TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021, compared with the three months ended December 31, 2020 for income and cash-flow measures. Balance-sheet comparisons are with September 30, 2021. The filing was dated February 8, 2022.
Business context
TFS Financial is a retail consumer banking company focused primarily on residential mortgage lending and deposits, operating principally through Third Federal Savings and Loan Association of Cleveland. Its loan portfolio is concentrated in residential real estate, with significant exposure to Ohio and Florida. Approximately 81% of outstanding common shares were held by its mutual holding company.
Key financial metrics
| Measure | Quarter ended Dec. 31, 2021 | Comparable period / change |
|---|---|---|
| Total assets | $14.13 billion | Up 1% from Sept. 30, 2021 |
| Net interest income | $57.8 million | $58.7 million, down 2% year over year |
| Net interest margin | 1.69% | 1.66% year over year; interest-rate spread was 1.57%, versus 1.51% |
| Net income / diluted EPS | $16.1 million / $0.06 | $25.0 million / $0.09 |
| Net interest income after credit-loss release | $59.8 million | $60.7 million |
| Non-interest income | $8.2 million | $21.5 million |
| Non-interest expense | $47.7 million | $51.7 million |
| Return on average assets / equity | 0.46% / 3.67% | 0.68% / 6.04% |
| Cash and cash equivalents | $408.0 million | Down from $488.3 million at Sept. 30, 2021 |
| Loans held for investment, net | $12.65 billion | Up $136.0 million from Sept. 30, 2021 |
| Deposits / borrowed funds | $8.93 billion / $3.18 billion | Deposits down $60.3 million; borrowings up $88.8 million from Sept. 30, 2021 |
| Shareholders’ equity | $1.75 billion | Up $21.1 million from Sept. 30, 2021 |
Operating cash flow was $7.7 million, compared with $24.2 million a year earlier. Investing activities used $157.6 million, while financing activities provided $69.6 million; cash and equivalents declined by $80.3 million during the quarter. The allowance for credit losses, including unfunded commitments, was $89.2 million, or 0.70% of loans receivable. The company recorded a $2.0 million credit-loss release and $2.0 million of net loan recoveries.
Regulatory capital remained above well-capitalized thresholds. At December 31, the Association’s Tier 1 leverage ratio was 10.93% and its total risk-based capital ratio was 20.29%; the consolidated company’s Tier 1 leverage ratio was 12.72%. The company reported an average liquidity ratio of 6.24% for the quarter, against a stated minimum target of 5%.
Material changes versus the prior comparable period
- Net income fell $8.9 million, or about 35%, primarily as loan-sale gains declined. Net gain on sale of loans was $2.2 million, versus $16.4 million a year earlier; loan sales were $102.0 million, compared with $293.5 million.
- Interest and dividend income decreased 10% to $92.1 million, mainly because average loan balances and loan yields declined. Interest expense fell 21% to $34.2 million, principally due to lower deposit costs.
- Net interest margin improved modestly to 1.69% from 1.66%, as lower funding costs more than offset reduced asset yields.
- Non-interest expense decreased 8% to $47.7 million. The prior-year quarter included a one-time associate bonus related to the pandemic, as well as higher appraisal and third-party fees.
- Residential mortgage loans held for investment increased for the first time since the start of the pandemic, as originations exceeded loan sales and repayments. Total first-mortgage originations were $877.1 million, down from $1.12 billion year over year; 24% were adjustable-rate and 76% fixed-rate.
Outlook, management commentary and risks
No quantified earnings or revenue guidance was provided. Management said it planned to expand sales of certain fixed-rate loans to Fannie Mae during fiscal 2022 and beyond, testing risk-based and loan-level pricing in markets outside Ohio and Florida. Startup and marketing costs were expected, but management did not expect a significant fiscal 2022 financial impact.
Management identified interest-rate risk, credit quality, liquidity and diverse funding, and expense control as key priorities. It stated that liquidity was adequate and that the company expected to remain well capitalized. For a modeled parallel 200-basis-point rate increase, the Association’s economic value of equity was estimated to decline 10.23%; modeled 12-month earnings at risk was estimated to increase 3.04% under a gradual 200-basis-point increase. These are scenario estimates, not forecasts of actual results.
- Interest-rate and funding risk: Mortgage assets are generally longer-term than deposits and borrowings. Management warned that a rapid rate increase or a prolonged flat or inverted yield curve could adversely affect future net interest income. $3.46 billion of certificates of deposit were due within one year; replacement funding could cost more.
- Credit and concentration risk: About 90% of assets were residential real estate and home-equity loans. Residential and construction lending was concentrated in Ohio and Florida. Home Today loans had higher credit risk and accounted for a disproportionate share of delinquencies relative to their small portfolio balance.
- COVID-19 accommodations: Active COVID-19 forbearance plans totaled $12.0 million at quarter-end, down from $21.8 million at September 30, 2021. Most active deferrals were scheduled to end by March 31, 2022. Management expected future foreclosure volume could rise after foreclosure deferrals ended.
- Credit estimates: The allowance relies on economic forecasts, models and management judgments. The quarter included a net $4.2 million qualitative reduction in the loan allowance; the Home Today portfolio had a negative allowance balance reflecting expected recoveries.
- Other matters: Unrealized losses on available-for-sale securities were attributed to market interest rates; management said it did not intend, and was not more likely than not required, to sell them before recovery. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether the sharp year-over-year decline in loan-sale gains persists, and how planned expansion of Fannie Mae sales affects earnings and interest-rate exposure.
- How loan yields, deposit pricing and net interest margin respond to changing rates, including the sensitivity of modeled EVE and earnings at risk.
- Whether maturing certificates of deposit remain with the company and the cost and availability of replacement funding.
- Whether delinquencies, foreclosures and credit losses increase as COVID-19 forbearance plans expire, particularly in Ohio, Florida, home-equity lending and the Home Today portfolio.
- Whether cash usage, loan growth and capital distributions remain consistent with the company’s liquidity and capital targets.