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 fiscal year ended September 30, 2020.
The Company reported net income of $13.6 million for the quarter ended September 30, 2020 compared to net income of $21.5 million for the quarter ended September 30, 2019. Net income of $83.3 million was reported for the fiscal year ended September 30, 2020 compared to net income of $80.2 million for the fiscal year ended September 30, 2019. During the fourth fiscal quarter of 2020, net income was reduced by a combination of prepayment fees and additional interest expense recognized as a result of the early termination of certain Federal Home Loan Bank (“FHLB”) term borrowings and related interest rate swap agreements. The increase in net income for the fiscal year is primarily the result of higher net gain on the sale of loans, the Company’s share of net gain from the sale of commercial property, lower non-interest expense and a lower effective tax rate, partially offset by lower net interest income and an increase in the provision for loan losses.
“Third Federal has remained resilient in the midst of the pandemic and economic uncertainty,” said Chairman and CEO Marc A. Stefanski, “Thanks to record low interest rates and incredible effort by our associates, we originated more loans in 2020 than any other year in the company‘s history. First mortgage originations grew from $1.8 billion in 2019 to more than $3 billion in 2020, with excellent credit quality. First mortgage loans have an average credit score of 759 and an average loan-to-value ratio of 68%.
My parents founded Third Federal in 1938 based on three principles:
Third Federal continues to be guided by these standards so that we remain Strong Stable and Safe in any economic environment.”
Loan originations, mainly refinances, continued at a strong pace. We sold, or committed to sell, $844.3 million of fixed-rate loans and recorded related gains of $28.4 million during the fiscal year ended September 30, 2020, as we took advantage of the high origination levels, low interest rates and attractive Fannie Mae loan sale prices, while also managing our interest rate risk. Fiscal 2019 loan sales were $117.3 million and recorded gains were $1.9 million.
Net interest income was $50.2 million for the quarter ended September 30, 2020 and $64.3 million for the quarter ended September 30, 2019. Net interest income decreased by $23.1 million, or 8.7%, to $242.3 million, for the fiscal year ended September 30, 2020 from $265.4 million for the fiscal year ended September 30, 2019. The decrease during the quarter and fiscal year included $7.8 million of interest expense recognized for the early termination of certain FHLB term borrowings and related interest rate swap agreements. The Company took advantage of the availability of liquid assets from increased secondary market activity and prepayments on mortgage-backed security investments to terminate these contracts, which should serve to reduce future interest rate expense. The weighted average interest rate, including the impact of the swap contracts, on those advances repaid was 2.92%. Also contributing to the decrease was a compression of the interest rate spread. While prepayments and refinances of higher yielding loans have occurred rather quickly in this historically low rate environment, the replacement of long term borrowings and certificates of deposit, carrying above-market rates, tends to lag that activity. The interest rate spread was 1.23% and 1.52% for the quarter and fiscal year ended September 30, 2020, respectively, compared to 1.65% and 1.73% for the quarter and fiscal year ended September 30, 2019, respectively. The net interest margin was 1.40% and 1.69% for the quarter and fiscal year ended September 30, 2020, respectively, compared to 1.84% and 1.92% for the quarter and fiscal year ended September 30, 2019, respectively.
There was no provision for loan losses recorded during the quarter ended September 30, 2020 compared to a credit of $2.0 million for the quarter ended September 30, 2019. The provision for loan losses was $3.0 million during the fiscal year ended September 30, 2020 compared to a credit of $10.0 million during the fiscal year ended September 30, 2019. The allowance for loan losses was $46.9 million, or 0.36% of total loans receivable, at September 30, 2020, compared to $45.6 million, or 0.34% of total loans receivable, at June 30, 2020 and $38.9 million, or 0.29% of total loans receivable, at September 30, 2019. The increase in the allowance is mainly due to the establishment of a qualitative reserve for potential losses related to the COVID-19 outbreak that led to increased unemployment and deterioration in the overall macro-economic environment. Of the total allowance for loan losses, $28.0 million was allocated to residential mortgage loans and $18.9 million was allocated to home equity loans and lines of credit at September 30, 2020 and $24.0 million was allocated to residential mortgage loans and $14.9 million was allocated to home equity loans and lines of credit at September 30, 2019. As a result of loan recoveries exceeding charge-offs, the Company reported net loan recoveries of $1.4 million and $5.0 million for the quarter and fiscal year ended September 30, 2020, respectively, and $1.6 million and $6.5 million for the quarter and fiscal year ended September 30, 2019, respectively. The allowance will be determined under the Current Expected Credit Loss (CECL) methodology beginning October 1, 2020.
Total loan delinquencies decreased $7.2 million to $28.2 million, or 0.21% of total loans receivable, at September 30, 2020 from $35.4 million, or 0.27% of total loans receivable, at September 30, 2019. Delinquencies at September 30, 2020 included a $1.6 million decrease in delinquencies on core residential mortgages, a $2.4 million decrease on home today residential mortgages and a $3.2 million decrease on home equity loans and lines of credit when compared to September 30, 2019. Non-accrual loans decreased $17.9 million to $53.4 million, or 0.41% of total loans, at September 30, 2020 from $71.3 million, or 0.54% of total loans, at September 30, 2019.
