TFS Financial Corp (TFSL) 2014 Q2 法說會逐字稿

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. David 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 p.m. Eastern standard Time. The dial-in number for the replay is 1-800-695-0974. At this time, all participants 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 to as many questions as possible, we ask that you limit yourself to one question and one follow-up. Lastly, when posing a question, please pick up your handset to allow optimal sound quality.

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 risks 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 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 floor over to Mr. Marc Stefanski. You may begin, sir.

Good morning, everyone. Welcome to sunny Cleveland, Ohio and Third Federal's quarterly report. As you know, we had a pretty decent quarter this last quarter. And, along with that, we have been released from the 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 fortress 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 high 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 that, a few years ago, didn't qualify because of the value of their homes, were not -- were either 30% less or, in some cases, worse than that. We weren't able to refinance them or help them out in any way. We are seeing that beginning to turn around and in the markets that we are serving. And, along with that, we have had a progressive change in our focus and in terms of our statewide expansions.

We have increased that. We have improved that. We are continuing our laser sharp focus on housing, first mortgages and second mortgages now. And, of course, we continue to focus in on growing into the expenses that we have.

I am going to call on 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 just said this morning about the reports on housing.

We continue to remain very, very competitive and very, very aggressive. We plan to grow the balance sheet regardless of what the economic conditions are. So Paul, it is yours.

Thanks, Marc, and welcome to everyone. Just as Marc said, to go over a few specifics, we have changed the slide deck around a little bit -- made a couple changes to it. I will point out on page 4, Marc had mentioned the state expansion we are doing. And so we have sort of listed the states out there that we are offering mortgages in those states. We are also looking to expand our HELOCs into those states as well.

I do want to make it clear that our footprint is only in Ohio and Florida. The other states are really being done through Internet, direct mail, through our operations here in Cleveland. They are all underwrited consistently, being credit-processed that the loans go through and all handled through our Cleveland operations.

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

Really looking at page 8, sort of 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 of adjustable-rate and also 10-year fixed rate products. So that has been a huge improvement and helps our interest rate risk profile.

Page 9 sort of gives you a picture of where that has been between 2009 and 2014 for a first mortgage. And slide 10 really covers the entire loan book, which includes our HELOCs, 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 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 the delinquencies on those loans -- that middle bar -- under 1/10 of 1%, $7 million of delinquencies on $7 billion of originations, so certainly 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, a slide that is certainly important to a lot of our investors and it is important to us here at Third Federal, is that we did get the MOU released at the beginning of the month. We have begun our new 5 million share repurchase program that began April 9.

We have -- I know a number of the investors have asked questions about these, so I tried to put some numbers in that maybe answer some of those questions. Through yesterday we purchased around 650,000 shares in that buyback program.

From a dividend standpoint, we are certainly proceeding down the path of that. There is a lot more involved in that and getting the mutual holding company member vote, which we are working on, but that will be things that will come forward over the next few months.

And just as a reminder, we did push $85 million from the Thrift up to TFS Financial back in the December quarter. That adds to the available cash and capital. That's the holding company that helped support our dividends and buybacks.

So that pretty much sums up the quarter. I don't know if you want, Meredith, to talk about details.

Yes. Meredith said she could go over some of the fun-loving things that we have been doing to grow our business.

Good morning, everybody. This year we have just really focused on growing through our expansion. We have taken about $2 billion in loan applications so far this year. Of that, 77% are coming from new customers.

Most of our business is coming in through refinances. The purchase market still isn't healthy or what we would call healthy. And so you have heard a lot of news about refinances slowing down, but we have been very successful about keeping refinances going through expanding into new markets and just the creative way we have been marketing different products.

We had our 10-year, 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 states. 40% of our applications are coming in through our expansion states.

We have taken [850 million apps] from those states. That is 66% more than last year. So we are really excited about all that we have been doing to attract new customers.

We have just under $1 billion, I think, is that Paul mentioned this, in closed loans from our expansion states. The biggest state is California at this point, and New Jersey and Pennsylvania are following closely after that.

We have continued to expand our HELOC offering. That has been slower to the market. I think a lot of consumers actually have been using first mortgages as opposed to HELOCs.

But we have expanded into new states for HELOCs. We expect to be in the 17 states for HELOCs before the end of next quarter. We have closed about $60 million in loans in HELOCs so far this year, and just expect really what we experienced with HELOCs, it is still a little bit of runoff and we hope to turn the corner and actually start growing that portfolio. That's all I have.

