TFS Financial Corp Management Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: TFS Financial Corporation (TFSL)
by: SA Transcripts

TFS Financial Corp (NASDAQ:TFSL)

Q1 2014 Earnings Call

January 31, 2014 10:00 am ET

Executives

Marc A. Stefanski - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Nominating Committee

Paul J. Huml - Chief Operating Officer and Chief Accounting Officer

David S. Huffman - Chief Financial Officer, Principal Accounting Officer and Secretary

Meredith S. Weil - Chief Operating Officer of Third Federal Savings & Loan

Analysts

Matthew Breese - Sterne Agee & Leach Inc., Research Division

Howard Henick

Kevin O'Keefe

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Joseph Albert Stieven - Stieven Capital Advisors, L.P.

Michael Lee

Operator

Welcome to the TFS Financial Corporation's First Fiscal Quarter Earnings Conference Call and Webcast. Hosting the call today from TFS Financial is Mr. Marc Stefanski, Chief Executive Officer. He is joined by Mr. Dave Huffman, Chief Financial Officer; Ms. Meredith Weil, Chief Operating Officer of Third Federal Savings; and Mr. Paul Huml, Chief Accounting Officer. Today's call is being recorded and will be available for replay beginning at 2:00 p.m. Eastern Standard Time. The dial-in number for the replay is (800) 723-7372. [Operator Instructions]

Some of the information provided during the conference call may contain statements of future expectations and other forward-looking statements. These expectations are based on the management's current views and assumptions and involve known and unknown risk and uncertainties. It is possible that the company's actual results and financial condition may differ, possibly materially, from anticipated results and financial condition indicated in these forward-looking statements. For discussion of some of the risks and important factors that could affect the firm's future results, see Risk Factors in the company's latest Annual Report on www.thirdfederal.com. TFS Financial Corporation assumes no obligation to update any forward-looking information provided during the conference call.

It is now my pleasure to turn the conference over to Mr. Marc Stefanski. Sir, you may begin.

Marc A. Stefanski

Thank you very much. Good morning, everyone, welcome to our first quarter -- first fiscal quarter of 2014 earnings conference call. I'd just like to start off by letting you all know, even though it's been freezing cold here in Cleveland and snowy, at Third Federal, it's been nothing but sunshine and blue skies. As you probably already know, we had a $16 million quarter in profits and earnings. Overall, our margin maintained a strong 2.47%, delinquencies continue to fall overall, the balance sheet has been transformed -- continues to be transformed to our 10-year and ARM products. Over 50% of our balance sheet is now changed, and that's a humongous change since the year 2010. So in a very short period of time, we continue to transform our balance sheet to more -- to be more interest rate-risk friendly.

We also, this past quarter, were able to repurchase over $2 million in shares. The Federal Reserve had a non-objection to that continuation of a program that was started several years ago. And we were able to transfer dividend up, $85 million from the Thrift to the holding company as our regulators thought that, that was a favorable thing. If any of you recall, we did move that, we downstreamed that money to fortify the Thrift from a previous regulator's concern about how the Thrift was being operated and the unknowns in the future. But again, sunshine and blue skies since all these good things have happened this past quarter, and we look forward to continuing to grow our balance sheet, to take it -- we're going to take -- continue to take our three-pronged approach to attacking the market: one is growing our balance sheet, the second is paying dividends and the third, of course, is buying back our stock.

Paul, can you -- you have specifics of the stats in the deck that maybe you want to go over a few pages?

Paul J. Huml

Okay, great. Thanks, Marc, and welcome, everyone. As Marc mentioned, a fairly strong quarter for us. And a number of the first few pages of the slides are more of a background of our strategic approach and a snapshot of where we do business. So we're going to jump right to Page 6, which is more of the financial highlights, and certainly, Marc mentioned some of those numbers already, the net income of $16 million and some of the improving and better asset quality numbers. And a lot of those improvements reflects itself in the provision for loan loss. As you see the number, we certainly got that number down. If you look at where we were last year, $18 million for the quarter, this quarter we're at $6 million. And you can definitely see the trend in the far right for the fiscal year which ended September 2013. It's the provision that's definitely gone down and we see continued improvement on the provision line with help of net income.

And really, on the next slide, gives you more of a picture of where we've come from the quarterly net income trends, as well as where we were in a fiscal year standpoint. So that certainly is good news as we're moving across, getting to a consistent earnings trend. Page 8 really just gives again, our strong capital position.