At September 30, 2020, there were $165.6 million, or 1.26% of total loans receivable, in COVID-19 forbearance plans compared to $230.3 million, or 1.76% of total loans receivable, at June 30, 2020 and $36.0 million at March 31, 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 $16.1 million, to $141.3 million at September 30, 2020, from $157.4 million at September 30, 2019. COVID-19 forbearance plans are not generally classified as troubled debt restructurings.
Non-interest income increased $11.3 million to $17.1 million for the quarter ended September 30, 2020 from $5.8 million for the quarter ended September 30, 2019. The increase primarily related to a $10.7 million increase in the net gain on sale of loans to $11.5 million during the quarter ended September 30, 2020 compared to $0.8 million during the quarter ended September 30, 2019. Non-interest income increased $32.8 million to $53.3 million for the fiscal year ended September 30, 2020 from $20.5 million for the fiscal year ended September 30, 2019. The increase included a $26.5 million increase in net gain on the sale of loans, to $28.4 million during the fiscal year ended September 30, 2020 from $1.9 million during the fiscal year ended September 30, 2019, and the Company’s portion of net gain, $4.7 million, on commercial property sold by a partially owned subsidiary of the Company during the current fiscal year.
Non-interest expense increased $5.5 million to $50.6 million for the quarter ended September 30, 2020 from $45.1 million for the quarter ended September 30, 2019. The increase included a $2.5 million increase in marketing expense, a $1.2 million increase in pension expense, related to an increase in lump-sum settlements claimed during the year, $1.1 million of early termination fees related to the prepayment of FHLB advances and related swap contracts in the current year, and a $1.1 million increase in appraisal related expenses due to increased loan origination activity. The increase in marketing expense during the quarter was more timing related, as some marketing efforts were delayed earlier during the year in response to COVID-19. Marketing costs for the year declined $2.9 million when compared to the prior year. Total non-interest expense decreased $1.4 million for the fiscal year ended September 30, 2020 compared to the prior fiscal year.
Total income tax expense decreased $2.4 million, to $3.1 million, for the quarter ended September 30, 2020 from $5.5 million for the quarter ended September 30, 2019 and decreased $5.1 million to $16.9 million for the fiscal year ended September 30, 2020 from $22.0 million for the fiscal year ended September 30, 2019. The decrease includes the impact of a CARES Act provision, which permits a carry back of net tax operating losses to years taxed at higher rates, resulting in a current fiscal year tax benefit of $3.6 million, and excess tax benefits on stock-based compensation awards due to higher average prices on Company stock during the first half of the current fiscal year.
Total assets increased by $99.9 million, or 0.69%, to $14.64 billion at September 30, 2020 from $14.54 billion at September 30, 2019. This change was the primarily the result of increases in cash and cash equivalents, Federal Home Loan Bank stock and prepaid expenses and other assets offset by decreases in investment securities held for sale and mortgage loans held for investment.
The combination of cash and cash equivalents increased $222.9 million, or 81.01% to $498.0 million at September 30, 2020 from $275.1 million at September 30, 2019. 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 provide higher yields along with longer maturities.
Investment securities available for sale decreased $94.5 million, or 17.25% to $453.4 million at September 30, 2020 from $547.9 million at September 30, 2019. 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 $59.5 million to $13.14 billion at September 30, 2020 from $13.20 billion at September 30, 2019, reflecting the impact of increased loan sales during the year. The home equity loans and lines of credit portfolio increased $57.3 million and the residential core mortgage loan portfolio, including loans held for sale, decreased $95.0 million during the fiscal year ended September 30, 2020. Commitments originated for home equity loans and lines of credit were $1.32 billion for the fiscal year ended September 30, 2020 and $1.69 billion for the fiscal year ended September 30, 2019. Total first mortgage loan originations were $3.08 billion for the fiscal year ended September 30, 2020, of which 40% were adjustable-rate mortgages and 10% were fixed-rate mortgages with terms of 10 years or less. Total first mortgage loan originations were $1.81 billion for the fiscal year ended September 30, 2019, of which 41% were adjustable-rate mortgages and 5% were fixed-rate mortgages with terms of 10 years or less. During the fiscal year ended September 30, 2020, $844.3 million of fixed-rate loans were sold or committed for sale, resulting in a pre-tax gain of $28.4 million. During the fiscal year ended September 30, 2019, $117.3 million of fixed-rate loans were sold resulting in a pre-tax gain of $1.9 million.
The amount of Federal Home Loan Bank stock owned increased $34.9 million to $136.8 million at September 30, 2020 from $101.9 million at September 30, 2019, as a result of stock ownership requirements of the FHLB.
Other assets increased $16.8 million to $104.8 million at September 30, 2020 from $88.0 million at September 30, 2019. The increase related primarily to the current year adoption of amended lease accounting guidance, which, as of September 30, 2020, added a $16.0 million right-of-use asset, net of amortization, to the balance sheet.
