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TFS Financial Corporation Announces Net Income of $16.2 Million for Quarter Ended June 30, 2013

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CLEVELAND, July 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 reported net income of $16.2 million for the three month period ended June 30, 2013.

The Company's latest financial results compare to net income of $0.9 million for the three months ended June 30, 2012. The increase in net income is largely the result of a combination of a lower provision for loan losses and increased gain on sale of loans, partially offset by an increase in non-interest expenses. Net income of $40.2 million was reported for the nine months ended June 30, 2013, compared to net income of $10.4 million for the nine months ended June 30, 2012. The increase in net income for the nine months is largely 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 very pleased with the significant increase in our net income compared to last year," Chairman and CEO Marc A. Stefanski said. "We continue to experience improvements in loan performance and saw a 34-percent growth in our purchase business last quarter. These are both positive signs that the housing market in Ohio and across the country continues to strengthen.

"Key economic indicators in our markets continue to improve, reflecting the ongoing recovery in the residential real estate market," Stefanski added. "Loan delinquencies have decreased, while hiring this year has remained stable in Ohio and has picked up in Florida. With new home sales at their highest level since 2008, we are very optimistic about the future of our home mortgage business, and remain well positioned to meet our customers' borrowing and savings needs."

Lower interest rates on deposits, particularly on certificates of deposit, caused net interest income to increase slightly, to $66.1 million for the three months ended June 30, 2013 from $65.9 million for the three months ended June 30, 2012. Net interest income increased $6.6 million, or 3%, to $202.5 million for the nine months ended June 30, 2013 from $195.9 million for the nine months ended June 30, 2012. Low interest rates continue to decrease the yield on interest-earning assets and to a greater extent, the rate paid on deposits. As a result, the interest rate spread has improved from the prior year. The interest rate spread increased 13 basis points in the current quarter to 2.24% compared to 2.11% in the same quarter last year. The interest rate spread for the nine months ended June 30, 2013 was 2.26% compared to 2.11% in the nine month period last year. The net interest margin increased six basis points in the current quarter to 2.44% compared to 2.38% in the same quarter last year. The net interest margin for the nine months ended June 30, 2013 was 2.46% compared to 2.40% in the nine month period last year.

The Company recorded a provision for loan losses of $5.0 million for the three months ended June 30, 2013 compared to $31.0 million for the three months ended June 30, 2012. The Company reported $9.7 million of net loan charge-offs for the three months ended June 30, 2013 compared to $24.9 million for the three months ended June 30, 2012. Of the $9.7 million of net charge-offs in the current quarter, $4.0 million occurred in the equity loans and lines of credit portfolio, $3.7 million occurred in the residential, non-Home Today portfolio and $1.9 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 $186.5 million at June 30, 2013 and $208.3 million at September 30, 2012. The Company recorded a provision for loan losses of $33.0 million for the nine months ended June 30, 2013 compared to $73.0 million for the nine months ended June 30, 2012. The Company reported $36.9 million of net loan charge-offs for the nine months ended June 30, 2013 compared to $122.6 million for the nine months ended June 30, 2012. Of the $36.9 million of net charge-offs for the nine months ended June 30, 2013, $14.8 million occurred in the equity loans and lines of credit portfolio, $13.0 million occurred in the residential, non-Home Today portfolio and $9.1 million occurred in the Home Today portfolio. Net charge-offs of $122.6 million for the nine months ended June 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. The allowance for loan losses was $96.5 million, or 0.96% of total loans receivable, at June 30, 2013, compared to $100.5 million, or 0.97% of total loans receivable, at September 30, 2012.

Non-accrual loans decreased $23.7 million to $158.9 million, or 1.58% of total loans, at June 30, 2013 from $182.6 million, or 1.77% of total loans, at September 30, 2012. The $23.7 million decrease in non-accrual loans for the nine months ended June 30, 2013, consisted of a $11.5 million decrease in the residential, non-Home Today portfolio; a $6.2 million decrease in the residential, Home Today portfolio; a $5.8 million decrease in the equity loans and lines of credit portfolio; and a $0.2 million decrease in construction loans.

