TCF Financial Corporation
Q1 2009 Earnings Call Transcript

Published: 24 Apr 2009

[Operator:]

Good morning and welcome to TCF 2009, First Quarter Earnings Call. My name is Brandy and I'll be your conference operator today. All lines have been mute to prevent any background noise. After the speakers' remarks there will be question and answer period. (Operator Instructions). At this time, I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference call. Please go ahead, sir.

[Jason Korstange:]

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Neil Brown, President and Chief Operating Officer; Mr. Tom Jasper, Chief Financial Officer; Mr. Earl Stratton, Chief Information Officer; Mr. Barry Winslow, Vice Chairman; and Mr. Craig Dahl, President and CEO of TCF Equipment Finance. 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 2009 first quarter earning's release for more information about risk and uncertainties, which may affect us. Information we provide today is accurate as of March 31, 2009 and we undertake no duty to update that information. Thank you. And I would now turn the conference call over TCF Chairman and CEO, William Cooper.

[William A. Cooper:]

Thank you, Jason. First thing I'll mention, as we have previously released, TCF has paid off the so called TARP money, and I was send that letter yesterday for $361 million. That payment in exiting TARP will have a number of benefits at TCF. First of all, it will save about $0.14 or $0.15 a share, in earnings per share as a result of not having to pay the dividend on that preferred. Our reason for exiting at TARP was that basically the deal change, it was going to result in significantly increased regulation in many fashions with more to come. And, because of the way that regulators are currently looking at capital ratios these days that became apparent to us that it was not a good idea to lever that TARP which would create additional lever on tangible capital, which is now becoming an important capital ratio in the regulatory world. So, we still have to deal with the warrants. They have the right to purchase a little over 3 million shares at 16.93, we're in the negotiation with the treasury as to whether will repurchase those warrants. Its my understanding that if we don't purchase then there will be require to sale them to someone else. The term in the law is that, they are required to liquidate them. But we don't know exactly when that will be resolved, but it will be resolved in the next couple of weeks, at least maybe considerably sooner than that. In terms of the quarter, if I had to summarize it, we had relatively weak net interest margin, quite weak fee income. Our operating expenses are pretty much under control and our credit is relatively stable. Those are the kind of the big issues that driven the quarter. We earned $26 million in the quarter, which is $0.17 a share and that was down from $0.20 a share in the fourth quarter. And again, the preferred dividend was in the first quarter, our earnings would have been over $0.20 without that preferred dividend. Our net interest margin was 3.66%, down from 3.84, and I am going to talk a little bit about why that occurred and what's going to happen with that. Our charge-off was 1.04% versus 1.02. So, basically our charge-offs have basically stabilized. In terms of the net interest margin, what basically happened in the net interest margin was a huge success that we had on the deposit front, growing core deposits on checking and savings deposits by over $1 billion, with our inability to reinvest that money at good spreads in that short period of time. So we were in a very liquid position and basically we're bringing money in at 2% or even at a little higher and investing it at a quarter percent to the tune of some billion dollars. We have subsequently invested that, the bulk of that money either in the pay off of the TARP which is a good exchange of funds or in short-term agency investments which will actually give us a positive margin instead of a negative margin through the balance of the year. Given that, we expect the net interest margin for the balance of the year to be better than the first quarter with reduced deposit cost and increasing loan growth. The non-interest income was also weak which is what we have experienced over the last several quarters at $57 million which was down from both the previous quarter and the year ago. The good news there... and that's pretty well across the board, the good news there is that it appears that for the balance of the year... the second quarter and balance of the year as a result of very significant deposit number of checking account growth and increasing activity, we're going to see stronger fee income throughout the balance of the year. But it was weak in the first quarter. We're pretty confident we're going to see some pretty substantial improvements in fee income and the balance of the year. Loan growth was strong with the exception of consumer loans which is our home equity portfolio and that grew in all of the states except Michigan. We're basically not making home equity loans in Michigan for obvious reasons, that's a very troubled economy. It grew everywhere else, with the exception of Michigan. However, our commercial and equipment finance and our inventory finance areas, all had very strong growth and our loans now total 15.5 billion, up from 13.1 billion in the fourth quarter and 12.4 billion a year ago. So we're experiencing strong growth there and improved margins as a result of pricing advantages that we have on the loan side. We're anticipating to the balance of the year, continuing strong growth for that, particularly in the commercial side. We see consumer perhaps picking up a little bit and equipment finance and inventory financing continue to grow. In the first quarter, we originated some $750 million of loans, which is a very good result. Under deposits, as I mentioned we had very, very