TFS Financial Corp (TFSL) 2014 Q1 法說會逐字稿

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 PM Eastern Standard Time. The dial-in number for the replay is 800-723-7372.

At this time, all protestants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions). In the interest of time and to get you -- as many questions as possible, we ask that you limit yourself to one question and one follow-up. (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 a 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.

Thank you very much and good morning, everyone. Welcome to our first fiscal quarter of 2014 earnings conference call. I would just like to start off by letting you all know, even though it's been freezing cold here in Cleveland and so we, at Third Federal it has 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 has now changed, and that's a humongous changed since the year 2010. So, in a very short period of time, we continue to transform our balance sheet 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 -- 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 a -- we're going to continue to take our three-prong 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, you have specifics and the stats in the deck that maybe you want to go over a few pages?

Okay. Great. Thanks, Marc, and welcome, everyone. As Marc mentioned, a fairly strong quarter for us. And, remember, the first few pages of the slides are more of a background of our strategic approach and a snapshot of where we do business. 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 losses. You will see the number; we have certainly got that number down. If you look at where we were last year, $18 million for the quarter, this quarter we are at $6 million. And you can definitely see the trend in the far right for the fiscal year which ended September 2013. The provision has definitely gone down and we see continued improvement on the provision line, which helps the net income.

Really, on the next slide gives you more of a picture of where we have come from the quarterly net income trends as well as where we were on a fiscal year standpoint. So, that's certainly is good news as we are 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 have been able to get our CDs to reprice at a lower rate and still maintain the deposits. We have augmented those by some Federal Home Loan Bank advances and also brokered CDs. But we have 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 our 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, 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% number has dropped to 50%. And you can see the ARMs has gone from 14% up to 38%. So, a big transformation in just a couple years from an interest rate risk standpoint, trying to focus on the ARMs on 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 are 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 of the Fed and we are 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.

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

(Operator Instructions). Matthew Breese from Sterne, Agee. Steve?

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?

Well, 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 in that process.

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, were you turned down?

Well, I think our focus -- you know, 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 to go through the process of asking the request for written non-objection. So, at this point, that's our main focus is getting the MOU lifted so we don't have to go through the type of process involved in the written non-objection.

Right, I understand. It 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.

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

Okay. And then on the upstream of capital to the Holding Company, which was another positive this quarter, I'm just curious as to why that happened at this point, one. Two, did that require any sort of regulatory authorization? Did the regulators 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?

Well, the $85 million is tied to a regulatory guideline that says the Thrift can dividend up to its Holding Company current calendar year to date earnings plus it's two previous calendar years. So as you get towards the end of a 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.

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.

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 volatility over the past few months. And I was hoping to just gain some insight as to how you are thinking about the trajectory from here.

Matt, it's Meredith. What we have 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 has been mentioned earlier on the call, has really attracted a new population. I think the other trend that we are seeing is people who have not been able to refinance in the past because of the property value decline -- as we have seen property values increase, there are new people in the marketplace. So we have been able to continue to grow the business and we expect that to continue.

We have 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 have also been able to reprice a lot of CDs. And that repricing will slow down, but we have been shifting the deposit side of the balance sheet into other tools that will help us manage the interest rate risk.

So, projection-wise, think about a flat margin?

That would be my expectation.

Okay. Thank you very much.

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.

Howard Henick from Scurlydog Capital.

I have a question that's a little bit 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 are getting the equity practically for free. Kearney just did a deal the other day; East Boston Savings Bank has done some deals. Have you ever looked at these? And does your MOU keep you from even attempting to do these types of deals, which I think are very lucrative and really build stockholder value in the long run?

Our MOU does not prevent us from doing that. We struggle with the cultural issues. We have looked at a few companies, talked to a 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.

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

No, I understand that, and it's absolutely true. The problem 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 are 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.

Okay, and you were talking 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 are focusing on getting the MOU lifted, can I assume that you are not going to make an attempt on either initiating a dividend or doing more buybacks until the MOU is lifted? Or are these simultaneous paths?

I think they are simultaneous equations. But we cannot -- we are not really allowed to discuss when a regulator might be coming in to do an overview on the Company.

