TFS Financial Corporation — Form 10-Q Summary
Business context and reporting period
Retail consumer banking, primarily mortgage lending and deposit gathering, conducted through Third Federal Savings and Loan Association of Cleveland. This is the fiscal second quarter ended March 31, 2024; results are compared with the quarter and six months ended March 31, 2023. Balance-sheet comparisons are with September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Key financial metrics
| Metric | Quarter ended March 31, 2024 | Six months ended March 31, 2024 |
|---|---|---|
| Net interest income | $71.4 million; up 3% | $140.5 million; down 3% |
| Net income | $20.7 million; up 30%; diluted EPS $0.07 | $41.4 million; up 9%; diluted EPS $0.15 |
| Interest and dividend income | $183.5 million; up 24% | $360.7 million; up 26% |
| Interest expense | $112.1 million; up 43% | $220.2 million; up 55% |
| Net interest margin | 1.71%, down 7 basis points year over year | 1.70%, down 16 basis points year over year |
| Non-interest income / expense | $5.7 million / $52.2 million; expense down 6% | $12.0 million / $102.5 million; expense down 6% |
| Net provision (release) for credit losses | $1.0 million release | $2.0 million release |
Quarterly earnings benefited from higher asset yields and balances and lower salaries and marketing expenses. Higher deposit and borrowing costs offset much of the growth in interest income. For the six-month period, the increase in interest expense exceeded the increase in interest income, reducing net interest income.
- Balance sheet: Assets were $17.02 billion, up 0.6% from September 30, 2023. Net loans held for investment were $15.15 billion, approximately flat; residential mortgage balances fell while home equity loans and lines of credit grew.
- Funding and debt: Deposits totaled $9.94 billion, up 5.1%; borrowed funds were $4.96 billion, down 6.0%. Certificates of deposit (CDs) were $7.52 billion, including $1.26 billion of brokered CDs. Borrowings were all from the FHLB at quarter-end.
- Liquidity: Cash and cash equivalents were $594.3 million. Additional borrowing capacity was $3.15 billion; available sources include FHLB and Federal Reserve borrowing and Fed Funds arrangements. The average liquidity ratio was 6.44% for the quarter.
- Cash flow: For the six months, operating activities provided $50.5 million, investing activities provided $30.1 million, and financing activities provided $46.9 million. Cash and cash equivalents increased $127.6 million to $594.3 million.
- Credit quality: The loan allowance was $68.2 million; including the $26.7 million allowance for unfunded commitments, total credit-loss allowances were $94.8 million. Loans 90 or more days past due were $14.2 million; non-accrual loans were $35.3 million. Net recoveries were $2.3 million for the six months.
- Capital and shareholder returns: Company CET1 and Tier 1 risk-based capital ratios were each 19.05%; the Association’s CET1 ratio was 17.40%. Dividends declared were $0.2825 per share for the quarter; no shares were repurchased during the six months.
Material changes versus comparable periods
- Quarterly net income rose 30%, while six-month net income increased 9%. Quarterly net interest income rose, but the six-month figure declined 3% as funding costs climbed faster than interest income.
- For the quarter, the average loan yield increased to 4.30% from 3.77%, while the average cost of interest-bearing liabilities rose to 2.98% from 2.23%. The six-month net interest margin fell to 1.70% from 1.86%.
- Deposits increased $485.8 million from fiscal year-end, principally due to $868.4 million of CD growth, partly offset by lower checking, savings, and money market balances. Borrowed funds declined $318.2 million.
- At March 31, 2024, loans 90 or more days past due were 0.09% of net loans, unchanged from September 30, 2023; non-accrual loans increased to $35.3 million from $31.9 million.
- Shareholders’ equity was $1.91 billion, down 1.0% from fiscal year-end. Net income and an accounting-adoption adjustment were offset by dividends and a $42.8 million adverse six-month change in accumulated other comprehensive income, primarily reflecting swaps and market-value changes.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no numerical earnings or margin guidance. Management says it expects to remain well-capitalized and considers liquidity adequate, and intends to continue dividends, support asset growth, and pursue strategic repurchases. Management also expects its expanded mortgage-sale approach not to significantly affect fiscal 2024 results.
- Funding and interest-rate risk: $4.41 billion of CDs mature within one year. If balances do not renew, replacement funding may cost more. Management identifies margin pressure from the prolonged inverted yield curve and higher rates. In a modeled immediate 200-basis-point rate increase, EVE would fall 21.57% at the Company and 25.09% at the Association; these model estimates depend on assumptions and are not forecasts.
- FHLB restriction: Effective January 19, 2024, the Association was restricted from obtaining FHLB advances with terms longer than one year after a second consecutive “Needs Improvement” CRA rating. Management says alternative funding, including retail and brokered CDs, is expected to prevent a material effect on funding costs or margins.
- Credit and concentration risks: The portfolio is heavily concentrated in residential real estate, with substantial Ohio and Florida exposure. Higher prime rates have increased payments on adjustable-rate home equity lines and may pressure borrower affordability. Management notes that delinquencies have risen across portfolios, though they remain near historic lows.
- Accounting change: The Company adopted ASU 2022-02 on October 1, 2023, eliminating TDR accounting. Adoption increased retained earnings by $7.9 million, net of tax, and reduced the allowance by $10.3 million.
- Contingencies: An escheat audit covering Ohio, Kentucky, and Florida is underway; any potential loss is not reasonably estimable. Management does not expect ordinary-course legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether CD maturities renew, and the resulting deposit and borrowing costs and net interest margin.
- Progress and any funding or capital consequences related to the FHLB restriction and the Association’s CRA rating.
- Trends in delinquency, non-accrual loans, home-equity-line performance, and allowance adequacy, particularly in Ohio and Florida.
- Actual sensitivity of earnings and capital to interest-rate changes compared with the filing’s modeled EVE and earnings-at-risk estimates.
- Any update on the escheat audit, and continuation of the dividend and MHC dividend-waiver arrangements, which were approved through July 11, 2024.