TCF Financial Corporation
Q4 2009 Earnings Call Transcript

Published: 21 Jan 2010

[Operator:]

Good morning, and welcome to TCF's 2009 year-end and fourth quarter earnings call. My name is Celeste, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator instructions) At this time, I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference.

[Jason Korstange:]

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Neil Brown, President and Chief Operating Officer; Mr. Barry Winslow, Vice Chairman; Mr. Tom Jasper, Chief Financial Officer, Mr. Earl Stratton, Chief Information Officer; Mr. Tim Bailey, Chief Credit Officer; and, Mr. Craig Dahl, Executive Vice President of TCF Finance Corporation and Head of the Specialty Finance Division. During this presentation, we will make – 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 year-end and fourth quarter earnings release for more information about risks and uncertainties, which may affect us. The information that we will provide today is accurate as of December 31st, 2009. And we will undertake no duty to update the information. Thank you. And I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

[William Cooper:]

Thank you, Jason. TCF announced today earnings for the – earnings per share for the quarter of $0.15 for the fourth quarter of 2009, compared with $0.14 in the third quarter – third quarter of 2009. Net income was $19.5 million as compared to $17.5 million in the third quarter. This is the 59th consecutive quarter that TCF has had positive earnings. It’s actually the 85th quarter, approximately I think, that other than a restructuring charge we had on mortgage-backed securities a year ago. But it’s the 85th quarter, I believe, of operating earnings. In general, what I can say about the quarter, it appears that we have an improving economy and this may be signaling some improvements in connection with credit, which has been a major impediment in terms of the entire banking business. I can say in general, our banking philosophy and banking model has proven to be superior in this in that we’ve outperformed, particularly from our credit point of view, most of our peers. Net interest income for the quarter was good. It was a $169 million, up $22.5 million or 15% from the fourth quarter of 2008, and up to $8.5 million or 5% with the third quarter. Net interest margin was 4.07, compared with 3.84 a year ago, and 3.92. So our net interest margin is improving with the falling deposit rates and better margins on our loans, which is I think a key parameter for the banking business in general. Our non-interest income banking fees and service charges in the fourth quarter of 2009 were $108.7 million, up $8.3 million or 8.3% from the fourth quarter of 2008, and down slightly from the third quarter of 2009, which is seasonal in nature. Typically, the fourth quarter banking fees are weaker than the third quarter. A better measure is how it compared to a year ago. Card revenue in the fourth quarter of 2009 was $26.8 million, up $1.6 million or 6.2% from the fourth quarter of 2008, and up $0.5 a million at 1.6% from the third quarter of 2009. We’ve seen improvements in our debit card revenues, which is probably a reflection of an improving economy. Volumes are picking up a little, dollar amount per purchase is picking up a little. Leasing equipment finance revenues in the fourth quarter were very strong at $24.4 million, up $8.1 million or 49% from the fourth quarter of 2008, and $9.2 million or up 60% from the third quarter. Our specialty finance area in general has had significant growth in our inventory finance area, in particular which was a start-up has had very significant growth. Loans and leases average consumer loans have basically been flat. And what we’ve seen is continuing run off of the older vintages, which have had higher charge offs and delinquencies offset by a growth of newer vintages of 2008-'09 vintages, which have experienced substantially better delinquency and charge off data. But on the whole, they’ve been flat. There has been a switch between variable rate and fixed rate, which is good and is an improvement in the margin. December 31, ’09, 68% of our consumer real estate loans were first mortgages. Average commercial loans in the fourth quarter were – increased $265.7 million or 7.8% from the fourth quarter of 2008 and were essentially flat from the third quarter. In general, I can say our commercial business, demand is pretty good and we’re putting loans on at better margins and better terms and conditions than we’ve had in the past. Average leasing equipment finance balance is in the fourth quarter increased $660 million or 27% from the fourth quarter of 2008, and $237 million or 8.5% from the third quarter of 2009. There are some equipment – some portfolio acquisitions in those numbers which would indicate that in general we wouldn’t expect to see those same levels of growth coming forward unless, indeed, we find more of those acquisitions. The average inventory finance loans in the fourth quarter increased $197 million or 100% from the third quarter of 2009. The increase was due primarily to inventory financial loans in the lawn and garden sector in the fourth quarter totaling $225 million. We sold some securities. We sold some of the approximately $600 million of Fannie Mae and Freddie Mac callable debentures that we had invested in for – put our liquidity because of our strong deposit growth. Those investments were callable. And in the near future, we had gains in them. It made sense for us to liquidate those and take some gains. We reinvested into mortgage-backed securities with a yield of a little over 4%. The deposit growth throughout the bank has been good. And our deposit costs have been excellent. Our average cost of deposits is 0.74%. That’s down from 0.94% at the third quarter and 1.51% in the fourth quarter. This is a little number times a big number that creates significant improvements in the net interest margin. Within the deposit numbers are some real mix