TFS Financial Corporation Accomplishes Another Quarter of Outstanding Growth

TFS Financial Corporation (NASDAQ: TFSL) (the "Company"), the holding company for Third Federal Savings and Loan Association of Cleveland (the "Association"), today announced results for the quarter ended December 31, 2019.

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Chairman and CEO Marc A. Stefanski (Photo: Business Wire)

The Company reported net income of $25.6 million for the quarter ended December 31, 2019, compared to net income of $20.3 million for the quarter ended December 31, 2018. The change was largely attributable to a gain from the sale of commercial properties, increased gain on the sale of loans and an increase in the credit for loan loss provision, partially offset by a decrease in net interest income.

"Third Federal continued to experience exceptional growth during the last three months,” said Chairman and CEO Marc A. Stefanski. “Our loan portfolio grew $278 million as lower interest rates attracted borrowers to refinance. We also continued to grow our customer base as retail deposits increased $235 million. We accomplished this growth with minimal impact to our net interest income. It was a great way to finish 2019, and we look forward to sharing our ongoing success with our customers, associates, communities and shareholders”.

Net interest income decreased $3.6 million, to $64.2 million for the quarter ended December 31, 2019 from $67.8 million for the quarter ended December 31, 2018. The average balance and yield of interest-earning assets increased $387.4 million and decreased five basis points, respectively, during the quarter ended December 31, 2019 when compared to the quarter ended December 31, 2018. The decrease in yield can be attributed to lower rates charged on home equity lines of credit during the more recent period, due to reductions in the Wall Street Journal Prime Rate, the index to which home equity lines of credit are linked. The average balance and cost of interest-bearing liabilities increased $458.1 million and 11 basis points, respectively, during the quarter ended December 31, 2019 when compared to the same period last year. The opportunity to grow retail deposits in a competitive rate environment contributed to the increased cost. The average balance and cost of certificates of deposit grew $153.4 million and 26 basis points, respectively, to $6.5 billion at 2.14% for the quarter ended December 31, 2019 from $6.4 billion at 1.88% for the quarter ended December 31, 2018. The interest rate spread for the quarter ended December 31, 2019 was 1.63% compared to 1.79% in the same quarter last year. The net interest margin for the quarter ended December 31, 2019 was 1.82% compared to 1.98% in the same quarter last year.

The provision for loan losses was a credit of $3.0 million for the quarter ended December 31, 2019 compared to a credit of $2.0 million for the quarter ended December 31, 2018. Continued recoveries of loan amounts previously charged off, low levels of current loan charge-offs, decreases in delinquency rates and reduced exposure from home equity lines of credit coming to the end of the draw period resulted in the loan provision credit. The Company closely monitors present and emerging risks within the loan portfolio when assessing the adequacy of the allowance for loan losses. The Company reported $1.4 million of net loan recoveries for the quarter ended December 31, 2019 and $1.5 million of net loan recoveries for the quarter ended December 31, 2018. Gross loan charge-offs were $1.6 million for the quarter ended December 31, 2019 and $1.3 million for the quarter ended December 31, 2018, while loan recoveries were $3.0 million in the current quarter and $2.8 million in the prior year quarter. The allowance for loan losses was $37.3 million, or 0.28% of total loans receivable, at December 31, 2019, compared to $38.9 million, or 0.29% of total loans receivable, at September 30, 2019 and $41.9 million, or 0.32% of total loans receivable, at December 31, 2018.

Non-accrual loans decreased $11.0 million to $60.3 million, or 0.45% of total loans, at December 31, 2019 from $71.3 million, or 0.54% of total loans, at September 30, 2019. The decrease consisted of a $3.8 million decrease in the residential core portfolio, a $0.9 million decrease in the Home Today portfolio and a $6.3 million decrease in the home equity loans and lines of credit portfolio. Improved performance within the portfolios and reclassifications to accruing status on loans modified in troubled debt restructurings, with sustained periods of performance, contributed to the changes.

Total loan delinquencies decreased $1.4 million to $34.0 million, or 0.25% of total loans receivable, at December 31, 2019 from $35.4 million, or 0.27% of total loans receivable, at September 30, 2019. The decrease in delinquencies consisted of a $0.6 million decrease in the residential core portfolio, a $0.4 million increase in the Home Today portfolio, and a $1.2 million decrease in the home equity loans and lines of credit portfolio.

