TFS Financial Corporation: A Unique Shareholder-Friendly Bank (NASDAQ:TFSL)
TFS Financial Corporation (NASDAQ: TFSL) is a bank stock that we got excited about over a year ago when we gave the bank stock a Buy rating after reviewing the company’s key metrics noting the huge increases they had seen in the start-ups. We were impressed by the fact that TFS Financial originated more loans in 2020 than any other year in company history. That was something.
However, stocks were severely devastated in 2022, and banks were wiped out for about a year. Pretty ugly charts for the sector. Now fast forward here to October 2022. We think the sector is one of the best to buy as rates rise. While there is some macro risk of a possible recession due to the US Federal Reserve’s measures to combat inflation, we firmly believe that the ability to issue higher-yielding credit will prime the financial sector for years of strength. The margins should be expanded. Dividends should have fuel to be raised. There has been some pressure on the stock and operations at TFS Financial, but the stock is now yielding over 8%. This could be a warning sign of future pain, but assuming the yield holds and the bank also operates at average efficiency, the stock is a buy here and the stock is still attractive by valuation metrics.
Headline Q4 2022 performance
In the fourth quarter, the company reported results that beat consensus estimates. Based on strong loan growth and increasing net interest income, the company reported net income of $25.4 million compared to net income of $17.1 million for the third quarter of 2022. There were strong sequential increases. Earnings per share were $0.09, up from $0.06 in the second quarter and a year ago. That’s a nice improvement, driven by a stronger loan portfolio.
loans and deposits
Keep in mind that community-focused banks are more traditional lenders. What we mean is that they depend on credit and deposit growth, borrowing at a low rate and lending at a higher rate. This is what we call the net interest spread or margin, which we monitor closely. We also like to monitor changes in non-performing loans due to value adjustments or late payments. The latter has improved greatly since the crisis began, but is crucial. The company has worked hard to expand credit in this environment.
Loans for sale totaled $14.26 billion at the end of the quarter, up 14% from $12.51 billion a year earlier. Lending has been brisk in recent months, including first mortgages and home equity lines of credit. These rose about 10% year over year to $5.8 billion.
Although lending is healthy, we always want deposits to fund these loans. As with many of the other banks we cover, deposits slipped. Deposits were down $72.6 million, down nearly 1% year over year. They were $8.92 billion at the end of the quarter, up from $8.99 billion a year ago. The decline was the result of a $169.3 million decrease in certificates of deposit and an $82.3 million decrease in money market deposit accounts. On the other hand, both checking and savings account deposits combined increased by $178.6 million. Chairman and CEO Marc A. Stefanski commented in the press release:
Our efforts have resulted in a strong quarter and year of growth during a period of interest rate volatility…our $1.7 billion in loan growth this year is the result of our aggressive pursuit of new mortgage customers and opportunities. We continue to face the challenges of the current economic situation.
So the company has been expanding the portfolio aggressively, but given the concerns in the economy, we need to be sure that the credits are of high quality.
While credit activity is strong, there has been a notable decrease in the allowance for credit losses, but the overall credit situation has improved. Total loan defaults decreased $3.5 million to $21.2 million, or 0.15% of total loan receivables, compared to $24.7 million a year earlier.
We like that the total allowance for loan losses was $99.9 million, or just 0.70% of total loans. While there were more dollars in loan losses, the allowance last year was $89.3 million, or 0.71% of total loans.
One thing we noticed for most of the other banks we looked at is that loan loss provisions have increased for most banks. At the end of the financial year, the company actually had fewer credit risk provisions than a year ago thanks to more returns in the year. The total provision for credit losses for the full year was $1.0 million, compared to a $9.0 million loan — or so-called release of provisions — for last year. There are no provisions at the end of the fourth quarter, but we suspect that will change next year with the potential for a recession. Now with all that said, we saw an increase in profits. This was due in large part to better margins.
The net interest margin improved year-on-year as new loans were originated at higher interest rates. The interest margin was 1.88% for the year, a significant increase from last year’s 1.66%. This resulted in an increase in net interest income of $35.8 million, or 15%, to $267.4 million for the fiscal year. Great job.
Finally, we always like to look at key metrics like return on average assets and return on average equity. The higher the better for this of course. We were pleased to see the strong quarter-over-quarter improvements in these two metrics. The return on average assets rose to 0.65% from 0.46%, while the return on average equity rose to 5.53% from 3.75%. We like this improvement.
In order to keep paying dividends at the level it pays to shareholders, the “mutual holding company” owns more than 80% of the shares. Although this has happened in the past, there is no guarantee that this will happen again in the future. But it got the waiver for this year and paid out $1.13 in dividends. At the same time, the company is buying back shares to boost profits. The company notes that “dividends, managed portfolio growth and strategic share repurchases will be the focus for future capital deployment.”
We think this is exactly the kind of focus one would want from running a company like this. It has a unique structure but is a hidden gem in our opinion. We like it here, especially as the book value has increased.
Final Thoughts on TFS Financial
Originations continue to be strong. Asset quality has improved. Interest rates improved, and that helped spur higher-margin lending. Given the recent turnaround in interest rates, we believe investors should start buying as the stock has shrunk. This stock’s dividend yield is solid.
TFS Financial Corporation works for the benefit of shareholders. The structure of the company is unique, so we encourage potential investors to understand this structure. Overall, we love local banks here, but TFS Financial Corporation is a unique and solid choice at bargain prices.