TFS Financial CORP - FORM 8-K - EX-99.1

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8-K - 8-K - TFS Financial CORP	d259307d8k.htm

Exhibit 99.1

LOGO

Contact: Jennifer Rosa (216) 429-5037

For release Wednesday, November 16, 2011

TFS Financial Corporation Announces Fourth Quarter and Year Ended September 30, 2011 Financial Results

(Cleveland, OH—November 16, 2011)—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, 2011.

“Despite high unemployment, a weak economy and a stressed housing market, we remained profitable and continued to grow our business through geographic expansion, as well as competitive home mortgage and savings rates. We look forward to continuing to provide value for our communities, our customers, and our stockholders,” said Marc A. Stefanski, chairman and CEO of Third Federal.

The Company reported net income of $8.5 million for the three months ended September 30, 2011, compared to a net loss of $10.7 million for the three months ended September 30, 2010. This change was mainly attributable to an increase in net interest income and a decrease in the provision for loan losses. The Company reported net income of $9.3 million for the year ended September 30, 2011, compared to net income of $11.3 million for the year ended September 30, 2010. This change was mainly attributable to a decrease in non-interest income and an increase in non-interest expense, partially offset by an increase in net interest income and a decrease in the provision for loan losses.

Net interest income increased $8.9 million, or 16%, to $64.0 million for the three months ended September 30, 2011 from $55.1 million for the three months ended September 30, 2010. Net interest income increased $20.1 million, or 9%, to $247.6 million for the year ended September 30, 2011 from $227.5 million for the year ended September 30, 2010. Low interest rates have decreased the yield on interest-earning assets, and to an even greater extent, the rate paid on deposits and borrowed funds, and as a result, the interest rate spread has improved throughout the current fiscal year. The interest rate spread increased 20 basis points to 1.97% for the year ended September 30, 2011, compared to 1.77% for the year ended September 30, 2010.

The Company recorded a provision for loan losses of $19.0 million for the three months ended September 30, 2011 compared to $35.0 million for the three months ended September 30, 2010. The provisions exceeded net charge-offs of $15.3 million and $20.2 million for the three months ended September 30, 2011 and September 30, 2010, respectively. The Company recorded a provision for loan losses of $98.5 million for the year ended September 30, 2011 compared to $106.0 million for the year ended September 30, 2010. The provisions recorded

exceeded net charge-offs of $74.8 million and $68.0 million for the fiscal years ended September 30, 2011 and September 30, 2010, respectively. Of the $74.8 million of net charge-offs for the fiscal year ended September 30, 2011, $49.5 million occurred in the equity loans and lines of credit portfolio and $17.5 million occurred in the residential, non-Home Today portfolio. The allowance for loan losses was $157.0 million, or 1.58% of total loans receivable, at September 30, 2011, compared to $133.2 million, or 1.43% of total loans receivable, at September 30, 2010. Included in the individually evaluated portion of the allowance for loan losses is a specific reserve for losses on impaired loans in the amount of $55.5 million at September 30, 2011. As a result of the Association’s primary regulator changing from the Office of Thrift Supervision (“OTS”) to the Office of the Comptroller of the Currency (“OCC”) on July 21, 2011, the OCC is requiring all specific reserves maintained by savings institutions to be charged off by March 31, 2012. The Company expects to early adopt the OCC methodology, effective December 31, 2011. As a result, reported loan charge-offs for the quarter ending December 31, 2011 will be affected by the $55.5 million specific reserve maintained at September 30, 2011. This one time charge-off will not impact the provision recorded in the Consolidated Statements of Income, but will decrease the future reported balances of the allowance for loan losses and the delinquent/non-performing loans by that same amount.

Non-performing loans decreased $51.3 million to $235.3 million, or 2.37% of total loans, at September 30, 2011 from $286.6 million, or 3.08% of total loans, at September 30, 2010. The $51.3 million decrease in non-performing loans for the year ended September 30, 2011, consisted of a $10.1 million decrease in the residential, non-Home Today portfolio; a $22.4 million decrease in the residential, Home Today portfolio; a $17.6 million decrease in the equity loans and lines of credit portfolio; and a $1.2 million decrease in construction loans. The Home Today portfolio is an affordable housing program targeted toward low and moderate income home buyers, which totaled $264.0 million at September 30, 2011 and $280.5 million at September 30, 2010. Total loan delinquencies were $285.1 million, or 2.86% of total loans receivable at September 30, 2011, compared to $328.8 million, or 3.51% of total loans receivable at September 30, 2010.

