Loans discharged through Chapter 7 bankruptcy are also reported as TDRs per OCC interpretive guidance. For discussion on impairment measurement, see Note 4 to the Unaudited Interim Consolidated Financial Statements: LOANS AND ALLOWANCE FOR LOAN LOSSES.
The following table sets forth the recorded investment in accrual and non-accrual TDRs as of June 30, 2019.
 
 
Initial Restructurings
 
Multiple
Restructurings
 
Bankruptcy
 
Total
 
 
(In thousands)
Accrual
 
 
 
 
 
 
 
 
Residential Core
 
$
28,298

 
$
14,252

 
$
7,025

 
$
49,575

Residential Home Today
 
14,732

 
9,458

 
986

 
25,176

Home equity loans and lines of credit
 
24,259

 
173

 
1,012

 
25,444

Total
 
$
67,289

 
$
23,883

 
$
9,023

 
$
100,195

Non-Accrual, Performing
 
 
 
 
 
 
 
 
Residential Core
 
$
4,988

 
$
8,683

 
$
12,488

 
$
26,159

Residential Home Today
 
1,644

 
5,698

 
1,991

 
9,333

Home equity loans and lines of credit
 
9,610

 
2,608

 
2,059

 
14,277

Total
 
$
16,242

 
$
16,989

 
$
16,538

 
$
49,769

Non-Accrual, Non-Performing
 
 
 
 
 
 
 
 
Residential Core
 
$
3,667

 
$
1,677

 
$
724

 
$
6,068

Residential Home Today
 
433

 
2,056

 
498

 
2,987

Home equity loans and lines of credit
 
1,101

 
105

 
433

 
1,639

Total
 
$
5,201

 
$
3,838

 
$
1,655

 
$
10,694

Total TDRs
 
 
 
 
 
 
 
 
Residential Core
 
$
36,953

 
$
24,612

 
$
20,237

 
$
81,802

Residential Home Today
 
16,809

 
17,212

 
3,475

 
37,496

Home equity loans and lines of credit
 
34,970

 
2,886

 
3,504

 
41,360

Total
 
$
88,732

 
$
44,710

 
$
27,216

 
$
160,658

TDRs in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan

57

was not accruing interest at the time of restructuring, continues to not accrue interest and is performing according to the terms of the restructuring, but has not been current for at least six consecutive months since its restructuring, has a partial charge-off, or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status, where all borrowers have filed and have not reaffirmed or been dismissed. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring.
Income Taxes. We consider accounting for income taxes a critical accounting policy due to the subjective nature of certain estimates, including the impact of tax rate changes, such as those implemented by the Act signed into law in December 2017, that are involved in the calculation. We use the asset/liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. We must assess the realization of the deferred tax asset and, to the extent that we believe that recovery is not likely, a valuation allowance is established. Adjustments to increase or decrease existing valuation allowances, if any, are charged or credited, respectively, to income tax expense. At June 30, 2019, no valuation allowances were outstanding. Even though we have determined a valuation allowance is not required for deferred tax assets at June 30, 2019, there is no guarantee that those assets, if any, will be recognizable in the future.
Pension Benefits. The determination of our obligations and expense for pension benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate and expected long-term rate of return on plan assets. Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions could materially affect future pension obligations and expense.

Comparison of Financial Condition at June 30, 2019 and September 30, 2018
Total assets increased $234.4 million, or 2%, to $14.37 billion at June 30, 2019 from $14.14 billion at September 30, 2018. This increase was primarily the result of new loan origination levels exceeding the total of loans sales and principal repayments, as well as increases in mortgage backed security investments and prepaid expenses and other assets.
Cash and cash equivalents increased $1.5 million, or 1%, to $271.3 million at June 30, 2019 from $269.8 million at September 30, 2018. We manage cash to maintain the level of liquidity described later in the Liquidity and Capital Resources section.
Investment securities, all of which are classified as available for sale, increased $32.9 million, or 6%, to $564.9 million at June 30, 2019 from $532.0 million at September 30, 2018. Investment securities increased as $121.8 million in purchases and a $16.0 million reduction of unrealized losses exceeded the combined effect of $101.9 million in principal paydowns, and $2.9 million of net acquisition premium amortization that occurred in the mortgage-backed securities portfolio during the nine months ended June 30, 2019. There were no sales of investment securities during the nine months ended June 30, 2019.
Loans held for investment, net, increased $157.2 million, or 1%, to $13.03 billion at June 30, 2019 from $12.87 billion at September 30, 2018. The increase was caused by a $266.9 million increase in the balance of home equity loans and lines of credit during the nine months ended June 30, 2019, as new originations and additional draws on existing accounts exceeded repayments. Residential mortgage loans decreased $111.2 million, or less than 1%, to $10.91 billion at June 30, 2019. During the nine months ended June 30, 2019, $523.1 million of three- and five-year “SmartRate” loans were originated while $644.1 million of 10-, 15-, and 30-year fixed-rate first mortgage loans were originated. These originations were offset by paydowns and fixed-rate loan sales. Between September 30, 2018 and June 30, 2019, the total fixed-rate portion of the first mortgage loan portfolio decreased $31.7 million and was comprised of a decrease of $264.4 million in the balance of fixed-rate loans with original terms of 10 years or less, partially offset by an increase of $232.7 million in the balance of fixed-rate loans with original terms greater than 10 years. During the nine months ended June 30, 2019, we completed $85.1 million in loan sales, which included a $19.0 million sale to a private investor, $29.5 million of agency-compliant HARP II and Home Ready loans and $36.6 million of long-term, fixed-rate, agency-compliant, non-HARP II and non-Home Ready first mortgage loans that were sold to Fannie Mae. Also, during the nine months ended June 30, 2019, we purchased long-term, fixed-rate first mortgage loans that have a remaining balance of $4.4 million.
Commitments originated for home equity lines of credit and equity and bridge loans were $1.28 billion for the nine months ended June 30, 2019 compared to $1.13 billion for the nine months ended June 30, 2018. At June 30, 2019, pending commitments to originate new home equity lines of credit were $142.3 million and equity and bridge loans were $48.6 million. Refer to the Controlling Our Interest Rate Risk Exposure section of the Overview for additional information.

