TFS Financial Corp (TFSL) 2012 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; Ms. Meredith Weil, Chief Operating 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 2PM Eastern Standard Time. The dial-in number for the replay is 800-723-0549. 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).

In the interest of time and to get to as many questions as possible, we ask that you please 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 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. Mark Stefanski. Sir, you may begin.

Good morning everyone. At this time I would like to turn the floor over to Paul Huml, who will go over the report and deck that we have -- most of you should have in front of you. Paul?

Thank you, Marc, and thank you for joining our call. It is the third quarter of our fiscal year ended June 30, and I think our results continue around the same path. We're jumping to page 3 on the slides. Really assets have continued to grow and our deposits are up, and continue to have a strong equity position.

And really, next slide, really a continuation of our strategy to focus on the ARM production for loans. Again, 57% of our current fiscal year to date loan production is in our adjustable rate mortgage. And that has been a big shift since 2010 as we focused on interest rate risk management.

And again, you can see some of the credit scores and the average LTVs just reinforce the strong credit underwriting that we are focusing on as we're originating these new loans. Again, our markets of operation on page 5, no change from where we have been between Ohio and Florida.

Page 6 goes over the financial highlights. And you will see, again, that the loan growth is continuing from where we were last year, where we were at fiscal year-end and where we were at the previous quarter-end. Our net interest income has stayed consistent.

And I think as we have seen all along, our provision is really what is driving earnings. Unfortunately, this quarter it is a little higher than what we had hoped for. And it's a little higher than what we had last quarter and last year as well.

I think one of the main reasons for that is while some of our delinquencies and nonperforming assets and those ratios are improving, it is really the severity that we are seeing in some of the loans as they go through a foreclosure process, bankruptcy, when they are going out that the problem is that homes are just not selling for values that we need. So that is really the severity of the losses is what has been boosting our provision to help us cover any future losses.

Other than that, we have tried to keep ourselves aligned on the same approach. Our deposits, as I mentioned before, continue to increase and help fund the loan growth.

On the next page looking at capital position, again, very strong. We have always tried to focus on our capital and that is a good buffer for us as we move forward.

The next page is a new chart. If you followed along from previous quarters, just try to give you a little bit of an overview of our deposit base and what it has done over the last few years and what it has done over the last quarter -- few quarters. And, really, staying consistent in our deposit levels and growing them to a certain extent, even while the cost of funds, our average cost on those deposits have been decreasing over time.

And that is really what is helping to support our net interest income number, is being able to re-price some of these deposits and maintaining those deposits as they do re-price. So that is a key component as we move forward.

And again, the other half of the equation is on the next page, is the adjustable-rate loan production. Again, we are very -- continue the strong growth we have in there. Not a whole lot from a purchase market, but a lot from a refinance standpoint. And, again, the level that is in our ARMs is now -- our production 57% of what we are producing are the ARM products, and the average credit scores and LTVs have stayed very strong.

Next page, on the adjustable-rate growth. We continue to move -- from an interest rate risk protection is to get more of our assets in adjustable products. So 46% of all of our loans, which includes the equity lines of credit and all these smart rate ARMs that we have originated -- 46% of all loans are now adjustable rate.

And a lot of that growth is as a result of what we are looking at in some of the other states. As you may recall, we have started going out in May of 2011 to 10 new states, and we are increasing the volume in those states. And that is helping the loan growth.

And just looking at first mortgages, or adjustable-rate product is a third of all of our first mortgages at June. So we continue to move that percentage. The chart at the bottom of the page shows where we have been over time and how we have been able to move that number to help us from an interest-rate risk standpoint.

Next page goes over the loan delinquencies and charge-offs. And are delinquencies continue to decrease and we have increased our loan balances. The charge-offs that have gone up from prior quarter and from prior year, as we -- I think a lot of the impact from the severity of losses has impacted these charge-off numbers, and we hope to get in front of some of these through the provision that we have set up.

So, again, it is a quarter to quarter experience with the economy what it is. We continue to focus on this, but that is a number that continues to be outside of what we are hoping it to be.

The loan portfolio trends on the next page just go through graphically where some of the ratios are going. And you can see all of these have continued to either level off or decline over time. The performing, troubled debt restructurings and nonperforming assets and the delinquencies got a boost in the December quarter from our specific valuation charge-off, but they continue to go down as we work through.

So our delinquencies are down. And a lot of that is hopeful as we start moving forward.

Next page is probably the most difficult to write about, because we have walked that fine balance between the regulators, who don't want us to discuss anything to do with what they are doing from an exam standpoint, and as we try to balance in making sure that we are keeping the shareholders informed on what they need to know. So we try to keep a good balance of trying to keep everyone informed.

As we have gone through the regulatory process from when the MOU was first put in place, it is always certainly up to them as to when the MOU is removed. And we continue to get regulatory review of us. There is nothing final that we have received from our regulators.

We have had indication that a number of issues that are out there are getting cleaned up. I think the issues going forward revolve around interest-rate risk and are modeling that in analysis. And being a Savings and Loan, where we have a lot of long-term loans and shorter-term deposits, interest-rate risk is always going to be an issue that we deal with. So we are always watching it.

As we came through the new regulators, the OTS got rid of the model that they used to use to model interest-rate risk and analyze their various companies. And we have a new model in place that is going to need time to be back tested and validated and all of the various buzzwords that we need to do from a regulatory standpoint. So that is going to be an ongoing thing, and that is really the main focus from a regulation standpoint of what they want us to focus on.

I think some of the key things are, obviously, the MOU back from when it started revolved around the equity lines of credit. We stopped originating equity lines of credit back in 2010. We have now begun to originate equity lines of credit, particularly or just for our existing customers at this point. We are looking at some point to hopefully roll that out to new customers.

