Edgar Filing: TFS Financial CORP

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended December 31, 2010

¨	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 or former address, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of February 2, 2011 there were 308,418,393 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 73.65% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

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

TFS Financial Corporation

INDEX


		Page

PART l – FINANCIAL INFORMATION			3

Item 1.	Financial Statements (unaudited)		3

	Consolidated Statements of Condition December 31, 2010 and September 30, 2010		3

	Consolidated Statements of Income Three months ended December 31, 2010 and 2009		4

	Consolidated Statements of Shareholders’ Equity Three months ended December 31, 2010 and 2009		5

	Consolidated Statements of Cash Flows Three months ended December 31, 2010 and 2009		6

	Notes to Unaudited Interim Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		46

Item 4.	Controls and Procedures		48

Part II – OTHER INFORMATION			49

Item 1.	Legal Proceedings		49

Item 1A.	Risk Factors		49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		49

Item 3.	Defaults Upon Senior Securities		49

Item 4.	[Removed and Reserved]		49

Item 5.	Other Information		49

Item 6.	Exhibits		49

SIGNATURES			50

PART l – FINANCIAL INFORMATION

Item 1. Financial Statements

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except share data)


	December 31,			September 30,
	2010			2010
ASSETS
Cash and due from banks	$	37,401		$	38,804
Other interest-bearing cash equivalents		305,091			704,936

Cash and cash equivalents		342,492			743,740

Investment securities:
Available for sale (amortized cost $18,104 and $24,480, respectively)		18,095			24,619
Held to maturity (fair value $557,147 and $657,076, respectively)		551,255			646,940

		569,350			671,559

Mortgage loans held for sale (includes $0 measured at fair value at September 30, 2010)		0			25,027
Loans held for investment, net:
Mortgage loans		9,861,694			9,323,073
Other loans		7,237			7,199
Deferred loan fees, net		(16,241	)		(15,283	)
Allowance for loan losses		(148,246	)		(133,240	)

Loans, net		9,704,444			9,181,749

Mortgage loan servicing assets, net		33,532			38,658
Federal Home Loan Bank stock, at cost		35,620			35,620
Real estate owned		16,472			15,912
Premises, equipment, and software, net		62,142			62,685
Accrued interest receivable		36,697			36,282
Bank owned life insurance contracts		165,974			164,334
Other assets		97,949			100,461

TOTAL ASSETS	$	11,064,672		$	11,076,027

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,793,314		$	8,851,941
Borrowed funds		64,155			70,158
Borrowers’ advances for insurance and taxes		55,044			51,401
Principal, interest, and related escrow owed on loans serviced		292,452			284,425
Accrued expenses and other liabilities		112,131			65,205

Total liabilities		9,317,096			9,323,130
Commitments and contingent liabilities
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding		0			0
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 308,395,893, and 308,395,000 outstanding at December 31, 2010 and September 30, 2010, respectively		3,323			3,323
Paid-in capital		1,687,535			1,686,062
Treasury stock, at cost; 23,922,857 and 23,923,750 shares at December 31, 2010 and September 30, 2010, respectively		(288,354	)		(288,366	)
Unallocated ESOP shares		(82,335	)		(82,699	)
Retained earnings—substantially restricted		445,285			452,633
Accumulated other comprehensive loss		(17,878	)		(18,056	)

Total shareholders’ equity		1,747,576			1,752,897

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	11,064,672		$	11,076,027

See accompanying notes to unaudited interim consolidated financial statements.

TFS Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(In thousands, except share and per share data)


	For the Three Months
	Ended December 31,
	2010			2009
INTEREST INCOME:
Loans, including fees	$	103,200		$	107,048
Investment securities available for sale		111			113
Investment securities held to maturity		3,337			5,073
Other interest and dividend earning assets		793			569

Total interest and dividend income		107,441			112,803

INTEREST EXPENSE:
Deposits		47,278			55,013
Borrowed funds		477			485

Total interest expense		47,755			55,498

NET INTEREST INCOME		59,686			57,305
PROVISION FOR LOAN LOSSES		34,500			16,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		25,186			41,305

NON-INTEREST INCOME
Fees and service charges, net of amortization		2,904			5,470
Mortgage servicing assets impairment		(284	)		(73	)
Net gain on the sale of loans		0			3,041
Increase in and death benefits from bank owned life insurance contracts		1,640			1,608
Income on private equity investments		183			115
Other		2,376			1,472

Total non-interest income		6,819			11,633

NON-INTEREST EXPENSE
Salaries and employee benefits		17,485			21,171
Marketing services		2,101			2,025
Office property, equipment and software		5,110			5,253
Federal insurance premium		5,985			4,209
State franchise tax		939			1,042
Real estate owned expense, net		1,925			1,735
Other operating expenses		9,399			4,664

Total non-interest expense		42,944			40,099

(LOSS) INCOME BEFORE INCOME TAXES		(10,939	)		12,839
INCOME TAX (BENEFIT) EXPENSE		(3,591	)		3,913

NET (LOSS) INCOME	$	(7,348	)	$	8,926

(Loss) earnings per share - basic and diluted	$	(0.02	)	$	0.03

Weighted average shares outstanding
Basic		300,140,571			299,658,526
Diluted		300,140,571			300,150,676

See accompanying notes to unaudited interim consolidated financial statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

Three Months Ended December 31, 2010 and 2009

(In thousands)


															Accumulated other
															comprehensive
															income (loss)
	Common stock		Paid-in capital			Treasury stock			Unallocated common stock held by ESOP			Retained earnings			Unrealized gains/(losses) on securities			Pension obligation			Total shareholders’ equity
Balance at September 30, 2009	$	3,323		1,679,000			(287,514	)		(87,896	)		456,875			240			(18,163	)	$	1,745,865
Comprehensive Income
Net income		—		—			—			—			8,926			—			—			8,926
Change in unrealized losses on securities available for sale		—		—			—			—			—			(62	)		—			(62	)
Change in pension obligation		—		—			—			—			—			—			339			339

Total comprehensive income		—		—			—			—			—			—			—			9,203
Purchase of treasury stock (161,400 shares)		—		—			(1,810	)		—			—			—			—			(1,810	)
ESOP shares allocated or committed to be released		—		194			—			1,228			—			—			—			1,422
Compensation costs for stock-based plans		—		1,644			—			—			—			—			—			1,644
Excess tax effect from stock-based compensation		—		41			—			—			—			—			—			41
Dividends paid to common shareholders ($0.07 per common share)		—		—			—			—			(5,168	)		—			—			(5,168	)

Balance at December 31, 2009	$	3,323		1,680,879			(289,324	)		(86,668	)		460,633			178			(17,824	)	$	1,751,197

Balance at September 30, 2010	$	3,323		1,686,062			(288,366	)		(82,699	)		452,633			90			(18,146	)	$	1,752,897
Comprehensive Income
Net loss		—		—			—			—			(7,348	)		—			—			(7,348	)
Change in unrealized losses on securities available for sale		—		—			—			—			—			(97	)		—			(97	)
Change in pension obligation		—		—			—			—			—			—			275			275

Total comprehensive loss		—		—			—			—			—			—			—			(7,170	)
ESOP shares allocated or committed to be released		—		(321	)		—			364			—			—			—			43
Compensation costs for stock-based plans		—		1,795			12			—			—			—			—			1,807
Excess tax effect from stock-based compensation		—		(1	)		—			—			—			—			—			(1	)

Balance at December 31, 2010	$	3,323		1,687,535			(288,354	)		(82,335	)		445,285			(7	)		(17,871	)	$	1,747,576

See accompanying notes to unaudited iterim consolidated financial statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)


	For the Three Months Ended December 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(7,348	)	$	8,926
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
ESOP and stock-based compensation expense		1,850			3,066
Depreciation and amortization		7,779			3,992
Mortgage servicing asset impairment		284			73
Deferred income taxes		800			0
Provision for loan losses		34,500			16,000
Net gain on the sale of loans		0			(3,041	)
Other net gains		940			3,718
Principal repayments on and proceeds from sales of loans held for sale		0			49,263
Loans originated for sale		0			(86,538	)
Increase in bank owned life insurance contracts		(1,640	)		(1,606	)
Net decrease (increase) in interest receivable and other assets		925			(45,699	)
Net increase in accrued expenses and other liabilities		47,349			50,146
Other		276			(176	)

Net cash provided by (used in) operating activities		85,715			(1,876	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated		(1,162,813	)		(527,250	)
Principal repayments on loans		625,397			351,264
Proceeds from sales, principal repayments and maturities of:
Securities available for sale		8,380			3,498
Securities held to maturity		94,393			58,257
Proceeds from sale of:
Loans		0			122,636
Real estate owned		3,746			5,339
Purchases of:
Securities available for sale		(2,041	)		(2,105	)
Securities held to maturity		0			(107,431	)
Premises and equipment		(874	)		(615	)
Other		(190	)		136

Net cash used in investing activities		(434,002	)		(96,271	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(58,627	)		36,911
Net increase (decrease) in borrowers’ advances for insurance and taxes		3,643			(124	)
Net increase in principal and interest owed on loans serviced		8,027			37,190
Net (decrease) increase in short term borrowed funds		(3	)		5
Repayment of borrowings		(6,000	)		0
Purchase of treasury shares		0			(1,810	)
Excess tax benefit related to stock-based compensation		(1	)		41
Dividends paid to common shareholders		0			(5,168	)

Net cash (used in) provided by financing activities		(52,961	)		67,045

NET DECREASE IN CASH AND EQUIVALENTS		(401,248	)		(31,102	)
CASH AND CASH EQUIVALENTS—Beginning of period		743,740			307,046

CASH AND CASH EQUIVALENTS—End of period	$	342,492		$	275,944

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	48,359		$	57,405
Cash paid for interest on borrowed funds		473			480
Cash paid for income taxes		4,500			5,500
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned		5,057			7,435
Transfer of loans from held for sale to held for investment		25,027			0

See accompanying notes to unaudited interim consolidated financial statements.