strong deposit growth, our deposits now total 11.8 billion, up from 9.8 in the fourth quarter and which was basically flat while a year ago. That's deposit growth of over $1 billion and that occurred in the real core deposits. The core checking and savings, actually CDs, actually shrink a little. And I'll remind everybody that TCF doesn't engage in broker deposits in any fashion. Our average cost of deposits in the first quarter was 1.49% at the end of the quarter it was 1.4%, currently its 1.27%. That very strong deposit growth and the significant liquidity that we have is permitting us to push deposit reach down, particularly on the higher tiers across the board. And we expect to see the rate on our deposits continue to fall through the balance of the quarter, this quarter and in the next year, which should contribute significantly the improvements in the net interest margins throughout the balance of the year. The related fee income, the number of new checking accounts opened in this quarter was up 43.7%, as compared to the number of new checking accounts we opened in the first quarter of last year, which is again very strong growth in a very core issue with the bank, which will again feed into fee income and zero interest deposit growth as well. Our expenses were pretty well controlled and relatively flat with the exception of the deposit account premiums, which is the premiums we pay for new checking accounts. When you open 45% more checking accounts, you pay a higher premium, so our premium expense was up. In addition to that we continue to pay for the yields to our competitors and our FDIC premiums were up as well. The balance of our expenses were pretty well controlled, and with the exception of that one time charge that apparently is going to happen in the second quarter for FDIC premiums, we expect to see continuing flat performance in our operating expenses. Our credit quality was stable. We increased our reserve for loan loss from 172 to 181 million again, putting more provision in, than our charge offs and building our reserves. Our credit portfolio is a whole which is relatively stable. There is an additional $15 million of reserves in purchased leasing portfolio, equipment finance portfolio that doesn't sit in the reserve for loan loss but is available for charge-offs under our new accounting principles as well. Those new accounting... purchase accounting principle as it relates to reserves delinquencies and so forth are going to make it more difficult to do comparisons in terms of where we stand on that stuff today. The over 60 day delinquency which is the key indicator for us, in 30 days it goes up and down by the day of the week. The real leading indicator what's happening with credit with us is, the 60 day going can see and that way remained relatively unchanged between the quarters. Non-accrual leases and real-estate owned were up. I'll remind you that at TCF, non-performing assets are the product of poor credit, not the leading indicator of it. Delinquency is a much better measure of what's coming down to pipe for us, in terms of future charge-offs than non-performance, because overwhelmingly non-performing assets at TCF have already been written down. The provision for our credit losses was 43.7 million and that was down from the fourth quarter, but up obviously from the first quarter of last year. And our charge-offs were 34.9 million or 1.04%, that's up a couple of ticks from the fourth quarter of last year. So relatively stable, little change in the mix of what's going on there. As I mentioned earlier, we paid off our TARP. One of reasons that we were permitted to do that, whether a number of reasons, as I stated before TCF has never engaged in the activities that got most banks in trouble. We don't have a subprime loan portfolio, we don't have a credit card portfolio, we don't have a car loan portfolio. We don't have any derivatives, we don't have any toxic acids investment portfolio, we don't have any unconsolidated subsidiaries and we don't have any claw backs on stuff that were securitized and sold, because we never did that either. So, our TCF is historically charged off at 50% of industry averages and that continues. We have strong tangible comment, which is now become the new measure in the banking world. Paying off the TARP does not affect that level. We did cut our dividend from $0.25 to $0.05 to comply with some new Federal Reserve restructurings and on dividend payments. I would anticipate as we see stronger earnings throughout the balance of this year and in the next year that we would see improved dividends also. Since we're not in the TARP, we're no longer under the restrictions of the ability to increase dividends as we were in past and many others still are. Well that's where we are. It wasn't a real great quarter. We had some security gains that helped the quarter. We are... we are one of the very few banks in the country that actually has a profit in its securities portfolio as a result of lower rates. We indeed may take some more of those gains as its appropriate. We are not investing long-term in mortgage-backed with this additional liquidity, because we think putting stuff in it 3 and 4% at very long rates is a mistake at this point, because we think rates will be higher in the future. I'm optimistic in the balance of the year. As I mentioned earlier; we see improved margins coming, we see improved fee income coming. It looks like we have relatively stable credit. My prediction would be that would be what would occur to the balance of the year. We're going to see some mix changes. We've got some higher delinquencies and higher provisions in our equipment finance area. We've got some increased nonperformings in our commercial, most of that being in Michigan and most of that being home developers without any real changes in that connection. So that's where we see it today, and with that I would open it up to questions.

