Mortgage Portfolio Grew Despite Economic Headwinds

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 and nine months ended June 30, 2023.

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

“This year, we are celebrating our 85th year in business. Since 1938, we have seen many changes in the economy, but we are built to last, and are still seeing positives in our business,” said Chairman and CEO Marc A. Stefanski. “Our loan portfolio grew by more than $320 million this quarter, despite rising interest rates. The average credit score of our borrowers this fiscal year increased to 774, and 97 percent of our deposits are FDIC insured. Our 11 percent Tier 1 capital leverage ratio remains more than double the regulatory requirement, and we continue to find opportunities to expand our business and our product offerings.”

Highlights - Third Quarter Fiscal 2023

• Reported net income of $17.6 million
• Added $490 million of residential mortgage loans with an average yield of 5.69%
• Increased total deposits by $66 million
• Paid a $0.2825 dividend per share

The Company reported net income of $17.6 million for the quarter ended June 30, 2023, an increase of $1.7 million from $15.9 million for the quarter ended March 31, 2023. Results improved quarter over quarter primarily due to a decrease in non-interest expenses.

Net interest income decreased $0.5 million to $68.8 million for the quarter ended June 30, 2023 from $69.3 million for the quarter ended March 31, 2023. During the quarter, balances and yields on interest-earning assets increased, but were more than offset by an increase in the cost of funding. The interest rate spread was 1.50% for the quarter ended June 30, 2023 compared to 1.56% for the quarter ended March 31, 2023. The net interest margin was 1.75% for the quarter ended June 30, 2023 compared to 1.78% for the prior quarter.

During the quarter ended June 30, 2023, there was no provision for credit losses compared to a $1.0 million release of provision for the quarter ended March 31, 2023. The total allowance for credit losses increased $1.8 million, to $102.6 million, or 0.69% of total loans receivable, primarily due to an increase in loans held for investment. There was $1.8 million in net loan recoveries during the quarter ended June 30, 2023.

Total non-interest expense decreased $2.7 million to $52.9 million for the quarter ended June 30, 2023, from $55.6 million for the quarter ended March 31, 2023. The decrease consisted mainly of a $5.1 million decrease in salaries and employee benefits, partially offset by a $1.5 million increase in other expenses and $0.4 million increases in both marketing and property, equipment and software expenses. The decrease in salaries and employee benefits was primarily due to a reassessment and reduction of the accrual for discretionary incentive payments as well as a decrease in associate count due to natural attrition. The increase in other expenses related primarily to one-time public relations and event costs for the Association's 85th anniversary celebration and increases in appraisal and other loan-related expenses.

Total assets increased by $333.3 million, or 2%, to $16.59 billion at June 30, 2023 from $16.26 billion at March 31, 2023. The increase was mainly the result of new loan originations exceeding the total of loan sales and principal repayments and an increase in investment securities available for sale, partially offset by a decrease in other assets.

Investment securities available for sale increased $30.7 million, or 6%, to $513.3 million at June 30, 2023 from $482.6 million at March 31, 2023. During the quarter, $59.5 million of U.S. Treasury notes were purchased and pledged as collateral for initial margin requirements on swap contracts. This increase was partially offset by a $20.8 million decrease from principal repayments, net of purchases and premium or discount amortization, and a $7.9 million increase in unrealized losses on the investment securities portfolio.

Loans held for investment, net of allowance and deferred loan expenses, increased $320.4 million, or 2%, to $14.88 billion at June 30, 2023 from $14.56 billion at March 31, 2023.

Other assets decreased $49.4 million, or 31%, to $109.9 million at June 30, 2023 from $159.3 million at March 31, 2023. The decrease was primarily due to a decrease of $38.4 million in receivables for initial margin requirement on swap contracts. Additionally, there was a $13.4 million decrease in net deferred taxes, partially offset by a $2.9 million increase in interest receivable on swap contracts.

Compared to March 31, 2023, deposits increased by $66.2 million to $9.07 billion at June 30, 2023, which consists of brokered deposit increases of $111.1 million and retail deposits decreases of $44.9 million, or less than 1%, to $8.40 billion.