Page 9 really gets into some of the things we've done from our deposits, where we've been able to get our CDs to reprice at a lower rate, still maintain the deposits. We've sort of augmented those with some federal home loan bank advances and also brokered CDs, but we've been able to drive the average cost down continually over the last few years.

Slide 10 really gives a little more detail on our production for mortgage loans. And as Marc mentioned, really trying to move more towards from an interest rate risk management standpoint, trying to generate more adjustable rate mortgages and more of the shorter term 10-year fixed-rate mortgages. So you can see, since those products have been focused on the last couple years, we've really increased the amount of production that's coming from those categories.

And really to give you a snapshot on Page 11 of how the portfolio -- the first mortgage portfolio has been transformed. If you go back -- which the graph on the left is the first mortgage portfolio at September 2010, which was basically 85% longer-term fixed-rate loans. And by the time we get to December 31, 2013, that's -- through the focus on ARMs and 10-year fixed, that 85% numbers dropped to 50%, and can you see the ARMs has gone from 14% up to 38%. So a big transformation in just a couple years of -- from an interest rate risk standpoint trying to focus on the ARMs and the 10-year fixed rate product.

Page 12 really goes through the delinquencies and continued improvement on those numbers. And that's really graphically shown on the next page, 13, where all the trends are improving delinquencies, nonperforming assets and the troubled debt restructurings, which brings us to our favorite topic, the regulatory status and where we're at. As Marc mentioned, we were able to complete -- we got a written non-objection from the Fed to complete our 2 million shares during the previous quarter, which was completed. We were able to move $85 million from the Thrift up to TFS Financial. That doesn't impact overall consolidated numbers but it does move some of the capital from the Thrift up to the holding company to get towards our long-term goal of utilizing that capital for dividends and buybacks. We still come under the guise of the MOU and the Fed, and we're certainly focused on getting that MOU lifted as soon as possible. But until we do, certainly, any future buybacks or dividends are still subject to their non-objection. But certainly, an improved quarter and a lot of positive things did happen during the quarter.

So with that, that's my report.

Marc A. Stefanski

Thank you, Paul. And we can open it up for questions right now, if you like. Steve?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Matthew Breese from Sterne Agee.

Matthew Breese - Sterne Agee & Leach Inc., Research Division

My first question is around the buyback. I think we were all certainly pleased to see that the old authorization was completed this quarter, but I think the obvious question is, why not another repurchase authorization?

Marc A. Stefanski

Well, I -- we didn't say we weren't working on that and that certainly is subject to the Fed giving us a non-objection. So there is red tape that goes along with that. So it's not like you just submit it one day and the next day they say, "Okay." It's a process and so, we continue to work with them and their process.

Matthew Breese - Sterne Agee & Leach Inc., Research Division

So is it fair to assume that there has been at least a submission for a non-objection? If we look back to your 10-K, dated November 18, the repurchase plan was completed at that date. So I think the question is, was there -- were you turned down?

Marc A. Stefanski

Well, I think our focus -- they have 45 days to respond to any type of request. They also have the ability to ask for further questions and extend that process if need be. Our focus at this point is getting the MOU lifted so we don't have go through the process of asking the request for written non-objection. So at this point, that's our main focus of getting the MOU lifted so we don't have to go through the type of process involved in the written non-objection.

Matthew Breese - Sterne Agee & Leach Inc., Research Division

Right. I understand. It's just last quarter, from the conference call, it was clear that you were confident in the fundamentals of the bank, the earnings trajectory and were going to pursue buybacks, regardless.

Marc A. Stefanski

I think our confidence remains there. Unfortunately, we have a regulator that has not signed off on that as of yet. We're certainly working to get that finalized.

Matthew Breese - Sterne Agee & Leach Inc., Research Division

Okay. And then on the upstream of capital to the holding company, which was another positive this quarter. Just curious as to why that happened at this point, one? Two, did that require any sort of regulatory authorization, did the regulator sign off on that? And then lastly, you mentioned that, that was part of the $150 million that was initially downstreamed in 2010 as part of the first MOU. Is that $85 million segmented to that $150 million? And can we expect more from simple net income being upstreamed?

Marc A. Stefanski

The $85 million is tied to a regulatory guideline that says that Thrift can up dividend up to its holding company, current calendar year to date earnings plus its 2 previous calendar years. So as you get towards the end of the calendar year, you need to make a movement or the second oldest year sort of drops out of play. So that's really more of a regulatory calculation of what was available under those guidelines to move capital from the Thrift up to the holding company.

