TFS Financial Corporation — Form 10-Q Summary
Business context and reporting period. TFS Financial is a retail consumer bank focused primarily on residential mortgage lending and deposit gathering. This fiscal third-quarter report covers the three and nine months ended June 30, 2021; balance-sheet comparisons are with September 30, 2020. Unless stated otherwise, dollar amounts below are in millions.
Key financial results
| Metric | Three months ended June 30, 2021 | Prior-year quarter | Nine months ended June 30, 2021 | Prior-year period |
|---|---|---|---|---|
| Interest and dividend income | $95.4 | $110.0 | $295.3 | $349.5 |
| Net interest income | $57.1 | $62.9 | $174.2 | $192.1 |
| Non-interest income | $9.4 | $15.3 | $46.6 | $36.2 |
| Non-interest expense | $47.9 | $44.8 | $148.4 | $141.7 |
| Net income | $16.0 | $26.8 | $64.0 | $69.7 |
| Diluted EPS | $0.06 | $0.10 | $0.23 | $0.25 |
- Margins: Quarterly net interest margin was 1.63%, down from 1.74%; the nine-month margin was 1.66%, down from 1.79%. Quarterly net interest spread was 1.50%, versus 1.60%.
- Credit costs: The company recorded a $1.0 million credit-loss release for the quarter and a $7.0 million release for the nine-month period, compared with no provision for the prior-year quarter and a $3.0 million provision for the prior-year nine months.
- Cash flow: Operating activities provided $121.4 million in the first nine months, versus $91.4 million a year earlier. Cash and cash equivalents increased $82.1 million from fiscal year-end to $580.1 million.
- Balance sheet and funding: Total assets were $14.24 billion, down 3% from September 30, 2020. Net loans were $12.60 billion; deposits were $9.15 billion; borrowed funds were $3.14 billion, all from the FHLB of Cincinnati. Shareholders’ equity was $1.71 billion.
- Liquidity and capital: The quarterly average liquidity ratio was 7.43% against a 5% management minimum. The Association reported Tier 1 leverage capital of 10.80% and total risk-based capital of 20.69%, above applicable well-capitalized thresholds.
- Dividends: Dividends were $0.28 per share for the quarter and $0.84 per share year to date. No shares were repurchased during the nine-month period.
Material changes versus comparable periods
- Quarterly net income declined 40%, mainly because net gains on loan sales fell to $3.4 million from $10.8 million and net interest income decreased $5.8 million. Lower income tax expense partly offset these declines.
- For the nine-month period, net income decreased $5.7 million. Net interest income fell 9%, while non-interest income rose 29%, chiefly from higher loan-sale gains and bank-owned life insurance income.
- Lower market rates reduced asset yields: nine-month loan yield fell to 3.00% from 3.36%. Lower deposit costs partly cushioned the effect, but did not prevent margin compression.
- Loans held for investment, net, decreased $501.8 million from fiscal year-end as loan sales and repayments exceeded originations. Deposits declined $74.8 million and borrowed funds declined $379.0 million.
- Adoption of CECL on October 1, 2020 increased the allowance for credit losses by $46.2 million and reduced retained earnings by $35.8 million after tax. At June 30, the allowance was $66.4 million for loans plus $23.3 million for unfunded commitments.
Outlook, management commentary, risks and unusual items
- Management provided no specific earnings or revenue guidance. It cited interest-rate risk, credit quality, liquidity and funding access, and operating expense control as key priorities.
- COVID-19 forbearance balances declined to $42.8 million, or 0.34% of loans, from $165.6 million at September 30, 2020. The company said continued economic and housing-market uncertainty informed its credit-loss estimates. Most active plans had been extended to at least 12 months.
- Residential real estate exposure is concentrated in Ohio and Florida. Management also highlighted higher credit risk in home equity lending and the legacy Home Today portfolio. Total non-accrual loans were $49.2 million; 30-days-or-more delinquencies were $25.5 million.
- Interest-rate modeling estimated an 8.86% decline in economic value of equity under an instantaneous +200-basis-point shock. Estimated 12-month earnings at risk increased 3.98% under a gradual +200-basis-point scenario. These are model estimates, not forecasts.
- A second consecutive “Needs to Improve” Community Reinvestment Act rating was received in March 2021. Management said that a potential restriction on FHLB long-term advances had not been imposed as of August 5, 2021 and expected no impact to funding access; this remains a risk to monitor.
- On July 13, 2021, the mutual holding company’s members approved a proposed waiver of its share of dividends up to $1.13 per share through July 13, 2022. Federal Reserve non-objection and its timing were pending at the filing date.
- One-time items included a $1,500 after-tax bonus paid to each associate in December 2020 and a $70 million bank-owned life insurance premium contribution during the first quarter. Management stated that pending legal matters were not expected to have a material adverse effect and reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the CRA rating results in any restriction on access to FHLB advances longer than one year.
- How borrowers perform as COVID-19 forbearance plans expire, and whether delinquencies, charge-offs or the credit-loss allowance increase.
- Whether net interest margin stabilizes amid changing asset yields, deposit costs and interest-rate swap effects.
- How the $3.63 billion of certificates of deposit due within one year are retained or refinanced, and the resulting funding cost.
- Whether the Federal Reserve issues non-objection to the proposed mutual holding company dividend waiver.