TCF Financial Corporation
Q1 2015 Earnings Call Transcript

Published: 21 Apr 2015

[Operator:]

Good morning, everyone and welcome to TCF’s 2015 First Quarter Earnings Call. My name is Jamie and I will be the 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, TCF Director of Investor Relations 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. Craig Dahl, Vice Chairman and President of TCF Financial Corporation; Mr. Tom Jasper, Vice Chairman; Mr. Mike Jones, Chief Financial Officer; Mr. Jim Costa, Chief Risk Officer; and Mr. Mark Bagley, Chief Credit Officer. During this presentation, we may make projections and other forward-looking statements regarding future events for the future financial performance of the company. We caution you that such statements are predictions and actual events or results may differ materially. Please see the forward-looking statement disclosure contained in our 2015 first quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of March 31, 2015 and we undertake no duty to update the information. During our remarks today, we will be referencing a slide presentation that is available on the Investor Relations section of TCF’s website, ir.tcfbank.com. On today’s call, Mr. Cooper will begin with an introduction, Mike Jones will discuss first quarter highlights and expenses, Mark Bagley will discuss credit quality, and Craig Dahl will provide a business update and closing comments. We will then open it up for questions. I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

[William Cooper:]

Thank you, Jason. First of all, in terms of some significant things that have occurred, I think important one is the promotion of Craig Dahl, a 16-year veteran of TCF, prior to that at Wells Fargo/Norwest Bank to President, which is a key step towards the execution of our succession and strategic plan, and we expect to see some organizational changes that Craig will be making during the year, which will be I think significant for TCF. Basically, we had another solid quarter, and there were a number of things that occurred in the quarter that of note that I will just mention, first of all, the sale of the TDR portfolio in the fourth quarter last year had its desired benefit with continued credit quality improvement. Our charge-offs in the quarter were a little over 25 basis points and non-accruals were down 16% from a year ago. So, we have seen the sale of that TDR portfolio, which was restructured residential loans, which is kind of the last act in housing market crisis at TCF and that’s pretty much over. During the quarter, we made the decision to reinvest a portion of the proceeds from the sale of those TDRs into loans in our core businesses, which will have the benefit of improved net interest margin over the next 12 months. As a matter of fact, we will in general recoup the gain on sale that we didn’t have as a result of putting those loans into portfolio pretty much over the next 12 months, and that’s helping us in connection with our goal of having loan growth in 5% to 10% range over the year, which pretty much matches our capital accumulation rates which would fund the capital associated with that loan growth. We had some unusual one-time items. We funded our foundation – the expenses for the foundation for the year in the quarter of $2.8 million taking advantage of certain tax benefits to do that all at one time as opposed to over the year, which we have done in the past. We also wrote off some Visa expenses in connection with a contract that we had with Visa, which will have significant operating expense benefits in coming years, which impacted the quarter on a unique basis. We continue to have a strong loan and lease growth. It was $3.6 billion, which is up 15% from a year ago. It was very strong originations. And as I mentioned, I think these originations and our goals for sales puts us on track for a 5% to 10% on a loan growth for the year. We had a steady net interest margin, which is contrary to what’s happened in the industry as a whole at 4.50. That net interest margin rate is among the highest margins in the banking industry. That margin continues to be under assault from continuing lower interest rates, but we were able to keep it at close to 4.50 in the quarter. We had our normal seasonal decline in fees and service charges on our deposit accounts that occurs in the first quarter. And we had – we have now had 18 constitutive quarters of deposit growth, all core with some 90% of our deposits being insured. I think our deposits were up another 8%. So all in all, an eventful quarter and all of which is taking us down the path of strong earnings going forward. We are well positioned in the banking industry. The TCF’s – all of TCF’s basic parameters compare favorably to our peers. Our net interest income as a percentage of assets, this is different than the margin that was 4.16 versus 3.08 for our peers, our non-interest income 2% versus 1%. We had a total revenue at 621 versus 410, the return on average assets were 85 basis points, yield on loans is 50 basis points higher than our peers at 5%, and our rate on deposits is lower. Our balance sheet as a result of our lending origination capacity is much stronger in connection with loans with 85% of our assets being loans as compared to 65% for peers, almost all funded by core deposits. We have a low level of borrowings as a result and a good strong return on tangible equity. With that I will turn it over to Mike Jones for highlights.

