TFS Financial Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020. The filing is unaudited. TFS Financial is a retail consumer banking company focused on mortgage lending and deposits, operating principally through Third Federal Savings and Loan Association. Its mutual holding company owned approximately 81% of outstanding shares.
Financial performance and position
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Interest and dividend income | $110.0 million | $121.0 million | $349.5 million | $359.8 million |
| Net interest income | $62.9 million | $65.5 million | $192.1 million | $201.1 million |
| Provision (credit) for loan losses | $0 | ($2.0 million) | $3.0 million | ($8.0 million) |
| Non-interest income | $15.3 million | $5.1 million | $36.2 million | $14.7 million |
| Non-interest expense | $44.8 million | $49.9 million | $141.7 million | $148.6 million |
| Net income | $26.8 million | $18.3 million | $69.7 million | $58.7 million |
| Diluted EPS | $0.10 | $0.06 | $0.25 | $0.21 |
| Net interest margin | 1.74% | 1.90% | 1.79% | 1.95% |
At June 30, 2020, total assets were $14.83 billion, net loans held for investment were $13.38 billion, deposits were $9.23 billion, borrowed funds were $3.76 billion, and shareholders’ equity was $1.66 billion. Compared with September 30, 2019, assets rose 2%, deposits rose 5%, net loans rose 1%, borrowings declined 4%, and equity declined 2%.
Cash and cash equivalents totaled $329.3 million, up from $275.1 million at September 30, 2019. For the nine months, operating activities provided $91.4 million, investing activities used $197.1 million, and financing activities provided $159.8 million; cash increased $54.1 million. The allowance for loan losses was $45.6 million, or 0.34% of recorded loans, versus $38.9 million, or 0.30%, at September 30, 2019.
Regulatory capital remained strong: the Association reported Tier 1 leverage capital of 10.25% and total risk-based capital of 19.29%; the Company’s Tier 1 leverage ratio was 11.82%. The company reported an average liquidity ratio of 5.41% for the quarter, against a stated minimum target of 5%.
Material changes versus comparable periods
- Quarterly net income increased 46%, despite a $2.6 million decline in net interest income. Higher gains on loan sales, lower expenses, and a lower effective tax rate supported earnings.
- Quarterly net gain on loan sales rose to $10.8 million from $0.5 million, reflecting $314.9 million of loan sales and stronger percentage gains in the lower-rate environment. The current-quarter gain included $2.3 million related to loan sales that closed in July.
- For the nine-month period, net income rose to $69.7 million, supported by higher loan-sale gains, lower expenses, a $4.3 million gain on commercial property sales, and lower income taxes. Net interest income fell 4%.
- Net interest margin contracted to 1.74% for the quarter and 1.79% for the nine months, from 1.90% and 1.95%, respectively, as asset yields declined faster than funding costs.
- The nine-month loan-loss provision shifted to an expense of $3.0 million from an $8.0 million credit in the prior-year period. Net recoveries were $3.7 million, compared with $4.9 million.
- Other comprehensive loss was $76.6 million for the nine months, largely from cash flow hedge valuation changes; total comprehensive loss was $6.9 million despite positive net income.
Outlook, risks, and unusual items
- COVID-19 and credit exposure: Active COVID-19 forbearance plans totaled $230.3 million, or 1.72% of loans, at June 30; $16.6 million was classified as TDRs. Most plans were initially three months, and the majority had been extended to six months. Management said the economic and housing-market impact remained highly uncertain.
- The $45.6 million loan-loss allowance included a $24.2 million qualitative component, the majority of which management attributed to its COVID-19 assessment. Management warned that future allowance increases may be needed as borrower conditions and the economy develop.
- Management expected the allowance for credit losses on loans and the liability for unfunded commitments to increase approximately 120%–150% upon planned CECL adoption on October 1, 2020. This was an estimate subject to further refinement and future economic conditions.
- Interest-rate risk remains significant. Management stated that a rapid rate increase or a prolonged flat or inverted yield curve could adversely affect net interest income. The filing’s model estimated a 5.92% EVE decrease under a +200-basis-point shock and a 12.16% decrease under a 100-basis-point decline; these are model-based estimates, not forecasts.
- Funding and concentration risks include $3.27 billion of certificates of deposit due within one year, reliance on FHLB advances and brokered CDs, and substantial residential real estate exposure in Ohio and Florida. The company reported $553.9 million of brokered CDs and $3.76 billion of FHLB advances at quarter-end.
- Unfunded home-equity-line commitments were $2.51 billion; commitments to originate loans were $885.4 million. Management stated that commitments were expected to be funded through normal operations.
- The company suspended its stock repurchase program in April 2020 in response to COVID-19. It continued paying dividends; the quarterly dividend was $0.28 per share. The mutual holding company’s dividend waiver was renewed in July 2020 for dividends declared through July 14, 2021.
- The company recorded a $4.3 million share of gain on sale of commercial properties in the December 2019 quarter and said additional residual income might be recognized in 2020, depending on escrow-reserve outcomes. Management said pending legal matters were not expected to have a material adverse effect.
- Key stated risks include pandemic-related economic deterioration, higher delinquencies and collateral losses, margin compression, competition, regulatory and capital changes, cybersecurity risks associated with remote work, and disruption to critical third-party services. The filing provides no specific earnings or revenue guidance.
Important facts for investors to verify
- Whether COVID-19 forbearance borrowers resume payments and how extensions, defaults, delinquencies, and subsequent modifications affect credit losses.
- How the October 1, 2020 CECL adoption changes the allowance and unfunded-commitment liability relative to the estimated 120%–150% increase.
- Whether elevated loan-sale gains and refinance-driven volumes persist, and how loan sales affect recurring earnings, servicing, and asset growth.
- Trends in net interest margin, deposit pricing and retention, CD maturities, and the cost and effective duration of FHLB borrowings and swaps.
- Capital, liquidity, dividend, and repurchase-program developments, including the effect of any future capital distributions on the Association.
- Changes in Ohio and Florida housing and employment conditions, home-equity performance, and the valuation of collateral supporting the loan portfolio.