News

TFS Financial Corporation Grows Deposits and Home Equity Loans

CLEVELAND–(BUSINESS WIRE)–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 six
months ended March 31, 2019.


The Company reported net income of $20.1 million for the three months
ended March 31, 2019, compared to net income of $23.3 million for the
three months ended March 31, 2018, and net income of $40.5 million for
the six months ended March 31, 2019, compared to net income of $42.9
million for the six months ended March 31, 2018. A combination of a
decrease in net interest income and an increase in non-interest expense
was partially offset by a lower effective tax rate for both the
three-month and six-month periods in the current year, as compared to
the same periods last year. Additionally, the provision credit for loan
losses decreased compared to the prior six-month period.

“Third Federal is structured to succeed in all interest rate and
economic environments,” said Chairman and CEO, Marc A. Stefanski. “This
quarter, we continued to focus on objectives that support this strategy.
On the loan side of the business, demand for our home equity products
has been incredible. Home equity application volume increased 34
percent, compared to the same quarter in 2018, further growing our
variable rate loan portfolio. The beginning of the home buying season
helped increase our home purchase application volume by 25 percent over
last quarter. We also have been successful in retaining and growing
retail deposits. Since the beginning of the fiscal year, retail deposits
have increased $241 million. And finally, we are excited to continue to
provide our shareholders with a dividend that currently yields more than
6 percent annually.”

Net interest income was $135.6 million for the six months ended
March 31, 2019 and $141.7 million for the six months ended March 31,
2018. Market interest rate increases have impacted both loan yields,
particularly home equity lending products that feature interest rates
that reset based on the prime rate, as well as funding costs. Interest
income was higher in the current six-month period, due to a combination
of a $324.6 million increase in the average balance of interest-earning
assets, mainly loans, and a higher weighted average yield earned on
those assets. The average cost of interest-bearing liabilities was also
higher in the current year as a result of extending the duration of
funding sources that presently carry higher costs, but help control
interest rate risk exposure, and the impact on rates for overnight
borrowings from the relatively flat yield curve market. Retail deposit
growth has helped to reduce the balance of our wholesale borrowings. Net
interest income was $67.8 million for the three months ended March 31,
2019 and $71.7 million for the three months ended March 31, 2018. The
interest rate spread was 1.78% for both the three and six months ended
March 31, 2019 compared to 1.98% and 1.97%, respectively, for the three
and six months ended March 31, 2018. The net interest margin was 1.97%
for both the three and six months ended March 31, 2019, as compared to
2.13% and 2.11%, respectively, for the three and six months ended
March 31, 2018.

The provision for loan losses was a credit of $4.0 million during both
the three months ended March 31, 2019 and the three months ended
March 31, 2018. The provision for loan losses was a credit of $6.0
million for the six months ended March 31, 2019 compared to a credit of
$7.0 million for the six months ended March 31, 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 $2.2 million for the six months
ended March 31, 2019 and $4.7 million for the six months ended March 31,
2018, while loan recoveries were $6.1 million in the current year period
and $5.9 million in the prior year period. As a result of loan
recoveries exceeding charge-offs, the Company reported net loan
recoveries of $3.9 million for the six months ended March 31, 2019, and
$1.2 million for the six months ended March 31, 2018. The allowance for
loan losses was $40.3 million, or 0.31% of total loans receivable, at
March 31, 2019, compared to $42.4 million, or 0.33% of total loans
receivable, at September 30, 2018 and $43.1 million, or 0.34% of total
loans receivable, at March 31, 2018. Of the total allowance for loan
losses, $22.9 million was allocated to residential mortgage loans and
$17.4 million was allocated to home equity loans and lines of credit at
March 31, 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 March 31, 2018.

Total loan delinquencies increased $0.3 million, or less than 1%, to
$41.7 million, or 0.32% of total loans receivable, at March 31, 2019
from $41.4 million, or 0.32% of total loans receivable, at September 30,
2018. The increase in delinquencies consisted of a $1.4 million increase
in core residential mortgage loans partially offset by decreases of $0.6
million in home equity loans and lines of credit and $0.5 million in
home today residential mortgage loans.

Non-accrual loans decreased $0.5 million to $77.3 million, or 0.60% of
total loans, at March 31, 2019 from $77.8 million, or 0.60% of total
loans, at September 30, 2018.

Total troubled debt restructurings increased $0.9 million, to $166.3
million at March 31, 2019, from $165.4 million at September 30, 2018.
The portion of total troubled debt restructurings included as part of
non-accrual loans was $63.9 million at March 31, 2019 and $62.6 million
at September 30, 2018.

