TFS Financial Corp. Discusses its Loan Woes

Given the paucity of filings on Friday, we couldn’t help but pay attention to the 10-K that TFS Financial Corp. (TFSL) filed. The company actually tried to sneak it in late Wednesday — around 6:30 pm. But the SEC was closed for Thanksgiving by then so it wound up getting accepted on Friday morning.

Granted, TFS Financial isn’t exactly a household name. It’s the holding company for Third Federal Savings and Loan Association of Cleveland and operates 22 full-service offices in Ohio and 17 full-services branches in Florida. But we thought it provided an interesting snapshot of some of the issues that many banks of a similar size face — banks that don’t often make it into the headlines.

In the discussion about its market area, the company acknowledges that both Ohio and Florida have been hit particularly hard by the economic downturn. Citing both a —dramatic [increase] in foreclosures and reductions in employment rates and housing values, the filing adds that —The depressed housing market and employment uncertainties have created an aura of pessimism and apprehension, which is manifested in suppressed consumer housing demand.—¯ To make matters worse, TFS said that —a number of troubled financial institutions that compete for market share in Ohio and Florida have —significantly increased their interest rates paid to depositors.—¯ So at the same time that demand has dropped, competing for customers has just gotten more expensive, a combination that the filing said —could adversely affect future operating results.

There’s no question that the housing markets in Ohio and Florida were, indeed, hit hard. But after looking at the company’s web site (see the —About Us/History & Values page) and reading some of the company’s self-congratulatory marketing claims, they don’t square with what was going on pre-March 2009. The web page states: —We’re Strong, Stable and Safe: We’re Third Federal Savings and Loan. We’re known for our Guaranteed Lowest mortgage rates. We’re also the bank that doesn’t believe in putting customers at risk through questionable loan practices like sub-prime lending and zero-down mortgages. [emphasis added]

According to the filing, that wasn—t exactly the holding company’s policy until recently. Page 8 states that the company did offer —interest only residential real estate mortgage loans until March 11, 2009. As of September 30, 2009 (p.9), those loans accounted for $150.2 million on the company’s books.

Also on page 9, the company discusses its —Home Today program, adding that until March 27, 2009 the loans that were written under that program had —higher risk characteristics.—¯ According to the filing: —The Association did not classify it as a sub-prime lending program based on the exclusion provided to community development loans in the Office of Thrift Supervision’s Expanded Guidance for Sub-prime Lending.—¯ But the loans were problematic enough that on March 27, 2009, the company revised the Home Today underwriting guidelines —so as to be substantially the same as for our traditional first mortgage product.—¯ [Page 17 includes a sentence that underscores how much riskier the Home Today loans were: —At September 30, 2009, we had $291.7 million of loans that were originated under the Home Today program, 37.9% of which were delinquent 30 days or more in repayments, compared to 2.2% for the portfolio of non-Home Today loans as of that date.]

Finally, the company’s leaders predict that their loan-related woes are going to get worse before they get better. From page 17 of the filing:

Loans delinquent 90 days and over have continued to increase. Loans delinquent 90 days and over increased 47.9% to $255.7 million at September 30, 2009, from $172.9 million at September 30, 2008. The inability of borrowers to repay their loans is primarily a result of rising unemployment and uncertain economic prospects in our primary lending markets. Inasmuch as job losses and unemployment levels both continue to increase, we expect some borrowers who are current on their loans at September 30, 2009 to experience payment problems in the future. The excess number of housing units available for sale in the market today also may limit their ability to sell a home they can no longer afford. In Florida, housing values continue to remain depressed due to prior rapid building and speculation, which is now resulting in considerable inventory on the market and may limit a borrower’s ability to sell a home. As a result, we expect the level of loans delinquent 90 days and over will increase in the future.

That nearly 50% increase in delinquent loans may explain why the bank tried to file this so late on Wednesday night.