TFS Financial Corporation (TFSL) (the "Company"), the holding company for Third Federal Savings and Loan Association of Cleveland (the "Association"), today announced results for the three month period ended December 31, 2018.
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The Company reported net income of $20.3 million for the quarter ended December 31, 2018, compared to $19.6 million for the quarter ended December 31, 2017. Income tax expense decreased as a result of the Tax Cuts and Jobs Act and was partially offset by a decrease in net interest income, a decrease in the credit for loan loss provision and an increase in non-interest expense when compared to the same period last year.
"This quarter Third Federal achieved another solid increase of deposit growth,” said Marc A. Stefanski, Chairman and CEO. “Deposits gained more than $105 million in the first fiscal quarter and are up nearly $400 million during the past 12 months. In addition to deposit growth, we continue to provide great value to our shareholders as our quarterly dividend of $0.25 per share provides a current annual yield of more than 6 percent."
Net interest income in the current period decreased $2.2 million compared to the prior year quarter, as $13.2 million of additional interest expense in the current period more than offset $11.0 million of additional interest income. While the growth in the average balance of interest-earning assets was similar to that of interest-bearing liabilities, $377 million and $339 million, respectively, interest expense increased at a faster pace than interest income as retail deposits replace wholesale deposits and short-term borrowings, lengthening the duration of funding sources. The average balance of certificates of deposit was $6.4 billion for the three months ended December 31, 2018 compared to $5.8 billion for the three months ended December 31, 2017. Net interest income was $67.8 million for the quarter ended December 31, 2018 and $70.0 million for the quarter ended December 31, 2017. The interest rate spread for the quarter ended December 31, 2018 was 1.79% compared to 1.95% in the same quarter last year. The net interest margin for the quarter ended December 31, 2018 was 1.98% compared to 2.10% in the same quarter last year.
The provision for loan losses was a credit of $2.0 million for the three months ended December 31, 2018 compared to a credit of $3.0 million for the three months ended December 31, 2017. Continued recoveries of loan amounts previously charged off, low levels of current loan charge-offs and reduced exposure from home equity lines of credit coming to the end of the draw period resulted in the loan provision credit. The Company closely monitors present and emerging risks within the loan portfolio when assessing the adequacy of the allowance for loan losses. The Company reported $1.5 million of net loan recoveries for the three months ended December 31, 2018 and $19 thousand of net loan charge-offs for the three months ended December 31, 2017. Gross loan charge-offs were $1.3 million for the three months ended December 31, 2018 and $2.6 million for the three months ended December 31, 2017, while loan recoveries were $2.8 million in the current quarter and $2.6 million in the prior year quarter. The allowance for loan losses was $41.9 million, or 0.32% of total loans receivable, at December 31, 2018, compared to $42.4 million, or 0.33% of total loans receivable, at September 30, 2018 and $45.9 million, or 0.36% of total loans receivable, at December 31, 2017.
Non-accrual loans decreased $0.8 million to $77.0 million, or 0.59% of total loans, at December 31, 2018 from $77.8 million, or 0.60% of total loans, at September 30, 2018. The decrease consisted of a $0.6 million decrease in the residential core portfolio, a $0.2 million decrease in the Home Today portfolio and no change in the equity loans and lines of credit portfolio.
Total loan delinquencies increased $2.3 million to $43.7 million, or 0.34% of total loans receivable, at December 31, 2018 from $41.4 million, or 0.32% of total loans receivable, at September 30, 2018. The increase in delinquencies consisted of a $1.0 million increase in the residential core portfolio, a $1.3 million increase in the Home Today portfolio, and no change in the equity loans and lines of credit portfolio.
Total troubled debt restructurings increased $0.5 million at December 31, 2018, to $165.9 million from $165.4 million at September 30, 2018. Of the $165.9 million of troubled debt restructurings recorded at December 31, 2018, $84.5 million was in the residential core portfolio, $39.6 million was in the Home Today portfolio, and $41.8 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 $61.9 million at December 31, 2018 and $62.6 million at September 30, 2018.
Total non-interest expenses increased by $2.2 million, to $48.0 million, for the three months ended December 31, 2018 from $45.8 million for the three months ended December 31, 2017. The change consisted primarily of a $2.1 million increase in salaries and employee benefits, related to both the timing and amount of health insurance costs and, to a lesser extent, increases in wages and stock based compensation from awards granted in December 2018.
Total income tax expense decreased by $6.2 million, to $6.2 million, for the three months ended December 31, 2018, from $12.4 million for the three months ended December 31, 2017. The decrease in the expense was caused mainly by the combination of a decrease in income before income taxes and by the impact of the Tax Cuts and Jobs Act, which lowered the federal effective tax rate in the more recent period and required additional tax expense for the re-measurement of the deferred tax asset during the three months ended December 31, 2017.
Total assets increased by $101.3 million, or 0.72%, to $14.24 billion at December 31, 2018 from $14.14 billion at September 30, 2018. This change was mainly the result of new loan origination levels exceeding the total of loan sales and principal repayments, combined with a net increase in the combination of cash and cash equivalents and investment securities.
