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 March 31, 2012

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

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

As of May 3, 2012 there were 308,915,893 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 73.52% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

TFS Financial Corporation

INDEX


		Page
PART l – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)		3

	Consolidated Statements of Condition March 31, 2012 and September 30, 2011		3

	Consolidated Statements of Income Three and six months ended March 31, 2012 and 2011		4

	Consolidated Statements of Shareholders’ Equity Six months ended March 31, 2012 and 2011		5

	Consolidated Statements of Cash Flows Six months ended March 31, 2012 and 2011		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		60

Item 4.	Controls and Procedures		62

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings		63

Item 1A.	Risk Factors		63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63

Item 3.	Defaults Upon Senior Securities		63

Item 4.	Mine Safety Disclosures		63

Item 5.	Other Information		63

Item 6.	Exhibits		63

SIGNATURES			65

Item 1. Financial Statements

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except share data)


	March 31,			September 30,
	2012			2011
ASSETS
Cash and due from banks	$	43,739		$	35,532
Other interest-earning cash equivalents		298,676			259,314

Cash and cash equivalents		342,415			294,846

Investment securities:
Available for sale (amortized cost $14,380 and $15,760, respectively)		14,487			15,899
Held to maturity (fair value $377,500 and $398,725, respectively)		374,517			392,527

		389,004			408,426

Mortgage loans held for sale, at lower of cost or market		245,921			0
Loans held for investment, net:
Mortgage loans		9,985,914			9,920,907
Other loans		5,141			6,868
Deferred loan fees, net		(18,122	)		(19,854	)
Allowance for loan losses		(101,296	)		(156,978	)

Loans, net		9,871,637			9,750,943

Mortgage loan servicing assets, net		23,879			28,919
Federal Home Loan Bank stock, at cost		35,620			35,620
Real estate owned		18,452			19,155
Premises, equipment, and software, net		60,197			59,487
Accrued interest receivable		34,918			35,854
Bank owned life insurance contracts		174,013			170,845
Other assets		90,712			88,853

TOTAL ASSETS	$	11,286,768		$	10,892,948

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,823,176		$	8,715,910
Borrowed funds		419,094			139,856
Borrowers’ advances for insurance and taxes		55,722			58,235
Principal, interest, and related escrow owed on loans serviced		150,870			151,859
Accrued expenses and other liabilities		38,103			53,164

Total liabilities		9,486,965			9,119,024

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 shares issued; 308,915,893 outstanding at March 31, 2012 and September 30, 2011		3,323			3,323
Paid-in capital		1,689,810			1,686,216
Treasury stock, at cost; 23,402,857 shares at March 31, 2012 and
September 30, 2011		(282,090	)		(282,090	)
Unallocated ESOP shares		(76,917	)		(79,084	)
Retained earnings—substantially restricted		471,317			461,836
Accumulated other comprehensive loss		(5,640	)		(16,277	)

Total shareholders’ equity		1,799,803			1,773,924

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	11,286,768		$	10,892,948

See accompanying notes to unaudited consolidated financial statements.

TFS Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (unaudited)

(In thousands, except share and per share data)


	For the Three Months Ended March 31,				For the Six Months Ended March 31,
	2012		2011		2012		2011
INTEREST INCOME:
Loans, including fees	$	102,696	$	102,394	$	205,903	$	205,594
Investment securities available for sale		33		44		70		155
Investment securities held to maturity		1,538		2,793		3,272		6,130
Other interest and dividend earning assets		551		502		1,108		1,295

Total interest and dividend income		104,818		105,733		210,353		213,174

INTEREST EXPENSE:
Deposits		38,390		44,386		79,096		91,664
Borrowed funds		643		446		1,217		923

Total interest expense		39,033		44,832		80,313		92,587

NET INTEREST INCOME		65,785		60,901		130,040		120,587
PROVISION FOR LOAN LOSSES		27,000		22,500		42,000		57,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		38,785		38,401		88,040		63,587

NON-INTEREST INCOME
Fees and service charges, net of amortization		3,284		4,418		6,097		7,322
Increase in and death benefits from bank owned life insurance contracts		1,610		1,579		3,222		3,219
Other		1,517		2,270		2,801		4,545

Total non-interest income		6,411		8,267		12,120		15,086

NON-INTEREST EXPENSE
Salaries and employee benefits		21,049		19,815		41,434		37,300
Marketing services		2,377		2,103		4,754		4,204
Office property, equipment and software		5,073		4,887		10,071		9,997
Federal insurance premium and assesments		3,512		5,847		7,389		11,832
State franchise tax		1,716		1,428		2,705		2,367
Real estate owned expense, net		1,672		1,987		4,007		3,912
Appraisal and other loan review expense		1,163		1,576		2,153		3,902
Other operating expenses		6,758		6,332		13,286		13,405

Total non-interest expense		43,320		43,975		85,799		86,919

INCOME (LOSS) BEFORE INCOME TAXES		1,876		2,693		14,361		(8,246	)
INCOME TAX EXPENSE (BENEFIT)		854		469		4,880		(3,122	)

NET INCOME (LOSS)	$	1,022	$	2,224	$	9,481	$	(5,124	)

Earnings (loss) per share—basic and diluted		0.00	$	0.01	$	0.03	$	(0.02	)

Weighted average shares outstanding
Basic		301,153,080		300,215,753		301,098,610		300,177,749
Diluted		301,706,570		300,957,564		301,547,664		300,177,749

See accompanying notes to unaudited interim consolidated financial statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

Six Months Ended March 31, 2012 and 2011

(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, 2010	$	3,323		1,686,062			(288,366	)		(82,699	)		452,633			90			(18,146	)	$	1,752,897
Comprehensive Loss
Net loss		—		—			—			—			(5,124	)		—			—			(5,124	)
Change in unrealized losses on securities available for sale		—		—			—			—			—			(88	)		—			(88	)
Change in pension obligation		—		—			—			—			—			—			549			549

Total comprehensive loss		—		—			—			—			—			—			—			(4,663	)
ESOP shares allocated or committed to be released		—		(305	)		—			1,448			—			—			—			1,143
Compensation costs for stock-based plans		—		3,625			(3	)		—			—			—			—			3,622
Excess tax effect from stock-based compensation		—		(17	)		—			—			—			—			—			(17	)
Treasury stock allocated to restricted stock plan		—		(279	)		286			—			(7	)		—			—			—

Balance at March 31, 2011	$	3,323		1,689,086			(288,083	)		(81,251	)		447,502			2			(17,597	)	$	1,752,982

Balance at September 30, 2011	$	3,323		1,686,216			(282,090	)		(79,084	)		461,836			90			(16,367	)	$	1,773,924
Comprehensive Income
Net income		—		—			—			—			9,481			—			—			9,481
Change in unrealized gains on securities available for sale		—		—			—			—			—			(20	)		—			(20	)
Change in pension obligation		—		—			—			—			—			—			10,657			10,657

Total comprehensive income		—		—			—			—			—			—			—			20,118
ESOP shares allocated or committed to be released		—		(183	)		—			2,167			—			—			—			1,984
Compensation costs for stock-based plans		—		3,777			—			—			—			—			—			3,777

Balance at March 31, 2012	$	3,323		1,689,810			(282,090	)		(76,917	)		471,317			70			(5,710	)	$	1,799,803

See accompanying notes to unaudited interim consolidated financial statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands)


	For the Six Months Ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	9,481		$	(5,124	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
ESOP and stock-based compensation expense		5,761			4,765
Depreciation and amortization		9,299			12,125
Deferred income taxes		300			800
Provision for loan losses		42,000			57,000
Other net losses		1,771			1,797
Principal repayments on and proceeds from sales of loans held for sale		0			5,290
Loans originated for sale		0			(13,231	)
Increase in and death benefits for bank owned life insurance contracts		(3,208	)		(3,226	)
Net increase in interest receivable and other assets		(8,986	)		(122	)
Net increase (decrease) in accrued expenses and other liabilities		1,335			(8,868	)
Other		416			428

Net cash provided by operating activities		58,169			51,634

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated		(1,477,916	)		(1,634,641	)
Principal repayments on loans		1,057,939			1,021,391
Proceeds from sales, principal repayments and maturities of:
Securities available for sale		1,355			9,457
Securities held to maturity		104,275			167,970
Proceeds from sale of:
Loans		0			8,023
Real estate owned		10,377			6,882
Purchases of:
Securities available for sale		(12	)		(2,148	)
Securities held to maturity		(88,298	)		0
Premises and equipment		(1,300	)		(1,597	)
Other		(21	)		(360	)

Net cash used in investing activities		(393,601	)		(425,023	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		107,266			(95,999	)
Net decrease in borrowers’ advances for insurance and taxes		(2,514	)		(1,659	)
Net decrease in principal and interest owed on loans serviced		(989	)		(181,675	)
Net increase in short term borrowed funds		279,238			99,990
Repayment of long term borrowed funds		0			(2,000	)
Excess tax benefit related to stock-based compensation		0			(17	)

Net cash provided by (used in) financing activities		383,001			(181,360	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		47,569			(554,749	)
CASH AND CASH EQUIVALENTS—Beginning of period		294,846			743,740

CASH AND CASH EQUIVALENTS—End of period	$	342,415		$	188,991

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on deposits	$	79,546		$	92,370
Cash paid for interest on borrowed funds		1,207			927
Cash paid for income taxes		11,800			4,500
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned		9,656			11,316
Transfer of loans from held for sale to held for investment		0			25,027
Transfer of loans from held for investment to held for sale		245,920			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 the Holding Company and its subsidiaries (collectively, “TFS Financial” or the “Company”) is retail consumer banking, including mortgage lending, deposit gathering, and other insignificant financial services. On March 31, 2012, 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 March 31, 2012, 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, 2011 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, 2012.