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 (the Holding Company), a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of TFS Financial Corporation and its subsidiaries (collectively, TFS Financial or the Company) is retail consumer banking, including mortgage lending, deposit gathering, and other insignificant financial services. On December 31, 2010, approximately 74% of the Holding Company’s outstanding shares were owned by a federally chartered mutual holding company, Third Federal Savings and Loan Association of Cleveland, MHC (Third Federal Savings, MHC). The thrift subsidiary of TFS Financial is Third Federal Savings and Loan Association of Cleveland (the Association).

The accounting and reporting policies followed by the Company conform in all material respects to accounting principles generally accepted in the United States of America (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 mortgage loan servicing rights, the valuation of deferred tax assets, and the determination of pension obligations and stock-based compensation are particularly subject to change.

The unaudited interim consolidated financial statements were prepared without an audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial condition of TFS Financial at December 31, 2010, and its results of operations and cash flows for the periods presented. In accordance with Regulation S-X for interim financial information, these statements do not include certain information and footnote disclosures required for complete audited financial statements. The Holding Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 contains 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, 2011.

2.	EARNINGS PER SHARE

The following is a summary of our earnings per share calculations.


	For the Three Months ended December 31,
	2010								2009
	Income			Shares		Per share amount			Income		Shares		Per share amount
	(Dollars in thousands, except per share data)
Net (loss) income	$	(7,348	)						$	8,926
Less: (loss) income allocated to restricted stock units		(42	)							140

Basic (loss) earnings per share:
(Loss) income available to common shareholders	$	(7,306	)		300,140,571	$	(0.02	)	$	8,786		299,658,526	$	0.03

Diluted (loss) earnings per share:
Effect of dilutive potential common shares					0							492,150

(Loss) income available to common shareholders	$	(7,306	)		300,140,571	$	(0.02	)	$	8,786		300,150,676	$	0.03

Earnings per share is computed by dividing the income available to common stockholders by the weighted average number of shares outstanding for the period. Outstanding shares include shares held by Third Federal Savings, MHC, shares held by the Third Federal Foundation, shares held by the Employee Stock Ownership Plan (“ESOP”), stock options and

restricted stock units with a dilutive impact granted under the Company’s 2008 Equity Incentive Plan and shares held by the public, except that shares held by the ESOP that have not been allocated to participants or committed to be released for allocation to participants are excluded from the computations.

Due to the net loss for the three months ended December 31, 2010, the diluted earnings per share calculation excludes all common stock equivalents, including 1,703,200 shares of unvested restricted stock, 4,865,434 of unvested outstanding stock options and 152,991 of vested outstanding stock options. The shares were excluded from the computation of net loss per diluted share because their inclusion would have been anti-dilutive to earnings per share. For the three months ended December 31, 2009, there were 4,601,925 of unvested outstanding stock options excluded from the computation of net income per diluted share because their inclusion would have been anti-dilutive to earnings per share.

3.	INVESTMENT SECURITIES

Investments securities available for sale are summarized as follows:


	December 31, 2010
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	0	$	(64	)	$	1,936
Real estate mortgage investment conduits (REMICs)		7,395		67		(12	)		7,450
Money market accounts		8,709		0		0			8,709

	$	18,104	$	67	$	(76	)	$	18,095


	September 30, 2010
			Gross
	Amortized Cost		Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	7,000	$	63	$	0		$	7,063
REMICs		8,718		90		(14	)		8,794
Money market accounts		8,762		0		0			8,762

	$	24,480	$	153	$	(14	)	$	24,619

Investments held to maturity are summarized as follows:


	December 31, 2010
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Freddie Mac certificates	$	3,421	$	190	$	0		$	3,611
Ginnie Mae certificates		21,815		444		0			22,259
REMICs		517,477		4,842		(372	)		521,947
Fannie Mae certificates		8,542		788		0			9,330

	$	551,255	$	6,264	$	(372	)	$	557,147


	September 30, 2010
			Gross
	Amortized Cost		Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Freddie Mac certificates	$	4,441	$	231	$	0		$	4,672
Ginnie Mae certificates		22,375		598		0			22,973
REMICs		611,000		8,754		(268	)		619,486
Fannie Mae certificates		9,124		821		0			9,945

	$	646,940	$	10,404	$	(268	)	$	657,076

4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:


	December 31,			September 30,
	2010			2010
Real estate loans:
Residential non-Home Today	$	6,795,483		$	6,138,454
Residential Home Today		276,197			280,533
Home equity loans and lines of credit		2,737,188			2,848,690
Construction		89,433			100,404

Real estate loans		9,898,301			9,368,081
Consumer and other loans		7,237			7,199
Less:
Deferred loan fees—net		(16,241	)		(15,283	)
Loans-in-process (LIP)		(36,607	)		(45,008	)
Allowance for loan losses		(148,246	)		(133,240	)

Loans held for investment, net	$	9,704,444		$	9,181,749

A large concentration of the Company’s lending is in Ohio. As of December 31, 2010 and September 30, 2010, the percentage of residential real estate loans held in Ohio and Florida were 80% and 18%, respectively. As of December 31, 2010 and September 30, 2010, home equity loans and lines of credit held in Ohio and Florida were 40% and 28%, respectively. The percentage Home equity loans and lines of credit in California, as of December 31, 2010 and September 30, 2010 were 12% and 11%, respectively. The economic conditions and market for real estate in those states have a significant impact on the ability of borrowers in those areas to repay their loans. Effective June 28, 2010, the Association suspended the acceptance of new equity line of credit applications.

Home Today is an affordable housing program targeted to benefit low- and moderate-income home buyers. Through this program, prior to March 27, 2009, the Association provided loans to borrowers who would not otherwise qualify for our loan products, generally because of low credit scores. Although the credit profiles of borrowers in the Home Today program prior to March 27, 2009 might be described as sub-prime, Home Today loans generally contain the same features as loans offered to our non-Home Today borrowers. Borrowers in the Home Today program must complete financial management education and counseling and must be referred to the Association by a sponsoring organization with which the Association has partnered as part of the program. Borrowers must also meet a minimum credit score threshold. Because prior to March 27, 2009 the Association applied less stringent underwriting and credit standards to these loans, loans originated under the Home Today program prior to that date have greater credit risk than its traditional residential real estate mortgage loans. Effective March 27, 2009, the Home Today underwriting guidelines are substantially the same as our traditional first mortgage product. As of December 31, 2010, the balance of Home Today loans originated prior to March 37, 2009 was $274,092. 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 loan-to-value ratio greater than 100%, or option adjustable-rate mortgages.

The recorded investment of loan receivables in non-accrual status is summarized in the following table. Balances are net of deferred fees.


	December 31,		September 30,
	2010		2010
Real estate loans:
Residential non-Home Today	$	131,634	$	135,109
Residential Home Today		87,690		91,985
Home equity loans and lines of credit		52,596		54,481
Construction		3,621		4,994

Total real estate loans		275,541		286,569
Consumer and other loans		1		1

Total non-accrual loans	$	275,542	$	286,570

Loans are placed in nonaccrual status when they are contractually 90 days or more past due. At December 31, 2010 and September 30, 2010, there were no loans 90 days or more past due and still accruing. Loans modified in troubled debt restructurings that were in nonaccrual status prior to the restructurings remain in nonaccrual status for a minimum of six months. 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. A loan in nonaccrual is returned to accrual status, when, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is back to normal. Total nonaccrual loans at December 31, 2010 and September 30, 2010 includes $24.2 and $32.4 million, respectively, in troubled debt restructurings which are current but included with nonaccrual loans for a minimum period of six months from the restructuring date due to their nonaccrual status prior to restructuring.

Age analysis of the recorded investment in loan receivables that are past due at December 31, 2010 and September 30, 2010 is summarized in the following tables. Balances are net of deferred fees and any applicable LIP.


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
December 31, 2010
Real estate loans:
Residential non-Home Today	$	19,712	$	14,000	$	122,729	$	156,441	$	6,609,222	$	6,765,663
Residential Home Today		12,707		9,100		72,761		94,568		180,417		274,985
Home equity loans and lines of credit		12,780		9,672		52,330		74,782		2,677,960		2,752,742
Construction		1,543		0		3,621		5,164		46,899		52,063

Total real estate loans	$	46,742	$	32,772	$	251,441	$	330,955	$	9,514,498	$	9,845,453
Consumer and other loans		0		0		1		1		7,236		7,237

Total	$	46,742	$	32,772	$	251,442	$	330,956	$	9,521,734	$	9,852,690


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2010
Real estate loans:
Residential non-Home Today	$	20,748	$	9,933	$	121,601	$	152,282	$	5,955,965	$	6,108,247
Residential Home Today		12,836		8,970		74,831		96,637		182,515		279,152
Home equity loans and lines of credit		14,144		7,233		53,948		75,325		2,790,611		2,865,936
Construction		558		0		3,980		4,538		49,917		54,455

Total real estate loans		48,286		26,136		254,360		328,782		8,979,008		9,307,790
Consumer and other loans		0		0		1		1		7,198		7,199

Total	$	48,286	$	26,136	$	254,361	$	328,783	$	8,986,206	$	9,314,989

Activity in the allowance for loan losses is summarized as follows:


	For the Three Months Ended
	December 31, 2010
	Beginning										Ending
	Balance		Provisions			Charge-offs			Recoveries		Balance
Real estate loans:
Residential non-Home Today	$	41,246	$	11,474		$	(4,064	)	$	81	$	48,737
Residential Home Today		13,331		6,588			(1,819	)		43		18,143
Home equity loans and lines of credit		73,780		16,380			(13,815	)		414		76,759
Construction		4,882		58			(357	)		23		4,606

Total real estate loans:	$	133,239	$	34,500		$	(20,055	)	$	561	$	148,245
Consumer and other loans		1		0			0			0		1

Total	$	133,240	$	34,500		$	(20,055	)	$	561	$	148,246


	For the Three Months Ended
	December 31, 2009
	Beginning										Ending
	Balance		Provisions			Charge-offs			Recoveries		Balance
Real estate loans:
Residential non-Home Today	$	22,678	$	6,706		$	(2,777	)	$	5	$	26,612
Residential Home Today		9,232		1,447			(1,019	)		23		9,683
Home equity loans and lines of credit		57,594		8,632			(10,237	)		219		56,208
Construction		5,743		(785	)		(183	)		1		4,776

Total real estate loans:	$	95,247	$	16,000		$	(14,216	)	$	248	$	97,279
Consumer and other loans		1		0			0			0		1

Total	$	95,248	$	16,000		$	(14,216	)	$	248	$	97,280

An analysis of the allowance for loan losses at December 31, 2010 and September 30, 2010 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 collectively by evaluating groups of loans not individually evaluated.