Deposits increased $459.2 million, or 5.2%, to $9.23 billion at September 30, 2020 from $8.77 billion at September 30, 2019. The increase was the result of a $183.3 million increase in our certificates of deposit (“CDs”), $78.6 million of growth in our money market deposit accounts, a $134.0 million increase in our checking accounts and a $63.9 million increase in our savings accounts for the fiscal year ended September 30, 2020. Total deposits include $553.9 million and $507.8 million of brokered CDs at September 30, 2020 and September 30, 2019, respectively.
Borrowed funds, all from the FHLB, decreased $381.2 million, to $3.52 billion at September 30, 2020 from $3.90 billion at September 30, 2019. This decrease reflects a combination of a $506.1 million reduction in overnight and other short term advances and a net $100.1 million reduction in long term advances, offset by a net $225.0 million increase in 90 day advances that were utilized for longer term interest rate swap contracts. During the fourth quarter of fiscal 2020, $115 million of FHLB advances and $100 million of swap contracts related to those advances were terminated, resulting in the immediate recognition of $8.9 million of interest expense and fees.
Total shareholders’ equity decreased $24.9 million to $1.67 billion at September 30, 2020 from $1.70 billion at September 30, 2019. During the fiscal year ended September 30, 2020, other comprehensive income decreased by $62.6 million, primarily due to the net impact of changes in unrealized gains and losses on our swap contracts and available for sale investment securities. Unrealized losses on interest rate swap contracts represent the majority of the change and occur when current market interest rates are lower than those in effect at contract origination. The combined effect of the decrease in other comprehensive income and $55.5 million of quarterly dividends was partially offset by $83.3 million of net income and $10.2 million of adjustments related to our stock compensation and employee stock ownership plans. No shares of our common stock were repurchased during the three months ended September 30, 2020. During the fiscal year ended September 30, 2020, a total of 20,500 shares were repurchased at an average cost of $18.40 per share.
The Company declared and paid a quarterly dividend of $0.28 per share during each of the second, third and fourth fiscal quarters of 2020 and paid a $0.27 per share quarterly dividend during the first fiscal quarter of 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 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 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 $1.12 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 14, 2021), including a total of up to $0.84 during the three quarters ending December 31, 2020, March 31, 2021, and 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”). In April 2020, the Association adopted the Simplifications to the Capital Rule (“Rule”), which simplified certain aspects of the capital rule under Basil III. The impact of the Rule was not material to the Association’s regulatory ratios. At September 30, 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 10.39%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 19.37% and its total capital ratio was 19.96%. Additionally, the Company’s Tier 1 leverage ratio was 11.88%, its Common Equity Tier 1 and Tier 1 ratios were each 22.13% and its total capital ratio was 22.71%. The current capital ratios of the Association reflect the dilutive impact of $57.0 million of dividends that the Association paid to the Company, its sole shareholder, during the quarter ended December 31, 2019. 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 September 30, 2020 will be available on the Company’s website, www.thirdfederal.com, under the Investor Relations link within the “Recent Presentations” menu, beginning October 30, 2020. 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 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, seven lending offices in Central and Southern Ohio, and 16 full service branches throughout Florida. As of September 30, 2020, the Company’s assets totaled $14.64 billion.
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Forward Looking Statements |
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This report 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: |
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statements of our goals, intentions and expectations; |
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statements regarding our business plans and prospects and growth and operating strategies; |
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statements concerning trends in our provision for loan losses and charge-offs; |
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statements regarding the trends in factors affecting our financial condition and results of operations, including asset quality of our loan and investment portfolios; and |
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estimates of our risks and future costs and benefits. |
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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: |
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significantly increased competition among depository and other financial institutions; |
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inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; |
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general economic conditions, either globally, nationally or in our market areas, including employment prospects, real estate values and conditions that are worse than expected; |
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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, and changes in estimates of the allowance for loan losses; |
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decreased demand for our products and services and lower revenue and earnings because of a recession or other events; |
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changes in consumer spending, borrowing and savings habits; |
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adverse changes and volatility in the securities markets, credit markets or real estate markets; |
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our ability to manage market risk, credit risk and operational risk; |
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our ability to access cost-effective funding; |
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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; |
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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; |
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the adoption of implementing regulations by a number of different regulatory bodies, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us; |
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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; |
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our ability to retain key employees; |
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future adverse developments concerning Fannie Mae or Freddie Mac; |
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changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the FRS and changes in the level of government support of housing finance; |
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the continuing governmental efforts to restructure the U.S. financial and regulatory system; |
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the ability of the U.S. Government to remain open, function properly and manage federal debt limits; |
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changes in policy and/or assessment rates of taxing authorities that adversely affect us or our customers; |
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changes in accounting and tax estimates; |
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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); |
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the inability of third-party providers to perform their obligations to us; |
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civic unrest; |
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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; and |
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the impact of wide-spread pandemic, including COVID-19, on our business and the economy. |
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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. |
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Contacts
TFS FINANCIAL CORPORATION
Jennifer Rosa (216) 429-5037
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