TCF Financial Corporation
Q2 2011 Earnings Call Transcript

Published: 22 Jul 2011

[Operator:]

Good morning and welcome to TCF 2011 second quarter earnings call. My name is Christy and I will be your conference operator today. (Operator Instructions). At this time I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference call.

[Jason Korstange:]

Good morning, Mr. 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 and Chief Risk Officer, 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 Financial Corporation. 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 2011 second quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of June 30th, 2011 and we 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.

[Neil Brown:]

Thank you. TCF reported today its 65th consecutive quarter of earnings. We earned $29.8 million, 19 cents a share, essentially flat with 20 cents a share in the first quarter of this year. The total revenue was up slightly from the first quarter, $290 million versus $288 million. The components of that is net interest income was up slightly at $2 million, up $2 million at $176 million from the first quarter. The net interest income, excuse me, was up largely because of the improvement of the loan mix, higher margin loans growth and the shrinkage in lower margin loans. Along with the lower deposit costs, offset by our increasing asset sensitivity as TCF becomes more asset sensitive in preparation for rising interest rates and the impact of higher liquidity costs. The net interest margin was $4.02 was about flat with the first quarter, $4.06. As I mentioned that higher liquidity costs about 8 basis points in the margin and TCF's asset sensitivity we're now about 6% asset sensitive with more assets adjusting in a higher rate environment on liabilities. The banking fees were up about $3 million or 5% from the first quarter. Most of that was seasonal and to some degree, a better quality of accounts. The derivative amendment was finalized by the Federal Reserve in the last quarter. That is estimated across TCF on an annualized basis about 50% of its debit card income of somewhere -- will amount to something about $50, $60 million. We anticipate we’d be taking actions to mitigate the impact of that in the latter part of this year and the first part of next year and we anticipate our competitors will be doing a similar thing following the releases and discussion of this with our competitors. We think as we predicted that this will result in higher fee charges to consumers. Leasing fees which tend to be lumpy were $22.3 million on a year to date basis compared to year to date basis a year ago which is maybe a better way of looking at it because of its lumpy nature. Leasing fees continue to improve. I think they're up something like $9 million. Total loans overall were flat but there's been a change in the mix, in particular our fixed rate residential portfolio has shrunk about $500 million over the year while the higher margin variable rate residential portfolio has grown about $300 million a year. We tend to get on a matched basis a higher margin in variable rate than we do in fixed rate and in particular, TCF is not interested in going long 30 years at these very low residential rates that are present in the marketplace today. Commercial loans were about flat, equipment was essentially flat although we have a large backlog in both of those areas. Inventory finance is now at almost $1 billion and it grew 12% from the first quarter continuing that strong growth. There's a good possibility of signing some significant new programs in our inventory finance business over the next six months or so as well. Credit quality continued to improve, non-performing assets, charge-offs and 60-day delinquencies are all down from their peaks. Even with that, allowance for loan loss is up slightly at $255 million. Charge-offs were $43.8 million, 1.19% of loans, that's down from $55.8 million 1.5% loans in the first quarter. So when delinquencies and non-accruals improve, eventually that comes out in the charge-off line which eventually will come out in the provision line. We've had strong deposit growth. It's up $211 million from a year ago and that's mostly in core checking and savings money. Our deposit function continues to be very strong. Lots of good trends in there, improving account quality, higher balances per account, etc. The average interest cost on deposits was only 38 basis points. That's down four basis points from the first quarter. Again, that contributed positively to a net interest margin. Expenses were pretty flat at $196 million. The premiums that were paid to open new deposit accounts is up $3 million and that's because we're opening up more deposit accounts and we're being more aggressive in that area. We still have significant foreclosed real estate expense costs, foreclosed real estate expense costs at $12.6 million. Over time, as credit quality continues to improve, I expect to see significant improvements in that area. Our FDIC premium was up $2 million at $7 million from a year ago, flat with the first quarter and that run rate is probably where it's at and that reflects a change in the FDIC premiums as the new programs for banks over $10 billion etc. starts to kick in. We did have some one-time accrual clean-ups of $2 million that's in the other category. That's a one-time deal and we don't expect that to continue. We continue to have strong capital and we believe that we now exceed all of the basal requirements that will become effective in 2019 and beyond when those – at least what they appear to look like at those dates. But again, we've got the strongest capital in our history and much stronger capital than our large bank competitors. There are, we believe, at this point some real reasons for optimism. This quarter I would say was a stay-in-place quarter. We're just continuing to work through some of the difficulties associated with increases in regulation, the Durbin amendment, the increased liquidity requirements, capital requirements, etc. and a very difficult interest rate environment. But the reasons for optimism are that I don't believe these rates will stay where they're at and TCF's net interest margin is higher in a higher rate environment than it is in a lower rate environment and we're prepared for that to happen. It looks like it may not happen as fast as we thought but it will happen. Our loan-mix is improving, higher margin loans are growing, inventory finance variable rate consumer loans, etc. We're seeing a good improvement in that mix which over time will improve our net interest margin. Non-performing assets will continue to decrease. That's an asset we don't earn anything on. When we put it into an earning category, that will improve the margins and our trust-referred payoffs which we hope we can pay off before the end of the year, will improve the margin by something like $15 million a year pre-tax. Credit quality's still improving and we will – we expect to see improving provisions in the future, assuming the economy doesn't tank, which we don't expect. Foreclosed real estate costs, as I mentioned earlier, I think the run rate on that might be closer when we are in a more normalized environment of a couple million dollars over a quarter rather than $12 million. On the fee level, we expect to continue to have good growth in time over specialty finance fee income which we've seen and we expect to continue. That was interesting, last quarter, specialty finance fee income exceeded the debit card revenues. Didn't this quarter because of the lumpiness of it but we expect to see continuing growth in that line. We've got some new products coming online with negative balance which we're going to take out to the rest of the bank after piloting in Michigan and we expect to do over time things that will mitigate the cost of the Durbin thing with the changes in programs on deposit accounts and our new account originations are very strong, much increased over prior periods. So we have reasons to be optimistic going forward over the next year or couple of years. With that, I would open up the questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of John Armstrong of RBC Capital Market.

