TFS Financial Corporation Announces Fourth Quarter and Year Ended September 30, 2010 Financial Results

CLEVELAND, Nov. 10, 2010 (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 quarterly and fiscal year results for the periods ended September 30, 2010.

The Company reported net income of $11.3 million for the year ended September 30, 2010, compared to net income of $14.4 million for the year ended September 30, 2009. This change was attributed to decreases in both net interest income and non-interest income partially offset by a decrease in the provision for loan losses. The Company reported a net loss of $10.7 million for the three months ended September 30, 2010, compared to a net loss of $12.9 million for the three months ended September 30, 2009. This change was mainly attributed to a decrease in the provision for loan losses, partially offset by an increase in non-interest expense and a decrease in non-interest income.

The Company recorded a provision for loan losses of $106.0 million for the year ended September 30, 2010 and $115.0 million for the year ended September 30, 2009. The provisions recorded exceeded net charge-offs of $68.0 million and $63.5 million for the fiscal years ended September 30, 2010 and 2009, respectively. The Company recorded a provision for loan losses of $35.0 million for the three months ended September 30, 2010 and $57.0 million for the three months ended September 30, 2009. The provisions exceeded net charge-offs of $20.2 million and $17.6 million for the three months ended September 30, 2010 and 2009, respectively. The level of charge-offs in the portfolio remains elevated. As delinquencies in the portfolio have been resolved through pay-off, short sale or foreclosure, or management determines the collateral is not sufficient to satisfy the loan, uncollected balances have been charged against the allowance for loan losses previously provided. The allowance for loan losses was $133.2 million, or 1.42% of total loans receivable, at September 30, 2010, compared to $95.2 million, or 1.02% of total loans receivable, at September 30, 2009.   

Non-performing loans increased $31.7 million to $287.4 million, or 3.07% of total loans, at September 30, 2010 from $255.8 million, or 2.73% of total loans, at September 30, 2009. The $31.7 million increase in non-performing loans for the year ended September 30, 2010, consisted of a $35.7 million increase in the residential, non-Home Today portfolio; a $7.8 million increase in the residential, Home Today portfolio; a $5.2 million decrease in the equity loans and lines of credit portfolio; and a $6.6 million decrease in construction loans. Non-performing loans decreased $3.3 million to $287.4 million, or 3.07% of total loans, at September 30, 2010 from $290.7 million, or 3.25% of total loans, at June 30, 2010. The $3.3 million decrease in non-performing loans for the three months ended September 30, 2010, consisted of a $5.5 million increase in the residential, non-Home Today portfolio; a $4.3 million decrease in the residential, Home Today portfolio; a $3.5 million decrease in the equity loans and lines of credit portfolio; and a $1.0 million decrease in construction loans. The Home Today portfolio is an affordable housing program targeted toward low and moderate income home buyers, which totaled $280.5 million at September 30, 2010 and $291.7 million at September 30, 2009.  Responding to the economic challenges facing many customers, the level of loan modifications increased, resulting in $135.3 million of troubled debt restructurings recorded at September 30, 2010, an $88.8 million increase from September 30, 2009. Of the $135.3 million of troubled debt restructurings recorded at September 30, 2010, $57.4 million is in the residential, non-Home Today portfolio and $72.4 million is in the Home Today portfolio.

Net interest income decreased $2.6 million, or 1.1%, to $227.5 million for the year ended September 30, 2010 from $230.1 million for the year ended September 30, 2009. While net interest income decreased, the interest rate spread improved, increasing 7 basis points to 1.77% for the year ended September 30, 2010 from 1.70% for the year ended September 30, 2009. 

Non-interest income decreased $8.7 million, or 12.9%, to $58.6 million for the year ended September 30, 2010 from $67.4 million for the year ended September 30, 2009. This decrease primarily resulted from a $7.5 million decrease in net gain on the sale of loans, most of which occurred in the three months ended September 30, 2010.