Total troubled debt restructurings decreased $6.1 million at December 31, 2019, to $151.3 million from $157.4 million at September 30, 2019. Of the $151.3 million of troubled debt restructurings recorded at December 31, 2019, $76.4 million was in the residential core portfolio, $35.5 million was in the Home Today portfolio, and $39.4 million was in the home equity loans and lines of credit portfolio. The portion of total troubled debt restructurings included as part of non-accrual loans was $49.2 million at December 31, 2019 and $60.5 million at September 30, 2019.

Total non-interest income increased by $7.2 million, to $11.9 million, for the quarter ended December 31, 2019 from $4.7 million for the quarter ended December 31, 2018. The increase primarily related to a $2.8 million increase in the net gain on sale of loans and a $4.3 million net gain on the sale of the remaining commercial property held by a partially owned subsidiary of the Company, representing the Company's share of the gain. Loan sales totaled $208.5 million in principal balances at a $2.9 million net gain during the quarter ended December 31, 2019 compared to $20.7 million at a $0.1 million net gain during the quarter ended December 31, 2018.

Total income tax expense was $6.2 million for the quarters ended December 31, 2019 and December 31, 2018. The federal effective tax rate was 18.5% for the quarter ended December 31, 2019 compared to 20.0% for the quarter ended December 31, 2018. Excess tax benefits on stock options exercised are recognized in full at the time of activity and were the primary contributor to the change in the federal effective tax rate, totaling $0.4 million during the quarter ended December 31, 2019.

Total assets increased by $263.8 million, or 1.8%, to $14.81 billion at December 31, 2019 from $14.54 billion at September 30, 2019. This change was mainly the result of new loan originations and loan purchases exceeding the total of loan sales and principal repayments, combined with a net increase in the combination of cash and cash equivalents and investment securities, partially offset by decreases in premises, equipment and software, net and other assets.

The combination of cash and cash equivalents and investment securities increased $12.2 million, or 1.5%, to $835.2 million at December 31, 2019 from $823.0 million at September 30, 2019.

The combination of loans held for investment, net and mortgage loans held for sale increased $278.0 million, or 2.1%, to $13.48 billion at December 31, 2019 from $13.20 billion at September 30, 2019. Residential core mortgage loans, including those held for sale, increased $228.9 million during the quarter and included the opportunistic purchase of $230.3 million of fixed-rate residential mortgages, originated and serviced by the Association and sold in a prior year, from an investor seeking to manage their balance sheet, and sales of $208.5 million in fixed-rate residential mortgages, including the bulk sale of $99.0 million to a private investor. Total first mortgage loan originations were $750.6 million for the quarter ended December 31, 2019 and $383.8 million for the quarter ended December 31, 2018. The current period originations were 44% adjustable rate mortgages and 8% fixed-rate mortgages with terms of 10 years or less. The home equity loans and lines of credit portfolio increased $46.4 million during the quarter ended December 31, 2019. Commitments originated for home equity loans and lines of credit were $349.5 million for the quarter ended December 31, 2019 and $357.0 million for the quarter ended December 31, 2018.

Premises, equipment and software, net decreased $18.5 million, or 30.0%, to $43.1 million at December 31, 2019 from $61.6 million at September 30, 2019. The decrease included $18.1 million related to the sale of commercial properties described above.

Other assets decreased $8.6 million, or 9.8%, to $79.4 million at December 31, 2019 from $88.0 million at September 30, 2019. At December 31, 2019, an $18.4 million right of use asset related to the Company's operating leases was added to other assets due to the adoption of recently issued accounting guidance on the treatment of leases. This addition was more than offset by various decreases, none of which were individually significant.

Deposits increased by $234.5 million, or 2.7%, to $9.00 billion at December 31, 2019 from $8.77 billion at September 30, 2019. The increase in deposits was the result of a $184.5 million increase in our certificates of deposit ("CDs"), a $29.1 million increase in our checking accounts, and a $27.3 million increase in our money market accounts, offset by a $7.0 million decrease in our savings accounts during the quarter ended December 31, 2019. Total deposits include $501.4 million and $507.8 million of brokered CDs at December 31, 2019 and September 30, 2019, respectively.