[Operator:]

Thank you, sir. We'll now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

[Jon Arfstrom:]

Thanks. Good morning guys.

[William Cooper:]

Hi, Jon.

[Jon Arfstrom:]

Just a couple of questions for you. The first on the consumer portfolio with the delinquencies flattening out. I'm just wondering if you've seen any, are you clearly seeing stability there. Are you seeing maybe some potential improvement in that portfolio?

[William Cooper:]

Well we're seeing stability in certain areas, particularly for instance in Michigan, which is kind of a surprise. But all the credit metrics in Michigan where we've had the biggest problems seemed to have stabilized. Why, I cannot tell you, because there is a lot of other data that indicates that it should be going the other way, including home values and unemployment and so forth. But, we also have some impact as a result of the rewrites, which are now incurred by regulators that maybe as making those numbers looks slightly better than they are. But in general, we see a relatively stable situation in the consumer side.

[Jon Arfstrom:]

Thank you. And then the other category that seems to be on everybody mind is commercial real estate. And your delinquencies picked up a bit. It looks its below where it was two and three quarters ago, but its obviously a bigger category for you and we also look at the potential problem loans increasing. I'm just wondering if you can give us an idea of your outlook there and how you feel about how you're going to write in that portfolio?

[William Cooper:]

Barry Winslow is here, and he can comment on that.

[Barry Winslow:]

Well Jon, I guess, our outlook there I could say is guardedly optimistic net of Michigan. We're obviously got a number of things in Michigan we're working through. We stopped making most in Michigan sometime ago. And as many of our peers who are in that market, we're just working through that saving, setting Michigan aside for a second. We're guardedly optimistic about where we are in Minneapolis in Chicago. I mean, right now, we've got, I was counting them up, we've got five problem credits of any size in our commercial real estate portfolio between Chicago and Minneapolis. And I think we have just one in Denver. Obviously the Denver portfolio is relatively small. We're... and everybody seems to be concern about the retail services part and that sort of thing, that's about 28% right now, of our portfolio. But as I say, we're just... we're guardedly optimistic.

[Jon Arfstrom:]

Okay. Is total Michigan exposure between consumer and commercial still around the billion or is that come down at all?

[Barry Winslow:]

I think its slightly under a billion now. Isn't it Tom.

[Thomas Jasper:]

It's a little bit more than that.

[Neil Brown:]

Michigan's... this is Neil Brown. The Michigan exposure on consumer is 1.2 billion and commercial is 900 million. It is 2.2 billion in total.

[Jon Arfstrom:]

Okay. Alright, great. Thanks guys.

[Neil Brown:]

Michigan is about two-thirds of our commercial NPAs, right now Jon.

[Operator:]

Thank you. The next question comes from the line of Steven Alexopoulos with J.P. Morgan. Please go ahead.

[Steven Alexopoulos:]

Good morning guys. Maybe I'll start, did the regulators conduct any type of stress test that indicated a dividend cut was needed in order to repay the TARP?

[William Cooper:]

That was a little cloudy, but I think if you asked us is the regulator trust, stress test impacting the dividend. The answer to that is no, not for us. The stress test applies, at least at this point only to the largest nineteen, I think. And so the regulators have not performed that, we did are own stress test. The regulations that I was referring to were new advisory opinions by the Federal Reserve as to the appropriateness of dividend paying that just came out recently.

[Steven Alexopoulos:]

Okay. So they didn't do any type of stress test specific to their request to repay the TARP?

[William Cooper:]

No, we did our own and provided to them. They didn't request it, but in connection with giving them data, we gave them stress test that we thought complied fairly well with the stress test that we're going on in the industry as a whole, because we thought it was probably an appropriate thing for them to be looking at. So, we did our and gave it to them.

[Barry Winslow:]

Well, I would add to that, whatever the regulators did in the approval prices was not shared with us.

[William Cooper:]

Yes.

[Steven Alexopoulos:]

Okay. I'm curious. How much of a decline are you seeing in the overdraft fees from customers. Just getting more sensitive to the fee, given the weak economy, rather than just lower volumes. Is there a way to quantify that?

[William Cooper:]

It isn't really. One of the things is going on is that there is slightly higher balances, because people are spending less money and when there is slightly higher balances, there is less incidents. But the primary thing is on both of the debit card and ATM and NSF revenues is, simply lower volume of transactions. People are spending less. There are fewer transactions and when they do a transaction, it's a lower dollar amount and that appears to be what it has impacted it most. Now we've seen in a significant improvement in all of those things going into this quarter.

[Steven Alexopoulos:]

Alright. And then Bill maybe just one final question. How sticky do you think the deposit growth is. We're seeing the industry put a very strong deposit growth. I'd imagine some of that has moved over from the stock markets. Is there any way to gauge if you look at a billion dollars of growth this quarter. What might be sticky and I guess if it's in money market that might indicate that it's more temporary then if it did move to CDs.

[William Cooper:]

The encouraging thing about deposit growth for us. Now a lot of banks have had significant deposit growth in custodial funds and in broker deposits et cetera. Most of this money came to us in the core deposits and checking and savings. Some of it came... a fair amount of that came in the higher tiers, which as can be more volatile. But at almost all, this is what we hear from our branches came from the other banks.

[Steven Alexopoulos:]

Perfect. Thanks.

[Barry Winslow:]

Yes.

[Operator:]

Thank you. Our next question comes from the line of Dave Rochester with FBR Capital Markets. Please go ahead.

[David Rochester:]

Hi, good morning guys.

[William Cooper:]

Good morning.

[David Rochester:]

I just wanted to start real quick, if you have reserve methodology. We saw a decline in the reserve coverage of NPAs with the charge-offs in NPAs, today and as you mentioned local employments as of home price look little bit worse than we saw last quarter. So could you talk about your economic outlook that's embedded in that methodology and maybe as to when you expect the turn in the economy to take place, and what level you expect unemployment to peek?

