TFS Financial Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022; comparisons are primarily with FY2021. TFS Financial is a savings-and-loan holding company whose principal business is residential mortgage lending and retail deposit gathering through Third Federal Savings and Loan Association, based in Ohio and Florida. This is an annual report, not a standalone fourth-quarter report.
Financial performance and condition
| Metric | FY2022 / Sep. 30, 2022 | FY2021 / Sep. 30, 2021 |
|---|---|---|
| Total assets | $15.79 billion | $14.06 billion |
| Net interest income | $267.4 million | $231.6 million |
| Net interest margin | 1.88% | 1.66% |
| Net income | $74.6 million | $81.0 million |
| Diluted EPS | $0.26 | $0.29 |
| Deposits | $8.92 billion | $8.99 billion |
| Borrowed funds | $4.79 billion | $3.09 billion |
| Shareholders’ equity | $1.84 billion | $1.73 billion |
- Interest income rose 5% to $409.3 million, while interest expense fell 10% to $141.9 million. The interest-rate spread increased to 1.75% from 1.52%.
- Net income fell 8%, principally because loan-sale gains declined sharply and the credit-loss provision moved from a $9.0 million release to a $1.0 million provision. Non-interest income fell 57% to $23.8 million; gains on loan sales were $1.1 million versus $33.1 million.
- Residential mortgage originations were $3.65 billion. Loans held for investment, net, rose 14% to $14.26 billion. Home equity loans and lines of credit increased to $2.63 billion.
- Operating cash flow was $38.9 million, down from $83.2 million. Investing activities used $1.88 billion, largely reflecting loan growth; financing activities provided $1.72 billion, including increased borrowing. Cash and cash equivalents ended the year at $369.6 million.
- Average liquidity ratio was 5.64%, against management’s stated 5% minimum. At year-end, reported cash and available-for-sale securities totaled approximately $827 million. Borrowing capacity was approximately $9.24 billion, with $4.79 billion outstanding.
- The Association was well-capitalized: total risk-based capital was 18.84%, Tier 1 leverage was 10.33%, and CET1 was 18.25%. The Company’s equity-to-assets ratio was 11.7%.
Material changes and asset quality
- Assets grew 12.3%, mainly as loan originations exceeded loan sales and principal repayments. Borrowings increased $1.70 billion, primarily to fund loan growth, while deposits declined $72.6 million.
- Loan sales fell to $128.1 million from $762.3 million, reflecting the higher-rate environment. Management began a mortgage-banking pilot to originate more loans for sale; its FY2022 impact was described as immaterial.
- Non-performing assets declined to $36.8 million from $44.3 million; non-accrual loans were 0.25% of total loans versus 0.35%. Serious delinquencies were 0.09% of net loans, compared with 0.12%.
- Total allowance for credit losses, including $27.0 million for unfunded commitments, rose to $99.9 million from $89.3 million. Loan recoveries exceeded charge-offs by $9.7 million. Home equity lending remains a comparatively higher credit-risk segment.
- Available-for-sale securities had $43.7 million of gross unrealized losses at year-end, primarily attributed to higher interest rates. The company recorded no securities credit-loss allowance, citing government-agency guarantees and expected contractual cash flows.
- Accumulated other comprehensive income improved by $91.0 million, largely due to cash-flow hedge valuation changes, while unrealized securities losses increased.
Outlook, risks and other notable disclosures
- No specific earnings, revenue, or margin guidance is provided. Management says it believes liquidity and alternative funding access are adequate and expects a significant portion of CDs due within a year to remain, based on past experience.
- Interest-rate exposure is significant. A modeled instantaneous +200-basis-point shock reduced economic value of equity by 29.92%; a separate ramped +200-basis-point scenario projected a 0.29% decrease in 12-month net interest income. An instantaneous +200-basis-point scenario projected a 15.06% decline in that income measure. These are model estimates, not forecasts.
- The Association received a “Needs to Improve” Community Reinvestment Act rating in its latest cited examination. Management reported no notice, as of November 22, 2022, of a potential restriction on FHLB advances with maturities over one year; it stated it did not expect a funding impact. A restriction could affect access to longer-term advances.
- Other key risks include deposit competition and funding costs, mortgage demand and secondary-market liquidity, real-estate values and borrower credit, concentration in Ohio and Florida, cyber and vendor risks, regulation, and severe weather affecting Florida operations.
- The company reported $538.7 million of loan-origination commitments and $4.08 billion of unfunded home equity lines. These amounts are not necessarily future cash requirements because commitments may expire undrawn.
- An Ohio and Kentucky escheat audit is ongoing; any potential loss was not reasonably estimable. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The company paid $1.13 per share in dividends declared for FY2022 and repurchased 337,259 shares for $5.0 million. Its mutual holding company owned about 81% of shares, and the company’s ability to fund parent-level dividends and repurchases depends substantially on subsidiary distributions and regulatory conditions.
- Deloitte issued unqualified opinions on the financial statements and internal controls. The audit identified the allowance for credit losses as a critical audit matter because of the significant modeling assumptions and management judgment involved.
Important facts for investors to verify
- Whether net interest income and deposit pricing hold up as higher market rates flow through to deposits and borrowings.
- CD renewal and retention trends, the cost and availability of wholesale funding, and any change in FHLB borrowing access related to the CRA rating.
- Loan growth, particularly home equity exposure and the performance of adjustable-rate mortgages as rates reset; also monitor delinquencies, charge-offs, recoveries, and allowance assumptions.
- Whether loan-sale volumes and gains recover, and how the mortgage-banking pilot affects earnings and interest-rate risk.
- Movement in available-for-sale securities values, AOCI, and the sensitivity of modeled EVE and earnings to changing rates.
- Future dividend capacity, mutual holding company dividend-waiver approvals, and the extent to which capital is allocated to dividends, repurchases, or growth.