Total non-interest expenses increased $3.2 million to $98.7 million for
the six months ended March 31, 2019 compared to $95.5 million for the
six months ended March 31, 2018. The increase included a $2.2 million
increase in salaries and employee benefits and a $1.1 million increase
in other operating expenses. The increase in salaries and employee
benefits occurred mainly during the first three months of the current
year and related to both the timing and amount of health insurance costs
and, to a lesser extent, increases in wages and stock-based compensation
awards.

Total income tax expense decreased by $7.8 million, to $12.0 million for
the six months ended March 31, 2019, from $19.8 million for the six
months ended March 31, 2018. The decrease in the expense was caused
mainly by the impact of the Tax Cuts and Jobs Act which lowered our
effective 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 six months ended March 31, 2018 also included approximately $4.6
million of additional income tax expense for the re-measurement of the
net deferred tax assets as a result of the tax rate reduction.

Total assets increased by $69.3 million, or less than 1%, to $14.21
billion at March 31, 2019 from $14.14 billion at September 30, 2018.
This change was mainly the result of a net increase of $42.6 million in
mortgage backed security investments, continued growth in our home
equity line of credit portfolio and increases in prepaid expenses and
other assets, offset by a $10.5 million decrease in interest bearing
cash deposits, during the current fiscal year.

The combination of loans held for investment, net and mortgage loans
held for sale increased $14.1 million to $12.89 billion at March 31,
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 considering the relatively flat
yield curve market that we are currently experiencing. Residential core
mortgage loans, including those held for sale, decreased $127.3 million
during the six months ended March 31, 2019, and the home equity loans
and lines of credit portfolio increased $146.7 million. Total first
mortgage loan originations were $665.1 million for the six months ended
March 31, 2019, of which 48% were adjustable-rate mortgages and 6% were
fixed-rate mortgages with terms of 10 years or less. Total first
mortgage loan originations were $1.0 billion for the six months ended
March 31, 2018, of which 48% were adjustable-rate mortgages and 14% were
fixed-rate mortgages with terms of 10 years or less. Commitments
originated for home equity loans and lines of credit were $718.6 million
for the six months ended March 31, 2019 and $773.3 million for the six
months ended March 31, 2018. During the six months ended March 31, 2019,
$58.8 million of fixed-rate loans were sold resulting in a pre-tax gain
of $0.6 million. During the six months ended March 31, 2018, $68.5
million of fixed-rate loans were sold resulting in a pre-tax gain of
$0.5 million.

Prepaid expenses and other assets increased $20.4 million to $64.7
million at March 31, 2019 from $44.3 million at September 30, 2018. The
increase related primarily to a $12.4 million increase in initial margin
requirements posted on interest rate swap contracts and a $9.3 million
increase in the net deferred tax asset during the current fiscal year.

Deposits increased $241.2 million, or 2.8%, to $8.73 billion at
March 31, 2019 from $8.49 billion at September 30, 2018. The increase in
deposits was the result of a $108.4 million increase in our certificates
of deposit (“CDs”) and a $143.3 million increase in our savings
accounts, partially offset by a $11.3 million decrease in our checking
accounts for the six months ended March 31, 2019. Total deposits include
$591.3 million and $670.1 million of brokered CDs at March 31, 2019 and
September 30, 2018, respectively.

Borrowed funds, all from the FHLB, decreased $131.6 million, to $3.59
billion at March 31, 2019 from $3.72 billion at September 30, 2018. This
decrease reflects a $450.0 million reduction in overnight advances and a
$183.8 million reduction in long-term advances, offset by a $500.0
million increase in 90 day advances that were utilized for longer term
interest rate swap contracts. At March 31, 2019, FHLB advances include
$2.23 billion of short-term advances that have an effective duration at
inception of five to eight years, as a result of interest rate swap
contracts, and $750.0 million of overnight advances.

