TFSL (2015 - Q1)

Marc Stefanski - Chairman and Chief Executive Officer Paul Huml - Chief Accounting Officer Dave Huffman - Chief Financial Officer Meredith Weil - Chief Operating Officer Analysts:

Matthew Breese - Sterne Agee Joe Stephens - Stephens Capital Scott Beury - Boenning & Scattergood William Huff - Private Investor

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 at 2:00 p.m. Eastern Standard Time. The dial-in number for the replay is 800-839-2435. 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]. 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, Kevin, and welcome to Third Federal’s first quarter earnings conference call. And in the spirit of this being Super Bowl weekend, I’d like to say that the reports that Paul Huml would be sharing with all of us haven’t been deflated in any way. And that personally, I’m here because I have to be and I don’t want to get fired. So, without further ado, Paul, would you please go over the deck with everyone?

Okay. Thanks, Marc, and welcome, everyone. I’m not going to go over the slides in great detail, it’s sort of is a consistent theme from what we’ve been doing over the last number of quarters. What we’ve been trying to do is really the three-dimensional approach of growing the balance sheet, buybacks and our dividends. And a lot of what you’ll see in there supports that. A couple of pages I do want to talk about, page 5, the financial highlights section. And you’ll see which is supported later our delinquency and loan performance numbers are improving. So we’ve decreased our provision for loan losses down to $2 million for the quarter so that’s an improvement. And net income is staying steady from where it has been. One thing of note is on the net interest margin per say decline from previous quarter. And really that’s revolved around a new strategy that actually we put in place that the suggestion of a shareholder on last quarter’s call of increasing our federal home loan bank borrowings and investing that at the federal reserve to get some risk free return adding some dollars to the bottom line without having a lot of risk on the balance sheet. So that increased our average assets and liabilities on our balance sheet which negatively impacted the margin, but did add income to the bottom line. So that’s really the reason why you see that decline in the margin. Moving forward, really page 8, 9 and 10 are all very consistent that show consistently over time how we are reshaping our portfolio from a long-term fixed grade lender to more of an adjustable rate shorter-term really in response to some of the interest rate risk considerations that are out there. So, really pages, 8, 9 and 10 just provide different support and how we’ve been able to do that reposition our balance sheet over time. The next three pages, the 11, 12 and 13 really state how we’re doing from a loan performance, page 11 really emphasizes that our loan production over the last six years has really performed extremely well with high credit scores, high credit performance and very little delinquencies. And page 12 and 13, our delinquencies overall in our loan performance metrics have all improved over time. So that really tells a good story there. And then, heading to page 14, which I think generates a lot of interest from the investors and shareholders. It’s just a continuation of our strategy from the capital deployment side of continuing of share repurchase program and the dividend which started in September, we had another dividend in December. So for the quarter, we did buyback little over 2.8 million shares, and so we’re continuing that. There is, still 6.5 million shares remaining authorized under the Board program. And obviously we have the MHC dividend waiver boat which allows us to pay the dividend. So continued, again, what I said before, we’re just continuing the same story that we’ve had for the last couple of quarters. And that pretty much sums where we are for the quarter.

We’re open for our questions. Kevin? Hello Kevin. We’re here for questions.

[Operator Instructions]. We’ll take our first question from the line of Matthew Breese with Sterne Agee. Your line is now open.

Good morning, guys.

Hi, Matt, how are you?

I’m doing fine, thanks.

Good.

I was hoping to get a little bit more color on the upstream of cash from the bank to the holding company. Obviously, that was good to see. I was just wondering how would you characterize that. Was that more or less the last 12 months of net income, or was there anything in addition there to what you’ve earned?

Hi Matt, this is Paul again. Yes, that’s strictly the earnings base dividend upstream from the thrift into TFS Financial. That’s just based on earnings plus whatever dividend we’ve paid recently.

Okay. And how would you characterize your ability at this point to upstream more than what you’ve earned, as obviously your capital deployment strategy out-paces your net income generation?

Well, I think we’ve continued, certainly there is the level of cash and capital sitting in the holding company right now that’s more than adequate to cover needs. And we have talked about in the past that we have put $150 million down into the thrift in 2010, so that’s always a possibility that we would entertain moving, trying to move some of that capital back up. That would involve certainly an application with the regulators to get that approved.

