TFS Financial Corp (TFSL) 2011 Q1 法說會逐字稿

Welcome to TFS Financial Corporation's first fiscal 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, Mr. John Ringenbach, Chief Operating Officer of Third Federal Savings and am Paul Huml, Chief Accounting Officer. Today's call is being recorded and will be available for replay beginning at 1.30 PM Eastern Standard Time. The dial in number for the replay is 800-388-5895.

(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 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 firms 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 conference over to Mr. Marc Stefanski. Sir, you may begin.

Thank you very much, Beth and good morning everyone. I would like to immediately turn the floor over to Paul Huml. Paul is going to go over just some highlights from the deck that was accessible to all of you and then we're going to open up for questions and comments and I think that's where probably you want to get down to it to what you want to hear. So Paul, would you just go through that, what you prepared.

Great. Thanks, Marc. As Marc mentioned the slides were filed with the SEC on the 8-K yesterday. They're also on our website. They basically summarize the information that was in the 10-Q so I don't anticipate going over a lot of detail on the slides. I'm just going to hit some major points and allow more time for questions from the investors at the end.

So as you see on probably these first couple slides there's not been a lot of great change since the September 30 numbers that were out there. That we won't put a whole lot of detail into that. Strategic overview we have stayed very consistent. Basically it's non-commission Third Federal employees originating our loans using very conservative standards. That has not changed at all.

Financial highlights; we've dropped in some quarter numbers there and as you see from a balance sheet stand point I think we have done a good job of deploying the cash. As some of you may have followed we had a large loan sale on the June 30, 2010 quarter and we had a large amount of cash that's been redeployed into our loans over the next six months. So you can see we put over $500 million in our net loan portfolio in the quarter. So we have done a good job of redeploying that cash.

And from an operations standpoint, unfortunately the results continue to be driven by the provision and so, you know, we have $34..5 million in the provision for the quarter and that's really what's driven the loss for the quarter. Again, in the loans and deposit not a whole lot of change from our shift from where we've been. Capital position certainly remains strong and you will see in some of the thrift ratios that will reflect $150 million of capital that was pushed down to the thrift from the mid-tier holding company.

From a delinquency and charge-off standpoint we've stayed fairly consistent from a dollar amount delinquency as a percentage as the loan balance has grown percentages have dropped a little bit, but the general delinquencies have stayed relatively flat and the charge-offs are consistent with where we have been the last couple quarters. One of the major issues from the last time we talked was the memorandum of understanding that we received in August and this is sort of a timeline on that memorandum. We received it in August, they asked to address our home equity portfolio, the concentration in it, and the number of procedures.

We responded in September with a formal plan. We heard back from the OTS at the end of December with their non-objection and at this point we're just in a monitoring standpoint as far as the activities under that MOU. The big aspect of the MOU was the home equity lending reduction plan. In our plan we agreed that we would reduce our exposure to commitments by $1 billion by December 31 2011. That's from a June 30 balance.

Included we would also decrease our outstanding balances by $300 million. We would put $150 million into the thrift from the holding company. We completed that in October and the various procedures that were requested are in process. The big thing on the plan is of the $1 billion that was planned that we need to reduce by the end of December we've already completed $738 million by December 31. And the $300 million reduction we've (inaudible) through December 31 have reduced that by $159 million.

So we have made pretty good progress on that. Unfortunately, we've also just this week received from the OTS a new memorandum of understanding which rolls in the performance monitoring from the old MOU. The old MOU is now effectively terminated and they have just rolled their monitoring going forward into a new MOU. And some of the new items that they've asked us to address is interest rate risk, enterprise risk management, review of management compensation, formal director management succession plans, and some operational policies that need to be tightened up.

And they've also formalized as this MOU effected each of the thrift, the TFS financial and our mutual holding companies, that they require a true non-objection to any dividends or stock repurchases that we planned. They also have debt in there, but the holding company, right now we have no debt at the holding company and have never had debt at the holding company so not really a I big concern. But the big thing is putting the, a formal 45 day non-objection on the dividend and stock repurchase. And consistent with what with he have done in the past we want to work through the issues with the OTS. We don't intend to ask for dividends or stock repurchase approval at this point until we work through the issues with the OTS.

I think the big thing as we talked about earlier is the loan growth that we've experienced since we've had to shift away from the home equity lines of credit, which is prime based and variable and provides some interest rate protection. We had to reduce balances there. We've looked at what would replace some of that and not be a true same interest rate hedge as an HELOC but at least provide some interest rate protection is looking at adjustable mortgage first mortgage loan product. So we've initiated the new Smart Rate in July of 2010. Through December we have over $900 million of these new adjustable mortgages. As you can see from the chart we've focused more on a, close to 50/50 split as far as our fixed rate first mortgages and 50% to adjustable rate.

