TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021; comparative periods ended March 31, 2020. The interim financial statements are unaudited. TFS is primarily a retail consumer bank focused on mortgage lending and deposits.
Key financial results
| Metric | Quarter ended Mar. 31, 2021 | Prior-year quarter | Six months ended Mar. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Net interest income | $58.4 million | $65.0 million | $117.2 million | $129.2 million |
| Provision (release) for credit losses | $(4.0) million | $6.0 million | $(6.0) million | $3.0 million |
| Non-interest income | $15.7 million | $8.9 million | $37.2 million | $20.9 million |
| Non-interest expense | $48.8 million | $49.6 million | $100.5 million | $96.9 million |
| Net income | $23.0 million | $17.3 million | $48.0 million | $42.9 million |
| Diluted EPS | $0.08 | $0.06 | $0.17 | $0.15 |
| Net interest margin | 1.67% | 1.81% | 1.67% | 1.81% |
For the quarter, the reported net-interest margin and spread were 1.67% and 1.54%, respectively. Net income rose despite lower net interest income, principally because loan-sale gains increased and credit-loss expense was released. Six-month loan-sale gains were $25.4 million, compared with $6.1 million.
Financial condition, cash flow and capital
- At March 31, 2021, total assets were $14.46 billion, down 1% from September 30, 2020. Net loans held for investment were $12.68 billion, down 3%.
- Cash and cash equivalents were $665.4 million, versus $498.0 million at fiscal year-end; available-for-sale securities were $421.0 million.
- Deposits were $9.24 billion, broadly stable from September 30, 2020. Borrowed funds, all FHLB advances, declined to $3.29 billion from $3.52 billion. Brokered CDs were $572.4 million.
- Shareholders’ equity was $1.70 billion. The Association’s Tier 1 leverage ratio was 10.65%; its total risk-based capital ratio was 20.33%. Both exceeded the stated “well capitalized” thresholds.
- For the six months, operating cash flow was $43.9 million, investing cash flow was $323.1 million, and financing cash flow was $(199.7) million. Cash increased $167.4 million to $665.4 million. Investing cash flow included loan-sale proceeds and loan repayments; it should not be interpreted as recurring free cash flow.
- The quarterly common dividend was $0.28 per share. No shares were repurchased during the six months.
Material changes and credit quality
- Interest and dividend income fell 18% in the quarter and 17% year to date, reflecting lower asset yields and a smaller average loan balance. Interest expense also declined, but not enough to prevent net interest income and net interest margin from falling.
- Credit-loss allowance on loans was $67.7 million, or 0.53% of amortized-cost loans; the separate allowance for unfunded commitments was $22.0 million. The total allowance was $89.7 million at quarter-end. CECL adoption on October 1, 2020 increased the allowance by $46.2 million and reduced retained earnings by $35.8 million, net of tax.
- Loans in active COVID-19 forbearance declined to $64.2 million from $165.6 million at September 30, 2020. Non-accrual loans were $52.6 million; loans 90 or more days past due were $18.4 million. Management noted that some extended forbearance loans would undergo collateral review and could require charge-offs.
- Net recoveries were $2.6 million for the six months, compared with $2.5 million in the prior-year period. Management cited better forecasted economic measures and lower forbearance balances in explaining the allowance release, while retaining qualitative adjustments for pandemic uncertainty.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expected a moderate level of charge-offs as delinquent loans are resolved and judged liquidity adequate.
- Management highlighted exposure to interest-rate changes, credit and liquidity risk, operating expenses, competition, housing and employment conditions, and the continuing effects of COVID-19. The loan book is concentrated in residential real estate, particularly Ohio and Florida.
- In the Association’s interest-rate model, a 200-basis-point instantaneous increase implied a 13.89% decline in economic value of equity; a 100-basis-point decline implied a 4.69% decline. A separate 12-month earnings-at-risk model estimated a 2.99% increase under a gradual 200-basis-point rate rise. These are scenario estimates, not forecasts.
- In March 2021, the Association received a second consecutive “Needs to Improve” Community Reinvestment Act rating. The filing said FHLB practice is to restrict long-term advances in this situation; the Company had not received notice of a restriction as of May 6, 2021 and expected no funding impact. Confirm the status and implications.
- Other notable items: $70.0 million of additional premiums were placed in bank-owned life insurance during the six months; a $1,500 after-tax employee bonus contributed to higher year-to-date compensation expense; and a pension settlement adjustment added $0.4 million to quarterly expense.
- Management stated that ongoing legal proceedings were not expected to have a material adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan-sale gains remain sufficient to offset pressure on net interest income and margin.
- How COVID-19 forbearance exits, extended plans and collateral reviews affect delinquencies, charge-offs and the CECL allowance.
- The outcome and any actual effect of the CRA rating on access to FHLB long-term advances.
- Deposit retention and funding costs as $3.61 billion of CDs were scheduled to mature within one year of March 31, 2021.
- How interest-rate sensitivity, including the modeled EVE decline under a rate shock, changes with actual balance-sheet and market conditions.