[Mike Jones:]

Thanks Bill. Turning to Slide 5, this shows our performance for the quarter comparing first quarter of 2015 results with first quarter of 2014. Earnings per common share was $0.21, down 12.5% from a year ago driven mainly by reduced loan sales comparatively as we reinvested a portion of TDR proceeds into our core businesses. Loan and lease originations continue to be a strength for the organization, up 15%, and we continue to look to fund those loan and lease growth through core deposits with average deposits up 7.8%. Provision for credit losses continues to improve, down 11.7% with charge-offs declining 15 basis points as a percent of loans and leases from a year ago. Revenues were relatively flat on a quarter-over-quarter basis, with reduced loan sales and margin compression being offset by increased earning assets. Non-accrual loans and leases continued to decrease on a year-over-year basis, as we experienced the benefit of the fourth quarter TDR sale. Both return on average assets and return on average tangible common equity were down, impacted by the reduced revenues associated with reduced loan sales. The increased earning assets from those actions will increase revenue and returns in subsequent quarters. Turning to Slide 6, this highlights our revenue. First quarter revenue was impacted by the higher average loan and lease balances in auto finance, leasing, and equipment finance and inventory finance businesses. We experienced the normal seasonality around banking fees in the first quarter, off of fourth quarter run rates. This was offset slightly by growth in our servicing fee income. As mentioned on the last slide, revenue was also impacted by reduced gains on sales of loans, as more loans were held on the balance sheet. Net interest margin increased slightly in the quarter to 4.5%, as we saw the benefit of the selling in the low rate TDR portfolio, along with the bounce back of the inventory finance yields. These overall gains were offset by continued margin compression in the marketplace. On the right side of this slide, continues to show the foundation of our business model, diversification across our revenue sources both in the earning assets that generated our interest income and the fee income generated by both sides of the balance sheet. Flipping forward to Slide 7, non-interest expense as a percentage of total average managed assets remain flat on a linked quarter basis with compensation expenses remaining flat even with the reset of payroll taxes. Non-interest expense for the quarter increased $5 million mainly due to the donation of an investment of $2.8 million to the foundation within the quarter that increased contribution expense by the same amount. This expense will be recaptured through reduced expense in subsequent quarters. Also as Bill mentioned, we renegotiated our Visa contract that resulted in increased expense in the quarter that also will be recaptured in increased revenue and expense reduction in future quarters. FDIC expense returns to a normal run rate for future quarters in 2015. I will now turn the call over to Mark Bagley to talk about credit.

[Mark Bagley:]

Beginning on Page 8, 60-day delinquency rate excluding acquired portfolios and non-accruals was 14 basis points at March 31, 2015. This was down from 19 basis points at the March 31, 2014 and flat with December 31, 2014. The decrease from March 31, 2014 was primarily driven by the stabilization of the consumer real estate portfolio as economic conditions improved within TCF markets. Turning to non-performing assets, they were $285 million at March 31, 2015 compared with $330 million at March 31, 2014 for a percentage decrease of 13.8%. Non-performing assets rose slightly in Q1 2015 by 0.8% from December 2014. The decrease from March 31, 2014 was associated with a few factors on the sale of the consumer real estate TDR portfolio that occurred in the fourth quarter, which included approximately $40 million of non-accrual loans, improving credit quality and the continued efforts to work out commercial real estate problem loans. The net charge-off rate was 28 basis points at March 31, 2015, down from 43 basis points at March 31, 2014 and 40 basis points at December 31, 2014.  The decreases for both periods were primarily driven by the improved credit quality in the consumer real estate as well as the commercial portfolios. The provision for credit losses was $13 million for our first quarter of 2014, a decrease of $43 million from fourth quarter of 2014 and this decrease from year end 2014 was primarily driven by the provision expense related to the consumer real estate TDR loans sale for that period. Turning to Page 11, this page displays a line of business view of net charge-offs. What you will see is the improvement on Page 9 – pardon me, Page 9 displays the line of business view of net charge-offs. What you will note on this page is again the improvement in the consumer real estate portfolio as net charge-offs at March 31, 2015 were 51 basis points compared to 80 basis points at March 31, 2014, an improvement of 29 basis points and when compared to December 31, 2014, an improvement of 15 basis points. Looking at the commercial portfolio, you will see us in a net recovery position at March 31, 2015 compared to 19 basis points at March 31, 2014. There is an improvement of 26 basis points period over period and compared to December 31, 2014, a 19 basis point improvement. Also note the improvement you will see with respect to our auto finance business comparing March 31, 2015 of 66 basis points to December 31, 2014 of 83 basis points 17 basis point improvement is associated with the seasonality affect associated with that line of business.

