TCF Financial Corporation
Q1 2008 Earnings Call Transcript

Published: 23 Apr 2008

[Operator:]

Good morning and welcome to TCF's First Quarter Earnings Conference Call. My name is Eric, 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. [Operators Instructions]. At this time, I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications, to begin the conference call.

[Jason Korstange:]

Good morning. Mr. Lynn Nagorske, CEO, will host this conference. Joining Mr. Nagorske will be Mr. Neil Brown, President and Chief Operating Officer; Mr. Tom Jasper, Chief Financial Officer; Mr. Earl Stratton, Chief Information Officer; and Mr. Tim Bailey, President and CEO of TCF National Bank. 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 2008 first quarter earnings release for more information about risks and uncertainties which may affect us. Information we provide today is accurate as of March 31, 2008, and we undertake no duty to update the information. Thank you. I will now turn the conference call over to TCF CEO, Lynn Nagorske.

[Lynn A. Nagorske:]

Thank you, Jason and good morning to everyone. We reported our first quarter earnings today. EPS for the first quarter of 2008 was $0.38. That compares to $0.65 from a year ago, which included a number of significant items which I'll go through in just a second. Net income was 47.4 million. That compares to 82.7 million from the prior year quarter. ROA 1.18% and return on equity 17.08%. As I mentioned, last year's first quarter included a number of significant items. We sold 10 of our Michigan out-state branches and recognized a pretax gain of 31.2 million. After tax, that's 21.1 million or $0.16 earnings per share impact. We settled with the IRS an income tax settlement and that was $8.5 million or $0.07 EPS impact for a total of $0.23. In 2008, we had a couple of items. The Visa IPO, where we recorded a gain of $8.3 million was $0.04 after tax, EPS impact. We also reduced our reserves related to the Visa litigation that we set up last year in the fourth quarter. That was $3.8 million, $0.02 EPS impact. The result on mortgage backed securities and recognized a gain of $6.3 million, 4.1 after tax and $0.04 impact, so $0.10 for the 2008 quarter. It's also worth to note and we'll talk about this some more, TCF recorded $30 million provision for credit losses in the first quarter of 2008. That compares to $4.7 million in last year's first quarter. Net interest income for the first quarter was $142.8 million, that's up $7.3 million or 5.4% from last year's first quarter. Our net interest margin for the first quarter of 2008 was 3.84%, that's up one basis point from the fourth quarter of 2007, which I believe is a positive development and its down 16 basis points from the first quarter of 2007. Fee income for the quarter, total banking fee income was $99.5 million, that's up 3.4%. Some of the major categories included in that are fees and service charges 63.5 million, that's up 2.5% it's actually up 4.2% if you exclude those Michigan branches that I mentioned that we sold last year at the end of the first quarter. Card revenue 24.8 million up 6.5%, Leasing 12.1 million which was down 1.9 million or 13.3%, that decline is primarily sales type transactions which are lumpy in nature and customer driven. Total fees and other revenue $112.7 million, that's up about 0.5%. Branches during the quarter, and we had three openings, two traditional, one supermarket and we closed three branches during the quarter, one traditional and two supermarkets, so the count stays about the same. And as we noted in the release, at quarter end we did announce our plans to close and consolidate 12 of our underperforming supermarket branches in Colorado, and because of the regulatory notification periods they have actually occurred July of 2008. But about 800,000 of exit costs that we reported in the first quarter related to the closure of another 500,000 that we reported in the second quarter. And, that will improve our operating efficiencies on a go forward basis, and I should state we still like the supermarket banking business, so we are very pleased with the performance of our branches in Illinois and Minnesota. Our assets, with the quarter average assets, we had some nice growth up 1.2 billion or 10.7% from the first quarter of 2007. Consumer was up 11.3%, commercial was up 6.1%, and leasing was up 16.5%, so overall very good asset growth. Liabilities had a good story also during the quarter. They are up from the fourth quarter of 2007 and that's up 3.8%, with increases in almost all the deposit categories, but for a seasonal decline in the small business checking and we were especially pleased by the growth in retail non-interest bearing deposits, which are up 5% from the fourth quarter of 2007. It is worthy of note that at the end of March, total deposits outstanding for a record $10.4 billion at TCF. We were pleased by that. The average rates for deposits declined with the decline in the market rates and pricing changes we made to respond for those. And they were 1.99% that was the average rate during the quarter. That compares to about 2.38% a year ago first quarter. Non-interest expense was up 2.5% from the first quarter of 2007. I would characterize those as well controlled. A significant item that I mentioned previously was Visa, impacted us as I mentioned in two ways. The Visa IPO was completed in March and from that initial public offering, TCF received 8.3 million through deemed certain of our shares that we owned in Visa and also as part of that IPO, Visa funded a cash escrow fund, which covers the future settlement of certain covered litigation. And as a result of that funding, we were able to reduce our reserves that were previously established and that reduction was 3.8 million and is included in non-interest expense. Credit quality, as I previously mentioned during the quarter, our provision was 30 million, up from 4.7 million in the first quarter of 2007. Should note that the first quarter of 2007 did include 2.1 million recovery of a previously charged-off leveraged lease, an unusual non-recurring transaction, but nevertheless the provision is up and those increases are primarily due to higher home equity, loan charge offs and reserve increases, as well as some specific reserves for commercial loans primarily in Michigan. The provision breakdown, if you look at that $30 million, the major components are net charge offs, 13.6 million in the quarter. That was relatively flat with the fourth quarter, but up from 2.7 million in charge-offs a year ago, first quarter. We increased our reserves which are guidelines on rate reserves of 5.8 million and we had the specific reserves for individual credits or commercial lending 7.3 million, and that was mostly due to the Michigan residential construction in Belmont and commercial real estate loans. Home equity charge offs, in 2008 the first quarter was 9 million or 55 basis points. That compares to last year's first quarter of 3.2 million or 22 basis points, and in 2007 our fourth quarter was 6.7 million and the net charge offs were 42 basis points. And these higher charge offs are primarily due to the depressed residential real estate market condition and over supply of homes particularly in Minnesota and Michigan. I would remind everybody once again that TCF has no subprime lending programs, we have no teaser rate arms, we have no option arms although they are some of the things that we didn't do that are resulting in our ratios and charge-offs being less than others. Non-performing assets for the first quarter 134 million that compares to 105.6 million at the end of last year. So its an increase of 28.4 million. If you look at the components of that you'll see, home equity loans are up 9.7 million, as that's loans put through the pipeline, towards a final resolution. Commercial real estate loans are up 14.3 million, and that's primarily Michigan residential construction development and commercial real estate. Leasing was up 2.7 million and real estate own was up 2.1 million that's primarily consumer and residential on real estate. Delinquencies, we did see some increases there, over 30 days were 0.83% that compares to 0.67% at the end of the year also that's in home equity loans. Over 90 days, which is what most banks and other financial institutions report, crept up slightly 0.19%, that's 0.19% at the end of March compared to 0.12% at the end of the fourth quarter. Capital, we remain well-capitalized, and it's important to note in this environment that TCF has $103 million of excess capital over our highest and most restricted well [ph] capital as a requirement. As I noted in the release, TCF is not repurchasing shares. Though we believe it's prudent at this time to pursue our capital in this environment. So, with that I will open it up for questions. Question and Answer