David S. Huffman

And Matt, that wasn't necessarily an automatic, either. With the regulatory process, we needed to get the blessing of both the Fed and the OCC.

Matthew Breese - Sterne Agee & Leach Inc., Research Division

So a positive sign there. Maybe touching on just the operations of the bank itself. The margin was up this quarter, but obviously, there's been a lot of interest rate volatility over the past few months. And I was hoping just to gain some insight as to how you're thinking about the trajectory from here?

Meredith S. Weil

Matt, it's Meredith. What we've been really successful at is expanding our refinance volume by going to new markets. And we continue to pursue that objective. The 10-year fixed-rate product, as it's been mentioned earlier on the call, has really attracted a new population. I think the other trend that we're seeing is people who haven't been able to refinance in the past because of the property value decline. As we've seen property values increase, there are new people in the marketplace. So we've been able to continue to grow the business, and we expect that to continue. We've also seen the purchase market grow a little bit. It's not to levels of prior to 2008, but we definitely are seeing much improvement over the last few years in the purchase market. So we expect that will continue also. And really the goal has been to maintain the margin. We've also been able to reprice a lot of CDs. On that repricing, we'll slow down but we've been shifting the deposit side of the balance sheet into other tools that will help us manage the interest rate risk.

Matthew Breese - Sterne Agee & Leach Inc., Research Division

So projection wise, think about a flat margin?

Meredith S. Weil

That would be my expectation.

Marc A. Stefanski

And Matt, if you look at that historically, that's not too bad for Third Federal and how we operate. In fact, it's excellent.

Operator

Our next question comes from Howard Henick from Scurlydog Capital.

Howard Henick

I have a question that's a little bit though off the beaten track here. A lot of your competitors in the mutual MHC space have taken advantage of the MHC structure by merging with other mutuals, because basically, you're getting the equity practically for free. Kearny just did a deal the other day. East Boston Savings Bank has some deals. Have you ever looked at these? And does your MOU keep you from even attempting to do these type of deals, which I think are very lucrative and really builds stockholder value in the long run?

David S. Huffman

Our MOU does not prevent us from doing that. We struggle with cultural issues. We've looked at a few companies, talked to few people. But at the end of the day, we feel that we can better serve the market and grow our company and actually, eventually, once we get the MOU lifted, give better returns by growing organically, than we can with a merger.

Howard Henick

Even -- I'm not talking about stock companies, I'm talking about mutuals where basically you're not paying anything for the equity.

David S. Huffman

No, I understand that, and that's absolutely true. The problem is, is culturally, we have to merge the companies and that's a pain in the neck. It takes our focus off of our real business, which is growing our company. And by the time you get done with the social issues -- plus we're not geared up for that. We haven't done a merger probably since 1976. So we feel that we can grow our company organically more effectively and faster, better and easier, not disturbing our culture or having the headaches that go along with mergers to effectively get a better return for our shareholders.

Howard Henick

Okay. And you talked to Matt about your primary mission being getting the MOU lifted, which I kind of agree with. Do you have any estimate on timing? And if you're focusing on getting the MOU lifted, can I assume that you're not going to make an attempt on either initiating a dividend by doing more buybacks until the MOU is lifted? Or are these simultaneous tasks?

Marc A. Stefanski

I think they're simultaneous equations. But we cannot -- we're not really allowed to discuss when a regulator might be coming in to do an overview of the company.

Operator

Our next question is from Kevin O'Keefe from Brown Advisory.

Kevin O'Keefe

I hope you'll bear with me for a moment, but as a very significant stakeholder in your institution, I would submit that it's still about 23 degrees and cloudy with the potential for nothing but blue skies and sunshine in time. And that would be when you're not under the regulatory cloud of an MOU and you're allowed to resume what has been a very excellent history of capital return. I look at your institution and see that your excess capital exceeds minority tangible book and I can't in my mind say that things are blue skies and sunshine until you're allowed to do what you choose with your excess capital. And back to the point of M&A with the previous caller, the math may work, but I think in the meantime, I think there's no more compelling math that you can do than acquiring your own stock at less than 50% of your minority tangible book. And I'm very hopeful that the $85 million is a signal that once you're out from under the MOU, you'll be very aggressive like you have been within your own history and acquire your own shares of less than 50% of minority.

Marc A. Stefanski

That's a pretty good synopsis.

