TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019. Results are compared with the three months ended December 31, 2018; balance-sheet changes are generally compared with September 30, 2019. Amounts below are in millions except per-share data and ratios.
Business context and financial performance
TFS Financial is a retail consumer banking and mortgage-lending company operating principally through Third Federal Savings and Loan Association. Its business is concentrated in residential mortgages and home-equity lending.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Interest and dividend income | $120.1 | $118.3 |
| Net interest income | $64.2 | $67.8 |
| Net interest margin | 1.82% | 1.98% |
| Non-interest income | $11.9 | $4.7 |
| Non-interest expense | $47.3 | $48.0 |
| Net income | $25.6 | $20.3 |
| Basic and diluted EPS | $0.09 | $0.07 |
| Operating cash flow | $29.4 | $34.4 |
- Net income rose about 26%, although net interest income fell about 5%. Lower margin reflected funding costs rising faster than asset yields: average interest-bearing liability cost increased to 1.77% from 1.66%, while the yield on interest-earning assets declined to 3.40% from 3.45%.
- Non-interest income increased mainly because of a $4.3 million gain on the sale of commercial properties and higher gains on loan sales. Loan-sale gains were $2.9 million versus $0.1 million.
- The company recorded a $3.0 million credit for loan losses, compared with a $2.0 million credit a year earlier. Net recoveries were $1.4 million. The allowance was $37.3 million, or 0.28% of recorded loans, at quarter-end.
- Investing cash outflow was $251.7 million, principally reflecting loan originations; financing cash inflow was $228.4 million, mainly from deposit growth. Cash and cash equivalents ended at $281.2 million.
Financial position, liquidity and capital
- Total assets were $14.81 billion, up $263.8 million from September 30, 2019. Net loans held for investment were $13.47 billion, up $272.0 million.
- Deposits were $9.00 billion, up $234.5 million during the quarter. Borrowed funds, all from the FHLB of Cincinnati, were $3.89 billion, slightly below quarter-start. Brokered CDs totaled $501.4 million.
- Management reported an average liquidity ratio of 5.42% for the quarter against its stated 5% minimum target. Available immediate borrowing capacity was $73.1 million from the FHLB and $41.7 million from the Federal Reserve discount window; additional FHLB capacity was subject to collateral and stock requirements.
- The Association reported Tier 1 leverage capital of 10.19%, and the company reported 11.99%. The Association exceeded regulatory “well-capitalized” requirements and its capital conservation buffer.
- Shareholders’ equity was $1.73 billion. Quarterly dividends paid were $13.4 million, or $0.27 per share; the mutual holding company waived its share of the dividend. The company repurchased $0.4 million of stock.
Material changes and management commentary
- Residential mortgage originations were $750.6 million versus $383.8 million in the prior-year quarter. First-mortgage production shifted toward fixed-rate loans: 59.5% was fixed-rate, compared with 53.1% a year earlier.
- Loan sales totaled $208.5 million, including a $99.0 million bulk sale to a private investor and sales to Fannie Mae. The company also repurchased $230.3 million of previously sold and serviced fixed-rate mortgages.
- Non-performing assets declined to $63.1 million from $73.4 million at September 30, 2019; non-accrual loans were $60.3 million. Total loans 30 days or more past due were 0.25% of net loans, versus 0.34% a year earlier.
- The company sold the remaining two commercial office buildings held by a partially owned subsidiary, recording its $4.3 million share of the gain. Management said additional residual income could be recorded in 2020 depending on the resolution of sale escrow reserves.
- Management stated that liquidity was adequate and expected to remain well capitalized. It cautioned that rapid rate increases or an extended flat or inverted yield curve could adversely affect net interest income over time.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management noted interim results are not necessarily indicative of full-year results.
- Interest-rate risk remains central: under the company’s model, an instantaneous +200 basis-point shock reduced estimated economic value of equity by 14.10%; a +200 basis-point ramped increase was estimated to increase 12-month earnings at risk by 0.50%, while an instantaneous shock was estimated to reduce it by 3.15%. These are model estimates, not forecasts, and the company changed its risk-model software during the quarter.
- Credit exposures include concentrations in Ohio and Florida, home-equity lending, and the legacy Home Today portfolio, which was originated under less stringent standards. Home Today balances were $82.7 million and represented a disproportionate share of delinquencies.
- Certificates of deposit totaling $3.53 billion, or 39.3% of deposits, were due within one year. Replacement funding could cost more if customers do not renew.
- The company planned to adopt the expected-credit-loss standard (CECL) on October 1, 2020 and expected it to increase the overall loan-loss allowance; the amount was not yet determined. Management reported no material expected adverse effect from routine legal proceedings.
Key facts for investors to verify
- How much of the earnings increase came from the nonrecurring property-sale gain and elevated loan-sale gains, and whether any escrow-related residual income was subsequently recognized.
- Whether net interest margin stabilizes as deposit and borrowing costs change relative to loan yields.
- Subsequent trends in deposit renewals, funding costs, liquidity and FHLB borrowing dependence, particularly as near-term CDs mature.
- Credit performance and allowance adequacy for home-equity loans, the Home Today portfolio and geographically concentrated lending.
- The eventual CECL transition impact and the sensitivity of reported interest-rate-risk measures to the new model and assumptions.