Edgar Filing: TFS Financial CORP

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10-Q

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 June 30, 2011

¨	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 August 2, 2011 there were 308,442,143 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 73.63% 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 I – FINANCIAL INFORMATION			3

Item 1.	Financial Statements (unaudited)		3

	Consolidated Statements of Condition June 30, 2011 and September 30, 2010		3

	Consolidated Statements of Income Three and nine months ended June 30, 2011 and 2010		4

	Consolidated Statements of Shareholders’ Equity Nine months ended June 30, 2011 and 2010		5

	Consolidated Statements of Cash Flows Nine months ended June 30, 2011 and 2010		6

	Notes to Unaudited Interim Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		53

Item 4.	Controls and Procedures		55

Part II – OTHER INFORMATION			56

Item 1.	Legal Proceedings		56

Item 1A.	Risk Factors		56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		56

Item 3.	Defaults Upon Senior Securities		57

Item 4.	[Removed and Reserved]		57

Item 5.	Other Information		57

Item 6.	Exhibits		57

SIGNATURES			58

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except share data)


	June 30, 2011			September 30, 2010
ASSETS
Cash and due from banks	$	33,757		$	38,804
Other interest-bearing cash equivalents		243,812			704,936

Cash and cash equivalents		277,569			743,740

Investment securities:
Available for sale (amortized cost $16,573 and $24,480, respectively)		16,664			24,619
Held to maturity (fair value $449,380 and $657,076, respectively)		441,691			646,940

		458,355			671,559

Mortgage loans held for sale (none measured at fair value)		0			25,027
Loans held for investment, net:
Mortgage loans		9,863,637			9,323,073
Other loans		6,916			7,199
Deferred loan fees, net		(19,020	)		(15,283	)
Allowance for loan losses		(153,305	)		(133,240	)

Loans, net		9,698,228			9,181,749

Mortgage loan servicing assets, net		30,791			38,658
Federal Home Loan Bank stock, at cost		35,620			35,620
Real estate owned		20,126			15,912
Premises, equipment, and software, net		60,518			62,685
Accrued interest receivable		35,625			36,282
Bank owned life insurance contracts		169,172			164,334
Other assets		91,537			100,461

TOTAL ASSETS	$	10,877,541		$	11,076,027

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits	$	8,701,896		$	8,851,941
Borrowed funds		185,129			70,158
Borrowers’ advances for insurance and taxes		28,817			51,401
Principal, interest, and related escrow owed on loans serviced		89,430			284,425
Accrued expenses and other liabilities		105,882			65,205

Total liabilities		9,111,154			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; 308,442,143 and 308,395,000 outstanding at June 30, 2011 and September 30, 2010, respectively		3,323			3,323
Paid-in capital		1,690,561			1,686,062
Treasury stock, at cost; 23,876,607 and 23,923,750 shares at June 30, 2011 and September 30, 2010, respectively		(287,797	)		(288,366	)
Unallocated ESOP shares		(80,168	)		(82,699	)
Retained earnings—substantially restricted		453,503			452,633
Accumulated other comprehensive loss		(13,035	)		(18,056	)

Total shareholders' equity		1,766,387			1,752,897

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	10,877,541		$	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				For the Nine Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
INTEREST INCOME:
Loans, including fees	$	103,845	$	103,902	$	309,439	$	315,713
Investment securities available for sale		43		150		198		416
Investment securities held to maturity		2,871		4,674		9,001		14,639
Other interest and dividend earning assets		527		664		1,822		1,813

Total interest and dividend income		107,286		109,390		320,460		332,581

INTEREST EXPENSE:
Deposits		43,723		51,446		135,387		158,779
Borrowed funds		518		480		1,441		1,439

Total interest expense		44,241		51,926		136,828		160,218

NET INTEREST INCOME		63,045		57,464		183,632		172,363
PROVISION FOR LOAN LOSSES		22,500		30,000		79,500		71,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		40,545		27,464		104,132		101,363

NON-INTEREST INCOME
Fees and service charges, net of amortization		4,507		5,626		11,829		16,658
Net gain on the sale of loans		201		19,716		490		25,510
Increase in and death benefits from bank owned life insurance contracts		1,621		1,623		4,840		4,820
Income on private equity investments		763		200		977		546
Other		1,667		1,363		5,709		4,276

Total non-interest income		8,759		28,528		23,845		51,810

NON-INTEREST EXPENSE
Salaries and employee benefits		19,694		22,223		56,994		63,879
Marketing services		2,102		920		6,306		4,971
Office property, equipment and software		4,986		5,046		14,983		15,661
Federal insurance premium		2,759		4,239		14,591		12,762
State franchise tax		1,459		1,329		3,826		3,709
Real estate owned expense, net		1,994		1,380		5,906		4,042
Appraisal and other loan review expenses		1,005		158		4,907		480
Other operating expenses		5,553		5,386		18,958		14,609

Total non-interest expense		39,552		40,681		126,471		120,113

INCOME BEFORE INCOME TAXES		9,752		15,311		1,506		33,060
INCOME TAX EXPENSE		3,767		5,074		645		10,975

NET INCOME	$	5,985	$	10,237	$	861	$	22,085

Earnings per share - basic and diluted	$	0.02	$	0.03	$	0.00	$	0.07

Weighted average shares outstanding
Basic		300,347,978		299,826,025		300,234,492		299,725,977
Diluted		301,147,673		300,557,738		300,918,065		300,335,743

See accompanying notes to unaudited interim consolidated financial statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

Nine Months Ended June 30, 2011 and 2010

(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		—		—			—			—			22,085			—			—			22,085
Change in unrealized gains on securities available for sale		—		—			—			—			—			(83	)		—			(83	)
Change in pension obligation		—		—			—			—			—			—			1,018			1,018

Total comprehensive income		—		—			—			—			—			—			—			23,020
Purchase of treasury stock (161,400 shares)		—		—			(1,810	)		—			—			—			—			(1,810	)
ESOP shares allocated or committed to be released		—		1,032			—			3,874			—			—			—			4,906
Compensation costs for stock-based plans		—		4,984			—			—			—			—			—			4,984
Excess tax effect from stock-based compensation		—		123			—			—			—			—			—			123
Dividends paid to common shareholders ($0.21 per common share)		—		—			—			—			(15,561	)		—			—			(15,561	)

