TCF Financial Corporation (TCB)

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TCF Financial (TCB)

Q2 2013 Earnings Call

July 23, 2013 9:00 am ET

Executives

James E. Korstange - Senior Vice President and Director of Corporate Communications

William A. Cooper - Chairman, Chief Executive Officer and Member of Executive Committee

Michael Scott Jones - Chief Financial Officer and Executive Vice President

Craig R. Dahl - Vice Chairman of Lending, Executive Vice President of Lending and Director

Thomas F. Jasper - Vice Chairman of Funding, Operations & Finance, Executive Vice President of Funding, Operations & Finance and Director

Barry N. Winslow - Vice Chairman of Corporate Development and Director

Earl D. Stratton - Chief Operating Officer, Executive Vice President, Chief Operating Officer of Tcf Bank and Executive Vice President of Tcf Bank

Analysts

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Nicholas Karzon - Crédit Suisse AG, Research Division

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Emlen B. Harmon - Jefferies LLC, Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Dan Werner - Morningstar Inc., Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Presentation

Operator

Good morning, and welcome to TCF's Second Quarter Earnings Call. My name is Sarah, and I'll be your conference operator today. [Operator Instructions]

At this time, I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications, to begin the conference call.

James E. Korstange

Good morning. Mr. William Cooper, Chairman and CEO, will host this conference. Joining Mr. Cooper will be Mr. Barry Winslow, Vice Chairman of Corporate Development; Mr. Tom Jasper, Vice Chairman of Funding, Operations and Finance; Mr. Craig Dahl, Vice Chairman of Lending; Mr. Mike Jones, Chief Financial Officer; and Mr. Earl Stratton, Chief Operations Officer.

During this presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements and -- are predictions and that actual events or results may differ materially. Please see the forward-looking statement disclosure contained in our 2013 second quarter earnings release for more information about risk and uncertainties which may affect us. The information we will provide today is accurate as of June 30, 2013, and we undertake no duty to update the information.

During the remarks today, we will be referencing a slide and presentation that is available on our Investor Relations section of TCF's website ir.tcfbank.com. On today's call, Mr. Cooper will begin with the second quarter highlights; Mike Jones will discuss credit and expenses; Craig Dahl will then provide an overview of lending; Tom Jasper will review deposits, fee generations and capital; and then Mr. Cooper will wrap up with a summary. We will then open it up for questions.

I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

William A. Cooper

Thanks, Jason.

This morning, TCF reported earnings per share of $0.21, that's up 31.3% from the first quarter of 2013. It's up a similar amount on a core basis from a year ago second quarter as well. The ROA was 0.90% and the ROE was 8.4%, also substantially improved from prior periods. Total revenue was $302 million, that's up about 3.5% from the first quarter of 2013. Pretax pre-provision profit, which is really the best measure of a core profitability of a bank, was $93.3 million. That's up 6.3% from the first quarter. We kept net interest margin essentially flat at 4.72%. And the provision for credit losses was 30 -- $32.6 million, that's down 15% from the first quarter. Charge-offs were at 0.70 basis points, and that's down from 1.18% last year, also significant improvements. Non-accrual loans and leases and other real estate owned decreased $70 million or 17% from the first quarter. All of the credit metrics in the bank improved significantly from prior quarters.

The revenue growth, we had $302 million of revenue. $100 million of that was fee income of various kinds and $202 million was net interest margin where there's a 4.72% net interest margin rate which is flat with the previous quarter, which is contrary with most of our competitors. The revenue was impacted by an increased customer-driven leasing revenue. We had a recovery in our leasing revenue, increased banking fees which is mostly seasonal and the gains on sale of consumer and auto loans which are regular quarterly events today. The net interest margin was impacted by a continued compression in the pricing. As the higher-yielding loans made in prior periods run off and new loans come on, with the difficulty of reducing cost of funds any lower than their very low rates today, has presented some pressure on the net interest margin. Changes in mix and so forth are what permitted us to stay at a healthy 4.72% net interest margin, which is one of the highest in the banking business. Lower average liquidity balances also contributed to the margin.

The TCF's strong pretax pre-provision return on assets and core earnings is largely driven by the structure of its balance sheet. TCF has 85% of its assets and loans, as compared to our peers of $10 billion to $50 billion banks that are about 65%, with a lower level of securities in only about 3.5% versus 24% for our peers. That results in us having a higher net interest margin, as I just mentioned. Net interest income as a percentage of assets, total assets, is 4.39% at TCF versus 3% at our peers. And our core noninterest income is over 2% versus 1.16% at our peers, giving us revenue of almost 6.5%, as compared to 4.16% at our peers, and a pre-provision profit of almost 2%, as compared to about 1.5% in our peers.

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