Borrowed funds increased $247.3 million to $5.45 billion at June 30, 2023 from $5.20 billion at March 31, 2023. The increase was primarily used to fund loan growth.

Highlights - Fiscal Year-To-Date 2023

• Reported net income of $55.7 million
• Added $1.3 billion of new residential mortgage loans with weighted average yield of 5.23%
• Grew net interest income by 11% compared to the same period in fiscal 2022
• Remained well capitalized, with a Tier 1 leverage ratio of 11.18%
• Paid a $0.8475 dividend per share

The Company reported net income of $55.7 million for the nine months ended June 30, 2023 compared to net income of $49.1 million for the nine months ended June 30, 2022. The $6.6 million increase was primarily due to an increase in net interest income and a decrease in provisions for credit losses offset by a decrease in non-interest income and an increase in non-interest expenses.

Net interest income increased by $21.3 million, or 11.1%, to $213.2 million for the nine months ended June 30, 2023, compared to $191.9 million for the nine months ended June 30, 2022, driven by loan growth and a higher interest rate environment. The interest rate spread was 1.60% for the nine months ended June 30, 2023 compared to 1.71% for the nine months ended June 30, 2022. The net interest margin was 1.82% for the nine months ended June 30, 2023 compared to 1.83% for the prior year period.

During the nine months ended June 30, 2023, there was a $2.0 million release of provision for credit losses compared to $1.0 million of provision expense for the nine months ended June 30, 2022. Net loan recoveries totaled $4.6 million during the nine months ended June 30, 2023 and $7.3 million during the prior year period. The total allowance for credit losses at June 30, 2023 was $102.6 million, or 0.69% of total loans receivable, compared to $99.9 million, or 0.70% of total loans receivable, at September 30, 2022 and $97.6 million, or 0.70% of total loans receivable, at June 30, 2022. The allowance for credit losses included $27.8 million, $27.0 million, and $28.1 million in liabilities for unfunded commitments at June 30, 2023, September 30, 2022 and June 30, 2022, respectively.

Total loan delinquencies increased $1.6 million to $22.8 million, or 0.15% of total loans receivable, at June 30, 2023 from $21.2 million, or 0.16% of total loans, at September 30, 2022. Non-accrual loans decreased $5.1 million to $30.5 million, or 0.20% of total loans, at June 30, 2023 from $35.6 million, or 0.25% of total loans, at September 30, 2022.

Total non-interest income decreased $3.1 million, or 16.0%, to $16.3 million for the nine months ended June 30, 2023 from $19.4 million for the nine months ended June 30, 2022. The decrease consisted mainly of a $1.9 million decrease in fees and service charges and a $1.6 million decrease in net gain on the sale of loans. The decrease in net gain on the sale of loans was the result of less favorable secondary market pricing and a lower volume of loans sold. The decrease in fees and service charges was primarily due to a decrease in partnership income.

Total non-interest expenses increased $12.2 million, or 8.2%, to $161.6 million for the nine months ended June 30, 2023, from $149.4 million for the nine months ended June 30, 2022 and included increases of $2.0 million in salaries and employee benefits, $4.4 million in marketing costs, and $3.2 million in federal ("FDIC") insurance premiums and assessments. Additionally, there was a $1.2 million increase in pension expense, reported in other expenses, related to net actuarial gains and losses that are reassessed each year. FDIC premiums increased due to growth in deposits and a two basis point increase in FDIC assessment rates that went into effect on January 1, 2023.

Total assets increased by $805.1 million, or 5%, to $16.59 billion at June 30, 2023 from $15.79 billion at September 30, 2022. The increase was mainly the result of new loan originations exceeding the total of loan sales and principal repayments, a $55.4 million increase in investment securities available for sale and an increase in cash and cash equivalents.

Cash and cash equivalents increased $66.6 million, or 18%, to $436.2 million at June 30, 2023 from $369.6 million at September 30, 2022.

