TFS Financial Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. This is an annual report, not a standalone fourth-quarter filing. TFS Financial is a savings-and-loan holding company whose principal subsidiary, Third Federal Savings and Loan Association, focuses on residential mortgage lending and retail deposits in Ohio and Florida.
Financial performance and position
| Metric | FY2014 / September 30, 2014 | Comparison |
|---|---|---|
| Interest income | $374.7 million | Down 2% from $384.0 million |
| Net interest income | $271.4 million | Up 1% from $268.6 million |
| Net interest margin | 2.42% | Down 4 basis points from 2.46% |
| Net income / diluted EPS | $65.9 million / $0.22 | Up 18% from $56.0 million / $0.18 |
| Provision for loan losses | $19.0 million | Down from $37.0 million |
| Operating cash flow | $103.5 million | Down from $140.8 million |
| Total assets / loans, net | $11.80 billion / $10.63 billion | Assets up 5%; net loans up 5% |
| Deposits / borrowed funds | $8.65 billion / $1.14 billion | Deposits up 2%; borrowings up 53% |
| Shareholders’ equity | $1.84 billion | Down 2%; 15.6% of total assets |
| Liquidity | Average liquidity ratio 6.25% | Management’s minimum target is 5% |
Net interest income after loan-loss provision was $252.4 million. Non-interest income was $21.9 million, down 23%, primarily because loan-sale gains fell to $2.0 million from $8.3 million. Non-interest expense declined 1% to $175.5 million. Return on average assets was 0.57% and return on average equity was 3.52%.
Cash and cash equivalents fell to $181.4 million from $286.0 million. Cash flows were $103.5 million from operations, negative $668.6 million from investing, and positive $460.5 million from financing, resulting in a $104.6 million net cash decrease.
Material changes and credit quality
- Total non-performing assets declined to $157.3 million, or 1.33% of assets, from $178.5 million, or 1.58%. Non-accrual loans fell to $135.5 million from $155.8 million; loans 90 days or more delinquent declined to $61.6 million from $86.9 million.
- Net charge-offs declined to $30.2 million from $44.9 million. The allowance for loan losses decreased to $81.4 million, or 0.76% of loans, from $92.5 million, or 0.91%, because charge-offs exceeded the year’s provision.
- Mortgage loans grew, while home equity loans and lines of credit declined to $1.70 billion from $1.86 billion. Home equity exposures remain a significant credit concern, particularly as older lines approach repayment periods.
- Home Today loans were $154.2 million; 16.8% were delinquent 30 days or more, versus 0.6% of Core loans. This legacy portfolio carries higher credit risk.
- Brokered CDs rose to $356.7 million from $13.0 million. FHLB borrowings increased to $1.14 billion, primarily to fund loan and securities growth and manage funding costs.
Outlook, risks and unusual items
- No specific earnings or financial guidance is provided. Management describes regional employment and housing conditions as improving, but says the recovery remains uncertain and expects seriously delinquent loans to remain elevated in the foreseeable future.
- Interest-rate risk is material: an instantaneous 200-basis-point rise was estimated to reduce economic value of equity by 17.36% and projected 12-month net interest income by 2.2%. These are model estimates, not forecasts.
- Key risks include interest-rate and refinancing effects, Ohio and Florida real-estate and employment conditions, credit losses and collateral valuations, competition for deposits, regulatory and compliance costs, and reliance on mortgage-related assets. Fannie Mae/Freddie Mac support and changing capital rules are also relevant risks.
- During the year, the Association paid an $85 million dividend to the holding company. The Company repurchased approximately $103.1 million of shares and paid $4.9 million in dividends; a new authorization permits repurchases of up to 10 million shares.
- A November 2013 Fannie Mae resolution required a $3.1 million payment and withdrew specified historical repurchase and make-whole demands. Management maintained a $1.1 million accrual for potential remaining requests. The filing says ordinary-course legal proceedings are not expected to have a material adverse effect.
- The regulator terminated the remaining memoranda of understanding in April 2014. The Association was classified as well capitalized, with a 25.25% total risk-based capital ratio. New Basel III-related capital rules were scheduled to take effect in 2015.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Key facts for investors to verify
- Whether credit improvement persists, especially in Florida, Home Today loans, and home equity exposures approaching end-of-draw.
- Whether the $81.4 million loan-loss allowance remains adequate as the portfolio grows and economic or collateral conditions change.
- How higher FHLB borrowings and brokered CDs affect funding costs, liquidity, and net interest margin.
- Whether interest-rate changes produce outcomes consistent with the company’s EVE and earnings-at-risk models.
- Future cash dividends and share repurchases, including regulatory and mutual-holding-company waiver conditions.
- Any developments in Fannie Mae claims, mortgage-insurance recoveries, or other contingencies beyond the disclosed accruals.