[William Cooper:]

I think Bernanke's guess on it, is a pretty good guess, that's might, I think they've got... I think right now we're probably at or near the bottom of this recession. And I would think things are going to start to improve in the last half of the year. But, that's worth exactly what you've paid for it. The... as I mentioned earlier, one of the things about nonperforming assets with us, when you look at the reserve for loan loss. Reserve for loan loss really doesn't apply much to our nonperforming assets because our non-performing assets have already been written down. When either if you allocated reserves or when you... and when it gets to the real estate we actually take the charge-off and write it down. And in many cases, we take the charge-off on the loans as well. So that measure for us isn't a particularly good measure of what the reserve look like. A better measure for us here is delinquencies and charge offs, the history of charges offs. Our guess on the economy as it relates to some of that stuff is that, the probably the problems, and for instance; shopping centers isn't over, matter of fact it's probably just coming and there maybe some more problems down the road and that we're not in those big mall kind of situations, we have smaller deals, personal guarantees, good loan to values, et cetera. But something is going to call out one or couple of those deals. On the equipment finance side; we've seen increased delinquency, we do our provision on that in a different way. We actually book provisions based on the level of delinquency in most of our equipment finance area and its where you would expect to see it. Its manufacturing and so forth that ticked up. Good news is that, we had sawed increased delinquency and that delinquency is crept over, but the shorter-term delinquency hasn't reappeared to the same degree. Is that fair to say, Craig?

[Craig Dahl:]

Yes.

[William Cooper:]

There is... its not surprising in this economy that you have some delinquency in an equipment finance portfolio as well. But tends to get reserved up pretty quick, because of the way that formula works in that. So, and our take in the economy is that its weak, the unemployment is always a lagging indicator. Unemployment usually, if we're right and this is the bottom, unemployment usually goes up for a couple of quarters after the bottom. Even as the economy improves though, I wouldn't be surprised to see unemployment pickup a little more.

[David Rochester:]

Great. So, you're looking for the bottom in the second quarter at this point?

[William Cooper:]

Yes.

[David Rochester:]

Okay. And just going back to your comments on the leasing portfolio. I think you had talked about a little bit of weakness in manufacturing, I guess its causing some of that up-tick, are you seeing anything in construction. And I think in last conference call you talked about prices holding for Wayzata (ph) can you update us on trends you're seeing there?

[William Cooper:]

Craig Dahl, who runs that too, why don't you answer that, Craig?

[Craig Dahl:]

Good morning, Dave. The construction slowed in the second half of the year and did not changed materially in the first quarter, but manufacturing held up pretty good through the fourth quarter and did change in the first quarter. Business or asset values, we're seeing are fairly good right now, based on our recent auction results. And so, I would say those are down seasonally in the first quarter and we've seen them return in the more recent auctions.

[David Rochester:]

Alright. Sorry, go ahead.

[Craig Dahl:]

Did that answer your question?

[David Rochester:]

It did. And just one last and real quick. I know you have said in the past that NSF fees are large component at deposit fee line. Could you actually quantify what those were this quarter versus last year, so we can just get a general sense for what the dynamics are within that line?

[Craig Dahl:]

I'm sorry, I really don't have that number in front of me.

[David Rochester:]

Okay. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please go ahead

[Ken Zerbe:]

Thanks. Just on your securities gains. Over the last five years, you have averaged about $3 million gains per quarter. I understand this is part of your business, but is it right to think that this quarter's results are about $8 million above normal or are you guys intentionally taking on additional risk with your trading?

[Thomas Jasper:]

Well, I would say that we look at the value that securities portfolio generally is going to go up and when you look at the, what's happening on the other side of the balance sheet in the loan portfolio, in terms of what we buy. I mean, we are buying agency-backed, mortgage-backed securities, 99.9% of our portfolios Fannie Mae or Freddie Mac. So, I don't really look at what's happened seasonally there or on a average basis, we take the gains when we think it's prudent to do so on what the base and what our re-investment opportunities are. Right now, we are looking at avoiding reinvestment in mortgage-backed. So, we sold but we didn't... we haven't repurchased a lot of mortgage backed as we're not going to put long duration assets historically, its low yield on the balance sheet today. So it's still going to be a quarter-to-quarter decision that we make just based on the mix in the book.

[Ken Zerbe:]

Understood. Okay. So probably its going to be coming down from here, that make sense. And then, just in terms of deposit service charge, obviously, we saw big drop this quarter. Bill, if something you can tell us your thoughts on how the pending legislation over consumer protection or limiting overdraft in NSF fees could effect your fee income line?

[William Cooper:]

Well, really it depends on what happens, one of the things about that the legislation on NSF income and all other businesses, all that noise is coming from community groups and the shorts, in the industry. People at our short banks starts, but we don't hear from our customers. And the legislation they are talking about which is to allow people to... and effect opt out of you paying on NSF and their debit card or credit card, or check. Most people do not want that option. I mean, if you're out there in the morning Iowa (ph) and you go to your gas station and you want to fill it up and we turn you down, you got a problem. And also, it's complex in many cases as to whether an item is really NSF or not, is a direct deposit coming in later in the day or whatever. So, there's a lot of noise about it and it reminds me a lot of what they had with ATM fees a couple of years ago and then there was that privacy thing a few year before that. There's a lot of smoke and a lot of talk about it but, there isn't a lot of grass roots political push on it from consumers who are mad at it. Now, if they change the fee income structure around, in various ways and with this Congress indeed that could happen. The one opportunity that we always have, is we have a 1,800,000 checking accounts. We invented totally free checking by removing the monthly fee. If they take away other fees from us, what would likely happen in at TCF and the industry, is that those fees would be reinstated. And as is the way of the world today, what would happen is, everybody would be paying for the bad book keeping of the few people who write NSFs. I don't particularly that's right or fair, but if that's what happens that's what will happen.