58

The total allowance for loan losses decreased $3.1 million, or 7%, to $39.3 million at June 30, 2019 from $42.4 million at September 30, 2018, primarily reflecting improved credit metrics, including continued recoveries of loan amounts previously charged off, low levels of current loan charge-offs and reduced exposure from home equity lines of credit coming to the end of the draw period. Refer to Note 4. Loans and Allowance for Loan Losses for additional discussion.
Prepaid expenses and other assets increased $31.1 million to $75.4 million at June 30, 2019 from $44.3 million at September 30, 2018. This increase related primarily from an $11.8 million increase in initial margin requirements posted on interest rate swap contracts and a $17.9 million increase in the net deferred tax asset, mainly the result of fluctuations in unrealized gains and losses recognized through AOCI, during the current fiscal year.
Deposits increased $222.9 million, or 3%, to $8.71 billion at June 30, 2019 from $8.49 billion at September 30, 2018. The increase in deposits resulted primarily from a $177.7 million increase in our savings accounts (which included a $296.2 million increase in money market accounts in the state of Florida and a $118.5 decrease in high yield savings accounts), and a $76.1 million increase in CDs, partially offset by a $29.2 million decrease in our high-yield checking accounts. We believe that our savings and checking accounts provide a stable source of funds. In addition, our high-yield savings accounts are expected to reprice in a manner similar to our home equity lending products, and, therefore, assist us in managing interest rate risk. The balance of brokered CDs at June 30, 2019 was $518.8 million, which was a decrease of $151.3 million during the nine months ended June 30, 2019.
Borrowed funds, all from the FHLB of Cincinnati, increased $111.9 million, or 3%, to $3.83 billion at June 30, 2019 from $3.72 billion at September 30, 2018. Activity included $675.0 million of new 90-day advances that are hedged by equal notional amounts of new interest rate swaps with initial fixed-pay terms of five to eight years, offset by scheduled principal repayments of long-term advances and a $266.0 million decrease in the balance of short-term advances. The total balance of borrowed funds of $3.83 billion at June 30, 2019 consisted of overnight and short-term advances of $934.0 million, long-term advances of $492.2 million with a remaining weighted average maturity of approximately one year and short-term advances of $2.40 billion aligned with interest rate swap contracts with a remaining weighted average effective maturity of approximately 3.7 years. Interest rate swaps have been used to extend the duration of short-term borrowings to approximately five to eight years at inception, by paying a fixed rate of interest and receiving the variable rate. Refer to the Extending the Duration of Funding Sources section of the Overview and Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional discussion regarding short-term borrowings and interest-rate swaps.
Total shareholders’ equity decreased $47.9 million, or 3%, to $1.71 billion at June 30, 2019 from $1.76 billion at September 30, 2018. This net decrease primarily reflected the effect of $58.7 million of net income reduced by $7.9 million of repurchases of outstanding common stock, $37.1 million of cash dividend payments and a $69.2 million unrealized loss recognized in accumulated other comprehensive income, mainly the result of changes in market interest rates related to our interest rate swaps. Adjustments of $8.7 million related to our stock compensation plan and ESOP further offset the decrease. As a result of a July 11, 2018 mutual member vote, Third Federal Savings, MHC, the mutual holding company that owns approximately 81% of the outstanding stock of the Company, waived the receipt of its share of the dividends paid. Refer to Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional details regarding the repurchase of shares of common stock and the dividend waiver.


59

Comparison of Operating Results for the Three Months Ended June 30, 2019 and 2018
Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effects thereof were not material. Average balances are derived from daily average balances. Non-accrual loans are included in the computation of loan average balances, but only cash payments received on those loans during the period presented are reflected in the yield. The yields set forth below include the effect of deferred fees, deferred expenses, discounts and premiums that are amortized or accreted to interest income or interest expense.
 
 
Three Months Ended
 
Three Months Ended
 
 
June 30, 2019
 
June 30, 2018
 
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (1)
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (1)
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-earning cash
  equivalents
 
$
215,523

 
$
1,256

 
2.33
%
 
$
222,178

 
$
986

 
1.78
%
  Investment securities
 
3,992

 
24

 
2.40
%
 
529

 
3

 
2.27
%
  Mortgage-backed securities
 
562,877

 
3,365

 
2.39
%
 
542,308

 
2,888

 
2.13
%
  Loans (2)
 
12,919,756

 
115,129

 
3.56
%
 
12,614,419

 
105,956

 
3.36
%
  Federal Home Loan Bank stock
 
99,173

 
1,269

 
5.12
%
 
93,544

 
1,285

 
5.49
%
Total interest-earning assets
 
13,801,321

 
121,043

 
3.51
%
 
13,472,978

 
111,118

 
3.30
%
Noninterest-earning assets
 
425,132

 
 
 
 
 
370,488

 
 
 
 
Total assets
 
$
14,226,453

 
 
 
 
 
$
13,843,466

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
  Checking accounts
 
$
883,416

 
868

 
0.39
%
 
$
947,694

 
453

 
0.19
%
  Savings accounts
 
1,409,334

 
3,191

 
0.91
%
 
1,335,837

 
1,106

 
0.33
%
  Certificates of deposit
 
6,419,914

 
33,100

 
2.06
%
 
6,092,210

 
24,751

 
1.63
%
  Borrowed funds
 
3,572,771

 
18,366

 
2.06
%
 
3,524,967

 
14,535

 
1.65
%
Total interest-bearing liabilities
 
12,285,435

 
55,525

 
1.81
%
 
11,900,708

 
40,845

 
1.37
%
Noninterest-bearing liabilities
 
192,553

 
 
 
 
 
188,723

 
 
 
 
Total liabilities
 
12,477,988

 
 
 
 
 
12,089,431

 
 
 
 
Shareholders’ equity
 
1,748,465

 
 
 
 
 
1,754,035

 
 
 
 
Total liabilities and shareholders’ equity
 
$
14,226,453

 
 
 
 
 
$
13,843,466

 
 
 
 
Net interest income
 
 
 
$
65,518

 
 
 
 
 
$
70,273

 
 
Interest rate spread (1)(3)
 
 
 
 
 
1.70
%
 
 
 
 
 
1.93
%
Net interest-earning assets (4)
 
$
1,515,886

 
 
 
 
 
$
1,572,270

 
 
 
 
Net interest margin (1)(5)
 
 
 
1.90
%
 
 
 
 
 
2.09
%
 
 
Average interest-earning assets to average interest-bearing liabilities
 
112.34
%
 
 
 
 
 
113.21
%
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (1)
 
 
 
0.51
%
 
 
 
 
 
0.60
%
 
 
Return on average equity (1)
 
 
 
4.18
%
 
 
 
 
 
4.76
%
 
 
Average equity to average assets
 
 
 
12.29
%
 
 
 
 
 
12.67
%
 
 
_________________
(1)
Annualized.
(2)
Loans include both mortgage loans held for sale and loans held for investment.
(3)
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5)
Net interest margin represents net interest income divided by total interest-earning assets.

60

General. Net income decreased $2.6 million, or 12%, to $18.3 million for the quarter ended June 30, 2019 from $20.9 million for the quarter ended June 30, 2018. The decrease in net income was attributable to decreases in net interest income and non-interest income, partially offset by decreases in non-interest expenses and income tax expense.

