TFSL - NASDAQ

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 October 31, 2014, at 9:00 a.m. Eastern Standard Time. The dial-in number for the replay is (800) 695-2533. [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, Alish, and welcome, everyone, to Third Federal's Fourth Quarter Fiscal Earnings Call. Nothing but sunshine and blue skies here in Cleveland, Ohio, and throughout our operation. I'm sure you've reviewed the deck that was sent out. And without further ado, I'm just going to turn it over to Paul Huml for some highlights, and then we're wide open for questions. So Paul, take it away.

Thanks, Marc, and welcome, everyone, to our call. As Marc said, good news here. I think we've helped return back to our original model that we talked about when we first went through our IPO back in 2007, and that was a 3-dimensional approach of growth, buybacks and dividends. So we are able to get back to that after a long haul, but it's been nice to get back to our normalized approach. I'm certainly not going to go through the entire slide deck. I'm just going to hit a couple of key pages, hit some of the highlights. So if you flip to Page 5. It's some financial highlights of where we are. If you look at the last 2 columns that shows the year-to-year change in the assets. Obviously, it went from $11.3 billion last year to $11.8 billion this year, and most of that growth is all in the loan portfolio, which helps our growth standpoint. If you look at the profitability down below, our provision for loan losses has gone down from $37 million last year to $19 million this year. So that's reflective of the improving credit metrics we have, and certainly the net income which basically went from $56 million last year to $66 million this year. So all good signs, all good things that are moving along. If you flip to Page 10, sort of covers a little bit about our loan portfolio growth and how we've shifted our whole portfolio with a little bit of interest rate risk management in mind. It's just a comparison of where we were from 2009 to where we are in 2014, and less emphasis on the long-term fixed-rate loans. That's helping us adjust our interest rate risk management. And if you flip to the next page, Page 11 goes over some of the loan performance that we've had. And obviously, with our loan growth, you can see on the chart that the loan growth is really supported by some strong credit numbers. The delinquency numbers on our loans that we've originated in -- since 2009 and after has been stellar. And certainly, the performance of the 2008 is certainly getting better from where we have been and, overall, very strong numbers from a credit metric standpoint. There's a few more pages that go through some of the delinquencies and charge-offs, but all those are good numbers and improving and, really, to get down to, as we look at the importance of how we're running our company, on Page 14, is really the capital deployment section. And really in the last year -- really, in the last quarter, we've been able to complete our fifth stock repurchase program. We announced our sixth stock repurchase program for another 10 million shares. We're a little over 600,000 purchases into that sixth program as of 9/30 2014. We did, since our last call, we had the Mutual Holding Company member meeting, and they approved the dividend waiver for the next 12 months. That's through July 31, 2015. So we did declare and pay a dividend in September of $0.07 a share. So that's a strong thing. So really, when you look at it, the growth, the buybacks and the dividends is our story of how we're moving forward. So that in a nutshell, it's all positive news for the company this year, and we'll just open it up for questions from the investors at this point.

[Operator Instructions] Our first question is coming from Matt Breese with Sterne Agee.

I just wanted to say, first of all, it's great to see you're back working through the three-pronged approach to capital management. But I specifically wanted to dive into the share repurchase activity this quarter, which came in at around 2.5 million shares. I wanted again to get a sense for your appetite for share repurchases and if this level of activity is what we should expect going forward.

Our appetite's very strong, and I think that you can expect a level not only comparable but equally as aggressive.

Okay. And then presumably as it continues, it will become a little bit incrementally more difficult to purchase that next share. So as that happens over the coming, call it, year or so, how do you feel about increasing the level of the minority dividend?

Paul, do you want to...

Sure, I think that's one of the goals, as we look forward, as we start shrinking the number of outstanding minority shares that you can get more mileage on the same dividend dollars to less number of shareholders. Now with our dividend waiver that's approved, we're probably -- we have approved a $0.28 total dividend through next July 31. So doing the math, that's $0.07 a quarter for the next few quarters. But I think that's one of the long-term goals as we look at the cash available to pay dividends. If you got lower number of shareholders, the dividend per share is going to go up.

Right. Is an increased payout ratio to minority shares, is that in the cards as well?

I'm not sure I understand what your question is.

Well, I mean, if the payout today is, call it, minority shares roughly around 30%, could that be bumped up to 50% as share repurchases become more difficult?

Well I think that's certainly one of the things we look at with the 3-dimensional approach. Whatever is the easiest and provides the best return is what we're going to use. So if one lever gets turned up a little bit more as maybe the repurchases gets more difficult, that's certainly something we're going to look at.

Right, okay. And then switching back to the fundamental business. I was hoping to get a little bit more color on the dynamics in the margin this quarter and over the last 6 months. It's down around 14 basis points. And I just wanted to get a sense for what's rolling off in terms of the cost of CDs and the kind of loans you're putting on in terms of yields and get a sense for how much more compression there is coming or if there's a point where we could see that stabilized?

