Edgar Filing: TFS Financial CORP

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(do not check if a smaller reporting company)

TFSL 09.30.2012 MASTER 10-k

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K



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

For the fiscal year ended September 30, 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)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share

(Title of class)

The NASDAQ Stock Market, LLC

(Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

___________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on March 31, 2012, as reported by the NASDAQ Global Select Market, was approximately $763.4 million.

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

At November 19, 2012 there were 309,009,393 shares of the Registrant’s common stock, par value $0.01 per share, outstanding, of which 227,119,132 shares, or 73.50% of the Registrant’s common stock, were held by Third Federal Savings and Loan Association of Cleveland, MHC, the Registrant’s mutual holding company.

DOCUMENTS INCORPORATED BY REFERENCE (to the Extent Indicated Herein)

Portions of the registrant’s Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated by reference in Part III hereof.

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TFS Financial Corporation

INDEX



Part I

Item 1.	Business	3

Item 1A.	Risk Factors	47

Item 1B.	Unresolved Staff Comments	56

Item 2.	Properties	56

Item 3.	Legal Proceedings	56

Item 4.	Mine Safety Disclosures	56

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	56

Item 6.	Selected Financial Data	59

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	60

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	83

Item 8.	Financial Statements and Supplementary Data	86

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	86

Item 9A.	Controls and Procedures	86

Item 9B.	Other Information	88

Part III

Item 10.	Directors, Executive Officers and Corporate Governance	88

Item 11.	Executive Compensation	89

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89

Item 13.	Certain Relationships and Related Transactions, and Director Independence	89

Item 14.	Principal Accounting Fees and Services	89

Part IV

Item 15.	Exhibits and Financial Statement Schedules	90

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PART I



Item 1.	Business

Forward Looking Statements

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


•	statements of our goals, intentions and expectations;


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


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


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


•	estimates of our risks and future costs and benefits.

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


•	significantly increased competition among depository and other financial institutions;


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


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


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


•	adverse changes and volatility in the securities markets;


•	adverse changes and volatility in credit markets;


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


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


•	changes in consumer spending, borrowing and savings habits;


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


•	future adverse developments concerning Fannie Mae or Freddie Mac;


•	changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board and changes in the level of government support of housing finance;


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


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


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


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


•	adverse changes and volatility in real estate markets;


•	a slowing or failure of the moderate economic recovery;


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


•	the adoption of implementing regulations by a number of different regulatory bodies under the Dodd-Frank Act, and

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uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us,


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


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


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


•	the 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. Please see Item 1A. Risk Factors for a discussion of certain risks related to our business.

TFS FINANCIAL CORPORATION

TFS Financial Corporation (“we,” “us,” “our,” or the “Company”) was organized in 1997 as the mid-tier stock holding company for Third Federal Savings and Loan Association of Cleveland (“Third Federal Savings and Loan” or the “Association”). We completed our initial public stock offering on April 20, 2007 and issued 100,199,618 shares of common stock, or 30.16% of our post-offering outstanding common stock, to subscribers in the offering. Additionally, at the time of the public offering, 5,000,000 shares of our common stock, or 1.50% of our outstanding shares, were issued to the newly formed charitable foundation, Third Federal Foundation (the “Foundation”). Third Federal Savings and Loan Association of Cleveland, MHC (“Third Federal Savings, MHC”), our mutual holding company parent, holds the remainder of our outstanding common stock (227,119,132 shares). Net proceeds from our initial public stock offering were approximately $886 million and reflected the costs we incurred in completing the offering as well as a $106.5 million loan to the Third Federal Employee Stock Ownership Plan related to its acquisition of shares in the initial public stock offering.

Our ownership of the Association remains our primary business activity.

We also operate Third Capital, Inc. as a wholly-owned subsidiary.

As the holding company of Third Federal Savings and Loan, we are authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan holding companies, which include making equity investments and the acquisition of banking and financial services companies.

Our cash flow depends primarily on earnings from the investment of the portion of the net offering proceeds we retained, and any dividends we receive from Third Federal Savings and Loan and Third Capital, Inc. All of our officers are also officers of the Association. In addition, we use the services of the support staff of the Association from time to time. We may hire additional employees, as needed, to the extent we expand our business in the future.

THIRD CAPITAL, INC.

Third Capital, Inc. is a Delaware corporation that was organized in 1998 as our wholly-owned subsidiary. At September 30, 2012, Third Capital, Inc. had consolidated assets of $81.8 million, and for the fiscal year ended September 30, 2012, Third Capital, Inc. had consolidated net income of $0.5 million. Third Capital, Inc. has no separate operations other than as the holding company for its operating subsidiaries, and as a minority investor or partner in other entities including minority investments in private equity funds. The following is a description of the entities, other than the private equity funds, in which Third Capital, Inc. is the owner, an investor or a partner.

Hazelmere Investment Group I, Ltd. This Ohio limited liability company engages in net lease transactions of commercial buildings in targeted markets. Third Capital, Inc. is a partner of this entity, receives a preferred return on amounts contributed to acquire investment properties and has a 70% ownership interest in remaining earnings. Hazelmere Investment Group I, Ltd. incurred a net loss of $0.5 million during fiscal 2012.

Third Cap Associates, Inc. This Ohio corporation also maintains minority investments in private equity funds, and owns 49% and 60% of two title agencies that provide escrow and settlement services in the State of Ohio, primarily to customers of Third Federal Savings and Loan. For the fiscal year ended September 30, 2012, Third Cap Associates, Inc. recorded net income of $1.5 million.

Third Capital Mortgage Insurance Company. This Vermont corporation reinsures private mortgage insurance on residential mortgage loans originated by Third Federal Savings and Loan. For the fiscal year ended September 30, 2012, Third Capital Mortgage Insurance Company incurred a net loss of $0.4 million.

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THIRD FEDERAL SAVINGS AND LOAN ASSOCIATION OF CLEVELAND

General

Third Federal Savings and Loan is a federally chartered savings and loan association headquartered in Cleveland, Ohio that was organized in 1938. In May 1997, the Association reorganized into its current two-tier mutual holding company structure. The Association’s principal business consists of originating and servicing residential real estate mortgage loans and attracting retail savings deposits.

The Association’s business strategy is to originate mortgage loans with interest rates that are competitive with those of similar products offered by other financial institutions in its markets. Similarly, the Association offers high-yield checking accounts and high-yield savings accounts and certificate of deposit accounts, each bearing interest rates that are competitive with similar products offered by other financial institutions in its markets. The Association expects to continue to pursue this business philosophy. While this strategy does not enable it to earn the highest rates of interest on loans it offers or pay the lowest rates on its deposit accounts, the Association believes that this strategy is the primary reason for its successful growth in the past.

The Association attracts retail deposits from the general public in the areas surrounding its main office and its branch offices. It also utilizes its internet website and its customer service call center to generate loan applications and attract retail deposits. In addition to residential real estate mortgage loans, the Association originates residential construction loans. Prior to June 28, 2010, the Association also actively originated home equity loans and lines of credit. In connection with its home equity risk reduction program, in June 2010, originations of home equity loans and lines of credit were suspended. Beginning in 2012, the Association originates home equity loans and lines of credit to only its existing line customers. The Association retains in its portfolio a large portion of the loans that it originates. Loans that the Association sells consist primarily of long-term, fixed-rate residential real estate mortgage loans. Since June 2010, the volume of loan sales has decreased significantly as, to date, the Association has not adopted certain loan origination requirement changes affecting loan eligibility for sale as promulgated by Fannie Mae, effective July 1, 2010. The Association retains the servicing rights on all loans that it sells. The Association’s revenues are derived primarily from interest on loans and, to a lesser extent, interest on interest-bearing deposits in other financial institutions, deposits maintained at the Federal Reserve, federal funds sold, and investment securities, including mortgage-backed securities. The Association also generates revenues from fees and service charges. The Association’s primary sources of funds are deposits, borrowings, principal and interest payments on loans and securities and proceeds from loan sales.

