Marc Stefanski - CEO
Dave Huffman - CFO
John Ringenbach - COO, Third Federal Savings
Meredith Weil - CRO, Third Federal Savings
Paul Huml - CAO
Mike Shafir - Sterne, Agee
TFS Financial Corporation (TFSL) F2Q12 (Qtr End 03/31/2012) Earnings Call May 3, 2012 10:00 AM ET
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. (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 conditions 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.
Thank you very. I would like to say good 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 with your presentation.
Thanks Marc. And welcome everyone, thanks for joining us. We had a little difference that the earnings release came out two days ago, normally we like to do this a day after, but apologize for any inconvenience that caused.
But going on to really Page 3 of the slide, you'll there's not a lot of change in the overall situation of TFS Financial, total assets, deposits, equity are very similar to where they've been in the past and no change in our organizational structure from the mutual holding company.
Going to next page, on Page 4, I think just goes over our strategic overview and sort of a highlight is the ARM loan production that we've continued to generate a good percentage of our loan production is in the ARM area, 58% of the current year, which is an increase over the past couple of years.
And again, we've always focused on high credit quality and you'll see the FICO score 783 and average LTV 62% of our current production. So we continue to focus on high credit quality.
Page 5, again, not a lot of change in deposit breakdown, where we operate in Ohio and Florida. And actually deposits have increased a little bit in the current quarter.
Page 6, turning over the financial highlights. 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 a portion of loans held for sale, which is about $245 million have included in that net loans number to really reflect the total loan growth that we have.
And I think you'll see the biggest change in 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 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 we've actually seen some improvement in our performance from the delinquency numbers, the non-performing assets. And so it's really the charge-offs that we experienced in the quarter that led to this slight increase in provision.
Going on to Page 7, just a recap of our capital position, which has and always been strong, not a whole lot of change from that factor. Again, Page 8, loans and deposit balances. If you see a lot of consistency between the periods, where we're at and can 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 9, 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 long-term fixed rate lender and our production now is around a 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 showed on the chart on Page 10, where you can see consistent growth as to what the adjustable mortgages are as a percentage of our total first 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 with 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 little over a $100 million in closed loans as of March 31. So that's showing some consistent growth over the last couple of 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 in 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 30, that in accordance with OCC regulations we charged-off in that quarter. So you'll see a spike in the charge-offs for that December quarter and then back down.
But you won't 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.
On Page 12, it sort of goes over just more from a visible standpoint some of the key things we're looking at. And that we've seen the length of season non-performing assets peak and have started to trend downward. The trouble debt restructurings that are performing 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 it 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 based on some regulatory guidance issued in January, we looked at it the first mortgage was greater than 180 days delinquent.
So we've included those, even they're performing, they are now included in non-performing assets. Not a whole lot of impact from a income statement standpoint, as I think our provision has always included that. And as far as interest income, we still recognize interest income, one that's been collected. So since they're performing, there is not a lot of impact on the income statement.
And going on to Page 13, just sort of an update on regulatory status. Unfortunately, there is not a whole lot of news from there. We're still 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, we might get some type of indication, an action on that, but again, no guarantees. But that's sort our best guess at this point. Again, the interagency guidance on the ELOCs, I mentioned that that we are including about $14.5 million in non-performing.
Again we've got a few extra regulators we are dealing with. So 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.
There were numerous comments provided to the Fed back in last fall on their interim final rule, which were to require a member of vote to wave, for the mutual holding company to wait 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 I 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) Our first question is coming from Mike Shafir with Sterne, Agee.
Mike Shafir - Sterne, Agee
Just from a housekeeping standpoint, what tax rate should we be using moving forward?
I think we might have though in terms of reflecting the impact of our bank-owned life insurance, because that's the biggest common 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.
Now, I think that we've used somewhere obviously south of the statutory rate of 35%. But for your projections that's how I'd factor in for the effective rate.
Mike Shafir - Sterne, Agee
So basically looking at pre-tax income at somewhere at 35% rate and then subtracting the $6 million from that tax number?
Actually, I would subtract the $6 million from the pre-tax estimate dollar amount. So if you're estimating $50 million pre-tax, I'd take $6 million away from there and apply the 35% to $44 million.
Mike Shafir - Sterne, Agee
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 September quarter?
It's our best guess. And 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. 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, do you have another comment.
No, clearly the regulator have said, we are not suppose to comment on the status of their exams. But it's really just our best guess that fourth quarter we might hear something.
One other thing 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 and actually don't really have a threat to the FDIC insurance.
Mike Shafir - Sterne, Agee
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 wavers. So 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-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 or just deploying more money into growth and to the buyback process.
(Operator Instructions) And it does appear that we have no further questions in the queue at this time. I would like to turn the floor back over to Mr. Marc Stefanski for any additional or closing remarks.
Yes. Thank you. The only thing I'd like to add is that, we all, the Third Federal management team and the board, sincerely appreciate your commitment to Third Federal, the fact that you've considered to be shareholders during this rough time. It 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, long order depending on how long you are to hold your breath for.
And again, the economy it's a roller coaster ride with housing values and unemployment the way it is that will 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 loan loss provisions and those kind of things that help our ability to grow the company the way we like to grow it and be as profitable as we like to be.
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. And was there anyone else from the team that would like to add in my comments? Well, thank you. And appreciate it and thanks for joining in.
Thank you. This does conclude today's teleconference. As a reminder, the dial-in number for the replay is 1800-723-6062. Please disconnect your lines at this time. And have a wonderful day.