TFS Financial (US:TFSL)2023-08-09 16:44PART I – FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Presents TFS Financial Corporation's unaudited consolidated financial statements and notes for periods ended June 30, 2023 Consolidated Statements of Condition Total assets increased to $16.59 billion by June 30, 2023, driven by loan growth, with liabilities and equity also rising Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Total Assets | $16,594,988 | $15,789,879 | | Loans, net | $14,883,680 | $14,257,067 | | Investment securities available for sale | $513,303 | $457,908 | | Cash and cash equivalents | $436,215 | $369,564 | | Total Liabilities | $14,708,864 | $13,945,540 | | Deposits | $9,069,069 | $8,921,017 | | Borrowed funds | $5,452,228 | $4,793,221 | | Total Shareholders' Equity | $1,886,124 | $1,844,339 | Consolidated Statements of Income Nine-month net income increased to $55.7 million due to higher net interest income, while Q3 net income saw a slight rise Income Statement Summary (in thousands, except per share data) | Metric | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net Interest Income | $213,204 | $191,887 | | Provision (Release) for Credit Losses | $(2,000) | $1,000 | | Net Income | $55,704 | $49,132 | | Diluted EPS | $0.20 | $0.17 | | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net Interest Income | $68,779 | $71,302 | | Provision (Release) for Credit Losses | — | $4,000 | | Net Income | $17,603 | $17,147 | | Diluted EPS | $0.06 | $0.06 | Consolidated Statements of Comprehensive Income Total comprehensive income for the nine months ended June 30, 2023, decreased to $83.5 million due to smaller fair value changes in cash flow hedges Comprehensive Income (in thousands) | Component | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net Income | $55,704 | $49,132 | | Other Comprehensive Income | $27,836 | $72,755 | | Total Comprehensive Income | $83,540 | $121,887 | Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $1.89 billion, driven by net income and AOCI, partially offset by dividends and share repurchases - Key drivers for the change in shareholders' equity over the nine months were net income, dividends, changes in AOCI, and stock repurchases17 Consolidated Statements of Cash Flows Cash and cash equivalents increased by $66.7 million, with operating and financing activities providing cash, while investing activities used cash Cash Flow Summary (Nine Months Ended June 30, in thousands) | Cash Flow Category | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $76,896 | $51,113 | | Net cash used in investing activities | $(724,101) | $(1,480,110) | | Net cash provided by financing activities | $713,856 | $1,328,201 | | Net Increase (Decrease) in Cash | $66,651 | $(100,796) | Notes to Unaudited Interim Consolidated Financial Statements This section details accounting policies and financial data, covering loan portfolio, deposits, derivatives, fair value, and CECL adoption - The company's principal business is retail consumer banking, with 81.0% of shares owned by its mutual holding company21 - The company is phasing in the regulatory capital impact of the CECL accounting standard over a five-year period, ending in fiscal year 2025289 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance and condition, emphasizing strategies for interest rate risk, credit standards, liquidity, and capital in a rising rate environment Overview and Business Strategy Management expresses confidence in its business model, focusing on strong capital, stable deposits, and strategies to manage interest rate and credit risks - The company emphasizes its strong capital position, with a Common Equity Tier 1 (CET1) ratio of 20.01%142149 - The deposit base is stable, with 96.3% of retail deposits within FDIC insurance limits as of June 30, 2023143 - Key strategies to manage interest rate risk include promoting ARMs and HELOCs, using swaps, and selectively selling long-term fixed-rate loans151 Lending Activities and Credit Risk Lending is concentrated in residential real estate, with credit risk managed through stringent underwriting, resulting in decreased non-performing assets to 0.19% Non-Performing Assets (in thousands) | Category | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Non-accrual loans | $30,622 | $35,606 | | Real estate owned | $1,400 | $1,191 | | Total non-performing