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

(Operator Instructions) Matthew Breese, Sterne, Agee.

First of all, just congratulations on the MOU lift. Long time coming and I know it was a source of frustration for you, so congratulations. Secondly, with 650,000 shares bought back 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 metrics you think about internally to determine how attractive repurchases are.

Matt, thanks for the question. I would say we are in a mode where we certainly have an appetite for buying back shares. But, as Marc also mentioned, we are in a mode where we also want to grow the balance sheet as well. So I think there has got to be a balance out there.

As Marc mentioned, the three-dimensional approach to what we are doing is looking at a dividend, looking for growth, and looking at buybacks. So we certainly understand the dynamics of the buybacks, but I would say there is no set-in-stone parameters of what we are buying at this point.

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

No. Absolutely no limitations on that and we thought rather than push the envelope with the regulatory bodies, we would take one step at a time. And as soon as these things are sold, we are prepared to, again, buy back more stock.

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 in the last four years, being able to buy back stock or pay a dividend, or actually, because of the economy, grow 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 not take advantage of what might be out there. But, rest assured that we are strongly committed to buybacks and we will not be taking a backseat to those numbers in the future.

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 that was downstreamed at the onset of the MOU, your ability to potentially recuperate that? And then, to what level do you feel like minimum cash at the holding company, what does that level -- where should we be thinking about that?

Well, the first part of that question was I think why we did that. And that was to let -- give the regulators a clear signal -- and this was the OTS at the time -- that we were serious about fortifying the balance sheet at the Thrift level.

You may or may not know or recall that, back then, there was a big issue here locally in Cleveland with a company that had 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 of the thrift, about $500 million 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 a goodwill or a good faith gesture on our part to fortify the balance sheet at the Thrift, because there was some concern about where that might go. Paul, do you want to address the rest of it? I can't remember what the question was.

Sure. It talked about what the cash commitments are at the holding company. And there is not a lot of commitments at the holding company. You can look at our regulatory reportings, the Thrift represents over 99% of the total consolidated company. So there is a not a lot of investments or commitments at the holding company.

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?

If we do, it's really, that is a separate request to the regulator. There is a prescribed formula based on earnings at 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 is 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, is that I think both regulators are dealing with both the Fed and the OCC. I don't think that there is much other than geography related to where the money is at. The OTS seemed to have a fair -- because of their experience, that it was more than geography. And so I think it is workable to try to move that money.

But, again, we have got a ton of money at the holding company as it is and the will be used for buybacks and dividends as we move forward.

Right. And, as it pertains to dividends, in conversations you have had with the regulators regarding the waiver, what are the issues that have come up? I know you said you were investigating it, but does that mean that you have already begun to seek approval from depositors?

No. There's been no mailing yet out to depositors. It is something certainly we are working on and you have put together a proxy statement. You have to get the regulators to sign off on a preliminary view of what the proxy looks like and what you are sending out. But -- and that is something that will be coming in the future.

It is tough to say when that will be. Our hope is that it is in the short-term future. But we are working with putting all those documents together, get the blessing to go out to the depositors.

Joe Stieven, Stieven Capital.

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 deck, which is great. And the final thing is I would say, with a minority book at [23] and change, I fully support your aggressiveness in this repurchase. So thank you and that is really it. Matt asked my questions.

(Operator Instructions) Kevin O'Keefe, Brown Advisory.

Congrats as well on the MOU. That really is wonderful news. I think all of us on the call are pleased to put that era behind us.

I had a couple questions I guess on the dividend. My first question would be, what is it going to take to get the deposit base to waive their right to the dividend? What would it take for a depositor to waive their right to the dividend?

I guess, in other words, if I am a plain-vanilla depositor, why would -- when you call me and asked me to waive my right, why would I say yes? And I ask just because I am wondering what kind of hurdle you have to tackle in order to get that approved.

And then, second, I am just curious if you think that the minority shareholders will be subject to the Fed's soft 30% limitation. And I ask that just because one of your direct comps, Cap Fed in Kansas, had no problem paying out 100% of earnings.

And then my third thing would just be that Cap Fed once said to me that they prefer to be aggressive buying back their stock or do both at the same time because, if they buy back 10% of their shares over the course of a year, then that is effectively a 10% raise in the dividend to the current shareholders. So they found that as kind of a backdoor raise. And I thought that was a really intelligent thing they said.

