TFS Financial Corporation — Form 10-Q Summary
Business context and reporting period. TFS Financial is a retail consumer banking and mortgage-lending company operating primarily through Third Federal Savings and Loan Association of Cleveland. This unaudited report covers the three months ended December 31, 2018, the first quarter of fiscal 2019; income and cash-flow comparisons are against the three months ended December 31, 2017. Balance-sheet comparisons are against September 30, 2018.
Key financial metrics
| Metric | Quarter/current date | Comparison |
|---|---|---|
| Total assets | $14.24 billion | Up $101.3 million (0.7%) from September 30, 2018 |
| Interest and dividend income | $118.3 million | Up 10% year over year |
| Net interest income | $67.8 million | Down 3% from $70.0 million |
| Net interest margin | 1.98% | Down from 2.10%; interest-rate spread fell to 1.79% from 1.95% |
| Provision for loan losses | $2.0 million credit | Compared with a $3.0 million credit |
| Non-interest income / expense | $4.7 million / $48.0 million | Income down 2%; expense up 5% |
| Income before tax / tax expense | $26.5 million / $6.2 million | Tax expense was $12.4 million a year earlier |
| Net income / diluted EPS | $20.3 million / $0.07 | Net income up from $19.6 million; EPS unchanged |
| Cash and cash equivalents | $286.6 million | Up $16.8 million from September 30, 2018 |
| Operating cash flow | $(0.9) million | Compared with $98.0 million provided in the prior-year quarter |
| Deposits / borrowed funds | $8.60 billion / $3.73 billion | Deposits up $105.6 million; borrowings up $12.6 million from September 30 |
| Shareholders’ equity | $1.74 billion | Down $14.6 million from September 30 |
Loan interest income rose with portfolio growth and higher yields, but funding costs increased faster: interest expense rose 36% year over year, including higher deposit and borrowing costs. The lower tax expense largely reflects the reduced federal corporate tax rate under the Tax Cuts and Jobs Act and prior-year deferred-tax remeasurement expense.
Material changes and asset quality
- Loans held for investment, net, increased $48.2 million to $12.92 billion from September 30. Home equity loans and lines of credit grew $79.3 million; residential mortgage loans declined $29.3 million.
- Deposits increased, while brokered CDs declined about $93.7 million to $576.4 million. FHLB borrowings remained the principal wholesale borrowing source.
- The allowance for loan losses was $41.9 million, or 0.32% of recorded loans, versus $42.4 million at September 30 and $45.9 million a year earlier. The quarter included $1.5 million of net recoveries.
- Non-accrual loans were $77.0 million; total non-performing assets, including real estate owned, were $79.9 million, or 0.56% of assets. Loans 90 or more days delinquent were 0.2% of net loans. Troubled debt restructurings totaled $165.9 million.
- Residential lending is concentrated in Ohio and Florida. The legacy Home Today portfolio was $92.6 million and had higher delinquency rates than the core portfolio; the company no longer originates Home Today loans.
Outlook, risks, and unusual items
- Management stated liquidity was adequate and expected the Association to remain well capitalized. Its average liquidity ratio was 5.65% for the quarter against a stated minimum target of 5%.
- The Association’s regulatory capital ratios exceeded well-capitalized thresholds. Tier 1 leverage capital was 10.32% at the Association and 12.17% at the consolidated Company.
- Management expects a moderate level of charge-offs as delinquent loans are resolved. It identified interest-rate exposure, competition and funding costs, economic and housing-market conditions, credit quality, geographic loan concentrations, regulatory changes, and cybersecurity as risks.
- Interest-rate sensitivity remains significant: a modeled instantaneous +200-basis-point shock reduced estimated economic value of equity by 19.63%; modeled 12-month earnings at risk declined 3.01% under a gradual +200-basis-point increase, or 6.06% under an instantaneous increase. Management cautions that these models depend on assumptions and are not forecasts.
- Other comprehensive loss was $21.5 million, driven principally by a $26.8 million after-tax loss on cash-flow hedges; total comprehensive loss was $1.1 million despite net income of $20.3 million. The company said it expected $15.6 million in accumulated hedge amounts to be reclassified as a credit to interest expense over the following 12 months.
- The quarter’s cash-flow pattern included $35.3 million of cash collateral provided to derivative counterparties. Management attributed the operating-cash-flow decline in part to derivative collateral movements and timing of real-estate-tax payments.
- Common dividends paid were $12.3 million, or $0.25 per share, versus $8.4 million, or $0.17 per share, a year earlier; the company repurchased $3.7 million of stock. The mutual holding company had approved waiving its share of dividends through the stated waiver period.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting. No material change to previously reported risk factors was identified.
Important facts for investors to verify
- Whether deposit pricing and other funding costs continue to outpace asset-yield increases, putting pressure on net interest margin and earnings.
- Whether liquidity remains adequate as $2.70 billion of CDs mature within one year and the company funds loan commitments and home equity draws.
- Trends in delinquencies, non-accrual loans, TDR performance, recoveries, and the allowance—particularly in home equity and Home Today loans and in Ohio and Florida.
- Actual exposure to interest-rate changes and the assumptions behind the EVE and earnings-at-risk models, including hedge performance and collateral requirements.
- Whether the large unfunded home-equity commitments and loan-originations pipeline affect future funding needs, capital deployment, or credit exposure.
- The effects of adopting the expected-credit-loss standard (planned for October 1, 2020) and the lease-accounting standard (planned for October 1, 2019); management had not yet quantified the credit-loss standard’s impact.