TFS Financial Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018; comparisons are primarily with fiscal 2017. This is an annual filing, not a standalone fourth-quarter report. TFS Financial is a savings-and-loan holding company whose principal subsidiary, Third Federal Savings and Loan Association, focuses on residential mortgage lending and retail deposits in Ohio and Florida.
Financial performance and position
| Metric | FY2018 / September 30, 2018 | Prior comparable |
|---|---|---|
| Total assets | $14.14 billion | $13.69 billion |
| Net interest income | $280.9 million | $278.9 million |
| Net interest margin | 2.08% | 2.16% |
| Net income | $85.4 million | $88.9 million |
| Diluted earnings per share | $0.30 | $0.32 |
| Operating cash flow | $147.0 million | $108.7 million |
| Deposits | $8.49 billion | $8.15 billion |
| Borrowed funds | $3.72 billion | $3.67 billion |
- Interest income rose 8% to $443.0 million, while interest expense increased 25% to $162.1 million. Higher asset yields and loan growth were more than offset in part by faster-rising deposit and borrowing costs; net interest margin fell 8 basis points.
- Non-interest income increased to $21.5 million, including $3.4 million in net gains on loan sales. Non-interest expense rose 5% to $192.3 million. Return on average assets was 0.62% (0.67% in FY2017); return on average equity was 4.91% (5.28%).
- Net income declined 4%. The $11.0 million credit for loan losses was smaller than the $17.0 million credit in FY2017, while expenses increased; lower taxes partly offset these effects. The reported income-tax provision included approximately $6.6 million of expense from revaluing deferred tax assets after the Tax Cuts and Jobs Act.
- Loans, net, grew 4% to $12.87 billion. Home equity loans and lines of credit increased 17% to $1.82 billion; residential first mortgages totaled $11.03 billion. Mortgage originations were $2.31 billion and home equity originations were $1.51 billion.
- Cash and cash equivalents were $269.8 million and available-for-sale securities were $532.0 million. Average liquidity ratio was 5.57%. The Association reported $129.0 million of immediately available additional FHLB borrowing capacity and $55.6 million at the Federal Reserve discount window; greater collateral-based FHLB capacity is conditional on acquiring additional FHLB stock.
- Shareholders’ equity was $1.76 billion, or 12.4% of assets. The Association’s regulatory capital ratios remained well above well-capitalized thresholds: 10.87% leverage and 20.47% total risk-based capital. The company declared $0.76 per share in dividends and repurchased $19.7 million of stock.
Changes, outlook, and material risks
- Compared with FY2017, net interest income edged up, but margin narrowed as funding costs rose faster than asset yields. Deposits increased $340 million, driven by CDs, while high-yield savings and checking balances declined. FHLB borrowings remained substantial and their average cost increased.
- Credit indicators generally improved: non-performing assets fell to $80.5 million, or 0.57% of assets, from $84.6 million, or 0.62%; loans 90 days or more delinquent were 0.16% of net loans versus 0.19%. The allowance declined to $42.4 million, 0.33% of loans, from $48.9 million, 0.39%.
- Management said liquidity was adequate and expected to remain well capitalized. It expects a moderate level of charge-offs to continue and noted ongoing deposit-pricing competition and uncertainty in economic conditions. No specific earnings or revenue guidance was provided.
- Interest-rate exposure remains significant: an immediate 200-basis-point increase was modeled to reduce economic value of equity by 19.65%; a gradual 200-basis-point increase was projected to reduce 12-month net interest income by 2.32%. These are model estimates, not forecasts.
- Key risks include rising funding costs and deposit competition; Ohio and Florida real-estate concentration; home equity credit risk and payment increases as older lines leave draw periods; property-value and employment weakness; and dependence on FHLB funding. Home Today loans were just 0.7% of the loan portfolio but had materially higher delinquency than Core loans.
- The Association received a “Needs to Improve” Community Reinvestment Act rating in its most recent examination, covering 2012–2014 lending data. Management stated that legal proceedings are not expected to have a material adverse effect. The filing also identifies the expected adoption of CECL in fiscal 2021 as a potential source of higher credit-loss allowances; the impact was still being assessed.
- Auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The fiscal-year increase in comprehensive income included a substantial positive change in cash-flow hedge value, recorded in other comprehensive income rather than net income.
Important facts for investors to verify
- Whether deposit pricing and wholesale funding costs continue to compress net interest margin, and how much of the funding base depends on CDs, brokered CDs, and FHLB advances.
- Credit performance and allowance adequacy as the home equity portfolio grows, older lines approach repayment, and property values or employment conditions change.
- The sustainability of earnings and the $0.76 dividend against diluted EPS of $0.30; the filing reports a 253% dividend payout ratio.
- Progress and potential effects of CECL implementation, including any transition adjustment to equity or increase in loan-loss provisions.
- Effects of the CRA rating on regulatory approvals, and the continued availability of required mutual-member approvals and regulatory non-objection for dividend waivers.