TFS Financial Corporation — FY2012 Form 10-K
Business context and period. This annual report covers the fiscal year ended September 30, 2012 (including the quarter ended that date). TFS Financial is a savings-and-loan holding company whose principal subsidiary, Third Federal Savings and Loan, focuses on residential mortgage lending and retail deposits, primarily in Ohio and Florida.
Financial performance and condition
| Metric | FY2012 / September 30, 2012 | Comparable FY2011 |
|---|---|---|
| Net interest income | $262.2 million | $247.6 million |
| Net interest margin | 2.39% | 2.32% |
| Provision for loan losses | $102.0 million | $98.5 million |
| Non-interest income | $24.5 million | $31.0 million |
| Non-interest expense | $171.1 million | $168.1 million |
| Net income | $11.5 million; $0.04 per diluted share | $9.3 million; $0.03 per diluted share |
| Operating cash flow | $155.6 million | $135.6 million |
- Interest income declined 2% to $417.9 million, while interest expense fell 13% to $155.6 million. Net interest income rose 6%, chiefly as funding costs declined.
- Fourth-quarter net income was $1.1 million, versus $8.5 million in the year-earlier quarter. Fourth-quarter provision expense was $29.0 million.
- Total assets increased 6% to $11.52 billion. Net loans were $10.22 billion; deposits were $8.98 billion; borrowings were $488.2 million, up from $139.9 million.
- Cash and cash equivalents were $308.3 million. Management reported an average liquidity ratio of 5.80%. Additional immediate borrowing availability was $466.6 million from the FHLB and $233.3 million from the Federal Reserve; greater FHLB capacity was subject to additional stock ownership.
- Shareholders’ equity was $1.81 billion, or 15.7% of assets. The Association reported 22.19% total risk-based capital and 13.31% core capital to adjusted tangible assets, exceeding applicable requirements.
Material changes and unusual items
- Net charge-offs rose to $158.5 million from $74.8 million. The 2012 total included a one-time $55.5 million charge-off of specific valuation allowances under OCC direction and $15.8 million of Chapter 7 bankruptcy-related charge-offs. Excluding these items, net charge-offs were $87.2 million, still above the prior year.
- The allowance for loan losses declined to $100.5 million from $157.0 million, largely reflecting the required specific-allowance charge-off; the allowance ratio fell to 0.97% of loans from 1.58%.
- Non-accrual loans declined to $182.6 million from $235.3 million, and non-performing assets to $202.2 million from $254.4 million. The filing cautions that regulatory accounting changes and charge-offs contributed to reported declines.
- Total troubled debt restructurings increased to $221.4 million from $166.2 million. Home Today loans remained a notable credit concern: 21.1% were at least 30 days delinquent, compared with 1.3% of non-Home Today loans.
- The Association’s loan portfolio grew, led by residential mortgages; home-equity loans and lines of credit declined to $2.16 billion. Limited new home-equity lines resumed for qualifying existing customers in March 2012. Commercial builder lending was in runoff.
- Only $11.4 million of mortgage loans were sold during the year, reflecting Fannie Mae eligibility changes that the Association had not fully adopted. Serviced loans for others fell 30% to $3.81 billion, reducing servicing-fee income.
- All held-to-maturity securities were transferred to available-for-sale during the year after the Company’s regulator objected to their inclusion in reported liquid assets. The transfer produced a $2.2 million after-tax increase in accumulated other comprehensive income.
Outlook, commentary, and risks
- Management expects elevated delinquencies and charge-offs to persist in the foreseeable future, citing unemployment, uncertain economic prospects, weak housing values, and foreclosure delays, particularly in Florida.
- Management identifies interest-rate risk, credit risk, liquidity, and expense control as key priorities. A modeled immediate 200-basis-point rate increase would reduce projected 12-month net interest income by 12% and economic value of equity by 25.6%; these are scenario estimates, not forecasts.
- Regulatory memorandums of understanding remained in effect. The Company said required remediation steps had been performed, but termination or modification remained at regulators’ discretion. It did not intend to pay dividends or repurchase shares until regulatory concerns were resolved; no dividends were declared in FY2012.
- Potential risks include regulatory and compliance costs, proposed capital-rule changes, reliance on Fannie Mae/Freddie Mac and government-backed mortgage markets, deposit competition and maturities, mortgage-insurer claims, and concentrated exposure to residential real estate in Ohio and Florida.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. Management’s stated expectations are subject to the risks and uncertainties described in the filing.
Most important facts for investors to verify
- Whether credit quality continues to improve after separating ordinary losses from the $55.5 million specific-allowance and $15.8 million bankruptcy-related charge-offs.
- Whether the $100.5 million loan-loss allowance adequately covers the portfolio, including Home Today and home-equity exposures, and whether troubled restructurings re-default.
- Progress on regulatory matters and any effect on dividends, share repurchases, funding flexibility, or operating costs.
- How the Company manages interest-rate exposure while long-term fixed-rate loan sales remain limited, and whether reported rate-shock sensitivities change.
- Deposit retention and repricing as $2.55 billion of certificates of deposit mature within one year, alongside increased use of FHLB borrowings.
- Whether mortgage-loan sales, servicing balances, and fee income recover, and whether the $2.4 million accrual for servicing-related repurchase or reimbursement losses proves sufficient.