	December 31, 2010						September 30, 2010
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	19,091	$	29,646	$	48,737	$	15,790	$	25,456	$	41,246
Residential Home Today		12,835		5,308		18,143		9,752		3,579		13,331
Home equity loans and lines of credit		19,290		57,469		76,759		18,508		55,272		73,780
Construction		1,860		2,746		4,606		1,988		2,894		4,882

Total real estate loans:	$	53,076	$	95,169	$	148,245	$	46,038	$	87,201	$	133,239
Consumer and other loans		1		0		1		1		0		1

Total	$	53,077	$	95,169	$	148,246	$	46,039	$	87,201	$	133,240

The recorded investment in loan receivables at December 31, 2010 and September 30, 2010 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation for determining the allowance for loan losses; distinguishing between determinations made by evaluating individual loans and determinations made collectively by evaluating groups of loans not individually evaluated. Balances of recorded investments are net of deferred fees and any applicable LIP.


	December 31, 2010						September 30, 2010
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	152,556	$	6,613,107	$	6,765,663	$	147,002	$	5,961,245	$	6,108,247
Residential Home Today		132,879		142,106		274,985		129,721		149,431		279,152
Home equity loans and lines of credit		53,897		2,698,845		2,752,742		56,108		2,809,828		2,865,936
Construction		6,782		45,281		52,063		7,881		46,574		54,455

Total real estate loans:	$	346,114	$	9,499,339	$	9,845,453	$	340,712	$	8,967,078	$	9,307,790
Consumer and other loans		1		7,236		7,237		1		7,198		7,199

Total	$	346,115	$	9,506,575	$	9,852,690	$	340,713	$	8,974,276	$	9,314,989

The allowance for loan losses is assessed on a quarterly basis and provisions for loan losses are made in order to maintain the allowance at a level sufficient to absorb credit losses in the portfolio. Mortgage loan portfolios are evaluated as homogeneous pools based on similarities in credit profile, product and property types. Through the evaluation, general allowances for loan losses are assessed based on historical loan loss experience for each homogeneous pool. General allowances are adjusted to address other factors that affect estimated probable losses, including current delinquency statistics; the status of loans in foreclosure, real estate in judgment and real estate owned; national, regional and local economic factors and trends; and asset disposition loss statistics (both current and historical). Specific allowances are assessed on impaired loans as described later in this footnote.

Residential non-Home Today mortgage loans represent the largest piece of the residential real estate portfolio. Overall credit risk is low based on nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that are experiencing the most severe performance problems (sub-prime, no documentation, pay option arms). Delinquencies have shown an increase in the aggregate amount past due consistent with the continued deterioration in the overall economy and high unemployment. As described earlier in this footnote, Home Today loans, particularly those originated prior to March 27, 2009, have greater credit risk than traditional residential real estate mortgage loans.

Equity lines of credit represent a significant portion of the residential real estate portfolio. The continued erosion of the economy and declining housing prices continue to have an adverse impact on this portfolio since the equity lines tend to be in a second lien position. Effective June 28, 2010, due to the continuing deterioration in the overall housing and economic conditions including continued concerns for loans and lines in a second lien position, equity lines of credit and home equity loans are no longer offered.

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

Consumer loans include $1 of auto loans at December 31, 2010 and September 30, 2010. The remaining balance is comprised of loans secured by certificate of deposit accounts, which are fully recoverable in the event of non-payment.

Loans are charged off when less than the full payment is accepted as satisfaction for a loan; a foreclosure action is completed and the fair value of the collateral received is insufficient to satisfy the loan; management concludes the costs of foreclosure exceed the potential recovery; or, in the case of equity loans and lines of credit, management determines the collateral is not sufficient to satisfy the loan.

The recorded investment and the unpaid principal balance of impaired loans, including those whose terms have been modified in troubled debt restructurings, as of December 31, 2010 and September 30, 2010 are summarized as follows. Balances of recorded investments are net of deferred fees.


	December 31, 2010						September 30, 2010
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Residential non-Home Today	$	42,606	$	42,794	$	0	$	39,429	$	39,624	$	0
Residential Home Today		34,568		34,720		0		37,458		37,643		0
Home equity loans and lines of credit		18,187		18,084		0		20,378		20,255		0
Construction		109		110		0		192		194		0
Consumer and other loans		0		0		0		0		0		0

Total	$	95,470	$	95,708	$	0	$	97,457	$	97,716	$	0

With an allowance recorded:
Residential non-Home Today	$	108,917	$	109,397	$	18,778	$	107,572	$	108,104	$	15,790
Residential Home Today		99,345		99,783		13,148		92,263		92,719		9,752
Home equity loans and lines of credit		35,711		35,509		19,290		35,732		35,517		18,508
Construction		6,672		6,730		1,860		7,689		7,762		1,988
Consumer and other loans		1		1		1		1		1		1

Total	$	250,646	$	251,420	$	53,077	$	243,257	$	244,103	$	46,039

Total impaired loans:
Residential non-Home Today	$	151,523	$	152,191	$	18,778	$	147,001	$	147,728	$	15,790
Residential Home Today		133,913		134,503		13,148		129,721		130,362		9,752
Home equity loans and lines of credit		53,898		53,593		19,290		56,110		55,772		18,508
Construction		6,781		6,840		1,860		7,881		7,956		1,988
Consumer and other loans		1		1		1		1		1		1

Total	$	346,116	$	347,128	$	53,077	$	340,714	$	341,819	$	46,039

The average recorded investment in impaired loans and the amount of interest income recognized during the time within the period that the loans were impaired are summarized below. Balances of average recorded investments are net of deferred fees.


	Three Months Ended December 31,
	2010				2009
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential non-Home Today	$	41,018	$	0	$	45,730	$	0
Residential Home Today		36,012		0		42,799		0
Home equity loans and lines of credit		19,283		0		26,801		0
Construction		150		0		0		0
Consumer and other loans		0		0		0		0

Total	$	96,463	$	0	$	115,330	$	0

With an allowance recorded:
Residential non-Home Today	$	108,244	$	514	$	45,973	$	240
Residential Home Today		95,804		495		44,405		228
Home equity loans and lines of credit		35,721		61		31,744		37
Construction		7,181		9		60		0
Consumer and other loans		1		0		1		0

Total	$	246,951	$	1,079	$	122,183	$	505

Total impaired loans:
Residential non-Home Today	$	149,262	$	514	$	91,703	$	240
Residential Home Today		131,816		495		87,204		228
Home equity loans and lines of credit		55,004		61		58,545		37
Construction		7,331		9		60		0
Consumer and other loans		1		0		1		0

Total	$	343,414	$	1,079	$	237,513	$	505

Loans identified by management as having significant weaknesses, such that a loss is probable, are separately evaluated for impairment. Specific allowances are established for any impaired individually-evaluated loans for which the recorded investment in the loan exceeds the measured value of the collateral or, alternatively, the present value of expected future cash flows for the loan. The valuation is based on the fair value of the collateral when it is probable that repayment will not come from the borrower but from liquidation of the collateral, including but not limited to foreclosure and repossession. In light of housing market deterioration, the further unfavorable trending of delinquency statistics and the current instability in employment and economic prospects, an expanded loan level evaluation of equity lines of credit which were delinquent 90 days or more and residential real estate loans and equity loans which were delinquent 180 days or more has been conducted. This expanded evaluation supplemented, and was in addition to, traditional evaluation procedures. Beginning September 30, 2010, equity loans, bridge loans, and loans modified in troubled debt restructurings were included in loans individually evaluated at 90 or more days past due.

Loans modified in troubled debt restructurings are separately evaluated for impairment at the time of restructuring and at each subsequent reporting date, as long as they are reported as troubled debt restructurings. The impairment evaluation is based on the present value of expected future cash flows discounted at the effective interest rates of the original loans. Valuation allowances are recorded for the excess of the recorded investments over the result of the cash flow analyses. A loan modified in a troubled debt restructuring is reported as a troubled debt restructuring for a minimum of one year. After one year, a loan is no longer included in the balance of troubled debt restructurings if the loan was modified to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is not impaired based on the terms of restructuring agreement.

The following tables provide information about the credit quality of residential loan receivables by an internally assigned grade. Balances are net of deferred fees and any applicable LIP.


