TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; filed August 7, 2014. Dollar amounts below are in millions unless stated otherwise. The company is principally a retail consumer bank focused on residential mortgage lending and deposits, primarily in Ohio and Florida. Results are unaudited.
Financial performance and position
| Metric | Three months ended June 30, 2014 | Compared with 2013 | Nine months ended June 30, 2014 | Compared with 2013 |
|---|---|---|---|---|
| Net interest income | $67.9 | Up 3% | $204.7 | Up 1% |
| Provision for loan losses | $4.0 | Down from $5.0 | $15.0 | Down from $33.0 |
| Net income | $17.6 | Up from $16.2 | ||
| $50.0 | Up from $40.2 | |||
| Diluted EPS | $0.06 | Up from $0.05 | $0.17 | Up from $0.13 |
| Net interest margin | 2.41% | Down 3 basis points | 2.45% | Down 1 basis point |
Quarterly total interest income was $93.8 million, down slightly year over year, while interest expense fell 8% to $25.9 million. Nine-month interest income decreased 4% to $280.1 million and interest expense decreased 15% to $75.4 million. Lower loan yields were partly offset by reduced deposit costs and growth in mortgage-backed securities income.
- Assets and loans: Total assets were $11.72 billion at June 30, up 4% from September 30, 2013. Net loans held for investment were $10.51 billion, up 4%; residential mortgage loans grew, while home equity loans and lines declined.
- Credit: Allowance for loan losses was $82.5 million, 0.78% of recorded loans, versus $92.5 million and 0.96% at September 30, 2013. Nine-month net charge-offs were $25.0 million, down from $36.9 million. Non-accrual loans were $139.6 million; non-performing assets were $160.2 million, or 1.37% of assets.
- Cash flow: Nine-month operating cash flow was $85.3 million, versus $116.6 million in 2013. Investing activities used $494.8 million, principally reflecting loan originations and securities purchases; financing activities provided $379.0 million. Cash and cash equivalents ended at $255.5 million, down $30.5 million from September 30.
- Funding and liquidity: Deposits were $8.70 billion, up 3%; borrowed funds were $1.02 billion, up 37%, consisting of FHLB advances. Brokered CDs rose to $327.0 million from $13.0 million. The quarterly average liquidity ratio was 6.31% against a stated 5% minimum. Management said liquidity was adequate.
- Capital: Association core capital to adjusted tangible assets was 13.41%; Tier 1 capital to risk-weighted assets was 22.03%. Company Tier 1/Core capital was $1.86 billion, or 15.89% of adjusted tangible assets. Both entities exceeded stated well-capitalized thresholds.
Material changes and notable items
- Quarterly and nine-month earnings improved, chiefly due to lower loan-loss provisions and, for the nine-month period, lower other operating expense. Lower loan-sale gains partly offset the improvement.
- Nine-month first-mortgage originations were $1.57 billion. Adjustable-rate loans represented 38.0% of first-mortgage production; fixed-rate loans represented 62.0%, including a higher share of terms of 10 years or less than in the prior-year period.
- The Association resumed Fannie Mae loan sales after reinstatement as an approved seller in November 2013. It sold $57.6 million of loans in the nine months ended June 30, 2014, versus $334.7 million in the prior-year period, which included private-investor sales.
- The company repurchased 3.14 million shares for $68.3 million in the nine-month period. Its fifth repurchase program authorized up to 5 million shares; 1.86 million remained available at June 30.
- Federal Reserve memoranda of understanding covering the company and its mutual holding company were terminated April 1, 2014. The Association had previously had its MOU terminated in December 2012.
Outlook, risks, and contingencies
No quantitative earnings or revenue guidance is provided. Management expects moderate charge-offs to continue as delinquent loans are resolved, and expects the legacy Home Today portfolio to keep declining through amortization. Management described improving credit metrics but cautioned that economic recovery and housing-market conditions remain uncertain, especially in Florida.
- Interest-rate risk remains significant: the Association’s modeled economic value of equity fell 16.05% under an instantaneous 200-basis-point rate increase; modeled 12-month earnings at risk declined 0.3% under that scenario. Management said modeled results remained within internal limits, while noting model assumptions and limitations.
- Credit exposures include concentration in Ohio and Florida, higher-risk subordinate home equity loans, the legacy Home Today portfolio, and potential payment increases as home equity lines leave their draw periods. Approximately 14.2% of draw-period home equity credit exposure had current mean combined loan-to-value ratios above 100%.
- Certificates of deposit totaling $2.30 billion were due within one year. The company noted that replacement funding could cost more if deposits do not remain.
- At June 30, commitments to originate loans were $548.6 million and unfunded commitments were $1.16 billion, including home equity lines. Management expects commitments to be funded through normal operations.
- PMIC increased the cash portion of partial mortgage-insurance claim payments to 67%; the company recorded a one-time $1.3 million recovery. Mortgage-insurance claim payment risk and real-estate values remain relevant to loss estimates.
- The company fully charged off $5.3 million of loans that had remained delinquent for more than 1,500 days amid stalled foreclosure proceedings. Future foreclosure proceeds, if any, would be recorded as recoveries.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. No material changes to the risk factors in the 2013 Form 10-K were reported.
On July 31, 2014, members approved the mutual holding company’s proposed waiver of dividends of up to $0.28 per share through July 31, 2015. Federal Reserve non-objection and its timing were still pending at the filing date. The company had not paid cash dividends to public shareholders since May 2010.
Most important facts for investors to verify
- Whether improved credit quality persists and whether the lower provision and charge-offs are sustainable, given geographic concentration and collateral-value risks.
- How loan growth, loan yields, deposit pricing, brokered CDs, and increased FHLB borrowing affect future net interest margin and funding costs.
- Whether loan-sale capacity through Fannie Mae expands and provides meaningful liquidity and interest-rate-risk management.
- The adequacy of the $82.5 million loan-loss allowance, including assumptions about Home Today loans, home equity repayment transitions, and mortgage-insurance recoveries.
- The outcome of the dividend-waiver request and the use of capital for share repurchases versus other needs.