changes. We’ve continued to allow the CDs to run off. They’re down over 24% and have grown our checking and savings deposits. Savings in particular has had very strong growth. That’s contributed significantly to the reduction and the rate, and it makes our deposits – core deposits stronger. Year-to-date, we’re at $11.3 billion in deposits as compared to $9.9 billion, a 14% increase. At any case, the deposit story at TCF continues to be strong. We’ve had good checking account growth, good savings account growth in both units in dollars. Our interest expenses, the best thing to say about it, if you filter through all the numbers absent the FDIC premiums that we get to contribute as a result of the mistakes made in the industry and the growth in our inventory finance areas and business expansion kinds of things, if you really fair it through the numbers, you would see that basically our operating expenses are flat quarter-to-quarter. Credit allowance for loan and lease losses was at $244 million at 1.68% of loans, compared with $215 million at 1.51%. And basically, we have strengthened reserves above our charge off levels. The over 30-day delinquency rate was 0.69, down from 0.81 in September. That’s good news. That over 30 – 60-day delinquency is probably, for us, the best indicator of coming credit. Non-accrual loans and leases increased $27.4 million or 10% from September 30 of 2009. And most of that is in the – is in consumer and commercial real estate, which takes the firm on a time for us to liquidate. At December 31st, 2009, TCF had restructured loans of $252 million. That’s up $27 million from December 31, 2008. The reserves for losses on this accruing consumer restructured loans was $27 million or 10.7%. The over 60-day delinquency rate on these loans was 2.48%. These loans are accruing. They're a little over – the yield's a little over 3%, something like 3.5%. There’s a lot of story associated with these restructured loans. It is not the same kind of restructured consumer loans that you see in the rest of the banking industry. None of these loans were sub-prime. We have underwritten this loan. As you can tell by the delinquency rate, they're current. We have in effect accelerated the reserving process under generally accepted accounting principles associated with putting some $27 million in the reserve on these loans. It remains to see how they’ll work out. But in general, I would say this in terms of the way the process is working, these processes are good for these customers. This is a story – a typical story, where a fellow and his wife own a house. The value of the house has come down. He's still working with less hours. She lost the job. They can’t quite make their payments, but want to. We restructured this for a year or 18 months, reduce these payments. Hopefully they’ll go back under a regular payment at the end of 12 or 18 months. We re-underwrote this loan, rechecked the person’s credit and income, and so forth. And as I said, I think this is good for consumers. It’s good for the people in general. And it’s good for the bank. A provision for credit losses was $77 million, up from $47 million in the fourth quarter of 2008, and relatively flat with the third quarter. I think, we were fairly generous in connection with our provisioning and increasing the reserves where there’s lots of good signs in connection with the economy and so forth that things may be getting better, but they’re not definite trends, and we decided to build the reserves a little stronger than our formulas in the fourth quarter. And for the first time in eight quarters, TCF experienced a decrease in net charge offs. And again, I think that’s encouraging, but don’t bet the ranch on it. It really depends on what happens with the economy as a whole. We’ve seen improving home values and a slightly improving economy, but we haven’t seen any improvement in unemployment. But there are some positive signs out there in general. I’ll mention a little bit about the upcoming changes in our – in our key income with what the Fed new rules on how you handle NSFs. TCF believes that these rules are not in the best interest of our customers in connection with, we want our customers to be able to rely on their debit card and not to have that rejected even when by the end of the day they would have good funds in their account. We think it’s a poorly thought out rule. We are aggressively approaching our customers in giving them the opportunity to opt in. We had anticipated this. We’ve made a lot of progress on this. And we are indeed in the process of doing that right now with new and existing customers. It looks like as a result of this that the competitive environment is today, it looks like, as we predicted, that this is going to result in a monthly maintenance fee on checking accounts, in effect, the death of totally pre-checking. And we are evaluating that. And it’s likely that we’ll end up doing the same thing. It’s difficult to say how this'll all work out. Our goal in the thing is to at least make the thing revenue neutral. In effect, NSF revenue would come down, account maintenance fees would rise. Our goal is to make it revenue neutral. It may have an odd impact quarter-to-quarter, but the goal is to make it revenue neutral at least for the year as a whole. With that, I’ll open it up to question.

[Operator:]

(Operator instructions) Your first question comes from the line of Jon Arfstrom with RBC Capital Markets.

[Jon Arfstrom:]

Thanks. Good morning. Good morning, all.

[William Cooper:]

Hi, Jon.

[Jon Arfstrom:]

A couple of questions here, maybe just a follow-up on the deposit service charge outlook first. The way the Fed rules are written right now, you expect that to really be the final arbiter in terms of what you have to work around?

[William Cooper:]

Would you restate that? I don’t understand.

[Jon Arfstrom:]

Are you operating right now under the assumption that the Fed rules will be the final rules or do you expect anything else to out a less (inaudible)?