			Special
	Pass		Mention		Substandard		Loss		Total
December 31, 2010
Real Estate Loans:
Residential non-Home Today	$	6,633,119	$	0	$	113,925	$	18,619	$	6,765,663
Residential Home Today		185,869		0		80,416		8,700		274,985
Home equity loans and lines of credit		2,677,630		18,688		37,656		18,768		2,752,742
Construction		46,255		0		4,218		1,590		52,063

Total	$	9,542,873	$	18,688	$	236,215	$	47,677	$	9,845,453


			Special
	Pass		Mention		Substandard		Loss		Total
September 30, 2010
Real Estate Loans:
Residential non-Home Today	$	5,968,435	$	0	$	125,105	$	14,707	$	6,108,247
Residential Home Today		189,426		0		83,044		6,682		279,152
Home equity loans and lines of credit		2,789,966		18,224		39,906		17,840		2,865,936
Construction		46,521		0		6,217		1,717		54,455

Total	$	8,994,348	$	18,224	$	254,272	$	40,946	$	9,307,790

Residential loans are internally assigned a grade using the standard grades and classifications outlined in the Office of Thrift Supervision Examination Handbook for Asset Quality. Pass loans are assets well protected by the current paying capacity of the borrower and the value of the underlying collateral. Special Mention loans have a potential weakness that we feel deserves management’s attention and may result in further deterioration in its 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. Loss loans are considered uncollectible and continuing to carrying the asset without a specific valuation reserve or charge-off is not warranted. Loans which are Special Mention, Substandard, or Loss are generally reviewed when they become 90 days or more past due then at least annually thereafter.

The following table provides information about the credit quality of consumer loan receivables by payment activity.


	December 31,		September 30,
	2010		2010
Performing	$	7,236	$	7,198
Nonperforming		1		1

Total	$	7,237	$	7,199

Consumer loans are internally assigned a grade of performing or nonperforming when they become 90 days or more past due.

5.	DEPOSITS

Deposit account balances are summarized as follows:


	December 31,		September 30,
	2010		2010
Negotiable order of withdrawal accounts	$	994,675	$	967,645
Savings accounts		1,602,464		1,579,065
Certificates of deposit		6,195,604		6,303,585

		8,792,743		8,850,295
Accrued interest		571		1,646

Total deposits	$	8,793,314	$	8,851,941

6.	INCOME TAXES

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and city jurisdictions. With a few immaterial exceptions, we are no longer subject to federal and state income tax examinations for tax years prior to 2006. The State of Ohio has examined the Association through 2006 with no adjustment.

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.

7.	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. After December 31, 2002, employees not participating in the Plan, upon meeting the applicable eligibility requirements, 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). 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 benefit cost recognized in the statements of income are as follows:


	Three Months Ended
	December 31,
	2010			2009
Service cost	$	1,084		$	995
Interest cost		984			894
Expected return on plan assets		(842	)		(725	)
Amortization of net loss		438			537
Amortization of prior service cost		(15	)		(15	)

Net periodic benefit cost	$	1,649		$	1,686

Minimum employer contribution paid during the three months ended December 31, 2010 was $784. Minimum employer contributions expected during the remainder of the fiscal year are $4,992.

8.	EQUITY INCENTIVE PLAN

During the three months ended December 31, 2010 and 2009, the Company recorded $1,811 and $1,644, respectively, of stock-based compensation expense, comprised of stock option expense of $721 and $614, respectively, and restricted stock units expense of $1,090 and $1,030, respectively.

At December 31, 2010, 5,018,425 shares were subject to options, with a weighted average exercise price of $11.96 per share and a weighted average grant date fair value of $3.04 per share. Expected future expense related to the 4,865,434 non-vested options outstanding as of December 31, 2010 is $9,045 over a weighted average of 3.7 years. At December 31, 2010, 1,690,650 restricted stock units, with a weighted average grant date fair value of $11.93 per unit are unvested. Expected future compensation expense relating to the 1,703,200 restricted stock units outstanding as of December 31, 2010 is $10,711 over a weighted average period of 4.0 years. Each unit is equivalent to one share of common stock.

9.	COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into commitments with off-balance-sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. 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 December 31, 2010, the Company had commitments to originate loans as follows:


Fixed-rate mortgage loans	$	134,948
Adjustable-rate mortgage loans		174,302
Bridge loans		1,028

Total	$	310,278

At December 31, 2010, the Company had unfunded commitments outstanding as follows:


Equity lines of credit	$	1,645,695
Construction loans		36,608
Private equity investments		13,913

Total	$	1,696,216

The Company provides mortgage reinsurance on certain mortgage loans in its own portfolio, including Home Today loans and loans in its servicing portfolio, through contracts with two primary mortgage insurance companies. Under these contracts, the Company absorbs mortgage insurance losses in excess of a specified percentage of the principal balance of a given pool of loans, subject to a contractual limit, in exchange for a portion of the pools’ mortgage insurance premiums. At December 31, 2010, the maximum losses under the reinsurance contracts were limited to $15,455. The Company has incurred $1,868 of losses under these reinsurance contracts and has provided a liability for the remaining estimated losses totaling $4,787 as of December 31, 2010. Management believes it has made adequate provision for estimated losses. Based upon notice from our two primary mortgage insurance companies, no new contracts are being added to the Company’s risk exposure. Our insurance partners will retain all new mortgage insurance premiums and all new risk.

In management’s opinion, the above commitments will be funded through normal operations.

10.

FAIR VALUE

The Company follows the guidance provided by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements” (“ASC 820”) as they apply to assets and liabilities measured on a recurring basis and to all financial assets and financial liabilities and FASB ASC 825, “The Fair Value Option for Financial Assets and Financial Liabilities” (“ASC 825”). On October 1, 2009, the Company adopted the provisions of ASC 820 as they apply to nonfinancial assets and nonfinancial liabilities measured at fair value on a non-recurring basis.

As defined in ASC 820, fair value is 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 a fair value framework established by U.S. GAAP, 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 quarter 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.

ASC 825 provides an option to elect fair value as an alternative measurement for selected financial assets and financial liabilities not previously recorded at fair value. In accordance with these provisions, the Company has elected to measure at fair value mortgage loans classified as held for sale that are subject to pending loan securitization contracts entered into on or after October 1, 2008. The election is expected to reduce volatility in earnings related to timing issues on loan securitization contracts.

At December 31, 2010 and September 30, 2010, loans held for sale subject to pending securitization contracts had a fair value of $0 and $0 and an aggregate outstanding principal balance of $0 and $0. For the three months ended December 31, 2010 and 2009, respectively, net gain on the sale of loans includes $0 of net gain/loss and $1,250 of net losses related to changes during the period in the fair value of loans held for sale subject to pending securitization contracts that are fully offset by an equal amount of gains and losses on the derivative securitization contracts. Interest income on mortgage loans held for sale is recorded in interest income on loans. Mortgage loans held for sale not included in securitization contracts continue to be recorded at the lower of cost or fair value. At December 31, 2010 and September 30, 2010, these loans were reported at cost, $0 and $25,027, respectively.

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 December 31, 2010 and September 30, 2010, respectively, this includes $9,386 and $15,857 of sequentially structured, highly liquid collateralized mortgage obligations (“CMOs”) issued by Fannie Mae, Freddie Mac, and Ginnie Mae and $8,709 and $8,762 of secured institutional money market deposits insured by the FDIC up to the current coverage limits, with any excess collateralized by the holding institution. Both are measured using the market approach. The fair value of the CMOs is obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and is included in Level 2 of the hierarchy. The carrying amount of the money market deposit accounts is considered a reasonable estimate of their fair value because they are cash deposits in interest bearing accounts valued at par. These accounts are included in Level 1 of the hierarchy.

Mortgage Loans Held for Sale included in Pending Securitization Contracts—The fair value of mortgage loans held for sale is estimated using a market approach based on quoted secondary market pricing for loan portfolios with similar characteristics, including that portion which is included in pending securitization contracts. As described above, the Company elected the fair value measurement option for mortgage loans held for sale subject to pending securitization contracts. These loans are included in Level 2 of the hierarchy.

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 observable market price of the loan or the fair value of the collateral less estimated costs to sell. Impairment is measured using the market approach based on the fair value of the collateral less estimated costs to sell 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.

The fair value of the collateral for a collateral dependent loan is estimated using an exterior appraisal in the majority of instances. Only if supporting market data is unavailable or the appraiser is unable to complete the assignment will we use an alternative valuation method. Typically that would entail obtaining a Broker Price Opinion (“BPO”). In a rare instance, if neither of these methods is available we will attempt to obtain a reasonable estimate of value using a commercially available automated valuation model (“AVM”). These models are independently developed and regularly updated. Third Federal has engaged an independent firm to assist with our validation of automated valuation models.

Updated property valuations are obtained for all collateral-dependent impaired loans that become contractually 180 days past due, except that updated appraisals are obtained for equity lines of credit, equity loans, bridge loans, and loans modified in troubled debt restructurings that become contractually 90 days past due. Subsequently, annual updated appraisals are obtained for all loans that remain delinquent.

To calculate impairment of the collateral-dependent loan, the fair market values are generally reduced by a calculated cost to sell derived from historical experience and recent market conditions to reflect our average net proceeds. A valuation allowance is recorded by a charge to income for any indicated impairment loss. 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. 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.

Loans held for investment that have been restructured in troubled debt restructurings and are performing according to the modified 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 December 31, 2010 and September 30, 2010, respectively, this included $127,516 and $122,971 of loans with related allowances for loss of $5,376 and $5,086.

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 acquisition cost or fair value less estimated costs to sell. 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 December 31, 2010 and September 30, 2010, respectively, there was $9,391 and $9,421 of real estate owned included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis; the acquisition costs exceeded the fair values less estimated costs to sell of these properties. Real estate owned, as reported in the consolidated statements of condition, includes estimated costs to sell of $472 and $514 related to these properties at December 31, 2010 and September 30, 2010, respectively.

