Growth in Loan Originations, Strong Borrower Credit Highlight Successful Year for TFS Financial Corporation

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, 2021.

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

The Company reported net income of $17.0 million for the quarter ended September 30, 2021 compared to net income of $13.6 million for the quarter ended September 30, 2020. The improvement when compared to the prior year quarter included an increase in net interest income and lower non-interest expense, partially offset by lower net gain on the sale of loans. Net income of $81.0 million was reported for the fiscal year ended September 30, 2021 compared to net income of $83.3 million for the fiscal year ended September 30, 2020. A decline in net interest income and higher non-interest expense for the current fiscal year offset the benefit of higher non-interest income and releases from the credit loss provision.

“Even after a year of unprecedented loan activity in 2020, our originations in 2021 were up 20 percent,” said Chairman and CEO, Marc A. Stefanski. “In addition, the credit profile of our current customers, and those with mortgages in the pipeline, has been another source of strength during both this last quarter and our fiscal year.”

Loan origination volumes remained high, as there were $3.63 billion of first mortgage loans originated during the fiscal year ended September 30, 2021 and $3.08 billion for the fiscal year ended September 30, 2020. New equity line of credit commitments were $1.65 billion and $1.23 billion, respectively, for the fiscal years ended September 30, 2021 and September 30, 2020. During the fiscal year ended September 30, 2021, $762.3 million of loans were sold for a net gain of $33.1 million compared to $844.3 million sold for a net gain of $28.4 million during the fiscal year ended September 30, 2020. By comparison, loan sales were $117.3 million for a gain of $1.9 million during the fiscal year ended September 30, 2019.

Net interest income increased $0.3 million, or 0.6%, to $57.4 million for the quarter ended September 30, 2021 from $57.1 million for the quarter ended June 30, 2021. Net interest income was $50.2 million for the quarter ended September 30, 2020. Net interest income decreased by $10.7 million, or 4.4%, to $231.6 million, for the fiscal year ended September 30, 2021 from $242.3 million for the fiscal year ended September 30, 2020. The decrease between fiscal years was primarily due to lower yields 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 declined, 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 a heightened migration to lower-priced non-maturity deposit accounts from certificates of deposit due to historically low yield differentials. The quarter and year ended September 30, 2020 included $7.8 million of additional interest expense recognized on the terminations of advances and related swap contracts. The interest rate spread was 1.52% for both the fiscal years ended September 30, 2021 and September 30, 2020. The net interest margin was 1.66% and 1.69% for the fiscal years ended September 30, 2021 and September 30, 2020, respectively.

During the quarter ended September 30, 2021, a $2.0 million release of provision from the allowance for credit losses was recognized, bringing the total release of provision for the fiscal year to $9.0 million. A provision of $3.0 million was recorded for the prior fiscal year, with no provision during the quarter ended September 30, 2020. Releases from the allowance for credit losses during the recent fiscal year were primarily due to recoveries exceeding charge-offs and improvements in the economic trends and forecasts used to estimate credit losses for the reasonable and supportable period. 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 $89.3 million, or 0.71% of total loans receivable, at September 30, 2021 and included a $25.0 million liability for unfunded commitments. At September 30, 2020, the allowance for credit losses was $46.9 million, or 0.36% of total loans receivable. The Company recorded $1.5 million and $5.2 million of net loan recoveries for the quarter and fiscal year ended September 30, 2021, respectively, compared to $1.4 million and $5.0 million of net loan recoveries for the quarter and fiscal year ended September 30, 2020, respectively.

Total loan delinquencies decreased $3.5 million to $24.7 million, or 0.20% of total loans receivable, at September 30, 2021 from $28.2 million, or 0.21% of total loans receivable, at September 30, 2020. Delinquencies at September 30, 2021 included a $2.1 million decrease in delinquencies on residential mortgages and a $1.3 million decrease on home equity loans and lines of credit when compared to September 30, 2020. Non-accrual loans decreased $9.4 million to $44.0 million, or 0.35% of total loans, at September 30, 2021 from $53.4 million, or 0.41% of total loans, at September 30, 2020.