The combination of cash and cash equivalents and investment securities increased $49.4 million, or 6.16%, to $851.1 million at December 31, 2018 from $801.7 million at September 30, 2018.
The combination of loans held for investment, net and mortgage loans held for sale increased $48.3 million, or 0.38%, to $12.92 billion at December 31, 2018 from $12.87 billion at September 30, 2018. Residential core mortgage loans, including those held for sale, decreased $26.9 million during the three months ended December 31, 2018, while the home equity loans and lines of credit portfolio increased $79.3 million. Total first mortgage loan originations were $383.8 million for the three months ended December 31, 2018 and $540.8 million for the three months ended December 31, 2017. The current period originations were 47% adjustable rate mortgages and 6% fixed-rate mortgages with terms of 10 years or less. Commitments originated for home equity loans and lines of credit were $357.0 million for the three months ended December 31, 2018 and $389.9 million for the three months ended December 31, 2017. During the three months ended December 31, 2018, loan sales of $20.7 million were completed, resulting in net gain of $0.1 million. During the three months ended December 31, 2017, loan sales of $29.9 million were completed, resulting in net gain of $0.5 million.
Deposits increased by $105.6 million, or 1.24%, to $8.60 billion at December 31, 2018 from $8.49 billion at September 30, 2018. The increase in deposits was the result of a $90.5 million increase in our savings accounts, a $2.7 million increase in our checking accounts, and a $12.0 million increase in our certificates of deposit ("CDs") for the three months ended December 31, 2018. Total deposits include $576.4 million and $670.1 million of brokered CDs at December 31, 2018 and September 30, 2018, respectively.
Borrowed funds, all from the FHLB, increased $12.6 million, to $3.73 billion at December 31, 2018 from $3.72 billion at September 30, 2018, as loan growth led to increased cash demands. This increase consists of $225.0 million of additional 90 day advances that have an effective duration at inception of five to eight years as a result of interest rate swap contracts, offset by decreases of $117.0 million and $97.5 million of overnight advances and principal repayments on maturing term borrowings, respectively.
Total shareholders' equity decreased $14.6 million, or 0.83%, to $1.74 billion at December 31, 2018 from $1.76 billion at September 30, 2018. Activity reflects $20.3 million of net income in the current fiscal year reduced by $3.8 million of repurchases of common stock, a quarterly dividend of $12.3 million and $21 million of unrealized loss recognized in accumulated other comprehensive income and increased by $2.7 million consisting of a combination of adjustments related to our stock compensation plan and ESOP. A total of 242,500 shares of our common stock were repurchased at an average cost of $15.57 per share during the quarter ended December 31, 2018. At December 31, 2018, there were 6,224,479 shares remaining to be purchased under the Company's eighth repurchase program. The Company declared and paid a quarterly dividend of $0.25 per share during the quarter ended December 31, 2018. 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, 2018 member vote and the subsequent non-objection of the Federal Reserve, the MHC has the approval to waive the receipt of up to a total of $1.00 per share of possible dividends to be declared on the Company's common stock, including up to $0.50 in dividends during the six months ending June 30, 2019. The MHC has conducted the member vote to approve the dividend waiver each of the past five years under Federal Reserve regulations and for each of those five 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”). The Basel III Rules include a Common Equity Tier 1 Capital ratio, with a fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%. At December 31, 2018 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 10.32%, 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 19.56%. Additionally, the Company's Tier 1 leverage ratio was 12.17%, its Common Equity Tier 1 and Tier 1 ratios were each 22.40% and its total capital ratio was 22.94%. The Association's current capital ratios reflect the dilutive impact of $85 million of dividends that the Association paid to the Company, its sole shareholder, during the quarter ended December 31, 2018. Because of its intercompany nature, these dividends had no impact on the Company's capital ratios or its consolidated statement of condition.
Presentation slides as of December 31, 2018 will be available on the Company's website, www.thirdfederal.com, under the Investor Relations link under "Corporate Profile" beneath "Recent Presentations", beginning January 31, 2019. 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 80th anniversary in May, 2018. Third Federal, which lends in 21 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, eight lending offices in Central and Southern Ohio, and 17 full service branches throughout Florida. As of December 31, 2018, the Company’s assets totaled $14.24 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, among other things:
- 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 trends in factors affecting our financial condition and results of operations, including 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 globally, nationally or in our market areas, including employment prospects, real estate values 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, credit markets or real estate 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, 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 and the Federal Reserve 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;
- changes in our organization, or compensation and benefit plans and changes in expense trends (including, but not limited to trends affecting non-performing assets, charge-offs and provisions for loan losses);
- the continuing governmental efforts to restructure the U.S. financial and regulatory systems;
- the inability of third-party providers to perform their obligations to us;
- changes in accounting and tax estimates;
- the adoption of implementing regulations by a number of different regulatory bodies under the DFA, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us;
- the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets;
- the ability of the U.S. Government to manage federal debt limits; and
- cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data or disable our systems.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.
