TFS Financial Corp (TFSL) 2012 Q1 法說會逐字稿

Welcome to 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; 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 six o'clock p.m. EST. The dial-in number for the replay is 800-283-8217.

(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 on 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.

Thanks very much. Welcome, everyone. I'd like to at this time turn the phone over to Paul Huml, who will just begin with the deck that was made available to all of you.

And, Paul, go ahead.

Okay, thanks, Marc, and thanks, everyone, for joining us.

As Marc mentioned, we filed our earnings release yesterday at four, along with a copy of the slides that we're going to go over today, and at the end we'll have time available for questions.

Really just jumping to Page 3 of the slides is just a summary of where we are as a company at December 31, very consistent with where we were at September 30, our last fiscal year end, total assets $11.1 billion and shareholder's equity of $1.8 billion. That's about a little over 16% capital ratio, so very consistent with where we are.

The next slide is just a summary of our strategic overview, where we're doing, and I think as you'll see through some of the slides later we have traditionally been a fixed-rate lender, but based on some of the issues that have presented itself, whether it be interest rates, some of the regulatory issues with our equity lines of credit, we have introduced an adjustable rate first mortgage product that has become more a big part of what we're doing from a production standpoint. We've had the current quarter the adjustable rate product was 58% of our first mortgage production, which was up from 55% last quarter and 19% a year ago, so that's a big step from where we are trying to transition from a total fixed-rate lender to more of a variable rate product.

One of the areas that we've looked at is new state expansion, and we started that in mid-2011, and that has continued to expand. We're continuing to learn the best way to approach some of the out-of-state markets, but that'll be a big part of what we're doing.

We're going to continue to use our Third Federal associates to originate all loans, same credit standards. We're not buying loans from brokers. They're all being originated through Third Federal. And you can see through the credit scores, 777 of an average FICO score and the loan-to-value average is 61%. So, we've tried to stay from a credit standpoint very high on the scale.

Going to the next page, it's very little change in our markets of operation. Our branches are in Ohio and Florida, and that's where we've traditionally received all of our deposits, and that has not changed.

Next page, Page 6, really goes over the financial highlights, and there was just a little different breakout between what was put in the earnings release, but some of the key items is really looking at the loan growth. If you look over where loans were a year ago, September 30, 2011, December 31, even though we've not originated any equity loan products, the first mortgages more than made up for that, and we've continued to have growth. A lot of that is from the strong refinance market that's out there. And we've also, as you can see, maintained very strong capital.

Some of the highlights in the quarter-to-quarter earnings, as you'll see, our provision is down a little bit, $19 million to $15 million as we've seen some of our delinquencies come down a little bit, so that's a positive trend. Net income is very consistent with where we're at. And you'll see at the bottom from the asset quality some big improvements in our nonperforming and delinquency numbers, which is really driven by one particular factor, the charge-off of some specific valuation allowances that we can get into a little later. But in spite of that there is -- beyond the charge-offs there were some improvements in the delinquency, as well.

The next page, capital, very consistent with where we're at, very strong, high capital percentages.

And, again, Page 8, not a whole lot of change in our loan and deposit mix. I think you're seeing some people come down out of CDs as they mature because of the low rates and stay a little more short term, and probably our equity lines are decreasing a little bit and the first mortgages are becoming more of a percentage of the total.

The next page, on 9, sort of starts to tell the story of where we are with the adjustable rate loan production, and you can see over the last couple of years that production has really increased as we've responded to both the lower interest rates in the market and also the regulatory issues with our equity line of credits. And this really is from an approach of an interest rate risk management. Since HELOCs float at prime and we haven't been able to originate any of those in the last year and a half or so, the first mortgage, the ARM product, is helping from a long-term interest rate risk standpoint.

And, as I said, consistent with the total production, the ARM production is very high credit quality, as well, with the credit score and the average LTV of 778 for the credit score and 60% for the average LTV.

Next page is sort of the percentage of adjustable rate growth where it stands as far as our total portfolio. You can see over the years that 2010 we -- total first mortgages, 14% of them were adjustable rate at the end of fiscal 2010. That's more than doubled as a percentage through December 31, 2011. We're now up to 29%. When you actually factor in the equity lines of credit that are out there that are adjustable, 43% of all of our real estate loans have an adjustable rate feature in the loan. And from the new production in the new states that we're looking at, again, moving -- just starting in mid-2011, we have about $66 million of loans closed in those new states as of December 31, 2011, so we continue to work performance in those states.