Interest and Dividend Income. Interest and dividend income increased $9.9 million, or 9%, to $121.0 million during the current quarter compared to $111.1 million during the same quarter in the prior year. The increase in interest and dividend income resulted primarily from an increase in interest income from loans and to a lesser extent, interest income on mortgage-backed securities and interest earning cash equivalents.
Interest income on loans increased $9.1 million, or 9%, to $115.1 million during the current quarter compared to $106.0 million during the same quarter in the prior year. This change was partially attributed to a $305.3 million, or a 2%, increase in the average balance of loans to $12.92 billion for the quarter ended June 30, 2019 compared to $12.61 billion during the same quarter last year as new loan production exceeded repayments and loan sales. In addition to the increase in the average balance, the average yield on loans increased 20 basis points to 3.56% for the current quarter from 3.36% for the same quarter last year as market rate increases have impacted loan yields, particularly home equity lending products that feature interest rates that reset based on the prime rate.
Interest Expense. Interest expense increased $14.7 million, or 36%, to $55.5 million during the current quarter compared to $40.8 million during the quarter ended June 30, 2018. The increase resulted primarily from an increase in interest expense on deposits, and to a lesser extent, an increase in interest expense on borrowed funds.
Interest expense on CDs increased $8.3 million, or 34%, to $33.1 million during the current quarter compared to $24.8 million during the quarter ended June 30, 2018. The increase was attributed to a $327.7 million, or 5%, increase in the average balance of CDs to $6.42 billion during the current quarter from $6.09 billion during the same quarter of the prior year combined with a 43 basis point increase in the average rate paid on CDs to 2.06% for the current quarter from 1.63% for the same quarter last year. Rates were adjusted on deposits in response to changes in general market rates as well as to changes in the rates paid by our competition. The increase in deposits was used to fund our balance sheet growth and fund our capital management activities, including share repurchases and dividend payments.
Interest expense on borrowed funds, all from the FHLB of Cincinnati, increased $3.9 million, or 27%, to $18.4 million during the current quarter compared to $14.5 million during the quarter ended June 30, 2018. This increase was mainly attributed to a 41 basis point increase in the average rate paid on these funds to 2.06% for the current quarter from 1.65% for the same quarter last year as market rates, particularly short-term rates, have increased between the two periods and longer duration funding sources were utilized that carried higher interest rates. In addition to the increase in the rate paid on borrowed funds was a $47.8 million, or 1%, increase in the average balance of borrowed funds to $3.57 billion during the current quarter from an average balance of $3.52 billion during the same quarter of the prior year. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion.
Net Interest Income. Net interest income decreased $4.8 million to $65.5 million during the current quarter when compared to $70.3 million for the three months ending June 30, 2018. While the average balances and yields of interest-earning assets increased compared to the same periods last year, the increases were more than offset by an increased cost of deposits and borrowings. Our average interest earning assets during the current quarter increased $328.3 million, or 2%, when compared to the quarter ended June 30, 2018. The increase in average interest-earning assets was attributed primarily to the growth of the loan portfolio and to a lesser extent mortgage-backed securities, Federal Home Loan Bank stock and investment securities, partially offset by a decrease in other interest-earning cash equivalents. In addition to the increase in average interest earning assets was a 21 basis point increase in the yield on those assets to 3.51% from 3.30%. Our interest rate spread decreased 23 basis points to 1.70% compared to 1.93% during the same quarter last year, reflecting the effect of the flat yield curve. Our net interest margin decreased 19 basis points to 1.90% in the current quarter compared to 2.09% for the same quarter last year.
Provision for Loan Losses. We recorded a credit for loan losses of $2.0 million during the quarter ended June 30, 2019, as well as during the quarter ended June 30, 2018. The credits for loan losses reflected reduced levels of delinquent loans, lower charge-offs and continued elevated levels of recoveries of previously charged-off loans. We continue our awareness of the relative values of residential properties in comparison to their cyclical peaks. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan balance, uncollected balances have been charged against the allowance for loan losses previously provided. In the current quarter we recorded net recoveries of $1.0 million compared to net recoveries of $1.9 million in the quarter ended June 30, 2018. Loan loss provisions (credits) are recorded with the objective of aligning our overall allowance for loan losses with our current estimates of loss in the portfolio. The allowance for loan losses was $39.3 million, or 0.30% of total recorded investment in loans receivable, at June 30, 2019, compared to $43.0 million or 0.34% of total recorded investment in loans receivable at June 30, 2018. Balances of recorded investments are net of deferred fees or expenses and any applicable loans-in-

61

process. Refer to the Lending Activities section of the Overview and Note 4. Loans and Allowance for Loan Losses for further discussion.
Non-Interest Income. Non-interest income decreased $2.1 million, or 29%, to $5.1 million during the current quarter compared to $7.2 million during the quarter ended June 30, 2018 mainly as a result of a decrease in the net gain on sale of loans. Gains on the sale of loans decreased $2.0 million compared to the same quarter in the prior year which benefited from a bulk sale of $277.4 million of fixed rate loans to a private investor. There were $26.3 million of loan sales during the current quarter as compared to $305.5 million of loan sales during the quarter ended June 30, 2018.
Non-Interest Expense. Non-interest expense decreased $1.5 million, or 3%, to $49.9 million during the current quarter compared to $51.4 million during the quarter ended June 30, 2018. The decrease resulted primarily from a decline in salaries and employee benefits as well as other operating expenses, partially offset by an increase in marketing expenses. Salaries and employee benefits declined $1.1 million from the prior year mainly due to the non-recurrence of bonus payments awarded to all associates in the prior year in celebration of our 80th anniversary. Other operating expenses declined $1.0 million, primarily due to the non-recurrence of expenses related to the anniversary celebration, combined with lower professional services expense. Marketing expenditures increased $0.8 million during the current quarter as compared to the quarter ended June 30, 2018 and was attributed to the timing of media campaigns supporting our lending activities.
Income Tax Expense. The provision for income taxes was $4.5 million during the current quarter compared to $7.2 million during the quarter ended June 30, 2018. The provision for the current quarter included $4.8 million of federal income tax provision partially offset by $0.3 million of state income tax benefit. The provision for the quarter ended June 30, 2018 included $6.5 million of federal income tax provision and $0.7 million of state income tax provision. Our effective federal tax rate was 20.7% during the current quarter and 23.6% during the quarter ended June 30, 2018. As a result of the passing of the Tax Cuts and Jobs Act in 2017, the Company was required to use a blended maximum rate for the previous fiscal year. Our current effective income tax rate is below the federal statutory rate because of our ownership of bank-owned life insurance.

62

Comparison of Operating Results for the Nine Months Ended June 30, 2019 and 2018
Average balances and yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effects thereof were not material. Average balances are derived from daily average balances. Non-accrual loans are included in the computation of loan average balances, but only cash payments received on those loans during the period presented are reflected in the yield. The yields set forth below include the effect of deferred fees, deferred expenses, discounts and premiums that are amortized or accreted to interest income or interest expense.
 
 
Nine Months Ended
 
Nine Months Ended
 
 
June 30, 2019
 
June 30, 2018
 
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (1)
 
Average
Balance
 
Interest
Income/
Expense
 
Yield/
Cost (1)
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
  Interest-earning cash
equivalents
 
$
218,789

 
$
3,743

 
2.28
%
 
$
231,034

 
$
2,641

 
1.52
%
  Investment securities
 
3,981

 
71

 
2.38
%
 
176

 
3

 
2.27
%
Mortgage-backed securities
 
555,061

 
9,936

 
2.39
%
 
540,975

 
8,236

 
2.03
%
  Loans (2)
 
12,889,286

 
341,926

 
3.54
%
 
12,572,328

 
313,821

 
3.33
%
  Federal Home Loan Bank stock
 
95,420

 
4,098

 
5.73
%
 
92,196

 
3,826

 
5.53
%
Total interest-earning assets
 
13,762,537

 
359,774

 
3.49
%
 
13,436,709

 
328,527

 
3.26
%
Noninterest-earning assets
 
403,760

 
 
 
 
 
371,923

 
 
 
 
Total assets
 
$
14,166,297

 
 
 
 
 
$
13,808,632

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
  Checking accounts
 
$
887,980

 
2,477

 
0.37
%
 
$
958,256

 
903

 
0.13
%
  Savings accounts
 
1,358,347

 
8,267

 
0.81
%
 
1,396,146

 
2,101

 
0.20
%
  Certificates of deposit
 
6,383,562

 
94,254

 
1.97
%
 
5,906,826

 
69,930

 
1.58
%
  Borrowed funds
 
3,597,994

 
53,685

 
1.99
%
 
3,630,208

 
43,634

 
1.60
%
Total interest-bearing liabilities
 
12,227,883

 
158,683

 
1.73
%
 
11,891,436

 
116,568

 
1.31
%
Noninterest-bearing liabilities
 
177,676

 
 
 
 
 
186,942

 
 
 
 
Total liabilities
 
12,405,559

 
 
 
 
 
12,078,378

 
 
 
 
Shareholders’ equity
 
1,760,738

 
 
 
 
 
1,730,254

 
 
 
 
Total liabilities and shareholders’ equity
 
$
14,166,297

 
 
 
 
 
$
13,808,632

 
 
 
 
Net interest income
 
 
 
$
201,091

 
 
 
 
 
$
211,959

 
 
Interest rate spread (1)(3)
 
 
 
 
 
1.76
%
 
 
 
 
 
1.95
%
Net interest-earning assets (4)
 
$
1,534,654

 
 
 
 
 
$
1,545,273

 
 
 
 
Net interest margin (1)(5)
 
 
 
1.95
%
 
 
 
 
 
2.10
%
 
 
Average interest-earning assets to average interest-bearing liabilities
 
112.55
%
 
 
 
 
 
112.99
%
 
 
 
 
Selected performance ratios:
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (1)
 
 
 
0.55
%
 
 
 
 
 
0.62
%
 
 
Return on average equity (1)
 
 
 
4.45
%
 
 
 
 
 
4.92
%
 
 
Average equity to average assets
 
 
 
12.43
%
 
 
 
 
 
12.53
%
 
 
_________________
(1)
Annualized.
(2)
Loans include both mortgage loans held for sale and loans held for investment.
(3)
Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5)
Net interest margin represents net interest income divided by total interest-earning assets.