[Operator:]

[Operator Instructions] Our first question is from Jon Arfstrom with RBC Capital Markets. Please go ahead.

[Jon Arfstrom:]

Thanks, good morning.

[Lynn A. Nagorske:]

Hi.

[Jon Arfstrom:]

Can you talk a little bit about the margin drivers that surprises a bit on the upside and can you just talk about... whether in the quarter and what kind of outlook you have for that?

[Lynn A. Nagorske:]

You broke up a little bit Jon, but I think the question was what drove the margin and the one basis point increase in that rate and I am going to ask Tom Jasper our CFO to respond to that.

[Thomas F. Jasper:]

In the quarters Jon, really what we saw was in our short-term borrowings, and checking and savings, deposits reprising down more than our variable rate assets. And one of things on the variable rate consumer loans is that we are having an increase in the number of loans at their contractual floor at the end of the quarter versus at the end of the fourth quarter of last year. And that's really the biggest single item, those two items are the items that are really driving the change, one that changed in the margin.

[Jon Arfstrom:]

Okay, good and then in terms of loan loss provision that was higher than we had expected and you talked about some specific reserves against that, but is it likely we are going to hang around this $30 million level or is there anything else in there that might potentially take that down.

[Lynn A. Nagorske:]

Well, as you know John, we don't make predications for our earnings on a go forward basis, but it's largely going to be dependent on what happens in the housing market and that is the big part of this. And right now, I would say, I don't see conditions... see conditions staying difficult for the remainder of this year.

[Jon Arfstrom:]

And are you seeing any stability at all in Minnesota or Michigan? I guess what I'm trying to get at is the rate of deterioration, as to whether or not it's... flowing or accelerating or staying the same?