[William Cooper:]

We’re operating under the view that that will be the final rule. They will undoubtedly be some fine tuning or changing in it. But we’re operating on the basis of that will be the rule, yes.

[Jon Arfstrom:]

Okay, okay. And then in terms of the process of giving someone to opt in, is that something that you’re starting to work on right now? And if so, how was the success then?

[William Cooper:]

We actually piloted this in anticipation of this thing occurring last year and examined how our customers would look at it. One of the things about this new rule, the reason why, in my opinion, it’s a bad idea, is it overwhelmingly – our customer wants us to pay that – what might appear to be an NSF on a debit card or an ATM withdrawal. And overwhelmingly, they want that opportunity. When we make that opportunity available to our customer and explain what the impact is, that 60% of the time when it might appear that there’s an NSF and it’s not, that they will not be authorized. Overwhelming people say, “Well, I don’t want that to happen.” And a very large percentage of our customer base in that situation elects to opt in.

[Jon Arfstrom:]

The other question I had was the delinquencies, the first time in a long time that it's actually been down from the previous quarters. Is there anything more that you can give us that – a net in terms of the outlook or give us some more comforts that that may in fact be a trend?

[William Cooper:]

Well I’ll pass that on to those who know a little bit more about it. But one of the things on that, Jon, is – particularly on the consumer portfolio is simply a shift from the older vintages to the newer vintages. The newer vintages, 2008 and 2009 originations, have much lower delinquencies and charge offs than the older vintages. And the mix of the portfolio or changes as we’re continuing to originate new loans at lower loan-to-values, then because the home – the price – the homes have come down, the value of homes. And the other – the rest of it, anybody want to add?

[Neil Brown:]

Well this is Neil on the consumer portfolio. The TDR program has some (inaudible) and delinquencies. Start to know of those customers, how many of them would have made payments anyways, but for how long. Our main advantage, which is having an impact in producing delinquencies.

[Barry Winslow:]

Yes, Jon. This is Barry Winslow. I say on the commercial side, it’s been pretty – it's been pretty quiet. And actually, it was – it was – delinquency was down this quarter. I think a lot of that has to do with – we’ve been putting the full quarter press on working through this Michigan commercial portfolio. And as we work through that, a lot of that has just washed through our system and has then been charged down, charged off, real estate sold, and that sort of things. So those were a lot of the delinquencies last year. It's not to say that we still don’t have some issues in Lakeshore and Minnesota we’re working through. But there aren't as many credits there. There’re a few big credits there. But right now they seem to holding their own and we’re watching them. And that’s why we – it’s been stable to down on the commercial side.

[William Cooper:]

Even in our potential problem loans, which are the loans that we internally classify, but are performing, they are 96% current.

[Jon Arfstrom:]

All right. Thanks, guys.

[Operator:]

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

[Craig Siegenthaler:]

Thanks, and good morning.

[William Cooper:]

Good morning.

[Craig Siegenthaler:]

First just on the non-accrual trends, I wanted to understand the increase just a little better. And I’m wondering if you have the break out for the addition to non-accrual and also the disposition. And what I'm trying to see is if the additions drove the growth or was it really lower disposition activity?

[Tom Jasper:]

I can take that. This is Tom Jasper. Actually, we had a little bit of growth. We have the increase – an overall increase in those items coming in and that was really driven out of the consumer book in terms of in the amount of non-accruals. I would say the disposition activity we did, if you look at the REO line in terms of what – what will happen on the consumer real estate side, we did see a decrease in consumer real estate REO. But we did have accounts moving into REO for the quarter. And if you give me a minute, I can give you that number. But that's basically what happened in the quarter.

[Craig Siegenthaler:]

Okay. Got it. And maybe if you're looking for the number I can just ask the second question and that's really just on TDR trouble debt restructuring. And I think the number was about $100 million on the commercial side last quarter. I just want to know where that went in the fourth quarter. We know you include that in the non-accruals. But it's just a number we really could track.

[William Cooper:]

Tim, you want to take that on trouble debt restructuring? I think that was relatively flat, was it not?

[Barry Winslow:]

This is Barry Winslow. I'm sorry.

[Tim Bailey:]

Well the TDR is (inaudible) on consumers because I think you said commercial.

[Craig Siegenthaler:]

Yes, commercial.

[Barry Winslow:]

That's flat quarter-to-quarter.

[Tim Bailey:]

That's flat quarter-to-quarter.