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General. Net income decreased $5.1 million to $58.7 million for the nine months ended June 30, 2019 compared to $63.8 million for the nine months ended June 30, 2018. This decrease in net income was attributable to declines in net interest income and non-interest income, a decrease in the credit for loan loss provision and an increase in non-interest expense, partially offset by a decrease in income tax expense.
Interest and Dividend Income. Interest and dividend income increased $31.3 million, or 10%, to $359.8 million during the nine months ended June 30, 2019 compared to $328.5 million during the same nine months in the prior year. The increase in interest and dividend income resulted primarily from an increase in interest income from loans, and to a lesser extent, interest income on mortgage-backed securities and interest earning cash equivalents.
Interest income on loans increased $28.1 million, or 9%, to $341.9 million for the nine months ended June 30, 2019 compared to $313.8 million for the nine months ended June 30, 2018. This increase was attributed partly to a $317.0 million increase in the average balance of loans to $12.89 billion for the current nine-month period compared to $12.57 billion during the same nine months in the prior year as new loan production exceeded repayments and loan sales. The impact from the increase in the average balance of loans was combined with a 21 basis point increase in the average yield on loans to 3.54% for the nine months ended June 30, 2019 from 3.33% for the same nine months in the prior year. Increases in the prime rate between the two periods benefited the yield on home equity lines of credit for the nine months ended June 30, 2019, and contributed to the higher overall average yield.
Interest income on mortgage-backed securities increased $1.7 million, or 21%, to $9.9 million during the current nine months compared to $8.2 million during the nine months ended June 30, 2018. This increase was attributed to a 36 basis point increase in the average yield on mortgage-backed securities, combined with a $14.1 million increase in the average balance of mortgage-backed securities to $555.1 million for the current nine-month period compared to $541.0 million during the same nine months in the prior year.
Interest Expense. Interest expense increased $42.1 million, or 36%, to $158.7 million during the current nine months compared to $116.6 million during the nine months ended June 30, 2018. The increase resulted from an increase in interest expense on both deposits and borrowed funds.
Interest expense on CDs increased $24.4 million, or 35%, to $94.3 million during the nine months ended June 30, 2019 compared to $69.9 million during the nine months ended June 30, 2018. The increase was attributed primarily to a 39 basis point increase in the average rate we paid on CDs to 1.97% during the current nine months from 1.58% during the same nine months last year. In addition, there was a $476.7 million, or 8%, increase in the average balance of CDs to $6.38 billion from $5.91 billion during the same nine months of the prior year. Interest expense on savings and checking accounts increased $6.2 million and $1.6 million, respectively, to $8.3 million and $2.5 million during the nine months ended June 30, 2019, compared to the same nine month period of the prior year due to an increase in the average rates we paid on the deposits. Rates were adjusted on deposits in response to changes in general market rates as well as to changes in the rates paid by our competition. The increase in deposits was used, in combination with an increase in borrowings, to fund our balance sheet growth and our capital management activities, including share repurchases and dividend payments.
Interest expense on borrowed funds, all from the FHLB of Cincinnati, increased $10.1 million, or 23%, to $53.7 million during the nine months ended June 30, 2019 from $43.6 million during the nine months ended June 30, 2018. The increase was attributed to a 39 basis point increase in the average rate paid for these funds to 1.99%, during the nine months ended June 30, 2019 from 1.60% for the nine months ended June 30, 2018, as market rates have increased between the two periods and longer duration funding sources were utilized that carried higher interest rates. Partially offsetting the increase in the rate paid on borrowed funds was a $32.2 million, or 1%, decrease in the average balance of borrowed funds to $3.60 billion during the current nine months from $3.63 billion during the same nine months of the prior year. Refer to the Extending the Duration of Funding Sources section of the Overview and Comparison of Financial Condition for further discussion.
Net Interest Income. Net interest income decreased $10.9 million, or 5%, to $201.1 million during the nine months ended June 30, 2019 from $212.0 million during the nine months ended June 30, 2018. Average interest-earning assets increased during the current nine-month period by $325.8 million, or 2%, when compared to the nine months ended June 30, 2018. The increase in average assets was attributed primarily to the growth of our loan portfolio and to a lesser extent mortgage-backed securities. In addition to the increase in average interest earning assets was a 23 basis point increase in the yield on those assets to 3.49% from 3.26%. However, average interest-bearing liabilities increased by $336.4 million and experienced a 42 basis point increase in cost, as our interest rate spread decreased 19 basis points to 1.76% compared to 1.95% during the same nine months last year reflecting the flattening yield curve and general interest rate environment. Our net interest margin was 1.95% for the current nine-month period and 2.10% for the same nine month period in the prior year. Our interest rate spread and net interest margin narrowed as our overall funding costs increased more than our asset yields increased.

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Provision for Loan Losses. We recorded a credit for loan losses of $8.0 million during the nine months ended June 30, 2019 and a $9.0 million credit for loan losses during the nine months ended June 30, 2018. Continued strong recoveries of loan amounts previously charged off, low levels of current loan charge-offs and delinquent loans and reduced exposure from home equity lines of credit coming to the end of the draw period resulted in the loan provision credit during the current period. Nevertheless, we continue our awareness of the relative values of residential properties in comparison to their cyclical peaks. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan, uncollected balances have been charged against the allowance for loan losses previously provided. In the current nine months, we recorded net recoveries of $4.9 million, as compared to net recoveries of $3.0 million for the nine months ended June 30, 2018. The credit for loan losses recorded for the current nine months, as partially offset by net recoveries, resulted in a decrease in the balance of the allowance for loan losses. The allowance for loan losses was $39.3 million, or 0.30% of the total recorded investment in loans receivable, at June 30, 2019, compared to $43.0 million, or 0.34% of the total recorded investment in loans receivable, at June 30, 2018. Balances of recorded investments are net of deferred fees, expenses and any applicable loans-in-process. Refer to the Lending Activities section of the Overview and Note 4. Loans and Allowance for Loan Losses for further discussion.
Non-Interest Income. Non-interest income decreased $2.0 million, or 12%, to $14.7 million during the nine months ended June 30, 2019 compared to $16.7 million during the nine months ended June 30, 2018. The decrease in non-interest income is primarily due to a decrease in the net gain on sale of loans, which was $1.1 million during the nine months ended June 30, 2019 compared to $3.1 million during the nine months ended June 30, 2018. The prior year period benefited from a bulk sale of $277.4 million of fixed-rate loans to a private investor. There were loan sales of $85.1 million during the nine months ended June 30, 2019, compared to loan sales of $374.0 million during the nine months ended June 30, 2018.
Non-Interest Expense. Non-interest expense increased $1.7 million, or 1%, to $148.6 million during the nine months ended June 30, 2019 compared to $146.9 million during the nine months ended June 30, 2018. This increase resulted primarily from increases in salaries and employee benefits and marketing expenses, partially offset by a reduction in federal insurance premium and assessments. There was a $1.2 million increase in salaries and employee benefits during the current nine-month period compared to the nine-month period ended June 30, 2018, primarily related to both the timing and amount of health insurance for our employees, which can fluctuate based on the timing of claims. Marketing expenditures increased $1.2 million during the current period as compared to the prior period and was attributed to the timing of media campaigns supporting our lending activities.
Income Tax Expense. The provision for income taxes was $16.5 million during the nine months ended June 30, 2019 compared to $26.9 million during the nine months ended June 30, 2018. The decrease in expense was caused mainly by the combination of a decrease in income before income taxes and by the impact of the Act, which further lowered our effective federal rate in the more recent period and required additional tax expense for the re-measurement of the deferred tax asset during the nine months ended June 30, 2018. The provision for the current nine-month period included $15.2 million of federal income tax provision and $1.3 million of state income tax provision. The provision for the nine months ended June 30, 2018 included $25.3 million of federal income tax provision and $1.6 million of state income tax provision. Our effective federal tax rate was 20.5% during the nine months ended June 30, 2019 and 28.4% during the nine months ended June 30, 2018. Our expected effective federal income tax rate in the current year is lower than the federal statutory rate because of our ownership of bank-owned life insurance.

Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB of Cincinnati, borrowings from the FRB-Cleveland Discount Window, proceeds from brokered CDs transactions, principal repayments and maturities of securities, and sales of loans.
In addition to the primary sources of funds described above, we have the ability to obtain funds through the use of collateralized borrowings in the wholesale markets, and from sales of securities. Also, debt issuance by the Company and access to the equity capital markets via a supplemental minority stock offering or a full conversion (second-step) transaction remain as other potential sources of liquidity, although these channels generally require up to nine months of lead time.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, economic conditions and competition. The Association’s Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We generally seek to maintain a minimum liquidity ratio of 5% (which we compute as the sum of cash and cash equivalents plus unencumbered investment securities for which ready markets exist, divided by total assets). For

65

the three months ended June 30, 2019, our liquidity ratio averaged 5.61%. We believe that we had sufficient sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2019.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities and the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2019, cash and cash equivalents totaled $271.3 million, which represented an increase of 1% from September 30, 2018.
Investment securities classified as available-for-sale, which provide additional sources of liquidity, totaled $564.9 million at June 30, 2019.
During the nine-month period ended June 30, 2019, loan sales totaled $85.1 million, which included a $19.0 million sale to a private investor and sales to Fannie Mae, consisting of $36.6 million of long-term, fixed-rate, agency-compliant, non-HARP II and non-Home Ready first mortgage loans, $0.1 million of loans that qualified under Fannie Mae's HARP II initiative and $29.4 million of loans that qualified under Fannie Mae's Home Ready initiative. Loans originated under the HARP II and Home Ready initiatives are classified as “held for sale” at origination, though the HARP II program ended December 31, 2018. Loans originated under non-HARP II or non-Home Ready, Fannie Mae compliant procedures are classified as “held for investment” until they are specifically identified for sale.
At June 30, 2019, $2.6 million of long-term, fixed-rate residential first mortgage loans were classified as “held for sale,” all of which qualified under Fannie Mae's Home Ready initiative. There were no loan sale commitments outstanding at June 30, 2019.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows (unaudited) included in the unaudited interim Consolidated Financial Statements.
At June 30, 2019, we had $607.9 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had $2.11 billion in unfunded home equity lines of credit to borrowers. CDs due within one year of June 30, 2019 totaled $3.30 billion, or 37.8% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales, sales of investment securities, other deposit products, including new CDs, brokered CDs, FHLB advances, borrowings from the FRB-Cleveland Discount Window or other collateralized borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the CDs due on or before June 30, 2020. We believe, however, based on past experience, that a significant portion of such deposits will remain with us. Generally, we have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating residential mortgage loans, home equity loans and lines of credit and purchasing investments. During the nine months ended June 30, 2019, we originated $1.17 billion of residential mortgage loans, and $1.28 billion of commitments for home equity loans and lines of credit, while during the nine months ended June 30, 2018, we originated $1.72 billion of residential mortgage loans and $1.13 billion of commitments for home equity loans and lines of credit. We purchased $121.8 million of securities during the nine months ended June 30, 2019, and $121.1 million during the nine months ended June 30, 2018.
Financing activities consist primarily of changes in deposit accounts, changes in the balances of principal and interest owed on loans serviced for others, FHLB advances, including any collateral requirements related to interest rate swap agreements and borrowings from the FRB-Cleveland Discount Window. We experienced a net increase in total deposits of $222.9 million during the nine months ended June 30, 2019, which reflected the active management of the offered rates on maturing CDs, compared to a net increase of $256.7 million during the nine months ended June 30, 2018. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. During the nine months ended June 30, 2019, there was a $151.3 million decrease in the balance of brokered CDs (exclusive of acquisition costs and subsequent amortization), which had a balance of $518.8 million at June 30, 2019. At June 30, 2018 the balance of brokered CDs was $648.2 million. Principal and interest owed on loans serviced for others experienced a net decrease of $12.3 million to $19.2 million during the nine months ended June 30, 2019 compared to a net decrease of $13.1 million to $22.7 million during the nine months ended June 30, 2018. During the nine months ended June 30, 2019 we increased our advances from the FHLB of Cincinnati by $111.9 million to manage the funding of new loan originations and our capital initiatives, and actively manage our liquidity ratio. During the nine months ended June 30, 2018, our advances from the FHLB of Cincinnati decreased by $6.6 million. During the nine months ended June 30, 2019, collateral settlements paid to counterparties in connection with interest rate swap agreements was $116.4 million. During the nine months ended June 30, 2018, collateral settlements received from counterparties was $48.3 million.

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Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Cincinnati and the FRB-Cleveland Discount Window, each of which provides an additional source of funds. Also, in evaluating funding alternatives, we may participate in the brokered CD market. At June 30, 2019 we had $3.83 billion of FHLB of Cincinnati advances and no outstanding borrowings from the FRB-Cleveland Discount Window. Additionally, at June 30, 2019, we had $518.8 million of brokered CDs. During the nine months ended June 30, 2019, we had average outstanding advances from the FHLB of Cincinnati of $3.60 billion as compared to average outstanding advances of $3.63 billion during the nine months ended June 30, 2018. The decrease in net average balance in the current year reflects an increase in the use of deposits to fund balance sheet growth and our capital initiatives, and to manage our on-balance sheet liquidity. Refer to the Extending the Duration of Funding Sources section of the Overview and the General section of Item 3. Quantitative and Qualitative Disclosures About Market Risk for further discussion. At June 30, 2019, we had the ability to immediately borrow an additional $19.8 million from the FHLB of Cincinnati and $48.6 million from the FRB-Cleveland Discount Window. From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings beyond the outstanding balance at June 30, 2019 was $4.61 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement for the maximum limit of borrowing, we would have to increase our ownership of FHLB of Cincinnati common stock by an additional $92.3 million.
The Association and the Company are subject to various regulatory capital requirements, including a risk-based capital measure. The Basel III capital framework for U.S. banking organizations ("Basel III Rules") includes both a revised definition of capital and guidelines for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.
The Association is subject to the "capital conservation buffer" requirement level of 2.5%. The requirement limits capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" in addition to the minimum capital requirements. At June 30, 2019, the Association exceeded the regulatory requirement for the "capital conservation buffer".
As of June 30, 2019, the Association exceeded all regulatory requirements to be considered “Well Capitalized” as presented in the table below (dollar amounts in thousands).
 