[John Armstrong:]

Morning, guys. You hear me alright?

[William Cooper:]

Yes, we can.

[John Armstrong:]

Okay, good. I want to talk a little bit about what you just mentioned, Bill, the pilot program. And I don't know if it's Neil that'll give us some of the returns on it but give us an idea of how that's gone and you mentioned you're going to roll it out into the rest of the company and I guess I spent a lot of time on your company and the key line I look at is that $56 million number, quarterly number in fees and service charges. I think we're all wondering what happens to that line item when you start to roll out the negative daily balance accounts feature to the rest of the franchise.

[William Cooper:]

Well first of all, let me say that product structure – we did a pilot and we're not repiloting. What we did is we did a pilot to learn some things and we've learned a lot of things in terms of how behavior will change and so forth in that product. And we've made adjustments to our product structure that we're now going to roll out to the bank as a whole. I just have to caution that we've made assumptions of what we've learned from that. We've made changes and we're not positive what those changes will be, what the impact of those changes will be although we're optimistic about it. The whole thing on NSFs has been under a regulatory challenge. Things like sort order and etc. are basically – high to low sorts have been challenged. We've been successful on those challenges but it's clear that those things are going to change and part of this is to get away from those things that both regulators don't like and customers don't like in connection with the structure of this. We're satisfied that we have done that. What the revenue impact is going to be is not yet clear. One of the things that's happening right now as a result of the economy is that for one reason or another, people are maintaining higher average balances than they have in the past. Neil, what is it? It's up what?

[Neil Brown:]

[Audio disturbance] The average on non-interest bearing checking account balance is up to $1800, it's up 23%, that's $330 from a year ago.

[William Cooper:]

When people keep higher balances, average balances in their accounts, they tend to have fewer incidents and that's impacted our – those programs overall. That is an impact of the economy in my opinion and that will change and we've seen that happen in other economic situations like this. But at this point, we're optimistic that this is a superior program. We also believe it'll have a lower attrition rate which will allow us to build the portfolio of accounts on a stronger basis. Neil, do you have anything you want to add to that?

