TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022; the interim financial statements are unaudited. TFS Financial is a retail consumer banking company focused primarily on mortgage lending and deposits. Comparisons below are with the corresponding 2021 period unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net interest income | $71.3 million, up 25% | $191.9 million, up 10% |
| Net income | $17.1 million, up 7%; diluted EPS $0.06 | $49.1 million, down 23%; diluted EPS $0.17 |
| Net interest margin | 1.97%, versus 1.63% | 1.83%, versus 1.66% |
| Provision (release) for credit losses | $4.0 million provision, versus $1.0 million release | $1.0 million provision, versus $7.0 million release |
| Net interest income after provision | $67.3 million | $190.9 million |
- Balance sheet at June 30: Total assets were $15.41 billion, up 10% from September 30, 2021. Net loans held for investment were $13.90 billion, up 11%; deposits were $9.16 billion, up 2%; borrowed funds were $4.25 billion, up 37%.
- Funding and liquidity: Cash and cash equivalents were $387.5 million, down from $488.3 million at September 30, 2021. Available-for-sale securities totaled $449.9 million. The three-month average liquidity ratio was 5.46%, against a stated minimum target of 5%. Management said liquidity was adequate. Additional FHLB borrowing capacity, subject to collateral and other requirements, was $3.89 billion.
- Cash flow, nine months: Operating activities provided $51.1 million, investing activities used $1.48 billion, and financing activities provided $1.33 billion. Cash declined $100.8 million to $387.5 million.
- Credit quality: The loan allowance was $69.5 million, or 0.50% of amortized-cost loans; including the $28.1 million allowance for unfunded commitments, total allowance was $97.6 million. Non-accrual loans were $37.7 million; loans 90 or more days past due were $12.6 million. Net recoveries were $7.3 million for the nine-month period.
- Capital and distributions: The Association’s Tier 1 leverage ratio was 10.63%, and the Company’s was 12.11%; both exceeded applicable well-capitalized thresholds. The Company paid $43.8 million in dividends and repurchased $4.7 million of stock during the nine months.
Material changes versus comparable periods
- Quarterly net income improved as higher net interest income more than offset increased credit-loss provision, lower non-interest income, and higher expenses. Quarterly interest expense fell 18%, while net interest income rose 25%.
- Nine-month net income fell to $49.1 million from $64.0 million. Non-interest income declined 58%, chiefly because loan-sale gains fell: loan sales were $104.3 million versus $634.0 million, and net gain on loan sales was $2.2 million versus $28.8 million.
- Loan growth was funded in part by a $1.15 billion increase in borrowed funds. Checking balances grew, including $300.1 million in new brokered checking accounts, while certificates of deposit declined.
- Accumulated other comprehensive income improved from a loss of $67.8 million at September 30, 2021 to income of $5.0 million at June 30, 2022, reflecting gains on cash flow hedges that more than offset unrealized losses on available-for-sale securities.
Outlook, risks, contingencies and unusual items
- The filing gives no numerical earnings or revenue guidance. Management’s stated priorities include managing interest-rate and credit risk, maintaining liquidity and diverse funding, and controlling expenses.
- Interest-rate risk is significant. The Association’s modeled economic value of equity fell 22.27% under an instantaneous +200 basis-point shock; estimated 12-month earnings at risk fell 1.81% under a gradual +200-basis-point increase and 5.92% under an instantaneous increase. Management said modeled exposure was within internal limits; these scenarios depend on assumptions and are not forecasts.
- Loans are concentrated in residential real estate, with significant exposure to Ohio and Florida. Management identifies home-equity lending, rising-rate payment resets on adjustable-rate loans, and economic or property-market deterioration as credit risks. CDs totaling $3.27 billion were due within one year of June 30, 2022; replacement funding could cost more.
- Available-for-sale securities had $26.8 million of gross unrealized losses at June 30, attributed by management to market interest rates rather than credit quality. The company reported no credit-loss allowance on these securities and said it did not intend, and was not likely required, to sell them before recovery.
- Quarterly non-interest expense included a one-time after-tax $2,000 bonus to each associate. Legal actions arising in the ordinary course were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
- After quarter-end, members approved a proposed waiver of the MHC’s share of dividends, up to $1.13 per share through July 12, 2023. Federal Reserve Bank of Cleveland non-objection and its timing remained unknown as of the filing.
Key facts for investors to verify
- Whether loan growth and higher funding costs sustain net interest margin as rates and deposit competition change.
- Deposit retention and repricing, especially the $3.27 billion of CDs maturing within one year, and the extent of reliance on FHLB and brokered funding.
- Credit trends in home-equity and Ohio/Florida portfolios, including delinquency, recoveries, and allowance adequacy as economic conditions evolve.
- Interest-rate sensitivity and the assumptions behind EVE and earnings-at-risk models; also monitor hedge performance and securities’ unrealized losses.
- Whether the MHC dividend waiver receives the required regulatory non-objection and how future dividends and repurchases affect capital deployment.