Borrowed funds, all from the FHLB, decreased $13.3 million, to $3.89 billion at December 31, 2019 from $3.90 billion at September 30, 2019. This decrease consisted of a $100.0 million decrease in overnight and other short-term advances, offset by a $37.6 million increase in long term borrowings and a $50.0 million increase in 90 day advances that have an effective duration at inception of five to eight years as a result of interest rate swap contracts.

Total shareholders' equity increased $32.2 million, or 1.9%, to $1.73 billion at December 31, 2019 from $1.70 billion at September 30, 2019. Activity reflects $25.6 million of net income in the current fiscal year reduced by $0.4 million of repurchases of common stock and a quarterly dividend of $13.4 million. Other changes included $18.6 million of unrealized gain recognized in accumulated other comprehensive income and $1.7 million of adjustments related to our stock compensation and employee stock ownership plans. A total of 19,500 shares of our common stock were repurchased at an average cost of $18.37 per share during the quarter ended December 31, 2019. At December 31, 2019, there were 5,892,079 shares remaining to be purchased under the Company's eighth repurchase program.

The Company declared and paid a quarterly dividend of $0.27 per share during the quarter ended December 31, 2019. As a result of a mutual member vote, Third Federal Savings and Loan Association of Cleveland, MHC (the "MHC"), the mutual holding company that owns approximately 81% of the outstanding stock of the Company, was able to waive its receipt of its share of the dividend paid. Under current Federal Reserve regulations, the MHC is required to obtain the approval of its members every 12 months for the MHC to waive its right to receive dividends. As a result of a July 16, 2019 member vote and the subsequent non-objection of the Federal Reserve, the MHC has the approval to waive the receipt of up to a total of $1.10 per share of possible dividends to be declared on the Company's common stock, including up to $0.56 in dividends during the six months ending June 30, 2020. The MHC has conducted the member vote to approve the dividend waiver each of the past six years under Federal Reserve regulations and for each of those six years, approximately 97% of the votes cast were in favor of the waiver.

The Association operates under the capital requirements for the standardized approach of the Basel III capital framework for U.S. banking organizations (“Basel III Rules”). At December 31, 2019 all of the Association's capital ratios substantially exceed the amounts required for the Association to be considered "well capitalized" for regulatory capital purposes. The Association’s Tier 1 leverage ratio was 10.19%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 18.31% and its total capital ratio was 18.77%. Additionally, the Company's Tier 1 leverage ratio was 11.99%, its Common Equity Tier 1 and Tier 1 ratios were each 21.56% and its total capital ratio was 22.02%. The Association's current capital ratios reflect the dilutive impact of $57 million of dividends that the Association paid to the Company, its sole shareholder, during the quarter ended December 31, 2019. Because of its intercompany nature, these dividends had no impact on the Company's capital ratios or its consolidated statement of condition.

Judy Adam, the Chief Risk Officer of the Company, has announced that she will be retiring from employment in June 2020. Kitty Danckers, who has been with the Association since 1997 and has served in various roles including regional branch manager, manager of information services and operations support groups, and Chief Information Security Officer since 2016, will become the new Chief Risk Officer at that time. “Judy has been an integral part of our organization for 20 years, mentoring and leading with her strong business acumen and communication skills while in her role as the Chief Risk Officer since 2015,” said Chairman and CEO Marc A. Stefanski. “On behalf of our Board, our management team and our associates, I thank her and wish her the best in her retirement. We welcome Kitty into her new responsibilities, and have confidence that her background and her extensive experience in many areas of the Company have prepared her for her new role.”

Presentation slides as of December 31, 2019 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning January 31, 2020. The Company will not be hosting a conference call to discuss its operating results.

Third Federal Savings and Loan Association is a leading provider of savings and mortgage products, and operates under the values of love, trust, respect, a commitment to excellence and fun. Founded in Cleveland in 1938 as a mutual association by Ben and Gerome Stefanski, Third Federal’s mission is to help people achieve the dream of home ownership and financial security. It became part of a public company in 2007 and celebrated its 80^th anniversary in May, 2018. Third Federal, which lends in 25 states and the District of Columbia, is dedicated to serving consumers with competitive rates and outstanding service. Third Federal, an equal housing lender, has 21 full service branches in Northeast Ohio, seven lending offices in Central and Southern Ohio, and 16 full service branches throughout Florida. As of December 31, 2019, the Company’s assets totaled $14.81 billion.