[Lynn A. Nagorske:]

They... you know, the charge off rates clearly went up this quarter as compared to both the fourth quarter of '07 and the first quarter of last year. So, I can't... I think mathematically that to say that those are continuing to increase. Now having said that, the winter period or the first quarter, now there are some weather related things that happened to us and that'll be interesting to see in the spring here, whether that changes at all. But at this point in time, you know, the early indicators are delinquencies and those increased during the quarter charge offs. The one thing of good news that I would report is our sales of real estate own properties. We're basically keeping our inventories flat. And so, I think that's a sign that maybe there is some positive optimism out there but I think it's clearly too early to wave the flag and say it's over.

[Jon Arfstrom:]

It's probably the last time I get to ask about it, but can you give us update on the large Roe [ph] property?

[Neil W. Brown:]

Yeah, this is Neil. You're referring to a commercial real estate property in Minnesota, and it works [ph] for 13.8 million. We've got to go through a perfunctory matter this Thursday or Friday and pay back taxes and then that property becomes owned by TCF and we're actively in the process of marketing it.

[Jon Arfstrom:]

Okay, and how do you feel about the valuation that you have on it?

[Neil W. Brown:]

But we believe the book value is very solid.

[Jon Arfstrom:]

Okay. Thanks guys.

[Operator:]

Our next question comes from Scott Siefers with Sandler O'Neill. Please go ahead.

[Scott Siefers:]

Good Morning, guys. Just a couple of questions. First I was hoping you could talk a little bit about what are you seeing on the C&I side. Then I think you made the comment that some deterioration was led by commercial in Michigan. Was that real estate related, or just more general C&I deterioration. And then I guess two that point if you could talk about the move in commercial business charge-offs from 30 basis points up to 44, just the general kind of trends you are seeing on the non-real estate commercial side?

[Lynn A. Nagorske:]

Sure. I'll tackle the first one. In terms of what we are seeing in commercial... in C&I and commercial CRE. If you look across to our system, our credit quality and commercial is very good overall. With the exception of the Michigan market and that's not a new development. That market I think everybody in the country you saying is going through a recession. So be it about whether our national economy is in a recession but clearly Michigan market is and has been. Our difficulties in the commercial portfolio have mostly resided with the residential construction development if you want to call them homebuilder, exposures, and several other commercial real estate properties. And clearly, the sales of new homes have slowed down in that markets, one of the most difficult real estate markets in the country. Unfortunately for us, we are not in the city of Detroit; we're in the, the Detroit suburbs, which are still not as good as the rest of our markets, so that's, that's really rippled into slower sales means longer absorptions periods on properties and to the tune that you own them and get them appraised. That results in a very dramatic impact on your values and that's reflected in our numbers.

[Scott Siefers:]

Okay, and then, I guess jumping into fee income, the drop. I know seasonally this tends to be one of your weaker quarters, but the drop in service charges was among the more severe you guys have had in the last couple of years. Just any thoughts on kind of what drove that and where they go et cetera?

[Lynn A. Nagorske:]

Well, again you really shouldn't compare fourth quarter to first quarter as you pointed out because of seasonality. You only got to look at first quarter compared to first quarter and fees and service charges were up, I think a couple of percent and it's actually about 4% if you look at it without those Michigan branch sales that we did last year in the first quarter. What we are seeing there is that, clearly, I think the consumer has slowed down their spending, and we see that in terms of transaction volumes are down slightly if you compare those periods, and may be 2% in terms of total transactions. But the continued shift between last checks and more down curve. And then I would remind you that in the fourth quarter of last year we did have a price increase of $1.

[Scott Siefers:]

Okay, thank you.

[Operator:]

Our next question comes from Matt O'Connor with UBS. Please go ahead.

[Lynn A. Nagorske:]

Matt, just for a second, I want to go back to the last question, sorry. The other thing that is impacting our deposit fees is that we are seeing our customers keep more balances in their account. And during the quarter, if you look at average balances in non-interest bearing accounts I think it was up like $88. If you look at point in time its up even higher than that. For those larger balances main you have less incidence that impacts fee income and but you have more balances in non-interest bearing deposits and that helps the margin. So, I just wanted to point that out. Go ahead with the question I'm sorry?

[Matthew O'Connor:]

Okay, thanks. And that's actually a good segue into my first question regarding deposits. Since the volumes were quite good I know you have a lot of initiatives underway to boost deposit growth this year, but maybe you can give us a sense of how much is kind of higher balances that maybe as temporary as energy costs fuel costs go up versus gaining market share among some of your customers or new customers?

[Neil W. Brown:]

Well, Matt, this is Neil. I think the... there is two pieces to it, one is on the non-interest bearing balances as Lynn mentioned those average balances per account have come up probably due to the economy and that's probably seasonal as well. So, it wouldn't surprise me if that came down a little bit in the future quarters. But most of the money in terms of the deposit gathering is in other accounts and that's where we are in fact taking market share and its due to a lot of different initiatives, I'm not going to get into specifics on a telephone call like this but there is a great deal of focus to gather those deposits.