[William Cooper:]

Yes, Craig. That was flat. The commercial non-accruals are relatively flat to the end of the third quarter at about $103 million, at the end of this quarter at about $106 million. And what we – it was an exchange of plans. We moved three properties out of there that were Lakeshore properties to – to REOS. We had about a $17 million increase in REO. And then we moved one large loan from Minnesota in. And interestingly enough, it was the loan that had never been delinquent on one payment. But it was just one of the things that we thought because of the lumpiness of the cash flow and that sort of thing that we – the conservative thing to do was put it on non-accrual. And the final thing I'll say about what the commercial stuff we moved to REO is we don't like anything to go to REO commercial. But the good thing is all three properties were in Chicago. And in the city of Chicago right now, the courts are so backlogged with foreclosures and that sort of thing. It's taken you almost two years to get control of the property. And we're able to negotiate deeds and loans. So it's a good thing because we got these things a lot sooner than we otherwise would have so we can work them through. And on average, by the time a commercial property gets to – gets to non-accrual or REO for us, we've already, between reserves and write downs, written it down about 26%, 27%.

[Craig Siegenthaler:]

We've actually seen the TDR turn across the whole industry do pretty much the same thing, and that was accelerating like crazy. And then it was flat in the fourth quarter. Do you know what's driving that?

[William Cooper:]

This is Bill Cooper speaking. This is what happens, under generally accepted accounting principles, when we – on the consumer TDOs, when we set this thing up, there's a formula on what you have to set up on the thing. And we end up with a 10% or 11% reserve on it, and which runs through the provision. And obviously, there's a degree of decision processes as to whether you want to do that from an earnings perspective. And I suspect the industry is all just slow down because they said, "Gee, we can't handle this through the PNO. TCF has not done that for two reasons. One, as I said before, we think it's the right thing to do for our customer. And two, we think it's the right thing to do long term PNO.

[Craig Siegenthaler:]

Great. Thanks for taking my questions.

[William Cooper:]

You're welcome. I want to mention one other thing on the non-accrual loans, as Barry mentioned, they've already been reserved. We have allocated reserves on those of almost 25%. And we also have collected – even though they're non-accrual, we collected payments during 2009 of some $33 million on those loans. So they've already been written and or reserved, and they continue to come down as payments are made.

[Craig Siegenthaler:]

Got it.

[William Cooper:]

Tom, are you going to add some?

[Tom Jasper:]

Yes, Craig, just to follow up. This is Tom Jasper, just to follow up. We moved out of non-accrual on the consumer side to REO about $22 million in loans in the third quarter, and about $45 million of loans in the fourth quarter.

[Craig Siegenthaler:]

Okay. Got it. So it was a pick-up.

[William Cooper:]

And let me add also on the REO, real estate owned. Under REO, first of all, 63% of those are consumer, that means houses. They only stay there about 4.5 months. They move in and move out pretty quickly. And our inventory – number of inventory stays – has stayed relatively flat to declining. And those have been written down 27%. And one of the things when you look at – my point is on this, when you look at TCF's non-performing loans, it isn't – from a PNO perspective, much of a what's going to happen in the PNO is what's already happened in the PNO, and it's what's left over for liquidation as we take possession of these properties and liquidate them. What I'm saying is, when you look at non-accrual and REO at TCF or even potential problem loans, there isn't as much loss coming in the future by a long shot as what we've already pushed through the provision.

[Craig Siegenthaler:]

Okay, understand. Thank you.

[Operator:]

Your next question comes from the line of Todd Hagerman with Collins Stewart.

[Todd Hagerman:]

Good morning, everybody. Just a couple of more questions in terms of just the restructured credit and the reserve comments, Bill, that you made, if I understand it right, just first in terms of the restructured credit, those are permanent modifications, am I correct, as opposed to temporary mods.

[William Cooper:]

They are not. They're 12-month to 18-month mods.

[Todd Hagerman:]

Okay. And then I believe, Neil, that you talked last quarter just in terms of the expected acceleration in your proprietary programs. I'm just wondering if you have a sense that given where we are in the cycle, when we might – or when you guys might expect to see an inflection point in terms of those loan mods tapering off, if you will.

[Neil Brown:]

Well this is Neil. I think what I recall mentioning in the last call is that when we started that program in the third quarter, each month of the third quarter, the number of modifications we did actually came down. And that's true in the fourth quarter as well. But we will continue to do this. It's selective and discretionary on our part to determine whether or not the customer truly can overcome their hardship within a 12-month to 18-month period. And we'll continue to do that where it's appropriate. So I think this portfolio's going to continue to rise, but at a slower pace than it has.

[Todd Hagerman:]

Neil, the biggest bulk of these start to come out in June or July, something like that.

[Neil Brown:]

Yes. There's about little less than half of these mature in 2010. And the rest mature in 2011. But most of them, the big bulk of them, start in June.

[William Cooper:]

Yes. We haven't had – one of the reasons why it's grown is we haven't had many come out.

[Neil Brown:]

Right.

[William Cooper:]

We got to – they're all coming in and not coming out. And starting in June, we're going to see some come out as well.

[Todd Hagerman:]

Okay. And Bill, if I can just follow up on your comments on the reserves. So if I understand you correctly that while we may to see – while the loan modification program will likely moderate here in the next quarter or two, as you mentioned, your reserve, Bill, this quarter was a little bit more than what the model had suggested. And as we think about your coverage of charge offs in the various portfolios, it seems as if the reserve build is likely complete even with the modification program continuing.