Total troubled debt restructurings increased $5.4 million for the three months ended September 30, 2011 and increased $32.5 million to $166.2 million, at September 30, 2011 from $133.7 million at September 30, 2010. Of the $166.2 million of troubled debt restructurings recorded at September 30, 2011, $93.8 million was in the Home Today portfolio and $68.1 million was in the residential, non-Home Today portfolio. Of the $133.7 million of troubled debt restructurings recorded at September 30, 2010, $72.1 million was in the Home Today portfolio and $57.2 million was in the residential, non-Home Today portfolio. The portion of total troubled debt restructurings included as part of non-performing loans was $45.0 million at September 30, 2011 and $43.5 million, at September 30, 2010.

Non-interest income decreased $27.7 million, or 47%, to $31.0 million for the year ended September 30, 2011 from $58.6 million for the year ended September 30, 2010. Net gains on the sale of loans of $490 thousand were recorded during the year ended September 30, 2011, compared to gains of $25.3 million for the year ended September 30, 2010, reflecting the significantly lower volume of loan sales in the current fiscal year. Additionally, loan fees and service charges decreased $5.0 million in the current year compared to the prior year. This change is primarily related to servicing fees collected on loans sold and increased mortgage servicing asset amortization. The balance of our sold loan

portfolio has decreased 23% from September 30, 2010, due to the current low level of mortgage loan interest rates which prompted a significant increase in refinancing activity, combined with the low volume of loan sales.

Non-interest expense increased $6.1 million, or 4%, to $168.1 million for the year ended September 30, 2011, compared to $161.9 million for the year ended September 30, 2010, due to higher real estate owned expenses, appraisal expenses, marketing services and other operating expenses, partially offset by lower salaries and employee benefits. Appraisal and other loan review expense increases related to the expanded review of our equity loan and lines of credit portfolio. The other operating expenses increase was mainly due to increased professional and administrative fees associated with our home equity lending reduction plan, and enhancements to equity lending account administration and enterprise risk management processes. Marketing expenses have increased due to increased promotion of adjustable rate mortgages. The salaries and benefits reduction was due to decreased bonus and benefit accruals and employee stock ownership costs.

Total assets decreased by $183.1 million, or 2%, to $10.89 billion at September 30, 2011 from $11.08 billion at September 30, 2010. This change was mainly the result of decreases in our cash and cash equivalents and investment securities partially offset by an increase in our loan portfolio.

Cash and cash equivalents decreased $448.9 million, or 60%, to $294.8 million at September 30, 2011 from $743.7 million at September 30, 2010, and investment securities decreased $263.1 million, or 39%, to $408.4 million at September 30, 2011 from $671.6 million at September 30, 2010. This change can be attributed to the reinvestment of our most liquid assets into loan products.

Loans held for investment, net increased $569.2 million, or 6%, to $9.75 billion at September 30, 2011 from $9.18 billion at September 30, 2010. Residential mortgage loans increased $965.8 million during the year ended September 30, 2011, while the equity loans and lines of credit portfolio decreased by $357.5 million. A total of $1.18 billion of adjustable rate mortgages (mainly loans with the interest rate fixed for the first five years and adjustable yearly thereafter) were originated during the year ended September 30, 2011, representing 55% of all residential mortgage originations, compared to $380.2 million and 19% for the year ended September 30, 2010. Adjustable rate mortgages originated under the Smart Rate ARM program since July 2010 have an outstanding principal balance of $1.44 billion at September 30, 2011. These mortgages are intended to offset future interest rate risk exposure. The total principal balance of adjustable rate first mortgage loans was $1.83 billion, or 25% of all first mortgage residential loans, at September 30, 2011, compared to $892.3 million, or 14%, at September 30, 2010.

