TFS Financial Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2010; fiscal year ends September 30. The interim financial statements are unaudited. TFS is a retail consumer banking company focused on mortgage lending and deposits. Its mutual holding company owned approximately 74% of outstanding shares.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net interest income | $57.5 million (2010); $58.4 million (2009) | $172.4 million; $173.9 million |
| Provision for loan losses | $30.0 million; $20.0 million | $71.0 million; $58.0 million |
| Net income | $10.2 million; $10.0 million | $22.1 million; $27.3 million |
| Diluted earnings per share | $0.03; $0.03 | $0.07; $0.09 |
| Net interest margin | 2.17%; 2.23% | 2.20%; 2.21% |
At June 30, 2010, total assets were $10.94 billion, up 3% from September 30, 2009. Net loans held for investment were $8.76 billion, down 5%; deposits were $8.91 billion, up 4%; borrowed funds were $70.2 million; and shareholders’ equity was $1.76 billion. Cash and cash equivalents rose to $949.6 million from $307.0 million.
For the nine months, operating cash flow was negative $1.5 million, investing cash flow was positive $338.9 million, and financing cash flow was positive $305.1 million. Cash increased $642.5 million to $949.6 million. Management attributed the cash build to investing inflows, loan sales and deposit gathering; operating cash flow was affected by the $51.9 million FDIC assessment prepayment made in December 2009.
The Association reported regulatory capital ratios above “well capitalized” thresholds: total capital to risk-weighted assets of 19.45% versus 10.00% required, and core capital to adjusted tangible assets of 12.36% versus 5.00% required. The nine-month average liquidity ratio was 9.53%; management stated liquidity was adequate. Additional stated borrowing capacity was up to $910 million immediately from the FHLB and $374 million through Federal Reserve programs, subject to applicable conditions.
Changes versus comparable periods
- Quarterly net income increased 2%, while nine-month net income declined 19%. For the nine months, lower interest income and a higher loan-loss provision outweighed lower interest expense and slightly higher non-interest income.
- Nine-month interest income fell 11% to $332.6 million, while interest expense fell 20% to $160.2 million. The lower cost of deposits supported the spread, but nine-month net interest margin edged down to 2.20% from 2.21%.
- Nine-month non-interest income rose 2% to $51.8 million. Quarterly loan-sale gains increased to $19.7 million from $9.4 million; the company sold $542.1 million of loans in the quarter.
- Credit-loss indicators deteriorated year over year: the allowance for loan losses rose to $118.4 million, or 1.33% of loans, from $55.9 million, or 0.59%, at June 30, 2009. Non-performing loans were $290.7 million, or 3.25% of loans, versus $238.4 million, or 2.53%, a year earlier.
- Total non-performing assets were $305.1 million, or 2.79% of assets, at June 30, 2010. Loans 90 or more days delinquent totaled $260.6 million, compared with $238.4 million a year earlier. Troubled debt restructurings totaled $75.3 million.
Outlook, management commentary and risks
- No formal earnings guidance was provided. Management said elevated charge-offs were expected to continue as delinquent loans were resolved, and expected overall serious delinquencies to remain elevated given unemployment and housing-market conditions.
- Credit exposure is concentrated in residential real estate and home-equity lending, particularly in Ohio and Florida. Home Today loans were $283.2 million but represented 29.7% of total delinquencies; 35.4% of this portfolio was 30 or more days delinquent. Florida housing weakness and unemployment were identified as concerns.
- Following OTS concerns about the home-equity line portfolio and its administration, the Association suspended new equity loan and line originations, except bridge loans. The OTS required 45 days’ prior written notice before cash dividends or stock repurchases and could object. The company said it did not intend to pay dividends or repurchase shares until the concerns were resolved; its repurchase program was suspended.
- Fannie Mae delivery requirement changes effective July 1, 2010 were expected to limit sales of loans originated under the company’s traditional underwriting standards. Management anticipated reduced access to loan sales as a liquidity and interest-rate-risk management channel, was negotiating for eligible loans, and was developing an adjustable-rate mortgage product.
- Interest-rate sensitivity remained material: the company’s internal model estimated a 20.5% decline in net portfolio value under an instantaneous 200-basis-point rate increase and a 13.2% decline in 12-month net interest income under the same shock. Management cautioned that model assumptions limit predictive accuracy.
- Other risks include $2.23 billion of unfunded equity-line and other commitments, $2.88 billion of certificates of deposit due within one year, mortgage-insurance reinsurance exposure with a $5.2 million estimated remaining-loss liability, and pending implementation of financial-reform rules that management expected could increase operating and compliance costs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It said ordinary-course legal proceedings were not expected to materially harm financial condition or results.
Most important facts for investors to verify
- Whether OTS concerns were resolved, and the subsequent effect on home-equity lending, dividends and share repurchases.
- Subsequent trends in delinquencies, non-performing loans, charge-offs, troubled restructurings and allowance adequacy, especially for Florida, equity lines and Home Today loans.
- Whether Fannie Mae loan-sale eligibility was restored or alternative sale channels and the planned adjustable-rate product offset the expected reduction in loan sales.
- Deposit retention and funding needs as $2.88 billion of certificates mature within a year, alongside the company’s actual use of available borrowing capacity.
- Actual results versus the filing’s interest-rate sensitivity estimates and the assumptions underlying those models.