TFS Financial Corp (TFSL) 2011 Q3 法說會逐字稿

Welcome to TFS Financial Corporation's third 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; Mr. John Ringenbach, Chief Operating Officer of Third Federal Savings; Ms. Meredith Weil, Chief Retail 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 1.30 p.m. Eastern Standard Time. The dial-in number for the replay is 800-677-6124.

At this time, all participants have been placed in a listen-only mode. The floor will be opened for your questions following the presentation. (Operator Instructions). In the interest of time and to get as many questions as possible, we ask that you limit yourself to one question and one follow-up. (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 statements provided during the conference call.

It is now my pleasure to turn the floor over to Mr. Marc Stefanski. Sir, you may begin.

Good morning everyone. Thank you Beth. I would like to immediately turn the floor over to Paul Huml, who will go over the highlights that we've compiled in the deck that some or most of you or all of you may have received. Then we'll open it up for questions and comments. So Paul, if you want to jump in and begin the presentation.

I just want to get started. The slides that are out there, you can move through the slides and view whatever ones you want. I'm going to try and go through a sort of hit some of the highlights, not intending to go over everything on every slide, so -- and we'll have time for questions at the end.

Going into Slide 3, just a little background information on Third Federal and TFS Financial. We completed our IPO in April of 2007. We trade on NASDAQ, total assets at June 30 around $11 billion. Shareholders equity is about a little over 16%. We are a mutual holding company, so while there's 308 million shares outstanding, the mutual holding company owns 227 million of those. So there's a little over 81 million that's actually traded on the public market.

Just a little, on Page 4, just a little background on our operation. Started in Ohio but we also have 17 branches in Florida that were all started de novo, that we've started from scratch. Branch sizes average about $223 million per branch.

So going over to Page 5, just a strategic overview. Our business model is basically first mortgages for residential customers. That's what we've done. We continue to stress conservative underwriting as part of our approach to -- with the equity lines of credit that got reduced either regulators. We've gone into an adjustable-rate smart-rate program that started in July of 2010. So we -- 2010, so we continue to push that. We've also started to look at doing some refinancings with that product in other states, kind of a new product that we're pushing out.

Just to stress all of our loans are originated by noncommissioned Third Federal Associates using the same conservative underwriting standards for all of our branches.

We continue to strive to be a low cost provider. We think that's a big advantage to us. We have shown in the past that we understand the financial aspects of shareholders through buying back shares and paying dividends.

Going on to Page 6, just hitting some of the key financial highlights. We put up some information for prior years and previous quarters. But the provision for loan losses has stayed consistent the last couple quarters. Our ratios, capital ratios, are remaining very strong. Our net interest margin improved during the quarter from where it was last quarter.

So we are -- things are starting to trend up. There's definite signs that things are on the upside. So there's a number of stats down there. You're welcome to view them on your own and if you have questions later on.

Again, on the next page, loans and deposits were a fairly simple story with residential mortgage loans and consumer deposits. We don't do consumer loans; we don't do business checking. We're a very simple operation and as part of the low cost provider, we try to keep high average deposits in our branches. You can see over $223 million per branch.

Stressing on Page 8 where we are from a capital standpoint, I think, no matter how you look at it, whether it's the at the thrift standpoint or from the public company, holding company, TFS Financial, our equity positions are very strong and have remained strong.

Obviously, in today's economy, on Page 9, delinquencies and charge-offs have been a key item to look at. I think one of the things that we've looked at is our issues have focused in some of the real estate in Florida, and the HELOCs in Florida which have caused some high delinquencies and also some of the first mortgages there. But if you look at Ohio and Kentucky is thrown in there just because we have Cincinnati loan origination offices, but the Ohio piece, which represents the bulk of what we're doing, has maintained fairly low delinquencies when compared to where things are in the industry. So we feel pretty good about that. I think we're working to get our arms around the situation in Florida, and working on that.

Obviously, the home today has high delinquencies. They've always had high delinquencies. There's not a new -- not a lot of new loans going into the Home Today portfolio. It's mostly in runoff stage at this point. We see high delinquencies, but really the charge-offs are not that severe because we've done a lot from restructuring with those customers. We have a lot of private mortgage insurance as well that helps keep our losses on those loans down. We've seen a lot of in and out of delinquencies in that portfolio. As I say, it's a small piece of the overall portfolio, and it has been going down for the last two years.