Balance at June 30, 2010	$	3,323		1,685,139			(289,324	)		(84,022	)		463,399			157			(17,145	)	$	1,761,527

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 income		—		—			—			—			861			—			—			861
Change in unrealized gains on securities available for sale		—		—			—			—			—			(31	)		—			(31	)
Change in pension obligation		—		—			—			—			—			—			5,052			5,052

Total comprehensive loss		—		—			—			—			—			—			—			5,882
ESOP shares allocated or committed to be released		—		(281	)		—			2,531			—			—			—			2,250
Compensation costs for stock-based plans		—		5,397			(3	)		—			—			—			—			5,394
Excess tax effect from stock-based compensation		—		(36	)		—			—			—			—			—			(36	)
Treasury stock allocated to restricted stock plan		—		(581	)		572			—			9			—			—			—

Balance at June 30, 2011	$	3,323		1,690,561			(287,797	)		(80,168	)		453,503			59			(13,094	)	$	1,766,387

See accompanying notes to unaudited iterim consolidated financial statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)


	For the Nine Months Ended
	June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	861		$	22,085
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
ESOP and stock-based compensation expense		7,644			9,932
Depreciation and amortization		15,380			11,563
Deferred income taxes		400			0
Provision for loan losses		79,500			71,000
Net gain on the sale of loans		(490	)		(25,510	)
Other net losses		3,283			1,796
Principal repayments on and proceeds from sales of loans held for sale		0			151,536
Loans originated for sale		0			(202,677	)
Increase in bank owned life insurance contracts		(4,846	)		(4,818	)
Net decrease (increase) in interest receivable and other assets		5,992			(43,265	)
Net increase in accrued expenses and other liabilities		48,450			4,395
Other		662			2,502

Net cash provided by (used in) operating activities		156,836			(1,461	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated		(1,993,393	)		(1,807,187	)
Principal repayments on loans		1,371,213			1,403,028
Proceeds from sales, principal repayments and maturities of:
Securities available for sale		10,102			7,626
Securities held to maturity		214,681			230,801
Proceeds from sale of:
Loans		33,722			797,099
Real estate owned		11,201			14,223
Purchases of:
Securities available for sale		(2,288	)		(8,141	)
Securities held to maturity		(12,424	)		(295,564	)
Premises and equipment		(2,279	)		(3,100	)
Other		(853	)		122

Net cash (used in) provided by investing activities		(370,318	)		338,907

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(150,045	)		337,703
Net decrease in borrowers' advances for insurance and taxes		(22,584	)		(17,586	)
Net (decrease) increase in principal and interest owed on loans serviced		(194,995	)		2,236
Net increase in short term borrowed funds		100,016			0
Proceeds from long term borrowed funds		29,955			0
Repayment of long term borrowed funds		(15,000	)		0
Purchase of treasury shares		0			(1,810	)
Excess tax (provision) benefit related to stock-based compensation		(36	)		81
Dividends paid to common shareholders		0			(15,561	)

Net cash (used in) provided by financing activities		(252,689	)		305,063

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(466,171	)		642,509
CASH AND CASH EQUIVALENTS—Beginning of period		743,740			307,046

CASH AND CASH EQUIVALENTS—End of period	$	277,569		$	949,555

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	136,097		$	161,211
Cash paid for interest on borrowed funds		1,418			1,439
Cash paid for income taxes		4,500			11,900
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned		17,700			12,389
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 June 30, 2011, 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 June 30, 2011, 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 June 30,
	2011						2010
	Income		Shares		Per share amount		Income		Shares		Per share amount
			(Dollars in thousands, except per share data)
Net income	$	5,985					$	10,237
Less: income allocated to restricted stock units		33						154

Basic earnings per share:
Income available to common shareholders	$	5,952		300,347,978	$	0.02	$	10,083		299,826,025	$	0.03

Diluted earnings per share:
Effect of dilutive potential common shares				799,695						731,713

Income available to common shareholders	$	5,952		301,147,673	$	0.02	$	10,083		300,557,738	$	0.03


	For the Nine Months Ended June 30,
	2011						2010
	Income		Shares		Per share amount		Income		Shares		Per share amount
			(Dollars in thousands, except per share data)
Net income	$	861					$	22,085
Less: income allocated to restricted stock units		5						394

Basic earnings per share:
Income available to common shareholders	$	856		300,234,492	$	0.00	$	21,691		299,725,977	$	0.07

Diluted earnings per share:
Effect of dilutive potential common shares				683,573						609,766

Income available to common shareholders	$	856		300,918,065	$	0.00	$	21,691		300,335,743	$	0.07

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.

Outstanding stock options and restricted stock units are excluded from the computation of diluted earnings per share when their inclusion would be anti-dilutive. The diluted earnings per share calculation for the three months and nine months ended June 30, 2011 excludes 4,515,276 unvested outstanding stock options and 490,649 vested outstanding stock options and for the three and nine months ended June 30, 2010 excludes 3,503,200 unvested outstanding stock options and 135,800 restricted stock units because their inclusion would be anti-dilutive.

3.	INVESTMENT SECURITIES

Investment securities available for sale are summarized as follows:


	June 30, 2011
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
U.S. government and agency obligations	$	2,000	$	0	$	(17	)	$	1,983
Real estate mortgage investment conduits (REMICs)		5,830		108		0			5,938
Money market accounts		8,743		0		0			8,743

	$	16,573	$	108	$	(17	)	$	16,664


	September 30, 2010
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			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:


	June 30, 2011
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Freddie Mac certificates	$	2,741	$	166	$	0		$	2,907
Ginnie Mae certificates		20,202		584		0			20,786
REMICs		410,695		6,202		(81	)		416,816
Fannie Mae certificates		8,053		818		0			8,871

	$	441,691	$	7,770	$	(81	)	$	449,380


	September 30, 2010
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			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:


	June 30, 2011			September 30, 2010
Real estate loans:
Residential non-Home Today	$	6,988,085		$	6,138,454
Residential Home Today		267,627			280,533
Home equity loans and lines of credit		2,560,264			2,848,690
Construction		90,767			100,404

Total real estate loans		9,906,743			9,368,081
Consumer and other loans		6,916			7,199
Less:
Deferred loan fees—net		(19,020	)		(15,283	)
Loans-in-process (LIP)		(43,106	)		(45,008	)
Allowance for loan losses		(153,305	)		(133,240	)

Loans held for investment, net	$	9,698,228		$	9,181,749

A large concentration of the Company’s lending is in Ohio. As of June 30, 2011 and September 30, 2010, the percentages of residential real estate loans held in Ohio were 81% and 80%, respectively. As of June 30, 2011 and September 30, 2010, the percentage of residential real estate loans held in Florida was 17% and 18%, respectively. As of June 30, 2011 and September 30, 2010, the home equity loans and lines of credit held were concentrated in the states of Ohio, 39% and 40%, Florida, 28% and 28%, and California, 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 June 30, 2011, the balance of Home Today loans originated prior to March 27, 2009 was $265,496. 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.


