TFS Financial Corp (TFSL) 2011 Q4 法說會逐字稿

Welcome to TFS Financial Corporation's fourth fiscal quarter earnings conference 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 the 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 12 Eastern. The dial-in number for the replay is 800-283-4216. 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 the 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.

Good morning, everyone. Welcome. And at this time, I would like to turn the floor over to Paul Huml, who will go over the deck that was made available to everyone. And then we will follow-up with questions. Paul?

Okay, thanks, Mark. As you know, we put out the earnings release yesterday and then also the slides that we'll be briefly going over today. Really just jumping to page 3 in the slides, just an overview of where TFS Financial Corporation is as of September 30, which is our fiscal year-end. Very consistent with where we have been, you know, as it's a little under $11 billion. Shareholders' equity of $1.8 billion, which was a little over 16% capital, which we stayed very consistent with.

Going onto page 4, just sort of a strategic overview and we're a very consistent, simple organization focusing on individual mortgages and deposits. And we traditionally have been a fixed rate lender. Recently as of July 2010, with the issues with the equity lines of credit where we stopped originating equity lines of credit, we looked at trying to respond to our interest rate risk exposure. And we went more [to a way in] adjustable rate product, what we call our Smart Rate product.

And so, if you look at where we're at coming from a traditionally fixed rate [note], we've got 55% of our current fiscal year production was the Smart Rate adjustable product. So, we think that is pretty key going forward.

Generally, most of our mortgage loans and deposits have been generated in our footprint, which is Ohio and Florida. But starting in May of 2011 -- and it expanded a little further on. We have introduced the Smart Rate product into other states and using our same underwriting, same credit standards going out to other states to generate some loans. So that will be a key component of growth going forward.

And again, everything has originated by Third Federal Associates, same tough credit standards. And you can see on the first mortgage originations that we have done this year with the average credit score of 775 and an average LTB of 64, we're keeping that strong credit component.

From a markets of operation on page 5, really not a whole lot of change. Ohio and Florida is where our physical presence is and we stay very strong in those markets from a deposit standpoint.

On page 6, I think you can see some the things that stick out. And in a tough environment our loan growth, even considering that we stopped originating HELOCs and we reduced those consciously down $350 million, [albeit] in the last year our loan growth has increased, which is really the originations of some of the Smart Rate products.

We've been able to increase our net interest income from last year. I think probably the big difference is in the noninterest income where we lost some, is that we're not selling any more loans to Fannie Mae, so you see a lot of the gains that have fallen out of there. Our provision for loan losses, we're starting to see that trending down if you look out over the last few years and even from a quarter standpoint.

Again, the strong capital position has always been there, over 16% tangible capital percentage, and the asset quality at the bottom has seen some improvements there. And the capital on page 7 is a little more definition of where each of the ratios are at, both from a consolidated TFS Financial and the [FB Thrift], Third Federal savings.

And again, on page 8, just sort of a reinforcement of the simple story that we are, that we are mainly in loans and deposits from individuals. We don't do broker deposits. Most of our -- at this point more first mortgages [that are] in Ohio, we still service over $5.4 billion of loans for mainly Fannie Mae. And you can see the deposits remain very strong at an average deposit per branch size, $223 million.

I think on page 9 it's really -- the key story that we have going forward has been the adjustable rate growth as we shifted from a traditional fixed rate lender into more of an adjustable rate product. So we have generated 55% of our loan production in 2011, which was $2.14 billion during fiscal 2011. You can see on the chart; in 2010 we introduced the Smart Rate program in July of 2010, so only 19% of our production last year was variable for this current fiscal year at 55%, so that is kind of key.

Total ARMs on the books are representing now 25% of our -- all first mortgages. And as I mentioned before, we have expanded the Smart Rate refinance option to a number of new states. And four of them were done in May and then we have added six more in September.

Now there is not much of an impact in fiscal 2011. We probably have about $20 million of loans that have booked from those states. But we think that is going to be an item we keep an eye on as we move forward.