Page 10, I just wanted to go over some of the adjustable rate loans that we've been originating in response to the lack of the equity lines of credit that we've been doing. As you see, over the last few quarters, we've been able to get our production down to around a 50-50 mix of adjustable rate versus fixed rate. We have traditionally over the years been a mainly fixed rate lender, which adds to the interest rate risk. So in today's market, we've looked at doing more adjustable rates, which helps lessen that interest rate risk.

All the origination and underwriting that we've done has remained very consistent, very conservative. You can see the average credit score of the ARM production and the LTV is very good, 62%, the average credit score 775. So through that production which really started in July of 2010, we've been able to increase our adjustable mortgage to, up to 23% of our total first mortgages, so we're very happy with that growth.

As I mentioned, we are looking at some additional states that we've started taking applications in -- Pennsylvania, New Jersey, Illinois and North Carolina. Still kind of early in the game on that, but we hope that to be an area of growth as well.

Then on 11, sort of an issue that we have had and I think a lot of people who have followed us -- there's been a memorandum of understanding that we originally got from the OTS back in August of last year, which was amended and revised and replaced in February of this year. Some of the things that they ask for -- I'm just trying to give you an update on where things are. In the February MOU, they asked for us to go out and do an interest rate, an enterprise risk management study. Both of those studies are complete. We're in the process of implementing a new interest rate risk modeling system. We've established risk management committees at both the Board level and at management level. We feel very comfortable with where we are with the overall enterprise risk management approach.

Some of the other things that the OTS had asked for was management compensation studies, succession plans. All of those studies have been complete, submitted to the regulators. We have various operational policies mainly revolving around the equity lines of credit, ongoing account maintenance, and those type of issues, and those continue as we move forward.

Probably the biggest piece was the financial piece of the home reduction -- Home Equity Reduction Plan. In that, we had a December 31 deadline on that for those goals. Those have been met as of June 30, as you can see on the next page on 12, where we stand with those goals. The goal was to get our commitments down by $1 billion by the end of December of 2011. We've actually exceeded that at June 30. The home-equity balance reduction, we had a goal of $300 million by the end of December. We have exceeded that as of June.

Some of the -- just to recap, the $150 million capital infusion from the holding company down to the thrift, that was completed in October. That really had no bearing on the overall capital of the Company. That was just an internal allocation of capital down to the thrift. As I mentioned, the expanded line management and account management collection processes that continue, particularly in regards to our home-equity line of credit.

Another chart on the next page was really just to show what the goal was that we had committed to to the OTS was 261% to get our home-equity portfolio as a percentage of our capital and allowance. That was to achieve that by the end of December. Again, you can see we exceeded that as of June 30. So those -- obviously the -- all these requests and the MOUs with the OTS, obviously on July 21 we now have two regulators, which is the OCC and the Federal Reserve. So we have to make sure that those two parties are comfortable with the information we provided and what we're doing from an operational standpoint.

On the next slide, you'll see obviously, from an investor standpoint, dividends and stock repurchase is a big part of what we do. We try to have a three-part approach to how we use our capital, and this is two of them, dividends and stock repurchases, and the other is growth of the Company. But dividends and stock repurchases have been curtailed as we're working through the issues in the MOU. As we've alerted people before, we have to provide 45 days notice if we want to do that, for their approval. We need to get the new regulators coming in as of July 31. We understand that dividends and stock repurchases can be a key component. I think that's something we are looking to get back to. We have to make sure that we can get our new regulators comfortable with what we're doing, to get us back on that path. What the exact timing of that is unknown at this point. We're certainly working with them to get there as quick as possible.

Really just in summary, our focus is high-quality one-to-four mortgages primarily in our banking footprint, but we are looking in some other states for some growth. We have a strong capital position, and we have a lot of flexibility at the holding company. We're certainly working with the new regulators to resolve the MOU and get our efforts on returning to some of the shareholder-enhancing activities, the dividends and share buybacks.

So just sort of a summary where we are at the quarter. I know a number of people have certainly questions out there with the new regulators coming in that what the impact is going to be. I think that will continue to be a work in process as we start to meet with them and go over what their reviews are.

So at this point, I'm going to turn it back over to Beth, and she will instruct people how to work the question-and-answer session.

