TFS Financial Corporation — FY2021 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended September 30, 2021, rather than a calendar fourth quarter. TFS is a savings-and-loan holding company whose principal subsidiary, Third Federal Savings and Loan Association of Cleveland, focuses on residential mortgage lending and retail deposits, primarily in Ohio and Florida.
Key financial metrics
| Metric | FY2021 / September 30, 2021 | Prior comparable period |
|---|---|---|
| Total assets | $14.06 billion | $14.64 billion |
| Net interest income | $231.6 million | $242.3 million |
| Net income | $81.0 million; diluted EPS $0.29 | $83.3 million; diluted EPS $0.29 |
| Net interest margin / spread | 1.66% / 1.52% | 1.69% / 1.52% |
| Return on average assets / equity | 0.56% / 4.77% | 0.56% / 4.88% |
| Operating cash flow | $83.2 million | $121.8 million |
| Deposits / borrowed funds | $8.99 billion / $3.09 billion | $9.23 billion / $3.52 billion |
| Shareholders’ equity | $1.73 billion; 12.3% of assets | $1.67 billion |
- Revenue and expenses: Interest and dividend income fell 14% to $389.4 million, while interest expense fell 26% to $157.7 million. Non-interest income rose 4% to $55.3 million, including $33.1 million of net gains on loan sales. Non-interest expense increased 2% to $195.8 million.
- Cash flow and liquidity: Investing activities provided $547.4 million and financing activities used $640.2 million; cash and cash equivalents declined $9.7 million to $488.3 million. Average liquidity ratio was 6.66% (management’s stated minimum target: 5%). The Association reported access to additional borrowing capacity of $4.34 billion at the FHLB and $245.7 million at the Federal Reserve discount window, subject to applicable terms and collateral.
- Credit and capital: Loans, net, were $12.51 billion, down 5%. Non-accrual loans were $44.0 million, or 0.35% of loans; non-performing assets were 0.32% of total assets. The loan allowance was $64.3 million; the additional $25.0 million allowance for unfunded commitments brought total credit-loss allowances to $89.3 million. The Association’s total risk-based capital ratio was 21.00%, above the 10.00% well-capitalized threshold.
Material changes versus FY2020
- Net income decreased $2.3 million, or about 3%. Lower asset yields and average loan balances reduced net interest income by $10.6 million, partly offset by lower funding costs.
- Loan sales totaled $762.3 million versus $844.3 million in FY2020; the resulting net gain on loan sales increased to $33.1 million from $28.4 million. Loans held for investment, net, declined $594.0 million.
- Deposits fell $231.9 million and FHLB borrowings fell $429.9 million. Certificates of deposit due within one year totaled $3.47 billion at year-end.
- CECL adoption on October 1, 2020 increased the allowance at adoption by $46.1 million before tax and reduced opening retained earnings by $35.8 million after tax. FY2021 included a $9.0 million release of credit-loss provision, versus a $3.0 million provision in FY2020.
- Shareholders’ equity increased $60.4 million, aided by net income and a $64.2 million improvement in accumulated other comprehensive loss; quarterly dividends declared totaled $1.1225 per share. No shares were repurchased during FY2021.
Outlook, commentary and risks
- Management gave no explicit earnings or revenue guidance. It plans to expand mortgage-loan sale activity in FY2022 and beyond, testing risk-based pricing and loan-level pricing adjustments outside Ohio and Florida; startup and marketing costs are expected but not to significantly affect FY2022 results.
- Management identifies interest-rate risk, credit quality, liquidity/funding access and operating expenses as key areas to manage. In its modeled scenario, a gradual 200-basis-point rate increase would raise 12-month earnings at risk by 3.47%; an instantaneous 200-basis-point increase would reduce economic value of equity by 8.21%. These model estimates depend on assumptions and are not forecasts.
- COVID-19 forbearance plans remained active for 149 customers with $21.8 million of loans at year-end, down from $165.6 million a year earlier. Their resolution could affect future delinquencies, charge-offs and provisions.
- The Association received a second consecutive “Needs to Improve” Community Reinvestment Act rating. The filing says a possible FHLB restriction on advances with maturities over one year had not been imposed as of November 24, 2021; management expected no funding impact, but continued access is a risk to monitor.
- Other principal risks include intense deposit and lending competition; margin sensitivity to rates and refinancing; concentrated residential real-estate exposure; reliance on secondary mortgage markets and potential loan repurchases; cyber and vendor risks; and regulatory, pandemic and weather-related risks. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect.
- The independent auditor issued unqualified opinions on the financial statements and internal controls. The allowance for credit losses was identified as a critical audit matter, reflecting estimation and model complexity.
Important facts for investors to verify
- Review the composition, assumptions and sensitivity of the $89.3 million total credit-loss allowance, including the $25.0 million reserve for unfunded commitments, and the treatment and subsequent performance of COVID-19 relief loans.
- Track deposit retention and repricing, especially the $3.47 billion of CDs maturing within one year, and verify whether the CRA rating affects access to longer-term FHLB advances.
- Assess whether loan-sale gains and planned expansion of mortgage banking can offset pressure on net interest income and margins.
- Monitor home-equity credit performance, loan concentrations in Ohio and Florida, interest-rate swap costs, and the modeled exposure to rate changes.
- Verify future dividend capacity and policy: the mutual holding company controls approximately 80.9% of shares, and its dividend waivers require member approval and regulatory non-objection.