[Craig Dahl:]

Okay. This is Craig Dahl. Turning to Slide 10, I just wanted to say I am excited about the new role and I am looking forward to continuing the strong leadership with Bill Cooper and our TCF executive team. Now, the loan and lease portfolio, this slide demonstrate our consistent performance against our commitment to continue to diversify the portfolio. Retail loans are now down to 33% of the portfolio from 49% as recently as year end 2011. And our wholesale retail mix is now at 55% wholesale and 45% retail, which is a good blend for us. As you can see, there aren’t – there really aren’t any significant changes in portfolio mix since year end. Turning to Slide 11, loan and lease sales, we have been actively selling loans now since the fourth quarter of 2011. As listed on the slide the sales gives us flexibility around our diversification for product and geographic concentrations. It supports our capital liquidity positions and provides additional revenue sources. Mike has previously discussed our reduced amount of loan sales in the quarter and we estimate that at roughly $0.03 per share, which will be earned back through increased margins throughout the remainder of the year. Turning to Slide 12, the managed portfolio, you can see the portfolio continues to increase and the managed book ended the quarter at $20.9 billion, with the service for others at $3.5 billion. Servicing fee income was $7.3 million for the quarter compared to $4.3 million in the first quarter a year ago. Gains from loan sales were $14.9 million compared with $20.3 million in the first quarter of a year ago. Turning to Slide 13, the loan and lease balance roll forward. Originations were up $463 million for the quarter. And as you can see on the box on the right, they were up at all categories with the exception of leasing. Our teams continue to show a disciplined approach to structure and pricing and this slide shows that our diversification is still paying off for us. Turning to Slide 14, loan and lease yields, the two lines to point out here are the first mortgage line, which bounces up due to the fourth quarter sale of the lower yielding TDRs from 526 to 557 and inventory finance bounced back up after the temporary reduction tied to a significant program extension. Overall, our niche approach continues to keep us ahead of our peer group. Turning to Slide 15, deposit generation, as Bill has commented, we grew deposits in the quarter with only a 1 basis point increase in our cost from the fourth quarter. Our average total deposits have now increased for 18 consecutive quarters, and all of the factors listed on the slide remain consistent. Our attrition continues to trend down. We have a significant amount of deposits in lower or no cost categories and over 90% of our deposits are insured by the FDIC. Turning to Slide 16, our capital ratios, in 2013, the U.S. banking regulators approved final regulator capital rules, which become effective on January 1, 2015 and will be phased into 2019. Following the Basel III standards, as you can see, they have an immaterial impact of TCF’s capital and related ratios. Finally on Slide 17, the summary, we don’t believe the slide tells the whole story as the investments we made in the first quarter around renegotiation of the Visa contract, the contribution to the TCF Foundation, the cautious reinvestment of the sale proceeds, and the desire to hold more of our core loans on the balance sheet will all contribute incremental revenue throughout the remainder of 2015. And with that, I will turn it back to Bill Cooper.

[William Cooper:]

I think we are well poised now to as I said it earlier to continue our loan growth in the 5% to 10% level to – which kind of matches the capital accumulation rate that we have. So, we are actually perhaps accumulating capital faster than we are growing assets maintaining our ability to sell loans and manage our balance sheet accordingly with manage concentration risk and credit risk in terms of the loans that we sell and kind of remain optimistic that we should have had a strong year for the balance of the year. If the Fed increases rates during the year, TCF is well-positioned – very well-positioned for rising rates and our margin should improve with rising rates as a result of our funding in relatively rate insensitive and our assets being more rate sensitive. So, we should benefit from a rate increase if indeed it occurs during the year. With that, I would just open it up for questions.

[Operator:]

[Operator Instructions] And our first question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead with your question.

[Jon Arfstrom:]

Hey, thanks. Good morning.

[William Cooper:]

Good morning.

[Jon Arfstrom:]

Yes, good morning, good. Just a couple of questions on the sale versus retention type decision, first in Q1, all you are saying is you had $400 million in cash or in earning assets whole on the balance sheet and the decision to retain more versus sell this quarter was really about filling up the loan bucket, is that the way you want us to view this?

[William Cooper:]

Yes, you can view it that way and I will say this about it, the assets that we sold were yielding a little over 3% and they had credit issues and the assets that we put on the balance sheet yielded over 5% and should be much stronger from a credit perspective. So, yes, the answer to that is yes, we’ve utilized a portion of the proceeds from the sale of the TDR to put into loans as opposed to selling those loans. Mike, do you want to add any?

[Mike Jones:]

Yes. The only thing I also would add John is we could have taken the action the day that we sold and we got the proceeds in to invest it into investments at a 2% yield, and that 2% yield has decreased as the quarter progressed. And when we’ve made the decision to do as cautiously invest that proceeds into our core businesses that are yielding closer to 5%, and we think on the long haul and the long run, that’s going to be much better off for us and the shareholders.

[Jon Arfstrom:]

Okay. And when you say a portion, what does that mean? Does it mean there is more to come like this in Q2?

[Mike Jones:]

Yes. I think we took a look at the magnitude, the loan sales that we have had in 2014, and we took a portion of those and said okay, we are going to do that here. I think what you will see in subsequent quarters is more normalized type sales levels and us gradually investing the remaining portion over as those originations comes to bear.