(Operator Instructions). Daniel Arnold, Sandler O'Neill.

So I guess my first question is just I guess on the MOU here. I wanted to see if you guys have had started conversations with your new regulators and what they kind of -- if they've indicated what the process would be from here in getting this (inaudible), if there were any additional steps that they indicated that they wanted you to take or if it's now just a matter of them reviewing the existing MOU that's in place and seeing if that makes sense.

We have meetings scheduled with the Fed actually next week, but we have not engaged in any formal discussion with either one of the regulators on our position as far as the MOU or the buybacks or the dividend. So that's up-and-coming. We've talked casually with them and we've had discussions of course since we first started this process way back in February. But as you know, in a regulatory environment, the official baton wasn't handed off until July 21. That's when their actual process begins in terms of the analysis of our company or any other company that's involved in the transition.

Those conversations next week, is that part of a formal exam or is that just kind of an introductory meeting?

No, I think it's part -- it's not part of a formal exam. I think that the Fed, along with the OCC, is still trying to determine the order in which they're going to organize the processes moving forward, along with the people. So next week, we'll be meeting with the folks that will be our new regulatory line of command from the Fed's perspective. But yes, that's when the more formal talks will begin about where we stand and if we stand at all in terms of anything that's done -- that's been said and done with the policymakers in D.C.

Great. Then just as it relates to once (inaudible) you guys (inaudible) and you guys are able to buy back stock and pay dividends, how do you guys balance those two? With the stock trading where it's at right now, what do think is a more effective use of capital right now and how aggressive are you going to be on both ends?

Actually, our growth strategy, as Paul mentioned, is a three-tiered approach. It's growing the balance sheet along with buying back stock and paying dividends. So, we hopefully will be doing all those things in the very near future.

Okay, but you don't have a preference for one of those right now, or that I guess will depend on where things are at (inaudible)?

Yes, it really does depend on where things are at. We're prepared, if we're not able to pay dividends, which would don't know at this point, then we're prepared to continue the buyback program if that's allowed as we move forward.

Okay. Then I guess the last question, just as you guys look at your capital level, obviously the complexion of the balance sheet right now is a lot different than it was even a few quarters ago, just given the home equity exposure and the addition of first-lien mortgages. Does that affect what you guys think is kind of a normal operating capital level in that the risk on the balance sheet is actually lower? Do think you can operate a kind of lower normalized capital level than you could before, or how do you feel about that and what is kind of a normalized capital level in your guys' minds?

This is Dave Huffman. I think it's always relative to where we are in different cycles. You mentioned that it's less risky than we were a few quarters ago, but if we went back a year ago, we had almost $1 billion in cash. So from that standpoint, we have to be sensitive to where we are in different cycles. We hope we're coming out of the delinquency troughs and that we'll see continued improvement on that score. To the extent that improves, that might imply that we need a little bit capital.

As you'll recall when we had the idea, we probably raised more than we expected when we started the process, and our capital numbers were very high. We started the program to reduce those. As both Marc and Paul have indicated, it's a three-pronged attack. I think that we would intend to leverage the balance sheet a little bit more. But when we look back two years ago at the level of capital we had, that's been kind of a saving grace for us because the capital level is so strong that it really takes out of the equation, in our mind anyway, the risk of more severe environments that we can weather through things as we have done. It's almost circumstantial. So we'll just have to see where we are at that point in time and see what the risk profiles look like.

Great, thank you very much. I appreciate it.

Paul Miller, FBR Capital Markets.

This is Jessica Ribner for Paul. Just one question -- you're looking to expand your one-to-four family mortgage business out of footprint as well?

Yes, that's correct.

So what's your strategy for them, and where would that be?

Meredith?

This is Meredith Weil. We are currently expanded into Pennsylvania, New Jersey, Illinois and North Carolina. We're using a very similar strategy to our equity strategy when we expanded our equity business out of state. We've been doing direct mail and using Internet advertising to drive business through our customer service center and our Internet channel.

Just one more question if you don't mind. Are you guys seeing a lot of competition within footprint and even on the -- your marketing strategy out of footprint? Have you seen increased pricing competition, or anything like that?