[Lynn A. Nagorske:]

Big portion savings and you can see it in our numbers.

[Matthew O'Connor:]

Okay. And then separately when I was there I think it was late February. There was some commentary about, debating the de novo strategy going forward versus potentially getting back into acquisitions. And I'm just wondering what the outcome of that analysis was and where you stand on both the de novo on acquisitions?

[Lynn A. Nagorske:]

That's a excellent question and one that we've been given a great deal thought about, if you look at our numbers just a pure terms of number of branches its declined from 19 or 20 last year down to 10 or 11 this year, with this year's total being five traditional branches, three of those in Arizona, which is a new charter, and two of those that complete our build out in Colorado. I think with the environment, where it is, you know that's changed a little bit in terms of our strategy and I'm not making any big announcements today other than to say, this is a build versus buy decision. And we look at it in terms of what is the best return for our shareholders, in terms of growing the company and growing our earnings per share. Well, bank price and stock is down, including our own. You know you have to look at that a little more thoroughly. And so I think in the future, you might see us do some full time acquisitions that will fit in our existing lines of business. We will certainly take a look at what comes forward in terms of being opportunistic. But I would expect our de novo branches in 2009 to probably slow even further from where we are today.

[Matthew O'Connor:]

Okay, then just a follow-up on that in terms of which geographies you'd be most interested in from a retail bank point of view. How would you prioritize your markets?

[Lynn A. Nagorske:]

I would prioritize those as Chicago and Arizona. Obviously we are still very small in Arizona, and that's a place that we think long-term, it's going to be an excellent place for us to be because of the demographics. And then Chicago, a traditional branch network bigger than what we have today and would be a good thing for our franchise. So those would be the two areas with the highest priority.

[Matthew O'Connor:]

Okay. Thank you very much.

[Operator:]

Our next question comes from Todd Hagerman with Credit Suisse. Please go ahead.

[Todd Hagerman:]

Good morning everybody.

[Lynn A. Nagorske:]

Hi.

[Todd Hagerman:]

A couple of questions for you, Lynn, just kind of follow-up to the earlier question on the C&I business. Just noticed a pretty substantial pickup in terms of potential problem loans in the C&I category. Is that again kind of an extension of some of the challenges in the Michigan market or is it something more specific there that's going on?

[Lynn A. Nagorske:]

That one really relates to indirect exposure to the housing industry. We've got a couple of lumber companies that are well capitalized, but obviously their earnings are being impacted by this housing market. So, in abundance of caution, we classified those loans and that's what that reflects. It's not in Michigan.

[Todd Hagerman:]

Okay and just switching gears a little bit, again kind of talking about the de novo issue and the comments you made about the Colorado market, specifically. I know that Colorado has been... you've had some challenges there over the years, particularly with some of your supermarket partners there. Can you just talk a little bit more about what you are seeing in Colorado and the decision to kind of consolidate those branches in that market, kind of your outlook there?

[Lynn A. Nagorske:]

Sure, the decision we made to close the supermarket was really a store and branch specific, not market driven. We liked the Denver and Colorado Spring's market where we are. That's continuing to grow and expand. We think we've got an excellent branch network there. And so overall we are pleased with where we are in terms of Colorado, where we are headed. What we saw in these stores and as I mentioned, this doesn't really apply to your overall supermarket strategy. We still like our supermarket partner in Minnesota and Illinois, but in the stores that we were in, the store traffic just wasn't up to speed and that impacts our sales and our ability to grow those and so as we looked at it, you know, we just decided that it will be in the best interest of our shareholders to consolidate that operation. We have traditional branches that are close buy and actually improves our efficiencies and you've seen us do that over the years. It's how we've controlled their net interest expense, I call it weeding the garden, and we regularly call through our branch portfolio and if the branch isn't performing, we shine the spotlight on it and say, what can we do to improve it. And if we decide that its future prospects are not good, then we put it on an action list to do something else with it. So clearly, we like Colorado. We've been... we continue to like overall, our supermarket partners.

[Todd Hagerman:]

Remind me again, that I believe there was a king super, was your primary relationship there.

[Lynn A. Nagorske:]

That's correct.

[Todd Hagerman:]

Okay, terrific. Thank you.

[Operator:]

Our next question comes from Ben Crabtree with Stifel Nicolaus. Please go ahead.

[Ben Crabtree:]

Yeah. Good morning. Couple of maybe a follow on... a little follow onto that one. Do you have any grocery store units in Colorado or will you, when you get down with this?

