TFS Financial Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. Although the request references 2013 Q4, this is an annual filing; it also includes unaudited quarterly data. TFS Financial is a savings-and-loan holding company whose principal subsidiary originates and services residential mortgages and gathers retail deposits, primarily in Ohio and Florida.
Financial performance and condition
- Profit: Net income was $56.0 million, or $0.18 per diluted share, versus $11.5 million, or $0.04 per share, in FY2012. Return on average assets was 0.50% and return on average equity was 3.05%.
- Interest and margins: Interest income fell 8% to $384.0 million, while interest expense fell 26% to $115.4 million. Net interest income rose 2% to $268.6 million; net interest margin increased to 2.46% from 2.39%, and the interest-rate spread rose to 2.25% from 2.11%.
- Credit costs and other income: Provision for loan losses declined to $37.0 million from $102.0 million. Non-interest income was $28.5 million, including $8.3 million in loan-sale gains. Non-interest expense increased 4% to $177.7 million; income tax expense was $26.4 million.
- Cash flow: Operating activities provided $140.8 million, compared with $155.6 million in FY2012. Investing activities provided $145.2 million, versus $741.4 million used in FY2012; financing activities used $308.3 million. Cash and cash equivalents ended the year at $286.0 million.
- Balance sheet and funding: Total assets were $11.27 billion, down 2%; net loans were $10.08 billion. Deposits fell 6% to $8.46 billion, while FHLB borrowings rose 53% to $745.1 million. Shareholders’ equity was $1.87 billion, or 16.6% of assets.
- Liquidity and capital: The reported liquidity ratio was 6.24%, above the company’s 5% minimum target. Immediate additional borrowing capacity was $185.7 million from the FHLB and $179.0 million from the Federal Reserve; additional FHLB capacity was subject to a further stock-purchase requirement. The Association’s total risk-based capital ratio was 24.10%, and it was classified as well capitalized.
Changes versus FY2012
- Net income increased substantially, principally because the loan-loss provision was $65.0 million lower, supplemented by higher net interest income and loan-sale gains. This comparison is affected by FY2012 charge-offs, including $55.5 million of specific valuation allowances and $15.8 million related to Chapter 7 bankruptcy guidance.
- Net charge-offs fell to $44.9 million from $158.5 million. Excluding the cited FY2012-specific charge-offs, FY2012 net charge-offs were $87.2 million; management also attributed improvement to better credit performance.
- Non-performing assets declined to $178.5 million, or 1.58% of assets, from $202.2 million, or 1.76%. Non-accrual loans were $155.8 million, or 1.53% of loans, versus $182.6 million, or 1.77%.
- Loans held for sale fell to $4.2 million from $124.5 million as the company completed $349.2 million of loan sales. Deposits declined while borrowings increased to partly offset the deposit outflow.
Outlook, risks, contingencies and notable events
- Management gave no numerical earnings or growth guidance. It expected delinquencies and home-equity losses to remain elevated in the foreseeable future, despite improving credit metrics, citing economic uncertainty and still-depressed housing conditions, particularly in Florida.
- Interest-rate exposure remains material. The company’s model estimated that an immediate 200-basis-point increase would reduce economic value of equity by 14.0%; estimated 12-month net interest income would decline 0.5%. Management cautioned that model assumptions and methodology materially affect these estimates; an enhanced model produced substantially different results from the prior model.
- Home Today loans, mostly originated under older, less stringent underwriting, had a 30-days-or-more delinquency rate of 18.8%, versus 0.9% for non-Home Today loans. Home equity lines and loans totaled $1.86 billion; their subordinate-lien position and collateral values remain key credit risks. The allowance for loan losses was $92.5 million, 0.91% of recorded loans.
- Regulatory restrictions on dividends and capital distributions remained in effect under an MOU applicable to the holding company and mutual holding company. The Federal Reserve had issued non-objection to resuming the existing repurchase plan; repurchases began October 1, 2013. Future dividends and expanded repurchases remained subject to further regulatory non-objection. No dividends were declared in FY2013.
- On November 15, 2013, after fiscal year-end, FNMA approved revised origination procedures, which management expected would permit certain future loans to be sold or securitized through FNMA. The filing does not establish that these procedures had yet produced sales.
- Also after year-end, the Association reached an FNMA resolution agreement and remitted $3.1 million. FNMA withdrew outstanding repurchase and make-whole demands and generally waived future repurchase obligations for specified loans originated in 2000–2008 and delivered before 2009. The Association had recorded a $4.2 million accrual for potential repurchase or loss-reimbursement requests at year-end.
- Mortgage-insurance recoveries remain a risk: PMIC advised that claims would be paid at 55%, with the remainder deferred. Separately, mortgage reinsurance exposure had a contractual maximum loss of $11.7 million and a recorded liability of $2.2 million at year-end.
- The filing cites competition, low interest rates and potential margin pressure, regional economic and housing weakness, changing regulation and capital requirements, deposit competition, and operational or cybersecurity disruptions among material risks. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether improving delinquencies and lower charge-offs persist, and whether the $92.5 million loan-loss allowance adequately covers future losses.
- Performance and collateral risk in legacy Home Today and home-equity portfolios, including Florida concentration and mortgage-insurance claim recoveries.
- Whether FNMA approval translates into sustained loan-sale capacity, gains, servicing income and reduced interest-rate exposure.
- Deposit retention and refinancing needs for $2.28 billion of certificates maturing within one year, alongside increased FHLB funding.
- Whether regulatory restrictions are lifted, and the resulting timing and capacity for dividends or additional share repurchases.
- The sensitivity of earnings and economic value of equity to rate changes, including the assumptions and revised methodology underlying management’s interest-rate-risk models.