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TFS Financial Corporation Posts Strongest Annual Earnings Since 2005

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CLEVELAND, Oct. 30, 2013 (GLOBE NEWSWIRE) -- 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, 2013.

The Company reported net income of $15.8 million for the three months ended September 30, 2013 compared to net income of $1.1 million for the three months ended September 30, 2012. The increase in net income is largely the result of a lower provision for loan losses. Net income of $56.0 million was reported for the fiscal year ended September 30, 2013, compared to net income of $11.5 million for the fiscal year ended September 30, 2012. The increase in net income for the fiscal year is mainly the result of a lower provision for loan losses and increases in net interest income and gain on sale of loans, partially offset by an increase in non-interest expenses.

"We are pleased with the significant increase in our annual net income compared to last year," said Chairman and CEO Marc A. Stefanski. "The housing market improved this year and charge-offs continue to decline. We continue to add new customers and grow our variable rate and shorter-term mortgages. We were happy to resume our stock repurchase program which helps fuel our confidence for the future."

Lower interest rates on deposits, particularly on certificates of deposit, caused net interest income to increase $6.4 million, or 2%, to $268.6 million for the fiscal year ended September 30, 2013 from $262.2 million for the fiscal year ended September 30, 2012. To better manage funding costs, maturing higher rate certificates of deposits were replaced by other lower rate savings products or borrowed funds from the FHLB, as needed. The net interest income change for the current quarter was minimal compared to last year as net interest income for the three months ended September 30, 2013 decreased $0.2 million from the three months ended September 30, 2012. The interest rate spread increased 12 basis points in the current quarter to 2.24% compared to 2.12% in the same quarter last year. The interest rate spread for the fiscal year ended September 30, 2013 was 2.25% compared to 2.11% in the previous fiscal year. The net interest margin increased six basis points in the current quarter to 2.43% compared to 2.37% in the same quarter last year. The net interest margin for the fiscal year ended September 30, 2013 was 2.46% compared to 2.39% in the previous fiscal year.

The Company recorded a provision for loan losses of $4.0 million for the three months ended September 30, 2013 compared to $29.0 million for the three months ended September 30, 2012. The Company reported $8.0 million of net loan charge-offs for the three months ended September 30, 2013 compared to $35.9 million for the three months ended September 30, 2012. Of the $8.0 million of net charge-offs in the current quarter, $3.8 million occurred in the equity loans and lines of credit portfolio, $1.7 million occurred in the residential, non-Home Today portfolio and $2.4 million occurred in the Home Today portfolio. The Home Today portfolio, which has had minimal new originations since 2009, is an affordable housing program targeted toward low and moderate income home buyers, totaled $178.4 million at September 30, 2013 and $208.3 million at September 30, 2012. The Company recorded a provision for loan losses of $37.0 million for the fiscal year ended September 30, 2013 compared to $102.0 million for the fiscal year ended September 30, 2012. The Company reported $44.9 million of net loan charge-offs for the fiscal year ended September 30, 2013 compared to $158.5 million for the fiscal year ended September 30, 2012. Of the $44.9 million of net charge-offs for the fiscal year ended September 30, 2013, $18.6 million occurred in the equity loans and lines of credit portfolio, $14.7 million occurred in the residential, non-Home Today portfolio and $11.5 million occurred in the Home Today portfolio. Net charge-offs of $158.5 million for the fiscal year ended September 30, 2012 included the impact of charging off, during that period, the Specific Valuation Allowance (SVA), which was $55.5 million at September 30, 2011 and $15.8 million of mostly performing loans as a result of implementing new regulatory guidance on Chapter 7 bankruptcies. The allowance for loan losses was $92.5 million, or 0.91% of total loans receivable, at September 30, 2013, compared to $100.5 million, or 0.97% of total loans receivable, at September 30, 2012.

Non-accrual loans decreased $26.8 million to $155.8 million, or 1.53% of total loans, at September 30, 2013 from $182.6 million, or 1.77% of total loans, at September 30, 2012. The $26.8 million decrease in non-accrual loans for the fiscal year ended September 30, 2013, consisted of a $14.7 million decrease in the residential, non-Home Today portfolio; a $6.3 million decrease in the Home Today portfolio; a $5.4 million decrease in the equity loans and lines of credit portfolio; and a $0.3 million decrease in construction loans.

