TFS Financial's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

| About: TFS Financial (TFSL)

TFS Financial Corporation (NASDAQ:TFSL)

F2Q 2014 Earnings Conference Call

April 25, 2014 10:00 a.m. ET

Executives

Marc A. Stefanski – President and Chief Executive Officer

Paul J. Huml – Chief Accounting Officer and Chief Operating Officer of TFS Financial Corporation

David S. Huffman – Chief Financial Officer

Meredith S. Weil – Chief Operating Officer of Third Federal Savings

Analysts

Matthew Breese – Sterne Agee

Joe Stieven – Stieven Capital

Kevin O'Keefe – Brown Advisory

Operator

Welcome to TFS Financial Corporation's Second 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 1800-695-0974. [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 the 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 floor over to Mr. Marc Stefanski. You may begin, sir.

Marc A. Stefanski

Good morning, everyone. Welcome to sunny Cleveland Ohio on Third Federal’s quarterly report. As you know we had a pretty decent quarter this last quarter and along with that we have been, at least from MOU from the Federal Reserve which allows us to continually focus on our three dimensional approach of growth, stock buybacks and dividends.

Our overall objective is to continue to have a fortuitous type balance sheet which will allow us to sustain in good times and in bad. We have proven that over the last four years that with our capital ratios we are able to weather the storm and we have always felt in the last few years that it hasn’t been a recession in the housing industry, it has been a real depression. We are thankfully seeing some signs of that changing where we see values have improved and increased. Some of the folks, a few years ago didn’t qualify because of the values of their homes with either 30% less or in some cases worse than that, we weren’t able to refinance them or help them out in anyway. We are seeing that beginning to turn around in the markets that we are serving and along with that we have had a progressive change in our focus in terms of our state-wide expansions. We have increased that, we have improved that while we are continuing our laser sharp focus on housing, first mortgages and second mortgages now and of course we continue to focus on growing into the expenses that we have.

I am going to call in Paul Huml to go over some specifics on the deck that was sent out and also Meredith Weil is here to give some color on our growth and our expansion and some of the numbers that will help give you more confidence that we are able to grow in any kind of environment despite what the Wall Street Journal has said this morning about the reports on housing. We continue to remain very-very competitive and very-very aggressive when we plan to grow the balance sheet regardless of what the economic conditions are. So, Paul?

Paul Huml

Thanks Marc and welcome to everyone. Just as Mark said, we will go over few specifics. We have changed the slide deck around a little bit and there is couple of changes to it. I will point out on page 4, Marc had mentioned the state expansion we are doing and so the list of the states are there that we are operating mortgages in those states. We are also looking to expand our HELOC into those states as well. I do want to make it clear that our footprint is only in Ohio and Florida the other states that are really being done to (inaudible) direct mail through our operations here in Cleveland, they are all under-rated. Under-rated consistently being credit process that the loans go through and all handled through our Cleveland operations.

Financial highlights, really the net income for the quarter $16.4 million, very consistent from where we have been. Our provision for loan losses down to $5 million for the quarter and that really relates to a number of the improved credit metrics that we have seen. We can see on page 6 where the quarterly net income has been which has stayed relatively consistent over the last number of quarters.

Looking at page 8, sort it talks about the mortgage loan production and how we have shifted the whole balances from where we were a long term fixed rate lender into a mix of a lot adjustable rate and also 10 year fixed rate product. So that's been a huge improvement and helps our interest rates risk profile.

Page 9, so it gives you a picture of where that has been between 2009 and 2014 for our first mortgage and slide 10 really covers the entire loan book which includes our realized but surely shows the shift away from the long term fixed rate loans that we have had in the past.

A new slide that we put in that is on page 11 which really is indicative of the improved credit metrics that we have used in our underwriting and it basically shows the loans that have originated in 2009 or after and you can see that the delinquencies on those loans have middle bar, under 1/10 or 1%, 7 million of delinquencies of 7 billion of originations. So certainly it shows what the improved underwriting standards that we have had and strong credit focus that we have had over the last five years.

Going through some of the delinquencies and charge off numbers definitely improvements as you can see on page 12 and 13 where those numbers are all improving, so that has helped support our lower loan loss provision. And obviously on page 14, on slide is certainly important to a lot of our investors and then important to us here at third Federal is that we did get the MOU release at the beginning of the months, we have began our new 5 million share repurchase program that began on April 9th.

I know a number of investors have asked questions about this and so I am trying to put some numbers in that may be the answer some of those questions through yesterday, we purchased around 650,000 shares in that buyback program.

From a dividend standpoint, we're certainly proceeding down the path of that is a lot more involved and that getting the mutual holding company member both which we're working on but that will be things that will come forward over the next few months. And just as a remainder, we did push 85 million from the Thrift up to TFS Financial back in the December quarter because that adds to the available cash and capital but that the holding company, that helps support our dividends and buybacks. So that pretty much sums up the quarter and if you want Meredith talk about the details?