2.	EARNINGS PER SHARE

Basic earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. For purposes of computing earnings per share amounts, outstanding shares include shares held by the public, shares held by the ESOP that have been allocated to participants or committed to be released for allocation to participants, the 227,119,132 shares held by Third Federal Savings, MHC, and, for purposes of computing dilutive earnings per share, stock options and restricted stock units with a dilutive impact. At March 31, 2012 and 2011, respectively, the ESOP held 7,691,780 and 8,125,120 shares that were neither allocated to participants nor committed to be released to participants.

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


	For the Three Months Ended March 31,
	2012						2011
	Income (loss)		Shares		Per share amount		Income (loss)		Shares		Per share amount
	(Dollars in thousands, except per share data)
Net income	$	1,022					$	2,224
Less: income allocated to restricted stock units		6						12

Basic earnings per share:
Income available to common shareholders	$	1,016		301,153,080	$	0.00	$	2,212		300,215,753	$	0.01

Diluted earnings per share:
Effect of dilutive potential common shares				553,490						741,811

Income available to common shareholders	$	1,016		301,706,570	$	0.00	$	2,212		300,957,564	$	0.01


	For the Six Months Ended March 31,
	2012						2011
	Income (loss)		Shares		Per share amount		Income (loss)			Shares		Per share amount
	(Dollars in thousands, except per share data)
Net income (loss)	$	9,481					$	(5,124	)
Less: income (loss) allocated to restricted stock units		47						(29	)

Basic earnings (loss) per share:
Income (loss) available to common shareholders	$	9,434		301,098,610	$	0.03	$	(5,095	)		300,177,749	$	(0.02	)

Diluted earnings (loss) per share:
Effect of dilutive potential common shares				449,054							0

Income (loss) available to common shareholders	$	9,434		301,547,664	$	0.03	$	(5,095	)		300,177,749	$	(0.02	)

Outstanding stock options and restricted stock units are excluded from the computation of diluted earnings per share when their inclusion would be anti-dilutive. There were 5,429,223 unvested stock options, 854,202 vested stock options, and 40,000 restricted stock units outstanding at March 31, 2012 and 4,849,809 unvested stock options and 159,241 vested stock options outstanding at March 31, 2011 that were excluded from the computation of diluted earnings per share for the three and six months ended March 31, 2012 and 2011, respectively, because the effect would be antidilutive. Additionally, there were 1,636,950 restricted stock units outstanding at March 31, 2011 that were excluded from the computation of diluted earnings per share for the six months ended March 31, 2011 because the effect would be antidilutive.

3.	INVESTMENT SECURITIES

Investments available for sale are summarized as follows:


	March 31, 2012
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
U.S. government and agency obligations	$	2,000	$	40	$	0		$	2,040
Real estate mortgage investment conduits (REMICs)		4,261		72		(5	)		4,328
Money market accounts		8,119		0		0			8,119

	$	14,380	$	112	$	(5	)	$	14,487


	September 30, 2011
	Amortized Cost		Gross Unrealized				Fair Value
	Amortized Cost		Gains		Losses		Fair Value
U.S. government and agency obligations	$	2,000	$	46	$	0	$	2,046
REMICs		5,244		93		0		5,337
Money market accounts		8,516		0		0		8,516

	$	15,760	$	139	$	0	$	15,899

Investment securities held to maturity are summarized as follows:


	March 31, 2012
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Freddie Mac certificates	$	1,466	$	75	$	0		$	1,541
Ginnie Mae certificates		17,773		466		0			18,239
REMICs		347,839		2,123		(430	)		349,532
Fannie Mae certificates		7,439		749		0			8,188

	$	374,517	$	3,413	$	(430	)	$	377,500


	September 30, 2011
	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
Freddie Mac certificates	$	2,724	$	118	$	0		$	2,842
Ginnie Mae certificates		19,532		501		0			20,033
REMICs		362,489		4,837		(58	)		367,268
Fannie Mae certificates		7,782		800		0			8,582

	$	392,527	$	6,256	$	(58	)	$	398,725

4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans held for investment consist of the following:


	March 31, 2012			September 30, 2011
Real estate loans:
Residential non-Home Today	$	7,407,288		$	7,120,789
Residential Home Today		230,607			264,019
Home equity loans and lines of credit		2,316,224			2,491,198
Construction		57,348			82,048

Real estate loans		10,011,467			9,958,054
Consumer and other loans		5,141			6,868
Less:
Deferred loan fees—net		(18,122	)		(19,854	)
Loans-in-process (“LIP”)		(25,553	)		(37,147	)
Allowance for loan losses		(101,296	)		(156,978	)

Loans held for investment, net	$	9,871,637		$	9,750,943

At March 31, 2012, $245,921 of long-term, fixed-rate loans were reclassified from the portfolio of loans held for investment to mortgage loans held for sale.

In an October 2011 directive, the Office of the Comptroller of the Currency required all specific valuation allowances (“SVA”) on collateral-dependent loans (SVAs established when the recorded investment in an impaired loan exceeded the

measured value of the collateral) maintained by savings institutions to be charged off by March 31, 2012. As permitted, the Company elected to early-adopt this methodology effective for the quarter ended December 31, 2011. As a result, reported loan charge-offs for the six months ended March 31, 2012 were impacted by the charge-off of specific valuation allowances, which had a balance of $55,507 at September 30, 2011. This one-time charge-off did not impact the provision for loan losses for the quarter ended December 31, 2011; however, reported loan charge-offs during the December 2011 quarter increased and the balances of loans, the allowance for loan losses, non-accrual status loans and loan delinquencies as of December 31, 2011, all decreased accordingly.

A large concentration of the Company’s lending is in Ohio and Florida. As of March 31, 2012 and September 30, 2011, the percentages of residential real estate loans held in Ohio were 79% and 81%, and the percentages held in Florida were 17% and 17%, respectively. As of March 31, 2012 and September 30, 2011, home equity loans and lines of credit were concentrated in the states of Ohio (39% and 39%), Florida (29% and 29%) and California (12% and 12%), respectively. The economic conditions and market for real estate in those states have significantly impacted the ability of borrowers in those areas to repay their loans.

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 the Association’s loan products, generally because of low credit scores. Although the credit profiles of borrowers in the Home Today program for loans originated 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 were changed to be substantially the same as the Association’s traditional first mortgage product. As of March 31, 2012 and September 30, 2011, the balance of Home Today loans originated prior to March 27, 2009 was $226,722 and $261,817, respectively. 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 pay 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.


	March 31, 2012		September 30, 2011
Real estate loans:
Residential non-Home Today	$	99,022	$	125,014
Residential Home Today		46,368		69,602
Home equity loans and lines of credit		34,318		36,872
Construction		785		3,770

Total real estate loans		180,493		235,258
Consumer and other loans		0		0

Total non-accrual loans	$	180,493	$	235,258

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. Home equity loans and lines of credit where the customer also has a delinquent first mortgage greater than 180 days past due or delinquent first mortgage modification greater than 90 days past due will also be placed on nonaccrual status. At March 31, 2012, the recorded investment in nonaccrual status loans includes $14,595 of performing second lien loans subordinate to first mortgages delinquent greater than 180 days or subordinate to senior lien modifications delinquent greater than 90 days. 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 nonaccrual 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 nonaccrual status are applied to the oldest scheduled, unpaid principal and interest payment first. A nonaccrual loan, other than a troubled debt restructuring, a loan with a partial charge-off, or equity loan or line of credit with a delinquent first mortgage greater than 180 days or delinquent first mortgage modification greater than 90 days, 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 performing nonaccrual loans at March 31, 2012 and September 30, 2011 includes

$15,352 and $16,465, respectively, in troubled debt restructurings which are current according to the terms of their agreement but included with nonaccrual loans for a minimum period of six months from the restructuring date due to their nonaccrual status prior to restructuring or because they have been partially charged-off.

