TFS Financial Corporation Announces Fourth Quarter and Fiscal Year 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 quarter and fiscal year ended September 30, 2023.

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

"While increases in interest rates have been a challenge during the last two quarters, we are well-positioned for rate uncertainties in our industry," said Chairman and CEO Marc A Stefanski. "We have seen modest growth in our loan portfolio, as well as increases in deposits each quarter during our fiscal year. Our Tier 1 capital ratio remains strong at 11 percent – more than double the regulatory requirement. Like we have been for the past 85 years, we remain strong, stable and safe."

Highlights - Fourth Quarter Fiscal 2023

• Reported net income of $19.5 million
• Added $540 million of new residential mortgage loans with an average yield of 6.32%
• Increased total deposits by $381 million
• Paid a $0.2825 dividend per share

The Company reported net income of $19.5 million for the quarter ended September 30, 2023, an increase of $1.9 million from $17.6 million for the quarter ended June 30, 2023. Results improved quarter over quarter primarily due to an increase in net interest income and a decrease in non-interest expenses.

Net interest income increased $1.6 million to $70.4 million for the quarter ended September 30, 2023 from $68.8 million for the quarter ended June 30, 2023. The increase was primarily the result of an increase in the average balance and yield on loans, partially offset by an increase in the cost of funding. The interest rate spread was 1.46% for the quarter ended September 30, 2023 compared to 1.50% for the quarter ended June 30, 2023. The net interest margin was 1.74% for the quarter ended September 30, 2023 compared to 1.75% for the prior quarter.

During the quarter ended September 30, 2023, there was a $0.5 million provision for credit losses compared to no provision for the quarter ended June 30, 2023. The total allowance for credit losses increased $2.2 million, to $104.8 million, or 0.69% of total loans receivable, primarily due to growth in the home equity loans and lines of credit portfolios. There was $1.8 million in net loan recoveries during the quarter ended September 30, 2023.

Total non-interest expense decreased $1.4 million to $51.5 million for the quarter ended September 30, 2023, from $52.9 million for the quarter ended June 30, 2023. The decrease consisted mainly of a $3.1 million decrease in marketing costs and a $1.3 million decrease in other operating expenses, partially offset by a $3.4 million increase in salaries and employee benefits. The decrease in other operating expenses was mainly due to a combined decrease in third party loan origination costs and expenses for public relations and events related to the Association's 85th anniversary celebrations. Salaries and employee benefits returned to a normalized level after a one-time adjustment to incentive accruals during the previous quarter.

Total assets increased by $322.7 million, or 2%, to $16.92 billion at September 30, 2023 from $16.59 billion at June 30, 2023. The increase was mainly the result of new loan originations exceeding the total of loan sales and principal repayments.

Loans held for investment, net of allowance and deferred loan expenses, increased $282.1 million, or 2%, to $15.17 billion at September 30, 2023 from $14.88 billion at June 30, 2023.

Compared to June 30, 2023, deposits increased by $380.7 million to $9.45 billion at September 30, 2023, consisting of a $562.7 million increase in certificates of deposit and a $187.7 million decrease in savings and checking accounts combined.

Borrowed funds decreased $178.6 million to $5.27 billion at September 30, 2023 from $5.45 billion at June 30, 2023.

Highlights - Fiscal Year 2023

• Reported net income of $75.3 million
• Added $1.86 billion of new residential mortgage loans with weighted average yield of 5.55%
• Grew net interest income by 6% compared to fiscal year 2022
• Remained well capitalized, with a Tier 1 leverage ratio of 10.96%
• Paid a $1.13 dividend per share

The Company reported net income of $75.3 million for the fiscal year ended September 30, 2023 compared to net income of $74.6 million for the fiscal year ended September 30, 2022. The $0.7 million increase was mainly due to an increase in net interest income offset by an increase in non-interest expenses.

Net interest income increased by $16.2 million, or 6.0%, to $283.6 million for the fiscal year ended September 30, 2023, compared to $267.4 million for the fiscal year ended September 30, 2022, driven by loan growth and a higher interest rate environment for all categories of interest-earning assets. The weighted average cost of funding also increased, resulting in an 18 basis point decrease in the interest rate spread, to 1.57% for the fiscal year ended September 30, 2023 from 1.75% for the fiscal year ended September 30, 2022. The net interest margin was 1.80% for the fiscal year ended September 30, 2023 compared to 1.88% for the prior year period.

