TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter ended March 31, 2017; financial statements are unaudited. Comparisons are primarily with the three and six months ended March 31, 2016, and with September 30, 2016 for balance-sheet changes. Dollar amounts below are in millions unless stated otherwise.
Business context and financial position
TFS Financial is a retail consumer banking and mortgage-lending company operating principally through Third Federal Savings and Loan Association. Its business centers on residential mortgage lending and deposit gathering; approximately 80% of its outstanding common shares were held by its mutual holding company.
- Total assets were $13,406.2 at March 31, up $500.1, or 4%, from September 30, 2016. Net loans held for investment were $12,166.8, up $458.0, or 4%.
- Deposits were $8,188.0, down $143.4, or 2%. Borrowed funds, all from the FHLB of Cincinnati, were $3,366.2, up $647.4, or 24%.
- Cash and cash equivalents were $240.8; available-for-sale securities were $536.2. Shareholders’ equity was $1,678.4.
- Regulatory capital remained well above stated well-capitalized thresholds: the Association’s Tier 1 leverage ratio was 11.19%, and its total risk-based capital ratio was 21.16%. Company Tier 1 leverage capital was 12.81%.
Operating results and cash flow
| Metric | Three months ended March 31, 2017 | Year-over-year change | Six months ended March 31, 2017 | Year-over-year change |
|---|---|---|---|---|
| Net interest income | $70.3 | Up 4% | $138.5 | Up 2% |
| Net income | $23.5 | Up 22% | $43.1 | Up 16% |
| Basic and diluted EPS | $0.08 | From $0.07 | $0.15 | From $0.13 |
| Net interest margin | 2.18% | Down 7 basis points | 2.17% | Down 8 basis points |
| Non-interest income | $4.6 | Down 31% | $9.9 | Down 23% |
| Non-interest expense | $45.3 | Down 2% | $90.6 | Down 4% |
For the six-month period, operating cash flow was $64.2, investing cash flow was negative $498.2, and financing cash flow was positive $443.5. Cash and cash equivalents increased $9.5 to $240.8. The large investing outflow principally reflected loan originations and securities purchases; financing inflows included increased FHLB advances.
Material changes and management commentary
- Loan growth and higher average loan balances supported interest income and net interest income, but asset yields fell faster than funding costs. Average loan yield was 3.23% for the six months, versus 3.32% a year earlier; average funding cost was 1.08%, versus 1.11%.
- Management recorded a negative $6.0 provision for loan losses in both the quarter and six-month period, reflecting improving delinquency and charge-off trends and recoveries. The allowance fell to $56.8 from $61.8 at September 30; it was 0.47% of recorded loans, versus 0.60% a year earlier. The filing describes this as a release of provision, not a charge.
- Non-accrual loans declined to $83.6 from $90.0 at September 30, 2016; non-performing assets were $89.2, or 0.67% of assets. Total recorded troubled debt restructurings were $167.0.
- Non-interest income fell mainly because of lower gains on loan sales and lower BOLI death benefits. Loan-sale gains were $1.2 for the six months, versus $2.7 a year earlier, despite higher loan-sale volume. Lower expenses, including real-estate-owned and compensation costs, partly offset this decline.
- First-mortgage originations were $1,488.7 for the six months, including $760.7 of adjustable-rate Smart Rate loans. Management says adjustable-rate and shorter-term fixed-rate lending, loan sales, and longer-duration funding help manage interest-rate exposure.
Liquidity, risks, outlook, and unusual items
- Management reported an average liquidity ratio of 5.56% for the quarter against a stated 5% minimum target and considered liquidity adequate. Available additional borrowing capacity included $79.6 from the FRB-Cleveland Discount Window and up to $5.41 billion of FHLB capacity, subject to additional stock requirements.
- Certificates of deposit totaling $2.43 billion, or 29.7% of deposits, were due within one year. Management noted that replacement funding could cost more if these deposits leave.
- Interest-rate sensitivity is material. A parallel +200-basis-point shock reduced modeled economic value of equity by 20.14%, compared with 13.55% at September 30, 2016. The modeled 12-month earnings-at-risk decline was 3.30% for a gradual +200-basis-point increase, but 6.56% for an instantaneous increase; the latter exceeded the Board limit by 1.56 percentage points. Management said the results were generally within limits and proposed revised limits using the gradual-rate assumption. These model estimates rely on assumptions and are not forecasts.
- Credit risks include concentration in residential real estate, particularly Ohio and Florida, subordinated home-equity lending, and the legacy Home Today portfolio. Home Today was 0.9% of held-for-investment loans but represented 31.3% of loans 90 days or more delinquent. Management expects a moderate level of charge-offs as delinquent loans are resolved.
- Outstanding commitments included $604.7 of loan-originations and $1,398.1 of unfunded commitments, mainly home-equity lines. These contractual amounts do not necessarily represent future cash requirements because some may not be drawn.
- The Company repurchased $24.8 of shares and paid $12.9 in common dividends during the six months. The Association also paid an $81.0 dividend to the parent in December; management said this reduced the Association’s capital ratios but did not affect consolidated capital.
- Management reported no material change in previously disclosed risk factors and did not expect pending legal actions to have a material adverse effect. No formal earnings guidance was provided. Forward-looking results remain exposed to interest rates, competition, economic and housing conditions, regulation, and credit performance.
Important facts for investors to verify
- Whether loan growth and funding-cost management can offset continued pressure on net interest margin, particularly if rates rise or deposits run off.
- Whether the lower allowance remains adequate as the portfolio grows and home-equity borrowers approach repayment periods with higher required payments.
- The assumptions and Board-limit treatment behind the interest-rate sensitivity analysis, including the instantaneous-shock earnings-at-risk exception.
- The repayment and renewal outcomes for the $2.43 billion of CDs due within one year, and the actual cost and availability of alternative funding.
- The filing reports 457,710 shares repurchased under the eighth program through March 31 in the liquidity discussion, while the quarterly repurchase table totals 461,210 shares. Investors may wish to reconcile this difference.
- Future effects of the expected-credit-loss accounting standard, which management was still assessing; the filing does not provide a clear quantified adoption impact.