Okay. And then, obviously the MHC dividend waiver is still good but when do we start thinking about going after the next one and how do you feel about your ability to gain some approval there and run a bit more autonomously on just proving yourselves?

Well, I don’t know about the autonomy part because we do have a procedure that we have to go through according to the Federal Reserve. But we’re very confident that in the next few months we’ll begin our campaign again to solicit the boat for the following four quarters. That should be sometime early summer.

Do you expect the dividend to be the same or any changes to the payout ratio?

We haven’t given that any thought at this point. I’d say that, in terms of the response rate, we expect that to be the same. But beyond what I just told you, I mean, we haven’t really planned much out.

Okay, no, that’s fine. And then, fundamentally at the bank, can you give us a bit more color on the funding strategy, obviously borrowings are up, deposits were a bit down this quarter. And your loan to deposit ratio is a bit elevated versus some of your peers above 120%. Can you just give us a bit more color around that and whether or not we run into any sort of, to issues there we need more deposits?

Good morning, Matt. This is Dave. I hope you’re doing well.

I am. Thank you.

Thanks. And then, with respect to your question, we - our business is lending to homeowners. We have kind of that mono-line approach. And traditionally we had obtained all our funding through our retail branch system. A couple of years ago, as earnings became more and more important to us, we focused on optimal pricing in our cost of funding. And that led us to our Federal Home Loan Bank advances. And we’ve also pursued some broker deposits as we continue to try to extend the duration of our funding sources. One of the things that impacts our ratio is our high capital. If we had, if we were running with 6% capital, we might have more funding opportunities to leverage the retail side. I’d say we’re not uncomfortable with where we are at this, around 120% to 125%. I think that we see others that are - have a similar business approach up in the 140s. So, we don’t, we understand that we’re a unique organization and we’re retail focused. And we will go back into the market when we can provide our depositors with products that they are attracted to at a funding cost that’s favorable to us. I think we’re comfortable where we are Matt.

Okay, that’s fine. Do you have any sort of guidance on your margin outlook, especially given the new leverage strategy and the general flattening of the yield curve since we last spoke in September?

I don’t think we’ve attempted to provide margin outlooks. I think one of the slides in the packet does show how our deposit cost has kind of leveled out. If you looked at it, that funding cost is kind of bottoming out. And we do get, like I think almost all financial institutions, the point where it’s difficult to lower the funding cost anymore. We’re looking forward to some relief on the asset side if rates ever start to move back up, then we can see some improvement in the asset yield because we’re not sure that there is a lot more opportunity on the funding side to see the cost go lower. So I would say that the margin is something that’s going to be, it’s going to be a lot of work as we go forward until there is some relief in the market’s pricing. I don’t know if you’re seeing anywhere else where they, where they’re not facing that dilemma.

No, it’s pretty universal. I appreciate that, guys. Thank you.

Thank you, Matt.

Our next question comes from Joe Stephens with Stephens Capital. Your line is now open.

Good morning guys.

Good morning, Joe.

First of all, good quarter. Matt, actually had got a couple of my questions. So let me first hit on the MHC waiver. Marc, is there any chance that this MHC waiver can be extended beyond the one-year, I mean, literally if you just wasted money that you guys have to “expand” to get this waiver, and it’s almost sort of similar to getting a waiver from like un-issued shares. And is there any chance you can get this from more than one year. So we as investors and you guys as good managers don’t have to just expend your own, your capital and our capital for this very sort of weird thing? That’s question number one. And then, comment number two is, we would easily as investors support your effort if and when you get a chance to pull down your $150 million back from the bank up to your holding company? So, that’s it. Thanks guys.

Joe, pertaining to the dividend waiver, that’s one of the things that our agenda this year. We feel the same way that you do and have expressed that it’s an onerous process to annually go out and get that vote. The good news is, we can’t get that vote every single year. The obvious is that, it is a waste of money so we’re looking for trying to get some relief if it’s three-years, great. We’ll shoot for even as long as five years and find out where that lies. But that’s on our agenda things to do for 2015. And we’re right there with you.

And if I could ask one more question, would this type of market turmoil partially related to what’s happened with oil and some other foreign situations. Obviously that’s impacted your stock to some degree, not due to your performance at all but just due to these situations. Does this give you a chance to maybe even take advantage of this and be a little bit more aggressive in your repurchase activity? Thanks guys.

