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| 8-K - CURRENT REPORT - TFS Financial CORP | d8k.htm |
Exhibit 99.1
Contact: Jennifer Rosa (216) 429-5037
For release Wednesday, February 9, 2011
TFS Financial Corporation Announces First Fiscal Quarter Ended December 31, 2010 Financial Results
(Cleveland, OH – February 9, 2011) – TFS Financial Corporation (NASDAQ: TFSL) (the “Company”), the holding company for Third Federal Savings and Loan Association of Cleveland (the “Association”), today announced results for the quarter ended December 31, 2010.
The Company reported a net loss of $7.3 million for the three months ended December 31, 2010, compared to net income of $8.9 million for the three months ended December 31, 2009. The change in net income is largely the result of an increase in the provision for loan losses and non-interest expense, plus a reduction in non-interest income, partially offset by an increase in net interest income.
Marc A. Stefanski, chairman and CEO of Third Federal commented, “While the strong refinance market has allowed us to grow and attract new customers, we still face the challenges of a weak economy, an unemployment rate of 9 percent and increasing costs due to a changing regulatory environment.”
Net interest income increased $2.4 million, or 4.2%, to $59.7 million for the three months ended December 31, 2010 from $57.3 million for the three months ended December 31, 2009. The increase in net interest income resulted from a decrease in interest paid on interest-bearing liabilities, partially offset by a decrease in the interest received on interest-bearing assets. The interest rate spread increased 5 basis points to 1.82% for the three months ended December 31, 2010 from 1.77% for the three months ended December 31, 2009. The net interest margin increased one basis point to 2.21% compared to 2.20% for the same quarter last year.
The Company recorded a provision for loan losses of $34.5 million for the three months ended December 31, 2010 and $16.0 million for the three months ended December 31, 2009. The provisions exceeded net charge-offs of $19.5 million and $14.0 million for the quarters ended December 31, 2010 and 2009, respectively. Of the $19.5 million of net charge-offs, $13.4 million occurred in the equity loans and lines of credit portfolio. The allowance for loan losses was $148.2 million, or 1.50% of total loans receivable, at December 31, 2010, compared to $133.2 million, or 1.42% of total loans receivable, at September 30, 2010, and further compared to $97.3 million or 1.03% of total loans receivable at December 31, 2009. Included in the allowance for loan losses is a specific reserve for losses on impaired loans which was $53.1 million, $46.0 million and $31.8 million at December 31, 2010, September 30, 2010 and December 31, 2009, respectively.
Non-performing loans decreased $11.1 million to $275.5 million, or 2.80% of total loans, at December 31, 2010 from $286.6 million, or 3.08% of total loans, at September 30, 2010. Of the $11.1 million decrease, $3.5 million occurred in the residential, non-Home Today portfolio, $4.3 million occurred in the residential, Home Today portfolio, $1.9 million occurred in the equity loans and lines of credit portfolio
and $1.4 million occurred in the construction portfolio. Non-performing loans increased $10.8 million compared to $264.7 million, or 2.83% of total loans, at December 31, 2009. The Home Today portfolio is an affordable housing program targeted toward low and moderate income home buyers, which totaled $276.2 million at December 31, 2010 and $280.5 million at September 30, 2010.
Non-interest income decreased $4.8 million, or 41%, to $6.8 million for the three months ended December 31, 2010 from $11.6 million for the three months ended December 31, 2009. There were no sales of loans and therefore no gains were recorded during the three months ended December 31, 2010, compared to gains of $3.0 million for the same quarter last year. Additionally, increased refinancing activity caused the amortization of mortgage servicing rights to increase $2.8 million to $4.8 million for the three months ended December 31, 2010 from $2.0 million for the three months ended December 31, 2009.
Non-interest expense increased $2.8 million, or 7.1%, to $42.9 million for the three months ended December 31, 2010 from $40.1 million for the three months ended December 31, 2009 due to increases in other operating expenses and Federal insurance premiums, partially offset by lower salaries and employee benefit expense. Other operating expenses, consisting of mainly additional legal, consulting and appraisal expenses related to the expanded review of our equity loan and lines of credit portfolio, increased $4.7 million, or 101.5%, to $9.4 million for the three months ended December 31, 2010 from $4.7 million for the three months ended December 31, 2009. Salaries and employee benefits decreased $3.7 million, or 17.4%, to $17.5 million for the three months ended December 31, 2010 from $21.2 for the three months ended December 31, 2009, generally as a result of no executive bonus, a reduced employee bonus accrual and a reduction in the number of shares allocated under the Employee Stock Ownership Plan.
