TFS Financial Corporation (NASDAQ: TFSL) — FY2023 Form 10-K
Business context and reporting period: The company is a savings-and-loan holding company whose principal subsidiary, Third Federal Savings and Loan Association of Cleveland, originates and services residential mortgages and gathers retail deposits. Operations are concentrated in Ohio and Florida. This filing covers the fiscal year ended September 30, 2023; comparisons below are primarily with FY2022.
Key financial results
| Metric | FY2023 / September 30, 2023 | FY2022 / September 30, 2022 |
|---|---|---|
| Total assets | $16.92 billion | $15.79 billion |
| Net interest income | $283.6 million | $267.4 million |
| Net interest margin | 1.80% | 1.88% |
| Net income | $75.3 million | $74.6 million |
| Diluted EPS | $0.26 | $0.26 |
| Operating cash flow | $90.7 million | $38.9 million |
| Deposits | $9.45 billion | $8.92 billion |
| Borrowed funds | $5.27 billion | $4.79 billion |
| Shareholders’ equity | $1.93 billion | $1.84 billion |
- Earnings and margins: Net interest income rose 6%, as interest income increased $202.6 million, partly offset by a $186.5 million increase in interest expense. The average yield on interest-earning assets increased to 3.89% from 2.87%, while the average cost of interest-bearing liabilities rose to 2.32% from 1.12%. The interest rate spread narrowed to 1.57% from 1.75%. Net income edged up about 1%; return on average assets declined to 0.46% from 0.51%.
- Expenses and other income: Non-interest expense increased 8% to $213.1 million, including higher compensation, marketing, and FDIC-related costs. Non-interest income fell 10% to $21.4 million, with lower loan fees and loan-sale gains. The efficiency ratio increased to 69.88% from 68.04%.
- Loans and credit: Net loans increased 6.4% to $15.17 billion. The portfolio is primarily residential mortgages ($12.12 billion) and home-equity loans and lines ($3.03 billion). The allowance for credit losses on loans was $77.3 million; the separate allowance for unfunded commitments was $27.5 million. Non-accrual loans declined to $31.9 million from $35.6 million, and non-performing assets were 0.20% of assets versus 0.23%. Net recoveries were $6.4 million, compared with $9.7 million in FY2022.
- Liquidity and funding: Cash and cash equivalents were $466.7 million and available-for-sale securities were $508.3 million. The Association’s average liquidity ratio was 5.53%, against a stated minimum target of 5%. Deposits grew 5.9%; brokered CDs rose to $1.16 billion. CDs totaling $3.42 billion mature within one year. FHLB advances were $5.25 billion; reported additional borrowing capacity was $1.38 billion at the FHLB, plus $126.4 million at the Federal Reserve discount window and $585 million in Fed Funds arrangements.
- Capital and shareholder returns: The Association reported a 9.82% Tier 1 leverage ratio and 17.87% total risk-based capital ratio, exceeding well-capitalized thresholds. The company declared $1.13 per share in dividends for the year and repurchased 361,869 shares for $5.0 million. Its mutual holding company owns 81.01% of outstanding shares.
Material changes versus FY2022
- Higher market rates lifted asset yields but deposit and borrowing costs rose faster, compressing the net interest margin and spread.
- Loan balances expanded, particularly home-equity lending; residential mortgage originations and purchases fell to $1.86 billion from $3.65 billion. Loan sales declined to $77.2 million from $128.1 million.
- Deposits increased, but growth included a significant rise in brokered CDs; borrowed funds also increased to support loan growth and liquidity management.
- Available-for-sale securities had $53.4 million of gross unrealized losses at year-end, primarily attributed to interest-rate changes. The company said it did not intend, and was not more likely than not required, to sell them before recovery.
- Shareholders’ equity increased 4.5%, including a $62.1 million improvement in accumulated other comprehensive income, primarily reflecting cash-flow hedge and market-value movements.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management said it considers its business model and strategy appropriate, expects to remain well capitalized, and believes liquidity and alternative funding access are adequate.
- Interest-rate risk: The Association’s model estimates that an immediate parallel 200-basis-point rate increase would reduce its economic value of equity by 31.45%. A ramped 200-basis-point increase over 12 months is projected to reduce Association net interest income by 2.71%; the modeled instantaneous-shock reduction is 6.91%. These are scenario estimates, not forecasts.
- Funding and liquidity risks: Deposit competition, CD maturities, reliance on FHLB funding, and higher funding costs could pressure margins or liquidity. The FHLB revised its credit policy to reduce the borrowing limit from 50% to 40% of total assets; the company said it had begun replacing some 90-day FHLB advances with brokered deposits. A second “Needs to Improve” CRA rating could restrict access to FHLB advances with maturities over one year, although the company reported it had not received notice of such a restriction as of November 21, 2023.
- Credit and market risks: Higher rates may make adjustable-rate home-equity payments less affordable; early-stage home-equity delinquencies increased. The portfolio is concentrated in residential real estate and in Ohio and Florida. Home Today loans have weaker performance than core mortgages, though the legacy portfolio is small and no longer originated.
- Regulatory and other matters: The Association received a “Needs to Improve” CRA rating in its most recent federal evaluation. An escheat audit covering Ohio, Kentucky, and Florida is underway; any potential loss was not reasonably estimable. Management said ordinary-course legal actions are not expected to have a material adverse effect. The filing reports unqualified audit opinions and effective internal control over financial reporting.
- Accounting update: The company planned to adopt ASU 2022-02 on October 1, 2023 and expected an after-tax increase of $7.9 million to opening retained earnings from a decrease in the allowance for credit losses.
Important facts for investors to verify
- Track deposit retention and pricing, brokered-CD dependence, upcoming CD maturities, and remaining borrowing capacity after the FHLB policy change.
- Monitor net interest margin, deposit and wholesale funding costs, and actual performance against the disclosed interest-rate sensitivity scenarios.
- Review home-equity delinquencies, adjustable-rate loan resets, geographic concentrations, and the adequacy of both funded and unfunded credit-loss allowances.
- Confirm progress on the CRA rating and whether any restriction on longer-term FHLB advances is imposed.
- Reconcile allowance figures across the filing: the financial statements show $77.3 million for loans plus $27.5 million for unfunded commitments, or $104.8 million combined, while one critical-accounting-policy discussion cites $102.6 million.
- Assess whether the planned ASU 2022-02 adoption adjustment and dividend and repurchase plans affect capital, parent-company liquidity, or shareholder returns.