TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014; comparisons are with the corresponding 2013 periods unless otherwise noted. The interim financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are generally shown in millions.
Business context and financial performance
TFS Financial is a retail consumer banking company focused primarily on residential mortgage lending and deposit gathering, principally through Third Federal Savings and Loan Association of Cleveland. About 74% of its outstanding shares were held by its mutual holding company.
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Interest and dividend income | $93.3 | $186.4 |
| Net interest income | $69.0 | $136.8 |
| Provision for loan losses | $5.0 | $11.0 |
| Net income | $16.4 | $32.4 |
| Diluted earnings per share | $0.05 | $0.11 |
| Net interest margin | 2.48% | 2.48% |
Quarterly net income increased from $12.8 million to $16.4 million; six-month net income rose from $23.9 million to $32.4 million. Improvement was driven mainly by lower loan-loss provisions. Net interest income was up modestly, while total interest income declined.
Financial position, cash flow and liquidity
- Total assets were $11.53 billion at March 31, up 2% from September 30, 2013. Net loans held for investment were $10.36 billion, up 3%.
- Deposits were $8.42 billion, down 1% since September 30, 2013. Borrowed funds increased 44% to $1.07 billion, primarily FHLB advances used to support loan growth and deposit outflows. Brokered CDs rose to $217 million from $13 million.
- Cash and cash equivalents were $267.8 million, down $18.2 million over the six months. Operating cash flow was $61.1 million; investing cash flow was a use of $300.7 million and financing cash flow provided $221.5 million.
- Management reported an average liquidity ratio of 6.24% for the quarter against a 5% minimum target. It reported additional immediate borrowing capacity of $100.3 million from the FHLB and $161.6 million from the Federal Reserve discount window.
- Association regulatory capital ratios remained above well-capitalized thresholds: core capital to adjusted tangible assets was 13.44%, and Tier 1 capital to risk-weighted assets was 21.95%. Company ratios were 16.33% and 26.65%, respectively.
Changes versus comparable periods
- For the quarter, net interest income rose 2%; interest income fell 4% as loan yields declined, partly offset by higher mortgage-backed securities income. Interest expense fell 16%, chiefly due to lower CD balances and rates. Quarterly net interest margin was unchanged at 2.48%.
- For six months, net interest income rose less than 1%. Interest income fell 5%, while interest expense fell 19%, mainly as CD costs declined. Loan yield was 3.52%, down from 3.76%.
- Non-interest income declined 10% for the quarter and 26% for six months, largely reflecting lower loan-sale gains. Six-month loan-sale gains were $0.9 million versus $4.3 million.
- Non-interest expense was nearly flat for six months at $87.8 million; higher salaries and real-estate-owned expenses were offset by lower insurance assessments and other operating costs.
- Credit indicators improved: non-accrual loans declined to $142.7 million from $155.8 million at September 30, and non-performing assets were $162.6 million versus $178.5 million. Loans 90 or more days delinquent were 0.7% of net loans, down from 1.1% a year earlier.
Outlook, risks and unusual items
- No numeric earnings or revenue guidance was provided. Management expected a moderate level of future charge-offs as delinquent loans are resolved, while citing improving credit metrics alongside continuing economic and housing-market uncertainty.
- Credit exposure is concentrated in residential real estate, particularly Ohio and Florida. Management highlighted Florida housing conditions, higher-risk Home Today loans, and second-lien home-equity lending as concerns. Home Today loans were only 1.6% of the held-for-investment portfolio but accounted for a disproportionate share of serious delinquencies.
- The allowance for loan losses was $83.4 million, or 0.80% of recorded loans, versus $92.5 million, or 0.91%, at September 30. Six-month net charge-offs were $20.1 million. A new practice of fully charging off loans stalled in foreclosure for more than 1,500 days resulted in $5.3 million of charge-offs; future foreclosure proceeds may be recorded as recoveries. A $1.3 million one-time recovery reflected an increased cash payment percentage from mortgage insurer PMIC.
- Interest-rate risk remains significant. A modeled immediate 200-basis-point rate increase reduced estimated economic value of equity by 17.73%; management said interest-rate risk measures remained within board limits. The model is assumption-sensitive and is not a precise forecast.
- Management stated liquidity was adequate, but noted $2.48 billion of CDs were due within one year and may need replacement with other funding, potentially at higher cost. The company also cited sensitivity to interest rates, competition, real-estate values, economic conditions and regulatory changes.
- After quarter-end, on April 1, 2014, the Federal Reserve terminated memoranda of understanding covering the company and its mutual holding company. On April 4, the company announced a new authorization to repurchase up to 5 million shares and said it was investigating steps to reinstate a dividend. The prior repurchase program had bought 2,156,250 shares for $26.1 million during the six-month period.
- The Association settled Fannie Mae demands in November 2013 with a $3.1 million payment funded by existing accruals, with no earnings impact; no material repurchase or loss-reimbursement requests were outstanding at March 31. A $1.1 million accrual for probable servicing-related losses remained. Management did not expect ordinary-course legal proceedings to materially affect results.
Investor facts to verify
- Whether lower provisions and improving delinquency trends persist, especially in Florida, Home Today and home-equity portfolios.
- Whether loan growth and the shift toward longer-term fixed-rate production affect margins and interest-rate sensitivity.
- Deposit retention and refinancing of near-term CD maturities, alongside greater use and cost of borrowings and brokered CDs.
- The adequacy of the loan-loss allowance, including the effects of extended foreclosures, insurer recoveries and PMIC’s claim-payment capacity.
- Implementation of the fifth share-repurchase authorization and any regulatory steps or approvals required to resume dividends.