TFS Financial Corporation Announces Third Quarter Results

Strong Loan Originations Continue

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 nine months ended June 30, 2021.

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

The Company reported net income of $16.0 million for the quarter ended June 30, 2021 compared to net income of $26.8 million for the quarter ended June 30, 2020, with the decrease mainly from a combination of lower gain on the sale of loans and lower net interest income. Net income of $64.0 million was reported for the nine months ended June 30, 2021 compared to net income of $69.7 million for the nine months ended June 30, 2020. A decline in net interest income and higher expenses for the current nine month period offset the benefit of higher non-interest income and releases from the credit loss provision.

“Our commitment to our customers starts with our mission to help them achieve the dream of homeownership,” said Chairman and CEO Marc A. Stefanski. “Their success is our success, and the results show in our more than 30 percent growth in loan originations over last year.”

Loan origination volumes remained high, as we originated $845 million of first mortgages during the quarter ended June 30, 2021, consisting of $612 million of fixed-rate loans and $233 million of adjustable-rate loans. In the quarter ended June 30, 2020, we originated $871 million of first mortgages. For the nine months ended June 30, 2021 and 2020, first mortgage loan originations were $2.91 billion and $2.00 billion, respectively. New equity line of credit commitments were $387 million and $1.17 billion, respectively, for the quarter and nine months ended June 30, 2021. In the prior year, new equity line of credit commitments were $314 million for the quarter and $996 million for nine months.

Net gain on the sale of loans was $3.4 million on loan sales of $116.6 million for the quarter ended June 30, 2021, compared to a net gain of $10.8 million on loan sales of $314.9 million for the quarter ended June 30, 2020. Net gain on the sale of loans was $28.8 million on loan sales of $634.0 million for the nine months ended June 30, 2021, compared to a net gain of $16.9 million on loan sales of $638.2 million for the nine months ended June 30, 2020. The cumulative impact of total loan sales of $1.48 billion since the beginning of fiscal 2020 contributed to the decline in the loan portfolio and net interest income in the current year. By comparison, loan sales were $117.3 million for the fiscal year ended September 30, 2019.

Net interest income was $57.1 million for the quarter ended June 30, 2021 compared to $62.9 million for the quarter ended June 30, 2020. Net interest income decreased by $17.9 million, or 9.32%, to $174.2 million, for the nine months ended June 30, 2021 from $192.1 million for the nine months ended June 30, 2020. The interest rate spread was 1.50% and 1.51% for the quarter and nine months ended June 30, 2021 compared to 1.60% and 1.62% for the quarter and nine months ended June 30, 2020. The decrease in spread was primarily due to lower yield on loans as many borrowers refinanced to take advantage of the lower rate environment and a decrease in the average balances of loans due to loan sales and payoffs. In addition, the increase in lower yielding cash equivalent investments was a detriment to the overall yield on assets. Funding costs were lowered, partially offsetting the decrease in yield, through a reduction in the average balance of borrowed funds, including maturities and prior year terminations of Federal Home Loan Bank ("FHLB") advances and their related swap contracts; the repricing of certificates of deposit, as they mature, to market rates of interest; and the migration from certificates of deposit to lower-priced non-maturity deposit accounts. The net interest margin was 1.63% and 1.66% for the quarter and nine months ended June 30, 2021, respectively, compared to 1.74% and 1.79% for the quarter and nine months ended June 30, 2020, respectively.

A release of $1.0 million was recorded to the allowance for credit losses during the quarter ended June 30, 2021 compared to no provision for the quarter ended June 30, 2020 and a release of $7.0 million was recorded for the nine months ended June 30, 2021 compared to a provision of $3.0 million for the nine months ended June 30, 2020. Releases from the allowance for credit losses during the current year reflected improvements in the economic trends and forecasts used to estimate losses for the reasonable and supportable period and decreases in pandemic forbearance balances. On October 1, 2020, the Company adopted the Current Expected Credit Loss ("CECL") methodology and recognized a $46.2 million increase to the allowance for credit losses and a related $35.8 million reduction to retained earnings, net of tax. The allowance for credit losses was $89.7 million, or 0.71% of total loans receivable, at June 30, 2021, compared to $89.7 million, or 0.70% of total loans receivable, at March 31, 2021 and $46.9 million, or 0.36% of total loans receivable, at September 30, 2020. The allowance for credits losses at June 30, 2021 included a $23.3 million liability for unfunded commitments, primarily undrawn equity line of credit commitments. There was no liability for unfunded commitments recorded at September 30, 2020. The Company recorded $1.0 million and $3.6 million of net loan recoveries for the quarter and nine months ended June 30, 2021, respectively, compared to $1.2 million and $3.7 million of net loan recoveries for the quarter and nine months ended June 30, 2020, respectively.