Marc A. Stefanski

Yes, Meredith if you go over some of the fund moving things that we've been doing to grow our business.

Meredith S. Weil

Yes, Good morning, everybody. This year, we've just really focused on growing through our expansion. We've taken about $2 billion on loan applications so far this year, of that 77% are coming from new customers. Most of our businesses coming in through refinances. The purchase market still isn’t healthy or what we would call healthy and so you've heard a lot of news about refinance is slowing down but we've been very successful about keeping refinances going through expanding into new markets and just a creative way we have been marketing different products we have our tenure so there are a lot of people who weren’t contemplating refinancing again but refinancing and a lot of that is coming through our expansion stage.

40% of our applications are coming in through our expansion states. We've taken 850 million assets from those states that's 66% more than last year. So we're really excited about all that we've been doing to attract new customers. We have just under a billion I think is as Paul mention this, in close loans from our expansion state, the biggest state is California at this point and New Jersey and Pennsylvania are following closely after that.

We have continue to expand our HELOC offering that's been slower to the market, I think a lot of consumers actually has been using first mortgages as oppose to HELOC. So we have expanded into new states for HELOC. We expect to be in the 17 states for HELOC before the end of next quarter. We've closed about 60 million in loans so far this year and just expect really what we're experienced with HELOC is still a little bit of a runoff and we hope to turn the corner and actually start growing that portfolio.

Marc A. Stefanski

Okay. Thank you, Meredith. Thank you, Paul. At this time, we are wide open for questions or comments. So we turn it back over to you.

Question–and–Answer Session

Operator

The floor is now open for questions. (Operator Instructions). Thank you. Our first question is coming from Matthew Breese of Sterne Agee.

Matthew Breese – Sterne Agee

Good morning, guys.

Marc A. Stefanski

Good morning, Matt.

Matthew Breese – Sterne Agee

First of all just congratulations on the MOU lift. Long time coming and I know a source of frustration for you so congratulations. Secondly, with 650,000 shares buyback already, clearly there is a willingness to repurchase shares at current levels. But I was hoping you could provide some details on the parameters and metric you think about in terminally to determine how attractive repurchases are?

Paul Huml

Matt, thanks for the question. I would say, we're in a mode we're certainly having an appetite for buying back shares. But as Marc also mentioned we're in a mode, where we also want to grow the balance sheet as well. So I think there is going to be a balance out there as Marc mentioned the three dimensional approach to what we're doing is looking at a dividend, looking for growth and looking at buyback. So we certainly understand the dynamics of the buybacks but I would say there is no dead end stone parameters of what we're buying at this point.

Matthew Breese – Sterne Agee

Okay. And then you have a 5 million share repurchase authorization currently. What are the necessarily steps to reload on that and are there any limitations on that from the regulators?

Paul Huml

No, absolutely no limitations on that. And we thought rather than push the envelope with the regulatory bodies we would say going step at a time and as soon as these things are sold we are prepared to again buyback more stocks. So this is not an indication of how of a lack of enthusiasm toward the buyback program, this is just taking one step at a time based on the fact don’t forget we haven't been in this environment for the last four years being able to buy back stock or pay dividend are actually because of the economy grew the balance sheet effectively. So, we don't believe in giant steps we believe in building a foundation, continuing to build the relationship with our regulators and that take advantage of what might be out there but rest assure that we are strongly committed to buybacks and we will not be taking a backseat to those numbers in the future.

Matthew Breese – Sterne Agee

And then with that, as far as cash at the holding company goes, $237 million at quarter end, could you talk about the initial $150 million of cash those downstream at the onset of the MOU. Your ability to potentially recuperate that and then to what level do you see like minimum cash at the holding company. What is that level where it should, which way we will be thinking about that?

Marc A. Stefanski

For the first part of the question I think it was why we did that and that was to let the, give the regulators a clear signal that as this was the OTS the time that we were serious about fortifying the balance sheet at the Thrift level. You may or may not know or recall at back then there was a big issue here locally in Cleveland with a company that have the ability to downstream to the Thrift did not do that and when the company went out of business, the government was stuck with what was left the Thrift but $0.5 billion at the holding company that they couldn’t get their hands on.

So we didn’t know, what was going to happen, how it was going to happen, but it was goodwill or a good faith, it just trying hard part to fortify the balance sheet at the Thrift because there were some concerns about where that might go. Paul, do you want to address the rest of that, I can’t remember what the question was.

Paul J. Huml

Yes, sure. I talked about what the cash commitments are at the holding company. And there is not a lot of commitments at the holding company if we can look at our regulatory reporting or Thrift represents over 99% of the total consolidated company. So there is not a lot of investment or commitment at the holding company.