The Association’s website address is www.thirdfederal.com. Filings of the Company made with the Securities and Exchange Commission are available for free on the Association’s website. Information on that website is not and should not be considered a part of this document.

Market Area

Third Federal Savings and Loan conducts its operations from its main office in Cleveland, Ohio, and from 39 additional, full-service branches and eight loan production offices located throughout the states of Ohio and Florida. In Ohio, the Association’s 22 full-service offices are located in the northeast Ohio counties of Cuyahoga, Lake, Lorain, Medina and Summit, four loan production offices are located in the central Ohio county of Franklin and Delaware (Columbus, Ohio) and four loan production offices are located in the southern Ohio counties of Butler and Hamilton (Cincinnati, Ohio). In Florida, 17 full-service branches are located in the counties of Pasco, Pinellas, Hillsborough, Sarasota, Lee, Collier, Palm Beach and Broward. The economies and housing markets in Ohio and Florida have been negatively impacted by the current economic situation. In recent years, both states have experienced high foreclosures rates and reduced employment rates and housing values. The depressed housing market and employment uncertainties have created consumer pessimism and apprehension, which is manifested in suppressed consumer housing demand.

The Association also provides savings products in all 50 states and first mortgage refinance loans in 11 selected states outside of its branch footprint through its customer service call center and its internet site.

Competition

The Association faces intense competition in its market areas both in making loans and attracting deposits. Its market areas have a high concentration of financial institutions, including large money center and regional banks, community banks and credit unions, and it faces additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Some of its competitors offer products and services that the Association currently does not offer, such as commercial business loans, trust services and private banking.

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The majority of the Association’s deposits are held in its offices located in Cuyahoga County, Ohio. As of June 30, 2012 (the latest date for which information is publicly available), the Association had $4.80 billion of deposits in Cuyahoga County, and ranked second among all financial institutions with offices in the county in terms of deposits, with a market share of 12.96%. As of that date, the Association had $6.16 billion of deposits in the State of Ohio, and ranked 9^th among all financial institutions in the state in terms of deposits, with a market share of 2.53%. As of June 30, 2012, the Association had $2.93 billion of deposits in the State of Florida, and ranked 21^st among all financial institutions in terms of deposits, with a market share of 0.69%.

Since 2009 the Federal Deposit Insurance Corporation (“FDIC”) has administered the resolution of hundreds of troubled financial institutions, the Depository Insurance Fund (“DIF”) has incurred significant losses and the reserves of the DIF has been substantially depleted. This depletion prompted re-examination of the method of assessing insured institutions and rebuilding the DIF. Further, the Dodd-Frank Act, which was signed into law in July 2010, required that the FDIC amend its regulations to define “assessment base” as an insured institution’s average total assets minus average tangible equity during the assessment period. This revision had the effect of eliminating the funding cost advantage that borrowed funds generally had when compared to the funding cost associated with deposits. As a result, many financial institutions, including institutions that compete in our markets, have targeted retail deposit gathering as a more attractive funding source than borrowings, and have become more active and more competitive in their deposit product pricing. The combination of reduced demand by borrowers and more competition with respect to rates paid to depositors has created an increasingly difficult marketplace for attracting deposits, which could adversely affect future operating results.

From October 2011 through September 2012, the Association had the second largest market share of conventional purchase mortgage loans originated in Cuyahoga County, Ohio. For the same period, it also had the second largest market share of conventional purchase mortgage loans originated in the seven northeast Ohio counties which comprise the Cleveland and Akron metropolitan statistical areas. In addition, based on the same statistics, the Association has consistently been one of the six largest lenders in Franklin County (Columbus, Ohio) and one of the 10 largest lenders in Hamilton County (Cincinnati, Ohio) since it entered those markets in 1999.

The Association’s primary strategy for increasing and retaining its customer base is to offer competitive deposit and loan rates and other product features, delivered with exceptional customer service, in each of the markets it serves.

We rely on the Association’s almost 75-year history of serving its customers and the communities in which it operates, the Association’s high capital levels, and liquidity alternatives to maintain and nurture customer and marketplace confidence. The Company’s high capital ratio continues to reflect the beneficial impact of our April 2007 initial public offering, which raised net proceeds of $886 million. At September 30, 2012, our ratio of shareholders’ equity to total assets was 15.7%. Our liquidity alternatives include management and monitoring of the level of liquid assets held in our portfolio as well as the maintenance of alternative wholesale funding sources. At September 30, 2012, our liquidity ratio was 5.80% (which we compute as the sum of cash and cash equivalents plus unpledged investment securities for which ready markets exist, divided by total assets) and, through the Association, we had the ability to immediately borrow an additional $466.6 million from the Federal Home Loan Bank of Cincinnati (“FHLB of Cincinnati”) under existing credit arrangements along with $233.3 million from the Federal Reserve Bank of Cleveland (“Federal Reserve”). From the perspective of collateral value securing FHLB of Cincinnati advances, our capacity limit for additional borrowings at September 30, 2012 was $4.22 billion, subject to satisfaction of the FHLB of Cincinnati common stock ownership requirement. To satisfy the common stock ownership requirement we would have to increase our ownership of FHLB of Cincinnati common stock by an additional $75.0 million. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.”

We continue to utilize a multi-faceted approach to support our efforts to instill customer and marketplace confidence. First, we provide thorough and timely information to all of our associates so as to prepare them for their day-to-day interactions with customers and other individuals who are not part of the Company. We believe that it is important that our customers and others sense the comfort level and confidence of our associates throughout their dealings. Second, we encourage our management team to maintain a presence and to be available in our branches and other areas of customer contact, so as to provide more opportunities for informal contact and interaction with our customers and community members. Third, our CEO remains accessible to both local and national media, as a spokesman for our institution as well as an observer and interpreter of financial marketplace situations and events. Fourth, we periodically include advertisements in local newspapers that display our strong capital levels and history of service. We also continue to emphasize our traditional tagline—“STRONG * STABLE * SAFE”—in our advertisements and branch displays. Finally, for customers who adhere to the old adage of trust but verify, we refer them to the safety/security rankings of a nationally recognized, independent rating organization that specializes in the evaluation of financial institutions, which has awarded Third Federal Savings and Loan its highest rating.

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Lending Activities

The Association’s principal lending activity is the origination of first mortgage loans to purchase or refinance residential real estate. Its current policies generally provide that it will maintain between 40% and 70% of its assets in fixed-rate, residential real estate, first mortgage loans and up to 30% of its assets in adjustable-rate, residential real estate, first mortgage loans, subject to its liquidity levels and the credit demand of its customers. At September 30, 2012 adjustable-rate, residential real estate, first mortgage loans comprised 25% of total assets. The Association also originates residential construction loans to individuals (for the construction of their personal residences by a qualified builder) and prior to June 28, 2010 originated a significant amount of home equity loans and lines of credit. Between June 28, 2010 and March 11, 2012 the association suspended the acceptance of new equity line of credit applications. Effective March 20, 2012, the Association began offering new equity lines of credit to qualify existing home equity customers. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation -Monitoring and Limiting Our Credit Risk for additional information regarding home equity loans and lines of credit. At September 30, 2012, residential real estate mortgage loans totaled $8.15 billion, or 78.5% of our loan portfolio, home equity loans and lines of credit totaled $2.16 billion, or 20.8% of our loan portfolio, and residential construction loans totaled $69.2 million, or 0.7% of our loan portfolio.

