TFS Financial Corporation — FY2020 Form 10-K
Business context and reporting period. 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, primarily in Ohio and Florida. This 10-K reports the fiscal year ended September 30, 2020; fourth-quarter figures are for the three months ended that date.
Financial performance and condition
| Metric | FY2020 / September 30, 2020 | Prior comparable period |
|---|---|---|
| Net income | $83.3 million; diluted EPS $0.29 | FY2019: $80.2 million; diluted EPS $0.28 |
| Net interest income | $242.3 million | FY2019: $265.4 million |
| Net interest margin | 1.69% | FY2019: 1.92% |
| Non-interest income | $53.3 million | FY2019: $20.5 million |
| Provision for loan losses | $3.0 million expense | FY2019: $10.0 million credit |
| Operating cash flow | $121.8 million | FY2019: $103.0 million |
| Total assets | $14.64 billion | FY2019: $14.54 billion |
| Loans, net | $13.10 billion | FY2019: $13.20 billion |
| Deposits / borrowings | $9.23 billion / $3.52 billion | FY2019: $8.77 billion / $3.90 billion |
| Shareholders’ equity | $1.67 billion; 11.4% of assets | FY2019: $1.70 billion |
| Allowance for loan losses | $46.9 million; 0.36% of loans | FY2019: $38.9 million; 0.29% |
- FY2020 net income increased 4%, although net interest income fell 9%. Higher loan-sale gains, a $4.7 million gain on sale of commercial property, lower expenses, and a lower effective tax rate offset margin pressure and the higher loan-loss provision.
- Loan-sale gains were $28.4 million versus $1.9 million in FY2019; loan sales totaled $844.3 million. Net interest margin declined as asset yields fell faster than funding costs.
- Fourth-quarter net income was $13.6 million, versus $21.5 million in FY2019’s fourth quarter; fourth-quarter net interest income was $50.2 million versus $64.3 million.
- Liquidity ratio averaged 5.59% for the year. At year-end, cash and cash equivalents were $498.0 million and available-for-sale securities were $453.4 million. Reported additional borrowing capacity was $4.09 billion at the FHLB and $364.1 million at the Federal Reserve discount window, subject to collateral and other requirements.
- The Association’s regulatory capital ratios remained well above “well-capitalized” thresholds: total risk-based capital 19.96% and leverage capital 10.39%.
Material changes, outlook and risks
- COVID-19 and credit: Active forbearance plans totaled $165.6 million, or 1.26% of loans, at year-end; most affected loans were reported current and accruing under temporary relief rules. The allowance included a $25.2 million economic qualitative reserve attributed to COVID-19. Management warned that unemployment, a slowing recovery, and housing-market weakness could worsen borrower performance and require further provisions.
- Interest-rate exposure: Low rates reduced asset yields and net interest margin. Management’s model estimated that an immediate 200-basis-point rate increase would reduce economic value of equity by 4.63%; a 100-basis-point decrease would reduce it by 20.20%. These are model estimates, not forecasts.
- Unusual expense: Early termination of selected FHLB advances and related swaps resulted in $8.9 million of interest expense and fees in FY2020, including $7.8 million recognized from discontinued cash-flow hedges.
- CECL transition: The company expected to adopt CECL on October 1, 2020, with an estimated $46.1 million pretax increase in the allowance, including unfunded commitments, and a $35.8 million after-tax reduction to opening retained earnings.
- Capital returns: Dividends declared were $1.11 per share versus diluted EPS of $0.29; the reported dividend payout ratio was 382.76%. Share repurchases were suspended in April 2020 in response to the pandemic. The mutual holding company’s dividend-waiver approval and regulatory non-objection cover specified future dividends, but future approvals are not assured.
- No numeric earnings guidance was provided in the filing. Management emphasized interest-rate risk management, credit quality, liquidity, and expense control. Other material risks include competition for deposits, mortgage-sale market conditions and repurchase claims, regulatory requirements, cyber and vendor risks, and the Association’s “Needs to Improve” Community Reinvestment Act rating from its most recent cited examination.
- Management stated that pending legal matters were not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal controls; no material weakness was reported.
Investor verification checklist
- Track post-forbearance borrower performance, delinquency migration, charge-offs, and whether the COVID-related reserve remains adequate.
- Verify actual CECL adoption effects against the disclosed estimated $46.1 million pretax allowance increase.
- Assess whether loan-sale gains and mortgage refinancing activity are repeatable, and monitor the sustainability of earnings as margins remain compressed.
- Review the maturity and repricing profile of the $3.52 billion in FHLB borrowings, associated swaps, and the $3.51 billion of CDs due within one year.
- Evaluate dividend coverage, capital distributions, and the effect of mutual holding company dividend waivers; compare the $1.11 annual dividend with $0.29 diluted EPS.
- Confirm progress addressing the CRA rating and any implications for future applications, expansion, or corporate transactions.