TFS Financial Corporation
Q4 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

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

[Marc A. Stefanski:]

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?

[Paul J. Huml:]

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.

[Marc A. Stefanski:]

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

[Meredith S. Weil:]

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.

[Marc A. Stefanski:]

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

[Operator:]

[Operator Instructions] Our first question is coming from Matthew Breese of Sterne Agee.

[Matthew Breese:]

My first question is related to the buybacks. I was hoping you guys could touch a little bit more on the change in how you guys felt about approaching the regulator to restart the buyback? And then two, what is your confidence level that once you do complete the existing share repurchase program, that you'll be able to continue it after?

[Marc A. Stefanski:]

Okay. First of all, I think we mentioned in at least one other call previous to this one, is that from a regulatory perspective, both the OCC and Federal Reserve have always been concerned about the earnings level that we had. And I think in the last year, we've got at least 4 quarters worth of solid earnings. So with that in mind, we felt confident we could move forward and reinstate the buyback program. Once that's completed, we definitely plan to go back to the Federal Reserve and get a -- hopefully, get a non-objection from them. There's no reason why, at this point, we see that, that couldn't happen and continue the buyback program along with our pursuit of paying a dividend also. That's a little bit longer runway. There's a lot of hoops we have to jump through unlike before the Federal Reserve was our regulator at the holding company. But we're going to actively pursue that, too.

[Matthew Breese:]

Okay. And then let's just say you do go back to them for another buyback authorization. Could you just remind me, a standard buyback program, call it a 5% repurchase, is that of minority shares or total shares? If you do some percentage of total.

[Marc A. Stefanski:]

That would be on the minority shares.

[Matthew Breese:]

Okay. And then my last question is regarding the gain on sale income related to the Fannie Mae, the ability to sell Fannie Mae eligible loans. I guess we've been talking about that for a couple of quarters now, and I guess I'm curious as to what's the holdup, what's taking so long? And then once you do get authorization to do so, how much could that contribute to the bottom line?

[Meredith S. Weil:]

Matt, this is Meredith. We -- really, it's just a change in our process in how we originate loans, and that has just taken some time. We had implemented our Florida loans -- our Florida production earlier than Ohio production. Ohio went into place this quarter. And it's a similar process to really what we've experienced with our regulators where Fannie Mae has come in and done audits and they are just going through their process to reactivate our status. Our philosophy with selling loans is really -- continues to be to manage interest rate risk. There has been opportunity in the market to take advantage of the gains on sales. We've actually been selling HARP loans and we've actually looked at also private investors to sell loans. So for loan sales in the future, I think really, we are going to continue to balance just the benefits of growth versus the benefit of loan sales and really thinking about managing interest rates in addition to how loan sales will drive earnings.

[Matthew Breese:]

But nothing yet as to how we should they be thinking about the potential impact to the bottom line?

[Meredith S. Weil:]

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.

[Marc A. Stefanski:]

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.

[Operator:]

[Operator Instructions] And we'll take our next question from Joe Stieven of Stieven Capital.

[Joseph Albert Stieven:]

Marc, can you give us any color on how the repurchase has, number one, have you commenced? And how has it gone so far? How active have you guys been thus far since the announcement?

[Marc A. Stefanski:]

Well, we're buying.

[Paul J. Huml:]

Yes. Joe, this is Paul. I mean, we've started October 1 and we're certainly in the middle of buybacks. So I think when that's complete, that gets included in our next filing.

[Joseph Albert Stieven:]

I'm sorry, did you say your next what? You faded out, Paul.

[Paul J. Huml:]

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

[Operator:]

[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.

[Marc A. Stefanski:]

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.

[Operator:]

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