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



	September 30,
	2012					2011					2010					2009					2008
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)
Real estate loans:
Residential non-Home Today(1)
Ohio	$	6,088,264				$	5,691,614				$	4,843,804				$	4,582,542				$	5,133,689
Florida	1,396,612					1,269,242					1,168,701					1,285,426					1,105,836
Other	458,289					159,933					125,949					122,315					159,967
Total	7,943,165			76.5	%	7,120,789			71.5	%	6,138,454			65.4	%	5,990,283			64.0	%	6,399,492			68.7	%
Residential Home Today
Ohio	199,456					252,879					268,983					279,835					291,386
Florida	8,540					10,784					10,940					11,128					11,070
Other	329					356					610					729					697
Total	208,325			2.0		264,019			2.6		280,533			3.0		291,692			3.1		303,153			3.3
Home equity loans and lines of credit(2)
Ohio	838,492					982,591					1,145,819					1,192,498					1,098,912
Florida	628,554					712,087					797,658					831,979					731,538
California	256,900					293,307					324,778					343,432					292,100
Other	431,550					503,213					580,435					615,094					365,504
Total	2,155,496			20.8		2,491,198			25.0		2,848,690			30.4		2,983,003			31.8		2,488,054			26.7
Construction	69,152			0.7		82,048			0.8		100,404			1.1		94,287			1.0		115,323			1.2
Consumer loans:
Automobile	—			—		—			—		1			—		35			—		1,044			—
Other loans	4,612			—		6,868			0.1		7,198			0.1		7,072			0.1		6,555			0.1
Total loans receivable	10,380,750			100.0	%	9,964,922			100.0	%	9,375,280			100.0	%	9,366,372			100.0	%	9,313,621			100.0	%
Deferred loan fees, net	(18,561		)			(19,854		)			(15,283		)			(10,463		)			(14,596		)
Loans in process	(36,736		)			(37,147		)			(45,008		)			(41,076		)			(46,493		)
Allowance for loan losses	(100,464		)			(156,978		)			(133,240		)			(95,248		)			(43,796		)
Total loans receivable, net	$	10,224,989				$	9,750,943				$	9,181,749				$	9,219,585				$	9,208,736

______________________


(1)	See the Residential Real Estate Mortgage Loans section which follows for a description of Home Today and non-Home Today loans.

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

Loan Portfolio Maturities. The following table summarizes the scheduled repayments of the loan portfolio at September 30, 2012. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the fiscal year ending September 30, 2013. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.



Due During the Years Ending September 30,	Residential Real Estate				Home Equity Loans and Lines of Credit(1)		Construction Loans		Consumer And Other Loans		Total
Due During the Years Ending September 30,	Non-Home Today		Home Today		Home Equity Loans and Lines of Credit(1)		Construction Loans		Consumer And Other Loans		Total
	(In thousands)
2013	$	2,858	$	—	$	2,177	$	5,288	$	4,612	$	14,935
2014	6,504		9		2,164		2,281		—		10,958
2015	3,469		9		3,214		—		—		6,692
2016 to 2017	52,878		130		10,932		—		—		63,940
2018 to 2022	607,186		3,273		81,878		—		—		692,337
2023 to 2027	1,576,976		2,588		866,896		5,493		—		2,451,953
2028 and beyond	5,693,294		202,316		1,188,235		56,090		—		7,139,935
Total	$	7,943,165	$	208,325	$	2,155,496	$	69,152	$	4,612	$	10,380,750

______________________


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

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2012 that are contractually due after September 30, 2013.



	Due After September 30, 2013
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans:
Residential non-Home Today	$	5,015,213	$	2,925,094	$	7,940,307
Residential Home Today	208,206		119		208,325
Home Equity Loans and Lines of Credit(1)	50,620		2,102,699		2,153,319
Construction	42,747		21,117		63,864
Consumer Loans:
Other	—		—		—
Total	$	5,316,786	$	5,049,029	$	10,365,815

______________________


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

Residential Real Estate Mortgage Loans. The Association’s primary lending activity is the origination of residential real estate mortgage loans. A comparison of 2012 data to the corresponding 2011 data and the Association’s expectations for 2013 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.” The Association currently offers fixed-rate conventional mortgage loans with terms of 30 years or less that are fully amortizing with monthly loan payments, and adjustable-rate mortgage loans that amortize over a period of up to 30 years, provide an initial fixed interest rate for three or five years and then adjust annually. Effective March 11, 2009, the Association discontinued offering “interest only” residential real estate mortgage loans, where the borrower pays interest for an initial period (one, three or five years), after which the loan converts to a fully amortizing loan. At September 30, 2012, “interest only” residential real estate mortgage loans totaled $11.5 million.

Historically, residential real estate mortgage loans were generally underwritten according to Fannie Mae’s dollar limit requirements, and the Association referred to these loans that conform to such limits as “conforming loans.” Effective July 1, 2010, Fannie Mae, the Association’s primary loan investor, implemented certain loan origination requirement changes affecting

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loan eligibility that, to date, we have not fully adopted, as explained below. The Association generally originates both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which is currently $417,000 and $625,000, respectively, for single-family homes in most of our lending markets. The Association also originates loans above the lending limit for conforming loans, which the Association refers to as “jumbo loans.” The Association generally underwrites jumbo loans in a manner similar to conforming loans. Jumbo loans are not uncommon in the Association’s market areas. During periods of high market activity, these jumbo loans are generally eligible for sale to various firms that specialize in purchasing non-conforming loans although, since the beginning of the 2008 recessionary period, there has been very limited activity with respect to the sale of non-conforming loans. The Association has not sold any jumbo loans since June 2005.

The Association has always considered the promotion of home ownership a primary goal. In that regard, it has historically offered affordable housing programs in all of its market areas. These programs are targeted toward low- and moderate-income home buyers. The Association’s primary program is called Home Today and is described in detail below. Prior to March 27, 2009, loans originated under the Home Today program had higher risk characteristics. The Association did not classify it as a sub-prime lending program based on the exclusion provided to community development loans in the Expanded Guidance for Sub-prime Lending issued by The Office of Thrift Supervision and the Office of the Comptroller of the Currency. During the last several years, attention has focused on sub-prime lending and its negative effect on borrowers and financial markets. Borrowers in the Home Today program are not charged higher fees or interest rates than non-Home Today borrowers. These loans are not interest only or negative amortizing and contain no low initial payment features or adjustable interest rates, which are features often associated with sub-prime lending. While the credit risk profiles of the Association’s borrowers in the Home Today program are generally higher risk than the credit risk profiles of its non-Home Today borrowers, the Association attempts to mitigate that higher risk through the use of private mortgage insurance and continued pre- and post-purchase counseling. The Association’s philosophy has been to provide borrowers the opportunity for home ownership within their financial means. Effective March 27, 2009, the Home Today underwriting guidelines were revised to be substantially the same as for the Association’s traditional first mortgage product.

Prior to March 27, 2009, through the Home Today program, the Association originated loans with its standard terms to borrowers who might not have otherwise qualified for such loans. After March 27, 2009 borrowers under the Home Today program are subject to substantially the same qualification requirements as non-Home Today borrowers. To qualify for the Association’s Home Today program, a borrower must complete financial management education and counseling and must be referred to the Association by a sponsoring organization with which the Association has partnered as part of the program. Borrowers must meet a minimum credit score threshold. The Association will originate loans with a loan-to-value ratio of up to 90% through its Home Today program, provided that any loan originated through this program with a loan-to-value ratio in excess of 80% must meet the underwriting criteria mandated by its private mortgage insurance carrier. Because the Association previously applied less stringent underwriting and credit standards to these loans, the vast majority of loans originated under the Home Today program generally have greater credit risk than our traditional residential real estate mortgage loans. Effective October 2007, the private mortgage insurance carrier that provides coverage for the Home Today loans with loan-to-value ratios in excess of 80% imposed more restrictive lending requirements that have decreased the volume of Home Today lending, which decrease we expect will continue. As of September 30, 2012, the Association had $208.3 million of loans outstanding that were originated through its Home Today program. Originations under the Home Today program have effectively stopped as a result of these new requirements. At September 30, 2012, of the loans that were originated under the Home Today program, 21.1% were delinquent 30 days or more in repayments, compared to 1.3% for the portfolio of non-Home Today loans as of that date. At September 30, 2012, $27.5 million, or 13.4%, of loans originated under the Home Today program were delinquent 90 days and over and $41.1 million of Home Today loans were non-accruing loans, representing 22.5% of total non-accruing loans as of that date. See “—Non-performing Assets and Restructured Loans—Delinquent Loans” for a discussion of the asset quality of this portion of the Association’s loan portfolio.

