TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2014; income and cash-flow figures are for the three months ended that date and compare with the three months ended December 31, 2013. Balance-sheet comparisons are with September 30, 2014. Unaudited. Amounts below are rounded.
Business context and key financial metrics
TFS Financial is a retail consumer banking company focused primarily on residential mortgage lending and deposit gathering, operating through Third Federal Savings and Loan Association of Cleveland. About 76% of its common shares were held by its mutual holding company.
| Metric | Quarter / period-end result | Comparable or prior-period comparison |
|---|---|---|
| Interest and dividend income | $95.7 million | $93.0 million, up 3% |
| Net interest income | $67.1 million | $67.8 million, down 1% |
| Provision for loan losses | $2.0 million | $6.0 million |
| Non-interest income | $6.0 million | $5.1 million |
| Non-interest expense | $46.0 million | $42.9 million, up 7% |
| Net income / diluted EPS | $16.6 million / $0.06 | $16.0 million / $0.05 |
| Net interest margin / interest-rate spread | 2.14% / 1.99% | 2.47% / 2.29% |
| Total assets | $12.07 billion | $11.80 billion at September 30, 2014 |
| Loans held for investment, net | $10.77 billion | $10.63 billion at September 30, 2014 |
| Deposits / borrowed funds | $8.54 billion / $1.50 billion | $8.65 billion / $1.14 billion at September 30, 2014 |
| Cash and cash equivalents | $275.8 million | $181.4 million at September 30, 2014 |
| Shareholders’ equity | $1.81 billion | $1.84 billion at September 30, 2014 |
Cash flow, credit quality, and capital
- Operating cash flow was $71.6 million, versus $80.6 million a year earlier. Investing activities used $175.7 million; financing activities provided $198.5 million. Cash increased $94.4 million during the quarter.
- The allowance for loan losses was $79.8 million, or 0.74% of recorded loans, compared with $81.4 million, or 0.83%, at September 30. Net charge-offs were $3.6 million, down from $13.3 million in the prior-year quarter; the earlier period included $5.3 million of charge-offs tied to loans delinquent more than 1,500 days.
- Loans 90 days or more delinquent were 0.5% of net loans, compared with 0.6% at September 30 and 0.8% a year earlier. Non-accrual loans were $126.8 million; non-performing assets were $148.8 million, or 1.23% of assets. Troubled debt restructurings totaled $184.6 million.
- At December 31, the Association reported core capital of 12.79% of adjusted tangible assets and Tier 1 capital of 23.11% of risk-weighted assets; management said it exceeded well-capitalized requirements. The Company’s corresponding reported measures were 15.03% and 27.12%.
- The average quarterly liquidity ratio was 11.25%, above the company’s stated 5% minimum. It reported immediately available additional borrowing capacity of $850.0 million from the FHLB and $138.8 million from the Federal Reserve discount window.
Changes, outlook, risks, and unusual items
- Net income rose modestly year over year, mainly because the loan-loss provision fell; higher non-interest expenses and interest costs partly offset that benefit. Average loan balances grew, but loan yield declined 13 basis points to 3.41%. Net interest margin fell 33 basis points to 2.14%.
- Management attributed higher interest income partly to a strategy begun October 1, 2014: borrowing about $1.0 billion overnight from the FHLB early in the quarter, investing proceeds at the Federal Reserve, and repaying before quarter-end. Management described the strategy as essentially risk-free and expected to continue it while it increased net income, while acknowledging it lowered spread and margin. The filing does not quantify the strategy’s net income contribution.
- Deposits declined $114.7 million during the quarter as certificates of deposit fell; borrowings increased $366.1 million to fund loan growth, tax payments, securities purchases and liquidity management. Brokered CDs were $389.2 million. CDs totaling $2.35 billion were due within one year.
- Residential lending remains geographically concentrated: approximately 67% of residential real-estate loans were in Ohio and 17% in Florida. Management cited continuing concerns about Florida housing values and the uncertain breadth of the economic recovery. Home-equity lending is exposed to second-lien losses and payment increases as lines approach the end of their draw periods; some lines had current mean combined loan-to-value above 100%.
- Interest-rate sensitivity remains material. The Association’s modeled economic value of equity declined 14.04% under an instantaneous 200-basis-point rate increase; modeled 12-month earnings at risk declined 1.8% under that shock. Management cautioned that these models depend on assumptions and are not forecasts.
- The Association paid a $66 million dividend to the parent during the quarter, reducing its capital ratio; the intercompany payment did not reduce consolidated Company capital. TFS repurchased 2.80 million shares for $39.8 million and paid $4.7 million in common dividends. The mutual holding company waived its share of the declared dividends.
- Management said liquidity was adequate and expected the institution to remain well capitalized. No specific earnings or revenue guidance was provided. Management expects moderate loan charge-offs to continue as delinquent loans are resolved. Legal proceedings in the ordinary course were not expected to have a material adverse effect; the filing reported no material change in risk factors.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the overnight FHLB borrowing strategy continues to add net income after funding, FHLB stock and other costs, and how it affects margins and liquidity.
- Deposit retention and refinancing needs, including the $2.35 billion of CDs due within one year and reliance on FHLB borrowings and brokered CDs.
- Trends in delinquencies, net charge-offs, the allowance, TDR performance and exposures to Ohio, Florida, Home Today loans and home-equity lines near draw-period expiration.
- Capital and liquidity headroom after distributions, share repurchases and application of regulatory capital rules effective January 1, 2015.
- Assumptions behind reported interest-rate-risk measures and the sensitivity of earnings and economic value to rate changes.