TFS Financial Corp (TFSL) 2012 Q2 法說會逐字稿

Welcome to the TFS Financial Corporation's second 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 2 p.m. Eastern Time. The dial-in number for the replay is 1-800-723-6062.

At this time, all participants have been placed in a listen-only mode and the floor will be opened 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 very much, Sarah, and I'd like to say god morning to everyone and welcome. We have Paul Huml that will be going over the slide presentation that was released. And Paul, I'd like to turn the floor over to you and go ahead and -- with your presentation.

Okay. Thanks, Marc, and welcome, everyone. Thanks for joining us. We have a little difference that the earnings release came out two days ago. Normally, we like to do this the day after, but apologize for any inconvenience that caused.

But, going on to really page three of the slides, you'll see there's not a whole lot of change in the overall situation of TFS Financial. Total assets, deposits, equity, all very similar to where they've been in the past and no change in our organizational structure from a mutual holding company.

Going to the next page, on page four, I think it just goes over our strategic overview. And sort of the highlight is the ARM production, ARM loan production, that we've continued to generate a good percentage of our loan production is in the ARM area, 58% in the current year, which is an increase over the past couple years. And again, we've always focused on high credit quality and you'll see the FICO score is 783 and average LTV 62% of our current production, so we continue to focus on a high credit quality.

Page five. Again, not a lot of change in the deposit breakdown, where we operate in Ohio and Florida. And actually, deposits have increased a little bit in the current quarter.

Page six, going over the financial highlights. And I think you'll see in the loan area that we continue to have consistent loan growth. I have combined on the net loans line the portion of loans held for sale, which was about $245 million I've included in that loans number to really reflect the total loan growth that we have.

And I think you'll see the biggest change on the current quarter was our provision, which was $27 million for the quarter, which was up from $15 million last quarter and $22.5 million the same quarter last year. And the increase in the provision was really in response to some of the experience we had in charge-offs, the increase in charge-offs surrounding the foreclosure, the sheriff's sale process, and just seeing some slight deterioration in the market values, the values of the homes that we're moving through, but the allowance has gone back up to around $101 million in total.

With that, though, we've actually seen some improvement in our performance and the delinquency numbers, the nonperforming assets. So, it's really that the charge-offs that we experienced in the quarter that led to this slight increase in the provision.

Going on to page seven, just a recap of our capital position, which has and always been strong. Not a whole lot of change from that factor.

Again, page eight, the loans and deposit balances. I think you see a lot of consistency between the periods and where we're at. I think you slowly see the equity lines in credit decreasing a little bit and the residential non-home today increasing a little bit as production increases.

Page nine is sort of a big story as far as what we're doing in adjustable rate, which is really in response to help our interest rate risk going forward. Traditionally, had been a fixed -- long-term fixed rate lender and our production now is around the 50/50 mark of ARMs. Actually, for the current fiscal year we're about 58% of our production in ARMs. And again, the total credit scores and average LTV of the ARM production has been very strong.

A little bit more on the adjustable rate growth is really shown in the charge on page 10, where you can see consistent growth as what the adjustable mortgages are as a percentage of our total fist mortgage portfolio. So, we're changing the course of the ship a little bit. Whereas we had been traditionally that fixed-rate lender, now we have 31% of our total first mortgages as ARMs. And if you factor in the ELOCs, which are also adjustable, they're probably 45% of our total real estate loans are now adjustable rate.

And the new states that we've expanded into really started last year, just about a year ago. The 10 new states, we've booked a little over $100 million in closed loans as of March 31. So, that's shown some consistent growth over the last couple quarters as well and we continue to learn from that and hope to increase that number going forward.

Page 11 gets into some of the details on the loan delinquencies and charge-offs. I think you'll see in the delinquencies that those percentages are coming down. Again, I've included the loans held for sale on some of these percentages.

But, I think the charge-off, you see a big impact in the December quarter because, if you may recall, we had a specific valuation allowance of $55 million at September 30th that, in accordance with OCC regulations, we charged off in that quarter. So, you see a spike in the charge-offs for that December quarter and then back down. But, you will see that quarter-end March 31 charge-off of around $23 million up a little bit from what we would have had non-SVA charges in December and also the previous quarter. So, that was really some of the issues that drove the provision, but the delinquency numbers are improving.

And page 12 sort of goes over just more a -- from a visible standpoint some of the key things we're looking at, and that we've seen the delinquencies and the non-performing assets, excuse me, peaked and have started a trend downward. The troubled debt restructurings that are performing have sort of leveled off. So, we're seeing numbers improving or stabilizing from a delinquency and non-performing standpoint.

I think one of the things in the non-performing assets that sort of boosted it up a little bit this quarter was there was about $14.5 million of our ELOCs that are actually performing, but we've -- based on some regulatory guidance issued into January, we looked at it the first mortgage was greater than 180 days delinquent. So, we included those. Even though they're performing, they're now including -- included in non-performing assets. Not a whole lot of impact from an income statement standpoint, as I think our provision has always included that. And as far as interest income, we still recognize interest income when it's being collected. So, since they're performing, there's not a whole lot of impact on the income statement.

