TFS Financial Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; comparisons are primarily with FY2016. The filing also reports fourth-quarter results. TFS Financial is a savings-and-loan holding company whose principal business is residential mortgage lending and retail deposits, primarily through Third Federal Savings and Loan Association in Ohio and Florida.
Key financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Interest income | $409.0 million | $388.4 million |
| Net interest income | $278.9 million | $270.4 million |
| Net income | $88.9 million | $80.6 million |
| Diluted EPS | $0.32 | $0.28 |
| Net interest margin | 2.16% | 2.23% |
| Return on average assets / equity | 0.67% / 5.28% | 0.65% / 4.73% |
| Net cash from operating activities | $108.7 million | $84.9 million |
FY2017 net income rose 10%. Higher net interest income and a larger credit to loan-loss provision were partly offset by lower non-interest income and higher non-interest expense. The provision for loan losses was a credit of $17.0 million, compared with an $8.0 million credit in FY2016. Fourth-quarter net income was $23.0 million, versus $22.8 million in Q4 FY2016; Q4 included a $7.0 million credit for loan losses.
Balance sheet, funding and asset quality
- Total assets rose 6% to $13.69 billion; net loans increased 6% to $12.42 billion. Residential first mortgages made up most of the loan book.
- Deposits declined 2% to $8.15 billion. FHLB borrowings increased 35% to $3.67 billion; average borrowing cost rose to 1.32% from 1.23%. Brokered CDs totaled $620.7 million.
- Shareholders’ equity was $1.69 billion, or 12.3% of total assets. The Association’s regulatory capital ratios remained well above “well-capitalized” thresholds; its Tier 1 leverage ratio was 11.16%.
- Average liquidity ratio was 5.65%. At year-end, cash and cash equivalents were $268.2 million and available-for-sale securities were $537.5 million. Immediate additional borrowing capacity was $41.0 million at the FHLB and $72.3 million at the Federal Reserve; broader FHLB capacity was subject to additional stock requirements.
- Non-performing assets fell to $84.6 million, or 0.62% of assets, from $96.8 million, or 0.75%. Non-accrual loans were $79.1 million; 90-day-plus delinquencies were 0.19% of net loans, down from 0.24%.
- The allowance for loan losses declined to $48.9 million, or 0.39% of recorded loans, from $61.8 million, or 0.52%. Net recoveries were $4.2 million, compared with $1.8 million of net charge-offs in FY2016.
Changes, outlook and risks
- Loan growth and higher average loan balances lifted interest income, but the net interest margin narrowed as asset yields eased and funding costs increased. Borrowings supported balance-sheet growth, dividends and share repurchases.
- Management continued to emphasize competitive loan and deposit pricing, adjustable-rate and shorter-term mortgage products, diversified funding, capital strength and expense control. No numerical earnings or growth guidance is provided.
- Interest-rate sensitivity is material: the Association estimated an 18.33% decline in economic value of equity under an immediate 200-basis-point rate increase; modeled 12-month net interest income declined 1.63% under a gradual 200-basis-point increase. These are model estimates, not forecasts.
- Home equity lending remains a key credit-risk area, especially older lines with interest-only draw periods and potential payment increases at draw-period expiry. Home Today loans, a legacy program no longer originated, had higher delinquency than Core loans.
- Hurricane Irma affected Florida markets in September 2017. The company offered affected borrowers a three-month payment deferral; management anticipated possible short-term delinquency increases but did not expect a material increase in loan losses.
- Other cited risks include competition for deposits, interest-rate and reinvestment risk, concentration in Ohio and Florida real estate, regulatory and compliance costs, cyber and third-party vendor risks, and possible loan repurchase claims. Management said legal proceedings were not expected to have a material adverse effect.
- The expected-credit-loss standard (CECL) was scheduled to apply beginning in the company’s fiscal year starting October 1, 2020; management was assessing its impact. The company reported effective disclosure controls and internal control over financial reporting, and received an unqualified audit opinion.
Investor facts to verify
- Whether loan growth can continue without further margin pressure or increased reliance on wholesale borrowings and brokered CDs.
- The assumptions behind the $17.0 million loan-loss credit and the adequacy of the reduced allowance, particularly for home equity and legacy Home Today exposures.
- Upcoming CD maturities, undrawn home equity commitments of approximately $1.43 billion, and actual versus stated contingent borrowing capacity.
- The sustainability of dividends and repurchases: FY2017 dividends declared were $0.545 per share, while the reported dividend payout ratio was 170.31%; distributions depend on subsidiary capital, regulatory limits and mutual-holding-company waiver approvals.
- Actual post-Irma delinquencies and any CECL-related change to reserves, earnings or capital when implemented.