TFS Financial Corp. 10-Q Summary (Period Ended June 30, 2009)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2009, and the nine-month period ended June 30, 2009. TFS Financial Corporation is a federally chartered stock holding company conducting business primarily through its subsidiary, Third Federal Savings and Loan Association of Cleveland. The company focuses on retail consumer banking, including mortgage lending and deposit gathering. Approximately 74% of the company's outstanding shares are held by its mutual holding company.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Nine Months Ended June 30, 2009 |
|---|---|---|
| Net Income | $10.0 million | $27.3 million |
| Earnings Per Share (Diluted) | $0.03 | $0.09 |
| Total Assets | $10.78 billion | $10.78 billion (as of June 30, 2009) |
| Net Interest Income | $58.4 million | $173.9 million |
| Provision for Loan Losses | $20.0 million | $58.0 million |
| Allowance for Loan Losses | $55.9 million (0.59% of loans) | $55.9 million (0.59% of loans) |
| Non-Performing Loans | $238.4 million (2.53% of total loans) | $238.4 million (2.53% of total loans) |
| Cash and Cash Equivalents | $172.8 million | $172.8 million |
| Shareholders' Equity | $1.78 billion | $1.78 billion |
Material Changes vs. Prior Period
- Profitability: Net income for the quarter increased 48% to $10.0 million compared to $6.8 million in the prior year quarter, driven by higher non-interest income. However, net income for the nine-month period decreased 33% to $27.3 million from $40.4 million, primarily due to a significant increase in the provision for loan losses and non-interest expenses.
- Loan Losses: The provision for loan losses for the nine months ended June 30, 2009, was $58.0 million, more than double the $25.5 million recorded in the prior year period. Net charge-offs for the nine months were $45.9 million, compared to $8.4 million in the prior year. Non-performing loans increased 59.6% year-over-year to $238.4 million.
- Interest Income/Expense: Net interest income increased 7% for the nine-month period to $173.9 million. Interest expense decreased 21% due to lower rates on deposits, offset by higher costs on borrowed funds.
- Non-Interest Expenses: Total non-interest expense increased 17% for the nine-month period to $126.8 million. A significant driver was a 377% increase in federal insurance premiums to $15.5 million, largely due to a special FDIC assessment.
Outlook, Risks, and Management Commentary
- Credit Risk: Management highlights significant credit risk in equity lines of credit and the "Home Today" affordable housing portfolio. Delinquencies in the Home Today program are disproportionately high (35% delinquent 30+ days in Ohio). Management expects net charge-offs to continue increasing as delinquencies are resolved.
- Interest Rate Risk: The company manages interest rate risk by selling long-term fixed-rate loans and increasing equity line originations. Internal models suggest a 200 basis point increase in interest rates would decrease Net Portfolio Value (NPV) by 14% and reduce net interest income by 20% over the next 12 months.
- Liquidity and Capital: The company maintains a "well-capitalized" status with a core capital ratio of 12.37%. Liquidity is supported by $172.8 million in cash, $263.2 million in loans held for sale, and access to over $1.8 billion in borrowing capacity from the Federal Home Loan Bank.
- Legal Proceedings: A class action lawsuit regarding "document preparation fees" was dismissed by the Ohio Supreme Court on July 23, 2009, in favor of the company. The decision is final.
- Regulatory Risks: Potential legislative changes could eliminate the Office of Thrift Supervision and require conversion to a national bank, potentially impacting dividend policies and regulatory oversight.
Investor Verification Checklist
- Allowance Adequacy: Verify if the $55.9 million allowance (0.59% of loans) is sufficient given the rapid rise in non-performing loans to 2.53% and the specific concentration of risk in equity lines and Home Today loans.
- FDIC Assessments: Confirm the impact of the special FDIC assessment and potential future assessments on future earnings, as premiums have risen sharply.
- Home Today Portfolio: Review the specific delinquency trends and charge-off rates for the Home Today portfolio, which represents a small portion of assets but a large portion of delinquencies.
- Stock Repurchases: Monitor the company's stock repurchase program, which has reduced equity by $90.3 million in the nine-month period, and assess its impact on capital ratios.
- Interest Rate Sensitivity: Evaluate the company's exposure to rising interest rates, as indicated by the NPV sensitivity analysis showing a 14% decline in value under a +200 basis point shock.