TFS Financial Corporation — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2022; fiscal year ends September 30. Unaudited results. Unless noted, amounts are in millions.
Business context
TFS Financial is a retail consumer banking company focused on residential mortgage lending and deposits, operating principally through Third Federal Savings and Loan Association. Approximately 81% of its common shares were held by its mutual holding company.
Financial performance and condition
| Metric | Three months ended Mar. 31, 2022 | Three months ended Mar. 31, 2021 | Six months ended Mar. 31, 2022 | Six months ended Mar. 31, 2021 |
|---|---|---|---|---|
| Interest and dividend income | $93.5 | $98.0 | $185.6 | $199.9 |
| Net interest income | $62.7 | $58.4 | $120.6 | $117.2 |
| Net interest margin | 1.82% | 1.67% | 1.76% | 1.67% |
| Net income | $15.8 | $23.0 | $32.0 | $48.0 |
| Basic and diluted EPS | $0.06 | $0.08 | $0.11 | $0.17 |
| Net gain on sale of loans | $0.1 | $8.9 | $2.3 | $25.4 |
| Non-interest expense | $50.0 | $48.8 | $97.6 | $100.5 |
- Net income fell 31% for the quarter and 33% for the six-month period. Lower loan-sale gains were the primary driver, partly offset by higher net interest income; lower credit-loss releases also reduced the year-over-year comparison.
- For the quarter, net interest income rose $4.3 million despite lower interest-earning asset yields, as funding costs fell. Net interest margin increased 15 basis points year over year to 1.82%.
- Six-month operating cash flow was $40.7 million, versus $43.9 million a year earlier. Investing activities used $673.4 million, while financing activities provided $515.0 million. Cash and cash equivalents declined $117.7 million to $370.7 million.
- At March 31, total assets were $14.58 billion, loans held for investment net were $13.14 billion, deposits were $9.01 billion, FHLB borrowings were $3.56 billion, and shareholders’ equity was $1.80 billion. Compared with September 30, 2021, loans grew 5% and borrowings grew 15%.
- The total allowance for credit losses was $90.9 million, including $64.3 million for loans and $26.6 million for unfunded commitments. Non-accrual loans were $39.3 million; loans 90 or more days past due were $13.6 million. The company reported net recoveries of $4.7 million for the six months.
- The company’s Tier 1 leverage ratio was 12.66%; the Association’s was 10.99%. Both reported capital levels exceeded applicable “well capitalized” thresholds. Average liquidity ratio for the quarter was 5.47%, against a stated 5% minimum target.
Material changes and management commentary
- Six-month residential mortgage originations totaled $1.74 billion, down from $2.06 billion a year earlier. Home equity loan and line-of-credit commitments increased to $1.08 billion from $823.7 million.
- Loan sales, including commitments to sell, fell to $101.7 million from $517.5 million. Management said rising long-term rates affected sale economics and the decision to retain loans; $16.1 million of loans initially originated for sale were transferred to the held-for-investment portfolio.
- Deposits increased only $14.7 million. Checking balances rose, including $200 million of brokered checking, while certificates of deposit declined $317.4 million. FHLB advances increased $463.5 million, primarily to fund loan growth.
- Shareholders’ equity increased $63.5 million from September 30, reflecting net income and a $57.0 million after-tax improvement in other comprehensive income, partly offset by dividends and share repurchases. The company declared quarterly dividends of $0.2825 per share.
Outlook, risks, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it planned to expand certain Fannie Mae loan-sale activities in fiscal 2022 and beyond, with startup and marketing costs, and did not expect a significant fiscal 2022 financial impact.
- Interest-rate risk is material. A modeled instantaneous +200-basis-point shock reduced the Association’s economic value of equity by 22.11%, versus 8.21% at September 30, 2021. A separate ramped +200-basis-point scenario estimated a 0.07% increase in 12-month earnings at risk, while an instantaneous +200-basis-point scenario estimated a 4.08% decrease. These are model estimates, not forecasts.
- Management cited risks from inflation and interest-rate changes, competition, economic and real estate conditions, credit quality, funding access, regulation, and cyber and pandemic-related events. Loans are concentrated in residential real estate, particularly Ohio and Florida; home equity lending carries higher risk than traditional first mortgages.
- At March 31, $3.35 billion of CDs were due within one year. The company noted that replacement funding could cost more if deposits do not remain. It also had $3.68 billion of unfunded home equity lines and $870.1 million of loan-origination commitments.
- Available-for-sale securities had $21.0 million of gross unrealized losses, attributed to market interest rates rather than credit quality; management said it did not expect to sell them or be required to sell before recovery. Legal proceedings were described as normal-course matters not expected to have a material adverse effect.
Important facts for investors to verify
- Whether net interest margin and funding costs remain favorable as rates change and significant CD maturities approach.
- Whether loan growth, geographic concentration, home equity exposure, delinquencies, and allowance levels warrant changes in expected credit losses.
- How loan-sale volumes and gains evolve as management expands Fannie Mae sales and chooses between selling and retaining fixed-rate loans.
- Whether the reported interest-rate sensitivity models, liquidity position, and capital ratios remain within management’s risk limits under changing market conditions.
- The distinction between loan-loss allowance and total allowance: the latter includes the liability for unfunded commitments.