[William Cooper:]

We can hope.

[Todd Hagerman:]

Okay. Thanks very much.

[William Cooper:]

Yes.

[Operator:]

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

[Ken Zerbe:]

Great. Thanks. Just in terms of the leasing in the Equipment Finance business, I guess if we look at that line, it looks like revenues went up by $8 million. The operating lease depreciation went up by about $6.5 million just this quarter alone. If we think about that as a net $1.5 million increase to pre-tax earnings, is that how we should be thinking about this as the benefit of the acquisition going forward?

[Tom Jasper:]

Yes. This is Tom Jasper. I think you hit that right on the head. That's what you should look at. The operating lease revenue quarter-to-quarter went up by about $8.5 million in total.

[Ken Zerbe:]

Offset by the expenses, got you.

[Tom Jasper:]

Offset by the depreciation, but net-net that's what you can look in, in terms of the run rate. We don't expect to be originating significant operating leases going forward that key in with the – what the acquisition that we completed in September. So we're going to run off that portfolio. And it'll get replaced by direct finance leases that will get recorded up in the loan and lease category.

[Ken Zerbe:]

Okay. Great. And then the second question, do you – can you provide the number of checking customers you guys have as of – in the fourth quarter and how that changed versus in the third quarter? And also comment on whether or not you continue to be aggressive in terms of marketing to bring in customers.

[William Cooper:]

Neil, you want to address that?

[Neil Brown:]

Yes. Well the number of checking accounts at the end of the year was just over 1.7 million and that's up about 6.5% from a year ago.

[Ken Zerbe:]

Do you have it as of the end of the third quarter though?

[Neil Brown:]

Tom will give it.

[Tom Jasper:]

Yes. We finished the end of the fourth quarter, the total checking account was 1.727 million; and, at the end of the third quarter, it was 1.720 million. It's actually 1.728 million at the end of December.

[Ken Zerbe:]

Okay, so a couple of thousand people.

[William Cooper:]

Yes. As a result of Christmas and so forth, the fourth quarter is generally a weaker quarter in terms of checking growth. Another interesting thing I'll mention is that we grew savings by net – by approximately the same number. So we grew a savings account on almost one-for-one with a checking account.

[Ken Zerbe:]

Okay.

[Neil Brown:]

This is Neil. The other question on the marketing networks going forward, we're going to continue with our current level and actually increase a little bit in terms of marketing efforts.

[Ken Zerbe:]

Got you. Do you guys – just with that, if checking accounts were up 8,000 people on the base of 1.7 million. Do you feel you're still getting the return on the marketing? Because it seems that year-over-year, you're still pushing gains on a sequential that is, I'm going to call, relatively flat sequentially.

[Neil Brown:]

This is Neil again. To reiterate what Bill said, historically, we see a net reduction of checking accounts in the fourth quarter is a seasonal issue. So we continue to believe we're getting the returns we're looking for.

[William Cooper:]

One of the things, you just – if there's a crown jewel at TCF, it's that retail base. We raise on that $11 billion of money at 67 basis points interest costs that has a relatively long maturity with a huge fee income base as it's growing. And so, we've had – even through this economic crisis, that aspect of the business has continued to be a very strong revenue contributor at TCF. And we continue to be successful in the marketing. We have switched marketing. We've gone away from billboards and television, and so forth, more back – even to more direct marketing things. And it has been positive. And this year's checking account growth was substantially better than last year's, which is the key indicator.

[Ken Zerbe:]

Thank you.

[Operator:]

Your next question comes from the line of Dave Rochester with FBR Capital Markets.

[Dave Rochester:]

Hi. Good morning, guys. Real quick on the loan mods, when those actually come out in the 12-month, 18-month period, given the analysis that you've done and the – and the employment picture that you're saying, when are you expecting you'll need in terms of extension of that modification program? Are you anticipating that some of those will go back in? And what happens in terms of the classification of that? Do you have to downgrade those loans in that case or can you just keep them where they are?

[William Cooper:]

It's difficult to say. One of the things we did in the grand tradition of banking is create a committee that will review those to make sure that it's not easy to just re-up them, if you follow me. You'll hear a lot of banks say this, but these are different kinds of customers. This customer has lived in this home for seven years, lived in a home for seven years. He's had his job for – a job for five years. He had an excellent FICO score before the economy got soft, et cetera. And generally these are caused by some crisis – economic crisis at home, an illness or his wife lost his job, or he got back in his da, da, da, da, da, we're optimistic, when you look at the nature of these people, that they will work their way through this. They are not interested in screwing the bank or anything like that. The other thing that's going on in this process is that they may get out from underneath their unsecured credits. In other words, they may stiff the credit cardholder, et cetera in that kind of situation, which improves their debt coverage. I would love to give you a great prediction, but I personally am optimistic that a significant portion of these people will move back to a regular performing loan. I might mention that the interest that we're waving on this goes back – goes on the loan principle. We're not accruing it for accounting purposes, but it doesn't go a long way. And I would predict some of them will get re-upped again for another year. You then go through a recalculation if they get re-upped again in terms of what the economic impact is. But I think a substantial portion of them will go back on a regular schedule.