	June 30, 2011		September 30, 2010
Real estate loans:
Residential non-Home Today	$	126,149	$	135,109
Residential Home Today		71,739		91,985
Home equity loans and lines of credit		38,288		54,481
Construction		3,886		4,994

Total real estate loans		240,062		286,569
Consumer and other loans		1		1

Total non-accrual loans	$	240,063	$	286,570

Loans are placed in nonaccrual status when they are contractually 90 days or more past due. 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. Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid principal and interest payment first. A nonaccrual loan, other than a troubled debt restructuring, is returned to accrual status when contractual payments are less than 90 days past due. The number of days past due is determined by the number of days the oldest contractual principal and interest payment remains unpaid. Total nonaccrual loans at June 30, 2011 and September 30, 2010 includes $18,879 and $32,365, 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 June 30, 2011 and September 30, 2010 is summarized in the following tables. Balances are net of deferred fees and any applicable loans-in-process (LIP).


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
June 30, 2011
Real estate loans:
Residential non-Home Today	$	17,023	$	13,586	$	118,025	$	148,634	$	6,808,977	$	6,957,611
Residential Home Today		11,525		7,460		61,364		80,349		186,111		266,460
Home equity loans and lines of credit		11,091		6,336		37,988		55,415		2,518,238		2,573,653
Construction		704		40		3,886		4,630		42,263		46,893

Total real estate loans		40,343		27,422		221,263		289,028		9,555,589		9,844,617
Consumer and other loans		0		0		1		1		6,915		6,916

Total	$	40,343	$	27,422	$	221,264	$	289,029	$	9,562,504	$	9,851,533


	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
	June 30, 2011
	Beginning Balance		Provisions		Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	49,419	$	5,312	$	(5,067	)	$	131	$	49,795
Residential Home Today		24,685		4,810		(2,239	)		25		27,281
Home equity loans and lines of credit		72,510		11,830		(12,970	)		484		71,854
Construction		4,132		548		(308	)		2		4,374

Total real estate loans		150,746		22,500		(20,584	)		642		153,304
Consumer and other loans		1		0		0			0		1

Total	$	150,747	$	22,500	$	(20,584	)	$	642	$	153,305


	For the Three Months Ended
	June 30, 2010
	Beginning Balance		Provisions		Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	27,211	$	7,850	$	(3,565	)	$	189	$	31,685
Residential Home Today		8,414		2,574		(836	)		0		10,152
Home equity loans and lines of credit		61,140		19,459		(12,070	)		787		69,316
Construction		7,539		117		(406	)		10		7,260

Total real estate loans		104,304		30,000		(16,877	)		986		118,413
Consumer and other loans		1		0		0			0		1

Total	$	104,305	$	30,000	$	(16,877	)	$	986	$	118,414


	For the Nine Months Ended
	June 30, 2011
	Beginning Balance		Provisions		Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	41,246	$	21,281	$	(13,027	)	$	295	$	49,795
Residential Home Today		13,331		19,451		(5,586	)		85		27,281
Home equity loans and lines of credit		73,780		38,520		(41,743	)		1,297		71,854
Construction		4,882		248		(791	)		35		4,374

Total real estate loans		133,239		79,500		(61,147	)		1,712		153,304
Consumer and other loans		1		0		0			0		1

Total	$	133,240	$	79,500	$	(61,147	)	$	1,712	$	153,305


	For the Nine Months Ended
	June 30, 2010
	Beginning Balance		Provisions		Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	22,678	$	16,730	$	(8,107	)	$	384	$	31,685
Residential Home Today		9,232		4,159		(3,262	)		23		10,152
Home equity loans and lines of credit		57,594		46,747		(36,130	)		1,105		69,316
Construction		5,743		3,364		(1,858	)		11		7,260

Total real estate loans		95,247		71,000		(49,357	)		1,523		118,413
Consumer and other loans		1		0		0			0		1

Total	$	95,248	$	71,000	$	(49,357	)	$	1,523	$	118,414

The recorded investment in loan receivables at June 30, 2011 and September 30, 2010 is summarized in the following table. The table provides details of the recorded balances according to the method of evaluation used for determining the allowance for loan losses, distinguishing between determinations made by evaluating individual loans and determinations made by evaluating groups of loans not individually evaluated. Balances of recorded investments are net of deferred fees and any applicable LIP.


	June 30, 2011						September 30, 2010
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	158,860	$	6,798,751	$	6,957,611	$	147,002	$	5,961,245	$	6,108,247
Residential Home Today		135,080		131,380		266,460		129,721		149,431		279,152
Home equity loans and lines of credit		41,666		2,531,987		2,573,653		56,108		2,809,828		2,865,936
Construction		6,602		40,291		46,893		7,881		46,574		54,455

Total real estate loans		342,208		9,502,409		9,844,617		340,712		8,967,078		9,307,790
Consumer and other loans		1		6,915		6,916		1		7,198		7,199

Total	$	342,209	$	9,509,324	$	9,851,533	$	340,713	$	8,974,276	$	9,314,989

An analysis of the allowance for loan losses at June 30, 2011 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 by evaluating groups of loans not individually evaluated.


	June 30, 2011						September 30, 2010
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	21,871	$	27,924	$	49,795	$	15,790	$	25,456	$	41,246
Residential Home Today		17,685		9,596		27,281		9,752		3,579		13,331
Home equity loans and lines of credit		13,738		58,116		71,854		18,508		55,272		73,780
Construction		1,615		2,759		4,374		1,988		2,894		4,882

Total real estate loans		54,909		98,395		153,304		46,038		87,201		133,239
Consumer and other loans		1		0		1		1		0		1

Total	$	54,910	$	98,395	$	153,305	$	46,039	$	87,201	$	133,240

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 our residential real estate portfolio. We believe 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 have recently experienced severe performance problems at other financial institutions (sub-prime, no documentation, pay option adjustable rate mortgages).