Again, as consistent with all of our loan production, very high credit scores, credit quality, 775 average credit score, LTV 65. So right now we've been a traditional fixed rate lender. We're trying to shift a little bit and getting a little more interest rate risk in getting adjustable rates. And as far as the first mortgage portfolio we are approximately 20% of our first mortgage portfolio is now (inaudible). And the new volume of $900 million easily surpasses the $159 million that we reduced under the HELOC reduction plan and even the $300 million is flat. So we feel pretty good about that.

In summary, we're basically right now trying to work through the issues with the MOU with the OTS. Our focus is the OCC is going to become a regulator in July. We're working to try to accomplish those things. We've engaged Promontory to look at a number of things. In the MOU that talked about looking at interest rate risk and enterprise risk we had actually engaged Promontory to do those studies back in September well before they showed up in any issue with the OTS and the MOU.

So we have no problems complying with the requirements in the MOU. We anticipate making the deadlines that are put out there and our goal at this point is to get the issues with the OTS beyond us and move forward. In the appendix there is a couple charts that we've updated from the last time we presented. It talks about what our goals are from the home equity portfolio exposure and also some updated credit score data on our HELOC portfolio. But our goal is since we're moving along with the reduction plan is to complete that, resolve the issues with the MOU with the OTS and move forward.

So, just a brief summary of where we are at, at December 31. I wanted to leave a lot of time for questions from the investors.

At this point I'm going to open it up for questions.

Thank you. (Operator Instructions). Once again, the floor is now open for questions. (Operator Instructions). Our first question comes from Daniel Arnold with Sandler O'Neill. Go ahead please.

Hey, good mornings, guys. How's it going?

Morning.

My question actually is going to be on the new ARM production you guys had. I thought that was a pretty solid loan growth in the quarter and I wanted to see where those loans were coming from, how you guys were originating those. And are those end market credits or are those national credits? Just kind of get a sense of the profile of what you guys are putting on your books right now.

Good more Dan. Marc Stefanski. This is mostly from a footprint. Anywhere we had a branch in Ohio a lot of refinances but a lot of refinances from other organizations so that growth was done again in our footprint. So it was perfect timing on it because of the refinance boom that occurred and the rates were so low that a lot of people were taking advantage of it so it worked in our favor.

Okay. Great. And then if I could ask one more question just on the HELOC portfolio. It seems like if I look at the total delinquencies from the 10-Q, 30 plus days past due, that seems to have trended down modestly this quarter. Have you guys seen any change there or does it seem to be kind of gradually moving in the right direction for you guys?

This is John Ringenbach. I think it's gradually moving in the right direction, but we're very concerned about the unemployment. Obviously it continues to be very high, has a huge impact not only on our HELOCs but on our first mortgage portfolio. So we would like to be optimistic, but we find it hard to do that in the environment that we're in with the unemployment being 9% or higher.

Okay. Great. Thanks. I will let other people kind of jump in now.

Thank you. (Operator Instructions). Our next question comes from Paul Miller with FBR Capital Markets. Go ahead, please.

Hi. This is Jessica Ribner for Paul. We were just wondering about the provisions. How can we think about those going forward as your credit seems to be improving but you've been building provisions the last couple quarters?

Good morning. This is Dave Huffman. You know, the review of our credit portfolio is something that happens each quarter. The setting of the allowance for future losses is rather nebulous. We try to make it as quantitative as possible. Obviously, we've built that reserve at some point when we see delinquencies turn down, charge-offs start to turn down, there won't be the need for that level of reserve effectively. We've not gone to that point yet.

I know a number of other institutions have reached that point and you have seen some rather significant credits going back through their operations. But as John mentioned earlier, we might be a little bit later on the curve because of the employment situation and the impact it has on folks' primary residences. We've believed and it's really been part of our commitment to first mortgage loans that people who live in their homes really want to live there and they will do everything that they can to maintain that.

And they will keep their credit as up to date as possible but as unemployment endures there is kind of a cumulative effect that impacts their ability to do that. And that, as John mentioned, gives us concern in watching the delinquency level we're keeping on our first mortgage loan portfolio. So at some point we would expect the level of the allowance to be reduced but we are not sure when that happens at this point. I hope that answers your question.

Yes. Thank you. And also just one other question about your, the ARMs, your concentration of ARMs. Where do you see that going in terms of the percentage of your mortgages and your exposure to that? Are you looking for like a 50/50 split? Are you happy with just holding 20% of your mortgages and ARMs?

