TFS Financial Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports unaudited fourth-quarter results. TFS Financial is a savings-and-loan holding company whose principal business is residential mortgage lending and retail deposits, primarily through Third Federal Savings and Loan Association in Ohio and Florida.
Key financial results
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Interest and dividend income | $482.1 million | $443.0 million | Up 9% |
| Interest expense | $216.7 million | $162.1 million | Up 34% |
| Net interest income | $265.4 million | $280.9 million | Down 6% |
| Net interest margin | 1.92% | 2.08% | Down 16 basis points |
| Net income | $80.2 million | $85.4 million | Down 6% |
| Diluted earnings per share | $0.28 | $0.30 | Down $0.02 |
| Cash dividends declared per share | $1.02 | $0.76 | Up $0.26 |
Interest income grew as loan balances and yields increased, but funding costs rose faster: the average cost of interest-bearing liabilities increased to 1.76% from 1.36%. The effective federal tax rate fell to 20.3% from 28.4%; the company attributed the lower tax burden partly to the Tax Cuts and Jobs Act and bank-owned life insurance income. The GAAP income tax provision was $22.0 million, or 21.5% of pretax income.
- Fourth quarter: Net income was $21.5 million versus $21.6 million in Q4 FY2018; net interest income was $64.3 million versus $69.0 million.
- Cash flow: Operating cash flow was $103.0 million, investing cash flow was negative $342.0 million, and financing cash flow was positive $244.3 million. Cash and cash equivalents ended the year at $275.1 million, up $5.4 million.
- Balance sheet: Total assets were $14.54 billion, up 3%; net loans were $13.20 billion, up 3%. Shareholders’ equity was $1.70 billion, down 4%, including a $92.6 million after-tax other comprehensive loss, primarily associated with cash-flow hedges.
- Loans and credit quality: Home equity loans and lines of credit rose $356 million to $2.17 billion. Non-performing assets were $73.4 million, or 0.50% of assets, versus $80.5 million, or 0.57%, a year earlier. Loans 90 days or more delinquent were $16.1 million; the allowance for loan losses was $38.9 million, or 0.29% of loans.
- Deposits and debt: Deposits totaled $8.77 billion, including $507.8 million of brokered CDs; $3.31 billion of CDs matured within one year. FHLB borrowings totaled $3.90 billion. The company used $2.75 billion of short-term FHLB advances paired with interest-rate swaps to extend effective funding duration.
- Capital and liquidity: Association Tier 1 leverage capital was 10.54%, and total risk-based capital was 19.56%; the Association exceeded “well capitalized” requirements. Average liquidity ratio was 5.59%. Immediate additional borrowing capacity was $60.7 million from the FHLB and $44.9 million from the Federal Reserve Bank; further FHLB capacity depended on additional stock ownership and collateral.
Material changes and management commentary
- Net interest income fell despite higher asset yields because deposit and borrowing costs climbed more quickly. Management cited a flattening yield curve and higher funding costs.
- Loan sales declined to $117.3 million from $400.1 million; the prior year included a $277.4 million bulk sale. Net gains on loan sales consequently fell to $1.9 million from $3.4 million.
- The allowance declined by $3.5 million. The company recorded a $10.0 million credit for loan losses and had $6.5 million of net recoveries. Management cited improved delinquencies and lower exposure to older home-equity lines nearing the end of draw periods, but also flagged yield-curve inversion as a recession warning.
- Management said liquidity was adequate and expects to remain well capitalized. It gave no specific earnings, revenue, margin, or growth guidance in the filing.
- The company’s interest-rate model estimated that an immediate 200-basis-point rate increase would reduce economic value of equity by 15.78%; a gradual 200-basis-point increase was estimated to raise next-12-month net interest income by 1.53%. These are model estimates, not forecasts.
Outlook, risks, and unusual items
- Key risks include interest-rate and refinancing exposure, margin compression, competition for deposits, economic or housing-market deterioration, credit losses—particularly in home equity lending—and reliance on FHLB funding. Management expects a moderate level of charge-offs as delinquent loans are resolved.
- CECL was scheduled for adoption on October 1, 2020. Management expected the lifetime-loss methodology could increase the allowance, but the amount was not yet clear.
- The Association received a “Needs to Improve” Community Reinvestment Act rating in its most recent examination, covering 2012–2014 mortgage lending data. The filing notes possible restrictions on certain corporate applications or activities.
- The mutual holding company owns about 81% of TFS Financial. Its dividend waivers require member approval and regulatory non-objection; the structure may affect public shareholders’ influence and the company’s dividend flexibility.
- After year-end, on October 31, 2019, a subsidiary sold two commercial office buildings. The company estimated pretax income of $4 million to $5 million in 2020, subject to resolution of sale-related escrow reserves and credits.
- Management said ordinary-course legal actions were not expected to have a material adverse effect. Deloitte issued unqualified opinions on the financial statements and internal controls.
Investor verification checklist
- Verify the drivers and sustainability of declining net interest margin, including deposit repricing, CD maturities, FHLB borrowing costs, and swap terms.
- Assess whether loan growth—especially home equity lines—changes credit risk, allowance adequacy, or borrower payment exposure as lines enter repayment.
- Review the assumptions behind the $38.9 million allowance and the impact of future CECL adoption.
- Confirm available liquidity and collateral-dependent borrowing capacity, and monitor the $3.31 billion of CDs due within one year.
- Check the terms and final gain from the post-year-end property sale, and the status of CRA-related remediation and dividend-waiver approvals.