TCF Financial Corporation's CEO Discusses Q2 2012 Results - Earnings Call Transcript

TCF Financial Corporation (TCB)

Q2 2012 Earnings Call

July 19, 2012 11:00 AM ET


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


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



Good morning and welcome to TCF’s 2012 second quarter earnings call. My name is Christy, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (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; Mr. Earl Stratton, Chief Operations Officer; and Mr. Mark Nyquist, Chief Credit 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 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.

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