Deposits decreased $136.0 million, or 2%, to $8.72 billion at September 30, 2011 from $8.85 billion at September 30, 2010. This decrease is largely the result of a $246.3 million decrease in our certificates of deposit and accrued interest, partially offset by an $110.3 million increase in our savings and checking accounts for the year ended September 30, 2011.

Borrowed funds increased $69.7 million, or 99%, to $139.9 million at September 30, 2011 from $70.2 million at September 30, 2010. This increase reflects additional, lower cost, mainly short term FHLB borrowings.

Principal, interest and related escrow owed on loans serviced decreased $132.6 million, or 47%, to $151.9 million at September 30, 2011 from $284.4 million at September 30, 2010. This decrease mainly reflects the settlement of an increased level of prepayments for loans serviced for other investors and to a lesser extent, a lower balance in the sold loan portfolio.

At September 30, 2011, the Association was “well capitalized” for regulatory capital purposes, as its tier 1 risk-based capital ratio was 21.04% and its total-risk based capital was 22.29%, both of which substantially exceed the amounts required for the Association to be considered well capitalized.

The Company believes it has responded as required to, and has complied with, all of the timeframes specified by the OTS under previously issued Memoranda of Understanding (MOU). However, our remediation efforts await evaluation by our new primary regulators, the OCC and The Federal Reserve Bank, and accordingly, the requirements of the MOU will remain in effect until the OCC and Federal Reserve decide to terminate, suspend or modify them.

The Company, as previously announced, will host a post-earnings conference call at 9:30 a.m. (ET) on November 17, 2011. The toll-free dial-in number is 800-862-9098, Conference ID TFSLQ411. A telephone replay will be available beginning at 12:00 p.m. (ET) November 17, 2011 by dialing 800-283-4216. 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 18, 2011. The slides for the conference call will be filed with the SEC under a separate Form 8-K and will also 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:

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statements of our goals, intentions and expectations;

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statements regarding our business plans and prospects and growth and operating strategies;

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statements concerning trends in our provision for loan losses and charge-offs;

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statements regarding the asset quality of our loan and investment portfolios; and

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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:

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significantly increased competition among depository and other financial institutions;

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inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

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general economic conditions, either nationally or in our market areas, including employment prospects and conditions that are worse than expected;

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decreased demand for our products and services and lower revenue and earnings in the event of a recession;

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adverse changes and volatility in the securities markets;

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adverse changes and volatility in credit markets;

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legislative or regulatory changes that adversely affect our business, including changes in regulatory costs and capital requirements;

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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;

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changes in consumer spending, borrowing and savings habits;

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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;

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future adverse developments concerning Fannie Mae or Freddie Mac;

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changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

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changes in policy and/or assessment rates of taxing authorities that adversely affect us;

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the timing and the amount of revenue that we may recognize;

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changes in expense trends (including, but not limited to, trends affecting non-performing assets, charge-offs and provisions for loan losses);

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the impact of the current governmental effort to restructure the U.S. financial and regulatory system;

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inability of third-party providers to perform their obligations to us;

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adverse changes and volatility in real estate markets;

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a slowing or failure of the moderate economic recovery that began last year;

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the extensive reforms enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which will impact us;

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the adoption of implementing regulations by a number of different regulatory bodies under the Dodd-Frank Act, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us, including the impact of coming under the jurisdiction of new federal regulators;

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changes in our organization, or compensation and benefit plans;

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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; and

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the efficacy of the U.S. Federal 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, 2011			September 30, 2010
ASSETS
Cash and due from banks	$	35,532		$	38,804
Other interest-bearing cash equivalents		259,314			704,936

Cash and Cash equivalents		294,846			743,740

Investment securities
Available for sale (amortized cost $15,760 and $24,480, respectively)		15,899			24,619
Held to maturity (fair value $398,725 and $657,076, respectively)		392,527			646,940

Investment securities		408,426			671,559

Mortgage loans held for sale (none measured at fair value)		—			25,027
Loans held for investment, net:
Mortgage loans		9,920,907			9,323,073
Other loans		6,868			7,199
Deferred loan fees, net		(19,854	)		(15,283	)
Allowance for loan losses		(156,978	)		(133,240	)