[Dave Rochester:]

Okay. And were you saying that some of these have amortization schedules that are extended or is it just interest rate? How does that work with the mods?

[William Cooper:]

Well almost all of these were a payment-oriented thing. We reduced their payment, and basically, to 38%. Is that correct?

[Neil Brown:]

That's current verified income, Bill.

[William Cooper:]

Of current verified income, that's basically what we did. And we verified it. And we based it – and we went through this thing and reduced their payments to 38% of verified income.

[Dave Rochester:]

Okay, and one last one on – back on the deposit fees. I know you guys are still on the midst of the process. But I was curious if you could give us some color as to what portion of customers you've actually heard back from and your inquiries and what portion of those have accepted to up then.

[William Cooper:]

It's too early in the process to really quote those kinds of numbers. Obviously, the first thing we're going after is new customers. What I can tell you is both in terms in our pilots in the early stages of it, the vast majority of people opt in.

[Dave Rochester:]

Okay. All right, guys. Thank you.

[William Cooper:]

Let me just add something on that in general. If that's the case, if that's the way things work, the – I believe that with the competitive situation with what's going there, I believe that we will do a better job on opting our customers in than the rest of the banking industry, which mean will, hopefully, that we'll be able to maintain a better revenue source and a stronger customer base in that connection. And as a result of what the banking industry is going to have to do as a result of not doing a very good job of getting the customer opt in, we're going to be able to, I believe, strengthen our account growth and our revenues as well.

[Dave Rochester:]

All right. Thank you very much.

[Operator:]

Your next question comes from the line of Terry McEvoy with Oppenheimer.

[Terry McEvoy:]

Thanks. Good morning.

[William Cooper:]

Good morning.

[Terry McEvoy:]

I wonder if you could comment about the reorganization charge that was taken – in the press release you said, reorganizing the structure in business segments. Does any of that have to do with the discussion today on NSF fees and some of the changes that you're seeing or expect to see in the industry in trying to reorganize the organization to make sure you're prepared for those changes?

[William Cooper:]

No. We examined our organizational structure and looked at the way the banking world is working today and decided a more functional structure, with a stronger functional format than geographic, made sense. We determined that there was a significant savings to be done as well as we thought. And it has worked out a stronger management structure. It had nothing to do with anything regulatory.

[Terry McEvoy:]

And just my second question, Bill, in the past, you've always said that TCF's banking model would be successful in any larger, urban, Midwest market. Do you still think that's the case today? And would you have an interest in expanding over the next 12 months maybe through an FDIC-assisted transaction to get into another new market?

[William Cooper:]

I think in general that's true. We're not real thrilled in terms of being in places like Florida and California that tend to be very cyclical. We've already got our butts kicked in Michigan, cyclical economy. In terms of FDIC-assisted, we look at – we look at them all. Frankly, one of the concerns that I have when you look at what the government did with TARP, you got to really go a long way to trust the government, in my judgment, in connection with doing one of these assisted deals and having them being able to rely on their promises in connection with this assistance and these deals. I'm concerned that they'll want to redo the deal if it turned out to be a good deal. They don't have much respect for contract rights. So that makes me more cautious about that.

[Terry McEvoy:]

Thank you.

[Operator:]

Your next question comes from the line of Erika Penala with UBS.

[Erika Penala:]

Good morning. How many incidences of overdraft does the average debit cardholder usually have for a year?

[William Cooper:]

I'm sorry. I don't really have that data. I don't think anybody does here.

[Erika Penala:]

Okay. And in terms of the opt in program, I'm sorry if you'd explained this in the prepared remarks. But is the pilot program targeted on the new checking accounts that are being opened or are you also reaching out to existing checking account holder?

[William Cooper:]

The pilot we did was targeted at new customers. And what we've done so far has been involving around new customers. But the program overall will target our entire deposit base. But by the time this becomes affected, we will have touched the entire deposit base in many ways in connection with this issue. In addition to that, if we can't touch somebody and explain the issue and it has a negative on them, in other words, if we don't authorize a debit card transaction as a result of the customer not opting in, we'll notify the customer subsequently that, gee, that happened to them because they did not opt in and give them the opportunity to opt in, in the future.

[Erika Penala:]

And the 10.7% reserve established for the consumer TDRs, what were the underlying assumption in terms of the re-default rate and severity upon re-default?

[William Cooper:]

It was a 20% assumption of default rate. Is that correct?