Age analysis of the recorded investment in loan receivables that are past due at March 31, 2012 and September 30, 2011 is summarized in the following tables. When a loan is more than 30 days past due on its scheduled principal and interest payments, the loan is considered 30 days or more past due. Balances are net of deferred fees and any applicable loans-in-process.


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
March 31, 2012
Real estate loans:
Residential non-Home Today	$	11,056	$	8,675	$	91,451	$	111,182	$	7,271,387	$	7,382,569
Residential Home Today		6,952		3,834		35,510		46,296		180,643		226,939
Home equity loans and lines of credit		8,666		4,341		19,393		32,400		2,294,529		2,326,929
Construction		0		0		457		457		30,898		31,355

Total real estate loans	$	26,674	$	16,850	$	146,811	$	190,335	$	9,777,457	$	9,967,792
Consumer and other loans		0		0		0		0		5,141		5,141

Total	$	26,674	$	16,850	$	146,811	$	190,335	$	9,782,598	$	9,972,933


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
September 30, 2011
Real estate loans:
Residential non-Home Today	$	19,509	$	9,818	$	118,517	$	147,844	$	6,942,424	$	7,090,268
Residential Home Today		12,399		7,131		59,985		79,515		183,372		262,887
Home equity loans and lines of credit		11,299		6,126		36,521		53,946		2,449,707		2,503,653
Construction		72		0		3,770		3,842		40,403		44,245

Total real estate loans		43,279		23,075		218,793		285,147		9,615,906		9,901,053
Consumer and other loans		0		0		0		0		6,868		6,868

Total	$	43,279	$	23,075	$	218,793	$	285,147	$	9,622,774	$	9,907,921

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


	For the Three Months Ended March 31, 2012
	Beginning Balance		Provisions		Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	29,227	$	8,462	$	(7,626	)	$	239	$	30,302
Residential Home Today		20,092		5,814		(5,820	)		32		20,118
Home equity loans and lines of credit		46,435		12,204		(10,349	)		1,041		49,331
Construction		1,129		520		(106	)		2		1,545

Total real estate loans		96,883		27,000		(23,901	)		1,314		101,296
Consumer and other loans		0		0		0			0		0

Total	$	96,883	$	27,000	$	(23,901	)	$	1,314	$	101,296


	For the Three Months Ended March 31, 2011
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	48,737	$	4,495		$	(3,896	)	$	83	$	49,419
Residential Home Today		18,143		8,053			(1,528	)		17		24,685
Home equity loans and lines of credit		76,759		10,310			(14,958	)		399		72,510
Construction		4,606		(358	)		(126	)		10		4,132

Total real estate loans	$	148,245	$	22,500		$	(20,508	)	$	509	$	150,746
Consumer and other loans		1		0			0			0		1

Total	$	148,246	$	22,500		$	(20,508	)	$	509	$	150,747


	For the Six Months Ended March 31, 2012
	Beginning Balance		Provisions		Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	49,484	$	15,640	$	(35,164	)	$	342	$	30,302
Residential Home Today		31,025		18,717		(29,708	)		84		20,118
Home equity loans and lines of credit		74,071		7,307		(33,573	)		1,526		49,331
Construction		2,398		336		(1,192	)		3		1,545

Total real estate loans	$	156,978	$	42,000	$	(99,637	)	$	1,955	$	101,296
Consumer and other loans		0		0		0			0		0

Total	$	156,978	$	42,000	$	(99,637	)	$	1,955	$	101,296


	For the Six Months Ended March 31, 2011
	Beginning Balance		Provisions			Charge-offs			Recoveries		Ending Balance
Real estate loans:
Residential non-Home Today	$	41,246	$	15,969		$	(7,960	)	$	164	$	49,419
Residential Home Today		13,331		14,641			(3,347	)		60		24,685
Home equity loans and lines of credit		73,780		26,690			(28,773	)		813		72,510
Construction		4,882		(300	)		(483	)		33		4,132

Total real estate loans	$	133,239	$	57,000		$	(40,563	)	$	1,070	$	150,746
Consumer and other loans		1		0			0			0		1

Total	$	133,240	$	57,000		$	(40,563	)	$	1,070	$	150,747

The recorded investment in loan receivables at March 31, 2012 and September 30, 2011 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 loans-in-process.


	March 31, 2012						September 30, 2011
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	139,527	$	7,243,042	$	7,382,569	$	159,924	$	6,930,344	$	7,090,268
Residential Home Today		106,963		119,976		226,939		134,381		128,506		262,887
Home equity loans and lines of credit		20,397		2,306,532		2,326,929		39,738		2,463,915		2,503,653
Construction		1,311		30,044		31,355		5,729		38,516		44,245

Total real estate loans		268,198		9,699,594		9,967,792		339,772		9,561,281		9,901,053
Consumer and other loans		0		5,141		5,141		0		6,868		6,868

Total	$	268,198	$	9,704,735	$	9,972,933	$	339,772	$	9,568,149	$	9,907,921

An analysis of the allowance for loan losses at March 31, 2012 and September 30, 2011 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.


	March 31, 2012						September 30, 2011
	Individually		Collectively		Total		Individually		Collectively		Total
Real estate loans:
Residential non-Home Today	$	4,283	$	26,019	$	30,302	$	25,395	$	24,089	$	49,484
Residential Home Today		6,193		13,925		20,118		21,938		9,087		31,025
Home equity loans and lines of credit		2,195		47,136		49,331		14,324		59,747		74,071
Construction		106		1,439		1,545		1,255		1,143		2,398

Total real estate loans		12,777		88,519		101,296		62,912		94,066		156,978
Consumer and other loans		0		0		0		0		0		0

Total	$	12,777	$	88,519	$	101,296	$	62,912	$	94,066	$	156,978

At March 31, 2012, individually evaluated loans that required an allowance were comprised only of loans dependent on cash flows, such as performing troubled debt restructurings, and loans with a further deterioration in the fair value of collateral not yet identified as uncollectible. All other individually evaluated loans received a charge-off if applicable. At September 30, 2011, individually evaluated loans were comprised of loans dependent on cash flows, such as performing troubled debt restructurings, and impaired loans for which the recorded investment in the impaired loan exceeded the measured value of the collateral, previously referred to as an SVA. Effective for the quarter ended December 31, 2011, and in accordance with the previously described regulatory directive, SVAs were charged-off against the recorded loan balance.

Because many variables are considered in determining the appropriate level of general valuation allowances, directional changes in individual considerations do not always align with the directional change in the balance of a particular component of the general valuation allowance. Principal balances are used for the individually evaluated portion of the allowance for loan losses. At March 31, 2012 and September 30, 2011, respectively, individually allocated, collateral-based reserves on impaired loans were $0 and $55,507; $10,773 and $7,010 were allowances on other individually reviewed loans dependent on cash flows, such as performing TDRs; and $2,003 and $395 were allowances on loans with further deteriorations in the fair value of collateral not yet identified as uncollectible. Prior to the quarter ended December 31, 2011, specific valuation allowances were assessed on impaired loans as described later in this footnote.

Residential non-Home Today mortgage loans represent the largest portion of the residential real estate portfolio. The Company believes overall credit risk is low based on the nature, composition, collateral, products, lien position and performance of the portfolio. The portfolio does not include loan types or structures that have experienced severe performance problems at other financial institutions (sub-prime, no documentation or pay option adjustable rate mortgages).

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 March 31, 2012, approximately 55% of Home Today loans include private mortgage insurance coverage. The majority of the coverage on these loans was provided by PMI Mortgage Insurance Co. (“PMIC”), which the Arizona Department of Insurance seized in 2011 and indicated that all claims payments would be reduced by 50%. Appropriate adjustments have been made to all of the Association’s affected valuation allowances and charge-offs; and estimated loss severity factors were increased for loans evaluated collectively.

Home equity lines of credit represent a significant portion of the residential real estate portfolio. The state of the economy and low housing prices continue to have an adverse impact on this portfolio since the home equity lines generally are in a second lien position. Effective June 28, 2010, due to the deterioration in overall housing conditions including concerns for loans and lines in a second lien position, home equity lines of credit and home equity loans were no longer offered by the Association. Beginning March 20, 2012, The Association offered new home equity lines of credit to qualifying existing customers for whom the draw period of their current home equity line of credit was about to expire upon which date the home equity line of credit would otherwise convert to a ten year amortizing loan.

