TFS Financial Corporation Announces Earnings for the First Fiscal Quarter 2024

Expense management keeps Company well-positioned during the quarter

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, 2023.

This press release features multimedia. View the full release here: https://www.businesswire.com/news/home/20240130536299/en/

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

"Third Federal is well-positioned to withstand the ongoing volatility of the interest rate environment," said Chairman and CEO Marc A. Stefanski. "We have taken proactive and strategic measures to control expenses, significantly reducing the expense-to-asset ratio from 1.34 percent in December 2022, down to 1.17 percent in December 2023. We will continue to prudently manage our expenses to help safeguard against margin compression and will focus on maintaining the Company's strong Tier 1 capital ratio of nearly 11 percent to ensure that we remain strong, stable and safe during this challenging rate environment."

Highlights - First Quarter Fiscal Year 2024

• Reported net income of $20.7 million
• Remained well capitalized, with a Tier 1 leverage ratio of 10.78%
• Paid a $0.2825 dividend

Financial Results for the Quarter ended December 31, 2023 Compared to Prior Quarter

The Company reported net income of $20.7 million for the quarter ended December 31, 2023 compared to $19.5 million for the quarter ended September 30, 2023. The increase in net income was mainly due to a release of provision for credit losses, an increase in non-interest income and a decrease in non-interest expense, partially offset by a decrease in net interest income.

Net interest income decreased $1.3 million, or 2%, to $69.1 million for the quarter ended December 31, 2023, when compared to the quarter ended September 30, 2023 mainly due to the impact of a higher interest rate environment on cost of funds. There was a 36 basis point increase in the average cost of certificates of deposit partially offset by a 15 basis point increase in the average yield on interest-earning assets. The interest rate spread for the quarter ended December 31, 2023 was 1.39% compared to 1.46% for the preceding quarter. The net interest margin was 1.68% for the quarter ended December 31, 2023 and 1.74% for the quarter ended September 30, 2023.

During the quarter ended December 31, 2023, there was a $1.0 million release of provision for credit losses compared to a $0.5 million provision for the quarter ended September 30, 2023. The decrease in provision expense was primarily due to lower growth in loans held for investment due to a slowdown in residential lending. Net loan recoveries were $1.0 million during the quarter ended December 31, 2023 compared to $1.8 million for the prior quarter. The total allowance for credit losses at December 31, 2023 was $94.6 million, or 0.62% of total loans receivable, a $10.2 million decrease from $104.8 million, or 0.69% of total loans receivable, at September 30, 2023. The decrease was due to the adoption of recently issued accounting guidance related to the accounting for troubled debt restructurings, which resulted in a one-time $7.9 million, net of tax, cumulative effect adjustment to retained earnings. The total allowance for credit losses included a liability for unfunded commitments of $25.5 million at December 31, 2023 and $27.5 million at September 30, 2023.

Total loan delinquencies increased $2.5 million to $25.9 million, or 0.17% of total loans receivable, at December 31, 2023 from $23.4 million, or 0.15% of total loans receivable, at September 30, 2023. Non-accrual loans increased $1.6 million to $33.5 million, or 0.22% of total loans receivable, at December 31, 2023 from $31.9 million, or 0.21% of total loans receivable, at September 30, 2023.

Total non-interest income increased $1.2 million, to $6.3 million, for the quarter ended December 31, 2023 when compared to the quarter ended September 30, 2023. The change was primarily due to increases of $0.6 million in net gain on sale of loans and $1.0 million in benefits realized on bank owned life insurance contracts.

Total non-interest expense for the quarter ended December 31, 2023 decreased $1.2 million from the prior quarter, to $50.3 million, mainly due to a $1.6 million decrease in salaries and employee benefits, partially offset by a $0.6 million increase in marketing costs.

Financial Results for the Quarter ended December 31, 2023 Compared to Same Quarter a Year Ago

The Company reported net income of $20.7 million for the quarter ended December 31, 2023 compared to $22.2 million for the quarter ended December 31, 2022. The decrease in net income was mainly due to a decrease in net interest income, partially offset by an increase in non-interest income and a decrease in non-interest expense.

Net interest income decreased $6.1 million, or 8%, to $69.1 million for the quarter ended December 31, 2023 compared to $75.2 million for the same quarter a year ago. Contributing to this variance was an increase of 176 basis points in the average cost of certificates of deposit, partially offset by a 66 basis point increase in the average yield on loans. The interest rate spread for the quarter ended December 31, 2023 was 1.39% compared to 1.75% for the year-ago quarter. The net interest margin was 1.68% for the quarter ended December 31, 2023 and 1.95% for the quarter ended December 31, 2022.

Total non-interest income increased by $1.1 million, to $6.3 million for the quarter ended December 31, 2023, from $5.2 million for the quarter ended December 31, 2022, mainly due to a $1.0 million increase in benefits realized on bank owned life insurance contracts.

Total non-interest expense decreased $2.9 million, to $50.3 million for the quarter ended December 31, 2023, from $53.2 million for the same quarter a year ago. Variances between the two periods included a $3.3 million decrease in marketing costs, a $1.3 million decrease in salaries and employee benefits and a $1.0 million increase in federal insurance premium and assessments. The decrease in salaries and employee benefits was primarily related to a decrease in benefit costs between the two periods while the increase in FDIC premiums was primarily due to growth in deposits and a two basis point increase in FDIC assessment rates that went into effect on January 1, 2023.