[Neil Brown:]

[Audio disturbance] Well I have one other thing I want to add, Bill. What we have learned is that most of our customers think the daily fee product is a much better than (inaudible) product. Our sales employees like the product, the customers appreciate the simplicity and the transparency of the product so there's a lot of positive momentum behind that. I will say that it did (inaudible) the fees a little bit in the second quarter but that's why we're on pilot. We've learned what we needed to learn and we've tweaked the product design for a complete roll out (inaudible). We're training all of our necessary bank branch banking sales and customer service and support service employees and we're beginning the customer education process here soon. So we're looking forward to rolling this out (inaudible).

[William Cooper:]

The long and the short of it is, we believe and there's a lot of evidence, if you sell a better car that people like more, you'll sell more of them so.

[John Armstrong:]

And that's coming in Q4?

[William Cooper:]

Well we believe so, yes.

[John Armstrong:]

Okay and then just one question if I might. On inventory finance, I know that the seasonal decline given the type of clients that you have but what kind of expectation do you have for growth in those balances as the year progresses? Kind of in isolation and then what's possible on the new business side?

[William Cooper:]

[Audio disturbance] Craig?

[Craig Dahl:]

Well we will expect some seasonal increases coming in the third quarter based on the shipment of the winter products and also as far as new program acquisition goes, it's quite an extended process which goes from a letter of intent to a definitive agreement to a notice to the current provider. So we have several of those programs in process at this point at one step or another within that. So we're optimistic on how we'll look by the end of the year.

[John Armstrong:]

All right, thank you.

[William Cooper:]

In terms of loan growth, just let me expand too, it's an area that people don't tend to ask very much but it's an important area. The variable rate home equity line, which we've restructured in some – we've developed some new markets in terms of how we're doing those businesses, has developed into very high credit quality businesses because of the exit of competitors in many cases and we've had very strong growth in that aspect of it which has very good margins. It’s a very good business and that's another area of growth as I've mentioned up $300 million which could be accelerating as we expand it into additional markets and so forth. And that will have positive impact on both the net interest margin rate and the net interest margin dollars over time.

[John Armstrong:]

Okay, thanks.

[Operator:]

Our next question comes from the line of Paul Miller of FBR.

[Paul Miller:]

Yeah, how are you doing? And that leads into my question about the junior liens on the credit card side. It is an area that you're growing but it has ticked up the last two quarters on the loss side and a lot of other – we've seen a lot of improvement in other aspects of it but it's probably due to your growth. But can you add some color to those upticks on the charge-offs?

[Neil Brown:]

This is Neil. You're referring to the – you said credit cards but you're looking at the …

[Paul Miller:]

Junior liens, I meant. I'm sorry, if I said credit cards, I apologize. I meant the junior liens.

[Neil Brown:]

… yeah, the junior liens, the charge-offs we're experiencing there are consistent with the first liens are largely coming from the older vintages and all you're seeing there is a somewhat increased level of severity on the losses that we are taking. Actually, incidents are coming down but the production we've put on the books for the last couple years and what we're going after today and in the future is performing extremely well. So it's more of a legacy issue than it is an emerging issue.

[Paul Miller:]

Is most of your legacy stuff like piggyback type stuff and the new stuff is just retail branch basic junior lien origination?

[Neil Brown:]

We originate both through our branches and we have a correspondent referral program that's where we have a significant source of new production.

[William Cooper:]

I might mention in that correspondent referral second mortgage business, in the last 24 months, correct me if I'm wrong on this, if I mistake this, last 24 months in that business, we haven't had a single delinquency or a single charge-off.

[Neil Brown:]

That's correct.

[William Cooper:]

Is that correct?

[Neil Brown:]

Yeah, and it's really due to the nature of the underwriting, of course.

[Paul Miller:]

Now on the correspondent business though, is it piggyback loans or is it just regular junior liens that add a room or invest in the house?

[William Cooper:]

Both.

[Paul Miller:]

It could be both?

[William Cooper:]

Yeah.

[Paul Miller:]

Okay, okay, thank you very much.

[William Cooper:]

You're welcome.

[Operator:]

Your next question comes from the line from Steven Alexopoulos of JP Morgan.

[Steven Alexopoulos:]

Hey, good morning everyone.

[William Cooper:]

Morning.

