TFS Financial Corporation — Form 10-Q Summary
Business context and period. TFS Financial is a retail consumer banking and mortgage lender operating primarily through Third Federal Savings and Loan Association of Cleveland. This fiscal second-quarter report covers the three and six months ended March 31, 2015; balance-sheet comparisons are with September 30, 2014. Amounts below are in millions unless noted. The interim statements are unaudited.
Key financial metrics
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Interest and dividend income | $95.6 | $191.4 |
| Net interest income | $67.4 | $134.6 |
| Provision for loan losses | $1.0 | $3.0 |
| Non-interest income | $5.9 | $11.8 |
| Non-interest expense | $48.8 | $94.8 |
| Net income | $15.7 | $32.3 |
| Basic and diluted EPS | $0.05 | $0.11 |
| Net interest margin | 2.14% | 2.14% |
For the six months, operating cash flow was $48.4; investing cash outflow was $293.6 and financing cash inflow was $284.6. Cash and cash equivalents rose to $220.7 from $181.4 at September 30, 2014.
At March 31, total assets were $12.13 billion, net loans held for investment were $10.88 billion, deposits were $8.50 billion, borrowed funds were $1.67 billion, total liabilities were $10.34 billion and shareholders’ equity was $1.79 billion. The allowance for loan losses was $77.1, or 0.70% of recorded loans.
Changes versus comparable periods
- Quarterly net income declined 4% from $16.4 million; six-month net income was essentially unchanged from $32.4 million.
- Six-month net interest income fell 2%, and net interest margin declined from 2.48% to 2.14%. Loan yields fell as new originations were made at lower rates, while interest expense rose with higher average CD and borrowing balances.
- Six-month loan-loss provision fell to $3.0 million from $11.0 million. Net charge-offs decreased to $7.3 million from $20.1 million; the prior-year period included $5.3 million of charge-offs on loans delinquent more than 1,500 days. Non-accrual loans declined to $122.3 million from $135.5 million at September 30, 2014.
- Assets increased 3%, led by loan growth, cash, securities and FHLB stock. Deposits declined $153.0 million while borrowings rose $529.1 million. Equity decreased $49.0 million, principally reflecting $82.0 million of share repurchases and $9.3 million of dividends.
Management commentary, outlook and risks
- Management reported improving credit metrics but noted continuing economic and housing-market uncertainty, particularly in Ohio and Florida. At March 31, 90%-plus delinquencies were 0.5% of total net loans; non-performing assets were $142.6 million, or 1.18% of assets.
- Residential and home-equity lending remain concentrated in Ohio and Florida. Home Today loans were only 1.4% of held-for-investment loans but accounted for 24.2% of loans delinquent 90 days or more. Home-equity borrowers face second-lien risk and possible higher payments as draw periods end.
- The Association’s Tier 1 leverage ratio was 12.09%; its total risk-based capital ratio was 22.53%. Management said the Association exceeded “well-capitalized” regulatory requirements. Immediate additional borrowing capacity was reported as $956.3 million from the FHLB and $132.5 million from the FRB discount window.
- Management’s income strategy uses approximately $1.0 billion of additional overnight FHLB borrowing during quarters, with proceeds deposited at the Federal Reserve after required FHLB stock investment. Management said it modestly increases income but reduces spread and margin, and expects to continue while effective. Average liquidity ratio for the quarter was 10.75%, versus a stated minimum target of 5%.
- Interest-rate risk remains material: modeled EVE declined 13.67% under an immediate 200-basis-point rate increase, while modeled 12-month earnings at risk declined 1.1% under that scenario. Management cautioned that model results depend on assumptions and are not precise forecasts.
- Management expects moderate charge-offs to continue as delinquent loans are resolved. No specific earnings guidance was provided. It stated liquidity was adequate and expected the full-year effective tax rate to be below the federal statutory rate, partly because of bank-owned life insurance.
- PMIC, an insurer covering some loans, was paying claims at 67%; in April 2015 the Association was notified that future claims would be paid at 70%, with a catch-up adjustment for prior claims. Management said valuation allowances and loss-severity estimates were adjusted. Management did not expect pending legal matters to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the overnight borrowing strategy continues to add net income after considering its effect on net interest margin, leverage and funding costs.
- Whether deposit outflows, greater brokered-CD use and FHLB borrowing remain manageable; $2.07 billion of CDs were due within one year.
- Trends in home-equity delinquencies, upcoming draw-period expirations, collateral values and the adequacy of the loan-loss allowance.
- Future PMIC claim payments and the effect of insurer recoveries on credit-loss estimates.
- Capital allocation: the ongoing 10-million-share repurchase authorization had 3,763,450 shares remaining at quarter-end; confirm the effect of future repurchases and dividends on equity and capital.