[Neil Brown:]

That's correct.

[William Cooper:]

And there's a generally accepted accounting principle calculation that you go on to do that. It also takes them the time value and money, and a number of other issues of how you calculate that. It's a formula that you – that you use. But the default rate is assumed to be 20%.

[Erika Penala:]

Thanks so much.

[William Cooper:]

Another way of looking at that, if you look at that reserve of 10% or 11%, and if you said, "Gee, a third of these default," that would mean I would have a 30% write down available within those reserves.

[Erika Penala:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Tony Davis with Stifel Nicolaus.

[Tony Davis:]

Good morning, gentlemen. Tom, I just want to come back and tie this restructure commercial loan number down. What is the dollar amount of those loans that you have restructured at this point?

[Tom Jasper:]

In the commercial portfolio?

[Tony Davis:]

Right.

[Tom Jasper:]

I think it's around $10 million. But I have to verify that.

[William Cooper:]

Almost nothing.

[Tom Jasper:]

Okay.

[Neil Brown:]

Very small.

[Tony Davis:]

Okay. And I wondered too, it looks to me like that – that basically, I just wonder what your color is out there in terms of discussions on backlogs. And in the additional color, maybe you can give us, on credit trends, all the – what you mentioned as far as in terms of credit stress by market. In Michigan, you mentioned a little bit. But can you give us a little more color on what you're seeing there?

[William Cooper:]

On which category of credit?

[Tony Davis:]

Credit, CRE certainly.

[William Cooper:]

Commercial real estate?

[Tony Davis:]

Right.

[William Cooper:]

The vast majority of the credit issues that TCF has had are in Michigan. And Barry, I think 80% of our charge offs have been in Michigan.

[Barry Winslow:]

Right, about 80% of our – this is Barry Winslow. I think about 80% of our charge offs are – have been in Michigan. To give you a little flavor in – I'm not saying this trend is going forward. But last year, the Michigan charge offs were – loans outstanding was 3.9%. For the other areas in commercial at this point, 0.38%.

[Tony Davis:]

Thanks, Barry.

[Barry Winslow:]

So you can see what's going on there. Now Michigan is – we worked that portfolio down. There're still two or three big whales there as we call them, which are credits over $5 million. And we're watching closely and we have to deal with, but it – but we worked through that and it seems to be pretty stable. In Minnesota, in Lakeshore, there are some stresses in the portfolio as we just moved through there. But once again, it's not high numbers of credits. It's probably six or eight credits over $5 million that we just keep them with it and working through there. The other thing we have, too, is unlike some folks is our – if you look at our – at our retail commercial real estate, which everybody is hot and bothered about these days, our retail commercial real estate in terms of – of just strip centers, malls, et cetera is about 10% of our commercial portfolio. And if you put it – if you add it in our inventory finance that we see in our total commercial portfolio, which is about $7.2 billion, it's about 5% of that portfolio. So we would continue – we have a much lower concentration in this – in retail than others do.

[Tony Davis:]

Got you. Thanks, Barry. And Tom, just a – of the tax rate, is 37% still a reasonable, effective assumption for this year.

[Tom Jasper:]

Yes.

[Tony Davis:]

Okay. Thank you.

[Tom Jasper:]

Welcome.

[Operator:]

Your next question comes from the line of Ken Usdin with Bank of America/Merrill Lynch.

[Ken Usdin:]

Hi. Good morning, everyone. Just one question surrounding fees and expenses, there are a bunch of these line items that were – looked bigger than they've been in the last quarter. And Tom, I'm just wondering if you can just tease out whether some of those bigger line items were seasonal, or clean up, or our current run rates. And the ones I'm speaking of specifically is, I know you mentioned that leasing was helped by the acquisition, but that position is usually somewhat fourth quarter seasonal, second OREO costs, and then third securities gains, if you would. Thanks.

[Tom Jasper:]

The securities gains number, there's never a run rate built around that. We take the gains when we think it's prudent to do so. And we've taken them in the past. So there's really nothing to comment there. As it relates to leasing, as you mentioned, we do have a little bit of seasonality around that sales-type margin. But it is highly unpredictable and is not at – is not when we want it's driven on customer related events. But we did have the pickup of $8.5 million in operating lease revenue that I previously mentioned. That's the biggest change from quarter-to-quarter in the leasing and that will run off over time. And what was the third item?

[Ken Usdin:]

OREO expense, foreclosed – foreclosed real estate and OREO expense.

[Tom Jasper:]

Looking at that from quarter-to-quarter, the increase in OREO expense was about $1.8 million from commercial. That was the big – a big portion of it. And then $500,000 from consumer lending on just those – on those expenses.

[Ken Usdin:]

And do you feel like you still have a lot more of that to move through. I mean obviously, there're still some challenges in working it through. But will you expect the OREO line to still be relatively high as you have to get through the rest of it?