[Steven Alexopoulos:]

Maybe I'll start -- Bill to what do you contribute to growth and number of new checking accounts versus the first quarter it's up real sharp and have you seen a similar growth number in new debit cards issue?

[William Cooper:]

I will ask Neil to comment on that but it’s really increased emphasis. In a lot of ways the bank has been under this what I would call a regulatory attack. We had to do all of this work associated with Reg E in connection with opt in and opt out, huge resources applied to that from our branches to accomplish that and now the Durbin Amendment coming along and we've done pricing changes to account for some of those things and so forth. The Reg E thing is mostly behind us. It is now more of a function of opening new accounts than it is going back to existing account and we're now able to add additional resources from a marketing point of view, sales point of view and so forth in connection of acquisition of new accounts. Neil, do you want to add in?

[Neil Brown:]

Sure, this is Neil. We've also increased our new checking accounts we can offer from $50 to $100 and even in a certain market we are at $150. Along with that you we've added a must use your checking qualifier to get the premium, which is not only generating more new accounts but the quality new accounts in terms of activity and attrition to revenue is much improved. We also recently introduced a no minimum balance checking account, which is further boosted production. So as Bill mention a lot of things going on that impact checking over last year and half and even after all these big issues that we have taken. We will turn yet another corner in the fourth quarter of this year when we roll out a deal to make the balance product and by introducing our new checking product. Bottom line here we are going to stick we our strategy by having the best deposit products for all customer statements, best sales team producing best results. We are optimistic about our ability to continue to grow our core deposit franchises. That is what we do and we do it well.

[Steven Alexopoulos:]

For the new accounts I guess it is $120 thousands, do you roll them into this new negative account balance plan or these customers going to be switch?

[Neil Brown:]

Well to the extent they weren’t originated in Michigan we will convert them along with the rest of the accounts.

[Steven Alexopoulos:]

Okay. Another year you about to role the negative account balance plan to the rest of the franchise can you talk to use about what pricing is looking like? Is there I grace period where you don’t get charge a fee? How high does a fee go, items like that?

[William Cooper:]

We really don’t want to key competition to pricing issues before we deliver the pricing out there. We did change -- I'll say this, we did change the pricing structure somewhat. We made it simpler. Customers were confused about the different tiers and so forth and after our focus group interviews and so forth, with people we made the product simpler. I guess that is the best way to put it. In terms of the -- our existing per item account the new product does have better wavier provisions. In other words we've raised the dollar and I won’t say how much but we raise the dollar amount of how much you can get without paying anything kind of fees etc.

[Steven Alexopoulos:]

Maybe just one technical question, the affected tax rate was pretty high the past two quarters just over 37. Should we be thinking about that rate for the rest of the year?

[Tom Jasper:]

Yeah, this is Tom Jasper. That's a -- give or take some basis points that's a good rate for us going forth.

[Steven Alexopoulos:]

Okay, Thanks

[Operator:]

Our next question comes from the line of Ken Zerbe for Morgan Stanley

[Ken Zerbe:]

Great, Thanks. Maybe it's a little more of a theoretical question. You are very, very, (inaudible) right now. What's a downside of being asset sensitive right now? Is it just a yield give up that you are giving on the lower rate variable loans or is there -- or are you at risk if rates stay perpetually low? Thanks.

[William Cooper:]

Well you really said it to there isn't much down side of rates going lower because there isn't much lower for them to go. So normally when your asset sensitive your big risk is rates fall and you have the impact it is one of the reasons why we are asset sensitive the likelihood that rates are going to rise is substantially higher than rates are going to fall. Rates almost can't fall from where they are at. But the real risk is for a very substantial period of time they stay lower where they are. Now what the impact of that is is that you have a longer term of just negative carry of your financing basically a variable rate asset which tends to have a lower yield on the yield curb with a fixed rate longer term liability which tends to have a higher rate on a long term. That's the impact. So being asset sensitive permanently in a low rate environment without rates rising has a negative impact. It isn't necessarily a growing negative as long as that asset sensitivity does not grow but it is a negative impact. And it's like a lot of things it's an insurance policy against rising rates and one of the things I will say about this is when rates rise you think you are always less asset sensitive than you think you are because things change when rates rise. People change their behaviors in unanticipated ways. The best way to look at that thing is it's a several basis point cost in our net interest margin buying insurance against the negative impact of the change in rates. Let me say this, overall in the poll after rates change TCF makes more money in a higher rate environment because we have so much zero interest checking that contributes so much more than net interest margin in a generally higher rate environment than a generally lower rate environment.