So we consider that a positive step that we are able to -- trying to get back to a normalized approach for what we do as a business. One of the things that is very important as keeping the shareholders -- and doing what we are doing, and the buyback program is a key component of that. It is something that we are constantly trying to work on what the regulators and hope to get back into being able to do that, but unfortunately, we have no set time frame for when that is going to happen.

Again, we have nothing final from the regulators as to what they do, what they have looked at and what their feedback is. We have had some verbal things, but we're going to have to continue to stay patient with the whole process and understand that we are very focused on trying to get back into activities that will help our shareholders in the long run.

From a dividends -- we have had no indication from the Fed on the MHC dividend waiver issue. They had comments that went back to October and there has been no further word from them at this point as to what will happen there. So that is -- from a mutual holding company standpoint, that lack of a dividend waiver is going to have a huge impact on dividends for any mutual holding company. So we will continue to keep an eye on that and hope for the best from that standpoint.

So that, again, it really just summarizes where we were in the quarter. Again, our fiscal year-end is coming up in September. And there will be more details at that point, but just a brief update of where we are at the June 30 quarter.

So we are going to turn it over for questions from the audience.

The floor is now open for questions. (Operator Instructions). Mike Shafir, Sterne Agee.

Certainly some positive trends in the quarter. Just wondering on the salaries and benefits line, you guys had a pretty substantial decline versus last quarter. I was wondering if maybe you could just give us a little bit of detail on that.

Thanks for listening in and thanks for your question. You might have noticed that the earnings weren't as robust as we might have hoped, and we have some compensation that is linked to our performance. And we made adjustments to some of the accruals there.

Okay, so as we think about moving forward should we -- are we going to see a rise in that comp and benefits line next quarter?

We are hoping that you do, because you're going to see a rise in earnings.

Okay, I guess I am just trying to figure out if there is more -- is there more of a one-time type of scenario where accruals are down this quarter, and then you should start to see those get to more normalized levels? Historically that comp and benefits line has been around -- somewhere in that $20 million to $21 million range.

Yes, I would say that in comparing the March quarter to the June quarter, you're going to have a doubling effect, in that in the March quarter we continue to provide for accruals and in the June quarter then we weren't. And we were adjusting the accrual level. So you had a normalization in the June quarter that would -- it magnified the difference versus March.

Okay, thanks for that detail.

And, Mike, the incentive compensation is Companywide. It is throughout our workforce.

Okay. And then just also on the net interest margin, I was wondering how much do you have in the way of CDs that are going to be maturing in this current September quarter? And maybe you could give us a little bit of detail on what new money or what new deposit costs are coming in at versus what is maturing.

This is Meredith. We have just under $1 billion that will be maturing over the next six months. I think the challenge that we face is actually recapturing those dollars. And so, right now, the average interest that we are paying is around 1.7%, and so really those dollars are definitely going to re-price at a lower amount as long as we recapture those balances.

I am sorry -- the $1 billion that is going to be maturing over the next six months, what is the average weighted rate of those CDs that are going to be maturing?

They range anywhere above 2%, I would say. So there is a wide range in balances. Those dollars will go down. I think that really the chart that we show in the graph here, in the presentation here, tries to represent that our cost of funds is going down.

I think the challenge that we are also funding loans in the lower amount, and so really how that will affect our margin going forward really depends on where overall rates going. Unfortunately, the mortgage rates continued to be driven down. And so we think that ongoing challenge of trying to bring in longer-term deposits, which we pay more for, so that is -- you will see our margin has improved slightly.

But really how that is going to continue, I think it really depends on how we retain the dollars. We want to retain dollars long-term, because we are trying to match with our 5/1 ARM to really balance or interest-rate risk. So it really depends on how we bring those -- that money in.

Then, also, just the 5/1 ARM product, where's the bulk coming on the balance sheet, and at what rate?

It is just over 3% is our average rate that we are bringing on. So that is average with the fixed-rate volume that we are doing.

All right, guys, thank you very much for all that detail. Appreciate it.

(Operator Instructions). Will Waller, M3 Funds.

In the press release you noted that they were $10.5 million of charge-offs related to the equity lines and the line of credit portfolio. How much in specific reserves do you have on that portfolio as of June 30?

From a regulatory standpoint, there are no more specific reserves as it relates to that. All we have are general valuations that are allocated between the different categories. But there is no specific reserve that is attached to the equity line of credit.

I think as of your March 31 10-Q there was, I think, about $49 million or so, it looked like, that was of the $101 million of reserves that you had that were allocated to those portfolios. Is that not right?

Yes. I think we show a portion that gets related to each category. It is not specific to that. The allowance can be used for any losses, no matter what category it is in. We try to allocate them by category and those numbers will show up in the 10-Q.

Okay, and then how much of that home equity line of credit portfolio is greater than 100% loan-to-value, based on current evaluations of the underlying real estate?

I don't have that information at this point.

Okay, thanks.

(Operator Instructions). As there are no further questions, I will now like to turn it over to Mr. Marc Stefanski for any closing remarks.

Thanks very much. Again, the unemployment factors, the economy in general, and home values, obviously, are an unstable factor in our business. And right now, it seems like that with all the indicators, we are headed in the right direction.

We appreciate the patience that our shareholders have shown and support of the management team. And we will continue to slug it out in this very tough economy and tough business environment.

And if there is no further questions or comments from the team, well, thank you very much for your time, and we will see you next quarter.

Thank you. This does conclude today's teleconference. As a reminder, the dial-in number for the replay is 800-723-0549. Please disconnect your lines at this time and have a wonderful day.