Kevin O'Keefe

I don't even know if there was a question in there. I do have one question though. Matt Breese was asking about the $150 million that was sent down, and you guys mentioned that you did the -- your 2-years plus on the dividend up. I guess more directly, if you were lifted from the MOU, or even if you're under the MOU, what would it take to extract that $150 million special capital contribution down to the bank sub.

David S. Huffman

Well, Kevin, this is Paul. I think whatever you need to do if you try to get that back is going to require regulatory approval to get it. It'd be outside of the normal parameter.

Kevin O'Keefe

Okay. And that would be the case, whether or not there's an MOU?

Paul J. Huml

Yes.

Kevin O'Keefe

Okay, the second question is just with regard to the MOU, I think last year when we met with you all, you were thinking -- you had some internal risk management policies that needed to be updated that you felt were, frankly, a valuable thing to do and you were working hard on it. I'm just curious if there have been any updated discussions with the regulators as to what it will take to satisfy the MOU and get you out from under it. Have there been a new set of requests? Or is the process to resolution just extending out?

Meredith S. Weil

The process really has been ongoing. We continue to have communication with the regulators. The regulators, their exam cycle is typically a year and so, there's just a process that we need to go through. Throughout the past, really, few years, we've been building on our enterprise risk management process, and I think we all feel like we're in a really good place, and it's just a matter of time.

Kevin O'Keefe

And when was your last yearly exam?

Meredith S. Weil

That is what we are not permitted to share.

Kevin O'Keefe

Okay. All right. Well, we're all enthusiastic and we're excited waiting for you to be able to return capital. And just as a shareholder that's been involved for a while now, I would just encourage you to continue to be aggressive. And once we see you out from the MOU and back, buying back your own company at less than 50% of tangible book, I will get back on this call and tell you that it's -- that in my opinion, it's all blue skies and sunshine.

Marc A. Stefanski

All right. Well, thanks very much. But you know there are other parts for our business and just growing our business is an important third part to the -- to our strategy. And just last week alone, we took in $100 million worth of applications, which, in this environment, in this market, I mean, that's pretty significant and it goes to Meredith's point that the real estate market is improving. And that some people who a couple years ago couldn't or wouldn't qualify for a refinance, and maybe didn't want to extend themselves on a purchase, they're in the market and that their refinance capability is there. So we're not sitting on our hands by any means on any front at any time under any circumstances.

Kevin O'Keefe

Yes, and I don't mean to sound overly critical because fundamentally, things are going quite well. But from my side of the desk, unfortunately, you probably -- you're not going to get any credit for what you're doing awesome, I'll just complain about it when it goes the opposite direction. Fundamentally, I agree with you, things are going quite well. But you do have a common stock that we all feel is undervalued, so that's what we're focused on.

Operator

And our next question comes from Rick Weiss from Boenning.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

I was wondering if -- what do you think is -- excluding the MOU, I know it's hard to do that, but would be the optimal capital levels that you would like to run your business at? And just I guess a tangible level would -- to simplify it.

Paul J. Huml

This is Paul. And we've never put out a number of there what we're trying to this strive for. I think the regulatory position has changed so much over the last few years that there's -- you can never have too much capital. And so we'd certainly feel that we have excess capital, but to put a number out there at this point in such a changing environment, it probably does not make a lot of sense. I think we continue to evaluate that as we move along and certainly we feel we can work it down from 16. But to say, "It's a magic number," we've never done than that. We've always tried to keep at least double-digit capital positions. But there's a lot of regulatory changes from capital out there and until we get to a stable economy, whatever that may be, it's tough to put a number on and say, "This is the absolute number we're shooting for."

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. And I guess when you're talking about interest rate risk, would you be -- I see you're going away from the fixed -- or the 30-year fix to shorten it up, would you still be liability sensitive at this point, would you think?

David S. Huffman

Yes, we are.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

Okay. And then, on your -- I guess the core mortgage business, are you doing like, good production? Is it -- do you focus on, I guess, conforming mortgages? Or do you do jumbos as well? And do you have like an emphasis in, like either Ohio or Florida that's different from each other?

Meredith S. Weil

We are producing conforming mortgages but we also have some of our own unique products. And we do have some differences in our different geographies, more just a matter of how we expand. Currently, in our -- out of our branch footprint market, on our additional states, we only offer our ARM products and our 10-year fixed-rate product, we don't offer our conforming product. But we're constantly looking at what is the best mix of products that we offer in the different markets.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

And how's the -- I guess your -- the customer demand for that? Or because the rates are still historically pretty low and yet, you're still seeing good demand for the ARMs, is that right?