Matthew Breese - Sterne Agee

Okay. Marc I guess the first part of the question was the $150 million that was downstream do you think there is any potential for getting that back to the holding company?

Marc A. Stefanski

Yes, if we do, it's really not a separate request to the regulatory. There is a prescribed formulas based on our earnings that the Thrift as to what dividend, what you can dividend up to the holding company. So if you want to go beyond that and that's where the $150 million would come in that would be a special request to the regulators for them to approve that we have not done that at this point. The other thing is that I think both regulators are dealing with both the Fed and the OCC, don't think that there is much other than geography related to where the money is at. The OTS seem to have a fair because of their experience that it was more than geography and so I think it’s workable to try to move that money. But again we've got tonne of money at a holding company as it is and that will be used for buybacks and dividends as we move forward.

Matthew Breese – Sterne Agee

Right. And as it pertain the dividend in conversions you had with the regulators regarding the waiver. What are the issue that come up I know you said you're investigating it but does that mean that you've already begun to seek approvals from depositors?

Paul J. Huml

No, there has been no mailing yet out to deposit. So it certainly something we're working on with together a proxy statement, you have to get the regulators that sort buying off on a preliminary view of what the proxy looks like and what your spending out but that something that will be coming in the future. I know that’s tough that to say when that will be, our hope is in that it’s in the short term future but we are working with putting all those documents together, get the blessing to go out to the depositors.

Matthew Breese – Sterne Agee

Okay. Thank you very much guys.

Paul J. Huml

You're welcome.

Marc A. Stefanski

Thank you.

Operator

Our next question comes from Joe Stieven with Stieven Capital

Joe Stieven – Stieven Capital

Good morning, everyone.

Marc A. Stefanski

Hey, Joe, how are you?

Joe Stieven – Stieven Capital

Very well. Actually Matt sort of touched on a couple of my questions. The other thing I would at least say to you is that I actually appreciate some of the new disclosures in the debt which is great and the final thing is I would say with minority book 23 unchanged. I fully support your aggressiveness in this repurchase. So thank you that's really it. Matt asked my question.

Marc A. Stefanski

Thank you, Joe.

Operator

(Operator Instructions). Our next question comes from Kevin O'Keefe from Brown Advisory.

Kevin O'Keefe – Brown Advisory

Hi guys. Congrats as well on (inaudible) that really is wonderful news and I think all of us on the call. I pleased (inaudible) behind us. I got a couple of questions I guess on the dividend. My first question would be what it’s going to take to get the deposit base to waive their right to the dividend? Can you guys hear me?

Paul J. Huml

Yes, we hear you.

Kevin O'Keefe - Brown Advisory

Okay, fine. What it would take for depositors to waive the right through a dividend? I guess another words if I am a (inaudible) depositor why would if when you call me and ask me to wave my right, why I would say yes. And I asked just because I'm wondering what kind of hurdle you have to tackle in order to get that approved. And then second, I'm just curious if you think that the minority shareholders will be subject to the Fed’s kind of soft 30% limitation and if I ask just because one of your direct comps Cap Fed in Kansas had no problem paying out a 100% of earnings.

And then my third thing would just be that Cap Fed once said to say to me that they prefer to be aggressive buying back their stock or do both at the same time because if they buyback 10% of their shares over the course of the year then that's effectively a 10% raise in the dividend to the current shareholders and so they found that it’s kind of a back door raise. And I thought there was a really intelligent thing they have said, so that's more just a comment I wanted to forward along. But as far as the other two I'd love to hear your thoughts? Thanks guys and congrats.

Paul J. Huml

Yes, Kevin that certainly a horrible thing when you can combine the buybacks and dividends. You can shrink the number of shares that helps on the dividends payout. As far as what the depositors vote is going to be certain we intend to find out there have been a number of mutual holding companies there have received the dividend, waiver both. I think our position is whatever in the overall best interest of the company and supporting the stock price and making the value in the stockholder strong supports the overall company and supports the position for the Thrift which in turn helps the deposit base.

So we think there is a strong reason for them to do it. I think we've shown over our years of existence that we have been a strong component of our customers and we're going to continue to be so. So it certainly is something that we're going to try to find out in the deposit both but we think there a strong chance of it.

Kevin O'Keefe – Brown Advisory

And then as far as the restriction on payouts?

Paul J. Huml

We have not seen or heard anything as to how that's going to apply.

Kevin O'Keefe – Brown Advisory

Okay. And my last comment I would just make is to Joe's comment on repurchasing your stock. I think the simple math is every 5 million shares you guys buy is about a 4% spike to minority book value. So as from our standpoint if we can see you buying back your shares that whether it's 55% of minority tangible or 75% it's an awesome use of capital. So I love to hear that you out there already been aggressive and hope you stay there because we all benefit. Thanks guys and congrats again.

