TFS Financial Corporation — Form 10-Q Summary
Business context and reporting period. The filing covers the fiscal third quarter and nine months ended June 30, 2016; the comparable periods ended June 30, 2015. TFS is a retail consumer banking and mortgage lender operating primarily through Third Federal Savings and Loan Association. Figures below are in U.S. dollars; financial statement amounts are generally converted from thousands to millions. The interim statements are unaudited.
Financial results and position
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Net interest income | $67.4 million, versus $67.6 million | $202.8 million, versus $202.1 million |
| Net interest margin | 2.22%, versus 2.19% | 2.24%, versus 2.16% |
| Provision for loan losses | Negative $3.0 million (provision release), versus zero | Negative $5.0 million, versus a $3.0 million provision |
| Net income | $20.6 million, versus $17.3 million; diluted EPS $0.07, versus $0.06 | $57.7 million, versus $49.6 million; diluted EPS $0.20, versus $0.17 |
| Non-interest expense | $45.0 million, versus $47.8 million | $139.0 million, versus $142.6 million |
| Return on average assets | 0.66%, versus 0.55% | 0.62%, versus 0.52% |
At June 30, 2016, total assets were $12.62 billion, up 2% from September 30, 2015. Net loans held for investment were $11.44 billion, deposits $8.37 billion, FHLB borrowings $2.44 billion, and shareholders’ equity $1.68 billion. Cash and cash equivalents were $201.3 million; available-for-sale securities were $530.2 million. The allowance for loan losses was $64.8 million, or 0.56% of recorded loans, compared with $71.6 million at September 30, 2015.
For the nine months, operating cash flow was $55.0 million, investing cash flow was negative $197.9 million, and financing cash flow was positive $188.9 million. Cash increased $45.9 million to $201.3 million. Financing included a $413.2 million net increase in short-term borrowings, $94.7 million of share repurchases, and $16.8 million of common dividends.
Changes versus comparable periods
- Quarterly net income rose 19%; nine-month net income rose 16%. Management attributed the improvement chiefly to lower loan-loss provisions and reduced marketing expense, with nine-month results also benefiting from higher loan-sale gains and lower real-estate-owned expense.
- Net interest income was nearly flat in the quarter and increased less than 1% for the nine months. Loan growth supported interest income, while lower loan yields and higher borrowing costs offset some of the benefit.
- Credit indicators improved: non-accrual loans fell to $92.6 million from $106.8 million at September 30, 2015; non-performing assets were $101.7 million, or 0.81% of assets, versus $124.3 million, or 1.00%. Nine-month net charge-offs declined to $1.8 million from $7.5 million.
- Deposits increased $83.0 million and borrowings increased $274.3 million from September 30, 2015. Equity decreased $50.4 million, principally reflecting repurchases and dividends, partly offset by earnings.
Outlook, management commentary and risks
- No specific earnings or revenue guidance is provided. Management expects a moderate level of future charge-offs as delinquent loans are resolved, while noting continued uncertainty in the economy and housing values. It expects the Home Today portfolio to keep declining in the near term as amortization exceeds originations.
- Management reported an average liquidity ratio of 5.52% for the quarter and considered liquidity adequate. At quarter-end, the Association said it could immediately borrow an additional $308.2 million from the FHLB and $98.4 million from the Federal Reserve discount window; it also reported $5.24 billion of additional FHLB collateral capacity subject to stock-ownership requirements.
- The Association’s Tier 1 leverage capital ratio was 11.77%, above the 5.00% well-capitalized threshold; its Tier 1 risk-based ratio was 21.32%, above the 8.00% threshold. The company reported a 13.48% Tier 1 leverage ratio.
- Interest-rate risk remains material. A modeled instantaneous 200-basis-point increase would reduce economic value of equity by 14.35%; management estimated net interest income would decline 0.85% over the 12 months ending June 30, 2017 under that shock. These are model estimates, not forecasts.
- Credit exposure is concentrated in residential real estate, particularly Ohio and Florida. Home Today loans have higher credit risk than the Core portfolio; home equity lines also carry potential payment increases as draw periods end. The filing reports $1.23 billion of unfunded home equity line commitments and $849.5 million of commitments to originate loans.
- The new CECL accounting standard is expected to require lifetime expected-credit-loss estimates and may increase the allowance and related costs; the company was evaluating its impact. Management said ordinary-course legal matters were not expected to have a material adverse effect. The proposed waiver by the mutual holding company of up to $0.50 per share in dividends through July 2017 had member approval, but regulatory non-objection was pending at filing.
Investor facts to verify
- Whether the negative loan-loss provision is sustainable and how allowance coverage evolves as loan growth continues.
- Trends in delinquencies and losses, especially for Home Today loans, subordinated home equity exposures, and loans approaching the end of draw periods.
- Funding costs, the growth and maturity profile of FHLB borrowings and CDs, and the availability of liquidity under stressed conditions.
- The effect of interest-rate changes on margins and economic value, including the assumptions underlying the company’s sensitivity models and swaps.
- Regulatory action on the mutual holding company’s proposed dividend waiver and the eventual impact of CECL adoption.