TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Figures are unaudited; dollar amounts below are in millions unless noted. The company conducts retail consumer banking, primarily residential mortgage lending and deposit gathering, through Third Federal Savings and Loan Association.
Financial performance and position
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Interest and dividend income | $120.4 | $238.7 |
| Net interest income | $67.8 | $135.6 |
| Net interest margin | 1.97% | 1.97% |
| Net income | $20.1; diluted EPS $0.07 | $40.5; diluted EPS $0.14 |
| Provision (credit) for loan losses | $(4.0) | $(6.0) |
| Non-interest expense | $50.7 | $98.7 |
- Balance sheet at March 31: Total assets were $14.21 billion; net loans $12.89 billion; deposits $8.73 billion; FHLB borrowings $3.59 billion; and shareholders’ equity $1.74 billion.
- Cash and liquidity: Cash and equivalents were $259.2 million and available-for-sale securities were $574.6 million. The quarterly average liquidity ratio was 5.63%, versus a stated minimum target of 5%. Management said liquidity was adequate. The Association could immediately borrow an additional $262.7 million from the FHLB and $50.9 million from the Federal Reserve discount window.
- Capital: The Association’s Tier 1 leverage ratio was 10.45%; total capital to risk-weighted assets was 19.71%. Both exceeded well-capitalized thresholds. The company’s Tier 1 leverage ratio was 12.19%.
- Cash flows, six months: Operating activities provided $43.2 million, investing activities used $49.0 million, and financing activities used $4.6 million. Cash and equivalents declined $10.5 million to $259.2 million.
Material changes versus comparable periods
- Quarterly net income declined 14% from $23.3 million; six-month net income declined 6% from $42.9 million. Diluted EPS was $0.07 versus $0.08 for the quarter and $0.14 versus $0.15 for six months.
- Net interest income fell 5% for the quarter and 4% for six months. Asset yields rose, but funding costs rose faster: the six-month cost of interest-bearing liabilities increased to 1.69% from 1.27%, while net interest margin narrowed to 1.97% from 2.11%.
- Interest and dividend income increased 9% for the quarter and 10% for six months, driven mainly by loan growth and higher loan yields. Interest expense increased 37% and 36%, respectively, reflecting higher deposit rates and balances as well as higher borrowing costs.
- The loan-loss allowance declined to $40.3 million from $42.4 million at September 30, 2018; it was 0.31% of recorded loans, compared with 0.34% a year earlier. Net recoveries were $3.9 million for six months, versus $1.2 million in the prior-year period.
- Deposits grew $241.2 million from fiscal year-end, while borrowed funds fell $131.6 million. Shareholders’ equity declined $22.4 million, principally reflecting dividends, share repurchases, and a $36.8 million after-tax OCI loss, partly offset by net income and stock-plan activity.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expects to remain well-capitalized, believes liquidity is adequate, and expects a moderate level of charge-offs as delinquent loans are resolved.
- Management highlighted pressure on margins from rising funding costs and a flatter yield curve. A modeled instantaneous 200-basis-point rate increase would reduce Economic Value of Equity by 16.13%; a ramped 200-basis-point increase was modeled to reduce 12-month earnings at risk by 2.58%. These are scenario estimates, not forecasts, and depend on assumptions.
- Credit exposures include geographic concentration in Ohio and Florida, home-equity lending, and the legacy Home Today portfolio, which management says has greater credit risk and continues to run off. Loans 90 or more days delinquent were $20.8 million; non-accrual loans were $77.3 million. Total TDRs were $166.3 million.
- Outstanding commitments to originate loans were $499.6 million, with $1.95 billion of unfunded commitments, primarily home-equity lines. CDs totaling $3.18 billion, or 36.5% of deposits, mature within one year; replacement funding could cost more.
- Available-for-sale securities had $8.0 million of gross unrealized losses, which the company attributed to interest rates rather than credit quality; it reported no intent or expected requirement to sell before recovery. AOCI fell to a $13.5 million loss, largely reflecting cash-flow hedge valuation changes.
- The Association paid an $85 million dividend to the parent in December 2018, reducing its leverage capital ratio by an estimated 60 basis points. The mutual holding company waived its share of eligible dividends through July 11, 2019. The company repurchased 388,500 shares during the six months.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. The company was evaluating the expected-credit-loss standard, with planned adoption October 1, 2020; its impact was not yet determined.
Key facts for investors to verify
- Whether deposit and borrowing costs continue to outpace loan-yield increases, and the resulting effect on net interest margin and earnings.
- Trends in delinquencies, non-accrual loans, TDR performance, recoveries, and the adequacy of the loan-loss allowance, especially for home-equity and Home Today loans.
- Deposit retention and repricing as $3.18 billion of CDs mature within twelve months, alongside reliance on FHLB advances and brokered CDs.
- Actual interest-rate sensitivity versus modeled EVE and earnings-at-risk scenarios, including the assumptions behind those estimates.
- The future impact of CECL adoption and the effect of dividends, repurchases, and parent-subsidiary capital transfers on capital and liquidity.