|TFS FINANCIAL CORPORATION AND SUBSIDIARIES|
|CONSOLIDATED STATEMENTS OF CONDITION (unaudited)|
|(In thousands, except share data)|
|December 31,||September 30,|
|Cash and due from banks||$||42,528||$||29,056|
|Other interest-earning cash equivalents||244,091||240,719|
|Cash and cash equivalents||286,619||269,775|
|Investment securities available for sale (amortized cost $575,273 and $549,211, respectively)||564,479||531,965|
|Mortgage loans held for sale, at lower of cost or market (none measured at fair value)||755||659|
|Loans held for investment, net:|
|Deferred loan fees, net||39,526||38,566|
|Allowance for loan losses||(41,938||)||(42,418||)|
|Mortgage loan servicing assets, net||8,643||8,840|
|Federal Home Loan Bank stock, at cost||93,544||93,544|
|Real estate owned||2,888||2,794|
|Premises, equipment, and software, net||62,829||63,399|
|Accrued interest receivable||39,446||38,696|
|Bank owned life insurance contracts||213,568||212,021|
|LIABILITIES AND SHAREHOLDERS’ EQUITY|
|Borrowers’ advances for insurance and taxes||96,451||103,005|
|Principal, interest, and related escrow owed on loans serviced||30,577||31,490|
|Accrued expenses and other liabilities||36,362||31,150|
|Commitments and contingent liabilities|
|Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding||—||—|
|Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 280,135,164 and 280,311,070 outstanding at December 31, 2018 and September 30, 2018, respectively||3,323||3,323|
|Treasury stock, at cost; 52,183,586 and 52,007,680 shares at December 31, 2018 and September 30, 2018, respectively||(757,464||)||(754,272||)|
|Unallocated ESOP shares||(47,667||)||(48,751||)|
|Retained earnings—substantially restricted||815,918||807,890|
|Accumulated other comprehensive income||1,761||23,222|
|Total shareholders’ equity||1,743,780||1,758,404|
|TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY||$||14,238,678||$||14,137,331|
|TFS FINANCIAL CORPORATION AND SUBSIDIARIES|
|CONSOLIDATED STATEMENTS OF INCOME (unaudited)|
|(In thousands, except share and per share data)|
|For the Three Months Ended|
|Loans, including fees|| |
|Investment securities available for sale||3,124||2,589|
|Other interest and dividend earning assets||2,673||2,014|
|Total interest and dividend income||118,288||107,229|
|Total interest expense||50,476||37,241|
|NET INTEREST INCOME||67,812||69,988|
|PROVISION (CREDIT) FOR LOAN LOSSES||(2,000||)||(3,000||)|
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES||69,812||72,988|
|Fees and service charges, net of amortization||1,776||1,760|
|Net gain on the sale of loans||111||478|
|Increase in and death benefits from bank owned life insurance contracts||1,547||1,554|
|Total non-interest income||4,676||4,844|
|Salaries and employee benefits||25,364||23,253|
|Office property, equipment and software||6,986||6,651|
|Federal insurance premium and assessments||2,766||2,718|
|State franchise tax||1,262||1,126|
|Real estate owned expense, net||67||583|
|Total non-interest expense||47,980||45,776|
|INCOME BEFORE INCOME TAXES||26,508||32,056|
|INCOME TAX EXPENSE||6,175||12,443|
|NET INCOME|| |
Earnings per share — basic and diluted
|Weighted average shares outstanding|
|TFS FINANCIAL CORPORATION AND SUBSIDIARIES|
|AVERAGE BALANCES AND YIELDS (unaudited)|
|Three Months Ended December 31, 2018||Three Months Ended December 31, 2017|
|Balance||Expense||Cost (2)||Balance||Expense||Cost (2)|
|(Dollars in thousands)|
Interest-earning cash equivalents
|Investment securities||3,971||24||2.42||%||—||—||—|| |
|Federal Home Loan Bank stock||93,544||1,415||6.05||%||90,401||1,231||5.45||%|
|Total interest-earning assets||13,732,084||118,288||3.45||%||13,354,959||107,229||3.21||%|
|Total assets||$||14,118,170|| |
|Checking accounts||$||898,795|| |
|Certificates of deposit||6,352,338||29,836||1.88||%||5,751,520||22,265||1.55||%|
|Total interest-bearing liabilities||12,151,907||50,476||1.66||%||11,812,765||37,241||1.26||%|
Total liabilities and shareholders’ equity
|Net interest income|| |
|Interest rate spread (2)(3)||1.79||%||1.95||%|
|Net interest-earning assets (4)||$||1,580,177|| |
|Net interest margin (2)(5)||1.98||%||2.10||%|
Average interest-earning assets to average interest-bearing liabilities
|(1)||Loans include both mortgage loans held for sale and loans held for investment.|
|(3)||Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.|
|(4)||Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.|
|(5)||Net interest margin represents net interest income divided by total interest-earning assets.|