So that is more just a comment I wanted to forward along. But, as far as the other two, I would love to hear your thoughts. Thanks, guys, and congrats.

Yes, Kevin that is certainly a powerful thing when you can combine the buybacks and the dividends. When you can shrink the number of shares, that helps on the dividend payouts.

As far as what the depositors' vote is going to be, certainly we intend to find out. There have been a number of mutual holding companies that have received a dividend waiver vote. I think our position is, whatever is in the overall best interest of the Company and supporting the stock price, and making the value in the stockholders 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 have shown over our years of existence that we have been a strong component of our customers, and we are going to continue to be so. So it certainly is something that we are going to try to find out in the deposit vote, but we think there is a strong chance that will happen.

And then as far as the restrictions on payouts.

Yes. We have not seen or heard anything as to how that is going to apply.

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 from our standpoint, if we can see you buying back your shares, whether it is 55% of minority tangible or 75%, it is an awesome use of capital. So, love to hear that you are out there already being aggressive and hope you stay there because we all benefit. Thanks, guys, and congrats, again.

(inaudible) continue to do so.

(Operator Instructions) Joe Stieven, Stieven Capital.

Sorry to belabor this one point, but I thought the minority waiver was included in Dodd-Frank. I don't understand either who or what is requiring this excessive burdensome cost to you or any MHC. So I know it is technical, but I thought the MHC structure -- the freebie and the dividend labor -- was grandfathered in Dodd-Frank.

So, use one minute and just say, here is what has changed technically, because it makes no sense that you guys have to go through the ridiculous expense to get this done. So I would just like to -- this is not a complaint to you guys at all. This is more or less a complaint about ridiculous regulations. Thanks, guys.

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 perspective. 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 is just the world we live in today. There is no place that you can go anymore, especially in the banking industry, where the regulatory environment isn't on a full-court press. So we have adjusted to the times. We understand that.

Our job is to make it as painless for you guys at shareholders as possible, and we are trying to do that right now. This is obviously a first for us in getting that vote, but we are very confident we are going to get that vote and before the year is out we will be paying a dividend. So consequently, we just -- we feel what you are saying, but the reality of it is, is that we have got to work with it and we will figure it out.

[Ferris Smith].

I don't want to echo the sentiments of the other callers too much, but congratulations. I have two questions. First, you mentioned -- I think it was a quote that you have a ton of cash in the holding company already. I think the 2015 FDIC 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 as of now. How far down do you think you could take that level?

And the second question is, what percentage of earnings do you think you would be targeting as a dividend payout for the future?

I think as far as where capital ratios go, I think there is a lot that goes into that dynamic. And we talked about dividends. We talked about growth. So, trying to pinpoint an actual capital ratio we are striving for is something we haven't done and we don't intend to it this point, because there are so many different moving parts: where the economy grows, how fast the growth is, what the regulatory world is changing in.

And there is certainly a lot of stress testing rules that are out there that keep changing the dynamics of what is an actual well-capitalized number. So we don't have a target and, as Marc mentioned earlier, we are a long-term, slower focus on where we are going. And we have to look at each one of those avenues -- the dividends, the growth, and the buybacks and sort of adjust those as we are moving along. So there is no set target.

The other thing is, we are not trading off one for the other. We are balancing it and it is an amp. 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 fortress balance sheet. So in case the economy takes another turn for the worse, that we are prepared for that, so you as shareholders will not be damaged.

Now, so it is a delicate balancing at act all the way around, but all those things are extremely important. And it is our job and our fiduciary responsibility to make sure we follow through with that and protect your investment.

(Operator Instructions) [William Huff].

I would like to know if the directors or you guys have ever talked about a timetable for doing a step-in-step conversion, and how many years away might we be from that step?

Well, that is another thing that is always on the table. It is nothing that is going to be enacted on in the near future. And this is Marc Stefanski talking.

I always said that that is 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 is not a simple -- just flip the Company and take it public 100%. I just don't think it is that simple.

It appears 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.

Well, thank you for joining us here this morning. I can't emphasize enough about the patience and the hard work that has gone on from the board level to the management level, and also the investor level on what has transpired over the last four years.

Again, our commitment is to have a razor-sharp focus on our business, continue to fortify our balance sheet so we continue to be strong, stable, and safe in any environment; drive down 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. Thank you for your continued support.

This does conclude today's teleconference. As a reminder, the dial-in number for the replay is 1-800-695-0974. Please disconnect your lines at this time and have a wonderful day.