Matt, it's Dave. I hope you're doing well. Thanks for the question about the margin. That's certainly something that we look at every day. And over the last 6 months, we've really attempted to extend our liability duration a little bit, as rates have remained where they are. That's obviously cost us in the margin, but we're hoping and expecting that when rates start to pick up, we'll have the dividend paid back to us by maintaining our margin even more. So we can drive the margin by shortening the duration of the liabilities, but we've attempted not to do that. I don't know if that helps you in that process. It's a dynamic approach and something that we look at each day. We try to be opportunistic when we extend our borrowings. We continue to take out longer-term borrowings. We've done a fair amount of brokered certificates of deposits, which is something a little over a year ago, we have never had. And we had a campaign earlier in the year for our own depositors to try to extend their terms. And whenever you go to extend terms, you still have to pay up a little bit. So those -- that campaign, that depositor campaign occurred kind of in the second calendar quarter and the full effect of it starts to take hold in our September quarter. So I think that's part of the trending that you're seeing there. We've continued to be very successful in attracting new mortgage business. The margins on that business are still very attractive. We're very pleased with it. So we're looking for some good things as we enter into the next quarter. If you saw the expenses, our expenses were up a little bit, maybe some in compensation where we expensed compensation based on the number of weekdays in the quarter, and the September quarter had more weekdays oddly enough, and that tweaked our compensation expense a little bit for the September quarter versus the June quarter. You'll also see that our marketing dollars, our marketing expenditures were a little bit higher in the September quarter, and we're aggressively expanding in our nonfootprint stakes, or what we call our expansion stakes. A lot of the upfront dollars for marketing are spent before the business volume throws back in. So we're looking for some good things to happen there as we enter our December quarter and going forward.

So given the number of days in a quarter, will you expect some contraction in the level of operating expenses this quarter and the next quarter?

I have to look at the calendar, again, and I apologize for that. Both quarters have 92 calendar days, but I'd have to go back and look at the weekdays, and I apologize I didn't do that in advance of the meeting.

So Dave, you're going to have to count the holidays, too.

We count the holidays...

Including Halloween.

Halloween, right. But definitely, when we get into the March quarter, we have fewer weekdays there. So if you look at some of that trending, you'll see that.

[Operator Instructions] Our next question comes from Rick Weiss with Boenning.

Hey, I was wondering with -- it seems like the federal government is now making changes to, I guess, make it easier for homeowners to get mortgages like the FHA with the 3% requirement. Are these changes going to have any impact on your business?

Not necessarily. We're pretty aggressive in our marketing. We're pretty aggressive in our -- actually, our underwriting's pretty good. Seemingly a little more conservative than it was 5, 6, 7 years ago. But now the changes they've made probably won't affect us too much if they're going to make changes and the changes are to the borrowers who own their own businesses, then that will have a real positive change, I think, for anyone applying for a loan in that category. But other than that, we don't see that the changes that they're making is going to significantly alter our business plan or change it for the good or for the bad.

Okay. And just to follow up what you said, with respect to the waiver of the dividend, this is a process that would occur every year that the -- when you get the depositor or the member approval for this? Then does it go back to the regulators for a nonobjection? Is that good for 12 months? Is that how that works?

Yes, that's exactly how it works. And then what the nonobjection includes is how much we're going to pay for the year. So we're tied to that $0.07 a quarter or $0.28 a year for 4 quarters.

Our next question comes from Kenneth Coe with Brown Advisory.

It's Kevin O'Keefe from Brown Advisory. First off, nice-looking quarter. I'm curious how much stock have you purchased quarter-to-date have you said?

The quarter ended September?

No, no, no. In October. Can you tell us how much you purchased this month?

No, we typically wouldn't talk about that.

Okay. But we'll be able to figure it out on -- when you file your 10-Q in a few days, right?

Well, it's a 10-K, so we won't be filing until probably around Thanksgiving time.

Right, okay. Okay. So since you can't say that, I'll just throw a few statistics at you. Since you've been allowed to repurchase your shares once again, you retired 9% of the minority shares outstanding in less than a year, and your tangible book has increased by 8% and your tangible common equity ratio has only declined by 80 basis points, from 16.3% to 15.5%. I would just suggest, as you heard me say before, that repurchasing your shares, there was just absolutely no better argument in the entire financial landscape than what you guys are doing right now, and it's showing up, I mean, of the 92 banks that we track north of $1 billion of market, you're the #1 performing bank year-to-date. So continue to aggressively buy back stock. There's nothing else better that you can do with your capital, with our capital. So keep up the good work.

Noted. Thank you, Kevin. All right. You want to say that again? It sounded pretty good.

It does -- it feels a little weird getting on the call and just -- and saying nothing but praise, but that's the situation we're in right now.

Well, yes, we paid some dues last couple of years, and we're hoping to continue to reap the benefits of our hard work and investment in ourselves and our whole operation. And thank you, all, for being very patient with us.

[Operator Instructions] It appears we have no further questions at this time. I'll turn the floor back over to Mr. Marc Stefanski for any additional or closing remarks.

Thank you, Alish. Just one other item I'd like to throw out there for our investors and maybe for the whole bank environment is that we're talking now with our Governor Kasich of Ohio, along with our Senator, Sherrod Brown at the national level, to try to get something done with a homebuyer's tax credit. This was done back in 2010, and if anyone's done any history on what the economy, especially in the homebuying area, has shown, 2010 is the only time that we had a spike in homebuying activity. So with all the interest rate manipulation that's been going on and the very low rates, which is supposed to stimulate the homebuying environment, that hasn't happened. So once again, go back to 2010, what has happened? And 2010, that has made a difference. It's been the homebuyers' credit and that was just for a very short period of time. So again, we're working with our Ohio governor to try to maybe get something going here in Ohio for a tax credit and with Sherrod Brown on a national level, and Sherrod Brown, of course, is on the banking committee, too. So that's one good thing we're working on, politically. And also, just to reemphasize our 3-dimensional approach of growth, buybacks and dividends, we can't say that enough, and we appreciate your patience and understanding the last couple of years. And we're moving forward, and nothing but sunshine and blue skies. So thanks very much for tuning in.