Total loan delinquencies decreased $36.3 million to $136.2 million, or 1.35% of total loans receivable, at June 30, 2013 from $172.5 million, or 1.66% of total loans receivable, at September 30, 2012.

Total troubled debt restructurings decreased $18.7 million to $202.7 million at June 30, 2013 from $221.4 million at September 30, 2012. Of the $202.7 million of troubled debt restructurings recorded at June 30, 2013, $72.6 million was in the Home Today portfolio, $110.8 million was in the residential, non-Home Today portfolio and $18.9 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 $81.4 million at June 30, 2013 and $86.9 million at September 30, 2012.

Total assets decreased $381.6 million, or 3%, to $11.14 billion at June 30, 2013 from $11.52 billion at September 30, 2012. This change was mainly the result of the total of loan sales and principal repayments exceeding new loan origination levels.

The combination of cash and cash equivalents and investment securities increased $21.8 million, or 3%, to $751.5 million at June 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 $387.9 million, or 4%, to $9.96 billion at June 30, 2013 from $10.35 billion at September 30, 2012. During the nine months ended June 30, 2013, loan sales of $334.7 million were completed, consisting of $57.9 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. There were no loan sales during the nine months ended June 30, 2012. As a result of the loan sales mentioned above, residential non-Home Today mortgage loans, including those held for sale, decreased $139.1 million during the nine months ended June 30, 2013. The equity loans and lines of credit portfolio decreased by $229.0 million during that period. First mortgage loan originations were $1.54 billion for the nine months ended June 30, 2013, of which $711.3 million were adjustable rate mortgages, representing approximately 46% of all residential mortgage originations, compared to 58% for the nine months ended June 30, 2012. Approximately 48% of the fixed rate loan originations for the nine months ended June 30, 2013 were for terms of 10 years or less. Adjustable rate mortgages originated under the Smart Rate ARM program since July 2010 have helped to offset future interest rate risk exposure. Loans under the program have mainly either 15 or 30 year terms, with the initial interest rate fixed for either the first three or five years and adjusting annually thereafter, subject to various caps. Most loans originated under the program have been 30 year terms with interest rates fixed for five years. The total principal balance of all adjustable rate first mortgage loans was $3.10 billion, or 38% of all first mortgage residential loans, at June 30, 2013. We continue to originate additional HARP II eligible loans for sale which had a balance of $4.4 million at June 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 $350.9 million, or 4%, to $8.63 billion at June 30, 2013 from $8.98 billion at September 30, 2012. The decrease in deposits was the net result of a $30.4 million increase in our savings accounts, a $35.2 million increase in our checking accounts, and a $416.2 million decrease in our certificates of deposit ("CD") for the nine months ended June 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 decreased $13.1 million, or 3%, to $475.1 million at June 30, 2013 from $488.2 million at September 30, 2012. This decrease reflects lower overnight advances, which were reduced by $205 million and largely offset by additional medium term (four to six years) advances from the FHLB as a combination of loan sales and reduced loan production led to decreased cash demands during the period.

Principal, interest and related escrow on loans serviced decreased $48.6 million, or 38%, to $78.9 million at June 30, 2013 from $127.5 million at September 30, 2012. This decrease reflects the impact of a lower balance in the sold loan portfolio and the cyclical timing of real estate tax payments that have been collected from borrowers and remitted to various taxing agencies.

Total shareholders' equity increased $45.1 million, or 2%, to $1.85 billion at June 30, 2013 from $1.81 billion at September 30, 2012. Activity reflects $40.2 million of net income in the current fiscal year to date combined with adjustments related to our stock compensation plan, ESOP and accumulated other comprehensive loss.

At June 30, 2013, the Association and the Company were "well capitalized" for regulatory capital purposes. The tier 1 risk-based capital ratio was 22.65% for the Association and 26.52% for the Company. Total risk-based capital was 23.90%, for the Association and 27.77% for the Company. All ratios substantially exceed the amounts required for the Association and the Company to be considered well capitalized.

The Company will host a conference call to discuss its operating results for the three and nine month periods ending June 30, 2013 at 10:00 a.m. (ET) on July 31, 2013. The toll-free dial-in number is 866-952-1908 Conference ID TFSLQ313. A telephone replay will be available beginning at 2:00 p.m. (ET) on July 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 August 1, 2013. The slides for the conference call will be available on the Company's website.

