Home Equity and Retail Deposit Growth Among the Highlights

TFS Financial Corporation (NASDAQ: TFSL) (the "Company", "we", "our"), the holding company for Third Federal Savings and Loan Association of Cleveland (the "Association"), today announced results for the quarter and fiscal year ended September 30, 2024.

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

“During the year, Third Federal capitalized on the strong growth in our home equity products, and earnings increased approximately 6% in 2024 from the prior year, to almost $80 million,” said Chairman and CEO Marc A. Stefanski. "We successfully navigated margin compression and reduced our expense-to-asset ratio from 1.30 to 1.20 percent through natural attrition and cost-management efforts. We are proud that much of our $745 million in deposit growth came through our retail branch system in Ohio and Florida. And, to further support Third Federal, our nearly 11% Tier 1 capital ratio keeps us strong, stable and safe.”

The Company reported net income of $18.2 million for the quarter ended September 30, 2024 compared to $20.0 million of net income for the quarter ended June 30, 2024. The decrease was mainly due to the change in the provision for credit losses and a decrease in net interest income between the two periods.

Net interest income decreased $0.6 million, or 0.9%, to $68.7 million for the quarter ended September 30, 2024 from $69.3 million for the quarter ended June 30, 2024. The change was primarily due to an increase in the average balance of total interest-bearing liabilities, primarily certificates of deposit, compared to a decrease in the average balance of total interest-earning assets, primarily cash equivalents. The interest rate spread and net interest margin held steady between the two quarters at 1.36% and 1.67%, respectively.

During the quarter ended September 30, 2024, there was a $1.0 million provision for credit losses compared to a $0.5 million release of provision for the quarter ended June 30, 2024. Net recoveries were $1.1 million for the quarter ended September 30, 2024 compared to $1.4 million for the previous quarter. The total allowance for credit losses increased $2.1 million during the quarter to $97.8 million, or 0.64% of total loans receivable, from $95.7 million, or 0.63% of total loans receivable, at June 30, 2024. The increase was mainly due to growth in loans held for investment, primarily the home equity loans and lines of credit portfolios. The total allowance for credit losses included a liability for unfunded commitments of $27.8 million and $28.2 million at September 30, 2024 and June 30, 2024, respectively.

Total assets increased by $55.8 million, or less than 1%, to $17.09 billion at September 30, 2024 from $17.03 billion at June 30, 2024. The increase was mainly due to increases in loans held for investment and prepaid expenses and other assets, partially offset by a decrease in cash and cash equivalents.

Cash and cash equivalents decreased $96.7 million, or 17%, to $463.7 million at September 30, 2024 from $560.4 million at June 30, 2024 due to normal fluctuations and liquidity management.

Loans held for investment, net of allowance and deferred loan expenses, increased $132.1 million, or less than 1%, to $15.32 billion at September 30, 2024 from $15.19 billion at June 30, 2024. During the quarter ended September 30, 2024, the combined balances of home equity loans and lines of credit increased $296.5 million and residential core mortgage loans decreased $160.4 million. Repayments and sales of residential mortgage loans held for investment outpaced originations during the quarter ended September 30, 2024. The volume of mortgage loan originations remains low due to a relatively high interest rate environment, resulting in minimal refinance activity.

Prepaid expenses and other assets increased $31.0 million, or 37%, to $114.1 million at September 30, 2024 from $83.1 million at June 30, 2024. This increase was primarily due to increases in the net deferred tax asset of $11.6 million, the funded status of the defined benefit plan of $6.5 million and the swap margin receivable, related to changes in the market values of swap instruments, of $6.1 million. Additionally, there was a $7.4 million decrease in uncleared wire transfer receipts, primarily loan repayments, between the periods compared. The change in the net deferred tax asset, which was a net liability at September 30, 2023, was primarily due to a decrease in the net unrealized gain or loss on swap instruments, which are recorded in other comprehensive income net of related tax effect.

Deposits increased $169.1 million, or 2%, to $10.20 billion at September 30, 2024, compared to $10.03 billion at June 30, 2024, consisting of a $277.3 million increase in primarily retail certificates of deposit ("CDs") and decreases of $58.8 million in savings accounts, $15.3 million in money market deposit accounts, and $35.5 million in checking accounts. The increase in retail deposits was achieved through competitive rate and enhanced product offerings, supported by marketing efforts.

Borrowed funds decreased $36.5 million to $4.79 billion at September 30, 2024 from $4.83 billion at June 30, 2024, as maturing borrowings were paid off with cash and partially replaced with retail deposits.

