Prepared by Stephanie, Analyst at BAD BEAT Investing

Following our recent foray into wide coverage of the financial sector, we have begun to receive requests from our members for commentary on some real obscure names. One of these obscure names we were asked about was TFS Financial Corporation (TFSL). We think this bank is a buy after an overview of the key metrics of many undercovered names. Sector-wide, we have seen how low rates have weighed, and pressure on bond yields have kept these stocks down. However, in just the last few days, bond yields are moving and the outlook for banks has improved. Interestingly, the low rates had a small positive effect. Thanks to record low interest rates TFS Financial issued more loans in 2020 than any other year in the company‘s history. First mortgage originations grew from $1.8 billion in 2019 to more than $3 billion in 2020. That stuck out with us. Let us provide an overview of the company’s recent performance, and discuss why we see the stock as a buy

Headline performance

Despite huge loan growth and increased deposits, margins were low and the bank saw revenues decline. In Q4, the company reported a top line that fell from Q4 2019. With the present quarter’s revenues of $67.2 million, the company registered a 4.1% decrease in this metric year over year. Many other regional banks have seen flat to down revenues versus last year, while others saw increases. Overall, this was a decent result. The result was actually a $5 million beat against consensus, which was surprising. As we move down the lines of performance, the bank is in good shape. Given the difficulty of handicapping where results would land, we think this was pretty strong. This result was a decent end to a challenging fiscal year.

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The decline in revenues year over year was at least offset by that fact that there was no loan loss provisions this quarter. However, net interest margin got crushed, leading to the lower income we saw. The interest rate spread was 1.23% for the quarter and fell from 1.40% last year. Overall, TFS Financial reported net income of $13.6 million for the quarter compared to net income of $21.5 million for the quarter ended September 30, 2019. On a per share basis, this was just $0.05 this quarter. However, better days are ahead.

Loans and deposits grow

As you are likely aware, community-oriented banks are traditional lenders. Growth in loans and deposits is key for any bank, small or large, however. There has been mixed progress on loans and deposits.

Total loans, net of allowance and deferred loan expenses, and mortgage loans held for sale decreased $59.5 million to $13.14 billion at September 30, 2020 from $13.20 billion at September 30, 2019, reflecting the impact of increased loan sales that were made during the year. There was some notable growth, however, overall.

The home equity loans and lines of credit portfolio increased $57.3 million, and the residential core mortgage loan portfolio, including loans held for sale, decreased $95.0 million during the fiscal year. Commitments originated for home equity loans and lines of credit were $1.32 billion for the fiscal year ended September 30, 2020 and $1.69 billion for the fiscal year ended September 30, 2019.

Total first mortgage loan originations were $3.08 billion for the fiscal year which was huge. Of these, 40% were adjustable-rate mortgages and 10% were fixed-rate mortgages with terms of 10 years or less. Total first mortgage loan originations were $1.81 billion for the fiscal year ended September 30, 2019, of which 41% were adjustable-rate mortgages and 5% were fixed-rate mortgages with terms of 10 years or less.

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Deposits increased $459.2 million, or 5.2%, to $9.23 billion at September 30, 2020 from $8.77 billion at September 30, 2019. That was a nice move. The increase was the result of a $183.3 million increase in CDs, $78.6 million of growth in money market deposit accounts, a $134.0 million increase in checking accounts and a $63.9 million increase in savings accounts. Overall, the bank has made fine progress here. But what about asset quality.

A check on TFS Financial’s Asset quality

Loan originations and overall loan growth is a strength, but only if they are quality loans. What do we mean? Well, risky loans may offer a higher return but not if the debt cannot be repaid and turns to toxic debts. This quarter saw no provisions for losses. In addition, the bank’s overall asset quality, while stressed during the fiscal year, is improving as we head into 2021. This has us bullish.

Digging further, total loan delinquencies decreased $7.2 million to $28.2 million, or 0.21% of total loans receivable, at September 30, 2020 from $35.4 million, or 0.27% of total loans receivable, at September 30, 2019. That is very positive. Non-accrual loans decreased $17.9 million to $53.4 million, or 0.41% of total loans, at September 30, 2020 from $71.3 million, or 0.54% of total loans, at September 30, 2019. There was improvement from the sequential quarter on loans in forbearance as well. At September 30, 2020, there were $165.6 million, or 1.26% of total loans receivable, in COVID-19 forbearance plans compared to $230.3 million, or 1.76% of total loans receivable, at June 30, 2020. COVID-19 forbearance plans are not generally classified as troubled debt restructurings, and what we found positive was that troubled debt restructurings decreased $16.1 million to $141.3 million from a year ago.

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Bottom line on TFS Financial

Overall, the bank has been resilient during COVID. Originations were impressive. Low rates are here to stay, but the stock started catching a bid with the sector as it appeared that margins might begin to improve going forward. Asset quality has improved. The stock is attractive with the momentum in the sector in our opinion for a multi-year hold.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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