TCF Financial's CEO Discusses Q1 2012 Results - Earnings Call Transcript

TCF Financial Corporation (TCB)

Q1 2012 Earnings Call

April 19, 2012, 11:00 a.m. ET


Jason Korstange - Director of TCF Corporate Communications

William A. Cooper - Chairman and CEO

Barry N. Winslow - Vice Chairman of Corporate Development

Mr. Neil Brown - Chief Risk Officer

Thomas F. Jasper - Vice Chairman of Funding, Operations and Finance

Craig R. Dahl - Vice Chairman of Lending

Michael S. Jones - Chief Financial Officer

Earl D. Stratton - Chief Operations Officer


Jon Arfstrom - RBC Capital Markets

Emlen Harmon - Jefferies & Company

Ericka Penala – Bank of America/Merrill Lynch

Chris Gamaitoni - KBW

Dan Werner, Morningstar Equity

Paul Miller, FBR Capital Market

Steven Alexopoulos - J.P. Morgan Securities

Andrew Marquardt - Evercore Partners

Peyton Green – Sterne Agee & Leach

Matt O’Connor – Deutsche Bank



Good morning, and welcome to TCF’s 2012 First Quarter earnings conference 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.

Jason 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. Neil Brown, Chief Risk Officer, 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 are predictions, and that actual events or results may differ materially. Please see the forward-looking statement disclosure contained in our 2012 first-quarter earnings release for more information about risk and uncertainties, which may affect us. The information we will provide today is accurate as of March 31, 2012, and we undertake no duty to update the information.

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

William Cooper

Thank you, Jason. Today TCF announced its first quarter earnings, which largely reflect the first-quarter results of our successful balance sheet restructuring, which we had previously announced. And just to remind you what we did there, TCF repositioned its balance sheet through the prepayment of some $3.6 billion of long-term high-cost borrowings, along with the sale of some $1.9 billion of long-term, relative low-rate MBSs, using the net proceeds to pay down borrowings. We replaced those borrowings, $2.1 billion of those borrowings, at various maturities, with a cost of less than a half percent.

The net impact of all of those transactions was a $295 million hit to capital. This repositioning improves TCF’s net interest margin in future periods, somewhat in this period, it reduces our mark-to-market risk on our mortgage-backed portfolio, which I consider to be a significant risk.

Mortgage-backed securities are worth less when rates rise. It provides additional flexibility in managing our funding, as is demonstrated by the recently announced $800 million deposit acquisition that we’re doing that we can use as a source of funding, that was difficult to do in the old structure. On an operating basis, TCF remained profitable.

Another highlight in the quarter was the significant growth in loans, with loans growing over $1 billion in the quarter, and I think that’s a record growth, to $15.2 billion. This loan growth, along with the restructuring I mentioned, will significantly improve net interest margins in future periods. We expect the net interest margin rate to exceed 4.6% in future periods. That would put us up in the very top tier in terms of our net interest margin rate, and in my opinion better reflects the strong balance sheet, net interest margin capacity, of our loan and deposit function.

Credit metrics continue to improve slowly. Charge-offs were $38.9 million, versus $57.9 million in the fourth quarter, that’s 1.06% versus 1.63%. That -- charge-offs tend to be lumpy because sometimes you’re charging something off that you had previously reserved. But we did see improvement in that area.

Classified loans and delinquencies improved during the quarter modestly. Non-performings were up slightly.

The provision for loan losses decreased to $48.5 million, from $59.2 million, despite the need for additional guideline reserves on that billion dollar loan growth that I mentioned. And reserves were up approximately $10 million from the prior quarter, which largely reflects that growth in loans and the guideline reserves associated with it.

Most of TCF’s loan growth occurred in its specialty finance areas, with inventory finance growing to over $1.6 billion, up from $624 million, and that’s that BRP transaction that we had previously disclosed, most of that in any case, which we have had a very successful implementation of.

The auto finance grew to $139 million, even after the sale of some $72 million of loans, at a gain of $2.3 million. We expect continuing strong growth in the auto finance area in subsequent quarters for TCF.

Reflecting the partial month benefits of our restructuring and the loan growth, TCF’s margin grew to $180 million, up from $173 million, 4.14% up from 3.9% in the fourth quarter. And as I mentioned, we expect to see improvements in this area in subsequent quarters. The restructuring only occurred in the middle of March, and most of the loan growth occurred later in the quarter as well.

Retail fee income remains a challenge. However, some changes we made in March appear to be having a positive effect and we are optimistic that we’ll see improvement in this area in subsequent quarters as well.

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