 
Actual
 
Well Capitalized Levels
 
 
Amount
 
Ratio
 
Amount
 
Ratio
Total Capital to Risk-Weighted Assets
 
$
1,535,830

 
19.55
%
 
$
785,599

 
10.00
%
Tier 1 (Leverage) Capital to Net Average Assets
 
1,496,514

 
10.54
%
 
709,596

 
5.00
%
Tier 1 Capital to Risk-Weighted Assets
 
1,496,514

 
19.05
%
 
628,479

 
8.00
%
Common Equity Tier 1 Capital to Risk-Weighted Assets
 
1,496,500

 
19.05
%
 
510,639

 
6.50
%
The capital ratios of the Company as of June 30, 2019 are presented in the table below (dollar amounts in thousands).
 
 
Actual
 
 
Amount
 
Ratio
Total Capital to Risk-Weighted Assets
 
$
1,771,840

 
22.47
%
Tier 1 (Leverage) Capital to Net Average Assets
 
1,732,527

 
12.18
%
Tier 1 Capital to Risk-Weighted Assets
 
1,732,527

 
21.97
%
Common Equity Tier 1 Capital to Risk-Weighted Assets
 
1,732,527

 
21.97
%
In addition to the operational liquidity considerations described above, which are primarily those of the Association, the Company, as a separate legal entity, also monitors and manages its own, parent company-only liquidity, which provides the source of funds necessary to support all of the parent company's stand-alone operations, including our capital distribution strategies, which encompass our share repurchase and dividend payment programs. The Company's primary source of liquidity is dividends received from the Association. The amount of dividends that the Association may declare and pay to the Company in any calendar year, without the receipt of prior approval from the OCC but with prior notice to the FRB-Cleveland, cannot exceed net income for the current calendar year-to-date period plus retained net income (as defined) for the preceding two calendar years, reduced by prior dividend payments made during those periods. In December 2018, the Company received an $85.0 million cash dividend from the Association. Because of its intercompany nature, this dividend payment had no impact on the Company's capital ratios or its consolidated statement of condition but reduced the Association's reported capital ratios. At

67

June 30, 2019, the Company had, in the form of cash and a demand loan from the Association, $168.7 million of funds readily available to support its stand-alone operations.
On October 27, 2016, the Company announced that the Board of Directors approved the Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock. There were 4,024,421 shares repurchased under that program through June 30, 2019. During the nine months ended June 30, 2019, the Company repurchased $7.9 million of its common stock.
On July 11, 2018, at a special meeting of members of Third Federal Savings, MHC, the members (depositors and certain loan customers of the Association) of Third Federal Savings, MHC voted to approve Third Federal Savings, MHC's proposed waiver of dividends, aggregating up to $1.00 per share, to be declared on the Company’s common stock during the twelve months subsequent to the members’ approval (i.e., through July 11, 2019). The members approved the waiver by casting 63% of the eligible votes in favor of the waiver. Of the votes cast, 97% were in favor of the proposal. Third Federal Savings, MHC is the 81% majority shareholder of the Company. Following the receipt of the members’ approval at the July 11, 2018 special meeting, Third Federal Savings, MHC filed a notice with, and subsequently received the non-objection of the FRB-Cleveland for the proposed dividend waivers.
On July 16, 2019, at a special meeting of members of Third Federal Savings, MHC, the members (depositors and certain loan customers of the Association) of Third Federal Savings, MHC voted to approve Third Federal Savings, MHC's proposed waiver of dividends, aggregating up to $1.10 per share, to be declared on the Company’s common stock during the twelve months subsequent to the members’ approval (i.e., through July 16, 2020). The members approved the waiver by casting 62% of the eligible votes in favor of the waiver. Of the votes cast, 97% were in favor of the proposal. Third Federal Savings, MHC is the 81% majority shareholder of the Company. Following the receipt of the members’ approval at the July 16, 2019 special meeting, Third Federal Savings, MHC filed a notice with, and a request for the non-objection of the FRB-Cleveland for the proposed dividend waivers. Both the non-objection from the FRB-Cleveland and the timing of the non-objection are unknown as of the filing date of this quarterly report.
The payment of dividends, support of asset growth and stock repurchases are planned to continue in the future as the focus for future capital deployment activities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk has historically been interest rate risk. In general, our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and advances from the FHLB of Cincinnati. As a result, a fundamental component of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established risk parameter limits deemed appropriate given our business strategy, operating environment, capital, liquidity and performance objectives. Additionally, our Board of Directors has authorized the formation of an Asset/Liability Management Committee comprised of key operating personnel, which is responsible for managing this risk in a manner that is consistent with the guidelines and risk limits approved by the Board of Directors. Further, the Board has established the Directors Risk Committee, which, among other responsibilities, conducts regular oversight and review of the guidelines, policies and deliberations of the Asset/Liability Management Committee. We have sought to manage our interest rate risk in order to control the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we use the following strategies to manage our interest rate risk:
(i)
marketing adjustable-rate and shorter-maturity (10-year, fixed-rate mortgage) loan products;
(ii)
lengthening the weighted average remaining term of major funding sources, primarily by offering attractive interest rates on deposit products, particularly longer-term certificates of deposit, and through the use of longer-term advances from the FHLB of Cincinnati (or shorter-term advances converted to longer-term durations via the use of interest rate exchange contracts that qualify as cash flow hedges) and longer-term brokered certificates of deposit;
(iii)
investing in shorter- to medium-term investments and mortgage-backed securities;
(iv)
maintaining the levels of capital required for "well capitalized" designation; and
(v)
securitizing and/or selling long-term, fixed-rate residential real estate mortgage loans.
During the nine months ended June 30, 2019, $66.1 million of agency-compliant, long-term, fixed-rate mortgage loans were sold to Fannie Mae on a servicing retained basis. Additionally, during the nine months ended June 30, 2019, $19.0 million of fixed-rate loans were sold, on a servicing retained basis, in a single bulk sale to a private investor. At June 30, 2019, $2.6 million of agency-compliant, long-term, fixed-rate residential first mortgage loans that qualified under Fannie Mae's Home