Total loan delinquencies decreased $2.7 million to $25.5 million, or 0.20% of total loans receivable, at June 30, 2021 from $28.2 million, or 0.21% of total loans receivable, at September 30, 2020. Delinquencies at June 30, 2021 included a $1.6 million decrease in delinquencies on core residential mortgages, a $0.5 million decrease on home today residential mortgages and a $0.6 million decrease on home equity loans and lines of credit when compared to September 30, 2020. Non-accrual loans decreased $4.2 million to $49.2 million, or 0.39% of total loans, at June 30, 2021 from $53.4 million, or 0.41% of total loans, at September 30, 2020.

At June 30, 2021, there were $42.8 million, or 0.34% of total loans receivable, in COVID-19 forbearance plans compared to $165.6 million, or 1.26% of total loans receivable, at September 30, 2020. These forbearance plans allow borrowers experiencing temporary financial hardships related to COVID-19 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 $9.8 million, to $131.5 million at June 30, 2021, from $141.3 million at September 30, 2020. COVID-19 forbearance plans are not generally classified as troubled debt restructurings.

Non-interest income decreased $5.9 million to $9.4 million for the quarter ended June 30, 2021 from $15.3 million for the quarter ended June 30, 2020 and increased $10.4 million to $46.6 million for the nine months ended June 30, 2021 from $36.2 million for the nine months ended June 30, 2020. Changes between the quarter ended June 30, 2021 and the prior year quarter included a $7.4 million decrease in the net gain on the sale of loans and a $0.8 million increase in death benefits from bank owned life insurance contracts. For the nine months ended June 30, 2021, net gain on the sale of loans increased $11.9 million and income from bank owned life insurance contracts increased $2.2 million, when compared to the nine months ended June 30, 2020. The changes in net gain on the sale of loans was primarily due to a lower volume of loans sold during the recent quarter and higher market pricing on loan delivery contracts settled during the current fiscal year. A $4.3 million net gain on the sale of commercial property recognized during the nine months ended June 30, 2020 was also a notable change between the two fiscal year-to-date periods.

Total non-interest expense increased $3.1 million to $47.9 million for the quarter ended June 30, 2021 from $44.8 million for the quarter ended June 30, 2020 and increased $6.7 million to $148.4 million for the nine months ended June 30, 2021 from $141.7 million for the nine months ended June 30, 2020. When comparing the quarter ended June 30, 2021 to the prior year quarter, changes primarily consisted of a $2.0 million increase in salaries and employee benefits and a $0.4 million increase in each of marketing and data processing expenses. The increase during the nine months ended June 30, 2021 was mainly due to a $4.0 million increase in salaries and employee benefits, a $0.8 million increase in third party expenses related to equity lines of credit originations and a $2.9 million increase in marketing expense, partially offset by a $1.3 million decrease in federal insurance premiums, compared to the same period of the prior year. The increases in salary and benefits were spread between associate compensation, group health insurance and stock benefit plan expense, and, in the year-to-date period, included a one-time $1,500 after-tax bonus paid to each associate during the first quarter of the current fiscal year, in recognition of special efforts made during the pandemic crisis. The increases in marketing expense were timing related, as some marketing efforts were delayed during the previous fiscal year, in response to COVID-19.

Total income tax expense decreased $2.8 million to $3.7 million for the quarter ended June 30, 2021 from $6.5 million for the quarter ended June 30, 2020 and increased $1.6 million to $15.5 million for the nine months ended June 30, 2021 from $13.9 million for the nine months ended June 30, 2020. A carry back of net tax operating losses to years taxed at higher rates resulted in a tax benefit of $2.8 million during the nine months ended June 30, 2020 and, along with the fluctuation in pre-tax earnings, contributed to the change.

Total assets decreased by $405.5 million, or 2.77%, to $14.24 billion at June 30, 2021 from $14.64 billion at September 30, 2020. This change was mainly due to the combination of loan sales and principal repayments on loans exceeding the total of new loan originations, the impact of adopting CECL and a decrease in investment securities available for sale, partially offset by increases in cash and cash equivalents, FHLB stock and bank owned life insurance contracts.

The combination of cash and cash equivalents increased $82.1 million, or 16.48%, to $580.1 million at June 30, 2021 from $498.0 million at September 30, 2020. This increase is the result of cash flows from maturing investment securities and loan sales in the secondary market which are retained for reinvestment in investment securities and/or loan products that fit within the Company's growth and interest rate risk strategies.

Investment securities available for sale decreased $34.0 million, or 7.50% to $419.4 million at June 30, 2021 from $453.4 million at September 30, 2020. This decrease is a result of cash flows from security repayments and maturities exceeding purchases during the fiscal year. Pay downs on mortgage-backed securities increased due to the historically low mortgage interest rates.

