Loan Originations Continue to Drive TFS Financial Corporation Results

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, 2021.

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

The Company reported net income of $23.0 million for the quarter ended March 31, 2021 compared to net income of $17.3 million for the quarter ended March 31, 2020. Net income of $48.0 million was reported for the six months ended March 31, 2021 compared to net income of $42.9 million for the six months ended March 31, 2020. The increase in net income for the quarter and six month periods is primarily the result of higher net gain on the sale of loans and releases from the allowance for credit losses, partially offset by a decrease in net interest income and an increased income tax provision. Other changes include a decrease in other non-interest income and an increase in general and administrative expenses when comparing the fiscal year-to-date periods.

“At Third Federal, we’re seeing sunshine and blue skies ahead as our nation begins to emerge from the pandemic,” said Chairman and CEO Marc A. Stefanski. “Our loan pipeline is strong with refinances, home equities, and the signs of a hot home buying season, while forbearances are half of what they were at year-end.”

Loan originations, mainly refinances, continued at an active pace. We sold, or committed to sell, $517.5 million of fixed-rate loans and recorded related gains of $25.4 million during the six months ended March 31, 2021, 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.

Net interest income was $58.4 million for the quarter ended March 31, 2021 compared to $58.7 million for the quarter ended December 31, 2020 and $65.0 million for the quarter ended March 31, 2020. Net interest income decreased by $12.0 million, or 9.29%, to $117.2 million, for the six months ended March 31, 2021 from $129.2 million for the six months ended March 31, 2020. The interest rate spread was 1.54% for the quarter ended March 31, 2021 compared to 1.51% for the quarter ended December 31, 2020 and 1.64% for the quarter ended March 31, 2020. Funding costs were lowered through a reduction in the average balance of borrowed funds, including the early termination of above-market priced Federal Home Loan Bank ("FHLB") advances and their related swap contracts during the quarter ended September 30, 2020; through the repricing of certificates of deposit to market rates of interest, as they mature; and through the migration from certificates of deposit to lower-priced non-maturity deposit accounts. The interest rate spread was 1.53% for the six months ended March 31, 2021 compared to 1.63% for the six months ended March 31, 2020. The net interest margin was 1.67% for both the quarter and six months ended March 31, 2021, respectively, compared to 1.81% for the quarter and six months ended March 31, 2020, respectively.

A credit of $4.0 million was recorded to the allowance for credit losses during the quarter ended March 31, 2021 compared to a provision of $6.0 million for the quarter ended March 31, 2020 and a credit of $6.0 million was recorded for the six months ended March 31, 2021 compared to a provision of $3.0 million for the six months ended March 31, 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 Company recorded $1.4 million and $2.6 million of net loan recoveries for the quarter and six months ended March 31, 2021, respectively, compared to $1.1 million and $2.5 million of net loan recoveries for the quarter and six months ended March 31, 2020, respectively. Gross loan charge-offs were $1.4 million for the quarter ended March 31, 2021 and $1.3 million for the quarter ended March 31, 2020, while loan recoveries were $2.7 million in the current quarter and $2.4 million in the prior year quarter. The allowance for credit losses was $89.7 million, or 0.70% of total loans receivable, at March 31, 2021, compared to $92.3 million, or 0.71% of total loans receivable, at December 31, 2020 and $46.9 million, or 0.36% of total loans receivable, at September 30, 2020. The allowance for credits losses at both March 31, 2021 and December 31, 2020 included a $22.0 million liability for unfunded commitments, primarily undrawn equity line of credit commitments.

Total loan delinquencies decreased $1.2 million to $27.0 million, or 0.21% of total loans receivable, at March 31, 2021 from $28.2 million, or 0.21% of total loans receivable, at September 30, 2020. Delinquencies at March 31, 2021 included a $0.6 million decrease in delinquencies on core residential mortgages, a $0.8 million decrease on home today residential mortgages and a $0.2 million increase on home equity loans and lines of credit when compared to September 30, 2020. Non-accrual loans decreased $0.8 million to $52.6 million, or 0.41% of total loans, at March 31, 2021 from $53.4 million, or 0.41% of total loans, at September 30, 2020.

At March 31, 2021, there were $64.2 million, or 0.50% 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 $6.6 million, to $134.7 million at March 31, 2021, from $141.3 million at September 30, 2020. COVID-19 forbearance plans are not generally classified as troubled debt restructurings.

Non-interest income increased $6.8 million to $15.7 million for the quarter ended March 31, 2021 from $8.9 million for the quarter ended March 31, 2020 and increased $16.3 million to $37.2 million for the six months ended March 31, 2021 from $20.9 million for the six months ended March 31, 2020. The changes included higher net gain on the sale of loans, which increased $5.8 million, to $8.9 million for the quarter ended March 31, 2021, from $3.1 million during the quarter ended March 31, 2020 and increased $19.3 million, to $25.4 million during the six months ended March 31, 2021, from $6.1 million during the six months ended March 31, 2020. Additionally, the cash surrender value and death benefits from bank owned life insurance increased $1.3 million, to $3.8 million during the quarter ended March 31, 2021, from $2.5 million during the quarter ended March 31, 2020 and increased $1.4 million, to $5.4 million from $4.0 million for the six months ended March 31, 2021 and March 31, 2020, respectively. A $4.3 million net gain on the sale of commercial property recognized during the six months ended March 31, 2020 created further variance when comparing the two fiscal year-to-date periods.