Loans, net		9,750,943			9,181,749

Mortgage loan servicing assets, net		28,919			38,658
Federal Home Loan Bank stock, at cost		35,620			35,620
Real estate owned		19,155			15,912
Premises, equipment, and software, net		59,487			62,685
Accrued interest receivable		35,854			36,282
Bank owned life insurance contracts		170,845			164,334
Other assets		88,853			100,461

TOTAL ASSETS	$	10,892,948		$	11,076,027

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	8,715,910		$	8,851,941
Borrowed funds		139,856			70,158
Borrowers’ advances for insurance and taxes		58,235			51,401
Principal, interest, and related escrow owed on loans serviced		151,859			284,425
Accrued expenses and other liabilities		53,164			65,205

Total liabilities		9,119,024			9,323,130

Commitments and contingent liabilities

Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding		0			0
Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 308,915,893 and 308,395,000 outstanding at September 30, 2011 and September 30, 2010, respectively		3,323			3,323
Paid-in capital		1,686,216			1,686,062
Treasury stock, at cost; 23,402,857 and 23,923,750 shares at September 30, 2011 and September 30, 2010, respectively		(282,090	)		(288,366	)
Unallocated ESOP shares		(79,084	)		(82,699	)
Retained earnings—substantially restricted		461,836			452,633
Accumulated other comprehensive loss		(16,277	)		(18,056	)

Total shareholders’ equity		1,773,924			1,752,897

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,892,948		$	11,076,027

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (unaudited)

(In thousands except share and per share data)


	For the Three Months Ended September 30,					For the Fiscal Year Ended September 30,
	2011		2010			2011		2010
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	104,025	$	99,764		$	413,464	$	415,477
Investment securities available for sale		42		133			240		549
Investment securities held to maturity		2,454		4,407			11,455		19,046
Other interest and earning assets		157		607			821		1,216
Federal Home Loan Bank stock		355		399			1,513		1,603

Total interest and dividend income		107,033		105,310			427,493		437,891

INTEREST EXPENSE:
Deposits		42,455		49,683			177,842		208,462
Borrowed funds		562		484			2,003		1,923

Total interest expense		43,017		50,167			179,845		210,385

NET INTEREST INCOME		64,016		55,143			247,648		227,506

PROVISION FOR LOAN LOSSES		19,000		35,000			98,500		106,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		45,016		20,143			149,148		121,506

NON-INTEREST INCOME:
Fees and service charges, net of amortization		3,786		3,967			15,615		20,625
Net gain (loss) on the sale of loans		0		(207	)		490		25,303
Increase in and death benefits from bank owned life insurance contracts		1,681		1,671			6,521		6,491
Income on private equity investments		90		123			1,067		669
Other		1,580		1,274			7,289		5,550

Total non-interest income		7,137		6,828			30,982		58,638

NON-INTEREST EXPENSE
Salaries and employee benefits		19,020		20,036			76,014		83,915
Marketing services		1,439		1,072			7,745		6,043
Office property, equipment, and software		5,091		4,718			20,074		20,379
Federal insurance premium		4,925		6,136			19,516		18,898
State franchise tax		979		893			4,805		4,602
Real estate owned expense, net		2,155		1,297			8,061		5,339
Appraisal and other loan review expenses		694		820			5,601		1,300
Other operating expenses		7,281		6,848			26,239		21,457

Total non-interest expense		41,584		41,820			168,055		161,933

INCOME (LOSS) BEFORE INCOME TAXES		10,569		(14,849	)		12,075		18,211
INCOME TAX EXPENSE (BENEFIT)		2,090		(4,102	)		2,735		6,873

NET INCOME (LOSS)		8,479		(10,747	)		9,340		11,338

Earnings (loss) per share—basic and fully diluted	$	0.03	$	(0.04	)	$	0.03	$	0.04
Weighted average shares outstanding
Basic		300,724,876		300,002,153			300,358,096		299,795,588
Fully diluted		301,234,732		300,002,153			300,969,843		300,252,913

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

AVERAGE BALANCES AND YIELDS (unaudited)