Accrued expenses and other liabilities decreased by $83.1 million, or 46%, to $97.8 million at September 30, 2024 from $180.9 million at June 30, 2024 primarily related to in-transit real estate tax payments that cleared during the quarter.

Fiscal Year 2024

The Company reported net income of $79.6 million for the fiscal year ended September 30, 2024, an increase of $4.3 million compared to net income of $75.3 million for the fiscal year ended September 30, 2023. The change was primarily due to an increase in non-interest income and a decrease in non-interest expense, partially offset by a decrease in net interest income.

Net interest income decreased $5.1 million, or 1.8%, to $278.5 million for the fiscal year ended September 30, 2024 compared to $283.6 million for the fiscal year ended September 30, 2023. The decrease in net interest income was primarily due to an increase in the cost of interest-bearing liabilities, mainly certificates of deposit, partially offset by an increase in the yield on interest-earning assets, primarily loans. The weighted average balance and cost of the certificates of deposit portfolio increased 88% and 127 basis points, respectively. Balance growth was driven both by new deposit accounts and balances that migrated from savings and checking accounts. Certificate of deposit accounts that matured and repriced into a higher interest rate environment contributed to the cost increase. The interest rate spread was 1.38% for the fiscal year ended September 30, 2024, a 19 basis point decrease from 1.57% for the fiscal year ended September 30, 2023. The net interest margin was 1.69% for the fiscal year ended September 30, 2024 compared to 1.80% for the prior year period.

During both the fiscal year ended September 30, 2024 and September 30, 2023, there was a $1.5 million release of provision for credit losses. Continued recoveries of loan amounts previously charged off and low levels of current loan charge-offs resulted in the release of provision. Net loan recoveries totaled $4.7 million for the fiscal year ended September 30, 2024 and $6.4 million for the same period in the prior year.

The total allowance for credit losses at September 30, 2024 was $97.8 million, or 0.64% of total loans receivable, compared to $104.8 million, or 0.69% of total loans receivable, at September 30, 2023. The decrease was mainly due to the October 1, 2023 adoption of accounting guidance related to accounting for troubled debt restructurings ("TDRs"), which resulted in a $10.2 million reduction to the allowance and a $7.9 million adjustment to retained earnings, net of tax. The decrease was partially offset by an increase in total expected loss estimates related to growth in loans held for investment, primarily in the home equity loans and lines of credit portfolios. The allowance for credit losses included $27.8 million and $27.5 million in liabilities for unfunded commitments at September 30, 2024 and September 30, 2023, respectively. Total loan delinquencies increased to $31.9 million, or 0.21% of total loans receivable, at September 30, 2024 from $28.6 million, or 0.19% of total loans receivable, at June 30, 2024 and $23.4 million, or 0.15% of total loans receivable, at September 30, 2023. Non-accrual loans totaled $33.6 million, or 0.22% of total loans receivable, at September 30, 2024, a decrease from $35.4 million, or 0.23% of total loans receivable, at June 30, 2024 and an increase from $31.9 million, or 0.21% of total loans receivable, at September 30, 2023.

Total non-interest income increased $3.3 million, or 15.4%, to $24.7 million for the fiscal year ended September 30, 2024, from $21.4 million for the fiscal year ended September 30, 2023, primarily due to a $2.2 million increase in net gain on the sale of loans and a $0.6 million increase in the yield on bank owned life insurance contracts. There were $247.4 million of residential mortgage loans, primarily long-term fixed-rate loans, sold during the fiscal year ended September 30, 2024, including those in contracts pending settlement at the end of the period, with a net gain on sale of $2.7 million. During the fiscal year ended September 30, 2023, $77.2 million of residential mortgage loans were sold with a net gain on sale of $0.5 million.

Total non-interest expense decreased $8.8 million, or 4.1%, to $204.3 million for the fiscal year ended September 30, 2024, from $213.1 million for the fiscal year ended September 30, 2023. The change included decreases of $5.6 million in marketing costs and $5.0 million in salaries and employee benefits, partially offset by an increase of $1.1 million in federal ("FDIC") insurance premiums. The decrease in salaries and employee benefits was primarily related to decreases in staffing and accruals for discretionary incentive payments. FDIC premiums increased primarily due to growth in the total balance of deposit accounts.

Total assets increased by $172.8 million, or 1%, to $17.09 billion at September 30, 2024 from $16.92 billion at September 30, 2023. The increase was mainly the result of increases in loans held for investment, and to a lesser extent, investment securities and loans held for sale, partially offset by a decrease in Federal Home Loan Bank ("FHLB") stock.