Total shareholders’ equity decreased $22.4 million to $1.74 billion at
March 31, 2019 from $1.76 billion at September 30, 2018. Activity
reflects $40.5 million of net income in the current fiscal year reduced
by $6.2 million in repurchases of common stock and two quarterly
dividends totaling $24.7 million. Additionally, during the six months
ended March 31, 2019, other comprehensive income decreased by $36.8
million, mainly the result of changes in market interest rates on our
interest rate swaps, and there were $4.7 million of adjustments related
to our stock compensation plan and Employee Stock Ownership Plan. During
the three months ended March 31, 2019, a total of 146,000 shares of our
common stock were repurchased at an average cost of $16.66 per share.
During the six months ended March 31, 2019, a total of 388,500 shares
were repurchased at an average cost of $15.98 per share. At March 31,
2019, there were 6,078,479 shares remaining to be purchased under the
Company’s eighth repurchase program. The Company declared and paid a
quarterly dividend of $0.25 per share during each of the first two
fiscal quarters. 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 11, 2018 member
vote and the subsequent non-objection of the Federal Reserve, the MHC
has the approval to waive the receipt of up to a total of $1.00 per
share of possible dividends to be declared on the Company’s common
stock, including $0.25 during the quarter ending June 30, 2019. The MHC
has conducted the member vote to approve the dividend waiver each of the
past five years under Federal Reserve regulations and for each of those
five 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”). The Basel III Rules include a
Common Equity Tier 1 Capital ratio, with a fully phased-in required
minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.
At March 31, 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 10.45%, its Common Equity Tier 1 and Tier 1 ratios,
as calculated under the fully phased-in Basel III Rules, were each
19.19% and its total capital ratio was 19.71%. Additionally, the
Company’s Tier 1 leverage ratio was 12.19%, its Common Equity Tier 1 and
Tier 1 ratios were each 22.34% and its total capital ratio was 22.86%.
The Association’s current capital ratios 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 March 31, 2019 will be available on the
Company’s website, www.thirdfederal.com,
under the Investor Relations link within the “Recent Presentations”
menu, beginning May 1, 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
17 full service branches throughout Florida. As of March 31, 2019, the
Company’s assets totaled $14.21 billion.

Forward Looking Statements

This release 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;
  • decreased demand for our products and services and lower revenue and
    earnings because of a recession or other events;
  • 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;
  • our ability to enter new markets successfully and take advantage of
    growth opportunities, and the possible short-term dilutive effect of
    potential acquisitions or de novo branches, if any;
  • changes in consumer spending, borrowing and savings habits;
  • 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;
  • future adverse developments concerning Fannie Mae or Freddie Mac;
  • changes in monetary and fiscal policy of the U.S. Government,
    including policies of the U.S. Treasury and the Federal Reserve and
    changes in the level of government support of housing finance;
  • changes in policy and/or assessment rates of taxing authorities that
    adversely affect us or our customer;
  • changes in our organization, or compensation and benefit plans and
    changes in expense trends (including, but not limited to trends
    affecting non-performing assets, charge-offs and provisions for loan
    losses);
  • the continuing governmental efforts to restructure the U.S. financial
    and regulatory systems;
  • the inability of third-party providers to perform their obligations to
    us;
  • a slowing or failure of the prevailing economic recovery;
  • changes in accounting and tax estimates;
  • 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;
  • 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;
  • the ability of the U.S. Government to remain open, function properly
    and manage federal debt limits; and
  • cyber attacks, computer viruses and other technological risks that may
    breach the security of our websites or other systems to obtain
    unauthorized access to confidential information, destroy data or
    disable our systems.

Because of these and other uncertainties, our actual future results may
be materially different from the results indicated by any
forward-looking statements. Any forward-looking statement made by us in
this report speaks only as of the date on which it is made. We undertake
no obligation to publicly update any forward-looking statements, whether
as a result of new information, future developments or otherwise, except
as may be required by law.

   
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
 
March 31 September 30
2019 2018
ASSETS
Cash and due from banks $ 29,055 $ 29,056
Other interest-earning cash equivalents 230,185   240,719  
Cash and cash equivalents 259,240   269,775  
Investment securities available for sale (amortized cost $581,086
and $549,211, respectively)
574,572 531,965
Mortgage loans held for sale, at lower of cost or market (none
measured at fair value)
1,016 659
Loans held for investment, net:
Mortgage loans 12,882,319 12,872,125
Other loans 2,793 3,021
Deferred loan fees, net 40,177 38,566
Allowance for loan losses (40,286 ) (42,418 )
Loans, net 12,885,003   12,871,294  
Mortgage loan servicing assets, net 8,484 8,840
Federal Home Loan Bank stock, at cost 93,544 93,544
Real estate owned 2,898 2,794
Premises, equipment, and software, net 62,433 63,399
Accrued interest receivable 40,071 38,696
Bank owned life insurance contracts 214,619 212,021
Other assets 64,747   44,344  
TOTAL ASSETS $ 14,206,627   $ 14,137,331  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits $ 8,732,790 $ 8,491,583
Borrowed funds 3,590,072 3,721,699
Borrowers’ advances for insurance and taxes 88,839 103,005
Principal, interest, and related escrow owed on loans serviced 29,561 31,490
Accrued expenses and other liabilities 29,380   31,150  
Total liabilities 12,470,642   12,378,927  
Commitments and contingent liabilities
Preferred stock, $0.01 par value, 100,000,000 shares authorized,
none issued and outstanding

Common stock, $0.01 par value, 700,000,000 shares authorized;
332,318,750 shares issued; 280,076,911 and 280,311,070 outstanding
at March 31, 2019 and September 30, 2018, respectively

