TFS Financial Corporation — Form 10-Q Summary
Reporting period: Three months ended December 31, 2023, the first quarter of fiscal 2024. Comparison periods are the three months ended December 31, 2022, and, for balance-sheet changes, September 30, 2023. TFS Financial is a retail consumer bank focused on mortgage lending and deposits; its mutual holding company owned 80.9% of its common shares.
Financial performance and position
| Metric | Quarter / period-end | Comparison |
|---|---|---|
| Interest and dividend income | $177.2 million | Up 27% year over year |
| Net interest income | $69.1 million | $75.2 million; down 8% |
| Net interest margin | 1.68% | 1.95%; down 27 basis points |
| Net income / diluted EPS | $20.7 million / $0.07 | $22.2 million / $0.08 |
| Non-interest income / expense | $6.3 million / $50.3 million | $5.2 million / $53.2 million |
| Cash and cash equivalents | $551.8 million | $466.7 million at September 30 |
| Total assets | $17.05 billion | $16.92 billion at September 30 |
| Deposits / borrowed funds | $9.92 billion / $5.03 billion | $9.45 billion / $5.27 billion at September 30 |
| Shareholders’ equity | $1.87 billion | $1.93 billion at September 30 |
Interest expense rose 69% year over year to $108.1 million, as deposit and borrowing costs increased faster than asset yields. The average rate paid on certificates of deposit rose to 3.35% from 1.59%; the average loan yield rose to 4.26% from 3.60%. Annualized return on average assets was 0.49%, versus 0.56%; return on average equity was 4.25%, versus 4.75%. Annualized non-interest expense to average assets improved to 1.19% from 1.34%.
Quarterly cash flows were $36.3 million from operations, negative $41.8 million from investing, and positive $90.5 million from financing, producing an $85.0 million increase in cash. The $1.0 million net release for credit losses comprised a $1.0 million loan provision and a $2.0 million release for unfunded commitments. Total allowance for credit losses, including unfunded commitments, ended at $94.6 million.
Material changes and operating trends
- Net interest income fell despite higher interest income, as funding costs rose more rapidly. Net interest spread declined to 1.39% from 1.75%.
- Deposits increased $471.2 million from September 30, primarily from a $680.6 million increase in certificates of deposit; checking, savings, and money market balances declined. Brokered CDs rose to $1.49 billion.
- Loans held for investment, net, increased $41.5 million from September 30. Home equity loans and lines of credit grew $167.2 million, while residential mortgage balances declined. First-mortgage originations were $273.0 million, down from $485.5 million a year earlier; home-equity lending commitments were $436.1 million, up from $362.6 million.
- Other comprehensive loss was $75.0 million, largely from cash-flow hedge valuation changes, reducing equity from $1.93 billion to $1.87 billion. The quarter’s declared common dividend was $0.2825 per share; no shares were repurchased.
- Adoption of ASU 2022-02 reduced the allowance by $10.3 million and increased retained earnings by $7.9 million, net of tax. The change eliminated the prior TDR accounting approach.
Outlook, risks, and contingencies
The filing provides no specific earnings or growth guidance. Management said it expects to remain well capitalized and considers liquidity adequate. It cited stable core deposits, available contingent funding, interest-rate risk management, and continued expense control as priorities. The reported average liquidity ratio was 6.07%, against a stated minimum target of 5%.
- Capital and funding: The Association’s capital ratios exceeded well-capitalized regulatory thresholds. At December 31, it had approximately $3.03 billion of additional borrowing capacity across FHLB, Federal Reserve discount-window, and Fed Funds sources. Management expects no funding impact from an FHLB restriction effective January 19, 2024, which bars new advances with terms longer than one year because of a second consecutive “Needs Improvement” CRA rating. Existing advances and advances of one year or less are not affected.
- Interest-rate sensitivity: A modeled instantaneous +200-basis-point shock reduced estimated economic value of equity by 19.77% at the Company and 23.47% at the Association. Under the company’s ramped +200-basis-point scenario, modeled 12-month earnings at risk increased 1.25%. These are model estimates, not forecasts.
- Liquidity and deposit maturities: CDs totaling $4.12 billion, or 41.5% of deposits, were due within one year. The Company noted that replacement funding could cost more if these deposits do not remain. It reported that 96.2% of its $8.44 billion retail deposit base consisted of accounts structured within FDIC insurance limits.
- Credit and concentration: Residential real estate lending is concentrated in Ohio and Florida. Serious delinquencies were 0.10% of net loans, up from 0.09% at September 30 and 0.08% a year earlier; management noted late-stage delinquencies and home-equity delinquencies had increased. Rising prime rates may make variable-rate home-equity payments less affordable.
- Other matters: The Company is undergoing an escheat audit in Ohio, Kentucky, and Florida; any potential loss is not reasonably estimable. Management said ordinary-course legal actions are not expected to have a material adverse effect. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether deposit and borrowing costs continue to pressure net interest margin and earnings.
- Deposit retention and replacement funding needs as $4.12 billion of CDs mature within a year, including reliance on brokered CDs.
- Implementation and practical funding effects of the FHLB’s long-term-advance restriction, and the status of the CRA rating.
- Trends in serious delinquencies, home-equity credit quality, and the allowance after the accounting change.
- Changes in interest-rate exposure, including hedge-related OCI volatility and the assumptions behind EVE and earnings-at-risk models.