Company Overview and History
TFS Financial Corporation (NASDAQ:TFSL) is a leading financial institution that has weathered the storms of the past and is poised for continued success in the years ahead. With a rich history spanning over eight decades, the company has demonstrated its ability to adapt and thrive in the face of ever-changing market conditions.
Established in 1938 as Third Federal Savings and Loan Association of Cleveland, TFS Financial Corporation has grown to become one of the largest mutually-owned savings and loan associations in the United States. The company's journey took a significant turn in 2007 when it completed an initial public offering, becoming a publicly traded company. This transition allowed TFS to access capital markets, supporting its continued growth and expansion.
Challenges and Resilience
Throughout its history, TFS Financial has faced numerous challenges, including the collapse of the housing market and the subsequent financial crisis in 2008. The company's conservative lending practices and strong risk management helped it navigate this tumultuous period, emerging as a more resilient institution. Another key challenge has been managing interest rate risk exposure, given its focus on residential real estate lending. TFS Financial has employed various strategies, including the use of adjustable-rate loans and interest rate swaps, to mitigate the impact of market interest rate changes on its net interest income.
Despite these challenges, TFS Financial has maintained its status as a well-capitalized and profitable institution. The company's success has been driven by its core values of "Love, Trust, Respect, and a Commitment to Excellence." Additionally, TFS Financial has demonstrated a long-term commitment to community involvement, particularly in the revitalization of the Broadway-Slavic Village neighborhood in Cleveland, where its main office is located.
Risk Management and Capital Strength
One of the key strengths of TFS Financial Corporation is its commitment to prudent risk management. The company has consistently maintained a well-capitalized position, with a Tier 1 Leverage Capital to Net Average Assets ratio of 9.96% as of June 30, 2024, well above the regulatory requirement of 5.00% to be considered a "Well Capitalized" institution. This strong capital base has enabled TFS Financial Corporation to weather the challenges posed by the volatile economic environments of the past, including the 2008 financial crisis and the more recent pandemic-induced market disruptions.
The company operates a multi-disciplined risk management program that emphasizes stress testing and scenario analysis in the realms of interest rate risk, credit risk, market risk and liquidity risk. Key risk indicators are proactively monitored and reported throughout the organization. This approach has been particularly valuable in light of the failures of three large domestic regional banks during the first half of 2023, which negatively impacted consumer confidence and increased stress across the banking sector. Despite these challenges, TFS Financial remains committed to its mission, business model, and strategic approach, with capital ratios that remain a primary source of financial strength.
Loan Portfolio and Credit Quality
The company's loan portfolio reflects its conservative underwriting approach, with a strong focus on residential real estate and home equity lending. As of June 30, 2024, the amortized cost of the residential mortgage loan portfolio stood at $11.59 billion, representing 75.9% of the total loan portfolio. This includes $4.50 billion in adjustable-rate loans and $7.09 billion in fixed-rate loans. The Residential Core mortgage loans, which form the largest portion of the residential real estate portfolio, generally have low credit risk and do not include riskier loan types like sub-prime or no-documentation loans.
The home equity loan and line of credit segment, which totaled $3.59 billion, or 23.6% of the portfolio, has also been a strategic priority for the company, as it capitalizes on the growing demand for home-based financing solutions. While home equity lending generally carries higher credit risk than traditional residential mortgages, the company closely monitors and evaluates this portfolio, including conducting expanded loan-level reviews for home equity loans and lines of credit that are 90 days or more delinquent.
TFS Financial Corporation's commitment to risk management is further demonstrated by its proactive approach to credit risk monitoring. The company conducts regular reviews of its loan portfolio, with a particular emphasis on identifying and addressing potential problem loans. As a result, the company's non-performing assets ratio has remained relatively low, at 0.21% as of June 30, 2024, a testament to the effectiveness of its risk management practices.
Operational Efficiency and Growth Strategy
In addition to its strong risk management capabilities, TFS Financial Corporation has also demonstrated a keen focus on operational efficiency. The company's annualized non-interest expense to average assets ratio was 1.20% for the nine months ended June 30, 2024, reflecting its ability to maintain a disciplined cost structure while delivering high-quality service to its customers.