Forward Looking Statements

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

• statements of our goals, intentions and expectations;
• statements regarding our business plans and prospects and growth and operating strategies;
• statements concerning trends in our provision for loan losses and charge-offs;
• statements regarding the trends in factors affecting our financial condition and results of operations, including asset quality of our loan and investment portfolios; and
• estimates of our risks and future costs and benefits.

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

• significantly increased competition among depository and other financial institutions;
• inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;
• general economic conditions, either globally, nationally or in our market areas, including employment prospects, real estate values and conditions that are worse than expected;
• the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets, and changes in estimates of the allowance for loan losses;
• decreased demand for our products and services and lower revenue and earnings because of a recession or other events;
• changes in consumer spending, borrowing and savings habits;
• adverse changes and volatility in the securities markets, credit markets or real estate markets;
• our ability to manage market risk, credit risk and operational risk
• our ability to access cost-effective funding
• legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements and changes related to our ability to pay dividends and the ability of Third Federal Savings, MHC to waive dividends;
• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board;
• the adoption of implementing regulations by a number of different regulatory bodies, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us;
• our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;
• our ability to retain key employees
• future adverse developments concerning Fannie Mae or Freddie Mac;
• changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the FRS and changes in the level of government support of housing finance;
• the continuing governmental efforts to restructure the U.S. financial and regulatory system;
• the ability of the U.S. Government to remain open, function properly and manage federal debt limits;
• changes in policy and/or assessment rates of taxing authorities that adversely affect us or our customers;
• changes in accounting and tax estimates;
• changes in our organization, or compensation and benefit plans and changes in expense trends (including, but not limited to trends affecting non-performing assets, charge-offs and provisions for loan losses);
• the inability of third-party providers to perform their obligations to us;
• a slowing or failure of the prevailing economic recovery; and
• cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
		December 31, 2019				September 30, 2019
ASSETS
Cash and due from banks		$	25,935			$	31,728
Other interest-earning cash equivalents		255,291				243,415
Cash and cash equivalents		281,226				275,143
Investment securities available for sale (amortized cost $553,039 and $550,605, respectively)		553,997				547,864
Mortgage loans held for sale, at lower of cost or market (none measured at fair value)		9,608				3,666
Loans held for investment, net:
Mortgage loans		13,458,379				13,189,516
Other loans		2,900				3,166
Deferred loan expenses, net		43,785				41,976
Allowance for loan losses		(37,292		)		(38,913		)
Loans, net		13,467,772				13,195,745
Mortgage loan servicing rights, net		7,142				8,080
Federal Home Loan Bank stock, at cost		101,858				101,858
Real estate owned, net		2,813				2,163
Premises, equipment, and software, net		43,092				61,577
Accrued interest receivable		40,222				40,822
Bank owned life insurance contracts		219,041				217,481
Other assets		79,420				87,957
TOTAL ASSETS		$	14,806,191			$	14,542,356
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits		$	9,000,920			$	8,766,384
Borrowed funds		3,889,649				3,902,981
Borrowers’ advances for insurance and taxes		99,391				103,328
Principal, interest, and related escrow owed on loans serviced		31,503				32,909
Accrued expenses and other liabilities		55,779				40,000
Total liabilities		13,077,242				12,845,602
Commitments and contingent liabilities
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding		—				—
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 280,127,221 and 279,962,777 outstanding at December 31, 2019 and September 30, 2019, respectively		3,323				3,323
Paid-in capital		1,736,322				1,734,154
Treasury stock, at cost; 52,191,529 and 52,355,973 shares at December 31, 2019 and September 30, 2019, respectively		(766,492		)		(764,589		)
Unallocated ESOP shares		(43,334		)		(44,417		)
Retained earnings—substantially restricted		849,929				837,662
Accumulated other comprehensive income (loss)		(50,799		)		(69,379		)
Total shareholders’ equity		1,728,949				1,696,754
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	14,806,191			$	14,542,356