[Jon Arfstrom:]

Good. And then one more comment, Craig, you just made was on the desire to hold more, and Bill you talked about the loan growth of 5% to 10%, do you view that as a material change in the business model or would you view that as more subtle?

[Craig Dahl:]

No, I don’t think it’s a material change. The hold versus sell decision for TCF is a combination of things. We would like to grow our loan portfolio in accordance with the growth in our capital, so that – and we are kind of in a unique situation in that. Most banks don’t have that issue in terms of how fast you are accumulating capital versus how fast you are growing your assets. We have loan origination in excess of our capital accumulation rate, which is good, because that excess is in the form of a salable loan, and so we can take a decision on that. Now, on top of that, we have issues that we want to manage in connection with geographic concentration risk, credit risk that we want to keep versus what we want to sell, and so forth, which all comes into there. But the answer is where we are as a bank today, which is good solid credit, well capitalized, well funded, and we want to grow our balance sheet and grow our margin accordingly and have core earnings accumulated with that and the earnings associated with loan sales in effect of bonus to that if you will, which allows us to better manage our risks associated with that, that I just mentioned and improve our profitability as a whole. But the formula – the answer to that algebra formula is loan growth, the difference, the variable is how much we sell versus how much we keep.

[Jon Arfstrom:]

Alright, thank you for the help.

[Operator:]

Our next question comes from Bob Ramsey from FBR. Please go ahead with your question.

[Bob Ramsey:]

Hey, good morning. To sort of belabor the loan growth point, but I am curious you all mentioned that you will gradually reinvest the remaining TDR portion – a TDR sale portion over the course of the year, how much is that remaining portion?

[William Cooper:]

It’s a couple of $100 million.

[Bob Ramsey:]

Okay. And the loan growth outlook now for 5% to 10% loan growth this year, I mean, you have already done 4% in the first quarter, so you are almost at the low end of that range. What dictates which end of the range you are at? Is it really the capital accumulation through the year or what sort of makes the difference of 5% versus 10%, because it’s kind of a wide range?

[William Cooper:]

Well, it’s a range – a wide range in that percentage, but it’s big dollars and dollars. It takes a fair amount of dollars to change that percentage if you follow me. And so I would say the biggest variable is origination, which we don’t have total control over. I mean, we originate those loans that we think are solid credit quality and what we want to have in the various businesses that we are in, and so – and where they are coming from and what categories and so forth from a credit risk perspective. If I had to guess, I am guessing that we would come in somewhere in the middle of that 5% to 10% range for the year. Is that fair to say, Craig?

[Craig Dahl:]

Yes, this is Craig Dahl. I just want to add something to your view of this. The inventory finance business peaks at March 31 timeframe. So, that portfolio seasonally liquidates in the second quarter down to other levels. And so, the comparison for that portfolio should be made from March to March and June to June, because it doesn’t act as the way our more amortizing portfolios do as well.

[Bob Ramsey:]

Okay, that’s fair. And then I just sort of want to talk a little bit higher level about expenses and profitability. I mean, you will highlight on Slide 4, how much stronger TCB’s revenues, both net interest income and non-interest income are than peers on a return on asset sort of basis, but the bottom line ROA is actually a touch under peers, because your expenses are so much higher. I am just curious is there anything further that can really be done to push on expenses? Are there opportunities to sort of bring that down or structurally given your model, should we just expect that you are going to be substantially higher than the industry?

[William Cooper:]

The – I will say this in terms of the ROA, I believe the ROA for the balance of the year will compare much more favorably to peers than it did in the first quarter, because of the one-time events that we talked about. But TCF’s operating model is tends to generate higher operating expenses. It doesn’t cost you anything to put on $1 billion on mortgage backed securities in terms of operating expenses, but you will only get a 2% of yield and that isn’t the banking business per se. And TCF is in the lending business and the deposit business. And both of those things cost more. In addition to that as a result of our loan servicing that we do today, because of the loans that we sold and serviced that expense ratio was better measured against managed assets, not total assets and that continues to improve. That being said, there is more to be done on the expenses at TCF. And there is more to be done in connection with levering and particularly with some of our businesses and it is a continuing emphasis. But TCF probably will – in our business model always have a higher operating expense level accompanied with a higher revenue, hopefully that generates a higher return on assets, return on equity we will report.

[Bob Ramsey:]

Okay. And I guess along those lines, you sort of alluded in your opening remarks the fact that Craig could be making some organizational changes that could be significant later in the year, I am just curious if any of that will have a favorable impact on expenses or if they are targeting other outcomes?

