TFS Financial Corporation (NASDAQ:TFSL) is a leading financial institution that has demonstrated its ability to navigate the complex economic landscape, delivering solid financial performance amidst the recent challenges faced by the banking sector. With a strong focus on residential mortgage lending and home equity products, the company has leveraged its expertise to generate consistent results for its shareholders.
Financials
For the fiscal year ended September 30, 2023, TFS Financial reported annual net income of $75,250,000 and annual revenue of $304,996,000. The company's annual operating cash flow stood at $90,722,000, while its annual free cash flow reached $85,621,000. These figures underscore the company's financial strength and its ability to generate sustainable cash flows to support its operations and growth initiatives.
In the most recent quarter ended March 31, 2024, TFS Financial continued to demonstrate its resilience. The company reported net income of $20,713,000, a 30% increase compared to the same period in the prior year. This impressive performance was driven by a 24% increase in interest and dividend income, which reached $183,493,000 during the quarter. The growth in interest and dividend income was primarily attributable to a 53 basis point increase in the average yield on loans, as well as a 4% increase in the average balance of loans.
The company's net interest income also increased by $2,110,000, or 3%, to $71,378,000 during the quarter. This was despite a 43% increase in interest expense, which reached $112,115,000. The rise in interest expense was largely due to higher costs associated with certificates of deposit and borrowed funds, as the company actively managed its funding sources to mitigate the impact of the rising interest rate environment.
Credit Quality
TFS Financial's commitment to prudent risk management is evident in its credit quality metrics. As of March 31, 2024, the company's non-accrual loans stood at $35,253,000, representing 0.23% of total loans. The allowance for credit losses, which includes both the asset portion and the liability portion for off-balance sheet exposures, totaled $94,826,000, or 0.63% of total loans. These figures demonstrate the company's proactive approach to managing credit risk and maintaining a strong balance sheet.
Geographic Diversification
The company's geographic diversification also plays a crucial role in its success. As of March 31, 2024, approximately 57.6% of the combined total of its residential Core and construction loans held for investment were secured by properties in Ohio, while 17.6% were secured by properties in Florida. The remaining 24.8% were secured by properties in other states.
Liquidity
TFS Financial's liquidity position remains robust, with cash and cash equivalents totaling $594,334,000 as of March 31, 2024, representing a 27% increase from the $466,746,000 reported at the end of the previous fiscal year. The company's investment securities portfolio, classified as available-for-sale, stood at $520,172,000 at the end of the quarter, providing an additional source of liquidity.
The company's funding sources are also well-diversified, with deposits totaling $9,935,631,000 and borrowed funds of $4,955,438,000 as of March 31, 2024. The deposit base includes $1,261,663,000 in brokered certificates of deposit, which the company utilizes as a cost-effective funding alternative. TFS Financial also maintains significant borrowing capacity, with the ability to borrow up to $8,085,306,000 from the Federal Home Loan Bank of Cincinnati, the Federal Reserve Bank of Cleveland, and through arrangements with other institutions.
Capital Ratios
The company's capital ratios remain a source of financial strength, with the Association's Tier 1 (leverage) capital ratio standing at 9.79% and the Company's Common Equity Tier 1 Capital ratio at 19.05% as of March 31, 2024. These ratios exceed the regulatory requirements for a "Well Capitalized" institution, underscoring the company's commitment to maintaining a robust capital position.
Business Overview
TFS Financial's management team has demonstrated its ability to navigate the challenging interest rate environment through a multi-faceted approach. The company actively promotes adjustable-rate loans, such as its "Smart Rate" mortgage product, which provides borrowers with an interest rate lower than a traditional 30-year fixed-rate loan. Additionally, the company markets home equity lines of credit, which carry an adjustable rate of interest indexed to the prime rate, helping to manage its interest rate risk profile.
To further mitigate interest rate risk, TFS Financial utilizes interest rate swaps to extend the duration of its funding sources, such as short-term FHLB advances and brokered certificates of deposit. This strategy has allowed the company to lock in favorable long-term borrowing rates, helping to preserve its net interest margin in the face of rising interest rates.
The company's focus on residential mortgage lending and home equity products has been a key driver of its success. As of March 31, 2024, residential mortgage loans and home equity loans and lines of credit accounted for 77.6% and 21.9% of the company's total loan portfolio, respectively. This concentration in the residential real estate market has enabled TFS Financial to leverage its expertise and capitalize on the demand for these products.
Outlook
Looking ahead, TFS Financial remains cautiously optimistic about its future prospects. The company has not provided any specific guidance for the upcoming fiscal year. However, management has emphasized its commitment to maintaining a prudent risk management approach, diversifying its funding sources, and continuing to invest in technology and operational efficiencies to enhance its competitive position.
Conclusion
TFS Financial Corporation has demonstrated its ability to navigate the challenging economic environment, delivering solid financial performance and maintaining a strong balance sheet. The company's focus on residential mortgage lending and home equity products, coupled with its proactive risk management strategies and diversified funding sources, have positioned it well to weather the current market conditions. As the banking industry continues to evolve, TFS Financial remains committed to serving its customers and creating value for its shareholders.