TFS Financial's CEO Discusses F3Q 2012 Results - Earnings Call Transcript

TFS Financial Corporation (TFSL)

F3Q 2012 Earnings Call

July 31, 2012 10:00 am ET

Executives

Marc A. Stefanski – Chairman, President and Chief Executive Officer

Paul J. Huml – Chief Operating Officer and Chief Accounting Officer

David S. Huffman – Chief Financial Officer

Meredith S. Weil – Chief Operating Officer

Analysts

Mike Shafir – Sterne, Agee & Leach, Inc.

William C. Waller – M3 Funds LLC

Presentation

Operator

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 2.00 P.M. 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 as many questions as possible, we ask that you please limit yourself to one question and one follow-up. (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.

Marc A. Stefanski

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

Paul J. Huml

All right. Thank you Marc, and thank you for joining our call. Since the third quarter of our fiscal year ended June 30, 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 moving next slide, really continuation of what 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’s been a big shift since 2010, as we focused on interest rate risk management.

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

Page 6 sort of goes over the financial highlights, and you’ll 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 previous quarter end. Our net interest income has stayed consistent. And I think as we’ve seen all along, our provision is really what’s driving our earnings. Unfortunately this quarter, it’s 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 in non-performing assets, and those ratios are improving, it’s really the severity that we’re seeing in some of the loans as they go through a foreclosure process, bankruptcy when they’re going out, the problem is that homes are just not selling for values that we need.

So that’s really the severity of the loss since what’s been boosting our provision to help us cover in future losses. Other than that, we try to keep ourselves aligned with same approach, our deposits as I mentioned before by continued increase and help fund the loan growth.

In the next page, looking at capital position again, very strong we’ve always tried to focus on our capital, and that’s a good buffer for us as we move forward.

The next page is a new chart if you’ve followed along from previous quarters, just try to give you a little bit of an overview of our deposit base and what it’s done over the last few years and what it’s 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 to funds, our average cost on those deposits have been decreasing over time, and that’s really what’s helping to support our net interest income number is being able to repay some of these deposits, and maintaining those deposits as they do re-price.

So, that’s 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’s in our ARMs is now a production of 57% of what we are producing are the ARM products and the average credit scores and LTVs have stayed very strong.

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