The company's growth strategy has been anchored in its expansion beyond its traditional markets of Ohio and Florida, with a presence in 24 other states and the District of Columbia as of June 30, 2024. This geographic diversification has helped mitigate concentration risks and provided the company with additional avenues for growth. However, it's worth noting that a large concentration of the Company's lending remains in Ohio and Florida. As of June 30, 2024, approximately 57.9% and 17.4% of the combined total of its residential Core and construction loans held for investment were secured by properties in Ohio and Florida, respectively. Additionally, 24.1% and 22.8% of its home equity loans and lines of credit were secured by properties in Ohio and Florida, respectively.
Financial Performance
TFS Financial Corporation's financial performance has been solid, with net income of $61.37 million for the nine months ended June 30, 2024, up from $55.70 million in the same period of the prior fiscal year. The company's return on average assets and return on average equity for the nine-month period were 0.48% and 4.22%, respectively, reflecting its ability to generate consistent and profitable growth.
For the most recent fiscal year ended September 30, 2023, the company reported revenue of $305.00 million, net income of $75.25 million, operating cash flow of $90.72 million, and free cash flow of $85.62 million. In the most recent quarter ended June 30, 2024, revenue increased to $194.94 million, a 23.0% year-over-year increase driven by a 15.0% increase in interest income on loans. Net income for the quarter was $19.95 million, a 14.0% increase primarily due to an increase in net interest income and decreases in marketing and other operating expenses. Operating cash flow for the quarter was $111.97 million, with free cash flow of $111.14 million.
Liquidity Position
TFS Financial Corporation maintains a strong liquidity position, which is crucial for ensuring the company's ability to meet its financial obligations and support its ongoing operations. As of June 30, 2024, the company had cash and cash equivalents of $560.43 million. The company's debt-to-equity ratio stood at 2.57, while its current ratio and quick ratio were both 1.65, indicating a healthy short-term liquidity position.
In addition to its existing cash reserves, TFS Financial Corporation has substantial additional borrowing capacity. As of June 30, 2024, the company had access to $3.77 billion in additional borrowing capacity, including $2.68 billion from the Federal Home Loan Bank of Cincinnati, $646.00 million from the Federal Reserve Bank of Cleveland Discount Window, and $445.00 million in overnight Fed Funds through various arrangements. This robust liquidity position provides the company with significant flexibility to manage its operations and pursue growth opportunities.
Product Offerings and Market Position
TFS Financial Corporation's primary business activities and revenue drivers are in residential mortgage lending and home equity lending. The company offers a range of products to meet diverse customer needs:
1. Residential Core mortgage loans: These form the largest portion of the residential real estate portfolio and generally carry low credit risk.
2. Smart Rate adjustable-rate mortgage loans: These loans have an initial fixed-rate period of 3 or 5 years before resetting annually.
3. 10-year fixed-rate first mortgage loans: Offering stability for borrowers seeking longer-term fixed rates.
4. Home equity loans and lines of credit: A significant portion of the company's lending activity, closely monitored due to its higher risk profile.
5. Other loans: A small segment including loans secured by certificate of deposit accounts and forgivable down payment assistance loans.
6. Mortgage loans held for sale: The company also originates and sells certain mortgage loans in the secondary market.
This diverse product mix allows TFS Financial to cater to a wide range of customer needs while maintaining a focus on its core competencies in residential lending.
Future Outlook and Conclusion
Looking ahead, TFS Financial Corporation remains well-positioned to navigate the evolving financial landscape. The company's strong balance sheet, prudent risk management practices, and focus on operational efficiency provide a solid foundation for continued success. Additionally, the company's commitment to innovation and its ability to adapt to changing customer needs position it for long-term sustainable growth.
Despite the challenges posed by the current economic environment, including the recent stress in the banking sector, TFS Financial Corporation has demonstrated its resilience and its ability to create value for its shareholders. The company's business strategy of operating as a well-capitalized and profitable financial institution dedicated to providing exceptional personal service to its customers, combined with its core values and community commitment, sets it apart in the competitive financial services landscape.
As TFS Financial Corporation continues to execute on its strategic priorities, investors can be confident in its ability to weather economic storms and emerge as an even stronger institution. With its strong market position in Ohio and Florida, coupled with its expansion into other states, the company is well-positioned to capitalize on growth opportunities while maintaining its commitment to prudent risk management and operational excellence.