[William Cooper:]

I would say, they are more of organizational in terms of Craig’s perception of the way he would like to see things organized as opposed to targeted at cutting operating expenses. Although, there is a strong effort in going on to examine all of our operating expenses and reduce them where possible.

[Bob Ramsey:]

Okay, go ahead.

[William Cooper:]

Yes, great.

[Bob Ramsey:]

Okay. And the last question and I will hop out. But I know you said you expect the ROA to compare a lot more favorably to peers in the remaining quarters of 2015, is it fair that for the same reasons, we should see much better year-over-year EPS comparisons for you guys in this quarter?

[Mike Jones:]

That would be mathematically correct, yes.

[Bob Ramsey:]

Okay. Thank you, guys. I will hop out.

[Operator:]

Our next question comes from Emlen Harmon from Jefferies. Please go ahead with your question.

[Emlen Harmon:]

Hi, good morning. Just wanted to touch on GE Capital and whether you guys think that – excuse me, think that provides an opportunity to pick off some assets particularly in the inventory finance business, understanding it maybe a little large to actually buy portfolios out right?

[Mike Jones:]

GE has always been our largest competitor in that business. They are selling that aspect of the business as well. We will examine that and see whether there is some opportunity for us in connection with that, with the liquidation of that asset. One of the things I will say about that is that when something like that happens in the industry, it tends to shake up the industry. People will start to look at and say, well who is going to be doing this for me. And inventory finance is the core business for our customers, financing inventory for the retailers, for the manufacturer and so forth it’s really important business for them. And a big change in that always makes them – it gives them the real concerns. So a couple of things may happen. One, it may open the opportunity for us to find business in the marketplace that wouldn’t have happened otherwise and there is some possibility that we might be able to find something in the acquisition side. Craig, you would – do you have anything to add on that?

[Craig Dahl:]

The only thing I would – this is Craig Dahl. The only thing I would add is that there are also opportunities for different sales organizations to migrate away from a company in transition into a company with a more stable outlook, so that’s an opportunity as well.

[Emlen Harmon:]

Got it. Thanks. And then I wanted to hop back just to balance sheet growth, rather loan portfolio for the year, 5% to 10% loan growth is more than you have seen in the last few years, do you envision any change in the portfolio mix as you kind of ramp up the level of loan growth that you are expecting?

[William Cooper:]

Well, the mix has been changing somewhat as our auto portfolio has grown and our second mortgage portfolio was grown and some of our more mature businesses have been more steady. So I think you will see – continue to see some changes in that connection. But nothing radical, I would say in terms of the mix during the year.

[Emlen Harmon:]

Alright, got it. Thanks a lot guys.

[Operator:]

And our next question comes from Scott Siefers from Sandler O'Neill. Please go ahead with your question.

[Scott Siefers:]

Good morning guys. I also wanted to kind of revisit the loan portfolio piece, I just want to make to make sure I understand the permanence of the change here to portfolio most of which is – of course you will accelerate your loan growth that’s going to get more normalized or I should say lower base of gain on sale, so is this something that we can look at the first quarter gain on sale revenues and think of that of as a normalized number or on a kind of an every day – every 90-day basis, will you be determining how much you want to sell versus how much you want to portfolio such that in the aggregate the profitability is higher, but you maybe have a lot more volatility, I guess, in some ways it kind of reminds me what you did with the securities portfolio, I think maybe in 12 or 13 years ago, where it was ultimately the right decision, but it made quarter-to-quarter forecasting much more challenging?

[William Cooper:]

We don’t want to make predictions here. But I think we would see gains on sale of loans return to more normal levels through the balance of the year. Is that fair to say Craig?

[Craig Dahl:]

Yes. I want to add just a little tint on that Bill. If you look at Slide 11 in the presentation, you see that it has bounced around from 4.50 as high as 7.30. So we haven’t had a real steady amount of loan sales in the quarter. And I think that the way to look at this is, the timing of this is rather than dig another asset hole with additional sale in the first quarter, we decided to hold those asset levels and then we will make those decisions as the quarters come.

[Scott Siefers:]

Okay. And then is there any change to the philosophy on what you would portfolio versus sell, I guess, my impression has been that you guys in the past have been willing to portfolio that are higher quality stuff, but maybe the lower quality stuff that was marked by sale candidate, I mean, one was accurate, and two any change with the greater willingness to portfolio stuff?

[William Cooper:]

No. There is no change in that although I will say that in the auto business, the higher percentage of our origination or at least more dollars of origination are in the category that we would sell, because the origination in total is higher. But we are still in the same policy of what we will sell versus what we will keep.

