TCF Financial Corporation ( TCB) Reposition of Balance Sheet Call March 13, 2012 11:00 AM ET Executives Jason Korstange – Director William Cooper – Chairman & CEO Mike Jones – CFO & EVP Tom Jasper – EVP, Funding – Operations and Finance Craig Dahl – Chairman – TCF Inventory Finance Analysts Jon Arfstrom – RBC Capital Markets Steve Alexopoulos – JPMorgan Chris McGratty – KBW Tony Davis – Stifel Nicolaus Erika Penala of Bank – Bank of America Merrill Lynch Paul Miller – FBR Capital Markets Terry McEvoy – Oppenheimer Steve Zuccarello – UBS Emlen Harmon – Jefferies Chris Gamatoni – Compass Point Andrew Marquardt – Evercore Partners Presentation Operator
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During today’s conference, we will be referring to a slide presentation which is currently available on TCF’s website, irtcfbank.com. Today we will provide an overview of the transaction, a mid-quarter update and then a question and answer period.I will now turn over the conference call to Chairman and CEO, William Cooper. William Cooper Thank you Jason. Today TCF announced a restructuring of its balance sheet; we have sold 1.9 billion of mortgage backed securities which were collateralizing partially collateralizing long term fixed rate volumes that amounted to 6.3 billion. We sold the mortgages backs and the pay down borrowings, the net impact of this transaction is a charge to capital but a long term improvement in our net interest margin and a significant improvement in our interest rate risk and it gives TCF a significantly more flexibility in connection with how we do our funding. With that I will turn it over to Mike Jones, who will go through the details of the transaction. Mike Jones So if we flip forward in the investor presentation to slide six, this outlines the details of the transaction. We de-levered the balance sheet by selling 1.9 billion of 3.8% mortgage backed securities which resulted in a 77 million pretax gain. This action we feel reduces exposure to prepayment risk today and future exposure to mark to market risk as rates rise. This will result in reduction in margin of about 69 million as we move forward out through the year. With that said our intention is that we can utilize the capital associated with these assets to grow our core businesses at a much higher yield than the 3.8% of assets de-leveraged. Next we repositioned 3.6 billion of debt on the balance sheet by replacing the 4.4% Federal Home Loan bank advances with the mixture of floating and fixed rate debt at a rate of approximately 50 basis points. We also terminated 1.5 billion of 4.2% repurchase agreements reducing our overall wholesale borrowing outstanding.
Basically we are taking the old borrowing’s off at a cost of approximately a 150 million and replacing them with an annual cost of new borrowings about 11 million. So if you take a look at all of the results of those transactions, the reduction of the mortgage backed of 69 million, taking off the old borrowings at a cost of 150 million and replacing them with a cost of 11 million you get benefit of the 74 million of increased margin on a go forward basis.We are utilizing the cash held at the holding company anticipation of redeeming the trust preferred and infusing that cash down into TCF National Bank as we see this transaction as a better alternative than the redemption of the trust preferred securities. These actions will result in a one time after tax charge of 293 million that will be recorded during the first quarter of 2012. Moving to slide seven, we believe that this transaction and repositioning places the organization in a great spot and improves TCF's outlook focused in three areas. As I mentioned it significantly expands our net interest margin with already one of the strongest margin percentages among our peers this transaction will add an additional estimated 74 million in pretax margin to the organization or 96 basis points allowing the organization to consistently build additional capital overtime. We also believe transaction decreases the interest rate risk of the organization, it improves the overall asset and liability sensitivity position by eliminating long duration mortgage backed securities. Also it reduces the organizations reliance on wholesale funding why maintaining strong capital ratios. These actions place more stability in our earnings stream going forward as capital is less exposed to changes and interest rates. At this time I would like to turn it over to Tom Jasper, Vice Chairman of Funding to discuss the impact of the transaction on our funding strategies and the overall improvement in funding optionality. Read the rest of this transcript for free on seekingalpha.com