	Three Months Ended September 30, 2011									Three Months Ended September 30, 2010
	Average Balance			Interest Income/ Expense			Yield/ Cost(a)			Average Balance			Interest Income/ Expense			Yield/ Cost(a)
	(Dollars in thousands)
Interest-earning assets:
Other interest-bearing cash equivalents		225,024			157			0.28	%		911,204			607			0.27	%
Investment securities		10,601			9			0.34	%		15,980			82			2.05	%
Mortgage-backed securities		425,918			2,487			2.34	%		668,468			4,457			2.67	%
Loans		9,883,399			104,025			4.21	%		9,102,850			99,764			4.38	%
Federal Home Loan Bank stock		35,620			356			4.00	%		35,620			400			4.49	%

Total interest-earning assets		10,580,562			107,034			4.05	%		10,734,122			105,310			3.92	%

Noninterest-earning assets		244,525									242,161

Total assets	$	10,825,087								$	10,976,283

Interest-bearing liabilities:
NOW accounts	$	966,194			817			0.34	%	$	966,892			1,075			0.44	%
Savings accounts		1,674,599			2,315			0.55	%		1,574,336			2,792			0.71	%
Certificates of deposit		6,046,119			39,324			2.60	%		6,339,453			45,815			2.89	%
Borrowed funds		142,132			562			1.58	%		70,007			485			2.77	%

Total interest-bearing liabilities		8,829,044			43,018			1.95	%		8,950,688			50,167			2.24	%

Noninterest-bearing liabilities		226,648									317,062

Total liabilities		9,055,692									9,267,750
Shareholders’ equity		1,769,395									1,708,533

Total liabilities and shareholders’ equity	$	10,825,087								$	10,976,283

Net interest income				$	64,016								$	55,143

Interest rate spread (b)								2.10	%								1.68	%

Net interest-earning assets (c)	$	1,751,518								$	1,783,434

Net interest margin (d)					2.42	%(a)								2.05	%(a)

Average interest-earning assets to average interest-bearing liabilities		119.84	%								119.93	%

(a)	Annualized

(b)	Interest rate spread represents the difference between the yields on average interest-earning assets and the cost of average interest-bearing liabilities.

(c)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(d)	Net interest margin represents net interest income divided by total interest-earning assets.

TFS FINANCIAL CORPORATION AND SUBSIDIARIES

AVERAGE BALANCES AND YIELDS (unaudited)


	Year Ended September 30, 2011									Year Ended September 30, 2010
	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		293,626			821			0.28	%		505,706			1,216			0.24	%
Investment securities		11,821			101			0.85	%		17,343			364			2.10	%
Mortgage-backed securities		507,009			11,594			2.29	%		635,845			19,231			3.02	%
Loans		9,828,565			413,464			4.21	%		9,327,280			415,477			4.45	%
Federal Home Loan Bank stock		35,620			1,514			4.25	%		35,620			1,603			4.50	%

Total interest-earning assets		10,676,641			427,494			4.00	%		10,521,794			437,891			4.16	%

Noninterest-earning assets		261,369									302,647

Total assets	$	10,938,010								$	10,824,441

Interest-bearing liabilities:
NOW accounts	$	975,938			3,586			0.37	%	$	975,889			5,485			0.56	%
Savings accounts		1,631,764			9,954			0.61	%		1,442,641			13,181			0.91	%
Certificates of deposit		6,137,246			164,303			2.68	%		6,301,459			189,796			3.01	%
Borrowed funds		123,570			2,003			1.62	%		70,009			1,923			2.75	%

Total interest-bearing liabilities		8,868,518			179,846			2.03	%		8,789,998			210,385			2.39	%

Noninterest-bearing liabilities		312,147									281,976

Total liabilities		9,180,665									9,071,974
Shareholders’ equity		1,757,345									1,752,467

Total liabilities and shareholders’ equity	$	10,938,010								$	10,824,441

Net interest income				$	247,648								$	227,506

Interest rate spread (a)								1.97	%								1.77	%

Net interest-earning assets (b)	$	1,808,123								$	1,731,796

Net interest margin (c)					2.32	%								2.16	%

Average interest-earning assets to average interest-bearing liabilities		120.39	%								119.70	%

(a)	Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(b)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(c)	Net interest margin represents net interest income divided by total interest-earning assets.

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