Total assets decreased $11.4 million, or 1%, to $11.06 billion at December 31, 2010 from $11.08 billion at September 30, 2010. This change was the result of decreases in our cash and cash equivalents, investment securities and mortgage loans held for sale partially offset by an increase in our loan portfolio.
Cash and cash equivalents decreased $401.2 million, or 53.9%, to $342.5 million at December 31, 2010 from $743.7 million at September 30, 2010. Investment securities decreased $102.2 million, or 15.2%, to $569.4 million at December 31, 2010 from $671.6 million at September 30, 2010. These decreases can be attributed to the reinvestment of our most liquid assets into loan products that provide higher yields and longer maturities.
Loans held for investment, net increased $522.6 million to $9.70 billion at December 31, 2010 from $9.18 billion at September 30, 2010. Residential mortgage loans increased $652.7 million during the three months ended December 31, 2010, while the equity loans and lines of credit portfolio decreased by $111.5 million. A total of $582.0 million of adjustable rate mortgages (mainly five year loans) were originated during the three months ended December 31, 2010, representing over 55% of all residential mortgage originations, compared to $6.1 million and 1.4% for the same quarter last year. Under a marketing effort to offset future interest rate risk exposure, adjustable rate mortgages originated under the Smart Rate ARM program since July, 2010 have an outstanding principal balance of more than $900 million as of December 31, 2010. The total principal balance of adjustable rate first mortgage loans was $1.41 billion, or 19.9% of all first mortgage residential loans, at December 31, 2010, compared to $650.5 million, or 10.3%, at December 31, 2009.
Deposits decreased $58.6 million, or less than 1%, to $8.79 billion at December 31, 2010 from $8.85 billion at September 30, 2010. The decrease in deposits was the result of a $108.0 million decrease in our certificates of deposit partially offset by $25.6 million increase in our high-yield savings accounts combined with a $21.7 million increase in our high-yield checking accounts for the three-month period ended December 31, 2010.
Accrued expenses and other liabilities increased $46.9 million, or 72.0%, to $112.1 million at December 31, 2010 from $65.2 million at September 30, 2010. This increase reflects the in-transit status of $46.5 million of real estate tax payments that have been collected from borrowers and will be remitted to various taxing agencies.
Shareholders’ equity decreased $5.3 million to $1.75 billion at December 31, 2010 from September 30, 2010. This reflects $7.3 million of net loss during the three-month period partially offset by adjustments related to the allocation of shares of our common stock related to awards under the stock-based compensation plan and the ESOP.
At December 31, 2010, the Association was “well capitalized” for regulatory capital purposes, as its tier 1 risk based capital ratio was 20.07% and its total risk based capital was 21.32%, both of which substantially exceed the amounts required for the Association to be considered well capitalized.
“We’ve made great progress in our home equity reduction plan. We received a formal non-objection to the plan on December 27, 2010, and feel confident that we will satisfy all the requirements of the OTS,” Stefanski said. The Home Equity Reduction Plan (the “Plan”) was submitted to the Association’s primary regulator, the Office of Thrift Supervision (the “OTS”), in September 2010. The Plan was prepared in response to an August 13, 2010, Memorandum of Understanding (the “MOU”) between the Association and the OTS. Key elements of the Plan and progress through December 31, 2010 are: (1) A reduction by December 31, 2011, using June 30, 2010 as a starting point, of $1 billion in home equity loan commitments, including a $300 million reduction in outstanding balances. At December 31, 2010, commitments, including those lines suspended, but subject to customer appeal, have been reduced $738.2 million and outstanding balances have been reduced by $158.7 million. (2) A $150 million capital infusion from the Company to the Association. This was completed in October, 2010. (3) Implementation of expanded line management, account management and collection processes regarding home equity. These process changes are in various stages of completion.