[Ken Zerbe:]

Okay. Great. Thanks so much.

[Operator:]

Thank you. Our next question comes from the line of Ben Crabtree with Stifel Nicolaus. Please go ahead.

[Ben Crabtree:]

Yes. Thank you, good morning.

[William Cooper:]

Hi, Ben.

[Ben Crabtree:]

I guess a couple of question. Just a follow-up on something that you said was touched on briefly. What kind of mark-to-market gains are in the security portfolio at the moment?

[William Cooper:]

That is that, Tom?

[Thomas Jasper:]

Its about $49 million. This is Tom Jasper. Its about a $49 million gain at the end of the quarter.

[Ben Crabtree:]

Okay. Great. Given the discussion, recurring discussion with the charge-offs kind of being the lead to the driver behind the size of the reserve. Just wondering what the front-end of the pipeline looks like to you now, in terms of you deteriorating credit rating and things like that, how does the inflow work?

[William Cooper:]

Well, again, the best indicator for us on the consumer side is that 60 days delinquency level. And, right now that looks relatively stable. The commercial stuff, its so hard to do an indicator, because they'd simply get worse. Finally, they loose the tenant, in that now you got a problem and those kinds of things. There is not a systematic estimator of the direction of those things. We look at all of our rated commercial, commercial real estate loans, periodically top management looks involved and makes judgments on them. I think in general, you can say you've seen some deterioration particularly in shopping centers and kind of stuff. But it's... there is no, it doesn't look like there is big snakes crawling around that portfolio.

[Ben Crabtree:]

Okay. And in the past you've talked about the trends known, in repossessed homes. I guess I'd be interested in like the number that you've got in kind of your portfolio now versus, say what it was at the end of year. And, particularly interested in whether or not, the price you are able to market them, at is in fact fairly stable.

[Thomas Jasper:]

Ben, this Tom Jasper. At the end of the year, we owned 187 residential properties. In the first quarter, we added a 138 and sold 119. So, we finished that 206, are up 19 properties from the end of the year to the end of the first quarter. We've done a really good job in terms of the amount of time it takes us, a little bit over five months on average to sell a property. And so I think that's a pretty good indicator in terms of giving the pricing rate. I think that we expect that to continue for the rest of the year.

[William Cooper:]

One other things on that Ben, is there is really two home prices now, in connection with the marketplace. Those banks that own 500 or 1000 in Minnesota and there around, alright, wholesale these things. They sell them often blacks in auctions and so forth. And so there is a wholesale price. If you can buy twenty of these homes as an investor, you can get a pretty big discount. For us, we're a retail seller. And for most people who only can buy or only want to buy one house at a time, that price is considerably higher than that wholesale price. And typically what we do when we take one of these over is, we paint it, put new carpeting and fix the plumbing and mow the lawn et cetera, to enhance the sales price. And that work indeed works. And so, on average in my opinion, we're getting better prices on our homes simply because we have fewer homes. Here in Minnesota, I think we only own twenty seven homes. That's a manageable number, in terms of being able to market them.

[Ben Crabtree:]

And as I'm inferring what you... correctly, what you're saying is that the price you're getting for them is relatively stable as a percentage of the original loan?

[William Cooper:]

Well, it depends on when the loan was made.

[Ben Crabtree:]

Okay. The loan before went into foreclosure.

[William Cooper:]

We see the shriller numbers that show bigger declines in home values than we're seeing when we sell our homes.

[Ben Crabtree:]

Okay.

[William Cooper:]

And the reason for that is, these big auction prices are in those numbers. And so if somebody is willing to buy 25 houses, they can buy them at a 25% discount.

[Ben Crabtree:]

Alright.

[William Cooper:]

That draws that average down. But, the average person can't buy 25. And only wants to buy one and that's the way we're selling ours.

[Ben Crabtree:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ken Usdin from Banc of America Securities. Please go ahead.

[Kenneth Usdin:]

Thanks. Good morning. Two questions please. First of all, on the potential problem loans within that growth is on the commercial real estate, can you just give us a little color on granularity, whether that's a couple of big loans or whether that's a smattering of small ones?

[Unidentified Analyst:]

Yeah, I think it's really, a few big loans, few large loans that we had in Michigan, which is just, the beat is continuing over there. There was a few small ones over there also that we were cleaning up. And there were a couple of loans in Lakeshore. So as I say, we have not in terms of numbers, not that many numbers of issues in Lakeshore, Minnesota, it's mostly in Michigan. So, what you see rolling through there is just our dealing with a stress situation at Michigan.

[Kenneth Usdin:]

Okay. And when you speak about the, kind of the rolling through, can you give us an idea of just how recent experiences it has on potential problem loans, in fact rolling through to delinquencies NPAs charge-offs? Even qualitatively.

[Unidentified Analyst:]

Could you rephrase that a little bit, in terms of just, you mean the pipeline?

[Kenneth Usdin:]

Yeah, how has the pipeline... how has that roll rate been. As far as when things have been showing up in potential problems loans over the last three quarters, what is the incidents been of those loans actually converting into NPAs and charges offs?