Prior to November 25, 2008 the Association also originated loans under its high loan-to-value (“High LTV”) program. These loans had initial loan-to-value ratios of 90% or greater and could be as high as 95%. To qualify for this program, the loan applicant was required to satisfy more stringent underwriting criteria (credit score, income qualification, and other criteria). Borrowers did not obtain private mortgage insurance with respect to these loans. High LTV loans were originated with higher interest rates than the Association’s other residential real estate loans. The Association believes that the higher credit quality of this portion of the portfolio offsets the risk of not requiring private mortgage insurance. While these loans were not initially covered by private mortgage insurance, the Association had negotiated with a private mortgage insurance carrier a contract under which, at the Association’s option, a pre-determined dollar amount of qualifying loans could be grouped and submitted to the carrier for pooled private mortgage insurance coverage. As of September 30, 2012, the Association had $214.6 million of loans outstanding that were originated through its High LTV program, $184.0 million of which the Association has insured through the private mortgage insurance carrier. The High LTV program was suspended November 25, 2008.

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For loans with loan-to-value ratios in excess of 80% but equal to or less than 90% (which are available only for purchase transactions), the Association requires private mortgage insurance, except that for adjustable-rate, first mortgage loans that meet enhanced credit qualification parameters, loan-to-value ratios of up to 85% may be obtained without private mortgage insurance. Loan-to-value ratios in excess of 80% are not available for refinance transactions except that for adjustable-rate, first mortgage loans that meet enhanced credit qualification parameters, loan-to-value ratios of up to 85% may be obtained without private mortgage insurance.

The Association actively monitors its interest rate risk position to determine the desirable level of investment in fixed-rate mortgages. Prior to July 2010, depending primarily on market interest rates and its capital and liquidity positions, the Association elected to: (1) retain all of its newly originated longer-term fixed-rate residential mortgage loans, (2) sell all or a portion of such loans in the secondary mortgage market to governmental entities such as Fannie Mae or other purchasers; or (3) securitize such loans by selling the loans in exchange for mortgage-backed securities. Securitized loans can be sold more readily to meet liquidity or interest rate risk management needs, and have a lower risk-weight than the underlying loans, which reduces the Association’s regulatory capital requirements. All of the loans that the Association sold or securitized during the five fiscal years ended September 30, 2012 were fixed-rate mortgage loans.

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 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 loan portfolio, Fannie Mae enacted many credit tightening measures, culminating in the effective elimination of proprietary variances and waivers, accompanied by the imposition of additional file documentation requirements and expanded quality control procedures. In addition to substantively changing Fannie Mae’s operating environment, effects of the housing crisis spread throughout the secondary residential mortgage market and resulted in a significantly altered operating framework for all secondary market participants. We believe that this dramatically altered operating framework offers opportunities for business process innovators to create new secondary market solutions especially as such opportunities pertain to high credit quality residential loans similar to those that we have traditionally originated. With the current uncertainty as to how the secondary market might be structured in the future, the Association has concluded that it is premature to incur the costs of the infrastructural changes to our operations (file documentation collection and additive quality control procedures) that would be necessary to fully comply with current Fannie Mae loan eligibility standards. However, pursuant to the specifications of Fannie Mae's Home Affordable Refinance Program ("HARP II"), the Association sold $11.4 million of longer-term fixed rate residential loans to Fannie Mae during the fiscal year ended September 30, 2012. The Association continues 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. As a result, the Association’s ability to reduce interest rate risk via our traditional loan sales of newly originated longer-term fixed rate residential loans is limited until the Association either changes its loan origination processes or Fannie Mae, Freddie Mac or other market participants revise their loan eligibility standards. In response to this situation, the Association developed, and on July 21, 2010, began marketing a new adjustable-rate mortgage loan product that provides the Association with improved interest rate risk characteristics when compared to a long-term, fixed-rate mortgage.

The Association currently retains the servicing rights on all loans sold in order to generate fee income and reinforce its commitment to customer service. These one- to four-family residential mortgage real estate loans were underwritten generally to Fannie Mae guidelines and comply with applicable federal, state and local laws. At the time of the closing of these loans the Association owned the loans and subsequently sold them to Fannie Mae and others providing normal and customary representations and warranties, including representations and warranties related to compliance, generally with Fannie Mae underwriting standards. At the time of sale, the loans were free from encumbrances except for the mortgages filed for by the Association which, with other underwriting documents, were subsequently assigned and delivered to Fannie Mae and others. For the fiscal years ended September 30, 2012 and 2011, the Association recognized servicing fees, net of amortization, related to these servicing rights of $7.3 million and $11.4 million, respectively. As of September 30, 2012 and 2011, the principal balance of loans serviced for others totaled $3.81 billion and $5.43 billion, respectively. At September 30, 2012, substantially all of the loans serviced for Fannie Mae and others were performing in accordance with their contractual terms and management believes that it has no material repurchase obligations associated with these loans but an accrual for $2.4 million

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has been established for potential repurchase or loss reimbursement requests at September 30, 2012. See "Critical Accounting Policies: Mortgage Servicing Rights" for further discussion.

The Association currently offers “Smart Rate” adjustable-rate mortgage loan products secured by residential properties with interest rates that are fixed for an initial period of three or five years, after which the interest rate generally resets every year based upon a contractual spread or margin above the Prime Rate as published in the Wall Street Journal. These adjustable-rate mortgages provide the borrower with an attractive rate reset option, based on the Association’s then current lending rates. Prior to July 2010, the Association’s adjustable-rate mortgage loan products secured by residential properties offered interest rates that were fixed for an initial period ranging from one year to five years, after which the interest rate generally reset every year based upon a contractual spread or margin above the average yield on U.S. Treasury securities, adjusted to a constant maturity of one year, as published weekly by the Federal Reserve Board (“Traditional ARM”). All of the Association’s adjustable-rate mortgage loans are subject to periodic and lifetime limitations on interest rate changes. Prior to March 11, 2009, the Association offered mortgage loans where the borrower paid only interest for a portion of the loan term (“Interest-only ARM”). All of its adjustable-rate mortgage loans with initial fixed-rate periods of one, three or five years have initial and periodic caps of two percentage points on interest rate changes, with a cap of six percentage points for the life of the loan for Traditional ARM and Interest-only ARM loans and five or six percentage points for the life of Smart Rate loans. Previously, the Association also offered Traditional ARM loans with an initial fixed-rate period of seven years. Loans originated under that program, which was discontinued in August 2007, had an initial cap of five percentage points on the changes in interest rate, with a two percentage point cap on subsequent changes and a cap of five percentage points for the life of the loan. Many of the borrowers who select adjustable-rate mortgage loans have shorter-term credit needs than those who select long-term, fixed-rate mortgage loans. The Association will permit borrowers to convert non-“Smart Rate” adjustable-rate mortgage loans into fixed-rate mortgage loans at no cost to the borrower. The Association has never offered “Option ARM” loans, where borrowers can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan.

Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans primarily because the underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default. Interest-only loans present different credit risks than fully amortizing loans, as the principal balance of the loan does not decrease during the interest-only period. As a result, the Association’s exposure to loss of principal in the event of default does not decrease during this period. Adjustable rate, interest-only loans comprise less than 1% of our residential loans.

The Association requires title insurance on all of its residential real estate mortgage loans. The Association also requires that borrowers maintain fire and extended coverage casualty insurance (and, if appropriate, flood insurance up to $250 thousand) in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. A majority of its residential real estate mortgage loans have a mortgage escrow account from which disbursements are made for real estate taxes and flood insurance. The Association does not conduct environmental testing on residential real estate mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan.