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. At June 30, 2011, more than 54% of Home Today loans include private mortgage insurance coverage.

Equity lines of credit represent a significant portion of our residential real estate portfolio. The state of the economy and low housing prices continue to have an adverse impact on this portfolio since the equity lines generally are in a second lien position. Effective June 28, 2010, due to the perceived deterioration in the overall housing conditions including 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 June 30, 2011 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 June 30, 2011 and September 30, 2010 are summarized as follows. Balances of recorded investments are net of deferred fees.


	June 30, 2011						September 30, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Residential non-Home Today	$	44,608	$	44,803	$	0	$	39,430	$	39,624	$	0
Residential Home Today		18,438		18,519		0		37,458		37,643		0
Home equity loans and lines of credit		14,451		14,376		0		20,377		20,255		0
Construction		241		243		0		192		194		0
Consumer and other loans		0		0		0		0		0		0

Total	$	77,738	$	77,941	$	0	$	97,457	$	97,716	$	0

With an allowance recorded:
Residential non-Home Today	$	114,252	$	114,752	$	21,871	$	107,572	$	108,104	$	15,790
Residential Home Today		116,642		117,153		17,685		92,263		92,719		9,752
Home equity loans and lines of credit		27,215		27,073		13,738		35,731		35,517		18,508
Construction		6,361		6,415		1,615		7,689		7,762		1,988
Consumer and other loans		1		1		1		1		1		1

Total	$	264,471	$	265,394	$	54,910	$	243,256	$	244,103	$	46,039

Total impaired loans:
Residential non-Home Today	$	158,860	$	159,555	$	21,871	$	147,002	$	147,728	$	15,790
Residential Home Today		135,080		135,672		17,685		129,721		130,362		9,752
Home equity loans and lines of credit		41,666		41,449		13,738		56,108		55,772		18,508
Construction		6,602		6,658		1,615		7,881		7,956		1,988
Consumer and other loans		1		1		1		1		1		1

Total	$	342,209	$	343,335	$	54,910	$	340,713	$	341,819	$	46,039

At June 30, 2011 and September 30, 2010, respectively, the recorded investment in impaired loans includes $160,843 and $134,696 of loans modified in troubled debt restructurings of which $23,093 and $12,292 are 90 days or more past due.

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. Beginning the three months ended June 30, 2011, the reported amount of interest income recognized includes interest income on all impaired loans. Prior to that period, the reported amount included interest income from only impaired loans with an allowance, resulting in a reported amount that was less than, but not materially different from, the actual amount of interest income recognized. Balances of average recorded investments are net of deferred fees.


	Three Months Ended June 30,
	2011				2010
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential non-Home Today	$	42,508	$	194	$	49,298	$	0
Residential Home Today		22,697		97		45,783		0
Home equity loans and lines of credit		14,892		60		24,744		0
Construction		218		1		0		0
Consumer and other loans		0		0		0		0

Total	$	80,315	$	352	$	119,825	$	0

With an allowance recorded:
Residential non-Home Today		115,134	$	703	$	78,795	$	343
Residential Home Today		111,846		796		69,130		315
Home equity loans and lines of credit		29,526		75		34,582		40
Construction		6,835		29		1,370		0
Consumer and other loans		1		0		0		0

Total	$	263,342	$	1,603	$	183,877	$	698

Total impaired loans:
Residential non-Home Today	$	157,642	$	897	$	128,093	$	343
Residential Home Today		134,543		893		114,913		315
Home equity loans and lines of credit		44,418		135		59,326		40
Construction		7,053		30		1,370		0
Consumer and other loans		1		0		0		0

Total	$	343,657	$	1,955	$	303,702	$	698


	Nine Months Ended June 30,
	2011				2010
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential non-Home Today	$	42,018	$	194	$	41,055	$	0
Residential Home Today		27,948		97		40,901		0
Home equity loans and lines of credit		17,415		60		24,549		0
Construction		216		1		0		0
Consumer and other loans		0		0		0		0

Total	$	87,597	$	352	$	106,505	$	0

With an allowance recorded:
Residential non-Home Today	$	110,912	$	1,810	$	67,422	$	776
Residential Home Today		104,453		1,855		59,108		812
Home equity loans and lines of credit		31,474		176		33,661		146
Construction		7,025		47		1,253		0
Consumer and other loans		1		0		0		0

Total	$	253,865	$	3,888	$	161,444	$	1,734

Total impaired loans:
Residential non-Home Today	$	152,930	$	2,004	$	108,477	$	776
Residential Home Today		132,401		1,952		100,009		812
Home equity loans and lines of credit		48,889		236		58,210		146
Construction		7,241		48		1,253		0
Consumer and other loans		1		0		0		0

Total	$	341,462	$	4,240	$	267,949	$	1,734

The amount of interest income on impaired loans recognized using a cash-basis method is $542 for the three months ended June 30, 2011, not materially different for the nine months ended June 30, 2011 and not material for the three and nine months ended June 30, 2010.

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 loan 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 unfavorable delinquency statistics and the current instability in employment and economic prospects, we conducted an expanded loan level evaluation of equity lines of credit which are delinquent 90 days or more and residential real estate loans and equity loans which are delinquent 180 days or more. This expanded loan level evaluation supplements, and is in addition to, traditional evaluation procedures. Previously, these loans were part of large groups of homogenous loans which were collectively evaluated by portfolio for impairment in accordance with U.S. GAAP. Beginning September 30, 2010, equity loans, bridge loans, and loans modified in troubled debt restructurings were included in loans individually evaluated based on the fair value of the collateral at 90 or more days past due. Prior to September 30, 2010, the collateral-based evaluation was performed on these loans at 180 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 for 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 when the loan is less than 90 days past due. The result of the cash flow analysis is further discounted by a factor representing a potential for default. Valuation allowances are recorded for the excess of the recorded investments over the result of the cash flow analyses. Troubled debt restructurings that are 90 days or more past due are evaluated for impairment based on the fair value of the collateral. The fair value less estimated cost to dispose of the underlying property is compared to the combined basis in the loan to estimate a loss recorded as a specific valuation allowance in the allowance for credit losses. This applies to all mortgage loans and lines of credit. Consumer loans are not considered for restructuring. A loan modified in a troubled debt restructuring is classified as an impaired loan for a minimum of one year. After one year, a loan is no longer included in the

balance of impaired loans 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 table represents the recorded investment prior to modification and immediately after modification for all loans modified during the period. This table does not reflect the end of period recorded investment. The pre-modification outstanding recorded investment may be higher than the post-modification outstanding recorded investment due to borrower funds applied during modification. In contrast, the pre-modification outstanding recorded investment may be lower than the post-modification outstanding recorded investment when past due escrows are added to the unpaid principal balance.