New Memorandums of Understanding (the “New MOU”) were entered into with the OTS dated February 7, 2011, covering the Association, the Company and the Mutual Holding Company. In conjunction with the New MOU, the Association’s original MOU dated August 13, 2010, was terminated. The New MOU addresses the ongoing monitoring of issues required by the original MOU. In addition, the New MOU requires, at various dates through June 30, 2011, the following actions: (1) an independent assessment of the Association’s interest rate risk management policy and a plan to address any deficiencies noted; (2) an independent review of management compensation; (3) the submittal of an independent enterprise risk management study and a plan to address any deficiencies noted; (4) the submittal for OTS non-objection 45 days in advance, any plans for new debt, dividends or stock repurchases; (5) formal management and director succession plans; and (6) revisions to various operational policies. In September, 2010, the Company engaged a third party to conduct an independent assessment of its interest rate risk management policy and enterprise risk management approach. The assessments will be a part of
the response to the OTS to be delivered in February, 2011. The Company expects to be able to comply with the remaining timeframes specified in the New MOU. The OTS requirements also carry unanticipated costs to complete which will continue to increase the Company’s non-interest expense in amounts that are not expected to, but may, be material to its results of operations. The requirements of the New MOU will remain in effect until the OTS decides to terminate, suspend or modify them.
The Company will host a post-earnings conference call at 10:00 a.m. (ET) on February 10, 2011. The toll-free dial-in number is 800-894-5910, Conference ID 7TFSLQ111. A telephone replay will be available beginning at 1:30 p.m. (ET) February 10, 2011 by dialing 800-388-5895. The conference call will be simultaneously webcast on the Company’s website www.thirdfederal.com under the Investor Relations link under the “About Us” tab, and will be archived for 30 days after the event, beginning February 11, 2011. The slides for the conference call will be filed with the SEC under a separate Form 8-K and will also be available on the Company’s website.
Forward Looking Statements
This report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:
| • | statements of our goals, intentions and expectations; |
| • | statements regarding our business plans and prospects and growth and operating strategies; |
| • | statements concerning trends in our provision for loan losses and charge-offs; |
| • | statements regarding the asset quality of our loan and investment portfolios; and |
| • | estimates of our risks and future costs and benefits. |
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:
| • | significantly increased competition among depository and other financial institutions; |
| • | inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments; |
| • | general economic conditions, either nationally or in our market areas, including unemployment prospects and conditions, that are worse than expected; |
| • | adverse changes and volatility in the securities markets; |
| • | adverse changes and volatility in credit markets; |
| • | our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any; |
| • | changes in consumer spending, borrowing and savings habits; |
| • | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; |
| • | future adverse developments concerning Fannie Mae or Freddie Mac; |
| • | changes in monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; |
| • | changes in policy and/or assessment rates of taxing authorities that adversely affect us; |
| • | changes in laws or governmental regulations affecting financial institutions, including changes in regulatory costs and capital requirements; |
| • | the timing and the amount of revenue that we may recognize; |
| • | changes in expense trends (including, but not limited to trends affecting non-performing assets, charge-offs and provisions for loan losses); |
| • | inability of third-party providers to perform their obligations to us; |