[Scott Siefers:]

Okay. And then just really quick a couple of questions on expenses, first was what was the dollar value of that Visa expense that you guys have alluded to a couple of times. And then two, I feel like to a certain extent, if you go back to maybe 2013, I think that was kind of the year of investment and then some of those investments were supposed to be leveraged, I think a little more visibly in the expense base. So is there a point where we will kind of be at a higher watermark for expenses such that we can kind of see where all these investments have been and the operating leverage will be much more visible or are we still kind of at a point where the noise around the quarter-to-quarter dollars of expenses will be with us for a little while?

[Mike Jones:]

Yes. Scott, this is Mike Jones. I would say how you have to look at it. If you look at Slide 7 and you are focusing on comp and benefits rate, on a linked quarter basis its flat. And that’s even given the payroll tax reset that we have seasonality in the first quarter that happens every year to us. So, I think what we are trying to accomplish is maintaining and getting leverage out of that comp and employee benefit line item. There were several expenses within the quarter that will be recaptured throughout the subsequent quarters in 2015. And there were good decisions to be made and not just look at the short-term one quarter performance, but looking over the entire year 2015 as well as into 2016, there is about $1 million associated with the Visa contract renegotiation that will benefit us in subsequent quarters. Majority of that being paid back in one to two quarters and benefit us throughout the extension of that contract in subsequent years as well. And then on the contribution expenses that were all taken in the quarter will reduce our contribution expense in subsequent quarters throughout ‘15, so that’s just the timing of expense. And then I think lastly, how we are looking at it, we are being really critical on where we spend and where we invest. And we will continue to look at those expenses as we go throughout ‘15 making sure that we are getting as much leverage as we can out of the growth of the loan businesses.

[Scott Siefers:]

Okay, alright. I appreciate the color. Thanks a lot.

[Operator:]

Our next question comes from Chris McGratty from KBW. Please go ahead with your question.

[Chris McGratty:]

Hey, good morning everybody. Mike, on your margin or Bill, you think you said 450 in your prepared remarks, just want to make sure I am clear with the debt offering in February. Is it expectation for the next couple of quarters modest down bias from 450 or did I miss something in the prepared remarks?

[Mike Jones:]

No. I think that’s right, Chris. I mean, there is still going to be downward pressure on the net interest margin mainly due to us funding that asset growth with incremental deposit growth that has to be brought on at market rates at least in the short run. So, you will see continued pressure on that margin as we go throughout ‘15.

[Chris McGratty:]

Okay, that’s helpful. Maybe a follow-up on Texas, I think in previous slide decks you have alluded that you have got $600 million or $700 million of exposure, anything – any impact from what’s going on in Texas either from – it doesn’t seem like anything is going on from credit, but any kind of growth and maybe in your leasing portfolio that you are concerned about?

[Craig Dahl:]

No, there is no undue concern. And we don’t think we have any significant oil patch exposure to speak of. We have done that analysis and we don’t believe we have anything significant to speak of.

[Chris McGratty:]

Okay, Craig, thank you. And last question, Craig, congrats on the promotion, but Bill, anything read into the kind of the delay of the second announcement? It seems it was the board sees we are going with succession, but we haven’t gotten the CEO – efficient CEO kept for Craig, any update on timing, I know the board meeting is to be this afternoon?

[Craig Dahl:]

No, there is no slot there and people can draw their own conclusion. And our board will make those decisions when it’s appropriate.

[Chris McGratty:]

Alright, thank you.

[Operator:]

Our next question comes from Steven Alexopoulos from JPMorgan. Please go ahead with your question.

[Preeti Dixit:]

Hi, everyone. This is Preeti Dixit on for Steve. Just on the service charge pressure this quarter, how much of that would you attribute to normal seasonality? And then how much would you say is more structural, just trying to get a sense of what degree that could bounce back in the balance of the year?

[Tom Jasper:]

Yes, this is Tom Jasper. We experienced a normal amount of seasonality that we have seen. There has been changes in customer behavior going back multiple years that has led to a decrease in the fee revenue line, but we didn’t see anything outside of the normal seasonality in the first quarter compared to previous periods.

[Preeti Dixit:]

Okay, that’s helpful. And then just one other expense question for Mike, could you be a little more specific on what we should expect for that FDIC premium line. I know it’s bounced around a bit in last quarter. I think you expected another $9 million of annual savings this year, is that still fair?

[Mike Jones:]

Yes. I think you can look at the first quarter as a good run-rate for the remainder of this year.

[Preeti Dixit:]

Okay, great. That’s all I had. Thank you.

[Operator:]

And our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.

[Unidentified Analyst:]

Hi, good morning. This is actually [indiscernible] stepping in for Jared. First question is for Tom, it seems like there has been good traction on the gaining of market of money market deposits in recent quarters. Can you just talk about what the pace of current deposit campaigns are and where you are with that strategy?

