TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; filed August 8, 2013. Comparisons are with the corresponding 2012 periods unless stated otherwise. TFS Financial is a retail consumer bank focused on mortgage lending and deposit gathering.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Interest and dividend income | $94.2 million, down 10% | $291.4 million, down 7% |
| Net interest income | $66.1 million, up less than 1% | $202.5 million, up 3% |
| Provision for loan losses | $5.0 million, versus $31.0 million | $33.0 million, versus $73.0 million |
| Non-interest income | $8.8 million, up 40% | $23.2 million, up 26% |
| Non-interest expense | $46.3 million, up 14% | $134.0 million, up 6% |
| Net income | $16.2 million, versus $0.9 million | $40.2 million, versus $10.4 million |
| Diluted earnings per share | $0.05, versus $0.00 | $0.13, versus $0.03 |
Margins and returns: Third-quarter net interest margin was 2.44%, up 6 basis points; annualized return on average assets was 0.58% and return on average equity was 3.52%. For the nine-month period, net interest margin was 2.46%, up 6 basis points; annualized return on assets was 0.48% and return on equity was 2.93%.
Balance sheet at June 30, 2013: Total assets were $11.14 billion, down 3% from September 30, 2012. Net loans held for investment were $9.96 billion, down 3%; deposits were $8.63 billion, down 4%; borrowed funds were $475.1 million, down from $488.2 million. Cash and cash equivalents were $297.0 million, and available-for-sale securities were $454.5 million. Shareholders’ equity was $1.85 billion, up 2%.
Credit and cash flow: Allowance for loan losses was $96.5 million, 0.96% of recorded loans, versus $100.5 million at September 2012. Non-accrual loans were $158.9 million; total non-performing assets were $179.3 million, or 1.61% of assets. Net charge-offs for the nine months were $36.9 million, compared with $122.6 million in 2012; the prior-period amount included a $55.5 million one-time charge-off of specific valuation allowances under OCC guidance. Operating cash flow was $116.6 million; cash declined $11.3 million to $297.0 million. Investing activities provided $305.1 million, while financing activities used $433.0 million.
Material changes and management commentary
- Earnings improved substantially, driven mainly by lower loan-loss provisions and higher loan-sale gains. Net interest income was nearly flat for the quarter and increased modestly for the nine months: lower loan yields and balances were partly offset by lower deposit funding costs.
- Loan-sale gains were $4.0 million in the quarter and $8.3 million for the nine months; no loan-sale gains were reported in the prior-year periods. Nine-month loan sales totaled $334.7 million, including HARP II and private-investor transactions.
- Credit indicators generally improved: non-accrual loans declined from $182.6 million at September 2012, and 90-days-or-more delinquent loans were 1.0% of net loans. Management nevertheless expected elevated delinquencies and ongoing charge-offs, citing unemployment, housing inventory and depressed Florida property values.
- Loan exposure remains concentrated: about 75% of residential non-Home Today and construction loans were in Ohio and 18% in Florida. Home Today loans were only 2% of held-for-investment loans but made up 21% of 90-day-or-more delinquencies. Home equity loans and lines, often subordinate liens, remained a key source of credit losses.
- Management reported a 14.19% Association core-capital-to-adjusted-tangible-assets ratio and stated the Association exceeded all “well-capitalized” regulatory requirements. The company’s regulatory capital ratios were also reported as strong.
Outlook, risks, and contingencies
- No earnings or revenue guidance was provided. Management said it expected to remain well capitalized and considered liquidity adequate, but noted results are subject to economic, credit, interest-rate and market uncertainties.
- Management estimated that an instantaneous +200 basis-point rate shock would reduce economic value of equity by 27.4%; a -100 basis-point shock would increase it by 8.8%. Estimated 12-month earnings at risk showed a 1.7% decline under a +200 basis-point shock. These are model-based estimates, not forecasts, and depend on assumptions.
- A Federal Reserve-enforced memorandum of understanding remained in effect for the holding company and mutual holding company. It requires advance regulatory non-objection for proposed debt, dividends or capital distributions. The company said it would not pay cash dividends or repurchase shares until regulatory concerns are resolved; no shares were repurchased in the quarter.
- Management expected Fannie Mae to complete review of the company’s revised loan-origination procedures before September 30, 2013, potentially restoring eligibility for securitization and sale of qualifying new fixed-rate loans. Approval was not assured.
- Certificates of deposit totaling $2.49 billion were due within one year. TFS said a significant portion would likely remain, but replacement funding could cost more. It reported $455.7 million of immediately available additional FHLB borrowing capacity and $191.6 million at the Federal Reserve Discount Window.
- Other disclosed exposures include $1.23 billion of unfunded commitments (excluding suspended home-equity accounts), up to $13.1 million of maximum losses under mortgage-insurance reinsurance contracts, and a $2.4 million estimated liability for those losses. Management reported a $4.2 million accrual for probable Fannie Mae-related losses; no material repurchase or loss-reimbursement requests were outstanding.
- New regulatory capital rules were scheduled to apply to the Association beginning January 1, 2015; the company had not estimated their impact on reported risk-based capital ratios. Management said routine legal proceedings were not expected to materially affect results. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether lower credit-loss provisions reflect sustainable improvement, particularly in Florida, Home Today and second-lien home-equity portfolios, and whether the allowance remains adequate.
- How much of the earnings increase came from recurring operations versus lower provisions and loan-sale gains; monitor expense growth and net interest margin.
- Whether Fannie Mae approves the revised origination procedures and whether loan-sale activity and proceeds can be maintained.
- Deposit retention and funding costs as $2.49 billion of certificates mature, alongside available borrowing capacity and the reported liquidity ratio.
- Changes in the Federal Reserve memorandum of understanding, including any effect on dividends, repurchases, debt plans or capital distributions.
- Sensitivity of actual earnings and capital to interest-rate changes, noting the limitations of management’s model assumptions and that the filing describes interim results as not necessarily indicative of full-year performance.