TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; results are compared with the three months ended December 31, 2016 unless otherwise noted. The unaudited consolidated statements cover TFS Financial Corporation and subsidiaries. Its principal business is retail consumer banking, particularly residential mortgage lending and deposit gathering.
Financial results and position
| Metric | Current period / date | Prior comparable |
|---|---|---|
| Interest and dividend income | $107.2 million | $98.2 million |
| Net interest income | $70.0 million | $68.2 million |
| Net income | $19.6 million; diluted EPS $0.07 | $19.6 million; diluted EPS $0.07 |
| Net interest margin | 2.10% | 2.16% |
| Non-interest expense | $45.8 million | $45.3 million |
| Cash and cash equivalents | $323.6 million at Dec. 31, 2017 | $268.2 million at Sept. 30, 2017 |
| Total assets | $13.89 billion at Dec. 31, 2017 | $13.69 billion at Sept. 30, 2017 |
| Loans held for investment, net | $12.57 billion at Dec. 31, 2017 | $12.42 billion at Sept. 30, 2017 |
| Deposits / borrowed funds | $8.21 billion / $3.76 billion at Dec. 31, 2017 | $8.15 billion / $3.67 billion at Sept. 30, 2017 |
| Shareholders’ equity | $1.70 billion at Dec. 31, 2017 | $1.69 billion at Sept. 30, 2017 |
Cash flow: Operating activities provided $98.0 million; investing activities used $161.2 million; financing activities provided $118.5 million. Cash and cash equivalents increased $55.3 million during the quarter.
Credit and capital: The company recorded a $3.0 million credit for loan losses, compared with no provision or credit a year earlier. The allowance was $45.9 million, or 0.36% of recorded loans, at quarter-end. Non-accrual loans were $78.6 million; non-performing assets were $82.9 million, or 0.60% of assets. The Association reported Tier 1 leverage capital of 10.55% and total risk-based capital of 20.17%, above applicable well-capitalized thresholds. The company’s Tier 1 leverage ratio was 12.26%.
Material changes and management commentary
- Net income was essentially unchanged: higher net interest income and a loan-loss credit were offset mainly by higher income tax expense.
- Interest income rose 9%, supported by loan growth and higher yields. Interest expense rose 24%, chiefly as average FHLB borrowings increased 30% and their average cost rose to 1.56% from 1.13%. Net interest margin narrowed as funding costs increased faster than asset yields.
- The Tax Cuts and Jobs Act reduced the federal corporate rate, prompting a $4.6 million charge to revalue deferred tax assets. The reported effective tax rate increased to 38.8% from 30.8%. Management said the revaluation remained subject to refinement.
- Loan balances grew, with home equity loans and lines of credit increasing $73.4 million during the quarter. The company said renewed home-equity lending supports both growth and interest-rate-risk management.
- Delinquencies rose from September 30, particularly in residential Core and home equity portfolios. Management attributed much of the increase to Florida borrowers offered three-month payment deferrals after Hurricane Irma and expected the remaining deferrals to be resolved without a material increase in losses.
- The company repurchased 492,000 shares for approximately $7.5 million and paid $8.4 million in dividends during the quarter. Its eighth repurchase program authorized up to 10 million shares; 7.26 million remained available at December 31, 2017.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said it expected the Association to remain well capitalized and believed liquidity was adequate. The company reported an average quarterly liquidity ratio of 5.66% against a stated minimum target of 5%.
- Interest-rate exposure remains a key risk. A modeled instantaneous increase of 200 basis points reduced estimated economic value of equity by 19.76%; a ramped 200-basis-point increase was estimated to reduce 12-month earnings at risk by 2.33%. Management cautioned that these models rely on assumptions and are not forecasts.
- Funding depends on deposits, brokered CDs and FHLB advances. CDs totaling $2.20 billion were due within one year; replacement funding could cost more. Brokered CDs were $664.8 million at quarter-end.
- Loan concentrations in Ohio and Florida, home-equity payment increases as draw periods end, and the legacy Home Today portfolio are credit risks. Home Today loans were $105.0 million and represented a disproportionate share of delinquencies.
- The new tax law may affect mortgage demand, home values, borrower affordability and the company’s results. The filing also identifies competition, economic and real-estate conditions, interest-rate movements, regulatory changes, and Fannie Mae or Freddie Mac developments as risks.
- Commitments to originate loans totaled $516.7 million; unfunded commitments totaled $1.59 billion, including $1.54 billion of home-equity lines. Management stated that commitments were expected to be funded through normal operations. Routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the $4.6 million tax-law-related deferred-tax revaluation is adjusted in later periods and how the lower federal rate affects the ongoing effective tax rate.
- Whether higher funding costs continue to outpace asset-yield increases and further pressure net interest margin.
- Whether Hurricane Irma-related payment deferrals resolve as management expects and whether recent delinquency increases reverse.
- Credit performance in home-equity loans, including draw-period transitions, and the adequacy of the $45.9 million allowance.
- Liquidity and refinancing needs as $2.20 billion of CDs mature within one year, alongside reliance on FHLB borrowing and brokered deposits.
- Actual interest-rate sensitivity versus modeled EVE and earnings-at-risk scenarios, including the assumptions used in those estimates.