Shares of TFS Financial Corp. (TFSL) inched down 1.1% after the company reported fiscal first-quarter 2015 earnings (ended Dec 31) on Jan 29, after the market closed. Earnings per share of 6 cents came in line with the Zacks Consensus Estimate. The bottom line compared favorably with the year-ago figure of 5 cents.
Results reflected higher operating expenses and weak top-line performance. However, lower provisioning, improvement in asset quality and strong capital position were the positives for the quarter.
Net income in the quarter grew 3.9% year over year to $16.6 million.
TFS Financial has undertaken a strategy to increase its net income. As part of the strategy, the company will borrow approximately $1 billion from the FHLB funds and deposit the proceeds with the Federal Bank. However, it was not executed during the quarter in review.
Quarter in Detail
Total revenue was $73.1 million, slightly down from $72.9 million in the prior-year quarter. However, it outpaced the Zacks Consensus Estimate of $71.0 million.
Lower yield on assets were more than offset by an increase in interest-earning assets during the quarter, driving the rise in interest income. However, relatively higher interest expenses led to a fall in net interest income. Net interest margin (“NIM”) dropped 33 basis points (bps) year over year to 2.14% during the quarter.
Nevertheless, non-interest income increased 17.2% year over year to $6.0 million. The rise was mainly attributable to a higher net gain on the sale of loans, and increase in death benefits from bank-owned life insurance contracts as well as other income. However, these were partially offset by a fall in fee income and service charges.
Operating expenses were $46.0 million, up 7.3% from the year-ago quarter. The rise was primarily due to higher salaries and employee benefit costs, office and equipment expenses, real estate owned and marketing related expenses; partly offset by a decrease in federal insurance premium and assessments costs and other operating expenditure.
TFS Financial’s capital ratios were well above the regulatory requirement. As of Dec 31, 2013, Tier 1 risk-based capital ratio was 23.11%. Total risk-based capital came in at 24.31%.
Credit Quality
In the said quarter, credit quality continued to improve with TFS Financial reporting provision for loan losses of $2.0 million, down 66.7% from the year-ago quarter. Moreover, net loan charge-offs came in at $3.6 million, 72.9% below the prior-year quarter figure.
Share Repurchase
TFS Financial, under its sixth stock repurchase program, repurchased more than 2.8 million shares at an average price of $14.83 per share, worth approximately $41.5 million in fiscal first-quarter 2015.
Our Viewpoint
TFS Financial’s new strategy to increase its net income keeps us skeptical, as it adds pressure to the already subdued NIM and interest spread. Moreover, the low rate scenario and stringent regulations continue to challenge the company’s performance.
However, impressive credit metrics and healthy capital position bode well for the company. In addition, decent capital deployment activities make the stock an attractive pick for yield-seeking investors.
At present, TFS Financial carries a Zacks Rank #3 (Hold).
Performance of Other Banks
Among other companies in the same industry, Washington Federal Inc.’s (WAFD) fiscal first-quarter 2015 earnings of 39 cents beat the Zacks Consensus Estimate. Besides, People's United Financial Inc. (PBCT) and Hudson City Bancorp, Inc. (HCBK) reported fourth-quarter 2014 earnings of 22 cents and 8 cents, respectively, surpassing the estimates.
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