At September 30, 2021, there were $21.8 million, or 0.17% 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. Total troubled debt restructurings decreased $14.2 million, to $127.1 million at September 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 $8.4 million to $8.7 million for the quarter ended September 30, 2021 from $17.1 million for the quarter ended September 30, 2020. The decrease was primarily due to a $7.2 million decrease in net gain on the sale of loans and a $1.1 million reduction in the fair value of interest rate lock commitments on mortgage loans originated for sale, both related to pricing movement in the secondary mortgage market. Non-interest income increased $2.0 million to $55.3 million for the fiscal year ended September 30, 2021 from $53.3 million for the fiscal year ended September 30, 2020, mainly due to increases in the net gain on the sale of loans and in the cash surrender value and death benefits on bank owned life insurance contracts. These increases were offset by a decrease in other non-interest income which, in the previous fiscal year, included $4.7 million of net gain on the sale of commercial property.

Total non-interest expense decreased $3.2 million to $47.4 million for quarter ended September 30, 2021 from $50.6 million for the quarter ended September 30, 2020, primarily due to a $3.5 million decrease in other operating expenses. This included a $2.2 million net positive change in pension expense/benefit and no fees for termination of borrowings and swap contracts compared to $1.1 million in fees during the same quarter last year. Total non-interest expense increased $3.5 million to $195.8 million for the fiscal year ended September 30, 2021 from $192.3 million for the fiscal year ended September 30, 2020, with increases in salary and employee benefits and marketing expense being the main reason. The increase in salary and benefits was spread between associate compensation, group health insurance, stock benefit plan expense, and a one-time $1,500 after-tax bonus paid to each associate during the first quarter of fiscal year 2021 in recognition of special efforts made during the pandemic crisis. The increase in marketing expense was timing related, as some marketing efforts were delayed during the previous fiscal year, in response to COVID-19.

Total assets decreased by $584.8 million, or 4.0%, to $14.06 billion at September 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 and the impact of adopting CECL, partially offset by an increase in bank owned life insurance contracts.

The combination of loans held for investment, net of allowance and deferred loan expenses, and mortgage loans held for sale decreased $622.1 million, or 4.7%, to $12.52 billion at September 30, 2021 from $13.14 billion at September 30, 2020, reflecting the impact of prepayments and increased loan sales during the fiscal year. The residential core mortgage loan portfolio, including loans held for sale, decreased $587.6 million during the fiscal year, to $10.28 billion. At September 30, 2021, 45% of the residential mortgage loan portfolio were adjustable rate mortgages and 13% were fixed rate mortgages originated with terms of 10 years or less. The drawn balances of the home equity loans and lines of credit portfolio decreased $18.0 million, to $2.21 billion, during the fiscal year ended September 30, 2021.

Total bank owned life insurance contracts increased $74.4 million, to $297.3 million at September 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 $231.9 million, or 2.5%, to $8.99 billion at September 30, 2021 from $9.23 billion at September 30, 2020. The decrease was the result of a $567.5 million decrease in our certificates of deposit ("CDs"), partially offset by a $136.2 million increase in our checking accounts, a $157.1 million increase in our savings accounts and $43.5 million of growth in our money market deposit accounts, for the fiscal year ended September 30, 2021. Total deposits included $492.0 million and $553.9 million of brokered CDs at September 30, 2021 and September 30, 2020, respectively.

Borrowed funds, all from the FHLB, decreased $429.9 million, or 12.2%, to $3.09 billion at September 30, 2021 from $3.52 billion at September 30, 2020. Included in the decrease were $525.0 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 $95.2 million net increase in long term advances.

Total shareholders' equity increased $60.4 million, or 3.6%, to $1.73 billion at September 30, 2021 from $1.67 billion at September 30, 2020. Activity reflects $81.0 million of net income, a $64.2 million decrease in accumulated other comprehensive loss and $8.1 million of positive adjustments related to our stock compensation and employee stock ownership plans, reduced by $57.1 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 fiscal year ended September 30, 2021.

The Company declared and paid a quarterly dividend of $0.2825 per share during the fourth fiscal quarter of 2021 and a quarterly dividend of $0.28 per share during 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. As a result of a July 13, 2021 member vote and the subsequent non-objection of the Federal Reserve, the MHC has the approval to waive the 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 13, 2022), including a total of up to $0.8475 during the three quarters ending December 31, 2021, March 31, 2022 and June 30, 2022, to be declared at the discretion of the Company's board of directors. 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 September 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 11.15%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 20.43% and its total capital ratio was 21.00%. Additionally, the Company's Tier 1 leverage ratio was 12.65%, its Common Equity Tier 1 and Tier 1 ratios were each 23.18% and its total capital ratio was 23.75%. 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.

Presentation slides as of September 30, 2021 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning October 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 September 30, 2021, the Company’s assets totaled $14.06 billion.

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