[Neil W. Brown:]

Ben, this is Neil. Well, we are going to remain in two of the stores that we've been in, two of two, and that they're very good stores for us.

[Ben Crabtree:]

Okay, great. I'm assuming... I guess the other area that I want to talk about a little bit is the amount of the home equity loans that are not at the floors yet. Are there a significant variable home equity loans that are not yet at the floors?

[Lynn A. Nagorske:]

Think of the total Ben. There's about 1.100 billion, Tom, correct me if I'm wrong, at the end of the quarter of that total portfolio, probably about 65%, something like that. And there's a bit more, maybe another 100 million or little less that'll come in if we get a quarter percent drop.

[Ben Crabtree:]

So the net effect to that I am assuming is to move you to a liability sensitive position. As an organization, have you done something to offset that?

[Lynn A. Nagorske:]

Well, we have been liability sensitive, so you know, there's lots of changes going on with pre-payments and other things. Overall, our GAAP has... negative GAAP has increased slightly.

[Ben Crabtree:]

Just slightly. Okay. I guess that's probably all that I haven't heard yet. Thanks.

[Lynn A. Nagorske:]

You're welcome.

[Operator:]

Our next question comes from Heather Wolf with Merrill Lynch. Please go ahead.

[Heather Wolf:]

Hi there. Let's see, first a quick follow-up on the deposit trends. There is pretty big gap between the period and in the average balance. I am just wondering if there is anything unusual there, if that's the start of a pretty good trend in deposits.

[Lynn A. Nagorske:]

No, I don't think there is anything unusual. We did, we went through an unusual period, as you know was a 2% drop in the Fed funds rate including one in the quarter and then a eight-day period. And so as we move through the quarter, we priced down our deposits, unnecessarily evenly by category and we also I think wisely wanted to grow that deposit base, which puts less pressure on short-term borrowings. And then the variable rates you might have through a LIBOR exposure. So I think overall, we are in good shape. Liquidity is where we want it. Minimizing short-term borrowings in these very volatile credit markets is a good thing, and it means we are mostly retail funded. But I would expect that growth will more closely follow our power asset growth on a going forward basis.

[Heather Wolf:]

Okay and then, another question on volumes in home equity. This had pretty good sequential volume growth. Was that due to draw downs or was that due to sort of purposeful new customer acquisition in home equities?

[Lynn A. Nagorske:]

On the draw downs, I think you are referring to the utilization on the home equity lines of credit, and I think that at the end of the year, or a year ago that was at about a 49% utilization rate and today it's at about 53%. So, the utilization increases had a small impact on that, that's not unusual when you have a declining rate environment and a steeper slope to the yield curve. So, that wasn't surprising to us. And rest of it was really just our origination on our own strategy.

[Heather Wolf:]

Okay and then last question, I know I ask this every quarter but on the reserve build, trying to get a sense for how much of the reserve build this quarter was fairly conservative use of the Visa gain and how much of it was really driven by kind of the changes that you saw in your early stage indicators?

[Lynn A. Nagorske:]

Well, we don't have a formula that we put the Visa gains into the last reserves, I understand your question. We went thorough the quarter and followed our normal routines, but perhaps we were more conservative in our judgments, but mostly this is really due to changing conditions in the environment in the marketplace.

[Heather Wolf:]

Okay, great, thank you very much.

[Lynn A. Nagorske:]

You are welcome

[Operator:]

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

[Steven Alexopoulos:]

Hi, good morning every one.

[Lynn A. Nagorske:]

Hi.

[Steven Alexopoulos:]

Lynn, can you talk about the dynamic that's driving the much higher increase in the delinquencies in the first lien home equity compared to the junior lien?

[Lynn A. Nagorske:]

Yeah, one factor on that, and I'll ask... and we'll get down Neil to pitch in if there is something that I haven't mentioned, but if you look at that portfolio, the difference between the first and the second, you will notice that the first are larger and 64% of our home equity loans are first mortgages, that's a good thing from a collateral standpoint. That means we are in control of the property. The average loan amount is $115,000. The second mortgages which is 36% of our portfolio, the average loan amount is $35,000. I'm rounding a little bit here. So it gives you a feel most of the increase there is due to the larger loan balances in first mortgages.

[Neil W. Brown:]

And this is Neil, I would just add to that that there is a phenomenon with the foreclosure process in Chicago, in Illinois, excuse me where customers become delinquent and the process takes much longer. The entire process of serving foreclosure notice until the share sale can be eight months or a year and during that whole time period the loan sits as a delinquent loan and then after the share sale very shortly after that we owned the property. So its just a phenomenon of the process in Illinois that's impacting us and we are seeing some increases in delinquencies in that marketplace. And that marketplace 80% to 90% of our loans are in fact first mortgages. So we will see some elevation in those delinquencies, the good news is the loss rates in that market still are less than 20 basis points and then partly because it's a first mortgage portfolio.