Well, I don't think we would be disappointed to see that split increase to have more in the ARMs, particularly if our equity portfolio is managed down from here. If we went back several years, the purpose behind building the equity portfolio was to provide balance from an interest rate risk perspective in our balance sheet. And now we look to the ARMs to inject that interest rate sensitivity on the asset side of the balance sheet. So I don't think we would be disappointed to see the ARM portion increase even from the 20% we're at now.

And that's the strategy today. And don't forget that somewhere around August 1 we're going to have a new regulator and I think they're going to look at things differently. How differently we're not sure. But we don't know if that will open up the door for more home equities or not but we're not going to take that off of the possible things to do with a new regulator looking at how they, how they manage us and how they want us to manage our balance sheet.

Great I thanks so much.

Thank you. Our next question comes from Matthew Breeze with Sterne, Agee. Go ahead, please.

Hi guys. It's actually Matt Kelly for Mike Shafir. I was wondering on the new MOU can you talk specifically what the regulators are looking at for interest rate risk and maybe talk about capital requirements, liquidity requirements, net stable funding. I mean what are they telling you? What's the message in that part of the discussion with regulators?

This is Dave Huffman again. Thanks for calling in. You know, I think the regulators are looking at a broad spectrum of institutions that might have a much more complex balance sheet than we do. When you look at our balance sheet, we basically have fixed rate loans and we have retail funding. So it's very traditional in its structure, but when you compare us to other organizations that have more complex structures, they have more complex systems to monitor those structures and I think that the OTS would like to see us enhance our systems that we use in monitoring the process.

So we've always been a low cost organization, low cost operator, and we thought we had some pretty efficient means of evaluating our interest rate risk and some pretty efficient methods of modulating it. But the regulators would like us enhance that. I don't know if that's answering your question or not.

Yes. Is there any component of that discussion that if you are holding long-term fixed rate assets with material extension risks that, that's going to impact the capital and liquidity requirements that they are suggesting you have?

Well, our capital is so high already it's conceptually, you can always theorize an environment that's problematic, but in the mean time you have to operate in today's environment. So the OTS has a liquidation perspective which they must. I mean that's their purpose as the regulator, but as operators of the institution we have to maintain a going concern perspective. So we put a lot of focus on the margin and, not that we don't ignore the liquidation value. It's something that we're aware of. We understand we have to manage risk limits there, but we're constantly looking at that. We know that we're in a relatively low rate environment today and at some point if you believe in cycles, rates are going to go up. And, you know, that was really our purpose in getting in the HELOC portfolio because it provided us with a lot of upsides on rate up movements and that's really what we're looking for in the ARM portfolio as well. It's to give us some sensitivity when rates move up.

Now, you had asked about liquidity as well. You know, we are a retail shop, but we have a large capacity of wholesale borrowing available to us that we really view that as our liquidity hedge. So when you look at the balance sheet we don't have much in the way of wholesale debt on the books. As we proceed from here there may be a regulatory preference to have liquidity on the balance sheet as opposed to liquidity available through wholesale channels. So that's something that as we migrate to new regulators we may have some new thoughts on the table there.

Is the OCC model as focused on the liquidation perspective as the OTS model.

You know, I'm not sure how detailed the OCC model is with respect to interest rate risk and liquidation. It seems like the OCC may be as much more interested in systems to manage risk in total. And I think we have heard some feedback that maybe the OCC doesn't adopt the current OTS modeling frame work. But that's something that I think in the next six months we'll know more about that.

Okay. An then just one follow-up on the formal management and director succession plans how do you think, what are they driving at there? Do you think we'll see new board members or new additions to the team?

Well, certainly because of Dodd--Frank we have to add at least one board member that has experience in managing risk on a very high level at an organization of some magnitude, a public company with hopefully some years of banking experience also. So that's part of it, but we haven't always had an informal succession plan in place, but really nothing in writing. So this is just formalizing something that many, many companies have done in writing.

It's, to us it's really not that big of a deal. We're just going to take what we've talked about in the board room and put it on paper. For that matter why it shows up in an MOU, that's a good question. I just have no idea.

Got you. All right. Thank you very much.

Sure.

Thank you. At this time there are no questions in queue. (Operator Instructions). We'll pause one moment to allow everyone an opportunity to queue. It appears there are no further questions at this time. I would like to turn it back to our speakers for any closing remarks.

Again, Marc Stefanski. Thank you for having faith and confidence in us and we will continue to work hard to improve the results in the future and keep you posted. Thank you again.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.