TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The filing is unaudited; financial statement amounts are in thousands of dollars unless otherwise noted. TFS Financial is a retail consumer bank focused primarily on residential mortgage lending and deposits.
Financial performance and position
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Net interest income | $65.0 million | $67.8 million | $129.2 million | $135.6 million |
| Provision (credit) for loan losses | $6.0 million | $(4.0) million | $3.0 million | $(6.0) million |
| Non-interest income | $8.9 million | $4.9 million | $20.9 million | $9.6 million |
| Non-interest expense | $49.6 million | $50.7 million | $96.9 million | $98.7 million |
| Net income | $17.3 million | $20.1 million | $42.9 million | $40.5 million |
| Diluted EPS | $0.06 | $0.07 | $0.15 | $0.14 |
- Margins: Net interest margin was 1.81% for both the quarter and six-month period, down from 1.97% in each comparable 2019 period. Quarterly net interest spread fell to 1.64% from 1.78%.
- Assets and loans: Total assets were $15.00 billion at March 31, up 3% from September 30, 2019. Net loans held for investment were $13.57 billion, up $378.7 million; the allowance for loan losses was $44.4 million, or 0.33% of recorded loans.
- Funding and liquidity: Deposits were $9.09 billion, including $474.4 million in brokered CDs. Borrowings, all from the FHLB, were $4.08 billion. Cash and cash equivalents were $312.5 million and available-for-sale securities were $545.5 million. The average quarterly liquidity ratio was 5.41%; management said liquidity was adequate. The Association reported $1.58 billion of immediately available additional FHLB borrowing capacity and $39.6 million at the FRB discount window.
- Cash flow: Six-month operating cash flow was $62.5 million, investing cash outflow was $381.3 million, and financing cash flow was $356.1 million. Cash increased $37.3 million to $312.5 million.
- Capital and distributions: The Association’s Tier 1 leverage ratio was 10.11%, above the 5.00% well-capitalized threshold; its total risk-based capital ratio was 18.64%. Shareholders’ equity was $1.66 billion, down $41.6 million from September 2019. Dividends paid in the six months were $27.4 million. The company significantly restricted repurchases in March and suspended the program in April in response to COVID-19.
Material changes and unusual items
- Quarterly net income fell 14%, primarily reflecting lower net interest income and a swing from a loan-loss credit to a provision. For six months, net income rose 6%, helped by a $4.3 million gain on the sale of commercial properties, higher loan-sale gains, and lower tax and operating expenses.
- Quarterly loan-sale gains increased to $3.1 million from $0.5 million; six-month loan sales totaled $323.2 million and generated $6.1 million of gains. The six-month results included a private bulk sale of $99.0 million and sales to Fannie Mae.
- The quarterly $6.0 million loan-loss provision reflected management’s preliminary assessment of COVID-19-related economic deterioration, particularly for home equity lending. The allowance rose from $38.9 million at September 30, 2019 to $44.4 million at March 31, 2020.
- Net income for the quarter was accompanied by an $80.1 million comprehensive loss, largely from an after-tax $89.8 million loss on cash flow hedges recorded in other comprehensive income. For the six months, comprehensive loss was $18.6 million. This hedge-related fair-value movement reduced reported equity but was not a current-period net-income charge.
- The CARES Act reduced the tax burden: the six-month effective tax rate was 14.6%, versus 22.9% a year earlier. Management cited a $2.8 million current-period tax benefit from carryback provisions.
Outlook, commentary, and risks
- The filing provides no specific earnings or financial guidance. Management said results remain dependent on the duration and depth of COVID-19’s effects, including unemployment, borrower performance, and housing values.
- COVID-19 forbearance plans totaled $36.0 million at March 31, 2020 and $231.4 million as of May 12, 2020. Plans were initially offered for three months, with possible extension; eligible plans were not treated as delinquent or TDRs at March 31. Management warned that losses and delinquencies could rise after relief periods.
- Management cited interest-rate risk, credit risk, liquidity and funding access, and expense control as critical priorities. A rapid rate increase or an extended flat or inverted yield curve could adversely affect net interest income. The loan portfolio is concentrated in residential real estate, with significant Ohio and Florida exposure and a meaningful home-equity component.
- Management expects adoption of the CECL credit-loss standard on October 1, 2020 to increase the allowance, but had not quantified the impact. The allowance impact will depend on portfolio characteristics and economic forecasts at adoption.
- Other contingencies include $1.06 billion in loan-origination commitments and $2.41 billion in unfunded commitments, principally home equity lines. Management said ordinary-course legal matters were not expected to have a material adverse effect. The company noted pending escrow-reserve outcomes could produce additional residual income from the commercial property sale in 2020.
Important facts for investors to verify
- Whether COVID-19 forbearances, unemployment, and subsequent repayment outcomes cause higher delinquencies, charge-offs, or provisions than estimated.
- Whether net interest margin stabilizes or continues to contract as asset yields and deposit and borrowing costs reprice.
- How CECL adoption changes the allowance and retained earnings at October 1, 2020.
- Whether the company maintains liquidity and capital levels while meeting loan commitments, deposit maturities, and dividends; verify the status of the suspended repurchase program.
- How cash flow hedge valuation changes and related accumulated other comprehensive loss affect equity and future interest expense.