Mortgage Loan Servicing Assets—Mortgage loan servicing assets are initially recorded at fair value and subsequently amortized over the estimated period of servicing income. The servicing assets are assessed for impairment, based on fair value, on a quarterly basis using a discounted cash flow model incorporating assumptions market participants would use including estimated prepayment speeds, discount factors, and estimated costs to service. For measurement purposes, servicing assets are separated into stratum segregated primarily by the predominant risk characteristics of the loans serviced, such as type, fixed and adjustable rates, original terms, and interest rates. When the carrying value of the servicing asset for an individual stratum exceeds the fair value, the stratum is considered impaired. The amount of impairment is recognized through a valuation allowance recorded in current earnings and the stratum is included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis.

Land held for development—Land held for development includes real estate surrounding the Company’s main office in Cleveland, Ohio, acquired to preserve and redevelop the community. It is carried at the lower of acquisition cost or fair value less estimated costs to sell or develop and is included in other assets on the Consolidated Statement of Condition. Fair value is estimated under the market approach using values for comparable projects, adjusted by management to reflect current economic and market conditions. At both December 31, 2010 and September 30, 2010, respectively, there was $2,467 of land held for development included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. The acquisition costs of these properties exceeded their fair values less estimated cost to sell or develop by $1,500.

Derivatives—Derivative instruments include interest rate locks on commitments to originate loans for the held for sale portfolio and forward commitments on contracts to deliver mortgage-backed securities. Derivatives are reported at fair value in other assets or other liabilities on the Consolidated Statement of Condition with changes in value recorded in current earnings. Fair value is estimated using quoted secondary market pricing for loan portfolios with similar characteristics. 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. Because the closure rate is a significantly unobservable assumption, interest rate lock commitments are included in Level 3 of the hierarchy. Forward commitments on contracts to deliver mortgage-backed securities are included in Level 2 of the hierarchy.

Assets and liabilities carried at fair value on a recurring basis on the Consolidated Statement of Condition at December 31, 2010 and September 30, 2010 are summarized below.


			Recurring Fair Value Measurements at Reporting Date Using
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available for sale:
U.S. government and agency obligations	$	1,936	$	0	$	1,936	$	0
REMIC’s		7,450		0		7,450		0
Other		8,709		8,709		0		0

Total	$	18,095	$	8,709	$	9,386	$	0


			Recurring Fair Value Measurements at Reporting Date Using
	September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available for sale:
U.S. government and agency obligations	$	7,063	$	0	$	7,063	$	0
REMIC’s		8,794		0		8,794		0
Other		8,762		8,762		0		0

Total	$	24,619	$	8,762	$	15,857	$	0

A net loss of $0 and $121 were recorded in other income for the three month periods ended December 31, 2010 and 2009, respectively.

Summarized in the table below are those assets measured at fair value on a nonrecurring basis. This includes loans held for investment, other than those restructured in a troubled debt restructuring, that were individually evaluated for impairment, certain stratum of mortgage loan servicing assets which were found to have a fair value below amortized cost, and properties included in real estate owned that are carried at fair value less estimated costs to sell at the reporting date.

		$190,020		$190,020		$190,020		$190,020
			Nonrecurring Fair Value Measurements at Reporting Date Using
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Impaired loans, net of allowance	$	171,911	$	0	$	0	$	171,911
Real estate owned¹		9,391		0		0		9,391
Land held for development		2,467		0		0		2,467
Mortgage loan servicing assets		3,347						3,347

Total	$	187,116	$	0	$	0	$	187,116

¹	Amounts represent fair value measurements of properties before deducting estimated costs to sell.

		$190,020		$190,020		$190,020		$190,020
	September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
Impaired loans, net of allowance	$	177,895	$	0	$	0	$	177,895
Real estate owned¹		9,421		0		0		9,421
Land held for development		2,467		0		0		2,467
Mortgage loan servicing assets		237						237

Total	$	190,020	$	0	$	0	$	190,020

¹	Amounts represent fair value measurements of properties before deducting estimated costs to sell.

The following table presents estimated fair value of the Company’s financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.


	At December 31,				At September 30,
	2010				2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and due from banks	$	37,401	$	37,401	$	38,804	$	38,804
Other interest bearing cash equivalents		305,091		305,091		704,936		704,936
Investment securities:
Available for sale		18,094		18,094		24,619		24,619
Held to maturity		551,255		557,147		646,940		657,076
Mortgage loans held for sale		0		0		25,027		26,109
Loans-net:
Mortgage loans held for investment		9,697,207		9,725,072		9,174,550		9,436,025
Other loans		7,237		8,068		7,199		8,186
Federal Home Loan Bank stock		35,620		35,620		35,620		35,620
Private equity investments		2,050		2,050		2,327		2,327
Accrued interest receivable		36,697		36,697		36,282		36,282
Liabilities:
NOW and passbook accounts	$	2,597,139	$	2,597,139	$	2,546,710	$	2,546,710
Certificates of deposit		6,196,175		6,369,452		6,305,231		6,548,319
Borrowed funds		64,155		65,773		70,158		72,829
Borrowers’ advances for taxes and insurance		55,044		55,044		51,401		51,401
Principal, interest and escrow owed on loans serviced		292,452		292,452		284,425		284,425

Cash and Due from Banks, Interest Bearing Cash Equivalents—The carrying amount is a reasonable estimate of fair value.

Investment and Mortgage-Backed Securities—Estimated fair value for investment and mortgage-backed securities is based on quoted market prices, when available. If quoted prices are not available, management will use as part of their estimation process fair values which are obtained from third party independent nationally recognized pricing services using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Mortgage Loans Held for Sale—Fair value of mortgage loans held for sale is estimated 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 maturities.

Federal Home Loan Bank Stock—The fair value is estimated to be the carrying value, which is par. All transactions in capital stock of the FHLB of Cincinnati are executed at par.

Private Equity Investments—Private equity investments are initially valued based upon transaction price. The carrying value is subsequently adjusted when it is considered necessary based on current performance and market conditions. The carrying values are adjusted to reflect expected exit values. These investments are included in Other assets in the accompanying statements of condition at fair value.

Deposits—The fair value of demand deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities.

FHLB Advances—Estimated fair value for FHLB advances is estimated using discounted cash flows and rates currently charged for borrowings of similar remaining maturities.

Accrued Interest Receivable, Borrowers’ Advances for Insurance and Taxes, and Principal, Interest and Escrow Owed on Loans Serviced—The carrying amount is a reasonable estimate of fair value.

11.

DERIVATIVE INSTRUMENTS

The Company may enter 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. Such derivatives are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income. In addition, the Company may enter into commitments to originate loans, which when funded, will be classified as held for sale. Such commitments meet the definition of a derivative and are not designated in a hedging relationship; therefore, gains and losses are recognized immediately in the statement of income. The Company held no derivative instruments and therefore, had no derivatives designated as hedging instruments under FASB ASC 815, “Derivatives and Hedging,” at December 31, 2010 or September 30, 2010.

The following table summarizes the effects on income of previously held derivative instruments not designated as hedging instruments.


		Amount of Gain or (Loss) Recognized in Income on Derivative
		Three Months Ended
		December 31,
	Location of Gain or (Loss) Recognized in Income	2010		2009
Interest rate lock commitments	Other income	$	0	$	(121	)
Forward commitments for the sale of mortgage loans	Net gain on the sale of loans		0		1,250

Total		$	0	$	1,129

12.

RECENT ACCOUNTING PRONOUNCEMENTS

FASB Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805): Disclosures of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)” clarifies the acquisition date that should be used and expands supplemental disclosures required when reporting pro forma financial information related to business combinations. The amendments are effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The Company adopted the amendments to Topic 805 on January 1, 2011, with no material impact to its consolidated financial statements.

FASB ASU 2010-28, “Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)” modifies the impairment tests and provides guidance on determining whether it is more likely than not that goodwill impairment exists for reporting units with zero or negative carrying amounts. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company will adopt the amendments to Topic 350 on October 1, 2011 and does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

FASB ASU 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” expands disclosures about the credit quality of financing receivables and the allowance for credit losses, requiring such disclosures be presented on a disaggregated basis, either by portfolio segment, which is defined as the level at which an entity determines its allowance for credit losses, or by class, which is defined on the basis of the initial

measurement attribute, the risk characteristics, and the method for monitoring and assessing credit risk. Short-term trade accounts receivable and receivables measured at fair value or at the lower of cost or fair value are excluded from the scope of this update. The new guidance requires an entity to present, by portfolio segment, a roll forward of the allowance for credit losses and the recorded investment of the related financing receivables, and significant purchases and sales of financing receivables. Disclosures required by class of financing receivables include nonaccrual status, impaired balances, credit quality indicators, the aging of past dues, the nature and extent of troubled debt restructurings that occurred during the reporting period along with their impact on the allowance for credit losses, and the nature and effect of troubled debt restructurings that occurred during the previous twelve months that defaulted during the period along with their impact on the allowance for credit losses. The new and amended disclosures that relate to information as of the end of a reporting period are included in Note. 4 Loans and Allowance for Loan Losses. The disclosures that include information for activity that occurs during a reporting period are effective for the first interim or annual period beginning after December 15, 2010 and will be included in the Company’s consolidated financial statements for the period ending March 31, 2011, except disclosures about troubled debt restructurings, the effective date for which has been temporarily delayed by FASB ASU 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”

FASB ASC Subtopic 810-10, the consolidation guidance related to variable interest entities (“VIEs”), was amended to modify the approach used to evaluate VIEs and add disclosure requirements about an enterprise’s involvement with VIEs. These provisions are effective at the beginning of an entity’s annual reporting period that begins after November 15, 2009 and for interim periods within that period. The Company adopted the amendments to the consolidation guidance related to variable interest entities on October 1, 2010 with no material effect on its consolidated financial statements.

FASB ASC Topic 860, “Transfers and Servicing,” was amended to eliminate the concept of a “qualifying special-purpose entity” and change the requirements for derecognizing financial assets. The amendment requires additional disclosures intended to provide greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This updated guidance is effective for fiscal years beginning after November 15, 2009. The Company adopted the amendments to Transfers and Servicing on October 1, 2010 with no material effect on its consolidated financial statements.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on the Company’s consolidated financial statements or do not apply to its operations.

