TCF Financial Corporation (TCB) Q2 2012 Earnings Call July 19, 2012 11:00 AM ET Executives Jason Korstange – Director, Corporate Communications William Cooper – Chairman and CEO Mike Jones – EVP and CFO Craig Dahl – Vice Chairman and EVP, Lending Earl Stratton – EVP and CFO Tom Jasper – Vice Chairman and EVP, Funding, Operations and Finance Neil Brown – Chief Risk Officer Analysts Jon Arfstrom – RBC Capital Markets Erika Penala – Bank of America/Merrill Lynch Paul Miller – FBR Capital Markets Matt O’Connor – Deutsche Bank Craig Siegenthaler – Credit Suisse Steven Alexopoulos – JP Morgan Scott Siefers – Sandler O’Neill Emlen Harmon – Jefferies Dan Werner – Morningstar Equity Chris McGratty – KBW Terry McEvoy – Oppenheimer Andrew Marquardt – Evercore Partners Stephen Geyen – Stifel Nicolaus Peyton Green – Sterne Agee Tom Alonso – Macquarie Securities Presentation Operator
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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 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 30, 2012, and we undertake no duty to update that information. I will now turn the conference call over to TCF Chairman and CEO William Cooper. William Cooper Thank you, Jason. TCF today reported net income of some $31.5 million, that’s $0.20 a share, and that compares to the Street projection of about $0.18 a share in the second quarter. Return on assets was 0.76%; return on equity, 8.13%. The net interest margin reflecting the benefits of the restructuring that we did in the first quarter was 4.86% versus 4.02% last year. I believe that 4.86% is probably one of the highest net interest margins in the banking business, certainly among our peers. Our pre-provision pre-tax profit was $108 million in the quarter, up 53% from the first quarter and 14% from a year ago, again demonstrating the strong core operating potential of the Bank and the improvement in core earnings as a result of restructuring and the improvement in our core operations. Loans grew to $15.2 billion, up from $14.6 billion a year ago. Delinquencies continue to decline, signifying reduced credit cost in future periods. TCF has changed its strategy and returned to its roots with our reintroduction of Free Checking. Early returns show increased originations and decreased attrition as a result of those changes. Total core revenues totaled $298 million in the quarter, up 10.8% from the first quarter, again demonstrating the power of the growth in our balance sheet. Fee income was up 12.4% and margin was up 10%. Retail banking fees were up 15% from the first quarter, part of that at least was seasonal. We did have a gain on the sale that included the sale of our Visa Class B stock, the gain of some $13 million. Most of that gain was offset by one-time accounting or provision charges eating up that gain.
We sold some $144 million in auto loans at a gain of $5.5 million for the quarter. These were mostly the lower FICO-score auto loans, and that’s a core-earning provision for us as we expect to continue to sell auto loans on a quarterly basis. Even after that sale, auto loans on the balance sheet now total $262 million, up from $139 million in the first quarter. Those loans yielded 6.98% in the second quarter. Originations remain strong and we expect, in fact, them to improve. The quarter-to-quarter decrease in inventory finance loans was seasonal, as was predicted.Charge-offs remain below peak levels, and leading indicators are positive. Provisions included several one-time items totaling some $10 million. Deposit growth remains strong, we’re now at over $13 billion and that included an $800 million deposit acquisition that we completed. Interest expense on deposits was only about $10 million for the quarter versus interest income of $219 million. Borrowing only cost $10 million, down from $48 million a year ago, again demonstrating the power of the restructuring that we did. Interest expense in our margin at TCF is only 9% of interest income, one of the lowest rates in the banking business, one of the big contributors to our strong net interest margin. Core expenses are up due to the growth of our emerging businesses. For instance, we added some 50 people in the auto origination business. And even with that additional people, the auto business, which is a new business started for us at the beginning of the year, was profitable in the quarter. We expect to lever the operating expenses that we’ve added into our core businesses, business expansions, as we grow the balance sheet around those businesses, and that is indeed happening. Read the rest of this transcript for free on seekingalpha.com