TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2023; comparative periods ended March 31, 2022. The filing was submitted May 9, 2023. TFS Financial is a retail consumer bank focused on residential mortgage lending and deposits, operating principally through Third Federal Savings and Loan Association of Cleveland. Its mutual holding company owned approximately 81% of outstanding shares.
Financial and operating highlights
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net interest income | $69.3 million, up from $62.7 million | $144.4 million, up from $120.6 million |
| Net income | $15.9 million, compared with $15.8 million | $38.1 million, up from $32.0 million |
| Diluted EPS | $0.06, unchanged | $0.13, up from $0.11 |
| Net interest margin | 1.78%, down from 1.82% | 1.86%, up from 1.76% |
| Return on average assets / equity | 0.40% / 3.39% | 0.48% / 4.07% |
- Quarterly earnings drivers: Interest and dividend income rose 58% to $147.6 million, while interest expense increased 155% to $78.3 million. Higher loan yields and balances supported revenue, but rising deposit and borrowing costs compressed quarterly spread and margin. Non-interest expense rose 11% to $55.6 million; non-interest income was $5.3 million, down 5%.
- Six-month results: Interest and dividend income rose 54% to $286.5 million, and interest expense rose 119% to $142.1 million. Non-interest income declined 23% to $10.5 million, primarily due to lower loan-sale gains, fees and BOLI income. Non-interest expense increased 11% to $108.8 million.
- Balance sheet at March 31: Total assets were $16.26 billion, up 3% from September 30, 2022. Net loans held for investment were $14.56 billion, up $306 million; deposits were $9.00 billion, up $82 million; borrowed funds were $5.20 billion, up $412 million. Shareholders’ equity was $1.83 billion, down about $10 million.
- Cash flow and liquidity: For the six months, operating activities provided $43.1 million; investing used $346.9 million; financing provided $355.4 million. Cash and equivalents ended at $421.1 million. The average quarterly liquidity ratio was 5.57%, against a stated 5% minimum. Additional borrowing capacity was approximately $4.28 billion across FHLB, Federal Reserve discount-window and Fed Funds arrangements.
- Credit quality: The allowance for loan losses was $74.1 million (0.51% of amortized-cost loans); including unfunded commitments, total allowance was $100.8 million. Six-month net recoveries were $2.9 million, versus $4.7 million a year earlier. Non-accrual loans were $32.7 million, or 0.22% of loans; loans 90 or more days delinquent were $12.0 million, and no loans 90 or more days past due were still accruing.
- Capital and distributions: The Association reported Tier 1 leverage capital of 9.94% and CET1 capital of 17.57%, above applicable well-capitalized thresholds. The Company reported CET1 of 19.93%. Six-month dividends declared were $29.1 million and share repurchases totaled $5.0 million.
Material changes, outlook and risks
- Loan balances grew as originations and additional home-equity draws exceeded repayments and sales. Six-month first-mortgage originations were $821.9 million, down from $1.74 billion; home-equity commitments were $720.0 million, down from $1.08 billion.
- Funding costs and reliance on borrowings increased. At March 31, all $5.20 billion of reported borrowings were FHLB advances. Of deposits, $2.95 billion of CDs were due within one year. Uninsured deposits were reported at $332.8 million; management also stated that 96.1% of its $8.45 billion retail deposit base was within FDIC insurance limits.
- Available-for-sale securities had a $41.0 million net unrealized loss, largely attributed to higher interest rates. Management said it did not anticipate selling securities in unrealized-loss positions to meet liquidity needs. Accumulated other comprehensive income was $4.7 million, with material quarterly volatility associated principally with cash-flow hedges.
- Interest-rate sensitivity remains significant: a modeled immediate +200 basis-point shock reduced economic value of equity by 21.89%; modeled 12-month earnings at risk increased 5.71% under a gradual +200-basis-point scenario but decreased 1.29% under an instantaneous shock. Management said results were within internal limits and cautioned that model estimates are not forecasts.
- Management cited the recent failures of other banks and related pressure on depositor confidence. Risks include competition for deposits, higher funding and FDIC assessment costs, interest-rate and liquidity exposure, real-estate concentration in Ohio and Florida, economic deterioration, and potential pressure on loan demand and credit quality. Rising prime rates have contributed to early-stage home-equity delinquencies.
- No specific earnings or financial guidance was provided. Management said it considered liquidity adequate, expected to remain well capitalized, and planned to continue dividends, growth support and strategic repurchases. A potential FDIC special assessment related to recent bank failures had no announced amount or timing.
- The company is undergoing an escheat audit covering Ohio, Kentucky and Florida; any potential loss was not reasonably estimable. Management did not expect ordinary-course legal proceedings to have a material adverse effect. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How deposit retention, upcoming CD maturities and competition affect deposit pricing, liquidity and reliance on FHLB funding.
- Whether net interest margin stabilizes as asset yields and deposit and borrowing costs reset, including the performance of interest-rate swaps.
- Trends in home-equity delinquencies, non-accrual loans, charge-offs and allowance adequacy under changing economic and housing conditions.
- The extent to which unrealized securities losses, hedge-related AOCI changes or any need to sell assets could affect capital or liquidity.
- The actual amount and timing of any FDIC special assessment, and developments in the escheat audit.