Item 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:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans and prospects and growth and operating strategies;

•

statements concerning trends in our provision for loan losses and charge-offs;

•

statements regarding the asset quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

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

•

significantly increased competition among depository and other financial institutions;

•

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

•

general economic conditions, either nationally or in our market areas, including employment prospects and conditions that are worse than expected;

•

decreased demand for our products and services and lower revenue and earnings because of a recession;

•

adverse changes and volatility in the securities markets;

•

adverse changes and volatility in credit markets;

•

legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements;

•

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

•

changes in consumer spending, borrowing and savings habits;

•

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

•

future adverse developments concerning Fannie Mae or Freddie Mac;

•

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

•

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

•

the timing and the amount of revenue that we may recognize;

•

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

•

changes in consumer spending, borrowing and spending habits;

•

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

•

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

•

adverse changes and volatility in real estate markets;

•

a slowing or failure of the moderate economic recovery that began last year;

•

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

•

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

•

changes in our organization, or compensation and benefit plans; and

•

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.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Overview

Our business strategy is to operate as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to our customers. We cannot assure you that we will successfully implement our business strategy.

Since being organized in 1938, we grew to become, prior to 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 some Fun.” Our values are reflected in our pricing of loan and deposit products, and historically, in our Home Today program, as described below. Our values are further reflected in the Broadway Redevelopment Initiative (a long-term revitalization program encompassing the three-mile corridor of the Broadway-Slavic Village neighborhood in Cleveland, Ohio where our main office is located) and the education programs we have established and/or supported. We intend to continue to support our customers.

While recent financial and economic releases have not been as consistently negative, and some positive trends have been highlighted in many current earnings reports, much of the financial services industry remains relatively fragile and susceptible to the consequences of adverse financial conditions. Regionally high unemployment, weak residential real estate values, capital and credit markets that remain at less than robust levels, and a general lack of confidence in the financial service sector of the economy as a result of continuing bank failures present challenges for us.

Management believes that the following matters are those most critical to our success: (1) controlling our interest rate risk exposure; (2) monitoring and limiting our credit risk; (3) maintaining access to adequate liquidity and alternative funding sources; and (4) monitoring and controlling operating expenses.

Controlling Our Interest Rate Risk Exposure. Although housing and credit issues continue to dominate financial headlines and continue to have a distinctly negative effect on our reported operating results and, as described below, are certainly a matter of significant concern for us, historically our greatest risk has been interest rate risk exposure. When we hold long-term, fixed-rate assets, funded by liabilities with shorter repricing characteristics, we are exposed to potentially adverse impact from rising interest rates. Generally, and particularly over extended periods of time that encompass full economic cycles, interest rates associated with longer term assets have been higher than interest rates associated with shorter term assets. This difference has been an important component of our net interest income and is fundamental to our operations. We manage the risk of holding long-term, fixed-rate mortgage assets by moderating the attractiveness of our loan offerings, thereby controlling the level of additions (new originations) to our portfolio, and by periodically selling long-term, fixed-rate mortgage loans in the secondary market to reduce the amount of those assets held in our portfolio. During the quarter ended December 31, 2010, we did not sell any long-term, fixed-rate mortgage loans compared to $170.8 million during the quarter ended December 31, 2009. The lack of sales since September 30, 2010 reflects the impact of changes by Fannie Mae, the Association’s primary loan investor, related to requirements for loans that it accepts. Effective July 1, 2010, Fannie Mae implemented certain loan origination requirement changes affecting loan eligibility that we did not adopt. Accordingly, the Association’s ability to reduce interest rate risk via our traditional loan sales of newly originated longer-term fixed rate residential loans is limited until the Association either changes its loan origination processes or Fannie Mae, Freddie Mac or other market participants revise their loan eligibility standards. In the absence of such changes, future sales of fixed rate mortgage loans will be predominately limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values. In response to this change, we are currently marketing a new adjustable-rate mortgage loan product that provides us with improved interest rate risk characteristics when compared to a long-term, fixed-rate mortgage. During the quarter ended December 31, 2010 adjustable-rate mortgage loan production increased $575.9 million to $582.0 million from $6.1 million during the quarter ended December 31, 2009. During the same time period fixed-rate mortgage loan production increased $42.6 million to $469.3 million from $426.7 million. The amount of origination and refinancing volumes along with the portion of that activity that pertains to loans that we previously sold (but for which we maintained the right to provide mortgage servicing so as to maintain our relationship with our customer) when coupled with the level of loan sales, if any, determines the balance of loans held on our balance sheet. The amount of adjustable-rate loan activity described above resulted in $1.41 billion of long-term adjustable rate loans in our residential mortgage loan held for investment portfolio at December 31, 2010, as compared to $892.3 million at September 30, 2010 and $650.5 million at December 31, 2009. In addition, fixed-rate mortgage loan activity described above resulted in $5.66 billion of long-term fixed rate loans in our residential mortgage loan held for investment portfolio at December 31, 2010, as compared to $5.53 billion at September 30, 2010 and $5.67 billion at December 31, 2009.

In the past, we have also managed interest rate risk by promoting home equity lines of credit which have a variable interest rate. As described below, this product carries an incremental credit risk component and has been adversely impacted by the housing market downturn. Effective June 28, 2010, we suspended the acceptance of new home equity credit applications with the exception of bridge loans and, in accordance with a reduction plan that has been accepted by our primary regulator, we are actively pursuing strategies to decrease the outstanding balance of our home equity lending portfolio as well

as our exposure to undrawn home equity lines of credit. Accordingly, promotion of this product is no longer a strategy used to help manage our interest rate risk profile.

While there is no current evidence to indicate that interest rate increases are imminent, should a rapid and substantial increase occur in general market interest rates, it is probable that, prospectively and particularly over a multi-year time horizon, the level of our net interest income would be adversely impacted.

Monitoring and Limiting Our Credit Risk. While, historically, we had been successful in limiting our credit risk exposure by generally imposing high credit standards with respect to lending, the recent confluence of dramatically unfavorable regional and macro-economic events, coupled with our expanded participation in the second lien mortgage lending markets, has significantly refocused our attention with respect to credit risk. In response to the evolving economic landscape, we have continuously revised and updated 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 December 31, 2010, more than 89% of our assets consisted of residential real estate loans and home equity loans and lines of credit, the overwhelming majority of which were originated to borrowers in the states of Ohio and Florida. Our analytic procedures and evaluations include specific reviews of all home equity loans and lines of credit that become 90 or more days past due as well as specific reviews of all first mortgage loans that become 180 or more days past due. We also expanded our analysis of current performing home equity lines of credit to better mitigate future risk of loss.

In response to current market conditions, and in an effort to limit our credit risk exposure and improve the credit performance of new customers, we have tightened our credit criteria in evaluating a borrower’s ability to successfully fulfill his or her repayment obligation and we have revised the design of many of our loan products to require higher borrower down-payments, limited the products available for condominiums, and eliminated certain product features (such as interest-only adjustable-rate loans, loans above certain loan-to-value ratios, and equity lending products with the exception of bridge loans).

The Office of Thrift Supervision (“OTS”) has expressed concerns with the risk concentration and other aspects of the Association’s home equity loans and lines of credit portfolio and its administration of that portfolio. Under the terms of an August 13, 2010 memorandum of understanding (the “MOU”) between the Association and the OTS, management has prepared, or obtained, and has submitted to the OTS: (1) a third party report on our home equity lending portfolio; (2) a home equity lending reduction plan (the “Reduction Plan”); (3) enhanced home equity lending and credit risk management policies and procedures; and (4) an updated business plan. On December 27, 2010, notice was received from the OTS that they did not object to the Reduction Plan. The Association has made significant progress under the Reduction Plan. Key elements of the Reduction Plan and progress through December 31, 2010 are: (1) a reduction, using June 30, 2010 as a starting point, of $1 billion in home equity loan commitments, including a $300 million reduction in outstanding balances, by December 31, 2011. At December 31, 2010, commitments, including those lines suspended, but subject to customer appeal, have been reduced $738.2 million and outstanding balances have been reduced by $158.7 million. (2) a $150 million capital infusion from the Company to the Association. This was completed in October, 2010. (3) Implementation of expanded line management, account management and collection processes regarding home equity. These process changes are in various stages of completion.

New memorandums of understanding (the “New MOU”) were entered into with the OTS dated February 7, 2011, covering the Association, Third Federal Savings, MHC and the Company. In conjunction with the New MOU, the Association’s original MOU dated August 13, 2010 was terminated. The New MOU addresses the ongoing monitoring of issues required by the original MOU. In addition, the New MOU requires, at various dates through June 30, 2011, the following actions: (1) an independent assessment of the Association’s interest rate risk management policy and a plan to address any deficiencies; (2) an independent review of management compensation; (3) the submittal of an independent enterprise risk management study and a plan to address any deficiencies; (4) the submittal for OTS non-objection 45 days in advance, any plans for new debt, dividends or stock repurchases; (5) formal management and director succession plans; and (6) revisions to various operational policies. In September, 2010, we engaged a third party to conduct an independent assessment of our interest rate risk management policy and our enterprise risk management approach. The assessments will be part of the response to the OTS to be delivered in February, 2011. We expect to be able to comply with the remaining timeframes specified in the New MOU. The OTS requirements also carry unanticipated costs to complete which will continue to increase our non-interest expense in amounts that are not expected to, but may, be material to our results of operations. The Company does not intend to declare or pay a cash dividend, or to repurchase any of its outstanding common stock until the OTS’ concerns are resolved. The requirements of the New MOU will remain in effect until the OTS decides to terminate, suspend or modify them.