Next page goes through the loan delinquencies and charge-offs, and you'll see a little bit of the impact that I talked about earlier was the specific valuation allowance. From a regulatory standpoint, for those of you who don't know, we were always under an Office of Thrift Supervision regulator, up into July of 2011. Under the Dodd-Frank Act that was converted. We're now under the control of the OCC, Office of Controller and Currency.

One of the things that's different between a thrift shop and an OCC shop was the treatment of specific valuation allowances, and the OCC has indicated to all of the thrifts that they've now taken over the supervision that each of those valuation allowances were to be charged off as of March -- by March 31, 2012. We have done that in this quarter, December 31, 2011, so that balance was $55 million at the end of September, it's now 0 at the end of December 31. So that increased our charge-offs for the quarter, but you can see it also had a very positive impact on the delinquencies between September 30 and December 31. So, that's a pretty significant impact from a delinquency standpoint. And I think, as we've seen all along, our Florida properties, and particularly the [ELI] products, and the first mortgage, to extent, are bigger issues which mainly resolves around the values, property values down in Florida.

From a regulatory standpoint, just an update on where we are, because we've had a few changes in the regulatory standpoint. We had a memorandum of understanding that was in place from February of 2011. We believe that we have met all those objectives. We've responded to all the issues that they've raised. However, at this point we are waiting for the OCC and the Fed to review and validate all of the progress that we have made. So, we did go from the OTS as a regulator and essentially split into two regulators. The OCC regulates our thrift and the Federal Reserve Bank regulates our holding company. So we have two [that replaced] there.

We also, the fact that we're over $10 billion in assets, we also deal with the Consumer Financial Protection Bureau, which will be coming in and reviewing various parts of our business, and also the FDIC has expressed an interest in being over $10 billion that they also want to take a look at various things. So it is a changing environment from a regulatory world, and we're working through those.

And as part of that is the dividends and stock buyback program, which is certainly of high interest to all the investors and certainly of high interest to us. That is still subject to the 45-day non-objection period from the regulators, and our intention is to work through the concerns of the regulators and hopefully get back to those two programs as soon as possible.

And, again, some of the changes was the charge-off of the SVA, which I talked about earlier. There's really no income statement impact, but it did impact the allowance and the level of delinquencies accordingly.

Another issue from a regulatory standpoint that's still uncertain is the Federal Reserve, since they're now the regulator of our holding company and that's where dividends are paid from is the whole issue of a mutual holding company dividend waiver. In the past under OTS rules our mutual holding company, which owns over 73% of the shares, was able to waive its receipt of dividends, which allowed dividends to only go to our stockholders, public stockholders, who had paid for their shares. However, under the Federal Reserve they have sent out preliminary comments that the only way that these dividend waivers can continue is if we get a vote, a positive vote at least once a year from our depositors -- not our shareholders, but our depositors of the bank.

This certainly goes beyond whatever the Dodd-Frank provisions contemplated, and there's been numerous comments to the proposed rules from the Federal Reserve, of which we've sent in a letter. There were a number of other letters sent to the Federal Reserve on this very issue. At this point we are waiting for some type of final rule from the Fed to dictate where we go with the whole dividend waiver issue. So, again, that's another item that's still open.

The next page just sort of summarizes where we are with the cash dividends, stock repurchases. We'd certainly love to restart those programs up. Right now it's under the control of the regulators to make sure that they are happy with the progress that we've had under the MOU, and hopefully we can move that forward.

So, really, in summary on the last page we're going to continue to focus on high credit quality one to four family residential mortgages mainly in our footprint but also expanding into some of these new states, particularly as the refinance market stays strong. Obviously we have a strong capital position and we [like] -- and we have flexibility at the holding company. And we're viewing some of these regulatory issues. We're a long-term focused company, and these regulatory issues, while frustrating from a shareholder standpoint, frustrating from a management standpoint, we view these as really just short-term, temporary setbacks, and we hope to work through these and get back to our core focus of dividends and buybacks for our shareholders.

So, that sums up the presentation that we've had, and I'm going to open it up for questions from the investors, and thank you.

Thank you, Paul.