Home Equity Loans and Home Equity Lines of Credit. Prior to June 28, 2010, the Association offered home equity loans and home equity lines of credit, which were primarily secured by a second mortgage on residences. The Association also offered a home equity lending product that was secured by a third mortgage, although the Association only originated this loan to borrowers where the Association also held the second mortgage. Between June 28, 2010 and March 19, 2012, we suspended the acceptance of new home equity credit applications with the exception of bridge loans and, in accordance with a reduction plan that was accepted by our primary federal banking regulator in December 2010, we actively pursued strategies to decrease the outstanding balance of our home equity lending portfolio as well as our exposure to undrawn home equity lines of credit. During the quarter ended June 30, 2011, we achieved the balance and exposure reduction targets included in the home equity lending reduction plan (“Reduction Plan”), the objective of which was to reduce the Association’s exposure (measured against tier 1 capital plus allowance for loan losses) to the credit risk inherent in home equity lending products. The Reduction Plan’s performance period was June 30, 2010 through December 31, 2011. At September 30, 2012 and 2011, home equity loans totaled $179.0 million, or 1.7%, and $206.2 million, or 2.1%, respectively, of total loans receivable (which includes $124.3 million, and $122.9 million respectively, of home equity lines of credit which are in the amortization period and no longer eligible to be drawn upon), and home equity lines of credit totaled $1.97 billion, or 19.0%, and $2.28 billion, or 22.8%, respectively, of total loans receivable. Additionally, at September 30, 2012 and 2011, the unadvanced amounts of home equity lines of credit totaled $1.31 billion and $1.46 billion, respectively.

Beginning March 20, 2012, we again offered new home equity lines of credit to qualifying existing home equity customers, subject to certain property and credit performance conditions which include:


•	lower combined loan to value ("CLTV") ratios (80% in Ohio/Kentucky and 70% in Florida; prior programs extended to as high as 89.99%);


•	limited geographic offering (only Ohio, Kentucky and Florida; prior programs were offered nationwide);

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•	borrower income is fully verified (in prior programs income was not always fully verified);


•	the borrower is qualified using a principal and interest payment based on the current prime rate plus 2.00%, amortized for 20 years (prior programs qualified using the current prime rate);


•	the minimum credit score to qualify for the re-introduced home equity line of credit is 720 (our most recent prior home equity line of credit offering required a minimum credit score of 680); and


•	the term of the new home equity line of credit is a five year draw period, interest only payment, followed by a 20-year repayment period, principal and interest (prior program terms generally offered a 10-year draw period, interest only payment, followed by a 10-year repayment period, principal and interest).

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.

Prior to June 28, 2010, the underwriting standards for home equity loans and home equity lines of credit included an evaluation of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. In addition, prior to June 28, 2010, through a series of modifications and program adjustments, the home equity lending parameters became increasingly restrictive and included the additional evaluation of the applicant’s employment and income verification. From a geographic perspective, product offerings peaked in 2008 when offers were extended (primarily via direct mail) to targeted borrowers in 18 states. Generally, the least restrictive qualification and the most attractive product features from a borrower’s perspective were in place during portions of fiscal 2006 and 2007, when combined loan-to-value ratios of up to 89.99% were permitted, minimum credit scores reduced to 620, maximum loan amounts reached $250,000 and pricing for lines of credit reached Prime minus 1.01% when drawn balances exceeded $50,000. The Association originated its home equity loans and home equity lines of credit without application fees (except for bridge loans) or borrower-paid closing costs. Home equity loans were offered with fixed interest rates, were fully amortizing and had terms of up to 15 years. The Association’s home equity lines of credit were offered with adjustable rates of interest indexed to the prime rate, as reported in The Wall Street Journal. The Association’s Lowest Rate Guarantee program provided that, subject to the terms and conditions of the guarantee program, if a loan applicant or current home equity line of credit borrower found and qualified for a better interest rate on a similar product with another lender, the Association would offer a lower rate or, if the borrower closed under the rate and terms presented with respect to the other lender, the Association paid the loan applicant or borrower $1,000.

Bridge loans, where a borrower can utilize the existing equity in their current home to fund the purchase of a new home before the current home is sold, totaled $2.0 million, or 0.02% of total loans receivable, as of September 30, 2012. Bridge loans are originated for a one-year term, with no prepayment penalties. These loans have fixed interest rates, and are currently limited to a combined 80% loan-to-value ratio (first and second mortgage liens). The Association charges a closing fee with respect to bridge loans.

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The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean combined loan-to-value (“CLTV”) percent at the time of origination and the current CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of September 30, 2012. Home equity lines of credit in the draw period are by geographical distribution:



	Credit Exposure		Principal Balance		Percent Delinquent 90 days or more		Mean CLTV Percent at Origination(2)		Current Mean CLTV Percent(3)
	(Dollars in thousands)
Home equity lines of credit in draw period (by state):
Ohio	$	1,481,588	$	742,999	0.53	%	62	%	72	%
Florida	860,368		614,074		0.95	%	62	%	97	%
California	338,887		241,162		0.48	%	68	%	86	%
Other(1)	613,730		376,349		0.22	%	63	%	76	%
Total home equity lines of credit in draw period	3,294,573		1,974,584		0.60	%	62	%	79	%
Home equity lines in repayment, home equity loans and bridge loans	180,912		180,912		2.65	%	66	%	66	%
Total	$	3,475,485	$	2,155,496	0.77	%	63	%	78	%

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(1)	No individual state has a committed or drawn balance greater than 5% of the total.


(2)	Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.


(3)	Current Mean CLTV is based on best available first mortgage and property values as of September 30, 2012. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.

At September 30, 2012, 43% of our home equity lending portfolio was either in first lien position (24%) or was in a subordinate (second) lien position behind a first lien that we held (7%) or behind a first lien that was held by a loan that we serviced for others (12%). In addition, at September 30, 2012, 19% of our home equity line of credit portfolio makes only the minimum payment on their outstanding line balance.

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The following table sets forth credit exposure, principal balance, percent delinquent 90 days or more, the mean CLTV percent at the time of origination and the current mean CLTV percent of our home equity loans, home equity lines of credit and bridge loan portfolio as of September 30, 2012. Home equity lines of credit in the draw period are by the year originated:



	Credit Exposure		Principal Balance		Percent Delinquent 90 days or more		Mean CLTV Percent at Origination(1)		Current Mean CLTV Percent(2)
	(Dollars in thousands)
Home equity lines of credit in draw period:
2000 and prior	$	346,705	$	157,738	0.66	%	47	%	63	%
2001	56,751		34,809		1.40	%	67	%	74	%
2002	133,232		74,041		0.90	%	66	%	72	%
2003	284,177		147,870		0.57	%	68	%	73	%
2004	180,172		100,922		1.04	%	68	%	78	%
2005	126,040		77,431		1.54	%	68	%	87	%
2006	296,879		193,898		0.80	%	66	%	94	%
2007	455,833		324,883		0.82	%	67	%	95	%
2008	950,580		624,287		0.31	%	64	%	79	%
2009	408,592		214,074		0.16	%	56	%	66	%
2010	36,821		16,614		—	%	59	%	64	%
2011 (3)	232		135		—	%	39	%	75	%
2012	18,559		7,882		—	%	51	%	56	%
Total home equity lines of credit in draw period	3,294,573		1,974,584		0.60	%	62	%	79	%
Home equity lines in repayment, home equity loans and bridge loans	180,912		180,912		2.65	%	66	%	66	%
Total	$	3,475,485	$	2,155,496	0.77	%	63	%	78	%

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(1)	Mean CLTV percent at origination for all home equity lines of credit is based on the committed amount.


(2)	Current Mean CLTV is based on best available first mortgage and property values as of September 30, 2012. Current Mean CLTV percent for home equity lines of credit in the draw period is calculated using the committed amount. Current Mean CLTV on home equity lines of credit in the repayment period is calculated using the principal balance.


(3)	Amounts represent home equity lines of credit that were previously originated, and that were closed and subsequently replaced in 2011.

