TCF Financial Corporation (TCB)

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TCF Financial Corp (TCB)

Q2 2011 Earnings Call

July 21st, 2011, 11:00 am ET


Jason Korstange – Director, Corporate Communications

William Cooper - Chairman, CEO

Neil Brown - President and COO

Barry Winslow - Vice Chairman, CRO

Tom Jasper – EVP & CFO

Earl Stratton – EVP & CIO

Timothy Bailey - Vice Chairman & Chief Credit Officer, TCF National Bank

Craig Dahl - EVP


Tony Davis - Stifel Nicolaus

Ken Zerbe - Morgan Stanley

Peyton Green - Sterne Agee

Chris McGratty - KBW

Erica Panella - Merrill Lynch

Emlen Harmon - Jeffries

Steven Alexopoulos – JP Morgan

Paul Miller – FBR

John Armstrong – RBC Capital Market



Good morning and welcome to TCF 2011 second quarter earnings call. My name is Christy and I will 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.

Jason Korstange

Good morning, Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Neil Brown , President and Chief Operating Officer, Mr. Barry Winslow, Vice Chairman and Chief Risk Officer, Mr. Tom Jasper, Chief Financial Officer, Mr. Earl Stratton, Chief Information Officer, Mr. Tim Bailey, Chief Credit Officer and Mr. Craig Dahl Executive Vice President of TCF Financial Corporation. 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 are predictions and that actual events or results may differ materially. Please see the forward looking statement disclosure contained in our 2011 second quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of June 30th, 2011 and we undertake no duty to update the information. Thank you and I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

Neil Brown

Thank you. TCF reported today its 65th consecutive quarter of earnings. We earned $29.8 million, 19 cents a share, essentially flat with 20 cents a share in the first quarter of this year. The total revenue was up slightly from the first quarter, $290 million versus $288 million. The components of that is net interest income was up slightly at $2 million, up $2 million at $176 million from the first quarter. The net interest income, excuse me, was up largely because of the improvement of the loan mix, higher margin loans growth and the shrinkage in lower margin loans. Along with the lower deposit costs, offset by our increasing asset sensitivity as TCF becomes more asset sensitive in preparation for rising interest rates and the impact of higher liquidity costs. The net interest margin was $4.02 was about flat with the first quarter, $4.06. As I mentioned that higher liquidity costs about 8 basis points in the margin and TCF's asset sensitivity we're now about 6% asset sensitive with more assets adjusting in a higher rate environment on liabilities. The banking fees were up about $3 million or 5% from the first quarter. Most of that was seasonal and to some degree, a better quality of accounts. The derivative amendment was finalized by the Federal Reserve in the last quarter. That is estimated across TCF on an annualized basis about 50% of its debit card income of somewhere -- will amount to something about $50, $60 million.

We anticipate we’d be taking actions to mitigate the impact of that in the latter part of this year and the first part of next year and we anticipate our competitors will be doing a similar thing following the releases and discussion of this with our competitors. We think as we predicted that this will result in higher fee charges to consumers. Leasing fees which tend to be lumpy were $22.3 million on a year to date basis compared to year to date basis a year ago which is maybe a better way of looking at it because of its lumpy nature. Leasing fees continue to improve. I think they're up something like $9 million. Total loans overall were flat but there's been a change in the mix, in particular our fixed rate residential portfolio has shrunk about $500 million over the year while the higher margin variable rate residential portfolio has grown about $300 million a year. We tend to get on a matched basis a higher margin in variable rate than we do in fixed rate and in particular, TCF is not interested in going long 30 years at these very low residential rates that are present in the marketplace today.

Commercial loans were about flat, equipment was essentially flat although we have a large backlog in both of those areas. Inventory finance is now at almost $1 billion and it grew 12% from the first quarter continuing that strong growth. There's a good possibility of signing some significant new programs in our inventory finance business over the next six months or so as well. Credit quality continued to improve, non-performing assets, charge-offs and 60-day delinquencies are all down from their peaks. Even with that, allowance for loan loss is up slightly at $255 million. Charge-offs were $43.8 million, 1.19% of loans, that's down from $55.8 million 1.5% loans in the first quarter. So when delinquencies and non-accruals improve, eventually that comes out in the charge-off line which eventually will come out in the provision line. We've had strong deposit growth. It's up $211 million from a year ago and that's mostly in core checking and savings money. Our deposit function continues to be very strong. Lots of good trends in there, improving account quality, higher balances per account, etc. The average interest cost on deposits was only 38 basis points. That's down four basis points from the first quarter. Again, that contributed positively to a net interest margin.

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