	For the Three Months Ended June 30, 2011						For the Nine Months Ended June 30, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)						(Dollars in thousands)
Residential non-Home Today		30	$	5,524	$	5,536		113	$	19,878	$	19,911
Residential Home Today		106		9,951		10,116		235		21,634		21,962
Home equity loans and lines of credit		6		327		318		10		560		551

Total		142	$	15,802	$	15,970		358	$	42,072	$	42,424

The following tables set forth the recorded investment in troubled debt restructured loans modified during the period, by the types of concessions granted.


	For the Three Months Ended June 30, 2011
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Total
Residential non-Home Today	$	1,745	$	597	$	615	$	1,467	$	1,099	$	5,523
Residential Home Today		2,932		93		1,424		1,731		3,934		10,114
Home equity loans and lines of credit		84		0		0		167		63		314

Total	$	4,761	$	690	$	2,039	$	3,365	$	5,096	$	15,951


	For the Nine Months Ended June 30, 2011
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Total
Residential non-Home Today	$	6,918	$	872	$	5,158	$	2,277	$	4,093	$	19,318
Residential Home Today		7,603		408		5,240		3,323		5,278		21,852
Home equity loans and lines of credit		84		0		127		167		166		544

Total	$	14,605	$	1,280	$	10,525	$	5,767	$	9,537	$	41,714

The following table provides information on troubled debt restructured loans modified within the last 12 months that defaulted during the period presented.


	For the Three Months Ended June 30, 2011				For the Nine Months Ended June 30, 2011
Troubled Debt Restructurings That Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
	(Dollars in thousands)				(Dollars in thousands)
Residential non-Home Today		18	$	2,800		23	$	3,548
Residential Home Today		52		5,681		65		7,020
Home equity loans and lines of credit		3		365		4		409
Construction		0		0		0		0

Total		73	$	8,846		92	$	10,977

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.


	Pass		Special Mention		Substandard		Loss		Total
June 30, 2011
Real Estate Loans:
Residential non-Home Today	$	6,829,907	$	0	$	107,526	$	20,178	$	6,957,611
Residential Home Today		193,121		0		58,805		14,534		266,460
Home equity loans and lines of credit		2,517,901		13,143		28,953		13,656		2,573,653
Construction		41,217		0		4,207		1,469		46,893

Total	$	9,582,146	$	13,143	$	199,491	$	49,837	$	9,844,617


	Pass		Special 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 their repayment prospects and/or the Association’s credit position. Substandard loans are inadequately protected by the current payment capacity of the borrower or the collateral pledged with a defined weakness that jeopardizes the liquidation of the debt. Loss loans are considered uncollectible and continuing to carry the asset without a specific valuation allowance or charge-off is not warranted.

At June 30, 2011 and September 30, 2010, respectively, the recorded investment of impaired loans includes $118,951 and $90,167 of troubled debt restructurings that are individually evaluated for impairment, but have adequately performed under the terms of the restructuring and are classified as pass loans. At June 30, 2011 and September 30, 2010, respectively, there are $26,071 and $44,689 of loans classified substandard and $13,142 and $18,206 of loans classified special mention that are not included in the recorded investment of impaired loans; rather, they are included in loans collectively evaluated for impairment.

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


	June 30, 2011		September 30, 2010
Performing	$	6,915	$	7,198
Nonperforming		1		1

Total	$	6,916	$	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:


	June 30, 2011		September 30, 2010
Negotiable order of withdrawal accounts	$	983,958	$	967,645
Savings accounts		1,664,812		1,579,065
Certificates of deposit		6,052,184		6,303,585

		8,700,954		8,850,295
Accrued interest		942		1,646

Total deposits	$	8,701,896	$	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 2007. The Internal Revenue Service is currently conducting an audit of the Company’s 2008 federal tax return. 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 June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	1,085		$	995		$	3,253		$	2,985
Interest cost		838			894			2,806			2,682
Expected return on plan assets		(841	)		(725	)		(2,524	)		(2,176	)
Amortization of net loss		205			538			1,081			1,612
Amortization of prior service cost		(16	)		(16	)		(46	)		(46	)

Net periodic benefit cost	$	1,271		$	1,686		$	4,570		$	5,057

Minimum employer contributions paid during the nine months ended June 30, 2011 were $4,586. Minimum employer contributions expected during the remainder of the fiscal year are $1,175.

8.	EQUITY INCENTIVE PLAN

During the nine months ended June 30, 2011 and 2010, the Company recorded $5,397 and $4,984, respectively, of stock-based compensation expense, comprised of stock option expense of $2,144 and $1,898, respectively, and restricted stock units expense of $3,253 and $3,086, respectively.

At June 30, 2011, 5,005,925 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 4,515,276 non-vested options outstanding as of June 30, 2011 is $7,609 over a weighted average of 3.4 years. At June 30, 2011, 1,665,400 restricted stock units, with a weighted average grant date fair value of $11.78 per unit are unvested. Expected future compensation expense relating to the 1,711,950 restricted stock units outstanding as of June 30, 2011 is $9,053 over a weighted average period of 4.1 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 to originate loans generally have fixed expiration dates of 60 to 360 days or other termination clauses and may require payment of a fee. Unfunded commitments related to home equity lines of credit generally expire ten years following the date that the line of credit was established, subject to various conditions including compliance with payment obligation, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated statements of condition. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Company generally uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made.

At June 30, 2011, the Company had commitments to originate loans as follows:


Fixed-rate mortgage loans	$	76,063
Adjustable-rate mortgage loans		156,774
Bridge loans		1,462

Total	$	234,299

At June 30, 2011, the Company had unfunded commitments outstanding as follows:


Equity lines of credit	$	1,506,043
Construction loans		43,106
Private equity investments		13,813

Total	$	1,562,962

At June 30, 2011, the unfunded commitment on home equity lines of credit, including commitments for accounts suspended as a result of material default or a decline in equity is $1,766,538.