One aspect of our credit risk concern relates to the high percentage of our loans that are secured by residential real estate in the states of Ohio and Florida, particularly in light of the highly publicized difficulties that have arisen with respect to the real estate markets in those states. At December 31, 2010, approximately 80.0% and 18.0% of our residential, non-Home Today and construction loans were secured by properties in Ohio and Florida, respectively. Our 30 or more days delinquency ratios on those loans in Ohio and Florida at December 31, 2010 were 1.8% and 5.1%, respectively. Our 30 or more days

delinquency ratio for the non-Home Today portfolio as a whole was 2.3%. Also, at December 31, 2010, approximately 39.6% and 28.4% of our home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively. Our 30 days or more delinquency ratios on those loans in Ohio and Florida at December 31, 2010 were 2.1% and 4.0%, respectively. Our 30 or more days delinquency ratio for the home equity loans and lines of credit portfolio as a whole was 2.7%. While we focus our attention on, and are concerned with respect to the resolution of all loan delinquencies, as these ratios illustrate, our highest concern is centered on loans that are secured by properties in Florida. The “Allowance for Loan Losses” portion of the Critical Accounting Policies section provides additional details regarding our loan portfolio composition, delinquency statistics, our methodology in evaluating our loan loss provisions and the adequacy of our allowance for loan losses. As long as unemployment levels remain high, particularly in Ohio and Florida, and Florida housing values remain depressed due to prior overbuilding and speculation which has resulted in considerable inventory on the market, we expect that we will continue to experience elevated levels of delinquencies and risk of loss.

Our residential Home Today loans are another area of credit risk concern. Although the recorded investment in these loans total $275.0 million at December 31, 2010 and constitute only 2.8% of our total loan portfolio balance, they comprise 28.6% and 28.9% of our total delinquencies and our 90 days or greater delinquencies. At December 31, 2010, approximately 95.9% and 3.9% of our residential, Home Today loans were secured by properties in Ohio and Florida, respectively. At December 31, 2010, the percentages of those loans delinquent 30 days or more in Ohio and Florida were 34.4% and 35.4%, respectively. The disparity between the portfolio composition ratio and delinquency composition ratio reflects the nature of the Home Today loans. Prior to March 27, 2009 these loans were made to customers who, generally because of poor credit scores, would not have otherwise qualified for our loan products. We do not offer, and have not offered, loan products frequently considered to be designed to target sub-prime borrowers containing features such as higher fees or higher rates, negative amortization, or low initial payment features with adjustable interest rates. Our Home Today loan products, which prior to March 27, 2009 were made to borrowers whose credit profiles might be described as sub-prime, generally contain the same features as loans offered to our non-Home Today borrowers. The overriding objective of our Home Today lending, just as it is with our non-Home Today lending, is to create 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 do not have sufficient funds for downpayments, many loans include private mortgage insurance. At December 31, 2010, 55.1% of Home Today loans include private mortgage insurance coverage. From a peak recorded investment of $306.6 million at December 31, 2007, the total recorded investment balance of the Home Today portfolio has declined to $275.0 million at December 31, 2010. This trend generally reflects the evolving conditions in the mortgage real estate market and the tightening of standards imposed by issuers of private mortgage insurance. As part of our effort to manage credit risk, effective March 27, 2009, the Home Today underwriting guidelines were revised to be substantially the same as our traditional mortgage product. Inasmuch as most potential Home Today customers do not have sufficient funds for downpayments, the lack of available private mortgage insurance restricts our ability to extend credit. Unless and until lending standards and private mortgage insurance requirements loosen, we expect the Home Today portfolio to continue to decline in balance.

Maintaining Access to Adequate Liquidity and Alternative Funding Sources. For most insured depositories, customer and community confidence are critical to their ability to maintain access to adequate liquidity and to conduct business in an orderly fashion. The Company believes that maintaining high levels of capital is one of the most important factors in nurturing customer and community confidence. Accordingly, we have managed the pace of our growth in a manner that reflects our emphasis on high capital levels. At December 31, 2010, the Association’s ratio of core capital to adjusted tangible assets (a basic industry measure of which 5.00% is deemed to represent a “well capitalized” status) was 13.45%. We expect to continue to maintain high capital ratios.

In managing its level of liquidity, the Company monitors available funding sources, which include attracting new deposits, borrowing from others, the conversion of assets to cash and the generation of funds through profitable operations. The Company has traditionally relied on retail deposits as its primary means in meeting its funding needs. At December 31, 2010, deposits totaled $8.79 billion, while borrowings totaled $64.2 million and borrowers’ advances and servicing escrows totaled $347.5 million, combined. In evaluating funding sources, we consider many factors, including cost, duration, current availability, expected sustainability, impact on operations and capital levels.

To attract deposits, we offer our customers attractive rates of return on our deposit products. Our deposit products typically offer rates that are highly competitive with the rates on similar products offered by other financial institutions. We intend to continue this practice.

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 Federal Home Bank of Cincinnati (“FHLB”) and the Federal Reserve Bank of Cleveland (“Federal Reserve”). At December 31, 2010, these collateral

pledge support arrangements provide for additional borrowing capacity of up to $1.41 billion with the FHLB (provided an additional investment in FHLB capital stock of up to $28.2 million is made) and up to $332.3 million at the Federal Reserve. 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 immediately and efficiently sold in the institutional market and converted to cash. At December 31, 2010, our investment securities portfolio totaled $569.4 million. Finally, cash flows from operating activities have been a regular source of funds. During the three months ended December 31, 2010 and 2009, cash flows from operations totaled $85.7 million and $(1.9) million, respectively. Cash flow from operations in the three months ended December 31, 2009 was adversely affected by the $51.9 million prepayment of FDIC deposit insurance assessments (which has a remaining balance of $34.4 million at December 31, 2010).

Overall, while customer and community confidence can never be assured, the Company believes that our liquidity is adequate and that we have adequate access to alternative funding sources.

Monitoring and Controlling Operating Expenses. We continue to focus on managing operating expenses. Our annualized ratio of non-interest expense to average assets was 1.55% for the three months ended December 31, 2010. As of December 31, 2010, our average assets per full-time employee, and our average deposits per full-time employee were $11.6 million and $9.2 million, respectively. Based on industry statistics published by the OTS, we believe that each of these measures compares favorably with the averages for our peer group. Our average deposits held at our branch offices ($219.8 million per branch office as of December 31, 2010) contribute to our expense management efforts by limiting the overhead costs of serving our deposit customers. We will continue our efforts to control operating expenses as we grow our business.

While we devote a great deal of our attention to managing our operating expenses, certain costs are largely outside of our sphere of influence or control. One expense that increased dramatically in fiscal 2009 and is expected to remain high for the foreseeable future is our Federal deposit insurance premiums and assessments. In November 2009, the FDIC amended its assessment regulations to require insured institutions to pay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of calendar 2009 and to also prepay their estimated risk-based assessments for all of the calendar years 2010, 2011 and 2012. Our required $51.9 million prepayment was determined based upon our assessment rate in effect on September 30, 2009 and reflected a presumed 5% annualized growth factor applied to the institution’s assessment base as well as an assumed assessment rate increase of three cents per $100 of deposits effective January 1, 2011. In recognition of the industry’s weakened condition and the significant losses experienced by the FDIC, the prepayment was intended to preclude additional special assessments for the foreseeable future; however, the prepayment does not necessarily preclude the FDIC from changing assessment rates or from revising the risk-based assessment system, pursuant to the existing notice and-comment rulemaking framework. The Dodd-Frank Act requires the FDIC to adopt changes to the assessment base used to determine the amount of deposit insurance paid by insured institutions. Changes pursuant to this requirement are expected to be implemented in the second calendar quarter of 2011, and, absent changes to any other aspects of the assessment framework, including CAMELS classifications, are expected to result in a modest reduction in the Association’s prospective assessments.

Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operations depend, and which involve the most complex subjective decisions or assessments, are our policies with respect to our allowance for loan losses, the valuation of mortgage servicing rights, the valuation of income taxes and the determination of pension obligations and stock-based compensation.

Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. The allowance for loan losses consists of three components:

(1)

specific allowances established for any impaired loans for which the recorded investment in the loan exceeds the measured value of the collateral or, alternatively, the present value of expected future cash flows for the loan;

(2)

general allowances for loan losses for each loan type based on historical loan loss experience; and

(3)

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

The adjustments to historical loss experience are based on our evaluation of several factors, including:

•

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

•

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

•

the composition of the loan portfolio;

•

national, regional and local economic factors and trends;

•

asset disposition loss statistics (both current and historical);

•

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

•

the industry.

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

As described above, loans originated under the Home Today program have greater credit risk than traditional residential real estate mortgage loans. At December 31, 2010, we had a recorded investment of $275.0 million in loans that were originated under our Home Today program, 34.4% of which were delinquent 30 days or more in repayments, compared to 2.3% in our portfolio of residential non-Home Today loans as of that date.

Equity loans and equity lines of credit generally have higher credit risk than traditional residential mortgage loans. These loans and lines are usually in a second lien position and when combined with the first mortgage, result in generally higher overall loan-to-value ratios. In a stressed housing market with high delinquencies and low housing prices, such as currently exists, these higher loan-to-value ratios represent a greater risk of loss to the Company. A borrower with more equity in the property has a vested interest in keeping the loan current compared to a borrower with little or no equity in the property. In light of the weak housing market, the current level of delinquencies and the current instability in employment and economic prospects, we currently conduct an expanded loan level evaluation of our equity loans and lines of credit, including bridge loans, which are delinquent 90 days or more. This expanded evaluation supplements, and is in addition to, our traditional evaluation procedures. As delinquencies in our portfolios are resolved, we are realizing an increase in net charge-offs related to equity lines of credit which are being applied against the allowance for loan loss. At December 31, 2010, we had a recorded investment of $2.75 billion in equity loans and equity lines of credit outstanding, 1.9% of which were delinquent 90 days or more in repayments. Net charge-offs in this portfolio for the three months ended December 31, 2010 and 2009 were $13.4 million and $10.0 million, respectively.