Total loan delinquencies decreased $38.5 million to $134.0 million, or 1.31% of total loans receivable, at September 30, 2013 from $172.5 million, or 1.66% of total loans receivable, at September 30, 2012.

Total troubled debt restructurings decreased $19.7 million to $201.7 million at September 30, 2013 from $221.4 million at September 30, 2012. Of the $201.7 million of troubled debt restructurings recorded at September 30, 2013, $110.8 million was in the residential, non-Home Today portfolio, $70.0 million was in the Home Today portfolio and $20.7 million was in the equity loans and lines of credit portfolio. The portion of total troubled debt restructurings included as part of non-accrual loans was $84.9 million at September 30, 2013 and $86.9 million at September 30, 2012.

Total assets decreased $241.7 million, or 2%, to $11.28 billion at September 30, 2013 from $11.52 billion at September 30, 2012. This change was mainly the result of the combination of loan sales, principal repayments and net charge-offs exceeding new loan origination levels, partially offset by an increase in the combination of cash and cash equivalents and investment securities.

The combination of cash and cash equivalents and investment securities increased $33.7 million, or 5%, to $763.4 million at September 30, 2013 from $729.7 million at September 30, 2012, to maintain liquidity levels.

The combination of loans held for investment, net and mortgage loans held for sale decreased $261.3 million, or 3%, to $10.09 billion at September 30, 2013 from $10.35 billion at September 30, 2012. During the fiscal year ended September 30, 2013, loan sales of $349.2 million were completed, consisting of $72.4 million of fixed rate loans that qualified under Fannie Mae's Home Affordable Refinance Program (HARP II), $148.7 million of fixed rate non-agency whole loans and $128.1 million of variable rate non-agency whole loans. Net gain on the sale of these loans was $8.3 million. Loan sales of $11.4 million were completed during the fiscal year ended September 30, 2012, which generated a gain of $0.7 million. In spite of the increased loan sales mentioned above, residential non-Home Today mortgage loans, including those held for sale, increased $55.0 million during the fiscal year ended September 30, 2013. The equity loans and lines of credit portfolio decreased by $297.1 million during that period. First mortgage loan originations were $2.19 billion for the fiscal year ended September 30, 2013, of which 44% were adjustable rate mortgages and 26% were fixed rate mortgages with terms of 10 years or less, compared to 56% and 13%, respectively, for the fiscal year ended September 30, 2012. We continue to originate additional HARP II eligible loans for sale which had a balance of $4.2 million at September 30, 2013. We are in the process of implementing loan origination changes, which upon review and approval by Fannie Mae, will allow a portion of our future first mortgage loan originations to be eligible for securitization and sale as Fannie Mae mortgage backed securities.

Deposits decreased $516.9 million, or 6%, to $8.46 billion at September 30, 2013 from $8.98 billion at September 30, 2012. The decrease in deposits was the net result of a $31.7 million increase in our savings accounts, a $21.2 million increase in our checking accounts, and a $569.5 million decrease in our certificates of deposit ("CD") for the fiscal year ended September 30, 2013. To manage our cost of funds, maturing, higher rate CDs were replaced by other lower rate savings products or borrowed funds from the FHLB, as needed.

Borrowed funds increased $256.9 million, or 3%, to $745.1 million at September 30, 2013 from $488.2 million at September 30, 2012. This increase reflects additional mainly medium term (four to six years) advances of $320 million from the FHLB, partially offset by a $53 million reduction of overnight advances and other principal repayments.

Principal, interest and related escrow on loans serviced decreased $51.8 million, or 41%, to $75.7 million at September 30, 2013 from $127.5 million at September 30, 2012. This decrease reflects mainly the impact of a lower balance in the sold loan portfolio.

Total shareholders' equity increased $64.6 million, or 4%, to $1.87 billion at September 30, 2013 from $1.81 billion at September 30, 2012. Activity reflects $56.0 million of net income in the current fiscal year combined with adjustments related to our stock compensation plan, ESOP and accumulated other comprehensive loss.

Non-interest expense increased $6.6 million, or 4%, to $177.7 million for the year ended September 30, 2013 from $171.1 million for the year ended September 30, 2012. Increases in compensation and marketing were partially offset by decreases in federal insurance premium and assessments, real estate owned expenses and other operating expenses.