The Company assumes mortgage guaranty insurance on an excess of loss basis for the mortgage guaranty risks of certain mortgage loans in its own portfolio, including Home Today loans and loans in its servicing portfolio, through reinsurance contracts with two primary mortgage insurance companies. Under these contracts, the Company absorbs mortgage insurance losses in a range of five to seven percentage points in excess of the initial five percentage point loss layer of a given pool of loans, in exchange for a portion of the pool’s mortgage insurance premiums. The first five percent layer of loss must be exceeded before the Company assumes any liability. At June 30, 2011, the maximum losses under the reinsurance contracts were limited to $15,088. The Company has paid $2,202 of losses under these reinsurance contracts and has provided a liability for the remaining estimated losses totaling $4,282 as of June 30, 2011. When evaluating whether or not the reserves provide a reasonable provision for unpaid loss and loss adjustment expenses, it is necessary to project future loss and loss adjustment expense emergence and payments for loan delinquencies occurring through the balance sheet date. The actual future loss and loss adjustment expense may not develop as actuarially projected. They may in fact vary considerably from the projections as mortgage insurance results are influenced by factors such as unemployment, housing market conditions, loan repayment rates, etc. 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

Under U.S. GAAP, fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date and a fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. The Company’s policy is to recognize transfers between levels of the hierarchy as of the end of the 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.

As permitted under the fair value guidance in U.S. GAAP, the Company elects to measure at fair value mortgage loans classified as held for sale that are subject to pending loan securitization contracts. This election is expected to reduce volatility in earnings related to timing issues on loan securitization contracts.

At June 30, 2011 and September 30, 2010, there were no loans held for sale subject to pending securitization contracts. For the three months ended June 30, 2011 and 2010, net gain(loss) on the sale of loans included ($5) and $909, respectively, and for the nine months ended June 30, 2011 and 2010, net gain on the sale of loans included $0 and $517, respectively, 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 are recorded at the lower of cost or fair value. At June 30, 2011 there were no loans held for sale and at September 30, 2010, loans held for sale were reported at cost, $25,027.

Presented below is a discussion of the methods and significant assumptions used by the Company to estimate fair value.

Investment Securities Available for Sale- Investment securities available for sale are recorded at fair value on a recurring basis. At June 30, 2011 and September 30, 2010, respectively, this includes $7,921 and $15,857 of investments in U.S. government agencies including U.S. Treasury notes and sequentially structured, highly liquid collateralized mortgage obligations (“CMOs”) issued by Fannie Mae, Freddie Mac, and Ginnie Mae and $8,743 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 values of treasury notes and CMOs represent unadjusted price estimates obtained from third party independent nationally recognized pricing services using pricing models or quoted prices of securities with similar characteristics and are included in Level 2 of the hierarchy. At the time of initial measurement and, subsequently, when changes in methodologies occur, management obtains and reviews documentation of pricing methodologies used by third party pricing services to verify that prices are determined in accordance with fair value guidance in U.S. GAAP and to ensure that assets are properly classified in the fair value hierarchy. Additionally, third party pricing is reviewed on a monthly basis for reasonableness based on the market knowledge and experience of company personnel that interact daily with the markets for these types of securities. 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 elects 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 an alternative valuation method be used. Typically that would entail obtaining a Broker Price Opinion (“BPO”). If neither of these methods is available, a commercially available automated valuation model (“AVM”) will be used to estimate value. These models are independently developed and regularly updated. Third Federal has engaged an independent firm to assist with the 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, updated appraisals are obtained at least annually for all loans that remain delinquent.

To calculate impairment of collateral-dependent loans, 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 June 30, 2011 and September 30, 2010, respectively, this included $138,332 and $122,971 in unpaid principal balances of loans with related allowances for loss of $6,238 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 June 30, 2011 and September 30, 2010, respectively, there was $10,227 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 where 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 $743 and $514 related to these properties at June 30, 2011 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 June 30, 2011 and September 30, 2010, respectively, there was $2,544 and $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 at June 30, 2011 and September 30, 2010.

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 carried at fair value on a recurring basis on the Consolidated Statement of Condition at June 30, 2011 and September 30, 2010 are summarized below. There were no liabilities carried at fair value on a recurring basis on the Consolidated Statement of Condition at June 30, 2011 and September 30, 2010.


			Recurring Fair Value Measurements at Reporting Date Using
	June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Investment securities available for sale:
U.S. government and agency obligations	$	1,983	$	0	$	1,983	$	0
REMIC’s		5,938		0		5,938		0
Money market accounts		8,743		8,743		0		0

Total	$	16,664	$	8,743	$	7,921	$	0


	September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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
Money market accounts		8,762		8,762		0		0

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

Summarized in the table below are those assets measured at fair value on a nonrecurring basis. This includes loans held for investment that are individually evaluated for impairment, certain strata of mortgage loan servicing assets identified as having 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.


			Nonrecurring Fair Value Measurements at Reporting Date Using
	June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans, net of allowance	$	156,331	$	0	$	0	$	156,331
Real estate owned¹		10,227		0		0		10,227
Land held for development		2,544		0		0		2,544

Total	$	169,102	$	0	$	0	$	169,102


	September 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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		0		0		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 the 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 June 30, 2011				At September 30, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and due from banks	$	33,757	$	33,757	$	38,804	$	38,804
Other interest bearing cash equivalents		243,812		243,812		704,936		704,936
Investment securities:
Available for sale		16,664		16,664		24,619		24,619
Held to maturity		441,691		449,380		646,940		657,076
Mortgage loans held for sale		0		0		25,027		26,109
Loans-net:
Mortgage loans held for investment		9,691,312		9,763,167		9,174,550		9,436,025
Other loans		6,916		7,650		7,199		8,186
Federal Home Loan Bank stock		35,620		35,620		35,620		35,620
Private equity investments		1,764		1,764		2,327		2,327
Accrued interest receivable		35,625		35,625		36,282		36,282
Liabilities:
NOW and passbook accounts	$	2,648,770	$	2,648,770	$	2,546,710	$	2,546,710
Certificates of deposit		6,053,126		6,222,179		6,305,231		6,548,319
Borrowed funds		185,129		180,994		70,158		72,829
Borrowers’ advances for taxes and insurance		28,817		28,817		51,401		51,401
Principal, interest and escrow owed on loans serviced		89,430		89,430		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 expected cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Further, in order to appropriately capture and reflect credit exposure, estimated fair value is reduced by the allowance for loan losses.