[Steven Alexopoulos:]

Okay. Could you share what the average loan to values are on second lien home equity book?

[Lynn A. Nagorske:]

Somebody have that here? Thanks for looking it up.

[Neil W. Brown:]

I don't have the averages, this is Neil again. I don't have the average loan to value in first and second, so I would as once again caution you and you look at that if you have $91,000 mortgage on a $100,000 property one might report that as 91% loan-to-value when in fact $80,000 is less than 80% loan-to-value. So I really tend to shy away from looking at average LTVs [ph]. I look at the exposure, the dollar exposure, in this case, the $1,000 it's over 90% and if you look at it on that basis, we got about 3.5% of the dollars, exposed at an over 90% level, that's total first and second.

[Lynn A. Nagorske:]

Historically, and again, Neil's right to put caution on loan-to-values in this period where we're in a housing depression, is what I refer to, because those values have changed after the date of origination. But I think it's historically, our loan-to-values for the whole portfolio, the average is a little less than 80%, and I would say the new originations that are coming in are at least 5% lower than that. But we've tightened up over the last 18 months. All the criteria of home equity underwriting, we have lowered the loan-to-values, we have lowered the/or raised the debt service requirements. We've increased the interest rates and credit spreads that's the good news. The volumes that are coming on today have higher margins as you confirm to either treasury or to LIBOR, it's a floating rate with lower risk characteristics that's an ongoing process and something we do, each and every week and month.

[Steven Alexopoulos:]

Okay, may be just one final question. In the release, you cite that net charge-offs coming from real estate markets in Minnesota and Michigan. I mean we know its going on in Michigan, but could you share what was going on in Minnesota that drove the higher losses there?

[Lynn A. Nagorske:]

Well, that's not a... again, not a new phenomenon nor a new disclosure. This has been a pretty slow market, here in Minnesota, which we had not seen in the previous 20 years of being here, but the markets slow, our state economist, this quarter declared that Minnesota is technically in a recession and we've seen the real estate property values for... fall here, for the same reasons they have around the country. They're subprime, or in some cases locally we've had some broad range that TCF has not been involved in, but obviously that impacts the market.

[Steven Alexopoulos:]

Okay, thank you.

[Lynn A. Nagorske:]

Welcome.

[Operator:]

Our next question comes from Ken Usdin with Banc Of America Securities. Please go ahead.

[Kenneth Usdin:]

Thanks, good morning everyone.

[Lynn A. Nagorske:]

Hi.

[Kenneth Usdin:]

Just a follow up on a prior reserve question. Obviously, the company's has been building reserves for the last few quarters and charge-off trends have generally gone up, but I'm just wondering if you can give us some more color. Lynn's, your comment prior that you don't expect much changing on this kind of consumer led credit cycle, but at the same point you did say that some of... that you maybe a little bit of more conservative in the way you looked at the reserves. So I am just wondering, can you give us this overall comfort with the reserve and may be some just thoughts on the direction of charge offs and the... just the magnitude of over provisioning you might have to do, broadly speaking?

[Lynn A. Nagorske:]

Well, again I will answer that, but I will once again state that we don't make predictions. How we build our reserves and what you are seeing is, you know, first we look at our historical loss charge-off rates, and we have seen increases in those categories and I think its like that they will continue to increase in the next couple of quarters here. And that's based on delinquencies. Things that we see increasing and have reported, but we look at the experience levels and the charge-off rates and then we have three other tests at least with the home equity portfolio where we look at a vintage loss reserve analysis, we look at our at roll rates where it migrates from one category to the next, and establish a range of loss, and we're within that range of loss and we believe that our reserves are adequate at this time. And then, on top of that, we obviously look at specific individual credits. For us that largely comes in commercial real estate and during the quarter we did look at and had some status changes of non-accrual increase for a commercial real estate and home builders in Michigan. We get new appraisals on those, and we've booked the reserves on those. I would say, I think on the... Michigan home builder piece of it which... that's about $50 million. I think we're probably through the worst of that, in terms of we've got appraisals on all those properties and we've have collected those in our reserves. So we'll continue to go through that process as we go forward here. The thing that does benefit us is an institution and going through these cycles is our lending philosophy where we are a secured lender and that has been a wise strategy.

