TFS Financial Corporation — Form 10-Q Summary
Business context and reporting period
Retail consumer banking company focused primarily on residential mortgage lending and deposits. This fiscal second-quarter report covers the three and six months ended March 31, 2016; income comparisons are with the corresponding 2015 periods. Balance-sheet comparisons are primarily with September 30, 2015. Amounts below are in U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Quarter ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Interest and dividend income | $97.1 million | $193.6 million |
| Net interest income | $67.8 million | $135.4 million |
| Net interest margin | 2.25% | 2.25% |
| Net income | $19.3 million | $37.1 million |
| Basic and diluted EPS | $0.07 | $0.13 |
| Annualized return on average assets / equity | 0.62% / 4.52% | 0.60% / 4.32% |
- At March 31, 2016, total assets were $12.47 billion, net loans held for investment were $11.29 billion, deposits were $8.32 billion, borrowings were $2.28 billion, and shareholders’ equity was $1.69 billion.
- Six-month operating cash flow was $39.9 million, compared with $48.4 million in 2015. Cash and cash equivalents ended the period at $159.3 million.
- The allowance for loan losses was $68.3 million, or 0.60% of recorded loans. Non-accrual loans were $99.2 million; non-performing assets were $110.5 million, or 0.89% of assets.
- Association capital ratios included Tier 1 leverage of 11.67%, Tier 1 risk-based capital of 21.21%, and total risk-based capital of 22.22%; each exceeded the stated well-capitalized requirement. The quarterly average liquidity ratio was 5.5%.
Material changes versus comparable periods
- Quarterly net income rose 23% to $19.3 million; six-month net income increased 15% to $37.1 million. The filing attributes improvement mainly to lower credit-loss provisions and expenses, with higher net interest income and loan-sale gains also contributing.
- Net interest margin increased 11 basis points year over year to 2.25% in both the quarter and six-month period. Loan balances and interest income grew, while average loan yields declined (quarter: 3.32% versus 3.38%). Borrowing costs increased, partly offset by lower CD costs.
- The company recorded a $1.0 million negative provision in the quarter and a $2.0 million negative provision for six months, versus provisions of $1.0 million and $3.0 million in the respective 2015 periods. Six-month net charge-offs fell to $1.2 million from $7.3 million.
- Total assets increased $97.7 million, or 1%, from September 30, 2015. Net loans increased $107.2 million; deposits rose $32.0 million and borrowed funds increased $114.7 million. Equity declined $39.0 million, primarily due to $67.0 million of share repurchases and $11.4 million of dividends, partly offset by earnings.
- Year-over-year 90-days-or-more delinquencies fell to 0.3% of net loans from 0.5%; non-performing assets declined from $142.6 million to $110.5 million.
Outlook, management commentary, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management expects moderate charge-offs to continue as delinquent loans are resolved, while stating that liquidity is adequate and the institution is expected to remain well capitalized.
- Interest-rate risk remains central: the company uses adjustable-rate and shorter-term mortgage products, longer-duration funding, and swaps. Its model estimates that an immediate 200-basis-point rate increase would reduce economic value of equity by 11.67%; estimated earnings at risk would decline 0.55% over the next 12 months and 3.35% over the following 12 months. Management cautions that model results rely on assumptions and are not precise forecasts.
- Credit risks include concentration in Ohio and Florida, legacy Home Today loans, and home-equity lending—often in second-lien positions. Management also highlights possible payment increases as older home-equity lines reach the end of their draw periods. Approximately 5.3% of home-equity lines in the draw period had current combined loan-to-value ratios above 100%.
- Funding considerations include $1.79 billion of CDs due within one year and reliance on FHLB advances and brokered CDs. At March 31, the company reported $539.9 million of brokered CDs and immediate additional borrowing availability of $529.8 million from the FHLB and $104.7 million from the Federal Reserve discount window.
- The company began using $250 million of interest-rate swaps as cash-flow hedges during the period. It also repurchased $67.0 million of shares in the six months and paid $11.4 million in dividends. The $210 million of Association-to-parent dividends were intercompany transfers and did not affect consolidated capital, but reduced the Association’s capital ratios.
- Management said pending legal matters were not expected to have a material adverse effect; it reported no material change in previously disclosed risk factors. The prior-year comparison is affected by a short-term borrowing-and-investment strategy used in 2015 but not in 2016, which increased prior-year cash-equivalent income and influenced margin comparisons.
Important facts for investors to verify
- Whether credit quality and the lower allowance remain appropriate as loan growth continues, especially in home-equity and Home Today portfolios.
- The performance and loss exposure of older home-equity lines as draw periods expire, including collateral values and borrower payment changes.
- The effect of higher market rates on funding costs, net interest margin, and the company’s modeled interest-rate sensitivity.
- Deposit retention and refinancing needs for the $1.79 billion of CDs due within a year, and the continued use and cost of brokered deposits and FHLB borrowings.
- The ongoing effect of share repurchases and dividends on parent-company liquidity and the Association’s regulatory capital.
- Actual results versus management’s qualitative expectations; the filing cautions that interim results are not necessarily indicative of full-year performance.