On page 10, just going over some of the loan delinquencies and charge-offs, and -- pretty consistent with where we have been. Florida has been the issue that has given us the most concern, both from -- mainly from an HELOC standpoint but also from a first mortgage. You can see that delinquencies were little higher there, and a lot of that is based on the value -- the real estate values and the job issues down in Florida. So we continue to keep an eye on that.

But I think the key thing looking in there is that our Ohio production has done very well. First mortgages $5.7 million in Ohio with the delinquencies, total delinquencies of 1.4%. So we think we've done a good job. Comes back, that is 50% of our total loans is in that category. So we've done a good job from a credit standpoint trying to keep control of that.

One of the key items, going on to page 11, has been regulatory issues. You know, we have had an MOU in place since February. That's put us onto a couple of things.

We responded to a number of the issues the regulators have. At this point, we feel we've responded to the issues in the MOU. However, we still have to wait for the regulators to come out and validate the issues we have.

We feel we've responded. It's up to them to come in and take a look at it.

We had had a change in regulators. The Office of Thrift Supervision was our primary regulator. That changed as a result of the Dodd Frank Act. So on July 21, 2011 that changed, and now we have essentially two primary regulators. The OCC will regulate the Thrift and the Federal Reserve will regulate the Holding Company.

As part is that MOU, we have some restrictions on dividends and buybacks. That continues, still under the 45-day non-objection period.

One thing that comes out from the OCC coming to be our primary regulator for the Thrift is their position on specific reserves and our evaluation of our [loan approvals]. Under the OTS there was a category called specific reserves that were -- remained on the books. From an OCC standpoint, they have indicated in an October directive to all of the Savings institutions that all of the specific reserves need to be charged off by the March 31 quarter.

So, that will be -- at September 30 we had about $55 million of specific valuation reserves that's sitting in our allowance. We intend, at this point, to convert to the OCC methodology in the December quarter, so that will [give] a one-time boost to the charge-offs in the next quarter.

It won't impact our P&L. It is really just going to be a reduction of the allowance and a reduction of our nonperforming loans and delinquencies. So, that will be a one-time occurrence that we'll see we'll see in the next quarter.

Another issue from a regulatory standpoint is the Federal Reserve came out with some proposed guidance on mutual holding companies and dividend waivers. There was a comment period that closed at the end of October and we have responded to that. We think they put it in some constraints that said for a mutual holding company to waive its right to receive dividends, which we have done in the past. It's that they would require a member vote of all of our depositors.

We think that is overreaching [what] the rules were from the OTS, and obviously overreaches what the Dodd-Frank provision provided for. There's been a number of comment letters have been sent to the Fed addressing that and I think they are still in the process of evaluating that. And we'll wait to see where that comes out.

So, on page 12 we're still in sort of a waiting game on cash dividends and stock repurchases. We understand that is very critical to shareholders, and it is very critical to us. We're all part owners of the Company as well. It is very critical to what we're doing [from a] Company. But I think the key is we have to get the regulators happy with what we've done in response to some of their concerns, so we will wait for that to happen.

Really in summary, our focus is continuing that high credit quality [one-to-four] family mortgages, residential markets that we're going after traditionally in our banking footprint. But as you saw, we have expanded into some new states. We're going to see how that development goes. Hopefully that will be a growth area for us.

We continue to have strong capital and we have a lot of flexibility at the Holding Company. And we're looking to work with our new regulators to get us over the hump that we are, and be able to get back to hopefully dividends and share buybacks.

So that really, in a nutshell, is where we're at. I think it is very consistent. We've seen some trends that hopefully will continue and I'm going to open up the call for questions.

(Operator Instructions) Mike Shafir, Sterne Agee.

Hey, good morning guys.

Good morning.

Just a bit of a housekeeping question on your tax rate and then also the federal insurance premium, I was wondering kind of what occurred there on the insurance premium this quarter with it rising so significantly. And then also what kind of tax rate should we be thinking about moving forward?

This is Dave Huffman, Mike. On the deposit insurance, the Dodd-Frank changed the rules effective April 1. We're now -- instead of being based just on deposits, it is based on our liabilities.