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share and per share data)
		For the Three Months Ended
		December 31,
		2019				2018
INTEREST AND DIVIDEND INCOME:
Loans, including fees		$	115,225			$	112,491
Investment securities available for sale		2,864				3,124
Other interest and dividend earning assets		1,963				2,673
Total interest and dividend income		120,052				118,288
INTEREST EXPENSE:
Deposits		38,316				32,762
Borrowed funds		17,551				17,714
Total interest expense		55,867				50,476
NET INTEREST INCOME		64,185				67,812
PROVISION (CREDIT) FOR LOAN LOSSES		(3,000		)		(2,000		)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES		67,185				69,812
NON-INTEREST INCOME:
Fees and service charges, net of amortization		2,146				1,776
Net gain on the sale of loans		2,925				111
Increase in and death benefits from bank owned life insurance contracts		1,561				1,547
Other		5,298				1,242
Total non-interest income		11,930				4,676
NON-INTEREST EXPENSE:
Salaries and employee benefits		25,885				25,364
Marketing services		4,461				4,797
Office property, equipment and software		6,446				6,986
Federal insurance premium and assessments		2,619				2,766
State franchise tax		1,132				1,262
Other expenses		6,777				6,805
Total non-interest expense		47,320				47,980
INCOME BEFORE INCOME TAXES		31,795				26,508
INCOME TAX EXPENSE		6,153				6,175
NET INCOME		$	25,642			$	20,333
Earnings per share
Basic		$	0.09			$	0.07
Diluted		$	0.09			$	0.07
Weighted average shares outstanding
Basic		275,578,184				275,376,254
Diluted		277,888,588				277,073,317

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCES AND YIELDS (unaudited)
		Three Months Ended											Three Months Ended
		December 31, 2019											December 31, 2018
		Average Balance				Interest Income/ Expense				Yield/ Cost (1)			Average Balance				Interest Income/ Expense				Yield/ Cost (1)
		(Dollars in thousands)
Interest-earning assets:
Interest-earning cash equivalents		$	229,986			$	949			1.65	%		$	225,748			$	1,258			2.23	%
Investment securities		—				—				—	%		3,971				24				2.42	%
Mortgage-backed securities		545,729				2,864				2.10	%		537,050				3,100				2.31	%
Loans (2)		13,241,863				115,225				3.48	%		12,871,771				112,491				3.50	%
Federal Home Loan Bank stock		101,858				1,014				3.98	%		93,544				1,415				6.05	%
Total interest-earning assets		14,119,436				120,052				3.40	%		13,732,084				118,288				3.45	%
Noninterest-earning assets		489,200											386,086
Total assets		$	14,608,636										$	14,118,170
Interest-bearing liabilities:
Checking accounts		$	867,971			483				0.22	%		$	898,795			748				0.33	%
Savings accounts		1,490,074				3,024				0.81	%		1,286,543				2,178				0.68	%
Certificates of deposit		6,505,776				34,809				2.14	%		6,352,338				29,836				1.88	%
Borrowed funds		3,746,170				17,551				1.87	%		3,614,231				17,714				1.96	%
Total interest-bearing liabilities		12,609,991				55,867				1.77	%		12,151,907				50,476				1.66	%
Noninterest-bearing liabilities		273,002											192,504
Total liabilities		12,882,993											12,344,411
Shareholders’ equity		1,725,643											1,773,759
Total liabilities and shareholders’ equity		$	14,608,636										$	14,118,170
Net interest income						$	64,185										$	67,812
Interest rate spread (1)(3)										1.63	%										1.79	%
Net interest-earning assets (4)		$	1,509,445										$	1,580,177
Net interest margin (1)(5)						1.82		%									1.98		%
Average interest-earning assets to average interest-bearing liabilities		111.97		%									113.00		%
Selected performance ratios:
Return on average assets (1)						0.70		%									0.58		%
Return on average equity (1)						5.94		%									4.59		%
Average equity to average assets						11.81		%									12.56		%

(1)		Annualized.
(2)		Loans include both mortgage loans held for sale and loans held for investment.
(3)		Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)		Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5)		Net interest margin represents net interest income divided by total interest-earning assets.

 

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