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TFS Financial Corporation Continues Focus on Growth

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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 three months and fiscal year ended September 30, 2019.

This press release features multimedia. View the full release here: https://www.businesswire.com/news/home/20191030006006/en/

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

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

The Company reported net income of $80.2 million for the fiscal year ended September 30, 2019, compared to net income of $85.4 million for the fiscal year ended September 30, 2018. The change was largely attributable to a decrease in net interest income, partially offset by a lower effective tax rate. Less impactful changes included a decrease in the credit to the loan loss provision, a decrease in non-interest income and an increase in non-interest expenses. The Company reported net income of $21.5 million for the three months ended September 30, 2019, compared to net income of $21.6 million for the three months ended September 30, 2018.

"Third Federal had a solid year of growth in our loan and deposit portfolios," said Chairman and CEO Marc A. Stefanski. "Our mortgage loan portfolio grew $317 million, including a 19% increase in home equity loan balances. At the same time, our deposits grew $275 million. Our disciplined strategy is focused on continuing to grow the company for sustained long-term success. We will remain focused on maintaining strong capital, combined with consistent asset growth, allowing us to drive long-term, sustainable earnings, and support cash dividends and strategic share repurchases."

Net interest income decreased by $15.5 million, or 5.5%, to $265.4 million for the fiscal year ended September 30, 2019 compared to $280.9 million for the fiscal year ended September 30, 2018 and decreased by $4.7 million, or 6.7%, to $64.3 million for the three months ended September 30, 2019 from $69.0 million for the three months ended September 30, 2018. The average balance and yield of interest-earning assets increased $333.6 million and 20 basis points when comparing the fiscal year ended September 30, 2019 to the prior year, while the average balance and cost of interest-bearing liabilities grew by $369.3 million and 40 basis points. The opportunity to extend the duration of funding sources and the offering of competitive deposit rates during the current rate environment has contributed to the increased cost of funding. The interest rate spread was 1.65% and 1.73% for the three months and fiscal year ended September 30, 2019 compared to 1.85% and 1.93%, respectively, for the three months and fiscal year ended September 30, 2018. The net interest margin was 1.84% and 1.92% for the three months and fiscal year ended September 30, 2019 as compared to 2.03% and 2.08%, respectively, for the three months and fiscal year ended September 30, 2018.

The provision for loan losses was a credit of $10.0 million for the fiscal year ended September 30, 2019 compared to a credit of $11.0 million for the fiscal year ended September 30, 2018. The provision for loan losses was a credit of $2.0 million during both the three months ended September 30, 2019 and the three months ended September 30, 2018. Recoveries of loan amounts previously charged off, low levels of current loan charge-offs and reduced exposure from home equity lines of credit coming to the end of the draw period resulted in the loan provision credits during the periods. Gross loan charge-offs were $5.0 million for the fiscal year ended September 30, 2019 and $8.2 million for the fiscal year ended September 30, 2018, while loan recoveries were $11.5 million during the current fiscal year compared to $12.6 million during the prior fiscal year. As a result of loan recoveries exceeding charge-offs, the Company reported net loan recoveries of $6.5 million for the fiscal year ended September 30, 2019 and $4.5 million for the fiscal year ended September 30, 2018. The allowance for loan losses was $38.9 million, or 0.29% of total loans receivable, at September 30, 2019, compared to $39.3 million, or 0.30% of total loans receivable, at June 30, 2019 and $42.4 million, or 0.33% of total loans receivable, at September 30, 2018. Of the total allowance for loan losses, $24.0 million was allocated to residential mortgage loans and $14.9 million was allocated to home equity loans and lines of credit at September 30, 2019 and $21.5 million was allocated to residential mortgage loans and $20.9 million was allocated to equity loans and lines of credit at September 30, 2018. The decrease in the portion of the allowance allocated to home equity loans and lines of credit is attributable to the decrease in the end of draw exposure.