[Tom Jasper:]

Yes. In terms of looking at deposit growth throughout the year, what we attempt to do is look at a large amount of growth throughout the year and kind of break it into quarterly campaigns that we will look at market to market. And right now, we have gained good traction in our money market product. We are careful in terms of how we price the product in various markets. But we are seeing good texture of incremental deposits into the bank. As you work through – initially when you launch a new product like that, the disintermediation that comes from existing base, but as the campaign matures, you end up bringing in more incremental outside dollars. So, we are satisfied with that result and we continue to look for growth in the coming quarters in the neighborhood of a couple of $100 million dollars, $150 million to $200 million of deposit growth a quarter.

[Unidentified Analyst:]

Okay, great. And then just looking at the money market yields, it seems like that pace has been decelerating over the past couple of quarters, can you just talk about where you are there? Should we continue to see a slight uptick or is that going to stabilize going forward?

[Tom Jasper:]

We make those decisions based on what the competition is doing and how we are looking at relative deposit growth. And that’s the decision that we make month-to-month based on where our competitors are at and we set pricing accordingly. So, I hesitate to make predictions on that, because of customer preferences on product. And if somebody were to come out and offer a significant increase or significant increase in their money market product, you won’t necessarily look to match that. So, I hesitate to make any predictions around that, because they are driven by the marketplace and our competitors and what our overall appetite is.

[Unidentified Analyst:]

Okay, I understood. And then sorry to continue beating a dead horse here, but just the decision to portfolio versus sell, is this new strategic kind of objective going to impact at all the plan for securitizations during 2015 or should we continue to kind of think that as status quo?

[Mike Jones:]

I think you need to think that of that at this juncture as status quo. I mean, we still like that outlook and we will continue to utilize that outlook on a consistent basis throughout ‘15, ‘16 and the years to come. So, we like that program and we will continue to utilize that program.

[William Cooper:]

I think the way to kind of trending these questions that it looks like there is a change in the basic strategy of the bank and that’s not quite the case. We sold these TDRs. We got the proceeds. We became significantly more liquid. And we looked at various options, where you want to put this money and you want to stick it out there for 20 years at 2% and something they have to mark etcetera, etcetera or should we just fill up the gap by holding down loan sales and put it in the loan business, which is the business that we are in. But it’s not a strategic decision change that we have in terms of the way we are managing the bank. And I think you can expect those basic things to go back to normal over the balance of the year.

[Unidentified Analyst:]

Okay, thanks for the color. And then just one last question for Mike, I am sorry if I missed this, but did you say the expense associated with the donation this quarter was $5 million?

[Mike Jones:]

No, associated with that, that was just the linked quarter increase from fourth quarter to third quarter, that contribution expense was $2.8 million.

[Unidentified Analyst:]

$2.8 million, okay, got it. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Kevin Barker from Compass Point. Please go ahead with your question.

[Kevin Barker:]

Good morning. Thanks for taking my questions. On the service fee income, you saw a significant drop this quarter and you cited changes in customer behavior in the first quarter, could you expound upon what type of changes you are seeing from the customer and if there is any changes in your deposit products?

[Tom Jasper:]

This is Tom Jasper. There is no significant change in the checking account or the product itself that will lead to the – a reduction in seasonal fees. What we are – when we look at customer behavior we are looking at where the – part of it is driven by balances is part of the answer outside of the customer behavior. But in terms of the behavior itself it is related to incident rates as it relates to transactions and lots of things are driving changes in behavior. The increased adoption of online banking, the mobile banking within the customer set is just a single example of that in terms of how our customers utilize their account and the average number of transactions that the customer is doing in a given period. So those are the types of behavior changes in terms of how people utilize the account, but there is no significant change in the account itself.

[William Cooper:]

But one thing that has occurred, there are some data that indicates that the savings the consumers have gotten and our customer this really happens in states through lower oil prices have gone into deposits, not spending. And so on average, the customer has got a little bit more money in their account. And they haven’t cranked up the spending as was anticipated with lower oil prices.

[Tom Jasper:]

On average, Bill the increase is about 10% in the average checking account balance year-over-year.

[Kevin Barker:]

So given that decline, would you expect the service charges to continue to decline on a year-over-year basis and potentially continue to decline going into next several quarters, because your customer is becoming more attuned to where their account balances stand or what their spending habits are?

[Tom Jasper:]

If you look at what the history is – has been its really driven by multiple factors including the number of accounts, number of active accounts, how – again how much transactions in a given period the accounts have. So I think when you look at it, seasonally you will see an increase in fee revenue that we have seen from the first quarter to the second quarter, third quarter etcetera that that’s been the case. And the other changes in customer behavior will be driven by number of accounts and then how they continue to use it. But if you would look at the recent trends, you have seen a steady decline in that even on the year-over-year basis. But there are – as it relates to what will impact that going forward, a lot of that is going to have to do with the average balances in those accounts and the number of accounts.