Forward Looking Statements

This report 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 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)
June 30, September 30,
2013 2012
ASSETS
Cash and due from banks $34,401 $38,914
Other interest-earning cash equivalents 262,578 269,348
Cash and cash equivalents 296,979 308,262
Investment securities:
Available for sale (amortized cost $456,402 and $417,416, respectively) 454,530 421,430
Mortgage loans held for sale, at lower of cost or market ($3,017 measured at fair value, September 30, 2012) 4,376 124,528
Loans held for investment, net:
Mortgage loans 10,064,307 10,339,402
Other loans 4,276 4,612
Deferred loan fees, net (14,810) (18,561)
Allowance for loan losses (96,524) (100,464)
Loans, net 9,957,249 10,224,989
Mortgage loan servicing assets, net 15,272 19,613
Federal Home Loan Bank stock, at cost 35,620 35,620
Real estate owned 20,354 19,647
Premises, equipment, and software, net 58,644 61,150
Accrued interest receivable 31,576 34,887
Bank owned life insurance contracts 182,058 177,279
Other assets 79,882 90,720
TOTAL ASSETS $11,136,540 $11,518,125
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $8,630,530 $8,981,419
Borrowed funds 475,062 488,191
Borrowers' advances for insurance and taxes 47,527 67,864
Principal, interest, and related escrow owed on loans serviced 78,940 127,539
Accrued expenses and other liabilities 52,550 46,262
Total liabilities 9,284,609 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; 309,159,425 and 309,009,393 outstanding at June 30, 2013 and September 30, 2012, respectively 3,323 3,323
Paid-in capital 1,695,360 1,691,884
Treasury stock, at cost; 23,159,325 and 23,309,357 shares at June 30, 2013 and September 30, 2012, respectively (279,090) (280,937)
Unallocated ESOP shares (71,501) (74,751)
Retained earnings—substantially restricted 513,311 473,247
Accumulated other comprehensive loss (9,472) (5,916)
Total shareholders' equity 1,851,931 1,806,850
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,136,540 $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 June 30, For the Nine Months Ended June 30,
2013 2012 2013 2012
INTEREST INCOME:
Loans, including fees $92,399 $102,143 $286,329 $308,046
Investment securities available for sale 1,260 543 3,452 613
Investment securities held to maturity 973 4,245
Other interest and dividend earning assets 545 566 1,646 1,674
Total interest and dividend income 94,204 104,225 291,427 314,578
INTEREST EXPENSE:
Deposits 27,049 37,704 86,214 116,800
Borrowed funds 1,027 657 2,739 1,874
Total interest expense 28,076 38,361 88,953 118,674
NET INTEREST INCOME 66,128 65,864 202,474 195,904
PROVISION FOR LOAN LOSSES 5,000 31,000 33,000 73,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 61,128 34,864 169,474 122,904
NON-INTEREST INCOME:
Fees and service charges, net of amortization 2,141 2,960 6,590 9,057
Net gain on the sale of loans 3,978 8,257
Increase in and death benefits from bank owned life insurance contracts 1,611 1,607 4,793 4,829
Other 1,094 1,744 3,537 4,545
Total non-interest income 8,824 6,311 23,177 18,431
NON-INTEREST EXPENSE:
Salaries and employee benefits 21,929 18,375 64,356 59,809
Marketing services 3,219 2,376 9,471 7,130
Office property, equipment and software 5,004 5,392 15,318 15,463
Federal insurance premium and assessments 2,878 3,390 9,835 10,779
State franchise tax 1,564 1,672 4,976 4,377
Real estate owned expense, net 2,087 2,424 4,768 6,431
Appraisal and other loan review expense 725 322 2,510 2,475
Other operating expenses 8,860 6,791 22,795 20,077