[Kenneth Usdin:]

Right. Thanks that's great color. So, just one follow up on that is just with... then have you made any major changes to your, kind of severity assumptions? Obviously the delinquencies have gone up but have you changed anything in the reserve methodology as far as expectations of severity?

[Lynn A. Nagorske:]

Yeah, if you look at that, and obviously losses are a function of frequency and severity, and there's obviously subsets and categories that you go through, but overall, what you see at TCF is our average loss is up about 30%, 35% and that remains from the first quarter of a year ago, and the frequency of loss is about double from a very low level. So those are the two things that are driving that increase in home equity lending where the charge-offs a year ago were 3.2 million, this year it's 9 million. It's a combination of those two factors.

[Kenneth Usdin:]

Okay great. And one more quick one if I may. Just any update on the leasing business revenues? They've kind of fallen off a little bit, I am just wondering if that's specifically related to volume of business or anything related to recapture. Whatever update you can give us there please?

[Lynn A. Nagorske:]

Yeah, our leasing business is still overall doing well, and I would characterize it as strong. The best indication of that is the backlog, which at the end of the quarter was 407 million, and that compares to 342 million a year ago. So the backlog has been good. The fee income is primarily related to sales type revenues, which are really end of a lease term type transactions, and they can be lumpy, they are customer driven, I wouldn't read too much into one quarter of the decline, that business overall seems to be doing quite well.

[Operator:]

Do you have any further questions Mr. Usdin.

[Kenneth Usdin:]

I am all said, Thanks a lot.

[Operator:]

Thank you very much. Our next question comes from Rob Rutschow with Deutsche Bank. Please go ahead.

[Robert Rutschow:]

Hi. Good morning.

[Lynn A. Nagorske:]

Hi Rob.

[Robert Rutschow:]

I was just wondering... and I know you haven't really given us a whole of info on this, but just, if you could update us on, sort of the customer credit quality for the first-lien and second-lien home equity in terms of FICO scores or any other metric that you can give us?

[Lynn A. Nagorske:]

Well, the average FICO score origination for the whole portfolio was 722, that's had origination I think the update is also receivables up just a little bit and the requirements are or second mortgages or second liens that would be an even higher FICO store than the first mortgage. So, overall this, as I've said over and over we've had no subprime lending programs in this portfolio. This has been a high quality portfolio, it has been impacted by the over supply of homes, particularly at this point in time Minnesota and Michigan, which has increased the severity loss factor.

[Robert Rutschow:]

Okay, can you give us an idea of how much of the home equity portfolio will be resetting within the next six months, in terms of interest rates?

[Neil W. Brown:]

Yeah, this is…

[Lynn A. Nagorske:]

Go ahead.

[Neil W. Brown:]

This is Neil. We don't have any armed type of loans. All we have is fixed rate loans and loans and loans that are tied to prime.

[Robert Rutschow:]

Okay.

[Neil W. Brown:]

So, all the variable rate loans that we disclose, those are loans that are tied to prime and have prime changes, but those rates will change subject to the floors that are built into the agreements.

[Robert Rutschow:]

Okay, and the last question I had was... I was wondering if you can give us any color on how the NPAs and net charge offs progressed through the quarter were things building or were they relatively stable throughout the quarter?

[Lynn A. Nagorske:]

We really don't comment on monthly charge-off or credit statistics. It's obvious when looking at numbers and looking at the national trends that they increased during the quarter.

[Robert Rutschow:]

Okay, thanks.

[Operator:]

Our next question comes from Greg Ketron with Citigroup. Please go ahead.

[Greg Ketron:]

Good morning.

[Lynn A. Nagorske:]

Hi.

[Greg Ketron:]

Just a couple of questions, one regarding [ph] non-performing loans and non-performing assets. Is there any color that you can provide Lynn or Neil in terms of the process that you go through looking at the loan, trying to get it down to net realizable value moving into non-accrual loans, what kind of losses that you're seeing along those lines? And then, what's that process once you get it into nonperforming loans? How you continue to manage that through the process in terms of the additional potential write downs? And what valuations techniques you may use?

[Neil W. Brown:]

Yeah. This is Neil. You can kind of break that into two pieces; one, commercial real estate or commercial versus consumer and with the consumer loans, once stated 90 days pass through, we start the foreclosure process and if they get 250 days pass through we're in the foreclosure process and put them on non-accrual. And at that point, we adjust the values downward if necessary based on what we know about the property at that time. At that point in time, we can't get in inside the house but we do our best valuation of the property and essentially update that every month going forward throughout the whole cycle of foreclosure, ownership and subsequent marketing. So that can be multiple write downs on a given property just as time goes by. And then, on the commercial portfolio, if it goes 90 days pass through we put it on non-accrual and then we just treat it as an impaired loan and go through the impaired loan accounting exercise to value of those loans and setup reserves. That's updated monthly.