[William Cooper:]

Ancillary impact of that by the way is, there is a secular trend of people having better information and along with higher average balances and so forth to better manage their money and not have accidents as often. And one of the things that has resulted in is a lower attrition rate because very often those accidents result in termination of accounts. And so there is a mitigating impact of the lower attrition rate, higher balances, which creates higher margins and so forth. So it isn’t all bad news, and it’s actually TCF has spend a lot of time, a lot of money giving customers that information, so that they can better manage their money.

[Kevin Barker:]

Great. And in regards to the inventory and equipment finance, you have experienced very strong credit metrics over the last couple of years and the yields on those loans continue to be very attractive, when I think about those particular two asset classes, how should we think about a normalized charge-off rate through a cycle in regards to those particular asset classes?

[William Cooper:]

Well, I will comment and then I will ask Craig to comment on it. The equipment finance business, we have been in for 15 years and it has always had very good credit. There is just a lot of metrics that drive that in terms of the nature of that business. And we are probably in a trough of credit for everything right now in terms of a strong economy – a stronger economy and so forth. At some point, charge-offs will increase again. The inventory finance business just by its structure doesn’t – we have been in that business 5 years now and – 5 years, 6 years and by it’ structure, it doesn’t lend itself to very often where we have a charge-off almost always when you have a charge-off as a result of small fraud. And I think those are two categories in the balance sheet that we are optimistic that should be able to maintain good solid credit throughout cycles. Craig, do you have anything to add?

[Craig Dahl:]

No, other than we don’t really give guidance on where our stress loss rates will be expected to be, so.

[William Cooper:]

But these are good categories to be in.

[Kevin Barker:]

So you are not seeing increased competition given the outsized yields compared to most other loan categories?

[William Cooper:]

Well, the inventory – one of the things about a lot of our businesses in general that’s important is that you can’t just decide to go in the inventory finance business, it is a business that requires a system, big systems of how you manage this thing and so forth. The equipment finance business is – it’s been built over 15 years. You can’t just get in it. A lot of people have gotten in it and gotten out of it. And when you they get in it, they get the business we won’t do very often or the business somebody else won’t do. So it is what it is. We are in these businesses because they have better yields and they are not commodity businesses and over the pool they have better credit. And that’s why we are in those businesses.

[Kevin Barker:]

Thank you for taking my questions.

[Operator:]

And our next question comes from Stephen Geyen from D.A. Davidson. Please go ahead with your question.

[Stephen Geyen:]

Hey, good morning. Just wondering about the net charge-offs and wondering if there are any significant recoveries in the quarter. And maybe as a follow-on to that just thinking about the provision level, how that - is it going to be fairly anchored to net charge-offs going forward?

[William Cooper:]

There is some of that, I will turn it over to Mark in a second, but the provision is also driven by loan growth. We provide for a reserve for loan loss with loan growth even when there are no charge-offs. So the provision is a combination of charge-offs and the guideline reserves that we put on loans in the degree you grow loan as faster you grow your provision faster.

[Mark Bagley:]

This is Mark Bagley. The recoveries that we had on the commercial book were the result of several years of work and opportunity that really presented itself to us at this time. As we look on a go forward basis, the quality I guess I would say the remaining portfolio from a workout perspective is at a place where I wouldn’t necessarily expect significant recoveries coming in, but I would expect the ability to continue to work through those portfolios going forward.

[Stephen Geyen:]

Okay. And last question, the first mortgage for the consumer real estate loans originated $177 million this quarter and those loans in total were down a little bit quarter-over-quarter, the consumer loans were down from say $5.6 billion to just a bit more or down just a bit about $100 million, are you retaining any of those loans, is there any mix change in that or is that portfolio pretty well set in runoff and you are basically selling everything that you are originating?

[Craig Dahl:]

This is Craig Dahl. The first thing is that box of references that change in sales quarter-over-quarter, first quarter over first quarter, so the $177 billion is the amount of the increase in the first quarter of ‘15 versus the first quarter of ‘14.

[Stephen Geyen:]

Good point, yes.

[Craig Dahl:]

Okay. And there is really not much change in our origination philosophy or in our whole philosophy. So the numbers are fairly consistent year-over-year.

[Stephen Geyen:]

Okay, I appreciate your time.

[William Cooper:]

Jamie, I believe we got time for one more question.

[Operator:]

Sir, at this time I am showing no additional questions. Thank you for your questions today. Should you or any investors have further questions, Jason Korstange, Director of Investor Relations will be available for the remainder of the day at the phone number listed on the earnings release. We would now like to turn the conference call back over to TCF for any closing remarks.

[William Cooper:]

Just thank you, all for your attendance. Have a good day.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.