And the floor is now open for questions.

(Operator Instructions)

And our first question comes to us from Mike Shafir, with Sterne, Agee. Go ahead, please. Your line is open.

Hey, good afternoon, gentlemen.

Hi, how are you doing?

I was just wondering if maybe you could speak about some of the offsets. Your margins remain relatively stable, but your cost of CDs is still at 2.5%, and I was wondering why is that kind of so far above the market and how much more do you guys have repricing this year, kind of what rates are you putting new CDs on, so we can continue to potentially fight the pressures of reinvestment yields on the securities side?

Hi, Mike. This is Dave Huffman. Thanks for listening in on the call. That's a great question. It's one that we certainly pay a lot of attention to. Our CD portfolio is probably a little bit longer than a lot of other institutions because we have a longer duration asset with our fixed-rate loans. So we do try to target the longer CDs, so any time you have a positively shaped yield curve you're going to have higher rates out there. So we do have repricing coming. So that should continue for us.

Okay, and then just real quickly, on the non-interest income, that really fell off a lot sequentially this quarter. I was wondering, is there anything unique or one time in the numbers there?

I'd say that when we look at the -- you're talking about the non-interest expense, Mike, or --

No, the non-interest income.

Income, okay, on the income we had a little bit more in the way of servicing amortization on our sold loan portfolio because the repayments kicked up. So that was probably the biggest variance there. Plus the portfolio is shrinking in and of itself because we haven't been selling back into Fannie Mae. So I'd say that that's where, when you look at it, I think we were down about $1 million in the fees and service charges (inaudible) amortization. That's what caused that.

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

Thank you.

You're welcome.

Thank you, and our next question comes to us from Joe Steven, with Steven Capital. Go ahead, please. Your line is open.

Good afternoon, guys.

Hi, Joe.

Can you -- Paul, can you tell me, how much cash do you have sitting at the holding company, cash and real short-term investments? That's question one.

I would say there's probably capital wise there's about $275 million, probably liquid funds maybe $160 million, $165 million or so.

I'm sorry, Paul, say those numbers again. You say $275 million of --

Total capital at the holding company separate from the thrift is probably about $275 million.

Yes.

Liquid is probably $165 million.

Okay. Okay. And so obviously your ability to use that for share repurchases and dividends has no impact at all on the bank capital ratios, which you're still tremendously in excess of all the requirements. And I guess what is taking -- I mean we as stockholders, we've been very supportive, but at some point it just starts to get annoying that this process is taking so long. And, I mean, it's -- why do you guys think it's taking so long?

(Inaudible).

Probably a good reason not to answer.

I think to -- it's Marc Stefanski -- we're dealing with the federal government. We're dealing with a regulator that's brand new to some of the thrifts and the mutual holding companies. So they're digesting what we have. It just takes time. There's been a lot of training by the OCC and some by the Fed for the group that comes in and actually monitors what we're doing and examines the books at Third Federal and all the other companies, so this has just taken, unfortunately, longer than we had hoped for, and obviously we feel your pain and understand and commiserate with you from that perspective. And no one wants to move the ball further and faster down the field than all of us here in this room and the entire company as well as all the other shareholders. So, yes, Joe, I hear you.

It's just frustrating, Marc, when you hear the quote, unquote, Secretary Geithner 's on TV right now saying the biggest banks have the toughest capital ratios, and we're looking at you guys with 20% total cap being told you can't pay dividends when people with far less capital ratios than you are paying dividends. It's just annoying. So, I'm sorry, it was my editorial comment for the day. Thanks.

Thank you, and we feel your pain.

Thank you.

(Operator Instructions)

And we'll move on to Frank Rango, from Purchase Capital Management LLC. Go ahead, please.

Yes, good afternoon. With regards to your production of ARMs, do you guys have a target in mind as to what your portfolio mix objective will be between ARMs and fixed-rate mortgage?

We've really been focusing on trying to balance our fixed-rate and our ARM portfolio -- I'm sorry, this is Meredith Weil -- to more of a 50/50 balance, and we've actually gotten to the point where we're approaching a 50/50 balance with just adjustable rates in general, and so we'll continue to really -- that's why we're expanding into new markets so that we can continue to grow the ARM specifically. In the new markets we're only offering ARM. So that's really been helpful in balancing out the fixed-rate versus ARM.