[Unidentified Analyst:]

Well, in Michigan when we discovered a problem in Michigan, that it's pretty predictable that it's going to roll through, because of the fact that there is not much liquidity in the market over there as the values are down, there aren't a lot of buyers. There isn't... there aren't lot of people to take it out of that. In the other two states, it's basically, particularly Lakeshore will see, we'll see one problem occur, it will be fixed, we'll see another problem occur. But the only real consistency in that trend has been in Michigan.

[William Cooper:]

We want to know whether the potential problem loans, what's the history of those that become real problem loans, and I would say go ahead.

[Kenneth Usdin:]

Yeah, that's exactly right, Coop, that's alright.

[Thomas Jasper:]

Yeah, there is... this is Tom Jasper. In the end, there are some larger loans that make out a lot of a change in the potential problem loan category and its not unusual at all. I'm looking at the list. For some of those loans to be out there for five quarters, I'm looking at some of the items. Some of the loans that have been here for five consecutive quarters have never been delinquent, have never taken a charge-off et cetera. So, it really depends and its not a, there is not a blended weight of what happens within that portfolio. Many of them will never result in a charge-off.

[Neil Brown:]

This is, Neil...

[Kenneth Usdin:]

Alright. That's kind of what I'm getting it. So I'm just wondering if its been net ads of that same amount, because all the other stuff has already pulled through or if its in fact just kind of accumulating to a modest extent, but some of that stuff hasn't in fact yet rolled through at any point.

[Neil Brown:]

This is Neil. And we don't have exact statistics in front of us. But as a general rule, its more like 5 or 10% of those loans had actually ultimately become problems. A vast majority of them just sit there for a long period of time and we never take a loss, right.

[Kenneth Usdin:]

Right.

[William Cooper:]

And I think we've given a lot of thought not to disclosing them, most banks don't. Your question really brings to the core, the issue of people misinterpreting what that number means.

[Kenneth Usdin:]

Right. But because the question indeed, it does lead to and looking at it is just a question of provisioning. Does the provision that you've added this quarter reflects that potential roll through, if a good proportion of this did in fact turn into actual problem loans?

[Neil Brown:]

Well, this is Neil again. As a general rule, if we needed a provision on those loans they would be non-accrual, right. So that's...

[Kenneth Usdin:]

Understood.

[Neil Brown:]

So that stayed here.

[Kenneth Usdin:]

Alright. Understood, okay. And my second question is just, as part of TARP now being repaid, you've any just general thoughts on where are you want to now fit on capital ratios, given if they are still strong after taking out the TARP. And you did mentioned that TC has become a more important ratio to regulators. Any color on just kind of where you want to live on your various capital ratios?

[Unidentified Analyst:]

Well, in terms of the tangible common equity, it appear, there is no regulatory requirement for that interest doing enough. And a lot of banks are less than 3%, some pretty big banks. The... we're currently around 5.5%. And I guess, I would say, I think that ratio for us an appropriate ratio for us is somewhere between 5.5 and 6%, in terms of tangible capital. Time to get any other caller now.

[Thomas Jasper:]

I agree with that. The change in the dividend is going to definitely impact that a little bit going into for the second quarter results.

[Kenneth Usdin:]

Thanks a lot.

[William Cooper:]

Yes.

[Operator:]

Thank you. Our next question comes from the line of Lana Chan with BMO Capital Markets. Please go ahead.

[Lana Chan:]

Hi, good morning.

[William Cooper:]

Hi.

[Lana Chan:]

I had a couple of questions on the loan modifications and extensions. Do you have that number for how much you did in the fourth quarter versus the 251 million this quarter?

[Thomas Jasper:]

Yeah, this is Tom Jasper. If you go back to our release, we did. In total for this quarter we did 1600 modifications out of our 251 million. We did 762 modifications in the 2008 really through, which was really basically the fourth quarter from the time that we took down the TARP which was in the middle of November and about a $117 million.

[Lana Chan:]

Okay. And they did have an impact on the margin this quarter, the modifications, a meaningful impact?

[Thomas Jasper:]

No.

[Lana Chan:]

Okay. And, I'm sorry.

[Neil Brown:]

Lana, this is Neil. And the, one thing to think about on our loan modifications, they are generally very relatively short-term in nature. A lot of those are one payment and some of them are two or three payments. These are not significant modifications to the terms of all, alright.

[Lana Chan:]

Okay, got it. And before you talked about the non-performers as relative to those reserves that most of the non-performers have been written down. Do you have what percentage of the original value the NPAs have been written down to?

[Unidentified Analyst:]

No, I don't have that data. There would be a relatively meaningless data as a whole, because it's different in the different categories. You might in equipment finance on a $200,000 deal, you'll see a write-down of common of 50%, whereas in the commercial real estate a write-down of 15%. I mean, or in the residential side. So it really, that isn't a real meaningful number. What tends to happen there is, when they become nonperforming we write them down to what we think the market value is. Not sometimes we find out the market values even less, in which case there is another mark down. But essentially that portfolio has been written down to its estimated market value of the collateral.

[Lana Chan:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Sherry Singhvi (ph) with Alliance Bernstein. Please go ahead.

