TFS Financial Corporation (TFSL): Weathering Economic Headwinds with Steadfast Fundamentals

Published on March 14, 2025 | Ticker: TFSL

Introduction

TFS Financial Corporation (TFSL) is a holding company that operates through its principal subsidiary, Third Federal Savings and Loan Association of Cleveland. The company has a long and storied history, having been founded in 1938 by Ben and Gerome Stefanski. Over the past eight decades, TFS Financial has evolved into a leading provider of retail consumer banking services, including mortgage lending, deposit gathering, and other financial products, primarily serving customers in Ohio and Florida.

The company's unwavering commitment to its founding principles of "Love, Trust, Respect, and a Commitment to Excellence" has been the driving force behind its success. This unwavering focus on its core values has allowed TFS Financial to navigate various economic challenges and emerge as a trusted financial institution in its local communities. Throughout its history, TFS Financial has demonstrated remarkable resilience, particularly during the turbulent economic conditions of the 2008 financial crisis. The company's conservative underwriting and risk management practices enabled it to weather this storm without significant losses, ultimately emerging as a stronger institution.

Company History and Milestones

In 2007, TFS Financial Corporation reached a significant milestone by conducting an initial public offering and becoming a publicly traded company listed on the NASDAQ exchange. This transition provided the company with access to additional capital and resources, supporting its continued growth and expansion efforts. Despite these changes, TFS Financial has remained true to its roots, prioritizing exceptional customer service and maintaining a strong risk management culture.

Risk Management and Loan Portfolio

One of the hallmarks of TFS Financial's success has been its prudent risk management practices. The company's loan portfolio is predominantly composed of single-family, owner-occupied mortgages, with an average credit score of 777 as of December 31, 2024. This conservative approach has enabled TFS Financial to maintain a low-risk profile, even during periods of economic uncertainty.

Financials

The company's financial performance has been consistently strong, with annual net income of $79.6 million, annual revenue of $303.2 million, annual operating cash flow of $88.6 million, and annual free cash flow of $85.5 million as of the fiscal year ended September 30, 2024. This solid financial foundation has allowed TFS Financial to invest in strategic initiatives and deliver value to its shareholders.

The company's revenue remained relatively stable, with only a slight decrease of 0.6% from the previous fiscal year. Net income increased by 5.8% compared to the prior fiscal year, driven by a decline in non-interest expense and a release of the allowance for credit losses. Operating cash flow decreased by 2.3% year-over-year, primarily due to changes in working capital. Free cash flow remained relatively flat compared to the prior fiscal year.

For the most recent quarter, TFS Financial reported revenue of $186.8 million and net income of $22.4 million. Quarterly operating cash flow and free cash flow figures were not available.

Revenue Diversification

One of the key drivers of the company's success has been its focus on diversifying its revenue streams. While mortgage lending remains a core component of its business, TFS Financial has also cultivated a robust home equity lending portfolio, which accounted for $4.12 billion, or 27% of its total loan portfolio, as of December 31, 2024. This diversification has helped the company mitigate risks and capitalize on various market opportunities.

Cost Management

The company's disciplined approach to cost management has also been a significant contributor to its financial performance. TFS Financial has consistently worked to optimize its expense structure, with its non-interest expense to average assets ratio declining from 1.30% in fiscal year 2023 to 1.20% in fiscal year 2024. This focus on operational efficiency has enabled the company to maintain a competitive advantage in its markets.

Liquidity

Despite the economic challenges posed by factors such as rising interest rates and market volatility, TFS Financial has demonstrated its resilience. The company's Tier 1 leverage capital ratio stood at 9.96% as of December 31, 2024, well above the regulatory requirement for a "well-capitalized" institution. This strong capital position has provided the company with the flexibility to weather economic storms and continue investing in its growth initiatives.

TFS Financial maintains a solid liquidity position, with a debt-to-equity ratio of 2.45. As of December 31, 2024, the company had $4.66 billion in total borrowings, primarily from the Federal Home Loan Bank of Cincinnati. Additionally, TFS Financial has $594 million in available borrowing capacity from the Federal Reserve Bank of Cleveland Discount Window and $395 million in available Fed Funds arrangements with other institutions.

The company's current ratio and quick ratio both stand at 28.46, indicating a strong ability to meet short-term obligations.

Future Outlook

Looking ahead, TFS Financial remains cautiously optimistic about its future prospects. The company's management team has expressed confidence in the strength of the housing market, particularly in its core markets of Ohio and Florida, and believes that the company is well-positioned to capitalize on new opportunities.

Business Overview

TFS Financial Corporation, through its subsidiary Third Federal Savings and Loan Association of Cleveland, operates as a federally chartered savings and loan association. The company's primary focus is on retail consumer banking, offering a range of services including mortgage lending, deposit gathering, and other financial products.

The company's loan portfolio is primarily composed of residential real estate lending, which accounts for over 90% of total loans. The key products in this segment include:

1. Residential Core Mortgage Loans: Representing 72.8% of total loans as of December 31, 2024, this category includes traditional 30-year fixed-rate mortgages and the company's proprietary "Smart Rate" adjustable-rate mortgages. The Smart Rate product offers borrowers an interest rate that is initially fixed for 3 or 5 years, then resets annually, helping the company manage its interest rate risk exposure.

2. Residential Home Today Loans: A smaller portion of the portfolio (0.3%), these loans were part of an affordable housing initiative targeted at low- and moderate-income homebuyers, primarily originated before 2009.

3. Home Equity Lending: This segment includes both home equity loans (4.0% of total loans) and home equity lines of credit (22.8% of total loans). While carrying higher credit risk than first mortgage loans, the company closely monitors this portfolio and conducts expanded loan-level evaluations on delinquent accounts.

4. Other Lending: A small portion (0.2%) of the loan portfolio consists of other loans, such as those secured by certificate of deposit accounts and unsecured down payment assistance loans.

Geographic Diversification

While TFS Financial's lending activities are primarily concentrated in Ohio and Florida, the company has been actively expanding its footprint. As of December 31, 2024, Ohio and Florida accounted for 58.2% and 17.3% of the combined residential core and construction loan portfolios, respectively. Additionally, 23.1% and 22.3% of home equity loans and lines of credit are secured by properties in Ohio and Florida, respectively. The company has expanded its lending activities to 25 other states and the District of Columbia to diversify its geographic concentration risk.

Risk Management

TFS Financial emphasizes prudent underwriting practices, as evidenced by the average FICO score of 777 and average loan-to-value ratio of 67% for newly originated first mortgage loans during the most recent quarter. The company actively manages various risks, including interest rate movements, credit quality, liquidity, regulatory changes, and competition. Strategies to mitigate these risks include maintaining a well-capitalized position, growing adjustable-rate and shorter-term fixed-rate loans, marketing home equity lines of credit, extending the duration of funding sources, and selectively selling fixed-rate mortgage loans.

Conclusion

In conclusion, TFS Financial Corporation has proven itself to be a resilient and adaptable financial institution, with a long-standing track record of delivering consistent financial performance and value to its shareholders. Its unwavering commitment to its core values, prudent risk management practices, and strategic initiatives have positioned the company to navigate the current economic landscape and continue its growth trajectory. With a diversified loan portfolio, strong liquidity position, and expanding geographic presence, TFS Financial is well-equipped to face future challenges and capitalize on emerging opportunities in the retail consumer banking sector.

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