68

Ready program, were classified as “held for sale.” Of the agency-compliant loan sales during the nine months ended June 30, 2019, $29.5 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage loans which were sold under Fannie Mae's HARP II (the HARP II program ended December 31, 2018) or Home Ready programs, and $36.6 million was comprised of long-term (15 to 30 years), fixed-rate first mortgage loans which had been originated under our revised procedures and were sold to Fannie Mae under our reinstated seller contract, as described in the next paragraph. At June 30, 2019, we did not have any outstanding loan sales commitments.
Fannie Mae, historically the Association’s primary loan investor, implemented, effective July 2010, certain loan origination requirement changes affecting loan eligibility that we chose not to adopt until fiscal 2013. Since then, first mortgage loans (primarily fixed-rate, mortgage refinances with terms of 15 years or more and HARP II, and more recently Home Ready, loans) that are originated under the revised procedures are eligible for sale to Fannie Mae either as whole loans or within mortgage-backed securities. We expect that certain loan types (i.e. our Smart Rate adjustable-rate loans, home purchase fixed-rate loans and 10-year fixed-rate loans) will continue to be originated under our legacy procedures. For loans that are not originated under the revised (Fannie Mae) procedures, the Association’s ability to reduce interest rate risk via loan sales is limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values that meet the requirements of the FHLB's Mortgage Purchase Program or of private third-party investors.
We actively market an adjustable-rate mortgage loan product and a 10-year fixed-rate mortgage loan product. Each of these products provides us with improved interest rate risk characteristics when compared to longer-term, fixed-rate mortgage loans. Shortening the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and investments, as well as loans and investments with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. By following these strategies, we believe that we are better positioned to react to increases in market interest rates.
The Association evaluates funding source alternatives as it seeks to extend its liability duration. Extended duration funding sources that are currently considered include: retail certificates of deposit (which, subject to a fee, generally provide depositors with an early withdrawal option, but do not require pledged collateral); brokered certificates of deposit (which generally do not provide an early withdrawal option and do not require collateral pledges); collateralized borrowings which are not subject to creditor call options (generally advances from the FHLB of Cincinnati); and interest rate exchange contracts ("swaps") which are subject to collateral pledges and which require specific structural features to qualify for hedge accounting treatment (hedge accounting treatment directs that periodic mark-to-market adjustments be recorded in other comprehensive income (loss) in the equity section of the balance sheet rather than being included in operating results of the income statement). The Association's intent is that any swap to which it may be a party will qualify for hedge accounting treatment. The Association attempts to be opportunistic in the timing of its funding duration deliberations and when evaluating alternative funding sources, compares effective interest rates, early withdrawal/call options and collateral requirements.
The Association is a party to interest rate swap agreements. Each of the Association's swap agreements is registered on the Chicago Mercantile Exchange and involves the exchange of interest payment amounts based on a notional principal balance. No exchange of principal amounts occurs and the notional principal amount does not appear on our balance sheet. The Association uses swaps to extend the duration of its funding sources, add stability to interest expense and manage exposure to interest rate movements. In each of the Association's agreements, interest paid is based on a fixed rate of interest throughout the term of each agreement while interest received is based on an interest rate that resets at a specified interval (generally three months) throughout the term of each agreement. On the initiation date of the swap, the agreed upon exchange interest rates reflect market conditions at that point in time. As market conditions and interest rates change, the fair value of the swap can fluctuate. Generally, if the current corresponding term interest rate is higher than at the time the swap was executed, the fair value of the swap would increase. If the current corresponding term interest rate is lower than at the time the swap was executed, the fair value of the swap would decrease. The change in fair value is recorded in OCI and is subsequently reclassified into earnings over the duration of the swap period. Swaps generally require counterparty collateral pledges that ensure the counterparties' ability to comply with the conditions of the agreement. The notional amount of the Association's swap portfolio at June 30, 2019 was $2.40 billion. The swap portfolio's weighted average fixed pay rate was 1.99% and the weighted average remaining term was 3.7 years. Concurrent with the execution of each swap, the Association entered into a short-term borrowing from the FHLB of Cincinnati in an amount equal to the notional amount of the swap and with interest rate resets aligned with the reset interval of the swap. Each individual swap agreement has been designated as a cash flow hedge of interest rate risk associated with the Association's variable rate borrowings from the FHLB of Cincinnati.
Economic Value of Equity. Using customized modeling software, the Association prepares periodic estimates of the amounts by which the net present value of its cash flows from assets, liabilities and off-balance sheet items (the Association’s economic value of equity or EVE) would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach in measuring the interest rate sensitivity of EVE. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under

69

the assumption that instantaneous changes (measured in basis points) occur at all maturities along the United States Treasury yield curve and other relevant market interest rates. A basis point equals one, one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 2% to 3% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is tailored specifically to our organization, which, we believe, improves its predictive accuracy. The following table presents the estimated changes in the Association’s EVE at June 30, 2019 that would result from the indicated instantaneous changes in the United States Treasury yield curve and other relevant market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
 
 
 
 
 
 
 
 
EVE as a Percentage  of
Present Value of Assets (3)
Change in
Interest Rates
(basis points) (1)
 
Estimated
EVE (2)
 
Estimated Increase (Decrease) in
EVE
 
EVE
Ratio  (4)
 
Increase
(Decrease)
(basis
points)
Amount
 
Percent
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
+300
 
$
1,404,990

 
$
(560,174
)
 
(28.51
)%
 
10.44
%
 
(284
)
+200
 
1,671,081

 
(294,083
)
 
(14.96
)%
 
11.97
%
 
(131
)
+100
 
1,875,650

 
(89,514
)
 
(4.56
)%
 
13.01
%
 
(27
)
  0
 
1,965,164

 
—

 
—

 
13.28
%
 
—

-100
 
1,878,819

 
(86,345
)
 
(4.39
)%
 
12.48
%
 
(80
)
_________________
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
EVE Ratio represents EVE divided by the present value of assets.
The table above indicates that at June 30, 2019, in the event of an increase of 200 basis points in all interest rates, the Association would experience a 14.96% decrease in EVE. In the event of a 100 basis point decrease in interest rates, the Association would experience a 4.39% decrease in EVE.
The following table is based on the calculations contained in the previous table, and sets forth the change in the EVE at a +200 basis point rate of shock at June 30, 2019, with comparative information as of September 30, 2018. By regulation, the Association must measure and manage its interest rate risk for interest rate shocks relative to established risk tolerances in EVE.
Risk Measure (+200 Basis Points Rate Shock)
 
 
At June 30,
2019
 
At September 30, 2018
Pre-Shock EVE Ratio
 
13.28
 %
 
15.54
 %
Post-Shock EVE Ratio
 
11.97
 %
 
13.35
 %
Sensitivity Measure in basis points
 
(131
)
 
(219
)
Percentage Change in EVE
 
(14.96
)%
 
(19.65
)%
Certain shortcomings are inherent in the methodologies used in measuring interest rate risk through changes in EVE. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE tables presented above assume:
•
no new growth or business volumes;
•
that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, except for reductions to reflect mortgage loan principal repayments along with modeled prepayments and defaults; and
•
that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities.
Accordingly, although the EVE tables provide an indication of our interest rate risk exposure as of the indicated dates, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our EVE and will differ from actual results. In addition to our core business activities, which primarily sought to originate