Total non-interest expense decreased $0.8 million to $48.8 million for the quarter ended March 31, 2021 from $49.6 million for the quarter ended March 31, 2020 and increased $3.6 million to $100.5 million for the six months ended March 31, 2021 from $96.9 million for the six months ended March 31, 2020. The increase, when comparing the fiscal year-to-date periods, included a $1.9 million increase in salaries and employee benefits and a $2.6 million increase in marketing expense, partially offset by a $0.7 million decrease in federal insurance premiums. The majority of the increase in salaries and benefits was the result of 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 increase in marketing expense was more timing related, as some marketing efforts were delayed during the previous fiscal year, in response to COVID-19.

Total income tax expense increased $5.1 million to $6.3 million for the quarter ended March 31, 2021 from $1.2 million for the quarter ended March 31, 2020 and increased $4.5 million to $11.8 million for the six months ended March 31, 2021 from $7.3 million for the six months ended March 31, 2020. The change was primarily due to the impact of a CARES Act provision which permitted a carry back of net tax operating losses to years taxed at higher rates and resulted in a tax benefit of $2.8 million during the six months ended March 31, 2020.

Total assets decreased by $177.4 million, or 1.21%, to $14.46 billion at March 31, 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 $167.4 million, or 33.61%, to $665.4 million at March 31, 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 $32.4 million, or 7.15% to $421.0 million at March 31, 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 $394.9 million, or 3.01%, to $12.75 billion at March 31, 2021 from $13.14 billion at September 30, 2020, reflecting the impact of increased loan sales during the year. The home equity loans and lines of credit portfolio decreased $91.1 million and the residential core mortgage loan portfolio, including loans held for sale, decreased $279.3 million during the six months ended March 31, 2021. Commitments originated for home equity loans and lines of credit were $823.7 million for the six months ended March 31, 2021 and $733.3 million for the six months ended March 31, 2020. Total first mortgage loan originations were $2.06 billion for the six months ended March 31, 2021, of which 33% were adjustable-rate mortgages and 18% were fixed-rate mortgages with terms of 10 years or less. Total first mortgage loan originations were $1.33 billion for the six months ended March 31, 2020, of which 45% were adjustable-rate mortgages and 9% were fixed-rate mortgages with terms of 10 years or less. During the six months ended March 31, 2021, $517.5 million of fixed-rate loans were sold or committed for sale compared to $323.2 million of fixed-rate loans sold during the six months ended March 31, 2020.

The amount of Federal Home Loan Bank stock owned increased $26.0 million to $162.8 million at March 31, 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 $71.1 million, to $294.0 million at March 31, 2021, from $222.9 million at December 31, 2020, primarily due to $70 million of additional premiums placed during the quarter.

Prepaid expenses and other assets decreased $10.2 million to $94.6 million at March 31, 2021 from $104.8 million at September 30, 2020. The decrease related primarily to a $6.3 million decrease in margin requirements on matured and terminated swap contracts and a $4.4 million decrease in current and deferred federal income tax assets.

Deposits increased $12.9 million, or less than 1%, to $9.24 billion at March 31, 2021 from $9.23 billion at September 30, 2020. The increase was the result of a $115.8 million increase in our checking accounts, an $89.5 million increase in our savings accounts and $43.2 million of growth in our money market deposit accounts, partially offset by a $234.7 million decrease in our certificates of deposit ("CDs") for the six months ended March 31, 2021. Total deposits included $572.4 million and $553.9 million of brokered CDs at March 31, 2021 and September 30, 2020, respectively.

Borrowed funds, all from the FHLB, decreased $228.0 million, or 6.47%, to $3.29 billion at March 31, 2021 from $3.52 billion at September 30, 2020. Included in the decrease were $225.0 million of 90 day advances that were utilized for longer term interest rate swap contracts and $2.8 million of long term advances that reached maturity during the six-month period and were not replaced.

Borrowers' advances for insurance and taxes decreased by $17.4 million to $94.1 million at March 31, 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 will be remitted to various taxing agencies.

Accrued expenses and other liabilities increased by $23.4 million to $89.0 million at March 31, 2021 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 to fund undrawn equity lines of credit and construction loan balances upon the October 1, 2020 adoption of CECL.

Total shareholders' equity increased $31.6 million, or 1.89%, to $1.70 billion at March 31, 2021 from $1.67 billion at September 30, 2020. Activity reflects $48.0 million of net income and a $44.4 million decrease in accumulated other comprehensive loss, reduced by a $35.8 million provision to the allowance for credit losses, net of tax, with the adoption of CECL, $28.4 million of quarterly dividends and $3.4 million of adjustments related to our stock compensation and employee stock ownership plans. 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 six months ended March 31, 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 and second 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 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 $0.28 during the quarter 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 March 31, 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 10.65%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 19.75% and its total capital ratio was 20.33%. Additionally, the Company's Tier 1 leverage ratio was 12.33%, its Common Equity Tier 1 and Tier 1 ratios were each 22.88% and its total capital ratio was 23.45%. 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.

Anna Maria Motta, the Chief Information Officer of the Association, has announced that she will be retiring from employment at the end of September 2021. Andrew Rubino, who has been with the Association since 2000 and has served in various leadership positions, including Information Security Officer, and as a manager in the loan production, customer service, internet services, operations support and marketing groups, and has served as the Chief Marketing Officer since 2020, will become the new Chief Information Officer at that time. “Anna has been an integral part of our organization for 32 years, serving in almost every aspect of the organization and leading our technology initiatives while in her role as the Chief Information Officer since 2014,” said Chairman and CEO Marc A. Stefanski. “On behalf of our Board, our management team and our associates, I thank her and wish her the best in her retirement. We welcome Andy into his new responsibilities, and have confidence that his background and his extensive experience in many areas of the Company have prepared him for his new role.”

Presentation slides as of March 31, 2021 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning April 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 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 March 31, 2021, the Company’s assets totaled $14.46 billion.

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