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. Effective August 30, 2011, the Association made the strategic decision to exit the commercial construction loan business and ceased accepting new builder relationships. Existing builder commitments will be honored for a period not longer than one year, giving our customers the ability to secure new borrowing relationships.

Reflective of the much publicized foreclosure and mortgage servicing problems that have confronted the industry, the Company has generally experienced longer foreclosure timelines than those experienced in the past, particularly in Florida. The longer foreclosure timelines in Florida generally have a greater impact on the Association’s first position liens as opposed to subordinate liens primarily because the significant property value decline in Florida since 2008, when coupled with the subordinate lien position of home equity lending products, generally results in a high percentage of full charge-offs on the date of initial evaluation. Once a home equity loan or line of credit has been fully charged off, foreclosure timing is no longer relevant. Longer foreclosure timelines generally result in greater loss experience rates on first position liens where full charge-offs are not as prevalent, particularly to the extent that property values continue to decline during the foreclosure process. These expected higher loss experience rates are factored into the determination of collateral fair value and are considered in making charge-off decisions.

The recorded investment and the unpaid principal balance of impaired loans, including those whose terms have been modified in troubled debt restructurings, as of March 31, 2012 and September 30, 2011 are summarized as follows. Balances of recorded investments are net of deferred fees.


	March 31, 2012						September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Residential non-Home Today	$	79,478	$	77,201	$	0	$	32,713	$	32,854	$	0
Residential Home Today		40,012		40,103		0		8,614		8,651		0
Home equity loans and lines of credit		14,902		14,850		0		12,121		12,061		0
Construction		457		457		0		798		804		0
Consumer and other loans		0		0		0		0		0		0

Total	$	134,849	$	132,611	$	0	$	54,246	$	54,370	$	0

With an allowance recorded:
Residential non-Home Today	$	60,049	$	61,973	$	4,283	$	127,211	$	127,758	$	25,395
Residential Home Today		66,951		68,638		6,193		125,767		126,309		21,938
Home equity loans and lines of credit		5,495		5,571		2,195		27,617		27,480		14,324
Construction		854		854		106		4,931		4,971		1,255
Consumer and other loans		0		0		0		0		0		0

Total	$	133,349	$	137,036	$	12,777	$	285,526	$	286,518	$	62,912

Total impaired loans:
Residential non-Home Today	$	139,527	$	139,174	$	4,283	$	159,924	$	160,612	$	25,395
Residential Home Today		106,963		108,741		6,193		134,381		134,960		21,938
Home equity loans and lines of credit		20,397		20,421		2,195		39,738		39,541		14,324
Construction		1,311		1,311		106		5,729		5,775		1,255
Consumer and other loans		0		0		0		0		0		0

Total	$	268,198	$	269,647	$	12,777	$	339,772	$	340,888	$	62,912

At March 31, 2012 and September 30, 2011, respectively, the recorded investment in impaired loans includes $156,530 and $166,197 of loans modified in troubled debt restructurings of which $20,291 and $28,617 are 90 days or more past due.

For all classes of loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered in determining that a loan is impaired may include the deteriorating financial condition of the borrower indicated by missed or delinquent payments, a pending legal action, such as bankruptcy or foreclosure, or the absence of adequate security for the loan. Impairment is measured based on the fair value of the collateral less costs to sell when it is probable that the sole source of repayment for the loan is the underlying collateral. 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. A loan that is identified for individual evaluation based on a failure to make timely payments will continue to be reported as impaired until it is less than 30 days past due and does not

have a prior charge-off. Loans in all portfolios that have a partial charge-off due to meeting the criteria for individual impairment evaluation will continue to be individually evaluated for impairment until, at a minimum, the impairment has been recovered.

Loans modified in troubled debt restructurings are separately evaluated for impairment on a loan by loan basis at the time of restructuring and at each subsequent reporting date for as long as they are reported as troubled debt restructurings. The impairment evaluation is based on the present value of expected future cash flows discounted at the effective interest rate of the original loan when the loan is less than 90 days past due. Expected future cash flows include a discount factor representing a potential for default. Valuation allowances are recorded for the excess of the recorded investments over the result of the cash flow analyses. Troubled debt restructurings that are 90 days or more past due or have a partial charge-off 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 recorded investment in the loan to estimate a loss recorded as a charge-off 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 majority of the Company’s modifications do not meet these criteria.

The average recorded investment in impaired loans and the amount of interest income recognized during the period that the loans were impaired are summarized below. Beginning with the three month period ended December 31, 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 March 31,
	2012				2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential non-Home Today	$	78,237	$	283	$	41,507	$	0
Residential Home Today		41,377		437		30,761		0
Home equity loans and lines of credit		18,170		37		16,760		0
Construction		654		1		152		0
Consumer and other loans		0		0		0		0

Total	$	138,438	$	758	$	89,180	$	0

With an allowance recorded:
Residential non-Home Today		59,536	$	765	$	112,467	$	593
Residential Home Today		67,164		658		103,197		564
Home equity loans and lines of credit		4,339		41		33,774		40
Construction		1,283		8		6,990		9
Consumer and other loans		0		0		1		0

Total	$	132,322	$	1,472	$	256,429	$	1,206

Total impaired loans:
Residential non-Home Today	$	137,773	$	1,048	$	153,974	$	593
Residential Home Today		108,541		1,095		133,958		564
Home equity loans and lines of credit		22,509		78		50,534		40
Construction		1,937		9		7,142		9
Consumer and other loans		0		0		1		0

Total	$	270,760	$	2,230	$	345,609	$	1,206


	Six Months Ended March 31,
	2012				2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential non-Home Today	$	56,096	$	504	$	39,919	$	0
Residential Home Today		24,313		702		32,206		0
Home equity loans and lines of credit		13,512		91		17,855		0
Construction		628		13		194		0
Consumer and other loans		0		0		0		0

Total	$	94,549	$	1,310	$	90,174	$	0

With an allowance recorded:
Residential non-Home Today		93,630	$	1,486	$	111,794	$	1,107
Residential Home Today		96,359		1,277		99,656		1,059
Home equity loans and lines of credit		16,556		80		33,785		101
Construction		2,893		28		7,499		18
Consumer and other loans		0		0		1		0

Total	$	209,438	$	2,871	$	252,735	$	2,285

Total impaired loans:
Residential non-Home Today	$	149,726	$	1,990	$	151,713	$	1,107
Residential Home Today		120,672		1,979		131,862		1,059
Home equity loans and lines of credit		30,068		171		51,640		101
Construction		3,521		41		7,693		18
Consumer and other loans		0		0		1		0

Total	$	303,987	$	4,181	$	342,909	$	2,285

The amounts of interest income on impaired loans recognized using a cash-basis method are $728 and $1,294 for the three and six months ended March 31, 2012, respectively, and are not considered material for the three and six months ended March 31, 2011.

For all loans modified during the three and six month periods ended March 31, 2012 (set forth in the table below), the pre-modification outstanding recorded investment was not materially different from the post-modification outstanding recorded investment.

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


	For the Three Months Ended March 31, 2012
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Total
Residential non-Home Today	$	2,638	$	261	$	193	$	1,703	$	364	$	5,159
Residential Home Today		201		0		124		819		875		2,019
Home equity loans and lines of credit		24		0		0		14		67		105

Total	$	2,863	$	261	$	317	$	2,536	$	1,306	$	7,283


	For the Six Months Ended March 31, 2012
	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Total
Residential non-Home Today	$	5,360	$	261	$	1,430	$	4,417	$	1,613	$	13,081
Residential Home Today		1,368		0		1,285		1,740		2,671		7,064
Home equity loans and lines of credit		24		0		62		14		158		258

Total	$	6,752	$	261	$	2,777	$	6,171	$	4,442	$	20,403

Troubled debt restructured loans may be modified more than once. Among other requirements, a re-modification may be available for a borrower upon the expiration of temporary modification terms if the borrower cannot return to regular loan payments. If the borrower is experiencing an income curtailment that temporarily has reduced his/her capacity to repay, such as loss of employment, reduction of hours, non-paid leave or short term disability, a temporary modification is considered. If the borrower lacks the capacity to repay the loan at the current terms due to a permanent condition, a permanent modification is considered. In evaluating the need for a re-modification, the borrower’s ability to repay is generally assessed utilizing a debt to income and cash flow analysis. As the economy remains sluggish and high unemployment persists, the need for re-modifications continues to linger, resulting in approximately 13% of short-term modifications extended into more permanent or longer-term modifications.