[Ken Zerbe:]

All right, great, that is helpful thank you.

[Operator:]

Our next question comes from the line of Tony Davis of Stifel Nicolaus

[Tony Davis:]

Hi, good morning Bill, Neil, everyone. Just a few things on modified loans here, looking at this quarter and December, the dollar amount of stuff that's coming up for renewal. Do you have any color on that?

[Neil Brown:]

This is Neil again. I'll handle largely or entirely from a consumer lending side of the house.

[Tony Davis:]

Right.

[Neil Brown:]

We have had, as you mentioned, quite a few loans mature in the last six or seven months and what we have really seen there is some of the customers are able to return back to their original payment and they come out of the TDR bucket but a bigger majority of those customers we put them into a stepped up payment program where we increased the payment from what it was during the initial modification but it's not back to the original payment.

[Tony Davis:]

Neil, can you give us a little more detail on that. The re-default rate and what is going back to original and what is going back to modified?

[Neil Brown:]

I cannot give you specifics because it does not happen the instant that the loan matures because it takes a month or two to work out a deal with the customer.

[Tony Davis:]

Okay.

[Neil Brown:]

But the sixty day past due number is 6.85% and the annualized charge operate is 6.04%.

[Tony Davis:]

Okay.

[Neil Brown:]

For the most part these loans are working out well and our customers are able to retain their houses but we are going to expand our modification program to put in some more medium-term and long-term solutions for customers who just are not going to return to where they once were. And so as we re-modify or extend some of these customers we may put them into a longer term product going forward if it is appropriate for the circumstance.

[Tony Davis:]

How far are you thinking about going out?

[Neil Brown:]

Well it is either a five year deal or in some cases a permanent modification.

[Tony Davis:]

Got you, ok, and that will be taking effect when?

[Neil Brown:]

We have done some permanent modifications relatively small so far and we are going to introduce the five year product in August.

[Tony Davis:]

Okay.

[Neil Brown:]

We've built that product into our assumptions as it relates to setting reserves as of June 30th so we have it already built into our reserving.

[Tony Davis:]

Okay, good and just an update on commercial or modified loans, the balances there perhaps?

[Neil Brown:]

I am sorry I did not get the last balances. What was your question, one more time where you broke up just at the end Tony?

[Tony Davis:]

Where do you stand, I guess, in commercial real estate modifications and what's the dollar amount of that?

[Neil Brown:]

It is $27 million dollars right now is in commercial accruing troubled debt restructures. As you know the accounting profession has come out with some expanded rules on what is and or more definitive rules, I guess I should say what is and what is not, but that is where we stand right now. It is going to be like most of these things there will be some of them that will rollout of TDRs. Some that will roll in but we don’t expect any …

[Unknown Corporate Executive:]

No major change.

[Unidentified Analyst:]

… huge increase.

[Tony Davis:]

Right.

[William Cooper:]

No story there.

[Tony Davis:]

Okay, thank you very much.

[Operator:]

Your next question comes from the line of Chris McGratty of KBW.

[Chris McGratty:]

Good morning guys.

[Unknown Corporate Executive:]

Hi.

[Chris McGratty:]

You’re investing in the Specialty Finance businesses. Maybe you can talk about, aside from that, investing possibly entertaining acquisitions.

[William Cooper:]

Possibility of acquisitions?

[Chris McGratty:]

Yeah, bank acquisitions, yup.

