Extraordinary Associate Effort Drives Business, Supports Customers at TFS Financial Corporation

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 quarter ended December 31, 2020.

The Company reported net income of $25.0 million for the quarter ended December 31, 2020, compared to net income of $25.6 million for the quarter ended December 31, 2019. The change included a decrease in net interest income, an increase in other operating expenses and an increase in non-interest income, bolstered by increased net gains on the sale of loans.

“At Third Federal, our associates continue to do extraordinary things for our customers during these unprecedented times,” said Chairman and CEO, Marc A. Stefanski. “Our strong loan originations this quarter, and a continued decrease in forbearances, are a testament to our associates’ effort. Their support of our customers and our company are the reason we have been strong, stable and safe since our founding in 1938.”

Loan originations, mainly refinances, continued at an active pace. We sold, or committed to sell, $293.5 million of fixed-rate loans and recorded related gains of $16.4 million during the quarter ended December 31, 2020, as we took advantage of high origination levels, low interest rates and attractive Fannie Mae loan sale prices, while also managing our interest rate risk.

Net interest income decreased $5.5 million, to $58.7 million for the quarter ended December 31, 2020 from $64.2 million for the quarter ended December 31, 2019. This decrease was primarily due to a 52 basis point reduction in the yield on interest-earning assets, primarily loans, to 2.88% during the quarter ended December 31, 2020 from 3.40% during the quarter ended December 31, 2019, as many borrowers are refinancing to take advantage of the current low interest rate environment. The yield on interest-earning assets was 2.95% for the quarter ended September 30, 2020. The decrease in yield was partially offset by a reduction in the cost of interest-bearing liabilities, which decreased 40 basis points to 1.37% for the quarter ended December 31, 2020 from 1.77% during the quarter ended December 31, 2019. Funding costs were lowered through a reduction in the average balance of borrowed funds, including the early termination of above-market priced FHLB borrowings and their related swap contracts during the quarter ended September 30, 2020, and through the repricing of certificates of deposit, to market rates of interest, as they mature. The interest rate spread for the quarter ended December 31, 2020 was 1.51% compared to 1.63% for the prior year quarter. The net interest margin for the quarter ended December 31, 2020 was 1.66% compared to 1.82% during the quarter ended December 31, 2019.

The provision for loan losses was a credit of $2.0 million for the quarter ended December 31, 2020 compared to a credit of $3.0 million for the quarter ended December 31, 2019. 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 Company recorded $1.3 million of net loan recoveries for the quarter ended December 31, 2020 compared to $1.4 million of net loan recoveries for the quarter ended December 31, 2019. Gross loan charge-offs were $0.9 million for the quarter ended December 31, 2020 and $1.6 million for the quarter ended December 31, 2019, while loan recoveries were $2.1 million in the current quarter and $3.0 million in the prior year quarter. The allowance for credit losses was $92.3 million, or 0.71% of total loans receivable, at December 31, 2020, including a $22.0 million liability for unfunded commitments. The allowance for loan losses was $46.9 million, or 0.36% of total loans receivable, at September 30, 2020 and $37.3 million, or 0.28% of total loans receivable, at December 31, 2019.

Total loan delinquencies remained unchanged at $28.2 million, representing 0.22% of total loans receivable at December 31, 2020 and 0.21% of total loans receivable at September 30, 2020. Non-accrual loans decreased $2.6 million to $50.6 million, or 0.39% of total loans receivable, at December 31, 2020 compared with $53.4 million, or 0.41% of total loans receivable, at September 30, 2020.

At December 31, 2020, there were $94.1 million of loans, or 0.73% 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 dates 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 $4.9 million to $136.4 million at December 31, 2020 from $141.3 million at September 30, 2020. COVID-19 forbearance plans are not generally classified as troubled debt restructurings.

Total non-interest income increased by $9.6 million, to $21.5 million for the quarter ended December 31, 2020, from $11.9 million for the quarter ended December 31, 2019. The change included higher net gains on the sale of loans, which increased $13.5 million compared to the prior year period, offset by $4.3 million of net gain that was recognized during the quarter ended December 31, 2019 on the sale of commercial property. During the quarter ended December 31, 2020, $293.5 million of loans were sold or committed for sale at a $16.4 million net gain compared to $208.5 million of loans sold at a $2.9 million net gain during the quarter ended December 31, 2019.

Total non-interest expenses increased $4.4 million, to $51.7 million for the quarter ended December 31, 2020, from $47.3 million for the quarter ended December 31, 2019. The increase consisted mainly of a combination of a $2.4 million increase in salaries and employee benefits and a $1.2 million increase in marketing services, related to the timing of when expenses are incurred. The majority of the increase in salaries and benefits was a result of a one-time after-tax bonus of $1,500 to all associates in recognition of their special efforts during this unusual year.