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 March 31, 2012				For the Six Months Ended March 31, 2012
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		11	$	1,172		12	$	1,217
Residential Home Today		52		4,189		60		4,960
Home equity loans and lines of credit		1		22		1		22

Total		64	$	5,383		73	$	6,199

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
March 31, 2012
Real Estate Loans:
Residential non-Home Today	$	7,282,395	$	0	$	100,174	$	0	$	7,382,569
Residential Home Today		179,596		0		47,343		0		226,939
Home equity loans and lines of credit		2,282,215		10,377		34,337		0		2,326,929
Construction		30,379		0		976		0		31,355

Total	$	9,774,585	$	10,377	$	182,830	$	0	$	9,967,792


	Pass		Special Mention		Substandard		Loss		Total
September 30, 2011
Real Estate Loans:
Residential non-Home Today	$	6,963,582	$	0	$	104,290	$	22,396	$	7,090,268
Residential Home Today		192,034		0		52,719		18,134		262,887
Home equity loans and lines of credit		2,449,273		13,591		27,033		13,756		2,503,653
Construction		39,378		0		3,761		1,106		44,245

Total	$	9,644,267	$	13,591	$	187,803	$	55,392	$	9,901,053

Residential loans are internally assigned a grade that complies with the guidelines outlined in the Comptroller’s Handbook for Rating Credit Risk. 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 the Association feels 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 effective as of December, 31, 2011, will be charged off. Prior to December 31, 2011, loss loans carried an SVA.

At March 31, 2012 and September 30, 2011, respectively, the recorded investment of impaired loans includes $119,885 and $121,115 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 March 31, 2012 and September 30, 2011, respectively,

there were $34,554 and $24,576 of loans classified substandard and $10,340 and $13,553 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.


	March 31, 2012		September 30, 2011
Performing	$	5,141	$	6,868
Nonperforming		0		0

Total	$	5,141	$	6,868

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

5.	DEPOSITS

Deposit account balances are summarized as follows:


	March 31, 2012		September 30, 2011
Negotiable order of withdrawal accounts	$	1,016,152	$	975,443
Savings accounts		1,772,789		1,681,586
Certificates of deposit		6,033,642		6,057,838

		8,822,583		8,714,867
Accrued interest		593		1,043

Total deposits	$	8,823,176	$	8,715,910

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 few exceptions, the Company is no longer subject to federal and state income tax examinations for tax years prior to 2008. The Internal Revenue Service is currently conducting an audit of the Company’s 2008, 2009, and 2010 federal tax returns. The State of Ohio Department of Taxation is currently conducting an audit of the Company’s 2008, 2009, and 2010 Ohio Franchise Tax Returns.

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 March 31,						Six Months Ended March 31,
	2012			2011			2012			2011
Service cost	$	0		$	1,084		$	1,005		$	2,168
Interest cost		678			984			1,595			1,968
Expected return on plan assets		(945	)		(841	)		(1,837	)		(1,683	)
Amortization of net loss		58			438			458			876
Amortization of prior service cost		0			(15	)		(15	)		(30	)
Recognized net gain due to curtailment		0			0			(267	)		0

Net periodic benefit cost	$	(209	)	$	1,650		$	939		$	3,299

Minimum employer contributions paid during the six months ended March 31, 2012 were $2,350. Minimum employer contributions expected during the remainder of the fiscal year are $2,101.

During the quarter ended December 31, 2011, the Company adopted an amendment to freeze Plan benefit accruals as of December 31, 2011 for participants in the Plan. As of December 31, 2011, the projected benefit obligation, as well as the unfunded liability recorded, was reduced by $16,149, the portion attributable to future salary increases. As a result of the freeze, net periodic benefit cost recognized in the statement of income will be significantly reduced after December 31, 2011. Offsetting a portion of that decrease will be a future benefit contribution attributable to employees impacted by the freeze, as they became eligible for the third tier of benefits under the 401(k) savings plan after December 31, 2011. The combined expense expected to be recorded during fiscal 2012 for the net periodic benefit cost of the pension plan and the additional third tier contributions for the affected employees is estimated to be $1,500.

8.	EQUITY INCENTIVE PLAN

On December 19, 2011, 1,277,500 options to purchase our common stock and 444,700 restricted stock units were granted to certain officers and employees of the Company. The awards were made pursuant to the shareholder-approved 2008 Equity Incentive Plan.

During the six months ended March 31, 2012 and 2011, the Company recorded $3,777 and $3,625, respectively, of stock-based compensation expense, comprised of stock option expense of $1,939 and $1,426, respectively, and restricted stock units expense of $1,838 and $2,199, respectively.

At March 31, 2012, 6,283,425 shares were subject to options, with a weighted average exercise price of $11.28 per share and a weighted average grant date fair value of $2.95 per share. Expected future expense related to the 5,429,223 non-vested options outstanding as of March 31, 2012 is $8,274 over a weighted average of 2.8 years. At March 31, 2012, 1,486,165 restricted stock units, with a weighted average grant date fair value of $10.82 per unit, are unvested. Expected future compensation expense relating to the 1,682,900 restricted stock units outstanding as of March 31, 2012 is $10,097 over a weighted average period of 3.3 years. Each unit is equivalent to one share of common stock.

9.	COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, the Company enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of 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 obligations, adequacy of collateral securing the line and maintenance of a satisfactory credit profile by the borrower. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Off-balance sheet commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated statements of condition. The Company’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The

Company generally uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made.

At March 31, 2012, the Company had commitments to originate loans as follows:


Fixed-rate mortgage loans	$	253,128
Adjustable-rate mortgage loans		414,550
Equity and bridge loans		862

Total	$	668,540

At March 31, 2012, the Company had unfunded commitments outstanding as follows:


Home equity lines of credit (excluding commitments for suspended accounts)	$	1,393,823
Construction loans		26,088
Private equity investments		13,813

Total	$	1,433,724

At March 31, 2012, 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 $1,631,350.

The Company assumes a portion of the 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 5% to 12% in excess of the initial 5% loss layer of a given pool of loans, in exchange for a portion of the pool’s mortgage insurance premiums. The first 5% layer of loss must be exceeded before the Company assumes any liability. At March 31, 2012, the maximum losses under the reinsurance contracts were limited to $15,087. The Company has paid $3,334 of losses under these reinsurance contracts and has provided a liability for the remaining estimated losses totaling $3,778 as of March 31, 2012. 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 materially from the projections as mortgage insurance results are influenced by a number of factors such as unemployment, housing market conditions and loan repayment rates. Management believes it has made adequate provision for estimated losses. Based upon notice from the Company’s two primary mortgage insurance companies, no new contracts are being added to the Company’s risk exposure. The Company’s insurance partners will retain all new mortgage insurance premiums and all new risk.

The following table summarizes the activity in the liability for unpaid losses and loss adjustment expenses:


	Three Months Ended March 31,						Six Months Ended March 31,
	2012			2011			2012			2011
Balance, beginning of period	$	3,979		$	4,787		$	4,023		$	5,082
Incurred increase (decrease)		329			(128	)		500			(142	)
Paid claims		(530	)		(251	)		(745	)		(532	)

Balance, end of period	$	3,778		$	4,408		$	3,778		$	4,408

Management expects that 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. A fair value framework is established whereby assets and liabilities measured at fair value are grouped into three levels of a fair value hierarchy, based on the transparency of inputs and the reliability of assumptions used to estimate fair value. The Company’s policy is to recognize transfers between levels of the hierarchy as of the end of the reporting period in which the transfer occurs. The three levels of inputs are defined as follows:


Level 1 –		quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 –		quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with few transactions, or model-based valuation techniques using assumptions that are observable in the market.
Level 3 –		a company’s own assumptions about how market participants would price an asset or liability.

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

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 March 31, 2012 and September 30, 2011, respectively, this includes $6,368 and $7,383 of investments in U.S. government and agency obligations including U.S. Treasury notes and sequentially structured, highly liquid collateralized mortgage obligations (“CMOs”) issued by Fannie Mae, Freddie Mac, and Ginnie Mae and $8,119 and $8,516 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– 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. Loans held for sale are carried at the lower of cost or fair value except, as described above, the Company elects the fair value measurement option for mortgage loans held for sale subject to pending agency contracts to securitize and sell loans. Loans held for sale are included in Level 2 of the hierarchy. Loans held for sale at March 31, 2012 are carried at cost. There were no loans held for sale at September 30, 2011.