At September 30, 2013, all capital ratios substantially exceed the amounts required for the Association to be considered "well capitalized" for regulatory capital purposes. The tier 1 risk-based capital ratio was 22.83% for the Association and 26.69% for the Company. Total risk-based capital was 24.08% for the Association and 27.94% for the Company.

Ralph Betters, the Chief Information Officer of the Association, has announced that he will be retiring from employment in January 2014. Anna Motta, who has been with the Association since 1989 and has served as the Manager of Retail Operations and Information Systems, will become the new Chief Information Officer. "Ralph has been an important contributor to our success during the last 22 years. He has been a thought leader and mentor throughout the company," said Chairman and CEO Marc A. Stefanski. "On behalf of our Board, our management team and our associates, I thank him and wish him the best in his retirement. Because of Anna's wide range of experience with the Association, she is well-positioned for her new role."

The Company will host a conference call to discuss its operating results for the three month and fiscal year periods ending September 30, 2013 at 10:00 a.m. (ET) on October 31, 2013. The toll-free dial-in number is 866-952-1908 Conference ID TFSLQ413. A telephone replay will be available beginning at 2:00 p.m. (ET) on October 31, 2013 by dialing 800-723-0394. The conference call will be simultaneously webcast on the Company's website www.thirdfederal.com under the Investor Relations link under the "About Us" tab, and will be archived for 30 days after the event, beginning November 1, 2013. The slides for the conference call will be available on the Company's website.

Third Federal Savings and Loan is a leading provider of savings and mortgage products. Founded in Cleveland in 1938 as a mutual association by Ben and Gerome Stefanski, Third Federal became a public company in 2007 and celebrated its 75th anniversary in May, 2013. The Association 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, eight lending offices in Central and Southern Ohio, and 17 full service branches throughout Florida. As of September 30, 2013, Third Federal assets totaled $11.2 billion.

Forward-Looking Statements

This release 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:

  • statements of our goals, intentions and expectations;
  • statements regarding our business plans and prospects and growth and operating strategies;
  • statements concerning trends in our provision for loan losses and charge-offs;
  • statements regarding the asset quality of our loan and investment portfolios; and
  • estimates of our risks and future costs and benefits.

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:

  • significantly increased competition among depository and other financial institutions;
  • inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;
  • general economic conditions, either nationally or in our market areas, including employment prospects and conditions that are worse than expected;
  • decreased demand for our products and services and lower revenue and earnings because of a recession or other events;
  • adverse changes and volatility in the securities markets;
  • adverse changes and volatility in credit markets;
  • 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 and Loan Association of Cleveland, MHC to waive dividends;
  • 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;
  • changes in consumer spending, borrowing and savings habits;
  • 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;
  • future adverse developments concerning Fannie Mae or Freddie Mac;
  • changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury or the Federal Reserve Board and changes in the level of government support of housing finance;
  • changes in policy and/or assessment rates of taxing authorities that adversely affect us;
  • the timing and the amount of revenue that we may recognize;
  • changes in expense trends (including, but not limited to, trends affecting non-performing assets, charge-offs and provisions for loan losses);
  • the impact of the continuing governmental effort to restructure the U.S. financial and regulatory system;
  • inability of third-party providers to perform their obligations to us;
  • adverse changes and volatility in real estate markets;
  • a slowing or failure of the moderate economic recovery;
  • the extensive reforms enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), which will continue to impact us;
  • the adoption of implementing regulations by a number of different regulatory bodies under the Dodd-Frank Act, and uncertainty regarding the exact nature, extent and timing of such regulations and the impact they will have on us;
  • the continuing impact of coming under the jurisdiction of new federal regulators;
  • changes in our organization, or compensation and benefit plans;
  • the results of the federal government shutdown and any future government shutdowns;
  • the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and their impact on the credit quality of our loans and other assets; and
  • the ability of the U.S. Government to manage federal debt limits.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
September 30, September 30,
2013 2012
ASSETS
Cash and due from banks $ 34,694 $ 38,914
Other interest-earning cash equivalents 251,302 269,348
Cash and cash equivalents 285,996 308,262
Investment securities:
Available for sale (amortized cost $480,664 and $417,416, respectively) 477,376 421,430
Mortgage loans held for sale, at lower of cost or market ($3,369 and $3,017 measured at fair value, respectively) 4,179 124,528
Loans held for investment, net:
Mortgage loans 10,185,674 10,339,402
Other loans 4,100 4,612
Deferred loan fees, net (13,171) (18,561)
Allowance for loan losses (92,537) (100,464)
Loans, net 10,084,066 10,224,989
Mortgage loan servicing assets, net 14,074 19,613
Federal Home Loan Bank stock, at cost 35,620 35,620
Real estate owned 22,666 19,647
Premises, equipment, and software, net 58,517 61,150
Accrued interest receivable 31,489 34,887
Bank owned life insurance contracts 183,724 177,279
Other assets 78,689 90,720
TOTAL ASSETS $ 11,276,396 $ 11,518,125
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits 8,464,499 8,981,419
Borrowed funds 745,117 488,191
Borrowers' advances for insurance and taxes 71,388 67,864
Principal, interest, and related escrow owed on loans serviced 75,745 127,539
Accrued expenses and other liabilities 48,170 46,262
Total liabilities 9,404,919 9,711,275
Commitments and contingent liabilities
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 309,230,591 and 309,009,393 outstanding at September 30, 2013 and September 30, 2012, respectively 3,323 3,323
Paid-in capital 1,696,370 1,691,884
Treasury stock, at cost; 23,088,159 and 23,309,357 shares at September 30, 2013 and September 30, 2012, respectively (278,215) (280,937)
Unallocated ESOP shares (70,418) (74,751)
Retained earnings—substantially restricted 529,021 473,247
Accumulated other comprehensive loss (8,604) (5,916)
Total shareholders' equity 1,871,477 1,806,850
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,276,396 $ 11,518,125
TFS Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except share and per share data)
For the Three Months Ended
September 30,
For the Fiscal Year Ended
September 30,
2013 2012 2013 2012
INTEREST INCOME:
Loans, including fees $ 90,511 $ 101,354 $ 376,840 $ 409,400
Investment securities available for sale 1,489 1,382 4,941 1,995
Investment securities held to maturity 4,245
Other interest and dividend earning assets 545 539 2,191 2,213
Total interest and dividend income 92,545 103,275 383,972 417,853
INTEREST EXPENSE:
Deposits 25,194 36,300 111,408 153,100
Borrowed funds 1,272 672 4,011 2,546
Total interest expense 26,466 36,972 115,419 155,646
NET INTEREST INCOME 66,079 66,303 268,553 262,207
PROVISION FOR LOAN LOSSES 4,000 29,000 37,000 102,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 62,079 37,303 231,553 160,207
NON-INTEREST INCOME:
Fees and service charges, net of amortization 2,331 2,416 8,921 11,473
Net gain on the sale of loans 10 688 8,267 688
Increase in and death benefits from bank owned life insurance contracts 1,671 1,655 6,464 6,484
Other 1,279 1,273 4,816 5,818
Total non-interest income 5,291 6,032 28,468 24,463
NON-INTEREST EXPENSE:
Salaries and employee benefits 22,115 20,304 86,471 80,113
Marketing services 3,512 2,669 12,983 9,799
Office property, equipment and software 5,691 5,026 21,009 20,489
Federal insurance premium and assessments 3,184 3,515 13,019 14,294
State franchise tax 1,651 1,662 6,627 6,039
Real estate owned expense, net 1,956 1,759 6,724 8,190
Appraisal and other loan review expense 495 697 3,005 3,172
Other operating expenses 5,027 8,885 27,822 28,962
Total non-interest expense 43,631 44,517 177,660 171,058
INCOME (LOSS) BEFORE INCOME TAXES 23,739 (1,182) 82,361 13,612
INCOME TAX EXPENSE (BENEFIT) 7,970 (2,288) 26,402 2,133
NET INCOME $ 15,769 $ 1,106 $ 55,959 $ 11,479
Earnings per share—basic and diluted $ 0.05 $0.00 $ 0.18 $ 0.04
Weighted average shares outstanding
Basic 302,087,477 301,433,861 301,832,758 301,226,639
Diluted 303,248,702 302,094,451 302,746,766 301,770,338
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCES AND YIELDS (unaudited)
Three Months Ended September 30, 2013 Three Months Ended September 30, 2012
Average
Balance
Interest
Income/
Expense
Yield/
Cost (1)
Average
Balance
Interest
Income/
Expense
Yield/
Cost (1)
(Dollars in thousands)
Interest-earning assets:
Other interest-bearing cash equivalents $ 248,210 $ 168 0.27% $ 275,256 $ 163 0.24%
Investment securities 7,859 9 0.46% 9,868 9 0.36%
Mortgage-backed securities 453,954 1,480 1.30% 391,808 1,373 1.40%
Loans 10,111,134 90,511 3.58% 10,475,180 101,354 3.87%
Federal Home Loan Bank stock 35,620 377 4.23% 35,620 376 4.22%
Total interest-earning assets 10,856,777 92,545 3.41% 11,187,732 103,275 3.69%
Noninterest-earning assets 296,283 288,538
Total assets $ 11,153,060 $ 11,476,270
Interest-bearing liabilities:
NOW accounts $ 1,023,489 $ 479 0.19% $ 993,593 $ 718 0.29%
Savings accounts 1,804,815 1,253 0.28% 1,771,915 1,667 0.38%
Certificates of deposit 5,686,907 23,462 1.65% 6,224,196 33,915 2.18%
Borrowed funds 567,672 1,272 0.90% 443,074 672 0.61%
Total interest-bearing liabilities 9,082,883 26,466 1.17% 9,432,778 36,972 1.57%
Noninterest-bearing liabilities 206,327 237,563
Total liabilities 9,289,210 9,670,341
Shareholders' equity 1,863,850 1,805,929
Total liabilities and shareholders' equity $ 11,153,060 $ 11,476,270
Net interest income $ 66,079 $ 66,303
Interest rate spread (2) 2.24% 2.12%
Net interest-earning assets (3) $ 1,773,894 $ 1,754,954
Net interest margin (4) 2.43% (1) 2.37% (1)
Average interest-earning assets to average interest-bearing liabilities 119.53% 118.60%
(1) Annualized
(2) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by total interest-earning assets.
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCES AND YIELDS (unaudited)
Fiscal Year Ended September 30, 2013 Fiscal Year Ended September 30, 2012
Average
Balance
Interest
Income/
Expense
Yield/
Cost
Average
Balance
Interest
Income/
Expense
Yield/
Cost
(Dollars in thousands)
Interest-earning assets:
Other interest-bearing cash equivalents $ 243,538 $ 635 0.26% $ 279,053 $ 697 0.25%
Investment securities 8,980 36 0.40% 10,212 38 0.37%
Mortgage-backed securities 441,907 4,905 1.11% 375,513 6,202 1.65%
Loans 10,200,360 376,840 3.69% 10,264,117 409,400 3.99%
Federal Home Loan Bank stock 35,620 1,556 4.37% 35,620 1,516 4.26%
Total interest-earning assets 10,930,405 383,972 3.51% 10,964,515 417,853 3.81%
Noninterest-earning assets 286,993 282,346
Total assets $ 11,217,398 $ 11,246,861
Interest-bearing liabilities:
NOW accounts $ 1,023,442 $ 2,273 0.22% $ 986,198 $ 2,839 0.29%
Savings accounts 1,804,127 5,669 0.31% 1,756,840 7,533 0.43%
Certificates of deposit 5,877,695 103,466 1.76% 6,064,950 142,728 2.35%
Borrowed funds 435,342 4,011 0.92% 359,666 2,546 0.71%
Total interest-bearing liabilities 9,140,606 115,419 1.26% 9,167,654 155,646 1.70%
Noninterest-bearing liabilities 239,702 279,909
Total liabilities 9,380,308 9,447,563
Shareholders' equity 1,837,090 1,799,298
Total liabilities and stockholders' equity $ 11,217,398 $ 11,246,861
Net interest income $ 268,553 $ 262,207
Interest rate spread (1) 2.25% 2.11%
Net interest-earning assets (2) $ 1,789,799 $ 1,796,861
Net interest margin (3) 2.46% 2.39%
Average interest-earning assets to average interest-bearing liabilities 119.58% 119.60%
(1) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by total interest-earning assets.

CONTACT: David Reavis (216) 429-5036

Source: Third Federal Savings and Loan