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.

Borrowed Funds—Estimated fair value for borrowed funds 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 had no derivative instruments at June 30, 2011 or September 30, 2010 and had no derivatives designated as hedging instruments under Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging,” during the three and nine months ended June 30, 2011 and 2010.

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


		Amount of Gain or (Loss) Recognized in Income on Derivative
	Location of Gain or (Loss)	Three Months Ended June 30,					Nine Months Ended June 30,
	Recognized in Income	2011		2010			2011		2010
Interest rate lock commitments	Other income	$	0	$	(49	)	$	0	$	(9	)
Forward commitments for the sale of mortgage loans	Net gain (loss) on the sale of loans		5		(909	)		0		(517	)

Total		$	5	$	(958	)	$	0	$	(526	)

12.

RECENT ACCOUNTING PRONOUNCEMENTS

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (ASU) 2011-05, “Presentation of Comprehensive Income” eliminates the option to present other comprehensive income (“OCI”) in the statement of shareholders’ equity and provides an entity the option to present the total of comprehensive income, the components of net income, and the components of OCI either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of OCI along with a total for OCI, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s). The amendments in this update are applied retrospectively and are effective for the Company for the interim and annual periods beginning October 1, 2012, with early adoption permitted. When adopted, the only impact of these amendments on the Company’s consolidated financial statements will be a change in the presentation of OCI.

FASB ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” eliminates unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards, clarifies the intent of existing fair value measurements, and expands disclosure requirements. ASU 2011-04 indicates that the highest and best use and valuation premises in a fair value measurement only apply to nonfinancial assets. In addition, ASU 2011-04 expands qualitative and quantitative fair value disclosures including those related to descriptions of valuation processes used, the sensitivity of fair value to changes in unobservable inputs and the interrelationships between those inputs, and quantitative disclosures about unobservable inputs and assumptions. The amendments in ASU 2011-04 are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). It requires creditors to evaluate modifications and restructurings of receivables using a more principles-based approach. Financial reporting implications of being classified as a TDR are that the creditor is required to: consider the receivable impaired when calculating the allowance for credit losses and provide additional disclosures about its troubled debt restructuring activities in accordance with the requirements of ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” as described below. ASU 2011-02 clarifies the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties, which are the two criteria used to determine whether a modification or restructuring is a TDR. ASU 2011-02 and the TDR disclosures required by ASU 2010-20 have been adopted for the reporting period ending June 30, 2011 and applied retrospectively to October 1, 2010 with no material impact on the Company’s 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. 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 are included in Note 4. Loans and Allowance for Loan Losses.

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, including the impact of coming under the jurisdiction of new federal regulators;

•

changes in our organization, or compensation and benefit plans;

•

the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets; and

•

the efficacy of the U.S. Federal government to manage federal debt limits.

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

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 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 persist in 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 three and nine-month periods ended June 30, 2011, we sold $28.3 million, and $33.6 million, respectively, of long-term, fixed-rate mortgage loans compared to $542.1 million and $942.2 million during the three and nine-month periods ended June 30, 2010, respectively. The low volume of loan 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 and a reduced level of fixed rate loan originations as described below.

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

The Association’s current 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 predominantly limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values. In that regard, in June 2011, we sold, on a servicing retained basis, $20.3 million of fixed-rate mortgage loans to a private investor. Also, in response to the agencies’ loan eligibility changes, in July 2010 we began marketing an adjustable-rate mortgage loan product that provides us with improved interest rate risk characteristics when compared to a long-term, fixed-rate mortgage. Since its introduction, the “SmartRate” adjustable rate mortgage has offered borrowers an interest rate lower than that of a fixed-rate loan. The rate is locked for three or five years then resets annually after that. It contains a feature to relock the rate an unlimited number of times at our then current rate and fee schedule, for another three or five years (dependent on the original reset period) without having to complete a full refinance transaction. Relock eligibility is subject to satisfactory payment performance history by the borrower. During the nine months ended June 30, 2011 adjustable-rate mortgage loan production increased $927.4 million to $956.1 million from $28.7 million during the nine months ended June 30, 2010. During the same time period, fixed-rate mortgage loan production decreased $368.5 million to $785.3 million from $1.15 billion. 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 $1.67 billion of long-term adjustable rate loans in our residential mortgage loan held for investment portfolio at June 30, 2011, as compared to $892.3 million at September 30, 2010 and $597.3 million at June 30, 2010. In addition, fixed-rate mortgage loan activity described above resulted in $5.59 billion of long-term fixed rate loans in our residential mortgage loan held for investment portfolio at June 30, 2011, as compared to $5.53 billion at September 30, 2010 and $5.36 billion at June 30, 2010.

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 was accepted by our primary regulator in December 2010, we actively pursued strategies to decrease the outstanding balance of our home equity lending portfolio as well as our exposure to undrawn home equity lines of credit. During the quarter ended June 30, 2011, we achieved the balance and exposure reduction targets included in the reduction plan. Notwithstanding achievement of the reduction plan target, promotion of this product is not a current strategy used to help manage our interest rate risk profile.

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 confluence of unfavorable regional and macro-economic events since 2008, coupled with our pre-2010 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 June 30, 2011, more than 90% 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 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).

Prior to its merger into the Office of the Comptroller of the Currency (“OCC”) on July 21, 2011, the Office of Thrift Supervision (“OTS”) expressed concerns with the risk concentration and other aspects of the Association’s home equity loans and lines of credit portfolio and the administration of that portfolio. Under the terms of an August 13, 2010 memorandum of understanding (the “MOU”) between the Association and the OTS, management prepared, or obtained, and 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 it did not object to the Reduction Plan. The Reduction Plan spans the period from June 30, 2010 through December 31, 2011. As of June 30, 2011, the Reduction Plan targets (a $1

billion reduction in home equity lending commitments, including a $300 million reduction in outstanding balances) had been met and exceeded as home equity lending commitments had been reduced by $1.05 billion, including $335.7 million in outstanding balances. Other elements of the Reduction Plan include: a $150 million capital infusion from the Company to the Association, which was completed in October, 2010: and implementation of expanded line management, account management and collection processes regarding home equity lending. These process changes continue to be implemented and are in various stages of completion. Further, the ratio of the Association’s home equity loans and lines of credit portfolio and open commitments relative to Tier 1 Capital, plus the allowance for loan losses, was reduced to 256% at June 30, 2011 from 350% at September 30, 2010. The December 31, 2011 targeted ratio as contained in the Reduction Plan is 261%.