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. These conditions are described more fully in Note 4, Loans and Allowance for Loan Losses.

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. The Association 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 home equity lines of credit, home 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 of the collateral are reduced by estimated costs to sell to reflect average net proceeds. Costs to sell, derived from historical experience and recent market conditions, range from 11% to 43%. Historically, a specific valuation allowance was recorded by a charge to income for any indicated impairment loss. Beginning with the quarter ended December 31, 2011, any indicated impairment loss is charged off. 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.

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 basis 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 March 31, 2012 and September 30, 2011, respectively, there was $13,402 and $10,533 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 $823 and $446 related to these properties at March 31, 2012 and September 30, 2011, 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. There was no impairment of the mortgage loan servicing asset recognized at March 31, 2012 and September 30, 2011.

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 cost basis or fair value less estimated costs to sell or develop and is included in other assets in the Consolidated Statements 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 March 31, 2012, land held for development is carried at its cost basis. At September 30, 2011, there was $111 of land held for development included in Level 3 of the hierarchy with assets measured at fair value on a non-recurring basis. At September 30, 2011, the acquisition cost of these properties exceeded their fair values less estimated cost to sell or develop by $3,000.

Derivatives – Derivative instruments include forward commitments on contracts to deliver loans or mortgage-backed securities. Derivatives are reported at fair value in other assets or other liabilities in 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. Forward commitments on contracts to deliver mortgage-backed securities are included in Level 2 of the hierarchy. The fair value of forward commitments on contracts to deliver loans was $0 at March 31, 2012 and September 30, 2011.

Assets and liabilities carried at fair value on a recurring basis in the Consolidated Statements of Condition at March 31, 2012 and September 30, 2011 are summarized below.


			Recurring Fair Value Measurements at Reporting Date Using
	March 31, 2012		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	$	2,040	$	0	$	2,040	$	0
REMIC’s		4,328		0		4,328		0
Money market accounts		8,119		8,119		0		0

Total	$	14,487	$	8,119	$	6,368	$	0


			Recurring Fair Value Measurements at Reporting Date Using
	September 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	$	2,046	$	0	$	2,046	$	0
REMIC’s		5,337		0		5,337		0
Money market accounts		8,516		8,516		0		0

Total	$	15,899	$	8,516	$	7,383	$	0

Summarized in the tables below are those assets measured at fair value on a nonrecurring basis. This includes loans held for investment that are individually evaluated for impairment excluding performing troubled debt restructurings, land held for development that is carried at lower of acquisition cost or fair value less estimated cost to sell or develop, 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
	March 31, 2012		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	$	134,919	$	0	$	0	$	134,919
Real estate owned¹		13,402		0		0		13,402

Total	$	148,321	$	0	$	0	$	148,321

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


			Nonrecurring Fair Value Measurements at Reporting Date Using
	September 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	$	145,698	$	0	$	0	$	145,698
Real estate owned¹		10,533		0		0		10,533
Land held for development		111		0		0		111

Total	$	156,342	$	0	$	0	$	156,342

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

The following provides quantitative information about significant unobservable inputs categorized within Level 3 of the Fair Value Hierarchy.

Fair Value

3/31/12

Valuation Technique(s)

Unobservable Input

Range (Weighted

Average)

Real Estate

Owned

$13,402

Market comparables, adjusted to reflect current economic and market conditions.

Discount on appraised value for recent market conditions:

• Properties appraised $0 to $50

• Properties appraised greater than $50

1% - 60% (25.6%)

1% - 28% (8%)

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 March 31, 2012				At September 30, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and due from banks	$	43,739	$	43,739	$	35,532	$	35,532
Other interest bearing cash equivalents		298,676		298,676		259,314		259,314
Investment securities:
Available for sale		14,487		14,487		15,899		15,899
Held to maturity		374,517		377,500		392,527		398,725
Mortgage loans held for sale		245,921		254,276		0		0
Loans-net:
Mortgage loans held for investment		9,866,496		10,081,884		9,744,075		9,953,386
Other loans		5,141		5,489		6,868		7,597
Federal Home Loan Bank stock		35,620		35,620		35,620		35,620
Private equity investments		1,188		1,188		1,604		1,604
Accrued interest receivable		34,918		34,918		35,854		35,854
Liabilities:
NOW and passbook accounts	$	2,788,941	$	2,788,941	$	2,657,029	$	2,657,029
Certificates of deposit		6,034,235		6,188,339		6,058,881		6,248,137
Borrowed funds		419,094		422,397		139,856		142,889
Borrowers’ advances for taxes and insurance		55,722		55,722		58,235		58,235
Principal, interest and escrow owed on loans serviced		150,870		150,870		151,859		151,859

Presented below is a discussion of the valuation techniques and inputs used by the Company to estimate fair value and the level of the fair value hierarchy within which the measurements are categorized.

Cash and Due from Banks, Interest Earning Cash Equivalents— The carrying amount is a reasonable estimate of fair value. (Level 1)

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 that are obtained from third party independent nationally recognized pricing services using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. (Level 2)

Loans— For mortgage loans held for investment and other loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. The use of current rates to discount cash flows reflects current market expectations with respect to credit exposure. Impaired loans are measured at the lower of cost or fair value as described above in this note. (Level 3)

Federal Home Loan Bank Stock— It is not practical to estimate the fair value of FHLB stock due to restrictions on its transferability. The fair value is estimated at 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 Consolidated Statements of Condition at fair value. (Level 3)

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. (Level 2)

Borrowed Funds— Estimated fair value for borrowed funds is estimated using discounted cash flows and rates currently charged for borrowings of similar remaining maturities. (Level 2)

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. (Level 2)

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 fair value of forward commitments for the sale of mortgage loans was $0 at March 31, 2012 and September 30, 2011. The Company had no derivatives designated as hedging instruments under Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging,” during the three and six months ended March 31, 2012 and 2011.

The following table summarizes the effect of previously held derivative instruments not designated as hedging instruments.


		Amount of Gain or (Loss) Recognized in Income on Derivative
		Three Months Ended March 31,					Six Months Ended March 31,
	Location of Gain or (Loss) Recognized in Income	2012		2011			2012		2011
Forward commitments for the sale of mortgage loans	Net gain on the sale of loans		0		(5	)		0		(5	)

Total		$	0	$	(5	)	$	0	$	(5	)

12.

RECENT ACCOUNTING PRONOUNCEMENTS

Pending as of March 31, 2012

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-12, “Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” defers indefinitely the provisions of FASB ASU 2011-05 that require entities to present reclassification adjustments for items that are reclassified from other comprehensive income (“OCI”) to net income by component in both the statement in which net income is presented and the statement in which OCI is presented. The only impact of these amendments on the Company’s consolidated financial statements would be a change in the presentation of OCI.

FASB ASU 2011-05, “Presentation of Comprehensive Income” eliminates the option to present 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 will be applied retrospectively for all periods presented and are effective for the company for the interim and annual periods beginning October 1, 2012, with early adoption permitted. The only impact of these amendments on the Company’s consolidated financial statements will be a change in the presentation of OCI.

FASB ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment” was issued in September 2011 to reduce the cost and complexity of performing the first step of the two-step goodwill impairment test. This amendment permits an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a more likely than not (more than 50%) likelihood that the fair value of the reporting unit is less than its carrying amount. The performance of the two-step impairment test becomes unnecessary if, after assessing the totality of events and circumstances, the entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount. The amendment is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

Adopted in quarter ended March 31, 2012

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 premise 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 the 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 did not have a material impact on the Company’s consolidated financial statements. The new and amended disclosures are included in Note 10, Fair Value.

FASB ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” eliminates from U.S. GAAP the requirement for entities to consider whether a transferor (i.e., seller) has the ability to repurchase the financial assets in a repurchase agreement. This requirement was one of the criteria under ASC 860 that entities used to determine whether the transferor maintained effective control. Although entities must consider all the effective-control criteria under ASC 860, the elimination of this requirement may lead to more conclusions that a repurchase arrangement should be accounted for as a secured borrowing rather than as a sale. The amendments in ASU 2011-03 are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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

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

Forward Looking Statements

This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

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statements of our goals, intentions and expectations;

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

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

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

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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:

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significantly increased competition among depository and other financial institutions;

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

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

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

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adverse changes and volatility in the securities markets;

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adverse changes and volatility in credit markets;

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legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements and changes related to our ability to pay dividends and the ability of Third Federal Savings and Loan Association of Cleveland, MHC to waive dividends;

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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;

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changes in consumer spending, borrowing and savings habits;

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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;

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future adverse developments concerning Fannie Mae or Freddie Mac;

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

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

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

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

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

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adverse changes and volatility in real estate markets;

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a slowing or failure of the moderate economic recovery;

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

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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;

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

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changes in our organization, or compensation and benefit plans;

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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

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

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

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 educational programs we have established and/or supported. We intend to continue to adhere to our primary values and to support our customers.

