TFS Financial Corporation — Form 10-Q Summary
Business context and reporting period. TFS Financial is a retail consumer banking company focused on residential mortgage lending and deposits, operating principally through Third Federal Savings and Loan Association of Cleveland. This unaudited Form 10-Q covers the three months ended December 31, 2015, the first quarter of fiscal 2016. Comparisons of operating results are to the three months ended December 31, 2014; balance-sheet comparisons are generally to September 30, 2015.
Key financial results
| Metric | Quarter ended Dec. 31, 2015 | Comparable prior quarter |
|---|---|---|
| Interest and dividend income | $96.4 million | $95.7 million |
| Net interest income | $67.6 million | $67.1 million |
| Net interest margin | 2.25% | 2.14% |
| Provision for loan losses | $(1.0) million (release) | $2.0 million expense |
| Non-interest income | $6.1 million | $6.0 million |
| Non-interest expense | $47.6 million | $46.0 million |
| Net income | $17.9 million | $16.6 million |
| Basic and diluted EPS | $0.06 | $0.06 |
| Return on average assets | 0.58% | 0.52% |
- Net income rose 8%, primarily reflecting the lower loan-loss provision and higher net interest income, partly offset by increased compensation and other operating costs. The filing does not present a conventional total-revenue figure.
- Average loan yield declined to 3.32% from 3.41%; average funding cost increased to 1.11% from 1.06%. Net interest margin improved partly because the prior-year quarter included a temporary borrowing-and-investment strategy that was not repeated.
- Cash provided by operating activities was $69.3 million, investing activities used $28.0 million, and financing activities used $37.1 million. Cash and cash equivalents increased $4.3 million to $159.6 million.
Financial position, liquidity and capital
- At December 31, 2015, total assets were $12.39 billion, loans held for investment, net, were $11.20 billion, deposits were $8.31 billion, borrowed funds were $2.16 billion, and shareholders’ equity was $1.70 billion.
- Loans held for investment, net, increased $15.2 million from September 30; deposits increased $19.5 million; borrowed funds decreased $4.4 million. Available-for-sale securities were $588.4 million.
- Management reported an average quarterly liquidity ratio of 5.6% against its stated 5% minimum target and considered liquidity adequate. The Association had $589.1 million of immediately available additional FHLB borrowing capacity and $109.9 million available at the Federal Reserve discount window.
- The Association reported regulatory capital ratios of 22.03% total capital to risk-weighted assets, 21.01% Tier 1 capital to risk-weighted assets, and 11.53% Tier 1 leverage capital. Management said the Association exceeded well-capitalized requirements.
- During the quarter, the Association paid $210 million in dividends to its parent, including a $150 million special dividend. These intercompany payments did not affect consolidated capital but reduced the Association’s capital ratios; the special dividend was a significant factor in the quarter’s worsened interest-rate sensitivity measure.
Material changes and credit quality
- Net charge-offs fell to $1.3 million from $3.6 million in the prior-year quarter. The allowance for loan losses declined to $69.2 million from $71.6 million at September 30, equal to 0.61% of recorded loans, versus 0.74% a year earlier.
- Loans 90 days or more delinquent were 0.3% of total net loans, down from 0.5% a year earlier. Nonperforming assets were $117.3 million, or 0.95% of assets, compared with $148.8 million, or 1.23%, a year earlier.
- The portfolio remains geographically concentrated: approximately 62% of residential Core and construction loans were secured by Ohio properties and 17% by Florida properties. Management highlighted continuing regional economic and housing-market risks, particularly in Florida.
- Home equity loans and lines of credit totaled $1.60 billion; delinquencies in that portfolio increased from the prior quarter. Management noted second-lien exposure, elevated risk on older vintages, and possible payment increases as lines reach the end of their draw periods.
- The Home Today portfolio was $131.7 million and represented a small share of total loans but a disproportionate share of delinquencies. Most loans in the program’s higher-risk legacy vintages predate tighter underwriting guidelines adopted in 2009.
Outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management expected a moderate level of charge-offs to continue as delinquent loans are resolved, while noting that actual results depend on economic, housing and employment conditions.
- Management identified interest-rate risk as a principal exposure. A modeled immediate 200-basis-point rate increase was estimated to reduce the Association’s economic value of equity by 16.99% and net interest income over the next 12 months by 2.04%. Management said modeled results were within board-approved limits; the filing cautions that model assumptions limit predictive accuracy.
- The company entered its first interest-rate swap in more than ten years: a $25 million notional cash-flow hedge with a 4.9-year remaining term, intended to extend the duration of variable-rate FHLB funding.
- Share repurchases totaled approximately $35.1 million during the quarter; the company also paid $5.8 million in dividends. The seventh repurchase authorization permits purchases of up to 10 million shares; 6.19 million remained authorized at December 31.
- Unfunded commitments included $631.2 million of commitments to originate loans and $1.20 billion of undrawn home equity lines. Certificates of deposit totaling $1.55 billion were due within one year. Management expected commitments to be funded through normal operations and believed a significant portion of maturing deposits would remain, but replacement funding could cost more.
- Unrealized losses on available-for-sale securities increased, primarily attributed to interest-rate changes rather than credit deterioration; management reported no intent or expected requirement to sell before recovery. Routine legal proceedings were not expected to have a material adverse effect. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether the improvement in earnings and credit measures persists, especially given the negative provision for loan losses and the reduced allowance ratio.
- Performance of the concentrated Ohio and Florida mortgage portfolios, legacy Home Today loans, and home equity loans approaching repayment-period transitions.
- Deposit retention and funding costs as $1.55 billion of CDs mature within a year, including the role of brokered CDs and FHLB borrowings.
- Interest-rate exposure and the assumptions underlying the EVE and earnings-at-risk models, including the effect of Association dividends and the new swap.
- Capital and liquidity at the Association after the $210 million of distributions to the parent, distinct from consolidated-company capital and liquidity.