3,323 3,323
Paid-in capital 1,729,499 1,726,992
Treasury stock, at cost; 52,241,839 and 52,007,680 shares at March
31, 2019 and September 30, 2018, respectively
(760,367 ) (754,272 )
Unallocated ESOP shares (46,584 ) (48,751 )
Retained earnings—substantially restricted 823,644 807,890

Accumulated other comprehensive income (loss)

(13,530 ) 23,222  
Total shareholders’ equity 1,735,985   1,758,404  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 14,206,627   $ 14,137,331  
 
   
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share and per share data)
 

For the Three Months Ended

For the Six Months Ended

March 31,

March 31,
2019   2018 2019   2018
INTEREST INCOME:
Loans, including fees 114,306 $ 105,239 $ 226,797 $ 207,865
Investment securities available for sale 3,494 2,759 6,618 5,348
Other interest and dividend earning assets 2,643   2,182   5,316   4,196  
Total interest and dividend income 120,443   110,180   238,731   217,409  
INTEREST EXPENSE:
Deposits 35,077 23,630 67,839 46,624
Borrowed funds 17,605   14,852   35,319   29,099  
Total interest expense 52,682   38,482   103,158   75,723  
NET INTEREST INCOME 67,761 71,698 135,573 141,686
PROVISION (CREDIT) FOR LOAN LOSSES (4,000 )   (4,000 ) (6,000 ) (7,000 )
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 71,761     75,698   141,573   148,686  
NON-INTEREST INCOME:
Fees and service charges, net of amortization 1,795 1,799 3,571 3,559
Net gain on the sale of loans 451 65 562 543
Increase in and death benefits from bank owned life insurance
contracts
1,874 1,509 3,421 3,063
Other 786   1,243   2,028   2,295  
Total non-interest income 4,906   4,616   9,582   9,460  
NON-INTEREST EXPENSE:
Salaries and employee benefits 26,152 26,057 51,516 49,310
Marketing services 6,719 6,016 11,516 11,054
Office property, equipment and software 6,261 6,728 13,247 13,379
Federal insurance premium and assessments 2,370 3,008 5,136 5,726
State franchise tax 1,282 1,284 2,544 2,410
Other expenses 7,943   6,595   14,748   13,585  
Total non-interest expense 50,727     49,688   98,707   95,464  
INCOME BEFORE INCOME TAXES 25,940 30,626 52,448 62,682
INCOME TAX EXPENSE 5,810   7,312   11,985   19,755  
NET INCOME $ 20,130   $ 23,314   $ 40,463   $ 42,927  
 
Earnings per share – basic and diluted $ 0.07   $ 0.08   $ 0.14   $ 0.15  
Weighted average shares outstanding
Basic 275,359,201 275,656,445 275,367,821 275,737,265
Diluted 277,343,155   277,256,178   277,197,565   277,434,648  
 
   
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCES AND YIELDS (unaudited)
 
Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
  Interest     Interest  
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost (2) Balance Expense Cost (2)
(Dollars in thousands)
Interest-earning assets:
Interest-earning cash equivalents $ 215,094 $ 1,229 2.29 % $ 231,728 $ 872 1.51 %
Investment securities 3,981 23 2.31 % %
Mortgage-backed securities 565,256 3,471 2.46 % 542,114 2,759 2.04 %
Loans (1) 12,876,333 114,306 3.55 % 12,615,707 105,239 3.34 %
Federal Home Loan Bank stock 93,544   1,414   6.05 % 92,643   1,310   5.66 %
Total interest-earning assets 13,754,208 120,443   3.50 % 13,482,192 110,180   3.27 %
Noninterest-earning assets 400,061   367,342  
Total assets $ 14,154,269   $ 13,849,534  
Interest-bearing liabilities:
Checking accounts $ 881,730 $ 861 0.39 % $ 957,316 $ 224 0.09 %
Savings accounts 1,379,163 2,898 0.84 % 1,404,328 492 0.14 %
Certificates of deposit 6,378,434 31,318 1.96 % 5,876,746 22,914 1.56 %
Borrowed funds 3,606,978   17,605   1.95 % 3,722,445   14,852   1.60 %
Total interest-bearing liabilities 12,246,305 52,682   1.72 % 11,960,835 38,482   1.29 %
Noninterest-bearing liabilities 147,975   158,421  
Total liabilities 12,394,280 12,119,256
Shareholders’ equity 1,759,989   1,730,278  

Total liabilities and shareholders’ equity

$ 14,154,269   $ 13,849,534  
Net interest income $ 67,761   $ 71,698  
Interest rate spread (2)(3) 1.78 % 1.98 %
Net interest-earning assets (4) $ 1,507,903   $ 1,521,357  
Net interest margin (2)(5) 1.97 % 2.13 %

Average interest-earning assets to average interest-bearing
liabilities

112.31 % 112.72 %

Contacts

Jennifer Rosa
(216) 429-5037

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