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 continue to 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 quality issues persist in financial headlines and continue to have a negative effect on our 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 re-pricing 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 primarily by moderating the attractiveness of our loan offerings, thereby controlling the level of additions (new originations) to our portfolio, and, prior to September 30, 2010, 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 six months ended March 31, 2012 no loans were sold while during the six months ended March 31, 2011, $5.3 million of long-term, fixed-rate mortgage loans were sold. For the full fiscal year ended September 30, 2011, we sold $33.6 million of long-term, fixed-rate mortgage loans. The total balance of loans sold subsequent to June 30, 2010 has been nominal in relation to the balance of our owned fixed-rate portfolio. As described in the following paragraphs, the low volume of loan sales since June 30, 2010 reflects the impact of changes by Fannie Mae related to requirements for loans that it accepts and a reduced level of fixed-rate loan originations.

Effective July 1, 2010, Fannie Mae, historically the Association’s primary loan investor, implemented certain loan origination requirement changes affecting loan eligibility that, to date, we have not adopted. In reaching our current decision regarding implementation of the changes necessary to comply with Fannie Mae’s revised requirements, we considered that since 1991, the Association, employing only non-commissioned loan originators and utilizing a centralized underwriting process, had sold loans to Fannie Mae under a series of proprietary variances, or contract waivers, that were negotiated between us and Fannie Mae during the term of our relationship. These proprietary concessions related to certain loan file documentation and quality control procedures that, in our opinion, did not diminish in any way the 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 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 overall 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 additional 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. During the three months ended March 31, 2012, we reclassified a pool of high credit quality, fixed-rate, first mortgage loans, with a principal balance of $248.1 million, from “loans held for investment” to “loans held for sale” and engaged an investment banking representative to offer those loans for sale as non-agency, whole loans in the secondary market. As a condition to any transaction, the Association will retain the mortgage servicing rights associated with any loans sold. At March 31, 2012 those loans had a recorded investment of $245.9 million.

Since June 30, 2010, the Association’s ability to significantly reduce interest rate risk via our traditional loan sales of newly originated longer-term fixed rate residential loans has been limited and will remain so until either the Association 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 and in March 2012, as stated above, we reclassified $248.1 million in principal balances of fixed-rate mortgage loans to “held for sale” with the intent to sell those loans on a servicing retained basis to private investors. 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 (never 60 days late, no 30-day delinquencies during the last twelve months, current at the time of relock, and no foreclosures or bankruptcies since the SmartRate application was taken). In addition to a satisfactory payment history, relock eligibility requires that the property continue to be the borrower’s primary residence. The loan term cannot be extended in connection with a relock nor can new funds be advanced. All interest rate caps and floors remain as originated. During the six months ended March 31, 2012 and 2011, adjustable-rate mortgage loan production totaled $773.1 million and $802.7 million, respectively, while during the same time periods, fixed-rate mortgage loan production totaled $564.4 million and $647.3 million, respectively. By comparison, during the six months ended March 31, 2010, adjustable-rate mortgage loan production totaled $15.4 million while fixed rate production totaled $725.4 million. The amount of origination and refinancing volumes along with the portion of that activity that pertains to loans that we previously sold (but for which we retained 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 $2.45 billion of long-term adjustable-rate loans in our residential mortgage loans held for investment portfolio at March 31, 2012, as compared to $1.83 billion at September 30, 2011 and $1.58 billion at March 31, 2011. In addition, fixed-rate mortgage loan activity described above resulted in $5.19 billion of long-term fixed rate loans in our residential mortgage loans held for investment portfolio at March 31, 2012, as compared to $5.56 billion at September 30, 2011 and $5.64 billion at March 31, 2011. The March 31, 2012 measurement excludes $245.9 million of long-term, fixed-rate loans reported as “held for sale”. At September 30, 2011 and March 31, 2011, “held for sale” loans excluded from the portfolio balances of fixed-rate loans described above totaled $0 and $8.1 million, respectively.

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 federal banking regulator in December 2010, we actively pursued strategies to decrease the outstanding balance of our home equity lending portfolio as well as our exposure to undrawn home equity lines of credit. During the quarter ended June 30, 2011, we achieved the balance and exposure reduction targets included in the reduction plan. Beginning in March 2012, we again offered new home equity lines of credit to qualifying existing customers for whom the draw period of their current home equity line of credit was about to expire, upon which date the home equity line of credit would otherwise convert to a ten year amortizing loan; additionally, we have begun to allow, subject to certain property and credit performance conditions, home equity line of credit customers not approaching repayment to refinance into new home equity lines of credit for other purposes, typically increases in the available line. At March 31, 2012, commitments to extend new home equity lines of credit to our existing customers totaled $240 thousand. Notwithstanding achievement of the reduction plan target and recent limited offers to extend new revolving lines of credit to qualifying, existing home equity line of credit customers, promotion of this product is not a current, meaningful strategy used to 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 March 31, 2012, 89% of our assets consisted of residential real estate loans (both “held for sale” and “held for investment”) and home equity loans and lines of credit, 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. Beginning March 31, 2012, performing home equity lines of credit were transferred to non-accrual status in those instances in which the borrower was 180 days or more delinquent on a first lien obligation or 90 days or more delinquent on a first lien modification. At March 31, 2012 the recorded investment of home equity lines of credit transferred to non-accrual was $14.6 million.

In response to current market conditions, and in an effort to limit our credit risk exposure and improve the credit performance of new customers, we have tightened our credit criteria in evaluating a borrower’s ability to successfully fulfill his or her repayment obligation and we have revised the design of many of our loan products to require higher borrower down-payments, limited the products available for condominiums, and eliminated certain product features (such as interest-only adjustable-rate loans, loans above certain loan-to-value ratios, and prior to March 2012, home equity lending products with the exception of bridge loans).

Prior to its July 21, 2011 merger into the Office of the Comptroller of the Currency (“OCC”), 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 spanned the period from June 30, 2010 through December 31, 2011. As of December 31, 2011, the Reduction Plan’s 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 $1.31 billion, including $506.1 million in outstanding balances, to $3.83 billion. Further reductions occurred during the quarter ended March 31, 2012 and as a result, through March 31, 2012 home equity lending commitments had been reduced by $1.42 billion, including $587.3 million in outstanding balances, to $3.72 billion. Other elements of the Reduction Plan included: 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 are all now substantially complete. 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 229% at March 31, 2012 from 237% at December 31, 2011. The December 31, 2011 targeted ratio as contained in the Reduction Plan was 261%.

Effective February 7, 2011, the MOU was terminated and replaced by new memoranda 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 December 31, 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 and the plan to address deficiencies was submitted on February 25, 2011); (2) an independent review of management compensation (the review was submitted to the OTS on June 30, 2011); (3) the submission 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 submission 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 have installed a new interest rate risk model that provides 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 and are awaiting results of the regulatory validation process. We do not anticipate results until sometime during the quarter ending September 30, 2012. The requirements of the MOU and New MOU carry costs to complete which will continue to increase our non-interest expense

in amounts that have not been, and 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 difficulties that have arisen with respect to the real estate markets in those states. At March 31, 2012, approximately 78.8% and 17.8% of the combined total of our residential, non-Home Today and construction loans held for investment were secured by properties in Ohio and Florida, respectively. Our 30 or more days delinquency ratios on those loans in Ohio and Florida at March 31, 2012 were 1.1% and 3.4%, respectively. Our 30 or more days delinquency ratio for the non-Home Today portfolio as a whole was 1.5%. Also, at March 31, 2012, approximately 39.0% and 28.9% 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 March 31, 2012 were 1.2% and 1.9%, respectively. Our 30 or more days delinquency ratio for the home equity loans and lines of credit portfolio as a whole was 1.4%. 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 extensive 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 totaled $226.9 million at March 31, 2012 and constituted only 2.3% of our total “held for investment” loan portfolio balance, these loans comprised 24.2% and 24.3% of our 90 days or greater delinquencies and our total delinquencies, respectively. At March 31, 2012, approximately 95.9% and 4.0% of our residential, Home Today loans were secured by properties in Ohio and Florida, respectively. At March 31, 2012, the percentages of those loans delinquent 30 days or more in Ohio and Florida were 20.2% and 16.6%, 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, was 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 down payments, many loans include private mortgage insurance. At March 31, 2012, 55.4% of Home Today loans included private mortgage insurance coverage. From a peak recorded investment of $306.6 million at December 31, 2007, the total recorded investment of the Home Today portfolio has declined to $226.9 million at March 31, 2012. 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 down payments, 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 March 31, 2012, the Association’s ratio of core capital to adjusted tangible assets (a basic industry measure under which 5.00% is deemed to represent a “well capitalized” status) was 13.5%. 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 March 31, 2012, deposits totaled $8.82 billion, while borrowings totaled $419.1 million and borrowers’ advances and servicing escrows totaled $206.6 million, combined. In evaluating funding sources, we consider many factors, including cost, duration, current availability, expected sustainability, impact on operations and capital levels.