| • | adverse changes and volatility in real estate markets; |
| • | a slowing or failure of the moderate economic recovery; |
| • | the extensive reforms enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act; |
| • | the adoption of implementing regulations by a number of different regulatory bodies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and uncertainty in the exact nature, extent and timing of such regulations and the impact they will have on us; |
| • | changes in our organization, or compensation and benefit plans; and |
| • | the strength or weakness of the real estate markets and of the consumer and commercial credit sectors and its impact on the credit quality of our loans and other assets. |
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(In thousands, except share data)
| December 31, 2010 |
September 30, 2010 |
|||||||
| ASSETS |
||||||||
| Cash and due from banks |
$ | 37,401 | $ | 38,804 | ||||
| Other interest-bearing cash equivalents |
305,091 | 704,936 | ||||||
| Cash and Cash equivalents |
342,492 | 743,740 | ||||||
| Investment securities |
||||||||
| Available for sale (amortized cost $18,104 and $24,480, respectively) |
18,095 | 24,619 | ||||||
| Held to maturity (fair value $557,147 and $657,076, respectively) |
551,255 | 646,940 | ||||||
| Investment securities |
569,350 | 671,559 | ||||||
| Mortgage loans held for sale (includes $0 measured at fair value for the period ended September 30, 2010) |
0 | 25,027 | ||||||
| Loans held for investment, net: |
||||||||
| Mortgage loans |
9,861,694 | 9,323,073 | ||||||
| Other loans |
7,237 | 7,199 | ||||||
| Deferred loan fees, net |
(16,241 | ) | (15,283 | ) | ||||
| Allowance for loan losses |
(148,246 | ) | (133,240 | ) | ||||
| Loans, net |
9,704,444 | 9,181,749 | ||||||
| Mortgage loan servicing assets, net |
33,532 | 38,658 | ||||||
| Federal Home Loan Bank stock, at cost |
35,620 | 35,620 | ||||||
| Real estate owned |
16,472 | 15,912 | ||||||
| Premises, equipment, and software, net |
62,142 | 62,685 | ||||||
| Accrued interest receivable |
36,697 | 36,282 | ||||||
| Bank owned life insurance contracts |
165,974 | 164,334 | ||||||
| Other assets |
97,949 | 100,461 | ||||||
| TOTAL ASSETS |
$ | 11,064,672 | $ | 11,076,027 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Deposits |
$ | 8,793,314 | $ | 8,851,941 | ||||
| Borrowed funds |
64,155 | 70,158 | ||||||
| Borrowers’ advances for insurance and taxes |
55,044 | 51,401 | ||||||
| Principal, interest, and related escrow owed on loans serviced |
292,452 | 284,425 | ||||||
| Accrued expenses and other liabilities |
112,131 | 65,205 | ||||||
| Total liabilities |
9,317,096 | 9,323,130 | ||||||
| Commitments and contingent liabilities |
||||||||
| Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding |
||||||||
| Common stock, $0.01 par value, 700,000,000 shares authorized; 332,318,750 shares issued; 308,395,893 and 308,395,000 outstanding at December 31, 2010 and September 30, 2010, respectively |
3,323 | 3,323 | ||||||
| Paid-in capital |
1,687,535 | 1,686,062 | ||||||
| Treasury stock, at cost; 23,922,857 and 23,923,750 shares at December 31, 2010 and September 30, 2010, respectively |
(288,354 | ) | (288,366 | ) | ||||
| Unallocated ESOP shares |
(82,335 | ) | (82,699 | ) | ||||
| Retained earnings – substantially restricted |
445,285 | 452,633 | ||||||
| Accumulated other comprehensive loss |
(17,878 | ) | (18,056 | ) | ||||
| Total shareholders’ equity |
1,747,576 | 1,752,897 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 11,064,672 | $ | 11,076,027 | ||||
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands except share and per share data)
| For the Three Months Ended December 31, |
||||||||
| 2010 | 2009 | |||||||
| INTEREST AND DIVIDEND INCOME: |
||||||||
| Loans, including fees |
103,200 | 107,048 | ||||||
| Investment securities available for sale |
111 | 113 | ||||||
| Investment securities held to maturity |
3,337 | 5,073 | ||||||
| Other interest and dividend earning assets |
793 | 569 | ||||||
| Total interest and dividend income |
107,441 | 112,803 | ||||||
| INTEREST EXPENSE: |
||||||||
| Deposits |
47,278 | 55,013 | ||||||
