TFSL - NASDAQ

Marc A. Stefanski - Chairman, Chief Executive Officer, President and Chairman of Executive Committee Paul J. Huml - Chief Operating Officer and Chief Accounting Officer Meredith S. Weil - Chief Operating Officer of Third Federal Savings and Loan

Matthew Breese - Sterne Agee & Leach Inc., Research Division Joseph Albert Stieven - Stieven Capital Advisors, L.P.

Welcome to TFS Financial Corporation's fourth 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 1 (800) 283-4216. [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 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. Sir, you may begin.

Thank you, Leo. Good morning, everyone. Welcome to our fourth quarter earnings conference call, and also it's the fiscal year end for us here at Third Federal. Some great news out of Cleveland, Ohio here, sunshine and blue sky. And we had a very, very good year in earnings. We were able to establish -- reestablish our buyback program with the non-objection by the Federal Reserve. And so all in all, delinquencies are in a much better place than they were a year ago, charge-offs are in a much better place. Our growth patterns are looking pretty good right now, and Meredith will give a report on that in a few minutes. But I'd like to turn it over to Paul Huml at this time, to go over some of the slides that hopefully all of you have in front of you. Paul?

Thanks, Marc. And welcome everyone. Thanks for joining us. As Marc said, certainly, a lot of improvement in the year and really going through some of the slides, I don't intend to go through the slides in great detail. But just jumping to Page 6, which is the financial highlights. You can clearly see the net income, $56 million for the year, over $11.5 million for last year. Great improvement there. Reason for that is really the loan-loss provision, which was helped by the improved loan performance, which Marc mentioned. It certainly had a little higher net interest income, a few loan sales during the year that helped that. Really going into some of the details, maybe Page 8. Which helped the net interest income number as we're able to continue to drive down the costs of our deposits, which helps improve the net interest income. Page 9. Really going through the first mortgage loan production and stressing that we've gone from a mainly fixed rate lender to a more of a mixed. Generally, if you look at between the ARM products and the 10-year fixed-rate loans, that's 70% of our new loan production. That's a dramatic change from where we were from just a few years ago. So that is helping us from our interest rate risk standpoint. Page 10 just gives you a little more detail on the adjustable rate fees, which is really relatively new to the portfolio but certainly growing considerably. And as Marc already mentioned, on Page 11 and Page 12, that the loan delinquencies, charge-offs, all the ratios relates to loan performance are generally improving and definitely have good trends to them. So that really brings us to the regulatory status. As many of you are probably aware, we did announce the start -- the restart of our fourth buyback program, which had a little over 2 million shares, which began October 1. So there's really no numbers as of September 30, but we have done that starting October 1. There still technically is an MOU in place by the Federal Reserve, that in future buybacks or dividends, continue to have to go back to them for a 45-day non-objection, but it was a key that they were -- did approve the restart of our existing buyback program, which again began October 1. So that pretty much sums up the financial results.

Yes, Meredith, would you like to bring us up-to-date on some of the operational issues that happened, or highlights?

Sure. Thanks. Thanks for joining the call. Just to go over some of the highlights from the year that has driven the good performance. Our purchase business for 2013, we've seen quite an improvement. We've had a 36% increase in our volumes. We've seen a lot of cash deals going on, and what the increase in purchase mortgages means to us is that there is just that there is definitely a general improvement in the economy and people are out there -- more traditional buyers are out there purchasing homes. Our refinance business, while there's continued news about the refinance business slowing, we've been able to continue to capture new refinances through our expansion markets. This year, 61% of our business is new business to us, they're new customers that we're adding to our portfolio. We originated over $350 million in our new market, so our 11 new states. All this business is taken through our retail channels and is all ARM business for the 10-year fixed-rate and accounted for 17% of our businesses here. So we're really excited about the expansion and what that means to continued refinances. And we've also continued to rebalance our portfolio so that we have more ARMs and more adjustable rate products so that we're managing our interest rate risk. Similar to Paul's point earlier, almost 50% of our portfolio is in adjustable rate product. And almost 20% of our fixed-rate portfolio is, in terms, less than 10 years. So to complement our efforts to rebalance the portfolio, we've also worked hard to implement conforming on programs. So all of the 15-year and 30-year fixed-rate refinances that we're generating now are going to our conforming path, and will be eligible for sale. We're still working with Fannie Mae on getting our active status back but we expect that to happen sometime this quarter. And then our equity lines of credit, we continue to see runoffs, which you'll see reflected in the numbers. And -- but we are working to expand our marketing efforts. We actually tripled our volume from last year, so we are looking forward to actually slowing that runoff in the next year. And then to also reiterate some of what Paul said about managing the cost of funds, our average cost of funds has gone down 44 basis points this year. We're definitely continuing to try and best manage our costs and then also balance that with managing our interest rate risks. So that is my summary. And we're just looking forward to another good year.

Okay. Leo, we are ready for questions, if you are.

I think that really, there are no real projections just given that a lot will depend on what happens in the interest rate environment. The -- earlier this summer, there really wasn't as much advantage to the loan sales. So a lot depends on what happens with interest rates.

Matt, I just wanted to also clarify something and I wanted to correct myself when I was talking about the future of the buyback program. I said we're hopeful that the Federal Reserve would approve our next request. I'm confident that the Federal Reserve will allow us to continue to do that.

Well, we're buying.

Our next SEC filing. We typically don't comment on the buybacks, while we're in the middle.

[Operator Instructions] And it appears that we have no further questions at this time. I'd be happy to turn the floor back over to Mr. Marc Stefanski for any additional or closing remarks.

Well, thank you for tuning in this morning. Of course, we're always -- especially Paul is available to field any additional calls and questions you might have. And certainly, the whole management team can address those also. So thank you for tuning in this morning and, Leo, that's it.