During the fiscal year ended September 30, 2023, there was a $1.5 million release of provision for credit losses compared to $1.0 million of provision expense for the fiscal year ended September 30, 2022. Net loan recoveries totaled $6.4 million during the fiscal year ended September 30, 2023 and $9.7 million during the prior year. The total allowance for credit losses at September 30, 2023 was $104.8 million, or 0.69% of total loans receivable, compared to $99.9 million, or 0.70% of total loans receivable, at September 30, 2022. The allowance for credit losses included $27.5 million and $27.0 million in liabilities for unfunded commitments at September 30, 2023 and September 30, 2022, respectively.

Total loan delinquencies increased $2.2 million to $23.4 million, or 0.15% of total loans receivable, at September 30, 2023 from $21.2 million, or 0.15% of total loans receivable, at September 30, 2022. Non-accrual loans decreased $3.7 million to $31.9 million, or 0.21% of total loans receivable, at September 30, 2023 from $35.6 million, or 0.25% of total loans receivable, at September 30, 2022.

Total non-interest income decreased $2.4 million, or 10.1%, to $21.4 million for the fiscal year ended September 30, 2023 from $23.8 million for the fiscal year ended September 30, 2022. The decrease consisted mainly of a $2.1 million decrease in loan fees and service charges and a $0.6 million decrease in each of net gain on the sale of loans and income and death benefits from life insurance contracts. The decrease in fees and service charges was primarily due to a decrease in income from title company partnerships related to a slowing in refinance activity.

Total non-interest expenses increased $15.0 million, or 7.6%, to $213.1 million for the fiscal year ended September 30, 2023, from $198.1 million for the fiscal year ended September 30, 2022 and included increases of $3.5 million in salaries and employee benefits, $4.0 million in marketing costs, $0.9 million in office property, equipment and software expenses, $4.1 million in federal ("FDIC") insurance premiums and assessments and $2.5 million in other operating expenses. The increase in other operating expenses was mainly due to public relations and event costs for the Association's 85th anniversary celebration during fiscal 2023 and an increase in pension expense related to net actuarial gains and losses that are reassessed annually. FDIC premiums increased due to growth in deposits and a two basis point increase in FDIC assessment rates that went into effect on January 1, 2023.

Total assets increased by $1.13 billion, or 7%, to $16.92 billion at September 30, 2023 from $15.79 billion at September 30, 2022. The increase was mainly the result of new loan originations exceeding the total of loan sales and principal repayments, along with increases in cash and cash equivalents and investment securities available for sale.

Cash and cash equivalents increased $97.1 million, or 26%, to $466.7 million at September 30, 2023 from $369.6 million at September 30, 2022 due to normal fluctuations and liquidity management.

Investment securities available for sale increased $50.4 million, or 11%, to $508.3 million at September 30, 2023 from $457.9 million at September 30, 2022. During the year, $59.5 million of U.S. Treasury notes were purchased and pledged as collateral for initial margin requirements on swap contracts. The increase was partially offset by $9.7 million of additional unrealized losses on the investment securities portfolio.

Loans held for investment, net of allowance and deferred loan expenses, increased $908.7 million, or 6%, to $15.17 billion at September 30, 2023 from $14.26 billion at September 30, 2022. The residential mortgage loan portfolio increased $538.3 million, to $12.08 billion, and home equity loans and lines of credit increased $396.6 million, to $3.03 billion. Loan originations and purchases during the fiscal year ended September 30, 2023 included $1.86 billion of residential mortgage loans and $1.70 billion of equity loans and lines of credit compared to $3.65 billion of residential mortgage loans and $2.16 billion of equity loans and lines of credit originated or purchased during the fiscal year ended September 30, 2022. The decrease in loan originations was primarily due to a generally increasing interest rate environment, resulting in minimal refinance activity. New mortgage loans included 89% purchases and 34% adjustable rate loans during the fiscal year ended September 30, 2023.