| Borrowed funds |
477 | 485 | ||||||
| Total interest expense |
47,755 | 55,498 | ||||||
| NET INTEREST INCOME |
59,686 | 57,305 | ||||||
| PROVISION FOR LOAN LOSSES |
34,500 | 16,000 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
25,186 | 41,305 | ||||||
| NON-INTEREST INCOME: |
||||||||
| Fees and service charges, net of amortization |
2,904 | 5,470 | ||||||
| Mortgage servicing assets impairment |
(284 | ) | (73 | ) | ||||
| Net gain on the sale of loans |
0 | 3,041 | ||||||
| Increase in and death benefits from bank owned life insurance contracts |
1,640 | 1,608 | ||||||
| Income on private equity investments |
183 | 115 | ||||||
| Other |
2,376 | 1,472 | ||||||
| Total non-interest income |
6,819 | 11,633 | ||||||
| NON-INTEREST EXPENSE: |
||||||||
| Salaries and employee benefits |
17,485 | 21,171 | ||||||
| Marketing services |
2,101 | 2,025 | ||||||
| Office property, equipment, and software |
5,110 | 5,253 | ||||||
| Federal insurance premium |
5,985 | 4,209 | ||||||
| State franchise tax |
939 | 1,042 | ||||||
| Real estate owned expense, net |
1,925 | 1,735 | ||||||
| Other operating expenses |
9,399 | 4,664 | ||||||
| Total non-interest expense |
42,944 | 40,099 | ||||||
| INCOME (LOSS) BEFORE INCOME TAXES |
(10,939 | ) | 12,839 | |||||
| INCOME TAX EXPENSE (BENEFIT) |
(3,591 | ) | 3,913 | |||||
| NET INCOME (LOSS) |
$ | (7,348 | ) | $ | 8,926 | |||
| Earnings (loss) per share – basic and fully diluted |
$ | (0.02 | ) | $ | 0.03 | |||
| Weighted average shares outstanding |
||||||||
| Basic |
300,140,571 | 299,658,526 | ||||||
| Fully diluted |
300,140,571 | 300,150,676 | ||||||
TFS FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCES AND YIELDS (unaudited)
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense |
Yield/ Cost (a) |
Average Balance |
Interest Income/ Expense |
Yield/ Cost (a) |
|||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Other interest-bearing cash equivalents |
543,632 | 434 | 0.32 | % | 279,740 | 165 | 0.24 | % | ||||||||||||||||
| Investment securities |
15,455 | 73 | 1.89 | % | 16,893 | 87 | 2.06 | % | ||||||||||||||||
| Mortgage-backed securities |
611,343 | 3,375 | 2.21 | % | 610,522 | 5,099 | 3.34 | % | ||||||||||||||||
| Loans |
9,620,125 | 103,200 | 4.29 | % | 9,454,267 | 107,048 | 4.53 | % | ||||||||||||||||
| Federal Home Loan Bank stock |
35,620 | 359 | 4.03 | % | 35,620 | 404 | 4.54 | % | ||||||||||||||||
| Total interest-earning assets |
10,826,175 | 107,441 | 3.97 | % | 10,397,042 | 112,803 | 4.34 | % | ||||||||||||||||
| Noninterest-earning assets |
279,257 | 297,271 | ||||||||||||||||||||||
| Total assets |
$ | 11,105,432 | $ | 10,694,313 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| NOW accounts |
$ | 973,422 | 928 | 0.38 | % | $ | 984,723 | 1,535 | 0.62 | % | ||||||||||||||
| Savings accounts |
1,589,013 | 2,537 | 0.64 | % | 1,283,810 | 3,397 | 1.06 | % | ||||||||||||||||
| Certificates of deposit |
6,253,379 | 43,813 | 2.80 | % | 6,295,373 | 50,081 | 3.18 | % | ||||||||||||||||
| Federal Home Loan Bank advances |
68,586 | 477 | 2.78 | % | 70,007 | 485 | 2.77 | % | ||||||||||||||||
| Total interest-bearing liabilities |
8,884,400 | 47,755 | 2.15 | % | 8,633,913 | 55,498 | 2.57 | % | ||||||||||||||||
| Noninterest-bearing liabilities |
469,018 | 297,738 | ||||||||||||||||||||||
| Total liabilities |
9,353,418 | 8,931,651 | ||||||||||||||||||||||
| Shareholders’ equity |
1,752,014 | 1,762,662 | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 11,105,432 | $ | 10,694,313 | ||||||||||||||||||||
| Net interest income |
$ | 59,686 | $ | 57,305 | ||||||||||||||||||||
| Interest rate spread (b) |
1.82 | % | 1.77 | % | ||||||||||||||||||||
| Net interest-earning assets (c) |
$ | 1,941,775 | $ | 1,763,129 | ||||||||||||||||||||
| Net interest margin (d) |
2.21 | % | (a | ) | 2.20 | % | (a | ) | ||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
121.86 | % | 120.42 | % | ||||||||||||||||||||
| (a) | Annualized |
| (b) | Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
| (c) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
| (d) | Net interest margin represents net interest income divided by total interest-earning assets. |