[William Cooper:]

Oh, bank acquisitions. You know, we're constantly looking at that. Right now the way the world is constructed is just about everybody would like to do a bank acquisition and just about nobody wants to sell. That's kind of the way the world is setup. However, we are becoming, we're becoming more organized in that in connection with how we look at that. And our appetite to some degree has changed in connection with what is a desirable bank acquisition in connection with the way the regulations have changed and the way markets have changed. I can say, not dropping any shoes, and say I don't want you to suspect we got anything on the doorstep, because we don’t but we do have a more positive outlook on that. One of the things that has occurred in this regulatory environment is I've never believed that there were economies of scale in banking. TCF has always out-earned the bigger banks. With the overlay of regulation today that is a largely fixed cost and growing your balance sheet under that fixed cost assuming you stay less than $50 billion, which gets you another layer of fixed costs. But growing your asset base within that and leveraging off that fixed cost has a leveraging advantage that wasn't there in the past. So, I would say if anything our appetite's is a little big for that but there's nothing on the doorstep.

[Chris McGratty:]

Okay and just one quick follow up. You know in the past you've been a little bit cautious on, I think, the Chicago market in terms of credit. Maybe you could just offer color of kind of the trends there and compare them to your core Minneapolis market.

[William Cooper:]

Well, Chicago is probably right now our weakest market, even weaker than Michigan and a lot of that is the foreclosure situation there. That drain is plugged up and has been for two years. In both of the commercial and the consumer, and it has slowed down the cleanup of the thing which has left it messy. They think they’re doing a good thing but they’re not. However, it is apparently slowly cleaning out but it still sits there as the worst market. Housing prices – it takes us longer to get a house through the system, and to get it sold takes us longer there than anywhere else.

[Unknown Corporate Executive:]

Even with all those (inaudible) senior credit indicators improved slightly.

[Chris McGratty:]

Any area of that specific market that you would invest in in the future?

[William Cooper:]

Is that -- is Chicago a market we would?

[Chris McGratty:]

Any further, yeah?

[William Cooper:]

Yes, we would. It’s still a huge – it’s the largest Midwest market. And this too will end. And it’s a huge market and there’s a lot of opportunity. There are a lot of little banks in Chicago and there is going to be a continuing consolidation in that market. And it isn’t a market by any means that we foreclose. You could say the same thing about Michigan, by the way. There’s still a lot of very good markets in Michigan so I wouldn’t foreclose any of those places.

[Chris McGratty:]

All right, thank you very much.

[William Cooper:]

Yes.

[Operator:]

You’re next question comes from the line of Peyton Green of Sterne Agee.

[Peyton Green:]

Ah yes. Good morning. Several questions, but first in terms of the residential real estate – the modified residential real estate loans – what was the reserve at the end of June?

[Neil Brown:]

This is Neal, again. The reserve was $44.5 million, just 13% of out standings.

[Peyton Green:]

Okay, and then I guess from what you said earlier would you expect the modified residential real estate loan balance to continue to increase over the next several quarters?

[William Cooper:]

Well there is the -- as you said, this quarter the increase was only $1.6 million on the accruing TDRs in consumer that will have some adjustment next quarter relating to the accounting change. It’s not going to be significant. And then over time we’re going to continue to see loans coming out of this portfolio as they improve. Although as we extend some of these modifications longer they’ll stay in this portfolio for longer periods of time but meanwhile they’re still earning us 3.5% interest.

[Unknown Corporate Executive:]

The answer is that if there is growth it will be pretty modest, if there is any, and there’s a good chance that it will shrink.

[Peyton Green:]

Okay, and then the OREO expense number remains pretty high. When would you expect that to start to trail off or do you expect kind of still the loss given default of about 30% to remain in place.

[William Cooper:]

I’m not sure.

[Neil Brown:]

This is Neil again. A big chunk of the expense down there is the cost of carrying these properties and as the number of properties we’re carrying comes down that’s when the expenses come down and we’re seeing that come down already this year, also, losses show up in the charge off-line.

[Peyton Green:]

Okay and then in terms of the variable rate HELOCs what kind of credit risk do you think exists once rates go up 300 basis points? I mean I know that didn’t seem like a likely outcome in the next 12 months but longer term?

[Neil Brown:]

That is the stress test we put on our underwriting.

[Peyton Green:]

Okay.

[William Cooper:]

We underwrite them that way.

[Peyton Green:]

Okay, good, and then, I guess if there’s one spot on the balance sheet that’s probably impairing your margin more than any it’s the $4.4 billion in long-term borrowings that I guess backing out the trust preferred cost about $405. Any thought to going ahead and maybe taking the hit and resetting that?