Effective February 7, 2011, the MOU was terminated and replaced by new memorandums of understanding (the “New MOU”) covering the Association, Third Federal Savings, MHC and the Company. The New MOU addressed the ongoing monitoring of issues raised in the original MOU. In addition, the New MOU required, at various dates through June 30, 2011, the following actions, all of which we have performed: (1) an independent assessment of the Association’s interest rate risk management policy and a plan to address any deficiencies (the assessment was submitted to the OTS on February 14, 2011); (2) an independent review of management compensation (the review was submitted to the OTS on June 30, 2011); (3) the submittal of an independent enterprise risk management study and a plan to address any deficiencies (the study and plan to address deficiencies was submitted to the OTS on February 11, 2011); (4) the submittal for OTS non-objection 45 days in advance of any plans for new debt, dividends or stock repurchases; (5) formal management and director succession plans (these plans were submitted to the OTS on March 30, 2011 and April 29, 2011, respectively); and (6) revisions to various operational policies (each of which has been completed). In a self-initiated effort, and prior to receipt of the New MOU, 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. As indicated above, just days after receipt of the New MOU, the assessments were submitted to the OTS. As a result of the assessments, we are installing a new interest rate risk model to provide more customized analysis and we have established new board and management level committees to govern and oversee risk management and compliance. As indicated above, we believe that to date, we have complied with all of the stipulations of the MOU and New MOU. The requirements of the MOU and New MOU carry 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 concerns of our regulators are resolved. The requirements of the New MOU will remain in effect until our primary regulator 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 June 30, 2011, approximately 80.3% and 17.7% 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 June 30, 2011 were 1.6% and 5.1%, respectively. Our 30 or more days delinquency ratio for the non-Home Today portfolio as a whole was 2.1%. Also, at June 30, 2011, approximately 39.5% and 28.5% 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 June 30, 2011 were 1.6% and 3.1%, respectively. Our 30 or more days delinquency ratio for the home equity loans and lines of credit portfolio as a whole was 2.2%. 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 totals $266.5 million at June 30, 2011 and constitutes only 2.7% of our total loan portfolio balance, these loans comprise 27.7% and 27.8% of our 90 days or greater delinquencies and our total delinquencies, respectively. At June 30, 2011, approximately 95.8% and 4.0% of our residential, Home Today loans were secured by properties in Ohio and Florida, respectively. At June 30, 2011, the percentages of those loans delinquent 30 days or more in Ohio and Florida were 30.0% and 35.5%, 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 required downpayments, many loans include private mortgage insurance. At June 30, 2011, 53.9% of Home Today loans included private mortgage insurance coverage. From a peak recorded investment of $306.6 million at December 31, 2007, the total recorded investment balance of the Home Today portfolio has declined to $266.5 million at June 30, 2011. 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 required 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 June 30, 2011, 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 13.82%. 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 June 30, 2011, deposits totaled $8.70 billion, while borrowings totaled $185.1 million and borrowers’ advances and servicing escrows totaled $118.2 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 Loan Bank of Cincinnati (“FHLB”) and the Federal Reserve Bank of Cleveland (“Federal Reserve”). At June 30, 2011, these collateral pledge support arrangements provide for additional borrowing capacity of up to $1.62 billion with the FHLB (provided an additional investment in FHLB capital stock of up to $32.4 million is made) and up to $311.5 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 June 30, 2011, our investment securities portfolio totaled $458.4 million. Finally, cash flows from operating activities have been a regular source of funds. During the nine months ended June 30, 2011 and 2010, cash flows from operations totaled $156.8 million and $(1.5) million, respectively. Cash flow from operations in the nine months ended June 30, 2010 was adversely affected by the $51.9 million prepayment of Federal Deposit Insurance Corporation (“FDIC”) deposit insurance assessments (which has a remaining balance of $27.5 million at June 30, 2011).

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 1.54% for the nine months ended June 30, 2011 and 1.49% for the nine months ended June 30, 2010. As of June 30, 2011, our average assets per full-time employee, and our average deposits per full-time employee were $11.3 million and $9.0 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 ($223.1 million per branch office as of June 30, 2011) 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 beginning in fiscal 2009 is our FDIC 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. Effective April 1, 2011, as mandated by the Dodd-Frank Act, the FDIC adopted significant changes to its assessment methodology used to determine the amount of deposit insurance paid by insured institutions. In addition to re-orienting the basis for determining assessment amounts from deposit balances to the balances of total liabilities (which generally subjects borrowings and other non-deposit, non-equity liabilities to the deposit insurance assessment factor), the Dodd-Frank Act also establishes a separate, risk-focused deposit insurance framework for large institutions, defined as those with total assets exceeding $10 billion. The large institution assessment framework is extremely complex and contains numerous definitional and instructional nuances that will, by necessity, require interpretive guidance from the FDIC as to their application. As a result of these changes, along with a one-time, $0.7 million benefit that resulted from the revised reporting of assessable balances since April 1, 2009, the Association’s deposit insurance assessments declined appreciably during the quarter ended June 30, 2011.

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 (“SVA”);

(2)

general allowances for loan losses for each loan type based on historical loan loss experience (“GVA”); 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 June 30, 2011, we had a recorded investment of $266.5 million in loans that were originated

under our Home Today program, 30.2% of which were delinquent 30 days or more in repayments, compared to 2.1% 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 June 30, 2011, we had a recorded investment of $2.57 billion in equity loans and equity lines of credit outstanding, 1.5% of which were delinquent 90 days or more in repayments. Net charge-offs in this portfolio for the nine months ended June 30, 2011 and 2010 were $40.4 million and $35.0 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.

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.

June 30, 2011

September 30, 2010

June 30, 2010

Amount

Percent

Amount

Percent

Amount

Percent

(Dollars in thousands)

Real estate loans:

Residential non-Home Today

Ohio

5,595,578

4,843,804

4,408,897

Florida

1,255,462

1,168,701

1,127,488

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller Reporting Company