[Lynn A. Nagorske:]

What really happens in front of that process also is we have a watch list of credits. And then, when the loan is considered special mention that might be the watch list. Most are doing monthly monitoring looking at what's happening with that portfolio looking at values and getting new appraisal information.

[Greg Ketron:]

Okay. And in the past you had provided I believe units you have taken in or loans that you have taken in or loans that you have disposed off during your quarter, into the nonperforming or ORE [ph]?

[Lynn A. Nagorske:]

Yes, that's -- Neil, will get back to you.

[Neil W. Brown:]

Yes. This is Neil again. Focusing on the consumer home equity portfolio, we brought in 87 properties this quarter, roughly 30 a month and we sold 78 properties and ended the quarter with a 130. So we're pretty good at marketing these properties and selling them probably in four to five months after we own them.

[Greg Ketron:]

Okay. And as you experienced upon sale that they have been pretty fairly valued versus the sales price that you are receiving on those?

[Neil W. Brown:]

Yes.

[Greg Ketron:]

Okay. The last question I had regarded margin and deposit pricing. In terms of, we've heard a number of banks talk about deposit pricing and those who are liability sensitive, certainly benefited from the rate environment. Then some also have began to talk about hitting deposit rate floors potentially, any sense for where you guys see yourselves going, if you think about Fed easing for the rest of this year, what kind of rate bait or percent of that you will be able to pass through?

[Neil W. Brown:]

Well, we've pretty much experienced that and gone through a lot of that in the first quarter, I would say, if the Fed eases next week will make -- another quarter, we'll certainly manage towards that and I don't expect any real difficulties with that. Beyond that, most of the color I get, so as the Fed is going to stop easing, so I'm not sure how bigger the concern that is.

[Greg Ketron:]

Okay. And from a competitive pricing standpoint, if you were to classify especially on your premier accounts, would you be at the top, middle, bottom of the markets that you are looking at?

[Neil W. Brown:]

Well, that's a tiered product. So I am not going to answer that for everyone of the tiers will let the top tier to work towards that top of the markets.

[Greg Ketron:]

Okay.

[Neil W. Brown:]

By design.

[Greg Ketron:]

Okay. Great. Thank you.

[Neil W. Brown:]

Welcome.

[Operator:]

[Operator Instructions] Our next question comes from Vic Guy [ph] with Owl Creek [ph]. Please go ahead.

[Vic Guy:]

Hi. Thanks for taking my question.

[Lynn A. Nagorske:]

You are welcome.

[Vic Guy:]

I wanted to just touch on your commercial real estate portfolio. I noticed that your charge offs in this space were down about 80% this quarter, but I also noticed your non-accrual in this space was up by 72%. Why was that?

[Neil W. Brown:]

The non-accruals would be, first off over two separate decisions and you're comparing the commercial real while it moves through the conveyor belt parts towards eventual workout, but values of the property to the loan balance. And there's many of these that will go into nonperforming status, where the current value of the collateral exceeds the loan balance. And, so in that case, the charge off is not required. And lot of banks have credit cards receivable or unsecured loans that are moving through that category. When we have an unsecured loan, in general, that requires a charge off. So, there's some clear differences between TCF and our secured lending philosophy in lot of the other banks you see.

[Vic Guy:]

When a loan hits the non-accrual basket, is it fully charged off or have you only just charged off the interest that's accrued at that point?

[Lynn A. Nagorske:]

Well, as Neil, mentioned on the consumer, it would be charged down on the commercial real estate loan. And we will make an individual evaluation. And it wouldn't necessarily require a charge off just because it went to non-accrual, a charge off would automatically occur, that has been moving from non-accrual. And we took titles of the property, that's one automatically would be charged on. Many times was charged on in advance of that.

[Vic Guy:]

Okay. So for the consumer loans then you don't need to wait for it to go to the other real estate owned basket to take the charge off when you foreclose. You actually take the full charge off as if you're foreclosing and once it's goes to the non-accrual.

[Lynn A. Nagorske:]

That's correct.

[Vic Guy:]

Okay. Thank you.

[Lynn A. Nagorske:]

Welcome.

[Operator:]

Mr. Nagorske, at this time, there are no further questions. Please continue with your presentation.

[Lynn A. Nagorske:]

Okay. Well, I'd like to thank everybody for listening in on our call and have a very good day. Thank you

[Operator:]

Ladies and gentlemen, this does conclude the TCF first quarter earnings call. You may now disconnect, and thank you for using AT&T conferencing