Paul J. Huml

We continue to do so.

Operator

(Operator Instructions) we have a follow up from Joe Stieven of Stieven Capital

Joe Stieven – Stieven Capital

Hey guys, sorry to (inaudible) but there is one point but the minority waiver was included in Dodd Frank, I don’t understand either who or what is requiring if excessive, burdensome cost to you or any MHC. So I know its technical but I thought the MHC structure in the dividend waiver was grandfathered in Dodd Frank. So can I use one minute and just say okay here is what changed technically because it makes no sense that you guys have to go through the ridiculous expense to get this done, so I just like, this is not a complaint to you guys at all this is more of as a complaint of ridiculous regulations. So thanks guys.

Marc A. Stefanski

Yes, Joe you are absolutely right it was grandfathered in Dodd Frank and the rules of the game have changed based on the Fed’s prospective and our mission is to comply with those rules so we can get that dividend approved by all the depositors and have all the shareholders benefit and that's just the world we live in today. There is no place that you can go anymore especially in the banking industry where regulatory environment is not full-court press, so we have adjusted to the times, we understand that our job is to make it as painless for you guys and shareholders as possible and we are trying to do that right now. This is obviously a first rush in getting their vote but we are very confident that we are going to get that vote and before the years out we will be paying a dividend. So consequently, we feel what you are saying but the reality of it is that we have got a work with it and we will figure it out.

Joe Stieven – Stieven Capital

Okay. Thank you, Mark.

Marc A. Stefanski

Thanks, Joe.

Operator

Our next question comes from (inaudible) smith.

Unidentified Analyst

Hello.

Marc A. Stefanski

Yes, good morning.

Unidentified Analyst

So, I don’t want to (inaudible) sentiments of the other callers too much but congratulations. I have two questions, first, you mentioned I think was good that you have a tonne of cash in the holding company already, I think the 2015 FDSC requirements will be about 8% of tier 1 risk based capital and I think you mentioned that you have got about 25% or 26% tier 1 capital is now. How far down do you think you can take that level and the second question is what percentage of earnings do you think it would targeting as the dividend payout for the future.

Marc A. Stefanski

As far as our capital ratio go, I think there has lot that goes into that dynamic and we talked about dividends and we talked about growth, so trying to pinpoint on actual capital ratio was driving for and something we haven’t done and we don’t intend to at this point. Because there are so many different moving parts, where the economy grows, how fast the growth is, what the regulatory of all this that changing in and there is certainly a lot of stress testing rules that are out there that keep changing the dynamics of what is a actual, well capitalized number so we don’t have a target and as Mark mentioned earlier we are a long term slower focused where we are going and we have to look at each one of the avenues, the dividend, the growth and the buybacks and sort of adjust those as we are moving along. So there is no set target.

Paul J. Huml

And the other thing is we are not trading off one for the other, we are balancing it and that's (inaudible). We have a three dimensional approach and we have to deal with the regulatory environment. We also have to consider what the economy is doing or not doing and at the same time maintain a fortuitous balance sheet so in case the economy takes another turn for the worst, they were prepared for that so you as shareholder won’t damaged. So it’s a delicate balancing act all the way around but all those things are extremely important and it’s our job and fiduciary responsibility to make sure we follow through with that and protect your investment.

Operator

(Operator Instructions) our next question comes from William (inaudible). Your line is open.

Unidentified Analyst

Yes. I like to know if the directors, have you guys ever talked about the timetable for doing step and step conversion, how many years away might be from that step?

Paul J. Huml

That is another thing that's always on the table. It’s nothing that it’s going to be enacted on in the near future. And this is (inaudible), I always said that that's for the next generation of management for Third Federal but I will never say never depending on what the financial needs of the company are and just where the economy is at and there is a lot of factors that go into that but it’s not a simple, just flip the company and take it public 100%, I just don’t think it’s that simple.

Operator

And it appears that we have no further questions at this time. I would like to turn the floor back over to Mr. Marc Stefanski for any additional or closing remarks.

Marc Stefanski

Thank you for joining us here this morning. I can’t emphasize enough about the patience and the hard work that's going on from the board level to the management level and also the investor level and what transpire over the last four year again our commitment is to ever razor sharp focus on our business and continue to fortify our balance sheet so we continue to be strong, stable and safe in any environment. Drive down expense, the expense ratios and continue our three dimensional approach of growth, buybacks and dividends and at the same time I am just pleased to say that we are back and we are happy to be there and thank you for your continued support.

Operator

Thank you. This does conclude today's teleconference. As a reminder, the dial-in number for the replay is 1800-695-0974. Please disconnect your lines at this time, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!