Total non-interest expense 46,266 40,742 134,029 126,541
INCOME BEFORE INCOME TAXES 23,686 433 58,622 14,794
INCOME TAX EXPENSE (BENEFIT) 7,439 (459) 18,432 4,421
NET INCOME $16,247 $892 $40,190 $10,373
Earnings per share—basic and diluted $0.05 $0.00 $0.13 $0.03
Weighted average shares outstanding
Basic 301,913,844 301,274,602 301,746,918 301,157,535
Diluted 302,926,219 301,936,577 302,587,159 301,681,201
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCES AND YIELDS (unaudited)
Three Months Ended June 30, 2013 Three Months Ended June 30, 2012
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost (1) Balance Expense Cost (1)
(Dollars in thousands)
Interest-earning assets:
Other interest-bearing cash equivalents $259,913 $172 0.26% $279,968 $190 0.27%
Investment securities 9,060 9 0.40% 10,070 9 0.36%
Mortgage-backed securities 446,513 1,251 1.12% 377,799 1,507 1.60%
Loans 10,084,908 92,399 3.66% 10,377,112 102,143 3.94%
Federal Home Loan Bank stock 35,620 373 4.19% 35,620 376 4.22%
Total interest-earning assets 10,836,014 94,204 3.48% 11,080,569 104,225 3.76%
Noninterest-earning assets 279,866 295,612
Total assets $11,115,880 $11,376,181
Interest-bearing liabilities:
NOW accounts $1,038,740 $487 0.19% $1,000,083 $715 0.29%
Savings accounts 1,808,667 1,249 0.28% 1,777,844 1,778 0.40%
Certificates of deposit 5,844,989 25,313 1.73% 6,113,501 35,211 2.30%
Borrowed funds 338,110 1,027 1.21% 394,682 657 0.67%
Total interest-bearing liabilities 9,030,506 28,076 1.24% 9,286,110 38,361 1.65%
Noninterest-bearing liabilities 240,376 285,112
Total liabilities 9,270,882 9,571,222
Shareholders' equity 1,844,998 1,804,959
Total liabilities and shareholders' equity $11,115,880 $11,376,181
Net interest income $66,128 $65,864
Interest rate spread (2) 2.24% 2.11%
Net interest-earning assets (3) $1,805,508 $1,794,459
Net interest margin (4) 2.44% (1) 2.38% (1)
Average interest-earning assets to average interest-bearing liabilities 119.99% 119.32%
(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)
Nine Months Ended June 30, 2013 Nine Months Ended June 30, 2012
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
(Dollars in thousands)
Interest-earning assets:
Other interest-bearing cash equivalents $241,981 $467 0.26% $280,319 $535 0.25%
Investment securities 9,355 27 0.38% 10,327 28 0.36%
Mortgage-backed securities 437,891 3,425 1.04% 370,081 4,830 1.74%
Loans (2) 10,230,102 286,329 3.73% 10,193,762 308,045 4.03%
Federal Home Loan Bank stock 35,620 1,179 4.41% 35,620 1,140 4.27%
Total interest-earning assets 10,954,949 291,427 3.55% 10,890,109 314,578 3.85%
Noninterest-earning assets 283,896 280,282
Total assets $11,238,845 $11,170,391
Interest-bearing liabilities:
NOW accounts $1,023,427 $1,794 0.23% $983,734 $2,121 0.29%
Savings accounts 1,803,898 4,416 0.33% 1,751,815 5,866 0.45%
Certificates of deposit 5,941,291 80,004 1.80% 6,011,868 108,813 2.41%
Borrowed funds 391,232 2,739 0.93% 331,863 1,874 0.75%
Total interest-bearing liabilities 9,159,848 88,953 1.29% 9,079,280 118,674 1.74%
Noninterest-bearing liabilities 250,827 294,024
Total liabilities 9,410,675 9,373,304
Shareholders' equity 1,828,170 1,797,087
Total liabilities and stockholders' equity $11,238,845 $11,170,391
Net interest income $202,474 $195,904
Interest rate spread (2) 2.26% 2.11%
Net interest-earning assets (3) $1,795,101 $1,810,829
Net interest margin (4) 2.46% (1) 2.40% (1)
Average interest-earning assets to average interest-bearing liabilities 119.60% 119.94%
(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.

CONTACT: David Reavis (216) 429-5036

Source: Third Federal Savings and Loan