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

We preserve the availability of alternative funding sources through various mechanisms. First, by maintaining high capital levels, we retain the flexibility to increase our balance sheet size without jeopardizing our capital adequacy. Effectively, this permits us to increase the rates that we offer on our deposit products thereby attracting more potential customers. Second, we pledge available real estate mortgage loans and investment securities with the Federal Home Bank of Cincinnati (“FHLB”) and the Federal Reserve Bank of Cleveland (“Federal Reserve”). At March 31, 2012, these collateral pledge support arrangements provide for additional borrowing capacity of up to $1.68 billion with the FHLB (provided an additional investment in FHLB capital stock of up to $33.6 million is made) and up to $265.1 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 sold in the institutional market and converted to cash. At March 31, 2012, our investment securities portfolio totaled $389.0 million. Finally, cash flows from operating activities have been a regular source of funds. During the six months ended March 31, 2012 and 2011, cash flows from operations totaled $58.2 million and $51.6 million, respectively. At March 31, 2012 our mortgage loans held for sale totaled $245.9 million, while our loan sales commitments totaled $50.0 million. The sales commitment related to a whole-loan transaction (as opposed to an agency securitization) entered into with a third-party investor. Periodically, in conjunction with continuing negotiations with Fannie Mae, we may determine that certain loans may qualify for delivery to Fannie Mae; however, there is no certainty that such negotiations will prove to be successful. While we feel this could adversely affect our liquidity position, we believe that it would be a short term effect. Should we elect to do so, we have the ability, after implementing appropriate process changes, to originate mortgages that would conform to the Fannie Mae Selling Guide requirements and would be eligible for delivery to Fannie Mae.

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

Monitoring and Controlling Operating Expenses. We continue to focus on managing operating expenses. Our annualized ratio of non-interest expense to average assets was 1.55% and 1.58% for the six months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, our average assets per full-time employee and our average deposits per full-time employee were $11.6 million and $9.1 million, respectively. Based on industry statistics published by the Office of Comptroller of the Currency as of December 31, 2011, we believe that each of these measures compares favorably with the averages for our peer group. Our average deposits held at our branch offices ($226.2 million per branch office as of March 31, 2012) 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 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, while no additional special assessments have been imposed, the prepayment does not preclude the FDIC from changing assessment rates or from revising the risk-based assessment system, pursuant to the existing notice and comment rulemaking framework. As required by the Dodd-Frank Act, effective April 1, 2011 the FDIC revised its assessment system to determine the amount of each institution’s deposit insurance assessment based on total assets less tangible capital of each institution instead of deposits. Changes pursuant to this requirement resulted in a 41% reduction in the Association’s assessment rate during the six months ended March 31, 2012 when compared to the six months ended March 31, 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, mortgage servicing rights, income taxes, pension benefits, 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 accounting principles generally accepted in the United States of America. Historically, our allowance for loan losses consisted of three components:

(1)

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

(2)

general allowances for loan losses for each loan type based on historical loan loss experience and allowance on individually reviewed loans dependent on cash flows, such as performing troubled debt restructurings, and a portion of the allowance on loans individually reviewed that represents further deterioration in the fair value of the collateral not yet identified as uncollectible (“general valuation allowances” or “GVAs”); and

(3)

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

In an October 2011 directive applicable to institutions subject to its regulation, the OCC required all SVAs on collateral dependent loans maintained by savings institutions to be charged off by March 31, 2012. As permitted, the Company elected to early-adopt this methodology effective for the quarter ended December 31, 2011. As a result, reported loan charge-offs for the quarter ended December 31, 2011 were impacted by the charge-off of the SVA, which had a balance of $55.5 million at September 30, 2011. This one time charge-off did not impact the provision for loan losses for the quarter ended December 31, 2011; however, reported loan charge-offs during the December 2011 quarter and the six month period ended March 31, 2012, increased and the balance of the allowance for loan losses as of December 31, 2011 decreased accordingly. Additionally, the SVA charge-off was a major reason for the decrease in the reported balances of seriously delinquent and nonperforming loans as of December 31, 2011 and for the six month period ended March 31, 2012. As a result of our early adoption of this required change, effective for the quarter ended December 31, 2011 and prospectively, the balance of the SVA component of the allowance for loan losses was and will be, zero.

In many respects, market valuation allowances are more qualitative in nature than are general valuation allowances. MVAs expand our ability to identify and estimate probable losses and are based on our evaluation of the following factors, some of which are consistent with factors that impact the determination of GVAs. For example, delinquency statistics (both current and historical) are used in developing the GVAs while the trending of the delinquency statistics is considered and evaluated in the determination of the MVAs. From a directional perspective, during periods of increasing loan loss experience, MVAs generally comprise larger portions of the total allowance for loan losses as MVAs provide a mechanism to extend existing trends and to reflect broader changes that exist within a particular region, product type, demographic, etc. and that may not yet be captured in traditional GVA measurements. Similarly, MVAs generally comprise smaller portions of the total allowance for loan losses during periods of improving loan loss experience, or following a period of stable loan loss experience, as traditional GVA measures become able to more fully capture probable losses. Factors impacting the determination of MVAs include:

•

the trending of delinquency statistics (both current and historical), including factors that influence the trending, particularly, as described in the following bullet points, in the context of regional economies, including local housing markets and employment;

•

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

•

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

•

the composition of the loan portfolio;

•

historical loan loss experience and trends;

•

national, regional and local economic factors and trends;

•

national, regional and local housing market factors and trends;

•

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

•

uncertainty surrounding borrowers’ ability to recover from temporary hardships for which short-term loan modifications are granted;

•

asset disposition loss statistics (both current and historical) and the trending of those statistics;

•

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

•

market conditions and regulatory directives that impact the entire financial services industry.

Additionally, when loan modifications qualify as troubled debt restructurings and the loans are performing according to the terms of the restructuring, we record an individually evaluated general valuation allowance for impairment based on the present value of expected future cash flows, which includes a factor for subsequent potential defaults, discounted at the effective interest rate of the original loan contract. Potential defaults are distinguished from re-modifications as borrowers who default are generally not eligible for re-modification. At March 31, 2012, the balance of such general valuation allowances was $10.8 million. In instances when loans require re-modification, additional valuation allowances may be required. The new valuation allowance on a re-modified loan is calculated based on the present value of the expected cash flows, discounted at the effective interest rate of the original loan contract, considering the new terms of the modification agreement. Due to the immaterial amount of this exposure to date, we continue to capture this exposure as a component of our MVA evaluation. The significance of this exposure will be monitored and if warranted, we will enhance our loan loss methodology to include a new default factor (developed to reflect the estimated impact to the balance of the allowance for loan losses that will occur as a result of future re-modifications) that will be assessed against all loans reviewed collectively. If new default factors are implemented, the MVA methodology will be adjusted to preclude duplicative loss consideration.

We evaluate the allowance for loan losses based upon the combined total of the historical loss and general components, and prior to December 31, 2011, the specific component. 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.

Home 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 eroded 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 home equity loans and lines of credit, including bridge loans, which are delinquent 90 days or more. This expanded evaluation is in addition to our traditional evaluation procedures. Our home equity loans and lines of credit portfolio continues to comprise the largest portion of our net charge-offs, although the level of home equity loans and lines of credit charge-offs has receded during the last three quarters from levels previously experienced. At March 31, 2012, we had a recorded investment of $2.33 billion in home equity loans and equity lines of credit outstanding, 0.8% of which were delinquent 90 days or more past due.

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. Effective August 2011, we no longer accepted new construction lending relationships and, as a result, the remaining portfolio is now in run-off mode.

We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future additions to the allowance may be necessary based on unforeseen changes in loan quality and economic conditions.

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

March 31, 2012

December 31, 2011

September 30, 2011

March 31, 2011

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

(Dollars in thousands)

Real estate loans:

Residential non-Home Today

Ohio

5,821,200

5,944,236

5,691,614

5,552,944

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller Reporting Company