TFS Financial Corporation — Form 10-Q
Business context and reporting period. TFS Financial is a retail consumer banking and mortgage lender operating principally through Third Federal Savings and Loan Association of Cleveland. This unaudited report covers the fiscal third quarter and nine months ended June 30, 2023; balance-sheet comparisons are to September 30, 2022. The filing was dated August 9, 2023. Approximately 81% of TFS’s shares were held by its mutual holding company.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Interest and dividend income | $156.7 million; up 52% year over year | $443.2 million; up 54% |
| Net interest income | $68.8 million; down 3.5% | $213.2 million; up 11% |
| Net interest margin | 1.75%, versus 1.97% | 1.82%, versus 1.83% |
| Net income | $17.6 million; up 3% | $55.7 million; up 13% |
| Diluted earnings per share | $0.06, unchanged | $0.20, versus $0.17 |
| Provision (release) for credit losses | None, versus $4.0 million provision | $2.0 million release, versus $1.0 million provision |
| Non-interest income / expense | $5.8 million / $52.9 million | $16.3 million / $161.6 million |
Financial position at June 30, 2023: Total assets were $16.59 billion, up 5.1% from fiscal year-end; net loans were $14.88 billion; deposits were $9.07 billion; borrowed funds were $5.45 billion; and shareholders’ equity was $1.89 billion. Cash and cash equivalents were $436.2 million, with $513.3 million in available-for-sale securities. Securities had $48.9 million of gross unrealized losses, attributed to higher market rates; the company recorded no credit-loss allowance on them.
Cash flow and capital: For the nine months, operating activities provided $76.9 million, investing activities used $724.1 million, and financing activities provided $713.9 million. Cash rose $66.7 million to $436.2 million. The Association’s total risk-based capital ratio was 18.52% and its leverage ratio was 9.93%; TFS Financial’s CET1 ratio was 20.01%. The Association exceeded regulatory well-capitalized thresholds.
Material changes and operating trends
- For the quarter, rising asset yields did not keep pace with rapidly higher funding costs: interest expense increased 179% year over year, and net interest income and margin declined. Management attributed margin pressure to rapid rate increases and an extended inverted yield curve.
- For the nine months, loan and other asset income growth exceeded the increase in funding costs, lifting net interest income and net income. Higher average loan balances and yields contributed to the increase.
- Loans held for investment, net, grew 4.4% from September 30, 2022, including growth in residential mortgages and home-equity loans and lines. Deposits increased 1.7%, while borrowings rose 13.7%, primarily to fund loan growth.
- Nine-month non-interest expense increased 8%, led by marketing, federal insurance assessments, salaries and other expenses. Non-interest income declined 16%, principally from lower loan-sale gains and fees.
- Credit indicators remained low: loans 30 or more days delinquent were 0.15% of net loans, and loans 90 or more days delinquent were 0.07%. Non-performing assets were $32.0 million, or 0.19% of assets. The loan allowance was $74.8 million; including $27.8 million for unfunded commitments, total credit-loss allowance was $102.6 million.
Outlook, risks and contingencies
No quantified earnings or margin guidance was provided. Management said its business model and risk-management approach remained appropriate, citing capital strength, stable core deposits, contingent liquidity and established risk controls. It expects to remain well capitalized and believes liquidity is adequate, while noting results are subject to economic and market uncertainty.
- Funding and liquidity: Average liquidity ratio for the quarter was 5.51%, against a 5% internal minimum. Available additional borrowing capacity was approximately $4.05 billion. Management reported that 96.3% of its $8.40 billion retail deposit base consisted of accounts structured within FDIC insurance limits; uninsured deposits totaled $311.3 million. CDs totaling $2.83 billion mature within one year, and replacement funding could cost more. Brokered CDs were $667.8 million.
- Rate sensitivity: A modeled instantaneous 200-basis-point rate increase reduced estimated economic value of equity by 19.58%; the modeled 12-month earnings-at-risk decrease was 1.03% under a gradual 200-basis-point increase and 9.72% under an instantaneous increase. These are model estimates, not forecasts, and depend on assumptions about rates and customer behavior.
- Credit and concentration: Lending is concentrated in residential real estate, including Ohio and Florida. Management noted that higher prime rates have increased home-equity line payments and contributed to early-stage delinquency pressure. Home-equity lending is generally riskier than first mortgages, and actual losses may differ from allowance estimates.
- Other items: The FDIC may impose special assessments tied to recent bank failures; amount and timing were not yet announced. An Ohio, Kentucky and Florida escheat audit is underway, and any potential loss was not reasonably estimable. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material risk-factor changes were reported for the quarter.
- The MHC’s members approved a proposed waiver of up to $1.13 per share of dividends through July 11, 2024; Federal Reserve Bank of Cleveland non-objection and timing remained unknown as of the filing. The company made no share repurchases in the quarter. Separately, the CEO adopted a Rule 10b5-1 plan covering a designated option to exercise for 286,500 shares, subject to stated conditions.
Important facts for investors to verify
- Whether deposit pricing and borrowing costs continue to pressure net interest margin, and how the $2.83 billion of CDs maturing within a year are retained or refinanced.
- Subsequent deposit flows, use of brokered funding and borrowings, and continued availability of contingent liquidity.
- Trends in home-equity delinquencies, non-performing loans, recoveries and allowance levels, particularly under higher interest rates or weaker housing conditions.
- The assumptions and actual outcomes behind interest-rate sensitivity models, and the impact of swap strategy on funding costs and earnings.
- The Federal Reserve’s response to the MHC dividend-waiver request and any FDIC special assessment, as well as the outcome of the escheat audit.