Loans held for investment, net of allowance and deferred loan expenses, increased $626.6 million, or 4%, to $14.88 billion at June 30, 2023 from $14.26 billion at September 30, 2022. The residential mortgage loan portfolio increased $405.9 million, to $11.95 billion, and home equity loans and lines of credit increased $232.3 million, to $2.87 billion. Loan originations during the nine months ended June 30, 2023 included $1.31 billion of residential mortgage loans and $1.24 billion of equity loans and lines of credit compared to $2.91 billion of residential mortgage loans and $1.60 billion of equity loans and lines of credit originated during the nine months ended June 30, 2022. Total originations include residential mortgage loans acquired from strategic partners. The decrease in originations was primarily due to a generally increasing interest rate environment, resulting in minimal refinance activity. Mortgage loan originations included 89% purchases and 36% adjustable rate loans for the nine months ended June 30, 2023.

Deposits increased $148.1 million, or 2%, to $9.07 billion at June 30, 2023 from $8.92 billion at September 30, 2022. The increase was the result of a $224.0 million increase in certificates of deposit ("CDs") and a $150.8 million increase in savings accounts, partially offset by a $70.3 million decrease in money market deposit accounts and a $158.9 million decrease in checking accounts. There were $667.8 million in brokered deposits at June 30, 2023 compared to $575.2 million at September 30, 2022.

Borrowed funds increased $659.0 million, or 14%, to $5.45 billion at June 30, 2023 from $4.79 billion at September 30, 2022. The increase was primarily used to fund loan growth. The total balance of borrowed funds at June 30, 2023, all from the FHLB, included $243.1 million of overnight advances, $1.58 billion of term advances with a weighted average maturity of approximately 2.3 years, and $3.60 billion of term advances, aligned with interest rate swap contracts, with a remaining weighted average effective maturity of approximately 3.9 years. Additional borrowing capacity at the FHLB was $3.25 billion at June 30, 2023.

Total shareholders' equity increased $41.8 million, or 2.3%, to $1.89 billion at June 30, 2023 from $1.84 billion at September 30, 2022. Activity reflects $55.7 million of net income and a $27.8 million net increase in accumulated other comprehensive income, reduced by $43.7 million for dividends paid and $5.0 million in repurchases of common stock. Additionally, there was $7.0 million of net positive adjustments related to our stock compensation and employee stock ownership plans. The change in accumulated other comprehensive income is primarily due to a net positive change in unrealized gains and losses on swap contracts. During the nine months ended June 30, 2023, a total of 361,869 shares of our common stock were repurchased at an average cost of $13.82 per share. The Company's eighth stock repurchase program allows for a total of 10,000,000 shares to be repurchased, with 5,191,951 shares remaining to be repurchased at June 30, 2023.

The Company declared and paid a quarterly dividend of $0.2825 per share during each of the quarters of fiscal year 2023. 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 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 11, 2023 member vote, the MHC has the approval to waive receipt of up to $1.13 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 11, 2024). The MHC has filed a notice with, and a request for non-objection from, the Federal Reserve Bank of Cleveland for the proposed dividend waiver. Both the non-objection from the Federal Reserve Bank and the timing of the non-objection are unknown at this point. The MHC has conducted the member vote to approve the dividend waiver each of the past ten years under Federal Reserve regulations and for each of those ten years, approximately 97% of the votes cast were in favor of the waiver.

The Company operates under the capital requirements for the standardized approach of the Basel III capital framework for U.S. banking organizations (“Basel III Rules”). At June 30, 2023 all of the Company's capital ratios substantially exceed the amounts required for the Company to be considered "well capitalized" for regulatory capital purposes. The Company's Tier 1 leverage ratio was 11.18%, its Common Equity Tier 1 and Tier 1 ratios were each 20.01% and its total capital ratio was 20.75%.

Presentation slides as of June 30, 2023 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning July 28, 2023. 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 85^th anniversary in May 2023. 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, four lending offices in Central and Southern Ohio, and 16 full service branches throughout Florida. As of June 30, 2023, the Company’s assets totaled $16.59 billion.

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