TFS Financial Corporation Remains Strong, Stable and Safe During an Uncertain Time

TFS Financial Corporation 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 nine months ended June 30, 2020.

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

The Company reported net income of $26.8 million for the quarter ended June 30, 2020, compared to net income of $18.3 million for the quarter ended June 30, 2019. Net income of $69.7 million was reported for the nine months ended June 30, 2020, compared to net income of $58.7 million for the nine months ended June 30, 2019. The increase in net income is the result of a combination of higher net gain on the sale of loans, lower non-interest expense and a lower effective tax rate partially offset by lower net interest income and an increase in the provision for loan losses. Additionally, gain from the sale of commercial property, recognized earlier in the year, contributed to the increase in net income for the current nine month period.

"During the quarter, Third Federal's performance hasn't missed a beat," said Chairman and CEO Marc A. Stefanski. "We continue to adapt to remain strong, stable and safe and maintain the highest level of service to our customers. We have focused on operating efficiently and managing expenses, as our non-interest expense ratio of 1.20% was the lowest it has been since we went public in 2007. At the same time, we have been able to meet the demand of a booming mortgage market. We originated over $1.2 billion in first and second mortgage loans. This is the highest number of originations in a single quarter in 15 years. Our company remains as resilient and productive as ever and I remain grateful for the continued support of our customers, associates, the communities we serve, and our shareholders."

Loan originations continued at a strong pace with total first mortgage loan originations of $870.5 million and $2.20 billion for the quarter and nine months ended June 30, 2020, respectively, compared to $502.1 million and $1.17 billion for the prior year periods. We sold $638.2 million of fixed-rate loans and recorded related gains of $16.9 million during the nine months ended June 30, 2020, as we took advantage of the high origination levels, low interest rates and attractive FNMA loan sale prices, while also managing our interest rate risk.

Net interest income was $62.9 million for the quarter ended June 30, 2020 and $65.5 million for the quarter ended June 30, 2019. Net interest income decreased by $9.0 million, or 4.5%, for the nine months ended June 30, 2020, to $192.1 million, from $201.1 million for the nine months ended June 30, 2019. The decrease is primarily attributable to compression in the interest margin. Growth occurred in the averages of both interest-earnings assets, primarily loans, and interest-bearing liabilities, but the yields on interest-earning assets decreased to a greater extent than the cost of funding. The interest rate spread was 1.60% and 1.62% for the three and nine months ended June 30, 2020, respectively, compared to 1.70% and 1.76% for the three and nine months ended June 30, 2019. The net interest margin was 1.74% and 1.79% for the three and nine months ended June 30, 2020 compared to 1.90% and 1.95% for the three and nine months ended June 30, 2019.

There was no provision for loan losses recorded during the quarter ended June 30, 2020 compared to a credit of $2.0 million for the quarter ended June 30, 2019. The provision for loan losses was $3.0 million during the nine months ended June 30, 2020 compared to a credit of $8.0 million during the nine months ended June 30, 2019. The allowance for loan losses was $45.6 million, or 0.34% of total loans receivable, at June 30, 2020, compared to $44.4 million, or 0.33% of total loans receivable, at March 31, 2020 and $38.9 million, or 0.29% of total loans receivable, at September 30, 2019. The increase in the allowance over the past two quarters is mainly due to the COVID-19 outbreak that led to increased unemployment and deterioration in the overall macro-economic environment. Of the total allowance for loan losses, $25.1 million was allocated to residential mortgage loans and $20.4 million was allocated to home equity loans and lines of credit at June 30, 2020 and $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. As a result of loan recoveries exceeding charge-offs, the Company reported net loan recoveries of $1.2 million and $3.7 million for the three and nine months ended June 30, 2020 and $1.0 million and $4.9 million for the three and nine months ended June 30, 2019.

Total loan delinquencies decreased $3.9 million to $31.5 million, or 0.23% of total loans receivable, at June 30, 2020 from $35.4 million, or 0.27% of total loans receivable, at September 30, 2019. Delinquencies at June 30, 2020 included a $0.6 million decrease in delinquencies on core residential mortgages, a $2.1 million decrease on home today residential mortgages and a $1.2 million decrease on home equity loans and lines of credit when compared to September 30, 2019. Non-accrual loans decreased $17.4 million to $53.9 million, or 0.40% of total loans, at June 30, 2020 from $71.3 million, or 0.54% of total loans, at September 30, 2019.