In general, the home equity line of credit product is characterized by a ten year draw period followed by a ten-year repayment period; however, prior to June 2010 (when new home equity lending was temporarily suspended), there were two types of transactions that could result in a draw period that extended beyond ten years. The first transaction involved customer requests for increases in the amount of their home equity line of credit. When the customer’s credit performance and profile supported the increase, the draw period term was reset for the ten-year period following the date of the increase in the home equity line of credit amount. A second transaction that impacted the draw period involved extensions. For a period of time prior to June 2008, Third Federal Savings and Loan had a program that evaluated home equity lines of credit that were nearing the end of their draw period and made a determination as to whether or not the customer should be offered an additional ten year draw period. If the account and customer met certain pre-established criteria, an offer was made to extend the otherwise expiring draw period by ten years from the date of the offer. If the customer chose to accept the extension, the origination date of the account remained unchanged but the account would have a revised draw period that was extended by ten years. As a result of these two programs, the reported draw periods for certain home equity line of credit accounts exceed ten years.

As shown in the table above, the percents of loans delinquent 90 days or more (seriously delinquent) originated during the years preceding the 2008 financial and housing crisis are comparatively higher than the years following 2008. Those years saw rapidly increasing housing prices, especially in our Florida market. As the housing prices have declined along with the general economic downturn coupled with higher unemployment, we see that reflected in delinquencies for those years. Equity lines of credit originated during those years also saw higher loan amounts, higher permitted loan-to-value ratios, and lower credit scores. Reflective of the general decrease in housing values since 2006, Current Mean CLTV percentages are higher than the Mean CLTV percentages at Origination.

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In light of the weak housing market, the current level of delinquencies and the instability in employment and economic prospects, we currently conduct an expanded loan level evaluation of our equity lines of credit which are delinquent 90 days or more.

The following table sets forth the breakdown of current mean CLTV percentages for our home equity lines of credit in the draw period as of September 30, 2012.



	Credit Exposure		Principal Balance		Percent of Total		Percent Delinquent 90 days or More		Mean CLTV Percent at Origination		Current Mean CLTV Percent
	(Dollars in thousands)
Home equity lines of credit in draw period (by current mean CLTV):
< 80%	$	1,630,782	$	802,798	40.6	%	0.70	%	52	%	53	%
80 - 89.9%	403,525		244,315		12.4	%	1.10	%	73	%	85	%
90 - 100%	287,460		196,522		10.0	%	0.50	%	75	%	95	%
> 100%	675,113		548,712		27.8	%	0.40	%	77	%	134	%
Unknown (1)	297,693		182,237		9.2	%	0.20	%	63	%	(1	)
	$	3,294,573	$	1,974,584	100.0	%	0.60	%	62	%	79	%

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(1)	Market data necessary for stratification is not readily available.

Construction Loans. The Association originates construction loans for the construction of single-family residences or previously for the purchase of developed lots. Construction loans are offered to individuals for the construction of their personal residences by a qualified builder (construction/permanent loans), and were previously offered to qualified builders (builder loans). At September 30, 2012, construction loans totaled $69.2 million, or 0.7% of total loans receivable. At September 30, 2012, the unadvanced portion of these construction loans totaled $36.7 million.

The Association’s construction/permanent loans generally provide for disbursements to the builder or sub-contractors during the construction phase as work progresses. During the construction phase, the borrower only pays interest on the drawn balance. Upon completion of construction, the loan converts to a permanent amortizing loan without the expense of a second closing. The Association offers construction/permanent loans with fixed or adjustable rates, and a current maximum loan-to-completed-appraised value ratio of 80%. At September 30, 2012, the Association’s construction/permanent loans totaled $58.5 million, or 0.6% of total loans receivable.

The Association’s builder loans consist of loans for homes that have been pre-sold as well as loans to developers that build homes before a buyer has been identified. The Association does not make land loans to developers for the acquisition and development of raw land. Construction loans to developers were limited to an 80% loan-to-completed-appraised value ratio for homes that were under contract for purchase and a 70% loan-to-completed-appraised value ratio for loans where no buyer had been identified. The interest rates are based on and adjust with the prime rate of interest, and are for terms of up to two years. 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 were honored for a period of up to one year, giving our customers the ability to secure new borrowing relationships. The builder loan portfolio as of September 30, 2012 is $7.6 million, which represents a 51% decrease from September 30, 2011. The portfolio is considered to be in runoff.

Prior to August 31, 2011, before making a commitment to fund a construction loan, the Association required an appraisal of the property by an independent licensed appraiser. The Association generally reviewed and inspected each property before disbursement of funds during the term of the construction loan.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Association may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. This is more likely to occur when home prices are falling, like our current economic environment.

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Loan Originations, Purchases, Sales, Participations and Servicing. Lending activities are conducted primarily by the Association’s loan personnel (all of whom are salaried employees) operating at our main and branch office locations and at our loan production offices. All loans that the Association originates are underwritten pursuant to its policies and procedures, which are generally consistent with Fannie Mae underwriting guidelines to the extent applicable, subject to the discussion below. The Association originates both adjustable-rate and fixed-rate loans and advertises extensively throughout its market area. Its ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by current market interest rates as well as anticipated future market interest rates. The Association’s loan origination and sales activity may be adversely affected by a rising interest rate environment or economic recession, which typically results in decreased loan demand. Most of the Association’s residential real estate mortgage loan originations are generated by its in-house loan representatives, by referrals from existing or past customers, by referrals from local builders and real estate brokers, from calls to its telephone call center and from the internet. From 2005 to October 2010, the Association maintained a relationship with one mortgage broker, which is affiliated with a national builder.

The Association decides whether to retain the loans that it originates, sell loans in the secondary market or securitize loans after evaluating current and projected market interest rates, its interest rate risk objectives, its liquidity needs and other factors. The Association sold $11.4 million of residential real estate mortgage loans (all fixed-rate loans, with 15- to 30-year terms) during the fiscal year ended September 30, 2012. As described in "Residential Real Estate Mortgage Loans", 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. Accordingly, the Association’s ability to reduce interest rate risk via our traditional loan sales of newly originated longer-term fixed rate residential loans is limited until either the Association changes its loan origination processes or Fannie Mae, Freddie Mac or other market participants revise their loan eligibility standards. While we have not changed our traditional underwriting standards, during the fiscal year ended September 30, 2012, the Association reclassified a pool of long-term fixed rate loans from the portfolio of loans held for investment and investment banking representatives were engaged to offer those loans for sale, on a servicing retained basis, as non-agency whole loans in the secondary market. The balance of loans held for sale was $124.5 million at September 30, 2012 and included $9.6 million of loans originated pursuant to the stipulations of Fannie Mae's HARP II. The fixed-rate mortgage loans that the Association originated and retained during the fiscal year ended September 30, 2012 consisted primarily of loans with 30-year terms.

Historically, the Association has retained the servicing rights on all residential real estate mortgage loans that it has sold, and intends to continue this practice in the future. At September 30, 2012, the Association serviced loans owned by others with a principal balance of $3.81 billion, including $6.3 million of loans sold to Fannie Mae remain subject to recourse. All recourse sales occurred prior to the year 2000. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. The Association retains a portion of the interest paid by the borrower on the loans it services as consideration for its servicing activities. The Association did not enter into any loan participations during the fiscal year ended September 30, 2012 and does not expect to do so in the near future.

Loan Approval Procedures and Authority. The Association’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by its board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the property that will secure the loan. To assess the borrower’s ability to repay, the Association reviews the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower.

The Association’s policies and loan approval limits are established by its board of directors. The Association’s Board of Directors has delegated authority to its Executive Committee (consisting of the Association’s Chief Executive Officer and two directors) to review and assign lending authorities to certain individuals of the Association to consider and approve loans within their designated authority. Residential real estate mortgage loans and construction loans in amounts above $625,000 require the approval of two individuals with designated underwriting authority. Loans in amounts below $625,000 require the approval of one individual with designated underwriting authority.