The combination of loans held for investment, net of allowance and deferred loan expenses, and mortgage loans held for sale decreased $531.7 million, or 4.05%, to $12.61 billion at June 30, 2021 from $13.14 billion at September 30, 2020, reflecting the impact of prepayments and increased loan sales during the year. The home equity loans and lines of credit portfolio decreased $73.1 million and the residential core mortgage loan portfolio, including loans held for sale, decreased $438.1 million during the nine months ended June 30, 2021.

The amount of Federal Home Loan Bank stock owned increased $26.0 million to $162.8 million at June 30, 2021 from $136.8 million at September 30, 2020, as a result of stock ownership requirements of the FHLB.

Total bank owned life insurance contracts increased $72.3 million, to $295.2 million at June 30, 2021, from $222.9 million at September 30, 2020, primarily due to $70 million of additional premiums placed during the current fiscal year.

Deposits decreased $74.8 million, or 0.81%, to $9.15 billion at June 30, 2021 from $9.23 billion at September 30, 2020. The decrease was the result of a $365.0 million decrease in our certificates of deposit ("CDs"), partially offset by a $126.6 million increase in our checking accounts, a $121.5 million increase in our savings accounts and $42.7 million of growth in our money market deposit accounts, for the nine months ended June 30, 2021. Total deposits included $530.9 million and $553.9 million of brokered CDs at June 30, 2021 and September 30, 2020, respectively.

Borrowed funds, all from the FHLB, decreased $379.0 million, or 10.76%, to $3.14 billion at June 30, 2021 from $3.52 billion at September 30, 2020. Included in the decrease were $400.0 million of 90 day advances that were utilized for longer term interest rate swap contracts that matured during the year and were paid off from available cash, partially offset by a $21.3 million net increase in long term advances.

Borrowers' advances for insurance and taxes decreased by $45.4 million to $66.1 million at June 30, 2021 from $111.5 million at September 30, 2020. This change primarily reflects the cyclical nature of real estate tax payments that have been collected from borrowers and were remitted to various taxing agencies.

Accrued expenses and other liabilities increased by $74.1 million to $139.7 million at March 31, 2021 from $65.6 million at September 30, 2020. The change was mainly due to a $48.5 million increase in outstanding payables, mainly for real estate tax payments in process, and a $23.3 million increase in the liability for off-balance sheet exposures related to the October 1, 2020 adoption of CECL.

Total shareholders' equity increased $37.9 million, or 2.27%, to $1.71 billion at June 30, 2021 from $1.67 billion at September 30, 2020. Activity reflects $64.0 million of net income, a $45.6 million decrease in accumulated other comprehensive loss and $6.7 million of positive adjustments related to our stock compensation and employee stock ownership plans, reduced by $42.7 million of quarterly dividends and a $35.8 million provision to the allowance for credit losses, net of tax, with the adoption of CECL. The decrease in accumulated other comprehensive loss is primarily due to a net positive change in unrealized gains and losses on swap contracts. No shares of our common stock were repurchased during the nine months ended June 30, 2021.

The Company declared and paid a quarterly dividend of $0.28 per share during each of the fourth fiscal quarter of 2020 and the first, second and third fiscal quarters of 2021. 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 13, 2021 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 $1.13 per share, on the Company's common stock during the twelve months subsequent to the members' approval (i.e., through July 13, 2022), to be declared at the discretion of the Company's board of directors. The members approved the waiver by casting 60% of the eligible votes, with 97% of the votes cast, or 59% of the total eligible votes, voting in favor of the proposal. 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. 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 eight years under Federal Reserve regulations and for each of those eight 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 June 30, 2021 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 10.80%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 20.11% and its total capital ratio was 20.69%. Additionally, the Company's Tier 1 leverage ratio was 12.39%, its Common Equity Tier 1 and Tier 1 ratios were each 23.07% and its total capital ratio was 23.65%. The current capital ratios of the Association reflect the dilutive impact of $55.0 million of dividends that the Association paid to the Company, its sole shareholder, during the quarter ended December 31, 2020. Because of its intercompany nature, these dividends had no impact on the Company's capital ratios or its consolidated statement of condition.

Paul J. Huml, the Chief Financial Officer (CFO) of the Company, has announced he will retire from employment during January 2022. Timothy W. Mulhern, who has been with the Association since 2003, currently serves as manager of finance and has served in various other leadership positions, including Internal Audit Director, Chief Credit Officer, and as a manager in the information technology, loan servicing, default servicing and deposit operations departments, will become the new CFO at that time. “Paul has been an integral part of our organization as a part of the executive management team during his 23 years at Third Federal,” said Chairman and CEO Marc A. Stefanski. “On behalf of our Board, our management team and our associates, I thank him and wish him the best in his retirement. We welcome Tim into his new responsibilities, and we are confident that his background and his extensive experience in many areas of the Company during the last 18 years have prepared him for his new role.”

Presentation slides as of June 30, 2021 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning July 30, 2021. 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 homeownership 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, 2021, the Company’s assets totaled $14.24 billion.

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