And going on to page 13, just sort of an update on the regulatory status. Unfortunately, there's not a whole lot of news from there. We're still in the -- under the effects of the MOU. We believe we've met all of the requirements under the MOU. We're still waiting through the validation process that both the regulators, the OCC and the Federal Reserve are going through. Our best guess at this point is maybe in the fourth quarter, I mean, we might get some type of indication and action on that but, again, no guarantees, but that's sort of our best guess at this point.

Again, the interagency guidance on the ELOCs. I mentioned that, that we're including about $14.5 million in non-performing. Again, we've got a few extra regulators we're dealing with. Still the dividends and the buybacks are in the same boat until we get some clarification from the regulators. And we really have heard nothing on the mutual holding company dividend waiver issue out of the Fed, that there were numerous comments provided to the Fed back in last fall. Their Interim Final Rule, which would require a member vote to waive -- for the mutual holding company to waive future dividends, we have had no direction from them at this point on that issue.

So again, not a whole lot of change in where we are in the quarter, but just wanted to give everybody a quick update. And then, at this point, we're going to open the lines up for questions.

(Operator Instructions). Thank you. Our first question is coming from Mike Shafir with Sterne, Agee. Your line is open. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning, Mike.

Good morning.

Just from a housekeeping standpoint, what tax rate should we be using moving forward?

Mike, this is Dave Huffman. Thanks for listening in on the call. I think we might have thought in terms of reflecting the impact of our bank-owned life insurance, because that's the biggest permanent item that we have. And I think we've thought in terms of adjusting whatever your estimate is for pre-tax earnings for the year by about $6 million. So, I think that were -- we've used somewhere -- it's obviously south of the statutory rate of 35% but, for your -- for projections, that's how I'd factor in for the effective rate.

So, basically looking at pre-tax income at -- somewhere at a 35% rate and then subtracting that tax -- the $6 million from that tax number?

I would actually -- but, I would subtract the $6 million from the pre-tax estimate dollar amount.

Okay.

So, if you're estimating $50 million pre-tax, I'd take $6 million away from there and apply the 35% to $44 million.

Okay. And then, on the MOU in terms of your recent commentary -- and this is the first time you guys have kind of addressed this and giving any kind of timeframe, just any further thoughts on that or why you assume that you're going to be able to get some kind of validation in and around that September quarter?

Well --.

Well, it's our best guess. And this -- we're going on two years on this thing from when it all began. And since we have in our minds really met all the key provisions there, it just -- and the OCC and the Fed have been our regulator for almost a year now, we're hoping that we're seeing some light at the end of the tunnel.

Paul, did you have another comment?

No, I think that's -- clearly, the regulators have said we're not support to comment on the status of their exams, but it's really just our best guess that fourth quarter we might hear something.

And then just as --.

The only --.

I'm sorry, go ahead.

The only other things I could add to that is that, in our discussions with the regulators, they are very anxious to continue to move these kinds of things forward, especially with organizations like ours that prevent -- or actually don't really have -- are a threat to the FDIC insurance.

And then, also, just as we think about post-MOU and capital deployment opportunities and so forth, how do you guys think about -- obviously, you haven't had any commentary on MHC dividend waivers. So -- and historically, you guys have been pretty active in repurchasing your own shares. So, maybe you could just kind of give us a thought process on priority of capital deployment with your excess capital position post the MOU.

Well, we've always talked about three different ways of deploying that capital; growing the balance sheet and the dividends and, of course, the buybacks. And unfortunately, if we can't or it's difficult to do the dividends, we'll just be plowing more money into growth and to the buyback process.

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

Okay.

Thank you. (Operator Instructions). And it does appear as though we have no further questions in the queue at this time. I would like thank you turn the floor back over thank you Mr. Marc Stefanski for any additional or closing remarks.

Yes, thank you.

Well, the only thing I'd like to add is, is that we, all of the Third Federal Management Team and the Board, sincerely appreciate your commitment to Third Federal. The fact that you've continued to be shareholders during this rough time kind of gives us a shot in the arm that we're still doing the right things and we'll be out of this dilemma that we're in in short order, or long order depending on what your -- how long you can hold your breath for.

And again, the economy is just -- it's a rollercoaster ride with housing values and unemployment the way it is and that'll continue to be a nemesis. And we're using our finest and best methods and people to try to figure out where we should be with some of these low loss provisions and those kinds of things that hamper our ability to grow the Company the way we'd like to grow it and be as profitable as we'd like to be.

But with that, ladies and gentlemen, thank you again very much from our team and our Board. We appreciate your confidence in us and we'll continue to slug through the regulatory issues that are holding us back right now.

But -- and was there anyone else from the team that would like to add to my comments?

No, I think we're all set, Marc. Thanks.

Okay. Well, thank you and appreciate it and thanks for chiming in.

Thank you. This does conclude today's teleconference. As a reminder, the dial-in number for the replay is 1-800-723-6062. Please disconnect your lines at this time and have a wonderful day.