[Unidentified Analyst:]

Hi guys, thanks for taking my question. Obviously credit has held up pretty well for you guys, but still if you look at the trends, the delinquencies, charge-offs, they are slowly trending up, lot better than your peers, but still trending up. Yet your provision expense for the past four quarters is actually down 63, 52, 47, 43. So, can you comment a little bit on that why is that the case?

[William Cooper:]

Well, we did some fairly substantial provisions earlier than that in terms of building the reserves. And, we have got some... we created environmental reserves in anticipation of charge-offs occurring in the future. And so, those things don't necessarily happen in the same periods, our provisioning occurs before charge-offs. And that's particularly true in the commercial real estate side, it might take you... very often can take you a significant period of time to get possession of the collateral and charge it off. So that connection isn't necessary a linear one. Tom, do you have anything to add on it.

[Thomas Jasper:]

What could frequently happen to commercial real estate, somebody loses a tenant and they are still paying but it's less than one... one-to-one debt service, we might put a consensus reserve up, because we look at it and we think well, this maybe an issue, but then they replace the tenant and nothing happens there. So it's pretty sporadic.

[Unidentified Analyst:]

Okay. Thank you.

[William Cooper:]

Yes.

[Operator:]

And your next question comes from the line of Fred Weiss with Atlantic Trust. Please go ahead.

[Frederick Weiss:]

Hi, just had two questions. First one has on the net interest margin which as we understand what happened last quarter. You talked about the cost coming down of deposits this quarter. Is the spread going to increase you think or is basically because the, while the costs are coming down, the yields on the portfolio are coming down or what do you think is a reasonable, you can climb backwards to 4% over the next couple of quarters or where do we go from here?

[William Cooper:]

Well it's a little difficult to say, in terms of that specific. But right now the cost of deposit is coming down faster then the yield loans.

[Unidentified Analyst:]

On commercial loans the stuff that we are booking now, the spreads are probably more than a 100 basis points higher than we've seen historically.

[Frederick Weiss:]

Okay. And I guess the other thing that everybody is on the pins and needles, trying to understand is credit losses. And clearly, you've talked about how the 60 days are stable, but the 30 days are going up and you see that's not a good indicator. So do you sort of flush that out more as it, because what percentage of... is there some sort of thing you see in the 30 days, it looks anomalies or just doesn't matter or...

[William Cooper:]

30 Days, that could be the day or the week that the quarter closed on, do you follow me.

[Frederick Weiss:]

Yeah.

[Unidentified Analyst:]

If you go up and down based on the day or the week, or the time of the year and all of that business. And that number tends to fluctuate a lot day-to-day. The 60 days is a different number, it indicate something more serious coming down to pike. And we've done these linear regression analysis of what is the best indicator of subsequent charge-offs for us, and it's the 60 day delinquency which is the best indicator.

[Frederick Weiss:]

Okay.

[Operator:]

(Operator Instructions). And our next question comes from the line of Mike Beerman with Eminence Capital. Please go ahead.

[Michael Beerman:]

Hi guys, I know you already touched on this, but I just want to get a little more color on the restructured loans. Did you say, you did take a mark-to-market charge on those loans this quarter?

[William Cooper:]

Restructured loans?

[Michael Beerman:]

The one on page 10, of your 8-K, the loan that, the modification loans for 251 million?

[Neil Brown:]

Those are... this is Neil again. Those are modifications on consumer home equity loans. And, the modification wasn't significant enough for it to be treated as a trouble debt restructuring, so there weren't any charges.

[Michael Beerman:]

So, any of that 250 million fall into, it doesn't sound like it would fall into your NPA category. But, does it fall into what you call the FDIC potential problem loan category?

[Neil Brown:]

No. Its related to commercial loans.

[Michael Beerman:]

So, I guess, I'm just trying to understand why we shouldn't, when we are looking at your reserves to loans and what you should be provisioning on any given quarter. You made these loan modifications because, potentially these are loans that are having trouble being paid. So, why wouldn't we in a minimum be marketing these to market, but put these into some type of risk category?

[Unidentified Analyst:]

When, with these loans, we have our own policies of how we do this. This isn't the government's program on how you go about doing this. And we basically don't do this unless we've got a customer, we were pretty confident that this is going to solve our problem. Doesn't it in every case solve the problem, but it does in most cases. So, and there obviously this group of loans is a category that we take into consideration overall when we're looking at the adequacy reserve with the portfolio as a whole. But they're way far away from nonperforming status or a mark-to-market status. It's typically okay, we'll wave this payment now to the current. Now let's go from here. And because we've had discussions with the customer where they are and we believe that they can continue to keep the credit current. And our data so far indicates that we're pretty successful in that.

[Michael Beerman:]

I appreciate that. But just giving your geographic exposure, the industry exposure with the auto and so on. I mean, if you haven't restructured someone's loan, its usually not a very good thing. And I'm again, there are... your peers and we're trying to apples-to-apples in analyzing your credit quality versus peers. There are institutions that will take any type of restructured loan once the terms have been modified, and include that into a nonperforming asset. And then at some point it may become a performing asset. But, as it's been modified. I mean, if you would take a more conservative view, isn't it fair to say that you could categorize that as a nonperforming asset, or am I missing something?