Credit performance continued to improve across our loan portfolios. Total loan delinquencies decreased $6.0 million to $35.4 million, or 0.27% of total loans receivable, at September 30, 2019 from $41.4 million, or 0.32% of total loans receivable, at September 30, 2018, and included a $2.2 million decrease in delinquencies on core residential mortgages, a $1.4 million decrease on home today residential mortgages and a $2.4 million decrease on home equity loans and lines of credit. Non-accrual loans decreased $6.5 million to $71.3 million, or 0.54% of total loans, at September 30, 2019 from $77.8 million, or 0.60% of total loans, at September 30, 2018. Troubled debt restructurings in non-accrual status were $60.5 million at September 30, 2019 and $62.6 million at September 30, 2018. Total troubled debt restructurings decreased $8.0 million, to $157.4 million at September 30, 2019, from $165.4 million at September 30, 2018.

Non-interest income decreased $1.0 million to $20.5 million for the fiscal year ended September 30, 2019 from $21.5 million for the fiscal year ended September 30, 2018. The decrease primarily related to a $1.5 million decrease in the net gain on sale of loans, partially offset by a $0.5 million increase in the proceeds and benefits of bank owned life insurance. Net gain on the sale of loans was $1.9 million during the fiscal year ended September 30, 2019 compared to $3.4 million during the fiscal year ended September 30, 2018. The prior year results benefited from a $277.4 million bulk sale of fixed-rate loans to a private investor.

Total non-interest expense increased $1.4 million to $193.7 million for the fiscal year ended September 30, 2019 compared to $192.3 million for the fiscal year ended September 30, 2018. The increase included a $2.7 million increase in salaries and employee benefits, consisting mainly of health insurance costs, partially offset by a $0.8 million decrease in federal deposit insurance premium and a $0.5 million decrease in office property and equipment. The discontinuation of a temporary surcharge on the federal deposit insurance premium more than offset increases due to deposit growth, reducing the premium during the current fiscal year.

Total income tax expense decreased by $13.8 million, to $22.0 million for the fiscal year ended September 30, 2019, from $35.8 million for the fiscal year ended September 30, 2018. The decrease in the expense was caused mainly by the impact of the Tax Cuts and Jobs Act which lowered our statutory federal tax rate to 21% in the current fiscal year from approximately 24.5% in the prior fiscal year. Total income tax expense for the fiscal year ended September 30, 2018 also included approximately $4.6 million of additional income tax expense for the re-measurement of our net deferred tax assets as a result of the tax rate reduction.

Total assets increased by $405.0 million, or 2.86%, to $14.54 billion at September 30, 2019 from $14.14 billion at September 30, 2018. This change was mainly the result of growth in our home equity line of credit portfolio during the current fiscal year and, to a lesser extent, increases in investment securities available for sale and prepaid expenses and other assets.

Investment securities available for sale increased $15.9 million, or 3.0%, to $547.9 million at September 30, 2019 from $532.0 million at September 30, 2018. The change included $158.0 million in purchases, $14.5 million of unrealized gain, $152.6 million in principal paydowns, and $4.1 million of net acquisition premium amortization during the fiscal year ended September 30, 2019.

The combination of loans held for investment, net of allowance and deferred loan expenses, and mortgage loans held for sale increased $327.5 million to $13.20 billion at September 30, 2019 from $12.87 billion at September 30, 2018. Growth in our home equity line of credit portfolio was partially offset by a decrease in our first mortgage loan portfolio. The home equity lines of credit provide a more effective loan product for managing the balance sheet and net interest margin, considering the relatively flat yield curve market that we are currently experiencing. The home equity loans and lines of credit portfolio increased $356.0 million during the fiscal year ended September 30, 2019. The residential core mortgage loan portfolio, including loans held for sale, decreased $24.8 million during the fiscal year ended September 30, 2019. Commitments originated for home equity loans and lines of credit were $1.69 billion for the fiscal year ended September 30, 2019 and $1.51 billion for the fiscal year ended September 30, 2018. Total first mortgage loan originations were $1.8 billion for the fiscal year ended September 30, 2019, of which 41% were adjustable-rate mortgages and 5% were fixed-rate mortgages with terms of 10 years or less. Total first mortgage loan originations were $2.3 billion for the fiscal year ended September 30, 2018, of which 49% were adjustable-rate mortgages and 10% were fixed-rate mortgages with terms of 10 years or less. During the fiscal year ended September 30, 2019, $117.3 million of fixed-rate loans were sold resulting in a pre-tax gain of $1.9 million. During the fiscal year ended September 30, 2018, $400.1 million of fixed-rate loans were sold resulting in a pre-tax gain of $3.4 million.