I’m for apology. You had some hesitation about repurchases? No, I’m just kidding. I’m just kidding. We love repurchases. We do and we’re going to continue to aggressively repurchase our stock.

Okay, thank you guys. Good quarter.

Okay.

Our next question comes from Rick Weiss with Boenning & Scattergood. Your line is now open.

Hi guys, this is Scott Beury filling in for Rick Weiss.

Good morning.

Good morning.

I just had a quick question on the fee income line. Obviously it was better linked quarter but I do think the deposit service charges were down a little bit, which is starting to look kind of like a trend this quarter from what we’ve been seeing. And I was wondering if you had any color on that?

Good morning, Scott. Thanks for calling in. Our deposit fees aren’t really a big number for us. What you’re seeing there is mainly our mortgage servicing fees that are in that fee line. And our mortgage servicing portfolio continues to decline. So if you look at that over time, you’ll see I think a continual decrease in that fee line item.

Thanks, that’s helpful. And just another broader question, can you give any color on what you’re seeing in terms of the housing market, Ohio in comparison with Florida and maybe anything there?

The housing market in both those areas, are very slow. We’ve noticed that across the country, it varies. Virginia’s really strong. New York is still strong. Parts of Pennsylvania, is still strong, North Carolina in terms of purchase mortgages. Our strategy of course is to pursue, purchase mortgages in those areas but at the same time we’ve been focusing on the refinance business because we’re stealing other company’s loans. Because a lot of people are in a re-price mode as these adjustable rates are in play. So that’s been our strategy but the purchase market is not great anywhere that we have stores.

Okay.

So, we’re looking outside our footprint to improve that.

All right, that’s helpful. That’s all I got. Thank you.

Okay, thank you.

[Operator Instructions]. We’ll take our next question from William Huff, Private Investor. Your line is now open.

Thank you, good morning.

Good morning.

With all your excess capital and reserves, I never hear any discussion of making any acquisitions around your area yet. Have you considered that at all or is that just nothing we’re interested in?

We have a unique culture. And in a lot of cases, when you’re merging two companies together you’ve entered cultural conflicts, that’s not our favorite thing. We don’t want to start managing that because that takes our eye off of our primary business. The second thing you run into in a lot of cases is, for the acquirer, we may be picking up a company that’s a little weaker. Hence that requires management’s attention towards the delinquency problems or foreclosures or other headaches that another company that we would be merging with would bring in. So that’s not our favorite way to grow our business. We do, we are in the acquisition business. We like to acquire our customers one at a time.

Okay, thank you.

Thank you.

And we’ll take a follow-up question from Matthew Breese with Sterne Agee. Your line is now open.

Just one follow-up. On the billion dollar leverage strategy, can you give us any components, what will be invested in FHLB stock, what’s the yield there? And then offsetting expenses so we can get an idea of what the net benefit is?

Matt, this is Paul again. Generally, as we’ve sort of said, we’ve had about $1 billion of advancements from FHLB. There is, you’ll see the FHLB stock we had to use part of that to increase our stockholdings in order to borrow more. And the rest of it is invested at the Federal Reserve. So there is not a lot of moving parts in there. You’re really borrowing at the FHLB rate. You’re investing generally - currently at 25 basis points for the Fed and whatever dividend pays on the FHLB stock. So that’s generally where we’ve been at it. It’s a program that we can stop on a day’s notice if it stops being attractive. But that’s generally where we’re at, at this point.

Okay. Do you know what the FHLB yield is I know it can differ from different regions?

I think the current rate for our FHLB in Cincinnati is 4%.

Okay. That’s all I had. Thank you very much. Appreciate your time.

And it appears we have further questions at this time.

Okay. Just as a final comment, it’s 17 degrees and snowy here in Cleveland. But the way we look at Third Federal’s business, it’s nothing by sunshine and blue skies. That strategy has been very, very helpful in that. It’s been supported by our three-dimensional approach growing the balance sheet, buying back stock and paying a dividend to our shareholders. So, we appreciate all your support. And on a final note, on a personal note, I’d like to thank all of you who have expressed their condolences for my wife’s passing. And just thank you very much. It means a lot to me and to the entire Stefanski family. So, with that we’ll close.

Thank you. This does conclude today’s teleconference. As a reminder the dial-in number for the replay is 800-839-2435. Please disconnect your lines at this time. And have a wonderful day.