And I believe that in that process the rate was adjusted so that the FDIC collected in total the same amount. So, companies with limited non-deposit borrowings saw a reduction in their rate while companies that had a wholesale borrowings in addition to deposits generally saw an increase to their rate. So, we did see an improvement from that standpoint.

In the June quarter, however, and I think we might have tried to include a note about this, we had an interpretation with respect to long-term unsecured borrowings that we hadn't taken advantage of previously. In June we filed a recovery for that. So, those two things impacted June and we didn't have a recurrence of the recovery in the September quarter. So I don't know if that answers your question, there, Mike.

So, I mean, is that $5 million kind of the run rate moving forward depending on your (inaudible) and so forth?

Yes. The number that is in the September quarter would reflect our run rate.

Okay. And then on the tax rate, which was lower this quarter --?

The tax rate, I think we might have talked about this last time. We have the BOLI, which is our most significant tax permanent item. And it's a fixed amount and it fluctuates depending on what the pretax earnings is going to be, or its impact fluctuates depending on what pretax earnings are.

And as we move through the June period, we didn't want to get ahead of ourselves with respect to what our taxable income was going to be. So we based the estimate at that time on what we knew then. And as we progressed through the September quarter, we came to the realization as to what our pretax earnings would be.

And then, as we're required to do, we then adjusted the effective rate to reflect the impact of that from [the difference]. Does that help you on that one?

Sure. And then moving forward, should we should we think about somewhere -- a tax rate somewhere in that 30% range then? If I look at the average for the following year, it is around 27%.

Yes, Mike, I would say it is a function of what the pretax earnings are. If we think about having a permanent difference of somewhere around $5 million or $6 million, then it becomes a function of pretax earnings. So in an absurd example, if our pretax earnings were $5 million we would expect to have a tax rate of zero.

Okay.

If it is $10 million, then our tax rate might be 17%. As the pretax number increases, the effective rate will gradually increase.

Okay, and then just one final one on the specific valuation charge-off. So, just to confirm this, if we just kind of thought about this in isolation during this quarter, your loan loss reserve to loans ratio would drop from that [1.58%] to somewhere in that [1.03%, 1.04%] range?

Yes.

Okay. Thanks a lot, guys. I appreciate all that detail.

Thank you.

Michael Lee, Royal Capital.

Hey guys, good morning. Could you guys just give us an update on how your latest exam has gone, or if that is in process, when it is scheduled for? And your expectations on when you will be able to get a ruling on the MOU?

What I can say is that we have not had the exam and we're anticipating that in the near future. But the exact date we're not sure of and can't comment on.

And then just any visibility on when you might be able to take up the MOU issue with the OCC?

Sure. The day after they are done. We'll be right there talking to them. We feel that we have complied with all of the things in the MOU and probably more. And we're very, very confident that we can have a positive outcome with the review coming up.

But again, we are dealing with a new regulator. We're not exactly sure how they will look at certain things. So this is kind of a burn-in period now and we're going to know more, I'm sure, within the next few weeks or months, and certainly let everyone know as soon as we find out something has changed.

Great. That's all I have. Thanks.

(Operator Instructions) [Frank Rango, Purchase Capital].

Yes, good morning, gentlemen. Just wanted to know if there were any changes in the mix between adjustable rate and fixed rate assets on the asset side of your balance sheet for the quarter?

Yes. Originations have been about 55% adjustable, 45% fixed for the year. So that continues to increase since we introduced the Smart Rate program in July 2010.

Got it. So what is the current rate ratio between adjustable rate and fixed rate assets?

Well, as far as the first mortgages, it's probably close to 25% adjustable now, 75% fixed.

It's just under 20% overall.

Just under 20% overall? Okay, great. Thanks.

At this time, I'm showing no further questions in queue. I will turn the call back to Mr. Marc Stefanski for any additional or closing remarks.

The only thing I want to say is Happy Thanksgiving. Thank you for joining in. And Paul Huml of course is available for all the shareholders to call right after the meeting. Good luck, Paul. (laughter) Thank you very much.

Thank you. This does conclude today's telephone conference. As a reminder, the dial-in number for the replay is 800-283-4216. Please disconnect your lines at this time and have a wonderful day.