70

Smart Rate (adjustable), home equity lines of credit (adjustable) and 10-year fixed-rate loans funded by borrowings from the FHLB and intermediate term CDs (including brokered CDs), and which are intended to have a favorable impact on our IRR profile, the impact of several other items and events resulted in the 4.68% improvement in the Percentage Change in EVE measure at June 30, 2019 when compared to the measure at September 30, 2018. Factors contributing to this improvement included changes in market rates, capital actions by the Association, assumption and modeling changes and changes due to business activity. Movement in market interest rates included a decrease of 106 basis points for the two-year term, a decrease of 119 basis points for the five-year term and a decrease of 106 basis points for the ten-year term, and which resulted in an improvement of 7.27% in the Percentage Change in EVE. Partially offsetting this improvement was the impact of an $85.0 million cash dividend that the Association paid to the Company. Because of its intercompany nature, this payment had no impact on the Company's capital position, or the Company's overall IRR profile, but reduced the Association's regulatory capital and regulatory capital ratios and negatively impacted the Association's Percentage Change in EVE by approximately 0.78%. Additionally, modifications and enhancements to our modeling assumptions and methodologies, which are continually challenged and evaluated, on a net basis, negatively impacted the Association's Percentage Change in EVE by 3.60%. Our core business activities, as described at the beginning of this paragraph, are generally intended to have a positive impact on our IRR profile, the actual impact is determined by a number of factors, including the pace of mortgage asset additions to our balance sheet (including consideration of outstanding commitments to originate those assets), in comparison to the pace of the addition of duration extending funding sources. During the current fiscal year-to-date period, the net affect of mortgage asset accumulation and funding source extension resulted in 1.79% of improvement to our Percentage Change in EVE. The IRR simulation results presented above were in line with management's expectations and were within the risk limits established by our Board of Directors.
Our simulation model possesses random patterning capabilities and accommodates extensive regression analytics applicable to the prepayment and decay profiles of our borrower and depositor portfolios. The model facilitates the generation of alternative modeling scenarios and provides us with timely decision making data that is integral to our IRR management processes. Modeling our IRR profile and measuring our IRR exposure are processes that are subject to continuous revision, refinement, modification, enhancement, back testing and validation. We continually evaluate, challenge and update the methodology and assumptions used in our IRR model, including behavioral equations that have been derived based on third-party studies of our customer historical performance patterns. Changes to the methodology and/or assumptions used in the model will result in reported IRR profiles and reported IRR exposures that will be different, and perhaps significantly, from the results reported above.
Earnings at Risk. In addition to EVE calculations, we use our simulation model to analyze the sensitivity of our net interest income to changes in interest rates (the institution’s EaR). Net interest income is the difference between the interest income that we earn on our interest-earning assets, such as loans and securities, and the interest that we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for prospective 12 and 24 month periods using customized (based on our portfolio characteristics) assumptions with respect to loan prepayment rates, default rates and deposit decay rates, and the implied forward yield curve as of the market date for assumptions as to projected interest rates. We then calculate what our estimated net interest income would be for the same period under numerous interest rate scenarios. The simulation process is subject to continual enhancement, modification, refinement and adaptation in order that it might most accurately reflect our current circumstances, factors and expectations. As of June 30, 2019, we estimated that our EaR for the 12 months ending June 30, 2020 would decrease by 0.88% in the event that market interest rates used in the simulation were adjusted in equal monthly amounts (termed a "ramped" format) during the 12 month measurement period to an aggregate increase of 200 basis points. This assumption differs from the assumption used to report our EaR estimates in reporting periods prior to March 31, 2017, when our EaR disclosures were determined under assumed instantaneous changes in market interest rates. While that scenario is no longer used, the Association continues to calculate instantaneous scenarios, and as of June 30, 2019, we estimated that our EaR for the 12 months ending June 30, 2020 would decrease by 4.53% in the event of an instantaneous 200 basis point increase in market interest rates.
Certain shortcomings are also inherent in the methodologies used in determining interest rate risk through changes in EaR. Modeling changes in EaR require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the interest rate risk information presented above assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although interest rate risk calculations provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. In addition to the preparation of computations as described above, we also formulate simulations based on a variety of non-linear changes in interest rates and a variety of non-constant balance sheet composition scenarios.
Other Considerations. The EVE and EaR analyses are similar in that they both start with the same month end balance sheet amounts, weighted average coupon and maturity. The underlying prepayment, decay and default assumptions are also the

71

same and they both start with the same month end "markets" (Treasury and Libor yield curves, etc.). From that similar starting point, the models follow divergent paths. EVE is a stochastic model using 100 different interest rate paths to compute market value at the cohorted transaction level for each of the categories on the balance sheet whereas EaR uses the implied forward curve to compute interest income/expense at the cohorted transaction level for each of the categories on the balance sheet.
EVE is considered as a point in time calculation with a "liquidation" view of the Association where all the cash flows (including interest, principal and prepayments) are modeled and discounted using discount factors derived from the current market yield curves. It provides a long term view and helps to define changes in equity and duration as a result of changes in interest rates. On the other hand, EaR is based on balance sheet projections going one year and two years forward and assumes new business volume and pricing to calculate net interest income under different interest rate environments. EaR is calculated to determine the sensitivity of net interest income under different interest rate scenarios. With each of these models, specific policy limits have been established that are compared with the actual month end results. These limits have been approved by the Association's Board of Directors and are used as benchmarks to evaluate and moderate interest rate risk. In the event that there is a breach of policy limits that extends beyond two consecutive quarter end measurement periods, management is responsible for taking such action, similar to those described under the preceding heading of General, as may be necessary in order to return the Association's interest rate risk profile to a position that is in compliance with the policy. At June 30, 2019, the IRR profile as disclosed above was within our internal limits.
Item 4. Controls and Procedures
Under the supervision of and with the participation of the Company’s management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated
and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
Item 1A. Risk Factors

There have been no material changes in the "Risk Factors" previously disclosed in our Annual Report on Form 10-K, filed with the SEC on November 27, 2018 (File No. 001-33390).

72

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Not applicable
(b)
Not applicable
(c)
The following table summarizes our stock repurchase activity during the quarter ended June 30, 2019.
 
 
 
Average
 
Total Number of
 
Maximum Number
 
Total Number
 
Price
 
Shares Purchased
 
of Shares that May
 
of Shares
 
Paid per
 
as Part of Publicly
 
Yet be Purchased
Period
Purchased
 
Share
 
Announced Plans (1)
 
Under the Plans
April 1, 2019 through April 30, 2019
82,000

 
$
16.40

 
82,000

 
5,996,479

May 1, 2019 through May 31, 2019
7,900

 
16.58

 
7,900

 
5,988,579

June 1, 2019 through June 30, 2019
13,000

 
17.79

 
13,000

 
5,975,579

 
102,900

 
16.59

 
102,900

 
 
 
 
 
 
 
 
 
 
(1)
On October 27, 2016, the Company announced that the Board of Directors approved the Company’s eighth stock repurchase program, which authorized the repurchase of up to 10,000,000 shares of the Company’s outstanding common stock. Purchases under the program will be on an ongoing basis and subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses of capital, and our financial performance. Repurchased shares will be held as treasury stock and be available for general corporate use. The repurchase program commenced in January 2017.
On July 16, 2019, at a special meeting of members of Third Federal Savings, MHC, the members (depositors and certain loan customers of the Association) of Third Federal Savings, MHC voted to approve Third Federal Savings, MHC's proposed waiver of dividends, aggregating up to $1.10 per share, to be declared on the Company’s common stock during the four quarterly periods ending June 30, 2020. The members approved the waiver by casting 62% of the eligible votes in favor of the waiver. Of the votes cast, 97% were in favor of the proposal. Third Federal Savings, MHC is the 81% majority shareholder of the Company.

Following the receipt of the members’ approval at the July 16, 2019 special meeting, Third Federal Savings, MHC filed a notice with, and a request for the non-objection of the FRB-Cleveland for the proposed dividend waivers. Both the non-objection from the FRB-Cleveland and the timing of the non-objection are unknown as of the filing date of this quarterly report.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable

73

Item 6.
(a) Exhibits
31.1
 
Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Section 305 of the Sarbanes-Oxley Act of 2002
 
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
The following unaudited financial statements from TFS Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed on August 7, 2019, formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Shareholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Unaudited Interim Consolidated Financial Statements.
 
 
 
101.INS
  
Interactive datafile                            
XBRL Instance Document -  the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
101.SCH
  
Interactive datafile                            
Inline XBRL Taxonomy Extension Schema Document
 
 
101.CAL
  
Interactive datafile                            
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
  
Interactive datafile                            
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
  
Interactive datafile                            
Inline XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
  
Interactive datafile                            
Inline XBRL Taxonomy Extension Presentation Linkbase Document

74

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
TFS Financial Corporation
 
 
 
 
Dated:
August 7, 2019
 
/s/    Marc A. Stefanski
 
 
 
Marc A. Stefanski
 
 
 
Chairman of the Board, President
and Chief Executive Officer
 
 
 
 
Dated:
August 7, 2019
 
/s/    Paul J. Huml
 
 
 
Paul J. Huml
 
 
 
Chief Financial Officer


75

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