[Tom Jasper:]

Well, there're a couple of things to think about. And that is – one is as it relates to the property taxes and there is a little bit of that that comes through in the fourth quarter and in the second quarter and so as those – on the consumer properties. So that's when we see that tax expense go up. The rest of that, as we – as we have in the relief that consumer real estate's been written down to about 27% versus the contractual part of it going into non-accrual. And so in terms of the write downs where – where we then – throughout '08 and '09 is as we are taking some of these properties back and property values were dropping, we had additional write downs that we were taking in that category. I won't expect going forward, as property values have stabilized, that the amount of REO spent that will incur per property is going to go – is going to go up. I would say it's going to be flat to down.

[Ken Usdin:]

Got it. Okay. Great. Thanks very much.

[Barry Winslow:]

This is Barry Winslow. A couple of people have asked the question about restructure commercial loans. I've relocated the number here. We have no restructure commercial loans that are on accrual right now. We have $9.6 million commercial loans that were restructured that are on non-accrual. That was $10.5 million at the end of the quarter. So those are effectively nothing relative to the size of the portfolio.

[Operator:]

Your next question comes from the line of Steven Alexopoulos with J.P. Morgan.

[Steven Alexopoulos:]

Hey. Good morning, everyone.

[William Cooper:]

Good morning.

[Steven Alexopoulos:]

Bill, not to beat a dead horse on the TDRs, but from a macro perspective, I guess I'm having a hard time reconciling why you need such a large reserve on them given the risk profile that you talked about. Eleven percent just seems very high.

[William Cooper:]

It's GAAP. Generally accepted accounting principles are where you have to compute the thing. And frankly, no one knows. Now you do know you had a problem with these guys, with these people. We do know they're good people. I share your optimism, but the – but there's a method under generally accepted accounting principles that you use to go – to calculate this. Tom, you want to add something?

[Tom Jasper:]

Yes. This is Tom Jasper. The only thing I would add is as we talked about and totally really have some of these loans running off and reaching their maturity date, the re-default assumption that we have right now, the 20%, that's based on some previous programs that we have that aren't exactly the same as the program that we're running. And that 20% is a big trigger as it relates to the amount of reserves. So when we get out and we have some of these loans reaching the end of their modification period, we'll potentially be looking at and we'll continue to look at this every quarter, whether or not that re-default rate is too aggressive or if it's sufficient. The biggest driver of that reserve level is the re-default rate. And right now, as we mentioned, we have 2.5% delinquency on that portfolio, 2.5% over 60 days. It looks good right now. But the tale of the tape's going to be when we reach the end of the modification period.

[Steven Alexopoulos:]

That's helpful. Have the CD balances bottomed year in? I'm just trying to see how much run off we could see there.

[Neil Brown:]

Well this is Neil Brown. They may go down a little bit further. There's a little bit of high rate CDs maturing in the first quarter. But after that, they're all pretty much at market.

[Steven Alexopoulos:]

Okay. And just a final question, looking at total risk base capital, the margin above well capitalized has relatively been – can you just touch on thoughts on rebuilding that a bit here? And would you favor Tier 1 or Tier 2?

[William Cooper:]

Well the best way to build capital, obviously, is to earn it. It may make sense in this environment assuming that our stock price improves and so forth that we will evaluate going forward whether perhaps it might be – make sense from a stockholder's perspective to have a stronger capital base. It's a possibility looking forward that we will look at building capital with some kind of a capital offering in the following year.

[Steven Alexopoulos:]

Perfect. Thanks.

[Operator:]

(Operator instructions) Your next question comes from the line of Lana Chan with BMO Capital Markets.

[Lana Chan:]

Hi. Not to dwell on the NFF fees again also, but a couple of the large, big banks have given out estimates of a couple of hundred million expected annual impacts from the new legislation. And I'm just wondering, is there something specifically unique about how you approach your customer base that gives you the confidence that you can make it revenue neutral with instilling the monthly maintenance charges?

[William Cooper:]

Well, I think if that's a couple of hundred million, I think I know the one you are referring to. First of all, I can't – I can't get to that number with that bank. And in the answer because I read these and see what's going on with the other – they basically said that they didn't expect to do anything in terms of getting customers to opt in. And if you don't do anything, then it's just going to have an impact. TCF has anticipated this for a long time. And we piloted it ahead of time. And we got a lot of data. And we've done a lot of work on it. And frankly, I believe that we're going to do a better job than a bunch of these big banks. And I will make this prediction. You're going to see, in the next couple of months, the biggest banks begging the Fed to delay this because they're just waking up in terms of what's going on. But I'm more – perhaps more optimistic because we're ready and have been ready to address the issue, I believe, sooner than others.

[Lana Chan:]

Okay. Thanks, Bill.

[Operator:]

And at this time, we have no further questions. I'll now turn the call back over to Mr. Cooper for closing remarks.

[William Cooper:]

Thank you very much. Have a good day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.