TFS Financial Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. The filing also provides unaudited fourth-quarter results. TFS is a savings-and-loan holding company whose principal business, through Third Federal Savings and Loan Association, is residential mortgage lending and retail deposits, primarily in Ohio and Florida.
Financial performance and position
| Metric | FY2015 / September 30, 2015 | Comparison |
|---|---|---|
| Interest income | $383.5 million | Up 2% from $374.7 million |
| Net interest income | $270.1 million | Down from $271.4 million |
| Net interest margin | 2.17% | Down from 2.42% |
| Net income / diluted EPS | $72.6 million / $0.25 | Up from $65.9 million / $0.22 |
| Net interest income after loan-loss provision | $273.1 million | Provision was a $3.0 million benefit, versus $19.0 million expense in FY2014 |
| Operating cash flow | $102.1 million | Versus $103.5 million |
| Total assets / loans, net | $12.37 billion / $11.19 billion | Assets up 5%; net loans up 5% |
| Deposits / borrowings | $8.29 billion / $2.17 billion | Deposits down 4%; borrowings up 90% |
| Shareholders’ equity | $1.73 billion | Down 6%; 14.0% of total assets |
| Liquidity | Average liquidity ratio 9.56% | Management’s stated minimum target is 5% |
| Asset quality | Non-performing assets 1.00% of assets; non-accrual loans 0.95% of loans | Down from 1.33% and 1.27%, respectively |
| Capital | Association: total risk-based capital 22.92%; Tier 1 leverage 12.78% | Exceeding regulatory “well-capitalized” thresholds |
Fourth quarter: Net income was $23.0 million, or $0.08 per diluted share. Net interest income was $68.0 million; the quarter included a $6.0 million reversal of loan-loss provision.
Material changes versus the prior period
- Net income rose 10%, principally because the loan-loss provision improved by $22.0 million and non-interest income increased $2.4 million. Higher non-interest expense and slightly lower net interest income partly offset those gains.
- Net interest margin narrowed 25 basis points. Average loan yield declined as new loans were originated at lower rates, while increased borrowings raised interest expense.
- Loan credit indicators improved: net charge-offs fell to $6.8 million from $30.2 million, and loans delinquent 90 days or more declined to 0.34% of net loans from 0.57%.
- Home equity lending balances fell 4%, but the allowance allocated to that portfolio increased 15% to $38.9 million. Management cited possible borrower payment increases as older lines reach the end of draw periods.
- Deposits fell $368.0 million while FHLB borrowings increased approximately $1.03 billion. The company repurchased $172.4 million of stock and paid $19.5 million in common dividends.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management says credit quality and regional conditions have improved, but warns that economic recovery remains uncertain and some currently current borrowers may face future payment problems.
- Interest-rate risk is central: an immediate 200-basis-point rate increase was estimated to reduce economic value of equity 14.61% and projected 12-month net interest income 2.6%. Prolonged low rates could also pressure asset yields and profitability.
- Credit exposure is concentrated in residential real estate and in Ohio and Florida. Legacy Home Today loans have materially weaker performance than Core loans; 13.0% were at least 30 days delinquent at year-end, versus 0.4% for Core loans.
- Home equity lines include $1.20 billion of undrawn balances; draw-period expirations and repayment increases may affect credit losses. The filing also identifies competition for deposits, funding costs, regulatory and compliance burdens, and severe weather in Florida as risks.
- A funding and income strategy used during portions of FY2015 involved short-term FHLB borrowing and depositing proceeds at the Federal Reserve. Management says it was not in use at year-end but could be used again depending on market rates.
- The company remained well-capitalized. The Association had regulatory approval for a $150 million special dividend to the parent; $50 million was paid after year-end in November 2015, with the remainder expected in FY2016. This is an intercompany transfer but reduces the Association’s capital ratios.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether margin pressure persists and how much earnings depend on funding mix, deposit pricing, and the short-term FHLB borrowing strategy.
- Whether improving delinquencies and charge-offs continue, especially for home equity loans and legacy Home Today loans; assess allowance coverage against portfolio trends.
- The liquidity and capital effects of deposit maturities, brokered-CD reliance, higher FHLB borrowings, and the remaining $100 million special dividend.
- How interest-rate movements affect net interest income, economic value of equity, mortgage prepayments, and servicing-rights valuation.
- Whether dividends and share repurchases remain sustainable given the 124% FY2015 dividend payout ratio and dependence on Association distributions and permitted MHC dividend waivers.