The Association also maintains automated underwriting systems for point-of-sale approvals of residential real estate mortgage loans. Applications for loans that meet certain credit and income criteria may receive a credit approval subject to an appraisal of the subject property.

The Association requires independent third-party appraisals of real property. Appraisals are performed by independent licensed appraisers.

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Non-performing Assets and Restructured Loans. Within 15 days of a borrower’s delinquency, the Association attempts personal, direct contact with the borrower to determine the reason for the delinquency, to ensure that the borrower correctly understands the terms of the loan and to emphasize the importance of making payments on or before the due date. If necessary, subsequent late charges and delinquent notices are issued and the borrower’s account will be monitored on a regular basis thereafter. The Association also mails system-generated reminder notices on a monthly basis. When a loan is more than 30 days past due, the Association attempts to contact the borrower and develop a plan of repayment. By the 90^th day of delinquency, the Association may recommend foreclosure. By this date, if a repayment agreement has not been established, or if an agreement is established but is subsequently broken, the borrower’s credit file is reviewed and, if considered necessary, the loan will be evaluated for impairment. For further discussion on evaluating loans for impairment, see Note 5. LOANS AND ALLOWANCE FOR LOAN LOSSES. A summary report of all loans 30 days or more past due is provided to the Association’s board of directors.

Loans are placed in non-accrual status when they are contractually 90 days or more past due or if collection of principal or interest in full is in doubt. Loans modified in troubled debt restructurings that were in non-accrual status prior to the restructurings remain in non-accrual status for a minimum of six months. Beginning with the quarter ended March 31, 2012, home equity loans and lines of credit which are subordinate to a first mortgage lien where the customer is seriously delinquent, are also placed in non-accrual status. Beginning in the quarter ended September 30, 2012, loans in Chapter 7 bankruptcy status where all borrowers have been discharged from their mortgage obligation are also placed in non-accrual status. Interest on loans in accrual status, including certain loans individually reviewed for impairment, is recognized in interest income as it accrues, on a daily basis. Accrued interest on loans in non-accrual status is reversed by a charge to interest income and income is subsequently recognized only to the extent cash payments are received. Cash payments on loans in non-accrual status are applied to the oldest scheduled, unpaid payment first. Cash payments on loans with a partial charge-off are applied fully to principal, then to recovery of the charged off amount prior to interest income being recognized. A non-accrual loan is generally returned to accrual status when contractual payments are less than 90 days past due. However, a loan may remain in nonaccrual status when collectability is uncertain, such as a troubled debt restructuring that has not met minimum payment requirements, a loan with a partial charge-off, an equity loan or line of credit with a delinquent first mortgage greater than 90 days, or a loan in Chapter 7 bankruptcy status where all borrowers have been discharged of their obligation. The number of days past due is determined by the number of days the oldest scheduled payment remains unpaid.

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The table below sets forth the recorded investments and categories of our non-performing assets and troubled debt restructurings at the dates indicated.



	September 30,
	2012			2011			2010			2009			2008
				(Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential non-Home Today	$	105,780		$	125,014		$	135,109		$	99,576		$	43,717
Residential Home Today	41,087			69,602			91,985			84,284			63,362
Home equity loans and lines of credit(1)(2)	35,316			36,872			54,481			59,762			54,856
Construction	377			3,770			4,994			11,553			10,773
Consumer and other loans	—			—			1			1			—
Total non-accrual loans(3)(4)(5)(6)	182,560			235,258			286,570			255,176			172,708
Real estate owned	19,647			19,155			15,912			17,697			14,108
Other non-performing assets	—			—			—			—			—
Total non-performing assets	$	202,207		$	254,413		$	302,482		$	272,873		$	186,816
Ratios:
Total non-accrual loans to total loans	1.77		%	2.37		%	3.08		%	2.74		%	1.87		%
Total non-accrual loans to total assets	1.58		%	2.16		%	2.59		%	2.41		%	1.60		%
Total non-performing assets to total assets	1.76		%	2.34		%	2.73		%	2.57		%	1.73		%
Troubled debt restructurings (not included in non-accrual loans above):
Real estate loans:
Residential non-Home Today	$	66,988		$	50,841		$	39,167		$	21,278		$	640
Residential Home Today	57,168			67,240			47,601			20,817			225
Home equity loans and lines of credit(1)	9,761			2,171			3,430			2,301			—
Construction	613			863			—			—			—
Consumer and other loans	—			—			—			—			—
Total(7)	$	134,530		$	121,115		$	90,198		$	44,396		$	865

______________________


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


(2)	The totals at September 30, 2012 include $8.8 million of performing home equity lines of credit included in non-accrual, pursuant to regulatory guidance regarding senior lien delinquency issued in January 2012.

(3)

At September 30, 2012, 2011, and 2010 includes $47.7 million, $16.5 million, and $32.2 million respectively, in troubled debt restructurings which are current but included with non-accrual loans for a minimum period of six months from the restructuring date due to their non-accrual status prior to restructuring or because they have been partially charged off. At the fiscal year ends prior to September 30, 2010, troubled debt restructurings that would have remained in non-accrual due to their accrual status prior to restructuring were not material and therefore were not included with non-accrual loans at those reporting dates.


(4)	Includes $39.1 million, $28.6 million, $12.3 million, $1.9 million, and $260 thousand in troubled debt restructurings that are 90 days or more past due as of September 30, 2012, 2011, 2010, 2009, and 2008, respectively.


(5)	During the quarter ended December 31, 2011, in accordance with an Office of the Comptroller of the Currency ("OCC") directive, our specific valuation allowance (which had a balance of $55.5 million as of September 30, 2011) were charged off, which reduced the balance of non-accrual loans.


(6)	At September 30, 2012, the recorded investment in non-accrual status loans includes $30.6 million of performing loans in Chapter 7 bankruptcy status where all borrowers have been discharged of their obligation.


(7)	Beginning in the quarter ended September 30, 2012, $20.5 million of accruing, performing loans in Chapter 7 bankruptcy status, where at least one borrower has been discharged of their obligation, are reported as troubled debt restructurings per the OCC Bank Accounting Advisory Series ("BAAS") interpretive guidance issued in July 2012.

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The gross interest income that would have been recorded during the year ended September 30, 2012 on non-accrual loans if they had been accruing during the entire period and troubled debt restructurings if they had been current and performing in accordance with their original terms during the entire period was $17.1 million. The interest income recognized on those loans included in net income for the year ended September 30, 2012 was $11.3 million.

At September 30, 2012, 2011, 2010, 2009 and 2008 respectively, the recorded investment of impaired loans includes $137.3 million, $129.1 million, $98.8 million, $50.8 million, and $5.2 million of accruing loans of which $134.5 million, $121.1 million, $90.2 million, $44.4 million, and $0 are troubled debt restructurings and $2.8 million, $8.0 million, $8.6 million, $6.4 million, and $5.2 million, respectively, of loans that are returned to accrual status when contractual payments are less than 90 days past due. These loans continue to be individually evaluated for impairment until contractual payments are less than 30 days past due. At September 30, 2012, 2011, 2010, 2009, and 2008, respectively, the recorded investment of non-accrual loans includes $21.0 million, $24.6 million, $44.7 million, $87.2 million, and $61.6 million that are not included in the recorded investment of impaired loans because they are included in loans collectively evaluated for impairment.

The level of loan modifications has increased, resulting in $221.4 million of total (accrual and non-accrual) troubled debt restructurings recorded at September 30, 2012, a $55.2 million increase from September 30, 2011. Among other activity, the change includes the addition of $70.9 million of loans in Chapter 7 bankruptcy status, where at least one borrower has been discharged of their obligation, being reported as troubled debt restructurings per the OCC Bank Accounting Advisory Series (BAAS) interpretive guidance issued in July 2012, and charging off of $7.7 million related to the specific valuation allowance ("SVA") balance on TDRs as of September 30, 2011 in accordance with an OCC directive. Of the $221.4 million of troubled debt restructurings recorded at September 30, 2012, $118.0 million is in the residential, non-Home Today portfolio and $81.9 million is in the Home Today portfolio.