[William Cooper:]

Well, you know we think about that stuff all the time and we did a similar thing to that years ago. Maybe 15 years ago. One of the things about that hit is it gets smaller as rates rise and as time goes on and so -- also the desirability of doing it gets smaller but we do, evaluate that. I’ll say this it’s not on the platter, at this point. But, I forgot to mention that actually in connection with the margin, as those higher cost fixed rate borrowings start to come off in the next several years that will improve the net interest margin as well depending on what the interest rate levels are when they come off

[Payton Green:]

Okay. Any idea what the weight of the average life of those borrowers was at June 30?

[William Cooper:]

I think most of them come off in 2013, 14, and 15.

[Payton Green:]

Okay, 13-15 okay, great. Okay, thank you very much for the color.

[Operator:]

Our next question comes from the line of Emlen Harmon of Jeffries.

[Emlen Harmon:]

Good morning could you talk a little bit about the charge offs that have been taken against the TDRs as part of modifications to date? Obviously you mentioned putting a reserve up against those for permanent modification but, I’m just curious as to what charge offs you’ve taken as a part of mods to this point?

[Neil Brown:]

This is Neil, our annual charge off rate on the mods, was just lowered to 6%.

[Emlen Harmon:]

Okay, but what portion of that is related to re-defaults as opposed to just charge-offs that you’re taking upfront when you’re re-structuring their loans?

[Neil Brown:]

They’re all related to re- defaults.

[Emlen Harmon:]

Okay and then just one other housekeeping I guess. Do you mention the 50 to $50 million dollar cost from Durbin, is that based on our current levels or is that based on what you’re forecast for fees will be next year without the amendment?

[Neil Brown:]

That’s off of current levels.

[Emlen Harmon:]

Okay great thanks a lot guys.

[Operator:]

As a reminder if you would like to ask a question, please press star and the number 1 on your telephone keypad. Your next question comes from the line of Erica Panella of Merrill Lynch.

[Erica Panella:]

Good morning. I just had a few follow up questions. I know you all already answered a lot of questions about this product but, I was wondering if you could share with us some of the conclusions you’ve observed on the Michigan pilot program in any given month. The frequent users of the negative balance product, about how many days would they be in a negative balance position?

[Neil Brown:]

We don’t want to tell the world what we paid to learn about this product. You follow me? We’re not going to give those kinds of details away. What I will tell you is, that one of the things we learned, and it makes sense, if people pay a little more to leave it outstanding a little longer, they pay it off a little faster. And that’s one of the things we learned about it. One of the things about this product, as a matter of fact in terms of this product of this aspect, we’re significantly improved the communication to customers. A person that goes negative now typically gets an email or a text or both, along with the regular mail. So, people get informed better. Now on the other hand, what happens to some people is because people – there’s a certainty about what the cost is and the pricing is, some people leave it out a little longer because they’re not worried about per item fees, this rash of per item fees that could occur over a longer period of time, as additional small items cleared. And so, what people like the most about it is the certainty of how it works, what the penalty is, how the penalty is assessed and how they mitigate the penalties. So, that is the important thing that we’ve learned and people like that. What people want is certainty about what goes on in their financial affairs. And what they really didn’t like was this concept of gee, they get 5, $5 dollar items over 3 days and end up paying a huge fee, even though the dollar amount of negative wasn’t that high. And so they didn’t like the randomness associated with it. And frankly, the penalty of the train wreck when that happens. So, that’s what we learned mostly about it. The customers like the certainty of it and to some degree so do we, because we know pretty much how it’s going to work and it isn’t subject to a lot of randomness as well.

[Erica Panella:]

Okay, and just a follow up to Emlen's question, just to be clear – so, when a loan is modified, there isn’t necessarily a charge off upfront in terms of reclassifying from performing to modified, but then there’s about a 13% reserve that allocated to that loan?

[William Cooper:]

That is correct.

[Erica Panella:]

Okay. All right, thank you.

[Operator:]

There are no further questions. I will know turn the call back over to Mr. William Cooper for any closing remarks.

[William Cooper:]

Thank you very much. You all have a good day.

[Operator:]

This concludes the city conference call. You may now disconnect.