Other assets increased $43.7 million to $88.0 million at September 30, 2019 from $44.3 million at September 30, 2018. The increase related primarily to a $29.8 million increase in initial margin requirements on interest rate swap contracts and an $11.6 million increase in current and deferred tax assets between the two periods.

Deposits increased $274.8 million, or 3.2%, to $8.77 billion at September 30, 2019 from $8.49 billion at September 30, 2018. The increase was the result of a $97.5 million increase in our certificates of deposit ("CDs") and $382.5 million of growth in our money market deposit accounts, first introduced in July 2018, partially offset by a $154.4 million decrease in our savings accounts and a $50.9 million decrease in our checking accounts for the fiscal year ended September 30, 2019. Total deposits include $507.8 million and $670.1 million of brokered CDs at September 30, 2019 and September 30, 2018, respectively.

Borrowed funds, all from the FHLB, increased $181.3 million, to $3.90 billion at September 30, 2019 from $3.72 billion at September 30, 2018. This increase reflects a $1.03 billion increase in 90 day advances that were utilized for longer term interest rate swap contracts, partially offset by a $700.0 million reduction in overnight and other short-term advances and a $146.2 million reduction in long-term advances. At September 30, 2019, FHLB advances include $2.75 billion of 90 day advances which have an effective duration at inception of five to eight years, as a result of interest rate swap contracts, and $500.0 million of overnight and other short-term advances.

Total shareholders' equity decreased $61.7 million to $1.70 billion at September 30, 2019 from $1.76 billion at September 30, 2018. During the fiscal year ended September 30, 2019, other comprehensive income decreased by $92.6 million, primarily due to the net impact of changes in unrealized gains and losses on our swap contracts and available for sale investment securities and recognition of a $7.2 million actuarial loss, net of tax, related to our pension obligation. Unrealized losses on interest rate swap contracts represent the majority of the change and occur when current market interest rates are lower than those in effect at contract origination. The combined effect of the decrease in other comprehensive income, four quarterly dividends totaling $50.5 million and $9.1 million in repurchases of common stock was offset by $80.2 million of net income and $10.2 million of adjustments related to our stock compensation and employee stock ownership plans. During the three months ended September 30, 2019, a total of 64,000 shares of our common stock were repurchased at an average cost of $17.95 per share. During the fiscal year ended September 30, 2019, a total of 555,400 shares were repurchased at an average cost of $16.32 per share.

The Company declared and paid quarterly dividends of $0.27 during the fourth fiscal quarter of 2019 and $0.25 per share during each of the first three fiscal quarters of 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 each 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 $1.10 per share of possible dividends to be declared on the Company's common stock during the twelve months subsequent to the members' approval (i.e., through July 16, 2020), including a total of up to $0.83 during the three quarters ending December 31, 2019, March 31, 2020, and 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 September 30, 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 10.54%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 19.07% and its total capital ratio was 19.56%. Additionally, the Company's Tier 1 leverage ratio was 12.05%, its Common Equity Tier 1 and Tier 1 ratios were each 21.73% and its total capital ratio was 22.22%. The current capital ratios of the Association reflect the dilutive impact of $85 million of dividends that the Association paid to the Company, its sole shareholder, during the quarter ended December 31, 2018. Because of its intercompany nature, these dividends had no impact on the Company's capital ratios or its consolidated statement of condition.

Presentation slides as of September 30, 2019 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning October 31, 2019. 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 80th 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, eight lending offices in Central and Southern Ohio, and 16 full service branches throughout Florida. As of September 30, 2019, the Company's assets totaled $14.54 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;

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;

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

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