TFS Financial Corporation (NASDAQ: TFSL) — Form 10-Q
Reporting period: Fiscal first quarter ended December 31, 2022; filed February 8, 2023. Comparisons below are year over year unless otherwise stated. Dollar amounts are in millions except per-share data.
Business context and key financial metrics
TFS Financial is a retail consumer banking company focused primarily on residential mortgage lending and deposits. Its mutual holding company owned approximately 81% of outstanding common shares.
| Metric | Quarter ended Dec. 31, 2022 | Comparable prior-year quarter |
|---|---|---|
| Interest and dividend income | $139.0 | $92.1 |
| Net interest income | $75.2 | $57.8 |
| Net interest margin | 1.95% | 1.69% |
| Provision (release) for credit losses | $(1.0) release | $(2.0) release |
| Non-interest income | $5.2 | $8.2 |
| Non-interest expense | $53.2 | $47.7 |
| Net income | $22.2 | $16.1 |
| Basic and diluted EPS | $0.08 | $0.06 |
| Net cash from operating activities | $78.8 | $7.7 |
- Balance sheet at Dec. 31: Assets were $16.13 billion; net loans held for investment were $14.47 billion; deposits were $9.01 billion; borrowed funds were $4.99 billion; and shareholders’ equity was $1.85 billion. Assets increased 2.1% and net loans increased 1.5% from September 30, 2022.
- Credit and liquidity: Allowance for credit losses totaled $100.6 million, including $26.1 million for unfunded commitments. Cash and cash equivalents were $443.6 million; the quarter’s average liquidity ratio was 5.51%. The Association reported Tier 1 leverage capital of 9.95% and total risk-based capital of 18.33%, above applicable well-capitalized thresholds.
Material changes versus the prior comparable period
- Net income rose 38% to $22.2 million, primarily as net interest income increased $17.3 million. Higher loan balances and yields lifted interest income, while net interest margin improved 26 basis points to 1.95%.
- Funding costs rose materially: interest expense increased 86% to $63.8 million. Average borrowed funds grew 53% and their average rate increased to 2.79% from 1.89%; the average CD rate rose to 1.59% from 1.24%.
- Non-interest income fell 37%, mainly because loan-sale gains declined to $17,000 from $2.2 million; loan sales were $19.2 million versus $102.0 million.
- Non-interest expense increased 12% to $53.2 million, including higher salaries and marketing expense. Net recoveries were $1.7 million, compared with $2.0 million.
- Deposits increased 1.0% from September 30, chiefly due to growth in CDs; brokered CDs rose to $650.1 million. Borrowed funds increased 4.0% to support loan growth.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management said loan sales and expansion of Fannie Mae-eligible originations would continue to be evaluated; expanded sales activity outside Ohio and Florida was described as a test, with startup and marketing costs, and was not expected to significantly affect fiscal 2023 results.
- Management considers liquidity adequate and expects to remain well capitalized, while noting that funding costs, deposit retention and loan demand depend on market rates and competition. CDs totaling $3.23 billion were due within one year; replacement funding could cost more.
- Interest-rate exposure remains a central risk. A modeled instantaneous +200-basis-point shock reduced Economic Value of Equity by 25.38%; a separate ramped +200-basis-point scenario estimated a 3.07% increase in 12-month earnings at risk, while an instantaneous shock estimated a 9.34% decrease. These are model estimates, not forecasts.
- Early-stage delinquencies increased in residential core and home-equity lending; management cited Hurricane Ian effects in Florida and higher prime rates on home-equity lines. Delinquencies remained low overall: loans 30+ days past due were 0.18% of net loans, and non-accrual loans were 0.23% of total loans.
- Available-for-sale securities had $46.4 million of gross unrealized losses, attributed by management to market interest rates rather than credit quality; the company reported no credit-loss allowance for these securities. The Ohio, Kentucky and Florida escheat audit’s potential loss was not reasonably estimable. Management did not expect pending ordinary-course legal actions to have a material adverse effect.
- Operating cash flow included a $63.0 million net increase in accrued expenses and other liabilities; the filing attributes a $44.3 million increase in real estate tax liability primarily to payment timing. Cash flow should therefore be considered alongside these working-capital movements.
Important facts for investors to verify
- Whether improving net interest margin and earnings can persist as deposit and borrowing costs reprice.
- Deposit retention, CD maturities, brokered-CD reliance and available borrowing capacity under changing market conditions.
- Trends in early-stage delinquencies, home-equity exposure, allowance adequacy and performance of loans affected by Florida storm impacts or higher rates.
- Realized outcomes versus modeled interest-rate sensitivity, including assumptions behind EVE and earnings-at-risk estimates.
- How loan-sale volumes, securities’ unrealized losses, the escheat audit and tax-liability timing affect future income, capital and liquidity.