Non-interest expense decreased $455 thousand, or 0.3%, to $161.9 million for the year ended September 30, 2010 from $162.4 million for the year ended September 30, 2009.  Non-interest expense increased $6.2 million, or 17.5%, to $41.8 million for the three months ended September 30, 2010 from $35.6 million for the three months ended September 30, 2009. The increase primarily resulted from increased marketing costs, federal insurance premiums and other operating expenses.

Total assets increased $477.2 million, or 4.5%, to $11.08 billion at September 30, 2010 from $10.60 billion at September 30, 2009. The change in assets was the result of increases in our cash and cash equivalents, investment securities and other assets partially offset by decreases in our loan portfolio. 

Cash and cash equivalents increased $436.7 million, or 142.0%, to $743.7 million at September 30, 2010 from $307.0 million at September 30, 2009, as we have retained our most liquid assets for subsequent reinvestment in investment securities and/or loan products that provide higher yields along with longer maturities. This increase is primarily the result of successful deposit gathering combined with an increase in payments collected from borrowers on loans we service for others.

Net loans held for investment decreased $37.8 million, or less than 1%, to $9.18 million at September 30, 2010 from $9.22 billion at September 30, 2009. The decrease was primarily the result of a $38.0 million increase in the allowance for loan losses to $133.2 million from $95.2 million.

Other assets increased $47.3 million, or 89%, to $100.5 million at September 30, 2010 from $53.2 million at September 30, 2009. This increase is largely the result of the $39.5 million remaining balance of a $51.9 million prepayment of FDIC insurance assessments made in December 2009.

Deposits increased $281.4 million, or 3%, to $8.85 billion at September 30, 2010 from $8.57 billion at September 30, 2009. The increase in deposits was primarily the result of a $355.7 million increase in high-yield savings accounts partially offset by a $48.1 million decrease in certificates of deposits, and a $22.3 million decrease in our high yield-checking accounts.

Principal, interest and related escrow owed on loans serviced increased $178.7 million, or 169%, to $284.4 million at September 30, 2010 from $105.7 million at September 30, 2009. This increase is primarily attributable to the increase of principal and interest payments resulting from increased prepayments related to an increase in refinance activity.   

Shareholders' equity increased $7.0 million during the year, to $1.75 billion at September 30, 2010. This reflects $11.3 million of net income during the year reduced by $1.8 million of repurchases of outstanding common stock and $15.6 million in dividends paid on our shares of common stock (other than the shares held by Third Federal Savings, MHC and unallocated ESOP shares) in the current fiscal year. The remainder reflects adjustments related to the allocation of shares of our common stock related to the ESOP, stock compensation plans and adjustments to our accumulated other comprehensive loss attributable primarily to the change in our pension obligation. We repurchased 161.4 thousand shares of common stock during the year ended September 30, 2010.

Under the terms of an August 13, 2010 Memorandum of Understanding ("MOU") with the Office of Thrift Supervision ("OTS"), the Association was responsible for the submission of various documents relating to its home equity lending portfolio. The Association believes the requirements of the MOU for the submission of documents have been met, subject to ongoing monitoring reports. The OTS is currently reviewing the plan the Association submitted to further limit its home equity portfolio exposure, but the OTS has neither approved nor disapproved the plan. The Association has begun several methods to reduce its home equity exposure, including refinances, voluntary home equity line of credit closures and line suspensions where borrowers have experienced significant declines in their equity in the mortgaged property.

At September 30, 2010, the Association was "well capitalized" for regulatory capital purposes, as its tier 1 risk based capital ratio was 18.00% and its total risk based capital was 19.17%, both of which substantially exceed the amounts required for the Association to be considered well capitalized.

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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 unemployment prospects and conditions, that are worse than expected;
• adverse changes and volatility in the securities markets;
• adverse changes and volatility in credit markets;
• 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 and 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 Board;
• changes in policy and/or assessment rates of taxing authorities that adversely affect us;
• changes in laws or governmental regulations affecting financial institutions, including changes in regulatory costs and capital requirements;
• 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);
• 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 that began last year;
• the extensive reforms enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which will impact us;
• the adoption of implementing regulations by a number of different regulatory bodies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us;
• changes in our organization, or compensation and benefit plans; and
• 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.

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