Deposits increased $528.8 million, or 6%, to $9.45 billion at September 30, 2023 from $8.92 billion at September 30, 2022. The increase was the result of a $786.7 million increase in certificates of deposit ("CDs") and a $95.4 million increase in savings accounts, partially offset by a $134.8 million decrease in money market deposit accounts and a $226.6 million decrease in checking accounts. There were $1.16 billion in brokered deposits at September 30, 2023 compared to $575.2 million at September 30, 2022. At September 30, 2023, brokered deposits included $665.0 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 4.1 years.

Borrowed funds increased $480.4 million, or 10%, to $5.27 billion at September 30, 2023 from $4.79 billion at September 30, 2022. The increase was primarily used to fund loan growth. The total balance of borrowed funds at September 30, 2023, all from the FHLB, included $592.0 million of overnight advances, $1.51 billion of term advances with a weighted average maturity of approximately 2.1 years, and $3.15 billion of term advances, aligned with interest rate swap contracts, with a remaining weighted average effective maturity of approximately 3.7 years. Additional borrowing capacity at the FHLB was $1.38 billion at September 30, 2023.

Total shareholders' equity increased $83.0 million, or 4.5%, to $1.93 billion at September 30, 2023 from $1.84 billion at September 30, 2022. Activity reflects $75.3 million of net income and a $62.1 million net increase in accumulated other comprehensive income, reduced by $58.3 million for dividends paid and $5.0 million in repurchases of common stock. Additionally, there was $9.0 million of net positive adjustments related to our stock compensation and employee stock ownership plans. The change in accumulated other comprehensive income is primarily due to a net positive change in unrealized gains and losses on swap contracts. During the fiscal year ended September 30, 2023, a total of 361,869 shares of our common stock were repurchased at an average cost of $13.82 per share. The Company's eighth stock repurchase program allows for a total of 10,000,000 shares to be repurchased, with 5,191,951 shares remaining to be repurchased at September 30, 2023.

The Company declared and paid a quarterly dividend of $0.2825 per share during each of the quarters of fiscal year 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 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 $0.8475 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 for U.S. banking organizations ("Basel III Rules"). At September 30, 2023 all of the Company's capital ratios substantially exceed the amounts required for the Company to be considered "well capitalized" for regulatory capital purposes. The Company's Tier 1 leverage ratio was 10.96%, its Common Equity Tier 1 and Tier 1 ratios were each 19.13% and its total capital ratio was 19.85%.

On October 26, 2023, the Board of Directors of TFS Financial Corporation approved certain leadership changes to be effective as of January 1, 2024. The Board appointed Timothy W. Mulhern, who currently serves as the Company's Chief Financial Officer, to the roles of Chief Innovation Officer of Third Federal Savings and Loan and Vice President of the Company. Additionally, the Board appointed Meredith S. Weil as the Company's Chief Financial Officer. Ms. Weil currently serves as the Chief Operating Officer and Secretary of the Company and as Chief Operating Officer of the Association. She will continue to serve as the Company's Secretary. Effective with these changes, Ms. Weil and other key officers of the respective entities will absorb responsibilities formerly performed by the Chief Operating Officer.

"I am very pleased to announce these changes that strengthen the capacity of our executive team to confront current economic challenges," said Mr. Stefanski. "The diverse backgrounds and business acumen of Ms. Weil and Mr. Mulhern have prepared them well to serve in these new roles."

Ms. Weil, age 57, has served as the Company's Chief Operating Officer since 2018. Ms. Weil joined Third Federal Savings and Loan in 1999 and has served as Chief Operating Officer of the Association since 2012. Ms. Weil has served on the Company's Board of Directors since 2014 and has been the Company's Secretary since 2021. She has worked in the banking industry since 1992.

Mr. Mulhern, age 57, was named the Chief Financial Officer of the Company in January 2022. Mr. Mulhern joined Third Federal Savings and Loan in 2003 and has held several key roles in management including IT and Servicing. He was named the Chief Credit Officer in August 2018 and Director of Internal Audit in June 2019.

Presentation slides as of September 30, 2023 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link within the "Recent Presentations" menu, beginning October 27, 2023. 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. As of September 30, 2023, the Company's assets totaled $16.92 billion.

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