Financial Position at December 31, 2023 Compared to Prior Fiscal Year End

Total assets increased by $135.8 million, or 1%, to $17.05 billion at December 31, 2023 from $16.92 billion at September 30, 2023. This change was mainly the result of increases in cash and cash equivalents and loans held for investment.

Cash and cash equivalents increased by $85.1 million, or 18%, to $551.8 million at December 31, 2023 from $466.7 million at September 30, 2023 due to normal fluctuations.

Loans held for investment, net of deferred loan fees and allowance for credit losses, increased $41.5 million, or less than 1%, to $15.21 billion at December 31, 2023 from $15.17 billion at September 30, 2023. During the quarter ended December 31, 2023, residential core mortgage loans decreased $128.6 million and the home equity loans and lines of credit portfolio increased $167.2 million. During the quarter ended December 31, 2023, repayments and sales of residential mortgage loans held for investment outpaced originations.

The change in loans held for investment was affected by the volume of loan originations and sales. During the quarter ended December 31, 2023, total first mortgage loan originations were $273.0 million compared to $543.6 million for the quarter ended September 30, 2023 and $617.9 million for the quarter ended December 31, 2022. The current period mortgage loan originations included 94% purchase transactions and 30% adjustable rates. Commitments originated for home equity loans and lines of credit were $436.1 million for the quarter ended December 31, 2023 compared to $462.2 million for the quarter ended September 30, 2023 and $858.9 million for the quarter ended December 31, 2022. There were $87.8 million of residential first mortgage loans sold during the quarter ended December 31, 2023.

Deposits increased by $471.2 million, or 5%, to $9.92 billion at December 31, 2023 from $9.45 billion at September 30, 2023. The increase in deposits was the result of a $680.6 million increase in certificates of deposit ("CDs"), offset by a $52.8 million decrease in checking accounts, a $65.3 million decrease in money market accounts and a $99.0 million decrease in savings accounts during the quarter ended December 31, 2023. Total deposits include $1.49 billion and $1.16 billion of brokered CDs at December 31, 2023 and September 30, 2023, respectively. At December 31, 2023, brokered CDs included $875.0 million of three-month certificates of deposit accounts aligned with pay-fixed interest rate swap contracts, with a remaining weighted average effective maturity of approximately 3.6 years.

Borrowed funds decreased $243.1 million, or 5%, to $5.03 billion at December 31, 2023 from $5.27 billion at September 30, 2023. The total balance of borrowed funds at December 31, 2023 consisted of $1.98 billion of long-term advances with a weighted average maturity of approximately 2.3 years and $3.03 billion of three-month advances, aligned with interest rate swap contracts, with a remaining weighted average effective maturity of approximately 3.4 years, all from the Federal Home Loan Bank.

Total shareholders' equity decreased $60.6 million, or 3%, to $1.87 billion at December 31, 2023 from $1.93 billion at September 30, 2023. Activity during the quarter reflects $20.7 million of net income, a $7.9 million adjustment to retained earnings related to a change in accounting principle described above with respect to changes in the allowance for credit losses, a $75.0 million net decrease in accumulated other comprehensive income, a quarterly dividend of $14.6 million and a net positive adjustment of $0.4 million related to stock compensation and employee stock ownership plans. The change in accumulated other comprehensive income is primarily due to a net negative change in unrealized gains and losses on swap contracts. There were no stock repurchases during the quarter. The Company's eighth stock repurchase program allows for a total of 10,000,000 shares to be repurchased and 4,808,049 shares have been repurchased as of December 31, 2023.

Other Noteworthy Items for the Quarter Ended December 31, 2023

The Company declared and paid a quarterly dividend of $0.2825 per share during the quarter ended December 31, 2023. 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 11, 2023 member vote and the subsequent non-objection of the Federal Reserve, the MHC has the approval to waive 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 11, 2024), including a total of up to $0.565 remaining. The MHC has conducted the member vote to approve the dividend waiver each of the past ten years under Federal Reserve regulations and for each of those ten years, approximately 97% of the votes cast were in favor of the waiver.

The Company operates under the capital requirements for the standardized approach of the Basel III capital framework ("Basel III Rules"). At December 31, 2023 all of the Company's capital ratios exceeded the amounts required for the Company to be considered "well capitalized" for regulatory capital purposes. The Company's Tier 1 leverage ratio was 10.78%, its Common Equity Tier 1 and Tier 1 ratios, as calculated under the fully phased-in Basel III Rules, were each 19.02% and its total capital ratio was 19.75%.

Kathleen (Kitty) M. Danckers, the Chief Risk Officer of the Company, announced that she will be retiring from employment in June 2024. Deborah (Debbie) Hand, who has been with the Association since 2008 and has served in various leadership positions, including Chief Credit Officer and as a manager in the Association's default servicing, internet services, escrow, and operational risk departments, will become the new Chief Risk Officer at that time. "Kitty has been an integral part of our organization for 26 years, mentoring and leading with her strong business acumen and communication skills while in her role as the Chief Risk Officer since 2020," 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 Debbie into her new responsibilities, and have confidence that her background and her extensive experience in many areas of the Company have prepared her for her new role."

Presentation slides as of December 31, 2023 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning January 31, 2024. 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 85^th anniversary in May 2023. 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, four lending offices in Central and Southern Ohio, and 16 full service branches throughout Florida.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240130536299/en/