Okay. And can you explain what the difference is between the product you're offering now and conforming product and exactly why you haven't been taking advantage, perhaps, of the fact that you could possibly sell some of these to the agencies?

On our fixed rate we have a different process. In the past we were granted waivers from Fannie Mae, and those waivers are no longer available for any lender. Our process, really, our underwriting guidelines are very strong, obviously, from the loans that we've been originating. We have very high credit scores and very low LTVs. But our process does differ a little bit from what Fannie Mae requires. They have certain rules along the way when you're originating loans, when you're closing a loan, the requirements that you have to go through and what you have to put the customer through.

We look at our relationship with the customer as a long-term relationship, and we want successful homeowners, and so we really look at high credit standards, but we also want to treat our customers well, and some of the requirements that Fannie Mae has instituted require you to possibly deny a customer close to closing, and those are things that we don't really want to do and treat high credit quality customers that way. So at this point in time we've made a decision to follow our standards, and hopefully in the future we'll be able to sell loans, but at this point we've made the decision not to.

Great. Well, thank you for that explanation. One other question, I never really focused (inaudible) on bank-owned life insurance contracts. It's $172 million. Are those life settlements, or exactly what are those?

I think -- Frank, this is Dave Huffman -- those are standard contracts.

Oh, so this is savings bank life insurance?

They're individual life insurance policies.

And they end up on your balance sheet because --

They're -- the premiums were funded upfront.

But the bank is actually the beneficiary of the death benefits?

Yes.

Yes.

Okay, and that's a pretty big investment in life insurance policies, isn't it?

I think we've had it for about 10 years, and I think that from a regulatory perspective there's always been a 25% of capital limit, and we've stayed substantially below that. So it's not, I think, an uncommon investment.

Right, right. Just, if we could just follow up for a second, I'm just wondering how you value those policies.

It's really the cash surrender value.

Cash surrender value. Okay. Great. Well, thank you.

Thank you, and we'll now move on to Mike Godby, from Fig Partners. Go ahead, please. Your line is open.

Good afternoon, guys. I've got a simple question given the regulatory environment and how harsh it's been on you folks as far as repurchases and the concerns about potential dividends. If by chance the regulatory environment doesn't shift and we don't get relief on the dividends or the repurchase possibilities, how many years would you have to go through that in order to come to terms with the second step conversion?

That's a good question. We really haven't given that much thought. I mean, we're optimistic that this thing is going to be moved along in the very near future, but we haven't given it that much thought in terms of the second step and how that applies to what's going on now.

Okay. That's fair enough. Thanks.

Thank you.

(Operator Instructions)

And it appears we have a follow-up question from Frank Rango. Go ahead, please.

Sorry to keep asking on this, but with regard to the regulatory scrutiny you're under right now, is there any -- do you guys get the sense at all that the fact that you're not originating conforming mortgages, that you have sort of a non-standard product, not that I'm saying there's anything wrong with it, but do you think that might be having some impact on the amount of time it's taking to get your application to be able to repurchase stock and do dividends through the regulatory agencies.

We don't have a sense that that's the case at all. The focus is certainly going to be on what we've done with the items listed in the MOU, and, Dave, did you have any other --

Yes, I'd say also, Frank, notationally, we did sell loans in the last year just as kind of a proof of concept. We didn't sell more loans because we've been sitting -- we've had so much cash there was really no advantage to us to sell the loans. So the fact that we don't sell to Fannie Mae currently, we don't view that as suggesting that our portfolio is either untradeable or illiquid.

Great. Thank you.

You're welcome.

And I'm showing no further audio questions at this time, so I'd like to hand it back to Mr. Marc Stefanski for any additional or closing comments.

I just wanted to thank all of you for chiming in, and, again, Paul Huml will be available for other questions if you had some along the way, as he's done in the past. So, thank you, Paul, for your presentation. It was well done. And thank you again for your time and effort and all the -- coordinating all this, Paul, and everyone else here at Third Federal. And, to all our shareholders, we're working in your benefit and we will continue to strive to make things better with the regulatory environment and work on your behalf to allow our -- your investment to be enhanced. So, thank you again.

Thank you. This does conclude today's teleconference. As a reminder, the dial-in number for the replay is 800-283-8217. Please disconnect your lines at this time, and have a wonderful day.