Total assets decreased by $69.4 million, or less than 1%, to $14.57 billion at December 31, 2020 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 and the impact of adopting CECL, offset by an increase in bank owned life insurance contracts.

The combination of loans held for investment, net and mortgage loans held for sale decreased $129.1 million, or 1.0%, to $13.01 billion at December 31, 2020 from $13.14 billion at September 30, 2020, mainly as a result of the increased loan sales mentioned above. Residential core mortgage loans, including those held for sale, decreased $42.3 million and the home equity loans and lines of credit portfolio decreased $61.6 million during the quarter. Total first mortgage loan originations were $1.12 billion for the quarter ended December 31, 2020 and $750.6 million for the quarter ended December 31, 2019. The current period mortgage loan originations included 77% refinance transactions, 33% adjustable rate mortgages and 18% fixed-rate mortgages with terms of 10 years or less. Commitments originated for home equity loans and lines of credit were $306.1 million for the quarter ended December 31, 2020 and $349.5 million for the quarter ended December 31, 2019.

Total bank owned life insurance contracts increased $71.6 million, to $294.6 million at December 31, 2020, from $222.9 million at September 30, 2020, primarily due to $70 million of additional premiums placed during the quarter.

Other assets decreased $5.6 million, or 5.3%, to $99.2 million at December 31, 2020 from $104.8 million at September 30, 2020. This decrease was primarily due to a $4.3 million reduction in margin requirements and receivables on swap contracts and a $1.2 million decrease in prepaid franchise tax.

Deposits decreased by $35.0 million, or less than 1%, to $9.19 billion at December 31, 2020 from $9.23 billion at September 30, 2020. The decrease in deposits was the result of a $173.9 million decrease in certificates of deposit (“CDs”), offset by a $64.2 million increase in checking accounts, a $35.3 million increase in money market accounts and a $39.8 million increase in savings accounts during the quarter ended December 31, 2020. Total deposits include $530.4 million and $553.9 million of brokered CDs at December 31, 2020 and September 30, 2020, respectively.

Borrowed funds, all from the FHLB, decreased $76.7 million, to $3.44 billion at December 31, 2020 from $3.52 billion at September 30, 2020. This decrease consisted of a $75.0 million decrease in 90 day advances, which were in place to support interest rate swap contracts that matured during the quarter, and a $1.7 million decrease in long term borrowings.

Borrowers’ advances for insurance and taxes increased by $30.7 million to $142.2 million at December 31, 2020 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 are in the process of being remitted to various taxing agencies.

Accrued expenses and other liabilities increased by $20.7 million to $86.3 million at December 31, 2020 from $65.6 million at September 30, 2020. The change was mainly due to a $22.0 million increase in the liability for off-balance sheet exposures on commitments to originate new loans and undrawn equity lines of credit and construction loan balances upon the October 1, 2020 adoption of CECL, partially offset by a $1.4 million decrease in payables outstanding.

Total shareholders’ equity decreased $14.0 million, or 0.8%, to $1.66 billion at December 31, 2020 from $1.67 billion at September 30, 2020. Activity reflects $25.0 million of net income in the current reduced by a $35.8 million provision to the allowance for credit losses, net of tax, upon the October 1, 2020 adoption of CECL, and a quarterly dividend of $14.1 million. Other changes include $10.4 million of unrealized net gain recognized in accumulated other comprehensive income, primarily related to changes in market values and maturities of swap contracts, and a $0.4 million net positive impact related to activity in the Company’s stock compensation and employee stock ownership plans. No shares of the Company’s common stock were repurchased during the quarter ended December 31, 2020.

The Company declared and paid a quarterly dividend of $0.28 per share during the quarter ended December 31, 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 its receipt of its share of the 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 14, 2020 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 $1.12 per share of possible dividends to be declared on the Company’s common stock, including up to $0.56 in dividends during the six months ending June 30, 2021. 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”). At December 31, 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 10.37%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 19.03% and its total capital ratio was 19.62%. Additionally, the Company’s Tier 1 leverage ratio was 12.15%, its Common Equity Tier 1 and Tier 1 ratios were each 22.28% and its total capital ratio was 22.86%. The Association’s current capital ratios reflect the dilutive impact of $55 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.

Presentation slides as of December 31, 2020 will be available on the Company’s website, www.thirdfederal.com, under the Investor Relations link within the “Recent Presentations” menu, beginning January 29, 2021. 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 December 31, 2020, the Company’s assets totaled $14.57 billion.

Contacts

TFS Financial Corporation

Jennifer Rosa (216) 429-5037

Read full story here