I think the competition is consistent with how it's been in the past. I think that the broker market has definitely changed a little bit, but because rates are so low, I think that really there is definitely rate competition out there. I think we've seen some success in our new states. It is too early to really tell. We really expanded at the end of May, so our results are still preliminary, but we've been able to really get out there and have interest even though we don't have a big brand presence in those new states.

Okay, great. Thank you so much guys.

Mike Shafir, Sterne Agee.

Good morning everyone. I was just wondering real quick on a housekeeping question. What's a good tax rate to use moving forward?

This is Dave Huffman. If you can tell me what our earnings are, I can give you a great tax rate. We do have the -- our biggest permanent difference item is our bank (inaudible) license (inaudible), the BOLI program. We have a little over $165 million in that, and the income from that is it creates the biggest tax difference. So if that income is in the $5 million or $6 million range, I would just adjust your estimate of pretax earnings on that. Does that help you?

Yes, that sounds good. Thank you very much. Then just as we think about kind of the balance sheet and what's gone on so far on the credit side, nonaccruals have come in the last couple of quarters and your charge-offs have remained relatively flat. It seems like things are starting to stabilize a little bit. So the bulk of those charge-offs have come in that home-equity portfolio. With the big reduction that you guys have had, could we potentially start to see charge-offs a little bit lower over the next couple of quarters?

This is John Ringenbach. I can try to help with that. I think the biggest concern we have -- and there has been some positive trends, both in delinquencies and the charge-offs -- but the biggest concern we have continues to be the employment situation. That's where most of our challenges are. Our Special Servicing Group, which does the modifications for mortgages, is still very busy. Our collection team is still working diligently with customers. The thing they see the most is folks who are underemployed or lose their employment. It's just a challenge. I think, if we see some improvement in the economy, some improvement in employment, we'd feel better about things, but right now it's not immediately obvious that that's happening.

One thing I want to add on that on the charge-offs is really, from the specific reserve standpoint, that's part of our allowance, which could impact the level of charge-offs. Under the OTS, they have a specific reserve that can be included in your allowance. The OCC does not have that total view, so I think there is a potential that some of those specific reserves turn into charge-offs as we get into a new regulatory world. So that won't really impact what we're doing from a P&L standpoint on the provision but can impact the level of charge-offs.

Then I was just wondering. Do you guys have the TDR balance on renegotiated loans for this quarter?

I think the TDRs have been -- the increase has been pretty consistent with what it was prior quarter. It probably went up about $9 million for the quarter.

Thank you very much for all that detail.

(Operator Instructions). Joe Stephens, Stephens Capital.

All my questions have been answered except for one. What's the cash position at the holding company right now?

Hey Paul.

We generally have about $250 million of capital that sits at the holding company. That's invested in a couple of different pieces. It's probably, the cash piece is probably in a $150 million range.

Okay, so it hasn't really changed too much. Okay.

No.

That's it. Thank you guys.

Ross Haberman, Haberman Management.

I was just wondering, could you elaborate on one of your slides, you talked about the operational issues which you're working on which are not -- I guess it said you're not quite done. I was wondering if you could elaborate, if possible, on what that is and what you still have to complete.

There's a number of examples in there --

I think it was Slide 11.

Yes, got it.

There's a number of examples of that, but one example would be account management techniques in terms of our equity line of credit portfolio. We are working with some third-party vendors and also internally to improve our account management techniques, trying to predict better who might be having a problem in the future and how we might be able to work with those customers. That does require a lot of modeling. That modeling is probably going to take another three or four months to complete. So that would be an example of where we're trying to revise our internal operating procedures but are not quite finished yet.

Is that the major item left, or there were a bunch of smaller items as well is that?

I think there's of smaller items left in terms of some of our collection processes and how we do those in using different techniques and phone systems. So, I'd say that's the largest one, but there are some other smaller ones too.

Do you think you'll be able to accomplish all that by when?

I think we'd like to see the major pieces completed by the end of the year.

The end of the calendar year?

Correct.

Okay guys. Best of luck. Thank you.

(Operator Instructions). It appears there are no further questions at this time. I'd like to turn it back to Mr. Marc Stefanski for any closing remarks.

I just want to thank all of you for chiming in. We are going to close the session now unless there's any other questions or comments from the team here. That will do it.

Thank you. This does conclude today's teleconference. As a reminder, the dial-in number for the replay is 800-677-6124. Please disconnect your lines at this time, and have a wonderful day.