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

We periodically evaluate the carrying value of loans and the allowance for loan losses 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. In addition, as an integral part of its examination process, the Office of Thrift Supervision periodically reviews the allowance for loan losses. The Office of Thrift Supervision may require us to recognize additions to the allowance based on its analysis of information available to it at the time of its examination.

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


	December 31, 2010						September 30, 2010						December 31, 2009
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
Residential non-Home Today
Ohio	$	5,416,967					$	4,843,804					$	4,634,145
Florida		1,241,323						1,168,701						1,273,755
Kentucky		137,193						125,949						124,360

Total Residential non-Home Today		6,795,483			68.6	%		6,138,454			65.4	%		6,032,260			64.2	%
Residential Home Today
Ohio		264,819						268,983						277,126
Florida		10,901						10,940						10,991
Kentucky		477						610						725

Total Residential Home Today		276,197			2.8			280,533			3.0			288,842			3.1
Home equity loans and lines of credit (1)
Ohio		1,083,954						1,145,819						1,187,834
Florida		777,955						797,658						831,279
California		317,167						324,778						339,889
Other		558,112						580,435						614,936

Total Home equity loans and lines of credit		2,737,188			27.6			2,848,690			30.4			2,973,938			31.6
Construction		89,433			0.9			100,404			1.1			97,199			1.0
Consumer and other loans		7,237			0.1			7,199			0.1			7,358			0.1

Total loans receivable		9,905,538			100.0	%		9,375,280			100.0	%		9,399,597			100.0	%

Deferred loan fees, net		(16,241	)					(15,283	)					(11,775	)
Loans in process		(36,607	)					(45,008	)					(40,233	)
Allowance for loan losses		(148,246	)					(133,240	)					(97,280	)

Total loans receivable, net	$	9,704,444					$	9,181,749					$	9,250,309

(1)	Includes bridge loans (loans where borrowers can utilize the existing equity in their current home to fund the purchase of a new home before they have sold their current home).

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


	At December 31, 2010								At September 30, 2010								At December 31, 2009
	Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans			Amount		Percent of Allowance to Total Allowance			Percent of Loans in Category to Total Loans
	(Dollars in thousands)
Real estate loans:
Residential non-Home Today	$	48,737		32.9	%		68.6	%	$	41,246		31.0	%		65.4	%	$	26,612		27.3	%		64.2	%
Residential Home Today		18,143		12.2			2.8			13,331		10.0			3.0			9,683		10.0			3.1
Home equity loans and lines of credit (1)		76,759		51.8			27.6			73,780		55.4			30.4			56,208		57.8			31.6
Construction		4,606		3.1			0.9			4,882		3.6			1.1			4,776		4.9			1.0
Consumer and other loans		1		0.0			0.1			1		0.0			0.1			1		0.0			0.1

Total allowance	$	148,246		100.0	%		100.0	%	$	133,240		100.0	%		100.0	%	$	97,280		100.0	%		100.0	%

(1)	Includes bridge loans (loans where borrowers can utilize the existing equity in their current home to fund the purchase of a new home before they have sold their current home).

Our analysis for evaluating the adequacy of and the appropriateness of our loan loss provision and allowance for loan losses is continually refined as new information becomes available and actual loss experience is acquired. During the last few years, numerous modifications to our procedures have been made. Most recently (at September 30, 2009), the qualitative MVA was formally added to our procedures to provide consideration of factors that may not be directly derived from historical portfolio performance. Orientation of the MVA is aligned more closely with contemporaneous qualitative factors, as opposed to the more historically-oriented loss experience factors used in the general valuation allowance. The MVA ensures that the provision for loan losses recognized in our income statement, as well as the balance of the allowance for loan losses carried on our balance sheet, remain consistent with not only our experience, but also with our expectations, which are influenced by the then-current status of the economy and housing markets and how those conditions may impact the performance of loans held on our balance sheet on the reporting date.

The MVA supplement to the “general” component of our overall allowance for loan losses added approximately $33 million to the provision for loan losses and the total allowance for loan losses carried on our balance sheet as of and for the quarter ended September 30, 2009.

Based on our evaluation in the current three-month period the total allowance for loan losses increased $15.0 million to $148.2 million at December 31, 2010. Also, based on our analysis, during the same three-month period a greater portion of the allowance for loan losses was allocated to our residential non-Home Today portfolio, as delinquencies continued to increase in that category. While delinquent loans in our Home Today portfolio decreased $2.1 million to $94.6 million in the current three-month period, our analysis determined that the portion of the allowance allocated to the Home Today portfolio needed to increase by 2.2%. In addition, a smaller portion (but still an increased dollar amount) of the allowance was allocated to equity loans and lines of credit as total delinquencies in that category saw a slight decrease. Additional discussion of non-performing loans as well as charge-offs appears later in this section.

As more delinquent loans have become subject to individual evaluation, the portion of the allowance for loan losses identified as specific reserves has increased and, as a result, the portion of the allowance for loan losses identified as general loss reserve applicable to loans not evaluated for specific reserves has decreased. Adjustments to the historical loss experience factors have been made in response to the weak real estate market, unemployment concerns in the Ohio market, an excess of available housing units in the Florida market, and uncertainties surrounding the future performance of restructured loans, and, as a result, the total loss allowance increased between December 31, 2009 and December 31, 2010.

The following table sets forth activity in our allowance for loan losses for the periods indicated.


	As of and for the Three Months Ended December 31,
	2010			2009
	(Dollars in thousands)

Allowance balance (beginning of the period)	$	133,240		$	95,248
Charge-offs:
Real estate loans:
Residential non-Home Today
Ohio		1,977			1,378
Florida		2,087			1,327
Kentucky		0			72

Total Residential non-Home Today		4,064			2,777

Residential Home Today
Ohio		1,819			915
Florida		0			104
Kentucky		0			0

Total Residential Home Today		1,819			1,019

Home equity loans and lines of credit (1)
Ohio		2,519			1,983
Florida		8,898			5,832
California		701			1,495
Other		1,697			927

Total Home equity loans and lines of credit		13,815			10,237

Construction		357			183
Consumer and other loans		0			0

Total charge-offs		20,055			14,216


Recoveries:
Real estate loans:
Residential non-Home Today		81			5
Residential Home Today		43			23
Home equity loans and lines of credit (1)		414			219
Construction		23			1
Consumer and other loans		0			0

Total recoveries		561			248

Net charge-offs		(19,494	)		(13,968	)
Provision for loan losses		34,500			16,000

Allowance balance (end of the period)	$	148,246		$	97,280

Ratios:
Net charge-offs (annualized) to average loans outstanding		0.81	%		0.59	%
Allowance for loan losses to non-performing loans at end of the period		58.96	%		36.75	%
Allowance for loan losses to the total recorded investment in loans at end of the period		1.50	%		1.04	%

(1)	Includes bridge loans (loans where borrowers can utilize the existing equity in their current home to fund the purchase of a new home before they have sold their current home).

The level of charge-offs in the equity loan and lines of credit category is not unexpected. The number of loans delinquent 90 days and over (seriously delinquent) remains at an elevated level, although it decreased $1.6 million from

September 30, 2010 and $9.8 million from December 31, 2009. In light of the weak housing market and the instability in the employment and economic prospects in our primary lending markets, we conduct expanded loan level reviews of equity lines of credit. As these delinquencies 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. For the three months ended December 31, 2010, $13.4 million in net charge-offs for equity loans and lines of credit have been recorded compared to $10.0 million for the three months ended December 31, 2009. The largest change was in our Florida market which increased $3.1 million, or 53%, to $8.9 million in the current three-month period ended December 31, 2010 compared to $5.8 million during the same three-month period last year. Charge-offs in our Residential Non-Home Today portfolio increased $1.3 million, or 46%, to $4.1 million in the current three-month period compared to $2.8 million in the three-month period ended December 31, 2009. We continue to evaluate loans becoming delinquent for potential losses and record provisions for our estimate of those losses. We expect this higher level of charge-offs to continue as the delinquent loans are resolved in the future and uncollected balances are charged against the allowance.

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


	Loans Delinquent For
	30-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)
At December 31, 2010
Real estate loans:
Residential non-Home Today
Ohio		236	$	23,719		587	$	67,745		823	$	91,464
Florida		42		9,567		262		53,515		304		63,082
Kentucky		3		426		6		1,469		9		1,895

Total Residential non-Home Today		281		33,712		855		122,729		1,136		156,441

Residential Home Today
Ohio		230		20,550		782		70,175		1,012		90,725
Florida		12		1,257		26		2,586		38		3,843

Total Residential Home Today		242		21,807		808		72,761		1,050		94,568

Home equity loans and lines of credit (1)
Ohio		223		7,439		346		15,695		569		23,134
Florida		133		9,001		211		22,083		344		31,084
California		29		2,750		32		3,826		61		6,576
Other		47		3,262		114		10,726		161		13,988

Total Home equity loans and lines of credit		432		22,452		703		52,330		1,135		74,782

Construction		4		1,543		26		3,621		30		5,164
Consumer and other loans		0		0		2		1		2		1

Total		959	$	79,514		2,394	$	251,442		3,353	$	330,956


	Loans Delinquent For
	30-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in thousands)
At September 30, 2010
Real estate loans:
Residential non-Home Today
Ohio		215	$	21,182		582	$	68,845		797	$	90,027
Florida		42		8,597		244		51,765		286		60,362
Kentucky		5		902		4		991		9		1,893

Total Residential non-Home Today		262		30,681		830

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller Reporting Company