Kevin O'Keefe from Brown Advisory.

I hope you will 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 (laughter). And that would be point you are not under the regulatory cloud of an MOU and you are 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 are 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 then 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 are out from under the MOU you will be very aggressive, like you have been within your own history, and acquire your own shares at less than 50% of minority.

That's a pretty good synopsis.

I don't know if there was even 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 your two years plus on the dividend up. I guess more directly, if you were lifted from the MOU, or even if you are under the MOU, what would it take to extract that $150 million special capital contribution down to the bank sub?

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

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

Yes.

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?

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 is just a process that we need to go through. Throughout the past really few years we have been building on our enterprise risk management process. And I think we all feel like we are in a really good place. And it's just a matter of time.

And when was your last yearly exam?

That is what we are not permitted to share.

Okay.

That was a good question.

All right. Well, we are all enthusiastic and we are excited, waiting for you to be able to return capital. And just as a shareholder who has 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 in my opinion it's all blue skies and sunshine.

All right. Well, thanks very much. But you know, there are other parts of our business, and just growing our business is an important third part to our strategies. Just last week alone, we took in $100 million worth of applications, which in this environment, in this market, 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 extended themselves on a purchase -- they are in the market, and that the refinance capability is there. So we are not sitting on our hands, by any means, on any front, at any time, under any circumstances.

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 are not going to get any credit for what you are doing awesome. I will 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 are focused on.

Absolutely. Understood.

Rick Weiss from Boenning.

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

This is Paul, and we'd never put out a number of there what we are trying to 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 certainly feel that we have excess capital. But to put a number out there at this point in such a changing environment 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 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 are shooting for.

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

Yes, we are.

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

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 markets, our additional states, we only offer our ARM products and our 10-year fixed rate products. We don't offer our conforming product, but we are constantly looking at what is the best mix of products that we offer in the different markets.

And how is the -- I guess the customer demand for that? Because the rates are still historically pretty low, and yet you are still seeing good demand for the ARMs. Is that right?

We are.

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

We offer a 5-1 and a 3-1 product (multiple speakers). Yes, the majority of our volume comes in the 5-1.

5-1. Okay, got it. Okay, thank you.

Joe Stieven from Stieven Capital.

First of all, nice quarter. But let me not beat around the bush compared to my good friend Kevin, but I will be a little bit more direct. 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 are taxpayers and citizens and customers, and it's just -- we would strongly endorse you just getting the repurchase approved the other way. Keep working on the MOU, but dual tracks.

But this is just been such a lengthy, ridiculous process it's frustrating for us. And not just investors but customers, citizens, taxpayers -- it's ridiculous. So we would strongly endorse you do anything possible to get this process going. And then, second thing, you are doing a nice job on the fundamentals. We appreciate it. Thank you, guys.

Thank you, Joe.

(Operator Instructions). Michael Lee from Hypotenuse Capital.

So, I hate to 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?

Mike, this is Paul. At this point, as I've said, the focus is on getting the MOU lifted. 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. (Multiple speakers) and to drag everyone through a written non-objection process is not productive at this point as we focus on getting the MOU lifted.

And I guess then the question becomes why. So you have to -- I don't what's involved in getting this non-objection; it sounds like you have to write a letter. Is there too much paperwork to fill out? Just help us understand why that's not a viable strategy at this point in time.

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 are going through that process, you are diverting the regulators from 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 to do a partial little non-objections without the overall buy-in? And that, we feel, is just non-productive. If we feel that it's got to a point where it's not being productive getting the MOU lifted, then we will certainly focus more on the written non-objection.

Okay, that makes a little more sense. I guess I can appreciate why you would take that tack, but I think everybody on this call would love to see you do both. But if you are 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?

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

I guess it just 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, for my money, I would say that you should submit to the Board a request for that repurchase authorization.

Yes, we could consider that, but I don't know how much good that will actually do. I think a key indicator, if you want to 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, and where this might be going.

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

Absolutely.

At this time we have no further questions.

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

Thank you. This does conclude today's teleconference. As reminder, the dial-in number for the replay is 800-723-7372. Please disconnect your lines.