TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2020; income and cash-flow comparisons are for the three months ended December 31, 2020 versus December 31, 2019. Balance-sheet comparisons are to September 30, 2020. Amounts below are in U.S. dollars.
Business context
TFS Financial is a retail consumer banking company focused principally on residential mortgage lending and deposits, operating through Third Federal Savings and Loan Association. Its loan portfolio is concentrated in residential real estate, with significant exposure to Ohio and Florida. About 81% of its outstanding shares were held by its mutual holding company.
Financial performance and position
- Net income: $25.0 million, down 2.5% from $25.6 million. Basic and diluted EPS were $0.09, unchanged year over year.
- Net interest income and margin: Net interest income was $58.7 million, down 8.5%. Net interest margin was 1.66%, compared with 1.82%; the interest-rate spread narrowed to 1.51% from 1.63%. Lower market rates reduced asset yields, while lower deposit and borrowing costs partly offset the effect.
- Revenue and expenses: Interest and dividend income declined 15% to $101.9 million; interest expense declined 23% to $43.2 million. Non-interest income increased 80% to $21.5 million, primarily on higher gains from loan sales. Non-interest expense rose 9% to $51.7 million. Income before taxes was $30.5 million and income tax expense was $5.5 million.
- Profitability ratios: Annualized return on average assets was 0.68%, versus 0.70%; return on average equity was 6.04%, versus 5.94%. Annualized non-interest expense to average assets increased to 1.41% from 1.30%.
- Assets and lending: Total assets were $14.57 billion, down $69.4 million from September 30. Net loans held for investment were $12.90 billion, down $203.6 million. First-mortgage originations increased to $1.12 billion from $750.6 million; loans sold or committed for sale totaled $293.5 million.
- Credit quality and allowance: The allowance for credit losses on loans was $70.3 million, or 0.54% of loan amortized cost. Including the $22.0 million allowance for unfunded commitments, total allowance was $92.3 million. The quarter recorded a $2.0 million credit for credit losses and $1.3 million of net loan recoveries. Non-accrual loans were $50.6 million; loans delinquent 90 days or more were $17.5 million.
- Funding, debt and liquidity: Deposits were $9.19 billion and borrowed funds, all from the FHLB of Cincinnati, were $3.44 billion. Cash and cash equivalents were $499.9 million and available-for-sale securities were $447.6 million. The average liquidity ratio was 6.19%; management said liquidity was adequate. The Association reported Tier 1 leverage capital of 10.37% and Tier 1 risk-based capital of 19.01%, above applicable well-capitalized thresholds.
- Cash flow: Operating activities provided $24.2 million, investing activities provided $52.8 million, and financing activities used $75.1 million. Cash and cash equivalents increased $1.9 million to $499.9 million.
- Shareholder returns: The company paid $14.1 million in dividends, or $0.28 per common share. It made no share repurchases during the quarter.
Material changes and unusual items
- Effective October 1, 2020, TFS adopted CECL, replacing the incurred-loss method with an expected-lifetime-loss approach. Adoption increased the allowance by $46.1 million and reduced opening retained earnings by $35.8 million, net of tax. The company elected a regulatory-capital transition period for the adoption impact.
- COVID-19 forbearance plans outstanding declined to $94.1 million, or 0.73% of loans, from $165.6 million at September 30. The filing states that most active plans were treated as current and accruing under applicable relief guidance; $10.1 million of the December balance was classified as TDRs.
- Loan-sale gains rose to $16.4 million from $2.9 million. The current quarter included $6.6 million of fair-value gains on loans held for sale subject to pending agency contracts. The prior-year quarter included a $4.3 million gain on sale of commercial property.
- Non-interest expense included a one-time after-tax $1,500 bonus for associates. The company also placed $70.0 million of additional premiums into bank-owned life insurance, contributing to its lower effective tax rate.
- Shareholders’ equity declined to $1.66 billion, mainly reflecting CECL adoption and dividends, partly offset by net income and improved accumulated other comprehensive income.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management said it expects to remain well capitalized and believes liquidity is adequate, while continuing to manage interest-rate exposure, credit risk, funding and operating expenses. Management anticipated a moderate level of charge-offs as delinquent loans are resolved, subject to the duration and severity of COVID-19’s effects.
Key disclosed risks include prolonged or worsening pandemic-related unemployment and housing-market effects; the concentration of residential lending in Ohio and Florida; refinancing and prepayment effects on loan yields; rising rates or a flat or inverted yield curve, which could pressure net interest income; competition for deposits and potentially higher funding costs; and uncertainties in credit-loss estimates and economic forecasts. At December 31, 2020, $3.30 billion of CDs were scheduled to mature within one year. Management noted that deposit runoff could require replacement funding at higher rates. The Association’s interest-rate model estimated a 5.64% decrease in economic value of equity under an instantaneous 200-basis-point rate increase, while projected 12-month earnings at risk increased 3.78% under a 200-basis-point gradual increase; management cautioned that these models rely on assumptions and are not precise forecasts.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It said pending legal matters were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the lower net interest margin and asset yields persist, and how loan sales, deposit pricing and FHLB funding affect subsequent results.
- How CECL assumptions and COVID-19-related borrower performance affect the allowance, charge-offs and recoveries in future quarters.
- Developments in the $94.1 million of active COVID-19 forbearance plans and the $3.30 billion of CDs due within one year.
- Whether Ohio and Florida housing-market exposure, home-equity lending and the portfolio’s geographic concentration create increased credit losses.
- Whether loan-sale gains and other non-interest income are repeatable, given their importance in offsetting weaker net interest income.
- Any changes to the dividend, the suspended share-repurchase program, or the mutual holding company’s dividend waiver, which was approved through July 14, 2021 subject to its terms.