TFS Financial Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

TFS Financial Corporation, a bank holding company, primarily operates through its subsidiary, Third Federal Savings and Loan, providing both retail and commercial banking and lending services mainly within Ohio and Florida.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

TFS Financial Corporation, operating primarily through its subsidiary, Third Federal Savings and Loan Association, stands as a regional banking institution with a focus on community-centric financial services. The bank’s primary operations center on traditional lending activities, including residential and commercial real estate mortgages. It also provides retail banking services to individuals and small businesses throughout Ohio and Florida. These operations include generating deposits, offering savings and checking accounts, and offering ancillary financial services.

Business Explanation

TFS Financial Corporation generates revenue mainly through:

  1. Net Interest Income: This is the difference between the interest earned on loans and mortgages and the interest paid on deposits. This is the primary source of income for the company. The rate paid on interest can fluctuate and that can affect the margins.
  2. Fees and Commissions: Derived from services such as account maintenance, loan origination, and transaction fees which can vary depending on economic activity.
  3. Non-interest Income: This includes profits from activities such as the sale of assets.

The banking industry is currently experiencing a volatile period with rates rising and falling, leading to increased uncertainty. The recent banking crisis has created a negative sentiment and has caused clients to withdraw their money. If large numbers of clients withdraw their money it will negatively affect the bank’s loan portfolios and income.

TFS Financial operates in a highly competitive environment, primarily in Ohio and Florida. It competes with other regional and large national banks as well as credit unions. This landscape demands efficiency and an ability to provide competitive loan terms. Some competitors have a larger balance sheet and better funding advantages which makes it difficult to compete on price for TFS.

### Financials Analysis

Let’s look into financials of the company based on the most recent report which is 10-Q for September 30, 2023:

*   **Net Interest Income (NII)**

    NII increased for the nine months ending September 30, 2023, reaching $629.6 million compared to $589 million for the same period in 2022. The increase was primarily due to higher interest rates and higher interest on securities. 
*   **Provision for Credit Losses**
      Provisions for credit losses were $2.2 million for the nine months ending September 30, 2023 compared to $88.3 million for the same period in 2022.    *   **Non-Interest Income**
    Non-interest income has shown an increase driven by profits from investment securities. For the period, this increase is around 25 million compared to 2 million for the same period last year.
*   **Operating Expenses**
    Operating expenses have also increased, from $282.9 million in the first 9 months of 2022 to $306.7 million in 2023.    *   **Net Income**
    Net income for the company has increased from 335 million to 356 million YoY.
*   **Cash and Cash Equivalents**:
      The company had cash and cash equivalents of $1.1 billion as of September 30, 2023, a decrease from $1.4 billion at the end of fiscal year 2022.
    
*   **Investments**:
     The value of investments stood at $6.27 billion as of September 30, 2023 compared to $6.19 billion for year end 2022.
   
*   **Loans**:
   Loans portfolio totaled $16.4 billion as of September 30, 2023, down slightly from $16.7 billion as of September 30, 2022.
*   **Deposits:**
Deposits stood at $15.9 billion on September 30, 2023, compared to $16.4 billion at the end of 2022.
  
*   **Equity:** 
   Shareholders' equity came out to be about 2.1 billion. The company has a tangible book value per share of around 22.80 which seems good.
  
*   **Debt to equity:** The company's D/E ratio is near 70% which is typical for banks. This isn't an issue.

### Moat Assessment

TFS Financial doesn’t have a significant moat.

  • Switching Costs: The company benefits from the inconvenience to the customer while switching banking service provider which is a type of switching costs moat. But this moat is weak as other similar banks provide pretty similar services.

  • Scale Advantages: TFS Financial, while large for a local bank, is smaller than a number of its competitors, particularly the national giants, and can’t take advantage of scale as much as the competitors. Also, there are not many advantages for the bank from operating as a large size bank as compared to a local bank.

Moat Rating: 2 / 5 - Although the company has some switching costs, they are not very strong and the company overall lacks a good moat.

### Legitimate Risks that Could Harm Moat and Resilience

  • Rising Interest Rates: Increased interest rates can reduce the demand for loans. It can also cause difficulty for the bank to find funds since the interest rates provided by its deposits are relatively low.
  • Economic Downturns and Increased Loan Default: A recession or economic downturn can lead to increase in delinquencies, defaults and foreclosures which could significantly affect the bank’s income.
  • Competition: The banking industry is intensely competitive. Competitors may have a higher brand value or scale advantage.
  • Regulatory Changes: The banking sector is heavily regulated. Changes in regulatory requirements might hurt the company’s profits. The change in interest rates can be unpredictable and could create major profitability problems. * Changing Consumer Preferences: Customers are increasingly becoming more inclined towards digital banking and other forms of financing. If a bank does not provide these services, they may lose their client base. * Technology: The company has to be careful about not investing too heavily into one technology. * Acquisitions: Companies that overpay on acquisitions create a large financial burden for themselves.

Resilience: The bank’s financial health will greatly depend on the economic environment and the bank’s ability to keep its interest margins at stable levels. It also requires that the company’s loans are of good quality and don’t end up as losses.

### Understandability

The business model of the bank is relatively straightforward. However, the complex details of finance and accounting and the uncertainty in forecasting future financial performance makes it a little difficult to understand.

Understandability Rating: 2 / 5 - While the general concept is simple, the complexity of finance is not easy to grasp and requires a decent understanding of financial terms and economics which the common investor might not possess.

### Balance Sheet Health

The company currently has a low debt, enough assets and reasonable solvency.

Balance Sheet Health Rating: 3 / 5 - The company appears to be in decent financial health. They are a bank so they are exposed to various market risks.