At June 30, 2020, there were $230.3 million, or 1.72% of total loans receivable, in COVID-19 forbearance plans compared to $36.0 million at March 31, 2020 and $231.4 million at May 12, 2020, as reported on the Company's Form 10-Q, filed May 15, 2020, for the period ending March 31, 2020. COVID-19 forbearance plans allow borrowers experiencing temporary financial hardships to defer a limited number of payments to a later point in time and catch up missed payments through a variety of repayment options. In accordance with regulatory guidance and the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the delinquency and accrual status of accounts in COVID-19 forbearance plans are generally frozen as of a specific date prior to entering a forbearance plan. The majority of our forbearance plans were current at the measurement date with interest income accruing throughout the term of their forbearance and, therefore, are not included in reported delinquency or non-accrual totals.

Total troubled debt restructurings decreased $14.2 million, to $143.2 million at June 30, 2020, from $157.4 million at September 30, 2019. COVID-19 forbearance plans are not generally classified as troubled debt restructurings.

Non-interest income increased $10.2 million to $15.3 million for the quarter ended June 30, 2020 from $5.1 million for the quarter ended June 30, 2019. The increase primarily related to a $10.3 million increase in the net gain on sale of loans to $10.8 million during the quarter ended June 30, 2020 compared to $0.5 million during the quarter ended June 30, 2019. Non-interest income increased $21.5 million to $36.2 million for the nine months ended June 30, 2020 from $14.7 million for the nine months ended June 30, 2019. The increase included a $15.8 million increase in net gain on the sale of loans, to $16.9 million during the nine months ended June 30, 2020 from $1.1 million during the nine months ended June 30, 2019, and the Company's portion of net gain, $4.3 million, on commercial property sold by a partially owned subsidiary of the Company during the first quarter of the current fiscal year.

Non-interest expense decreased $5.1 million for the quarter ended June 30, 2020 and decreased $6.9 million for the nine months ended June 30, 2020, from the corresponding prior year periods. The decreases primarily related to the reduction in marketing expenses, as media campaigns supporting our lending activities were temporarily reduced following the COVID-19 outbreak.

Total income tax expense increased $2.0 million, to $6.5 million, for the quarter ended June 30, 2020 from $4.5 million for the quarter ended June 30, 2019, reflecting the higher level of pre-tax income during the more recent period. Total income tax expense decreased $2.6 million to $13.9 million for the nine months ended June 30, 2020 from $16.5 million for the nine months ended June 30, 2019. The decrease encompasses the impact of a CARES Act provision, which permits a carry back of net tax operating losses to years taxed at higher rates, resulting in a current fiscal year tax benefit of $3.6 million.

Total assets increased by $292.4 million, or 2.01%, to $14.83 billion at June 30, 2020 from $14.54 billion at September 30, 2019. This change was mainly the result of growth in our loan portfolio during the current fiscal year and, to a lesser extent, increases in cash and cash equivalents, Federal Home Loan Bank stock and prepaid expenses and other assets.

The combination of cash and cash equivalents increased $54.2 million, or 19.70% to $329.3 million at June 30, 2020 from $275.1 million at September 30, 2019 to improve liquidity.

The combination of loans held for investment, net of allowance and deferred loan expenses, and mortgage loans held for sale increased $227.2 million to $13.43 billion at June 30, 2020 from $13.20 billion at September 30, 2019. The home equity loans and lines of credit portfolio increased $109.2 million during the nine months ended June 30, 2020. The residential core mortgage loan portfolio, including loans held for sale, increased $135.5 million during the nine months ended June 30, 2020 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. Commitments originated for home equity loans and lines of credit were $1.07 billion for the nine months ended June 30, 2020 and $1.28 billion for the nine months ended June 30, 2019. Total first mortgage loan originations were $2.20 billion for the nine months ended June 30, 2020, of which 45% were adjustable-rate mortgages and 9% were fixed-rate mortgages with terms of 10 years or less. Total first mortgage loan originations were $1.17 billion for the nine months ended June 30, 2019, of which 45% were adjustable-rate mortgages and 5% were fixed-rate mortgages with terms of 10 years or less. During the nine months ended June 30, 2020, $638.2 million of fixed-rate loans were sold, including $43.2 million in contracts pending settlement, resulting in a pre-tax gain of $16.9 million. During the nine months ended June 30, 2019, $85.1 million of fixed-rate loans were sold resulting in a pre-tax gain of $1.1 million.