Debt restructuring is a method being increasingly used to help families keep their homes and preserve our neighborhoods. This involves making changes to the borrowers’ loan terms through interest rate reductions, either for a specific period or for the remaining term of the loan; term extensions including those beyond that provided in the original agreement; principal forgiveness; capitalization of delinquent payments in special situations; or some combination of the above. These loans are measured for impairment based on the present value of expected future cash flows discounted at the effective interest rate of the original loan contract. Expected future cash flows include a discount factor representing a potential for default. Any shortfall is recorded as an individually evaluated general valuation reserve as part of the allowance for loan losses. We evaluate these loans using the expected future cash flows because we expect the borrower, and not liquidation of the collateral, to be the source of repayment for the loan. A loan modified as a troubled debt restructuring is reported as a troubled debt restructuring for a minimum of one year. After one year, a loan will no longer be included in the balance of troubled debt restructurings if the loan was modified to yield a market rate for loans of similar credit risk at the time of restructuring and the loan is not impaired based on the terms of restructuring agreement. No loans were removed from total troubled debt restructurings during the year ended September 30, 2012.

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The following table sets forth the recorded investments of accrual and non-accrual troubled debt restructurings, by the types of concessions granted as of September 30, 2012.



	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Bankruptcy		Total
	(In thousands)
Accrual
Residential non-Home Today	$	16,262	$	1,332	$	13,331	$	16,659	$	7,232	$	12,172	$	66,988
Residential Home Today	14,532		173		7,857		23,382		10,540		684		57,168
Home equity loans and lines of credit	76		633		813		243		384		7,612		9,761
Construction	—		613		—		—		—		—		613
Total	$	30,870	$	2,751	$	22,001	$	40,284	$	18,156	$	20,468	$	134,530
Non-Accrual, Performing
Residential non-Home Today	$	2,567	$	445	$	2,076	$	2,744	$	1,203	$	19,309	$	28,344
Residential Home Today	3,501		88		2,314		1,368		757		3,197		11,225
Home equity loans and lines of credit	29		13		—		6		—		8,125		8,173
Construction	—		—		—		—		—		—		—
Total	$	6,097	$	546	$	4,390	$	4,118	$	1,960	$	30,631	$	47,742
Non-Accrual, Non-Performing
Residential non-Home Today	$	3,210	$	1,025	$	1,699	$	1,384	$	1,003	$	14,380	$	22,701
Residential Home Today	3,944		99		3,820		2,308		663		2,667		13,501
Home equity loans and lines of credit	—		—		147		8		—		2,597		2,752
Construction	—		21		—		—		—		152		173
Total	$	7,154	$	1,145	$	5,666	$	3,700	$	1,666	$	19,796	$	39,127
Total Troubled Debt Restructurings
Residential non-Home Today	$	22,039	$	2,802	$	17,106	$	20,787	$	9,438	$	45,861	$	118,033
Residential Home Today	21,977		360		13,991		27,058		11,960		6,548		81,894
Home equity loans and lines of credit	105		646		960		257		384		18,334		20,686
Construction	—		634		—		—		—		152		786
Total	$	44,121	$	4,442	$	32,057	$	48,102	$	21,782	$	70,895	$	221,399

Troubled debt restructurings in accrual status are loans accruing interest and performing according to the terms of the restructuring. To be performing, a loan must be less than 90 days past due as of the report date. Non-accrual, performing status indicates that a loan was not accruing interest at the time of modification, continues to not accrue interest and is performing according to the terms of the restructuring, but has not been current for at least six months since its modification or is being classified as non-accrual per the OCC guidance on loans in Chapter 7 bankruptcy status, where all borrowers have been discharged of their obligation. Non-accrual, non-performing status includes loans that are not accruing interest because they are greater than 90 days past due and therefore not performing according to the terms of the restructuring.

Since August 2008, 43.3% of loans modified through the Association's restructuring program are for borrowers who are current on their loans but who request a modification due to a recent or impending event that has caused or will cause a temporary or permanent financial strain and who receive concessions that would otherwise not be considered.

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The recorded investment of troubled debt restructurings in accrual status as of September 30, 2012, separated based on modification date, is set forth in the following table.



	Reduction in Interest Rates		Payment Extensions		Forbearance or Other Actions		Multiple Concessions		Multiple Modifications		Bankruptcy		Total
	(In thousands)
Accruing Modifications Less Than One Year Old
Residential non-Home Today	$	6,692	$	258	$	994	$	6,774	$	2,855	$	3,283	$	20,856
Residential Home Today	1,117		—		548		1,657		3,780		70		7,172
Home equity loans and lines of credit	46		—		60		22		230		1,451		1,809
Construction	—		—		—		—		—		—		—
Total	$	7,855	$	258	$	1,602	$	8,453	$	6,865	$	4,804	$	29,837
Accruing Modifications Greater Than or Equal to One Year Old
Residential non-Home Today	$	9,570	$	1,074	$	12,337	$	9,885	$	4,377	$	8,889	$	46,132
Residential Home Today	13,415		173		7,309		21,725		6,760		614		49,996
Home equity loans and lines of credit	30		633		753		221		154		6,161		7,952
Construction	—		613		—		—		—		—		613
Total	$	23,015	$	2,493	$	20,399	$	31,831	$	11,291	$	15,664	$	104,693

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



	Loans Delinquent For
	30-89 Days			90 Days or Over			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At September 30, 2012
Real estate loans:
Residential non-Home Today
Ohio	181	$	19,301	436	$	43,871	617	$	63,172
Florida	32	5,974		258	30,873		290	36,847
Other	2	401		1	63		3	464
Total Residential non-Home Today	215	25,676		695	74,807		910	100,483
Residential Home Today
Ohio	208	15,068		519	26,604		727	41,672
Florida	7	542		21	913		28	1,455
Total Residential Home Today	215	15,610		540	27,517		755	43,127
Home equity loans and lines of credit(1)
Ohio	133	4,572		145	5,994		278	10,566
Florida	58	3,657		94	6,210		152	9,867
California	16	1,637		20	1,863		36	3,500
Other	27	2,020		43	2,520		70	4,540
Total Home equity loans and lines of credit	234	11,886		302	16,587		536	28,473
Construction	—	—		8	377		8	377
Other loans	—	—		—	—		—	—
Total	664	$	53,172	1,545	$	119,288	2,209	$	172,460

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	Loans Delinquent For
	30-89 Days			90 Days or Over			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At September 30, 2011
Real estate loans:
Residential non-Home Today
Ohio	204	$	20,315	529	$	62,340	733	$	82,655
Florida	37	8,438		272	55,700		309	64,138
Other	3	574		4	477		7	1,051
Total Residential non-Home Today	244	29,327		805	118,517		1,049	147,844
Residential Home Today
Ohio	213	18,395		634	57,664		847	76,059
Florida	11	1,135		25	2,321		36	3,456
Total Residential Home Today	224	19,530		659	59,985		883	79,515
Home equity loans and lines of credit(1)
Ohio	158	5,457		227	10,553		385	16,010
Florida	103	7,408		149	16,211		252	23,619
California	18	1,789		20	2,207		38	3,996
Other	36	2,771		81	7,550		117	10,321
Total Home equity loans and lines of credit	315	17,425		477	36,521		792	53,946
Construction	1	72		20	3,770		21	3,842
Other loans	—	—		—	—		—	—
Total	784	$	66,354	1,961	$	218,793	2,745	$	285,147



	Loans Delinquent For
	30-89 Days			90 Days or Over			Total
	Number	Amount		Number	Amount		Number	Amount
	(Dollars in thousands)
At September 30, 2010
Real estate loans:
Residential non-Home Today
Ohio	215	$	21,182	582	$	68,845	797	$	90,027
Florida	42	8,597		244	51,765		286	60,362
Other	5	902		4	991		9	1,893
Total Residential non-Home Today	262	30,681		830