assets | $32,022 | $36,797 | | As a % of Total Assets | 0.19% | 0.23% | - The allowance for credit losses on loans was $74.8 million, or 0.50% of total loans, at June 30, 2023184192 - Total seriously delinquent loans (90+ days) were 0.07% of total net loans at June 30, 2023217 Comparison of Financial Condition Total assets increased by 5.1% to $16.59 billion, driven by loan growth funded by increased deposits and borrowed funds - Net loans held for investment increased by $626.6 million, or 4.4%, to $14.88 billion233 - Deposits increased by $148.1 million, or 1.7%, with a shift into higher-yielding CDs238 - Borrowed funds increased by $659.0 million, or 13.7%, to fund loan growth239 Comparison of Operating Results Nine-month net income increased to $55.7 million, but Q3 net interest income decreased, compressing net interest margin to 1.75% due to rising funding costs Quarterly Performance Comparison (Three Months Ended June 30) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $68.8M | $71.3M | -3.5% | | Net Income | $17.6M | $17.1M | +2.9% | | Net Interest Margin | 1.75% | 1.97% | -22 bps | | Interest Rate Spread | 1.50% | 1.86% | -36 bps | Year-to-Date Performance Comparison (Nine Months Ended June 30) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $213.2M | $191.9M | +11.1% | | Net Income | $55.7M | $49.1M | +13.4% | | Net Interest Margin | 1.82% | 1.83% | -1 bp | | Interest Rate Spread | 1.60% | 1.71% | -11 bps | Liquidity and Capital Resources The company maintains strong liquidity and capital, with significant borrowing capacity and capital ratios exceeding 'well capitalized' minimums Association Capital Ratios (as of June 30, 2023) | Ratio | Actual | Well Capitalized Level | | :--- | :--- | :--- | | Total Capital to Risk-Weighted Assets | 18.52% | 10.00% | | Tier 1 (Leverage) Capital to Net Average Assets | 9.93% | 5.00% | | Common Equity Tier 1 Capital to Risk-Weighted Assets | 17.79% | 6.50% | - The company has access to $3.25 billion in additional FHLB borrowing capacity and $670.0 million in Fed Funds lines172 - The MHC, owning 81% of the company, approved waiving dividends for 12 months, pending Federal Reserve non-objection295296297 Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest rate risk is the primary market risk, with models showing a +200 bps rate shock would decrease EVE by 19.58% and NII by 1.03% Economic Value of Equity (EVE) Sensitivity Analysis (at June 30, 2023) | Change in Interest Rates (bps) | Estimated EVE (in thousands) | Change in EVE (%) | | :--- | :--- | :--- | | +300 | $857,989 | (33.30)% | | +200 | $1,034,465 | (19.58)% | | +100 | $1,181,829 | (8.12)% | | 0 | $1,286,296 | — | | -100 | $1,334,826 | 3.77% | - The EaR model estimates a gradual 200 basis point rate increase would decrease net interest income by 1.03%306 Item 4. Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of the reporting period end311 - No material changes to internal control over financial reporting occurred during the most recent fiscal quarter312 PART II — OTHER INFORMATION Legal Proceedings The company is involved in various legal actions, but management expects no material adverse effect on financial condition or results - Management does not expect ongoing legal actions to materially affect the company's financial condition or results313 Risk Factors No material changes to risk factors were reported for the quarter ended June 30, 2023, from prior disclosures - No material changes to risk factors were reported for the quarter ended June 30, 2023314 Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock, and the MHC approved a 12-month dividend waiver pending Federal Reserve non-objection - The company did not repurchase any common stock during the three months ended June 30, 2023318 - On July 11, 2023, MHC members approved a 12-month dividend waiver, up to $1.13 per share, pending Federal Reserve non-objection316317 Other Information Chairman and CEO Marc A. Stefanski adopted a Rule 10b5-1 trading plan for 286,500 stock options on June 14, 2023 - Chairman and CEO Marc A. Stefanski adopted a Rule 10b5-1 trading plan for 286,500 stock options on June 14, 2023320 Exhibits This section lists filed exhibits, including Inline XBRL financial statements and CEO/CFO certifications - Filed exhibits include Inline XBRL data files and CEO/CFO certifications pursuant to Sarbanes-Oxley321323