The amount of Federal Home Loan Bank stock owned increased $34.9 million to $136.8 million at June 30, 2020 from $101.9 million at September 30, 2019, as a result of stock ownership requirements of the FHLB.

Other assets increased $29.0 million to $117.0 million at June 30, 2020 from $88.0 million at September 30, 2019. The increase related primarily to the current year adoption of amended lease accounting guidance, which, as of June 30, 2020, added a $16.3 million right-of-use asset, net of amortization, to the balance sheet, and a $9.3 million increase in current and deferred tax assets.

Deposits increased $463.7 million, or 5.3%, to $9.23 billion at June 30, 2020 from $8.77 billion at September 30, 2019. The increase was the result of a $261.3 million increase in our certificates of deposit ("CDs"), $49.1 million of growth in our money market deposit accounts, a $120.7 million increase in our checking accounts and a $32.6 million increase in our savings accounts for the nine months ended June 30, 2020. Total deposits include $553.9 million and $507.8 million of brokered CDs at June 30, 2020 and September 30, 2019, respectively.

Borrowed funds, all from the FHLB, decreased $143.8 million, to $3.76 billion at June 30, 2020 from $3.90 billion at September 30, 2019. This increase reflects a combination of a net $325.0 million increase in 90 day advances that were utilized for longer term interest rate swap contracts, $250.0 million of new long-term advances, partially offset by $274.4 million in maturing long-term advances and a $444.4 million reduction in overnight and other short-term advances.

Total shareholders' equity decreased $41.3 million to $1.66 billion at June 30, 2020 from $1.70 billion at September 30, 2019. During the nine months ended June 30, 2020, other comprehensive income decreased by $76.6 million, primarily due to the net impact of changes in unrealized gains and losses on our swap contracts and available for sale investment securities. 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 and $41.4 million of quarterly dividends was partially offset by $69.7 million of net income and $7.4 million of adjustments related to our stock compensation and employee stock ownership plans. No shares of our common stock were repurchased during the three months ended June 30, 2020. During the nine months ended June 30, 2020, a total of 211,000 shares were repurchased at an average cost of $17.06 per share.

The Company declared and paid a quarterly dividend of $0.28 during each of the second and third fiscal quarters of 2020 and paid a $0.27 quarterly dividend during each the fourth fiscal quarter of 2019 and the first fiscal quarter of 2020. 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 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. At a July 14, 2020 special meeting of members of the MHC, the members of the MHC (depositors and certain loan customers of the Association) voted to approve the MHC's proposed waiver of dividends, aggregating up to $1.12 per share, on the Company's common stock during the 12 months subsequent to the members' approval (i.e., through July 14, 2021), to be declared at the discretion of the Company's board of directors. The members approved the waiver by casting 63% of the eligible votes, with 97% of the votes cast, or 61% of the total eligible votes, voting in favor of the waiver. The MHC has filed a notice with, and a request for non-objection from, the Federal Reserve Bank of Cleveland for the proposed dividend waivers. The MHC has conducted the member vote to approve the dividend waiver each of the past seven years under Federal Reserve regulations and for each of those seven 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"). In April 2020, the Association adopted the Simplifications to the Capital Rule ("Rule") which simplified certain aspects of the capital rule under Basil III. The impact of the Rule was not material to the Association's regulatory ratios. At June 30, 2020 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 10.25%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 18.73% and its total capital ratio was 19.29%. Additionally, the Company's Tier 1 leverage ratio was 11.82%, its Common Equity Tier 1 and Tier 1 ratios were each 21.62% and its total capital ratio was 22.18%. The current capital ratios of the Association reflect the dilutive impact of $57.0 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.

Susanne N. Miller, who has been with the Association since 1998, has been appointed the new Chief Accounting Officer of the Company. Paul J. Huml had served as both the Chief Financial and Accounting Officer since 2018, and will continue as CFO. Ms. Miller has served in various roles in the Company, including accounting manager since 2007. "On behalf of our Board, our management team and our associates, we welcome Susanne into her new responsibilities, and have confidence that her background and her experience with the Company have prepared her well for her new responsibilities," said Chairman and CEO Marc A. Stefanski.

Presentation slides as of June 30, 2020 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning July 31, 2020. These slides provide additional information with respect to the Company's response to COVID-19. 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 June 30, 2020, the Company's assets totaled $14.83 billion.

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