Loans held for investment, net of allowance and deferred loan expenses, increased $156.3 million, or 1%, to $15.32 billion at September 30, 2024 from $15.17 billion at September 30, 2023. Home equity loans and lines of credit increased $854.8 million to $3.89 billion and the residential mortgage loan portfolio decreased $693.0 million to $11.39 billion. The decrease in residential mortgage loans included $247.4 million of loans sold or committed for sale. Loans originated and purchased during the fiscal year ended September 30, 2024 included $854.2 million of residential mortgage loans and $2.28 billion of equity loans and lines of credit compared to $1.86 billion of residential mortgage loans and $1.70 billion of equity loans and lines of credit originated or purchased during the fiscal year ended September 30, 2023. The decrease in mortgage loan originations was primarily due to a relatively high interest rate environment, resulting in minimal refinance activity. New mortgage loans included 93% purchases and 18% adjustable rate loans during the fiscal year ended September 30, 2024.

Loans held for sale increased $14.5 million to $17.8 million at September 30, 2024, from $3.3 million at September 30, 2023, due to an increase in both loans committed to future delivery contracts with Fannie Mae and loans intended for future sale.

Investment securities increased $17.9 million, or 4%, to $526.3 million at September 30, 2024 from $508.3 million at September 30, 2023 primarily due to changes in fair values related to fluctuations in market interest rates.

FHLB stock decreased $18.6 million to $228.5 million at September 30, 2024 from $247.1 million at September 30, 2023. The decrease is a result of stock redemptions by the FHLB related to a decrease in the balance of FHLB advances. The FHLB has collateral requirements on funds borrowed that dictate the minimum amount of stock owned at any given time.

Deposits increased $745.3 million, or 8%, to $10.20 billion at September 30, 2024 from $9.45 billion at September 30, 2023. The increase was the result of a $1.37 billion increase in primarily retail certificates of deposit, partially offset by a $332.8 million decrease in savings accounts, a $153.5 million decrease in checking accounts and a $153.4 million decrease in money market deposit accounts. There was $1.22 billion in brokered deposits at September 30, 2024 compared to $1.16 billion at September 30, 2023. The increase in retail deposits was achieved through competitive rate and enhanced product offerings, supported by marketing efforts.

Borrowed funds decreased $480.8 million, or 9%, to $4.79 billion at September 30, 2024 from $5.27 billion at September 30, 2023. The decrease was primarily due to a decrease in overnight advances, and term advances, aligned with interest rate swap contracts, paid off at maturity. The total balance of borrowed funds at September 30, 2024, all from the FHLB, included $40.0 million of overnight advances, $1.81 billion of term advances with a weighted average maturity of approximately 2.0 years, and $2.93 billion of term advances, aligned with interest rate swap contracts, with a remaining weighted average effective maturity of approximately 3.2 years. Additional borrowing capacity at the FHLB was $2.09 billion at September 30, 2024.

Total shareholders' equity decreased $64.7 million, or 3%, to $1.86 billion at September 30, 2024 from $1.93 billion at September 30, 2023. Activity reflects $79.6 million of net income, a $7.9 million positive adjustment to retained earnings related to a change in accounting principle described above with respect to changes in the allowance for credit losses, a $100.8 million net decrease in accumulated other comprehensive income, dividends paid of $59.0 million and net positive adjustments of $7.6 million related to our stock compensation and employee stock ownership plans. The change in accumulated other comprehensive income was primarily due to a net decrease in unrealized gains and losses on swap contracts. There were no stock repurchases during the fiscal year ended September 30, 2024. The Company's eighth stock repurchase program allows for a total of 10,000,000 shares to be repurchased, with 5,191,951 shares authorized for repurchase at September 30, 2024.

The Company declared and paid a quarterly dividend of $0.2825 per share during each quarter of fiscal year 2024. 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 9, 2024 member vote and subsequent non-objection, 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 9, 2025), including a total of up to $0.8475 remaining. The MHC has conducted the member vote to approve the dividend waiver each of the past eleven years under Federal Reserve regulations and for each of those eleven 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 September 30, 2024 all of the Company's capital ratios exceed the amounts required for the Company to be considered "well capitalized" for regulatory capital purposes. The Company's Tier 1 leverage ratio was 10.89%, its Common Equity Tier 1 and Tier 1 ratios were each 18.50% and its total capital ratio was 19.24%.

Presentation slides as of September 30, 2024 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning October 31, 2024. 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 27 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, two lending offices in Central and Southern Ohio, and 16 full service branches throughout Florida. As of September 30, 2024, the Company’s assets totaled $17.09 billion.

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