Meredith S. Weil

We are.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

And would that be the hybrids, like the 7/1, 10/1, or 5/1 product?

Meredith S. Weil

We offer a 5/1 and a 3/1 product. The majority of our volume comes in the 5/1.

Richard D. Weiss - Boenning and Scattergood, Inc., Research Division

5/1. Okay, got it.

Operator

Our next question comes from Joe Stieven from Stieven Capital.

Joseph Albert Stieven - Stieven Capital Advisors, L.P.

Let me not beat around the bush compared to my good friend, Kevin, but I'll be at a bit more direct. The -- you guys have too much capital. And we, as investors, I think we strongly believe and endorse you guys, don't wait for this MOU because it seems like you keep getting pushed off or given the stiff arm. And not only are we investors, unfortunately, there is a perception that investors are bad people, but we're taxpayers and citizens and customers. And it's just we would strongly endorse you, just getting the repurchase approved the other way and keep working on the MOU but dual trash [ph] that this has just been such a lengthy, ridiculous process, it's frustrating for us. And not just investors, but customers, citizens, taxpayers, it's ridiculous. So I -- we would strongly endorse you do anything possible to get this process going. And then I -- the second thing, keep -- you're doing a nice job on the fundamentals, we appreciate it.

Operator

Our next question is from Michael Lee from Hypotenuse Capital.

Michael Lee

So I hate to kind of beat you over the head on this one more time, but I just want to ask a clarifying question. You said you think it's a simultaneous process, can we get a little more of a definitive answer? Have you pursued the non-objection for an additional repurchase?

Paul J. Huml

Mike, this is Paul. At this point, as I've said, the focus is on getting the MOU lifted. And we appreciate the patience that everyone has shown. Our goal is to get the MOU lifted. We can go through the written non-objection track. At this point, we feel it's in the best interest of the company, of the shareholders to focus on getting the MOU lifted. And to drag everyone through a written non-objection process does not -- is not productive at this point, as we focus on getting the MOU lifted.

Michael Lee

And I guess, then the question becomes, why? Because I mean so you have to -- I mean I don't know what's involved in getting this non-objection, it sounds like you have to write a letter. I mean, is there a bunch of -- there's too much paperwork to fill out? Or I mean, just help us understand why that's not a viable strategy at this point in time?

Paul J. Huml

Well, it's not an automatic you do it, and 45 days later, it happens. There's questions that come up. There's different documents that come through. And as you're going through that process, you're diverting the regulators from doing -- working on the other side of reviewing the issues that caused the MOU in the first place. So the question is, do you want them to focus totally on getting the MOU lifted? Or do you want partial, little non-objection without the overall buy in? And that we feel, is just nonproductive. If we feel that it's gotten to a point where it's not being productive getting the MOU lifted, then we'll certainly focus more on the written non-objection.

Michael Lee

Okay, so that makes a little more sense. I guess, I can appreciate why you would take that tack, but everybody on this call would love to see you do both. But if you're telling us that one gets in the way of the other, then I think I understand the rationale behind that. My follow-up question would be then, would the board consider authorizing a new repurchase plan even though you do not have the MOU lifted yet, or a written non-objection from the Fed?

Paul J. Huml

I guess I'm not sure -- I mean to do anything, I mean, we can authorize anything, but you really need the non-objection from the regulator to move forward so.

Michael Lee

I guess it would be from the market's perspective, it would be helpful for us as shareholders to know that the board stands ready to act as soon as that non-objection comes down. So I would -- for my money, I would say that you should submit to the board a request for that, your purchase authorization.

Marc A. Stefanski

Yes, we could consider that, but I don't know how much how much good that will actually do. I think a key indicator, if you want a look at indicators is the fact that we were able to upstream $85 million back to the holding company. That might give you an indication of where our thoughts are on where this might be going there.

Michael Lee

I totally appreciate that, Marc, and I hope you can just put this battle to bed. And just we can call this ancient history someday.

Operator

At this time, we have no further questions.

Marc A. Stefanski

Okay, well, thank you for listening in. We'll be in close contact with all of you., one way, shape or form. And by the next time we meet, we'll continue -- hopefully with a little warmer weather along with the sunshine and blue sky. Thank you for your time.

Operator

Thank you. This does conclude today's teleconference. As a reminder, the dial-in number for the replay is (800) 723-7372. Please disconnect your lines at this time, and have a wonderful day.

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