TFS Financial Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2015; fiscal year ends September 30. Unaudited interim results. Financial amounts below are in U.S. dollars; “million” and “billion” are used for readability.
Business context and reporting period
TFS Financial is a retail consumer banking and mortgage-lending company operating principally through Third Federal Savings and Loan Association of Cleveland. Its business centers on residential mortgage lending and deposit gathering. The mutual holding company owned approximately 77% of outstanding shares.
Financial and operating performance
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Interest and dividend income | $95.7 million | $287.1 million |
| Net interest income | $67.6 million | $202.1 million |
| Provision for loan losses | Nil | $3.0 million |
| Non-interest income | $6.1 million | $18.0 million |
| Non-interest expense | $47.8 million | $142.6 million |
| Net income | $17.3 million | $49.6 million |
| Diluted earnings per share | $0.06 | $0.17 |
| Net interest margin | 2.19% | 2.16% |
At June 30, total assets were $12.26 billion, net loans held for investment were $11.01 billion, deposits were $8.46 billion, borrowed funds were $1.90 billion, and shareholders’ equity was $1.76 billion. Cash and cash equivalents totaled $224.2 million; available-for-sale securities totaled $569.4 million. For the nine-month period, operating cash flow was $76.2 million, investing cash flow was negative $419.9 million, financing cash flow was $386.5 million, and cash increased by $42.8 million.
The Association reported Tier 1 leverage capital of 12.53% and Tier 1 capital to risk-weighted assets of 21.70%, above applicable well-capitalized thresholds. The Company’s corresponding ratios were 13.94% and 24.09%. The quarter’s average liquidity ratio was 8.41%; management reported additional immediately available borrowing capacity of $853.8 million from the FHLB and $123.8 million from the Federal Reserve discount window.
Changes versus comparable periods
- Quarterly net income declined 2% from $17.6 million; nine-month net income declined 1% from $50.0 million. Diluted EPS was unchanged at $0.06 and $0.17, respectively.
- Quarterly net interest income fell slightly; nine-month net interest income decreased 1%. Nine-month net interest margin declined to 2.16% from 2.45%, and the interest-rate spread declined to 2.01% from 2.29%.
- For the nine months, non-interest expense rose 9% to $142.6 million, led by marketing costs, which increased 72% to $17.4 million. Non-interest income increased 10% to $18.0 million, mainly from higher loan-sale gains.
- Loan-loss provisioning fell to $3.0 million from $15.0 million for the nine months; net charge-offs declined to $7.5 million from $25.0 million. The allowance fell to $76.9 million from $81.4 million at September 30, 2014.
- Net loans grew 4% from September 30, 2014. Deposits declined 2%, while borrowed funds rose 67% to $1.90 billion, primarily reflecting loan growth, liquidity management, and the temporary funding strategy described below.
- Shareholders’ equity declined 4%, largely due to $125.0 million of share repurchases and $13.6 million of dividends, partly offset by earnings and other equity-plan activity.
Management commentary, outlook, risks and unusual items
- Temporary funding/income strategy: The company borrowed approximately $1.0 billion intra-quarter from the FHLB and placed net proceeds at the Federal Reserve. Management said the strategy modestly increased income but reduced spread and margin; it was suspended in May 2015 as FHLB borrowing rates increased and was not in place at quarter-end. Management said it may resume it if effective.
- Credit quality: Non-performing assets were $134.8 million, or 1.10% of assets, down from $157.3 million, or 1.33%, at September 30, 2014. Loans 90 days or more delinquent were 0.4% of net loans. Management nevertheless cited lingering economic and housing-market challenges, especially in Ohio and Florida, and expects a moderate level of future charge-offs.
- Concentrations and portfolio risks: Lending remains concentrated in Ohio and Florida. Home Today loans, a legacy affordable-housing portfolio with higher credit risk, were $140.4 million and accounted for a disproportionate share of delinquencies. Home-equity lending carries second-lien and end-of-draw payment risks; 8.9% of home-equity lines in the draw period had current mean combined LTV above 100%.
- Interest-rate exposure: Management identified rising rates as a key risk to margins and asset values. A modeled +200 basis-point shock reduced economic value of equity by 15.24%; modeled earnings at risk fell 2.0% over the following 12 months. These are model estimates, not forecasts, and rely on assumptions.
- Funding and capital returns: Brokered CDs were $520.1 million, up from $356.7 million at September 2014. CDs totaling $1.90 billion were due within one year. The company repurchased $124.7 million of shares during the nine months and paid $13.6 million in dividends. A new 10-million-share repurchase authorization was announced after quarter-end; regulatory non-objection for a proposed mutual-company dividend waiver was pending at filing.
- Other contingencies: Management said ordinary-course legal matters were not expected to have a material adverse effect. Mortgage-insurance recovery assumptions and the fair value of servicing rights are subject to estimation uncertainty. The filing reported no material change to previously disclosed risk factors and no material control deficiency.
- Guidance: No specific earnings or revenue guidance was provided. Management stated that results for interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether deposit outflows, CD maturities, and increased FHLB borrowing affect funding costs and net interest margin.
- Whether the improvement in delinquencies and charge-offs continues, particularly in home-equity and Home Today loans and in Ohio and Florida.
- How the end-of-draw transition for home-equity lines and changes in home values affect borrower repayment and the allowance for loan losses.
- Whether management resumes the intra-quarter funding strategy, and its effect on earnings, liquidity, and reported margins.
- Execution and funding of the new share-repurchase authorization, dividend policy, and pending regulatory action on the proposed dividend waiver.
- Interest-rate sensitivity and the assumptions behind the company’s EVE and earnings-at-risk models.