[Thomas Jasper:]

This is Tom Jasper. I wouldn't categorize that as a nonperforming asset. One of thing on the modification and expenses that we do, the overwhelming majority of them are done at loans that are current, at the time of the modification. These are not loans that are 60-90 days past to that we're doing a change in that condition. So, it's sort of customer that is looking for a change, but it's somebody that's very current. The other thing I would add is, we do have reserves on the balance sheet within the consumer portfolio. And by amount of reserves and other things that have taken into account, as we look at the level of those reserves, we take everything into account as to what's going on within not only with the economic environment, but within our own portfolio as well. So, I think that we've addressed that risk within our loans.

[William Cooper:]

Yeah, inappropriate to market these to market, because overwhelmingly they don't ever reached that category.

[Michael Beerman:]

I understand. And so you're saying they haven't... if they are not delinquent, you're assuming they're going to continue to be current, but you're working with from a customer relation perspective. I guess, the big confusion, and I know that's been addressed in the call from a couple of other questions. And I do appreciate, you guys giving disclosure as other banks have this category, but they don't disclose, is the FDIC problem loan category. Maybe just for, I guess a quick education for people that are involved. Maybe compared to two categories, what would be a typical FDIC problem loan that wouldn't be classified as a nonperforming asset for you guys, because, obviously this would double your nonperforming assets if you assume they were all bad assets, which what you're saying is not the case that you mentioned, the 10% of these become bad assets if you look back historically. But, maybe just help us understand what the FDIC is telling you as a problem loan, but does not fall under the NPA category?

[Unidentified Analyst:]

First of all, we don't do anything with the FDIC. We're under the OCC.

[Michael Beerman:]

Well, with the regulators, I apologies.

[Unidentified Analyst:]

Okay. But, and these aren't necessarily. I mean, yes, these are our ratings, not their ratings, right. And we rate every commercial loan, we give it a score. And so, a loan... it could be an industry category. So, for instance; if we had a shopping center deal, and that might get downgraded because it's a shopping center in Michigan. It's not delinquent, it's got great collateral, but it got graded down.

[William Cooper:]

Right.

[Unidentified Analyst:]

And so there is no reason to put it on non-accrual or whatever, because they've missed the payment. But what it means, whether a better description of it would be the watch list.

[Michael Beerman:]

Right.

[Unidentified Analyst:]

These are loans that are in categories that they are current. But, do assume in the lumberyard business. It's current, we've got great collateral, but it's in the lumberyard business. So, we want to watch that. And we want to watch that and we want to review it every month when we review or watch list loans. And so overwhelmingly, those loans never turn into charge-offs or nonperformings, but they get special attention and review.

[Michael Beerman:]

Okay. And just, this I understood when someone else asked the question. When you go back historically, you think about 10% of these eventually become nonperforming assets based on just history?

[Unidentified Analyst:]

I doubt, if it's that many.

[Michael Beerman:]

Okay.

[Unidentified Analyst:]

I've never computed it, so I don't know. But overwhelmingly, these loans never become nonperforming.

[Michael Beerman:]

Thank you very much. I appreciate it.

[Unidentified Analyst:]

Alright.

[Operator:]

Thank you. And our next question is a follow question from the line of Ben Crabtree with Stifel Nicolaus. Please go ahead.

[Ben Crabtree:]

Just a quick question on the acquired leasing or equipment finance portfolio. You said basically, its what, $211 million portfolio, that's already net of the markdown of 15 million which we would think over as a loss reserve. Is that right?

[Thomas Jasper:]

Ben, its Tom Jasper. The portfolio its right, that purchase was 277 million and that's net of a $15 million reserve on those assets.

[Ben Crabtree:]

And where does that reserve? Does that reserve show-off anywhere on the balance sheet?

[Thomas Jasper:]

No. Its net in the assets. So...

[Ben Crabtree:]

Okay. I got it. Okay. So in the other words, if loses are exactly 15 million we'll never see that.

[Unidentified Analyst:]

That's right.

[Thomas Jasper:]

That's right. It will analyze their performance of that portfolio over the time that as it runs off, and if there is any need to establish additional reserves on that portfolio they would come towards the provision and reside in the allowance.

[Ben Crabtree:]

Okay. And so we would not view, and not expect any of that 277 to be a nonperforming loans or nonperforming assets?

[Thomas Jasper:]

No, they can move... those loans can move to non-accrual like any other loans.

[Ben Crabtree:]

No, but right now, I mean.

[Thomas Jasper:]

Right now, there is none that are... we had no charge-offs on that portfolio and very few that were non-accrual. We did buy some loans that were delinquent as part of that portfolio purchase, about $11 million were delinquent at the end of March from that portfolio purchase, but we bought them at a discount.

[Ben Crabtree:]

Sure. Okay. Great. Thank you.

[Operator:]

Thank you. And at this time we have no further questions. I'd like to turn the call back over to William Cooper, for any closing remarks.

[William Cooper:]

Thank you very much. Have a good day.

[Operator:]

Thank you, ladies and gentlemen, this concludes the TCF 2009 First Quarter Earnings Conference Call. You may now disconnect. Thank you for using ACT teleconferencing.