TCF Financial Corporation
Q1 2012 Earnings Call Transcript

Published: 20 Apr 2012

[Operator:]

Good morning, and welcome to TCF’s 2012 First Quarter earnings conference 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.

[Jason Korstange:]

Good morning. Mr. William Cooper, Chairman and CEO, will host this conference. Joining Mr. Cooper will be Mr. Barry Winslow, Vice Chairman of Corporate Development, Mr. Neil Brown, Chief Risk Officer, Mr. Tom Jasper, Vice Chairman of Funding Operations and Finance, Mr. Craig Dahl, Vice Chairman of Lending, Mr. Mike Jones, Chief Financial Officer, and Mr. Earl Stratton, Chief Operations Officer. 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 2012 first-quarter earnings release for more information about risk and uncertainties, which may affect us. The information we will provide today is accurate as of March 31, 2012, and we undertake no duty to update the information. I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

[William Cooper:]

Thank you, Jason. Today TCF announced its first quarter earnings, which largely reflect the first-quarter results of our successful balance sheet restructuring, which we had previously announced. And just to remind you what we did there, TCF repositioned its balance sheet through the prepayment of some $3.6 billion of long-term high-cost borrowings, along with the sale of some $1.9 billion of long-term, relative low-rate MBSs, using the net proceeds to pay down borrowings. We replaced those borrowings, $2.1 billion of those borrowings, at various maturities, with a cost of less than a half percent. The net impact of all of those transactions was a $295 million hit to capital. This repositioning improves TCF’s net interest margin in future periods, somewhat in this period, it reduces our mark-to-market risk on our mortgage-backed portfolio, which I consider to be a significant risk. Mortgage-backed securities are worth less when rates rise. It provides additional flexibility in managing our funding, as is demonstrated by the recently announced $800 million deposit acquisition that we’re doing that we can use as a source of funding, that was difficult to do in the old structure. On an operating basis, TCF remained profitable. Another highlight in the quarter was the significant growth in loans, with loans growing over $1 billion in the quarter, and I think that’s a record growth, to $15.2 billion. This loan growth, along with the restructuring I mentioned, will significantly improve net interest margins in future periods. We expect the net interest margin rate to exceed 4.6% in future periods. That would put us up in the very top tier in terms of our net interest margin rate, and in my opinion better reflects the strong balance sheet, net interest margin capacity, of our loan and deposit function. Credit metrics continue to improve slowly. Charge-offs were $38.9 million, versus $57.9 million in the fourth quarter, that’s 1.06% versus 1.63%. That -- charge-offs tend to be lumpy because sometimes you’re charging something off that you had previously reserved. But we did see improvement in that area. Classified loans and delinquencies improved during the quarter modestly. Non-performings were up slightly. The provision for loan losses decreased to $48.5 million, from $59.2 million, despite the need for additional guideline reserves on that billion dollar loan growth that I mentioned. And reserves were up approximately $10 million from the prior quarter, which largely reflects that growth in loans and the guideline reserves associated with it. Most of TCF’s loan growth occurred in its specialty finance areas, with inventory finance growing to over $1.6 billion, up from $624 million, and that’s that BRP transaction that we had previously disclosed, most of that in any case, which we have had a very successful implementation of. The auto finance grew to $139 million, even after the sale of some $72 million of loans, at a gain of $2.3 million. We expect continuing strong growth in the auto finance area in subsequent quarters for TCF. Reflecting the partial month benefits of our restructuring and the loan growth, TCF’s margin grew to $180 million, up from $173 million, 4.14% up from 3.9% in the fourth quarter. And as I mentioned, we expect to see improvements in this area in subsequent quarters. The restructuring only occurred in the middle of March, and most of the loan growth occurred later in the quarter as well. Retail fee income remains a challenge. However, some changes we made in March appear to be having a positive effect and we are optimistic that we’ll see improvement in this area in subsequent quarters as well. Our new auto-finance group will continue to provide a source of fee revenue, along with the continued strong equipment and leasing divisions’ fee growth as well as margins. Deposit growth remains strong, with deposits at $12.3 billion, all core, up from $12.1 billion, at a lower cost of 30 basis points versus 32 basis points in the fourth quarter. Operating expense growth reflects the cost of our new auto finance group, where we’ve added some 250 people, and the growth and the overhead associated with our inventory finance group in connection with that BRP transaction. Overall, the story of TCF’s first quarter is the successful repositioning of our balance sheet, strong loan growth, good deposit growth, improving margins, and slowly improving credit metrics, which we expect to, in the last half of this year, have improved results. With that, I’ll open it up to questions.

[Operator:]

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

[John Arfstrom:]

Thanks. Good morning, guys. Probably a question for Tom Jasper. I just wanted get a little more detail on the banking fees and service charges. Talk to us a little bit about what’s changed in terms of the product offering, and in terms of how the numbers flow? Will we see the typical second-quarter bounce back in fees? Or is there something that’s different about the product that you’re offering now?

[Tom Jasper:]

This is Tom Jasper. John, a couple of things. So the biggest change that we made was when we rolled out the daily negative product, we made a change in the first-quarter to allow our customers to have a choice on what type of overdraft service they would like on their account with the Choice Checking Account. So we moved the account base back to the traditional per-item that our customers were accustomed to, and allowed them to opt into the daily-negative product, if they wanted that product instead. That’s the biggest change in the product offering from last-quarter, and we’ve seen a positive impact as it relates to that change, although we’re less than 30 days into that, making that change late in the first quarter. And as Bill mentioned, we’re optimistic on what that will mean towards banking fee revenue going forward. But, we believe it’s been well received by our customer base. Your other question, as it relates to seasonality on the fees, you’re correct in that, there is generally seasonality when we get into the second-quarter around fees. And I wouldn’t expect that any changes that we’ve made around the product offering would have any impact as it relates to that traditional seasonality.

[John Arfstrom:]

That’s helpful. And then, what did you end up doing in sort order. I know that’s been a question the last couple of calls, but maybe you can clarify what’s happening there.

[Tom Jasper:]

The change, when we give the customer the choice of the per-item versus the daily-negative the sort order, is really irrelevant underneath the daily-negative product. So, on the per-item product, our sort order now, we changed from the high-low methodology to a methodology that more closely reflects the order in which the items were presented by the customer. So that change went into effect late in the first-quarter.

[John Arfstrom:]

Okay. Maybe question for Jones. Do you feel like the expense base right now reflects all of the acquisitions, or might we see a little bit more pressure in the coming quarter?

[Michael Jones:]

Yes, I think – John, this is Mike Jones. I think it reflects at least a full run rate. As you know, we closed the transaction at the end of November for the Auto Finance Business, and in the fourth-quarter we ramped up the expenses related to Inventory Finance. I would say on the Inventory Finance, that’s a good run rate on a go-forward basis. But, as you know, with the growing business, and we’re planning on growing Auto Finance, we need to add expenses to expand that business as we go into 2012 and 2013. So, I’d say it’s kind of a two- parter. We do have a four-quarter run rate in there. But as we grow that businesses those expenses will increase proportionally with that growth.

[John Arfstrom:]

But the big step up is in the numbers, is what you’re saying?

[Michael Jones:]

That’s correct.

[John Arfstrom:]

Thank you.

[Michael Jones:]

We put – we added some 250 people with the Gateway acquisition alone, and then that Inventory Finance Business, you have to have a staff to monitor the retailers and so forth. So, you know, and to a greater-to-lesser degree, what happens, and this happened in the first-quarter, and we told people it was going to happen. The operating expenses tend to come faster than the revenues and the provisions, which you could look at in some ways as being a one-time event. The guideline reserve for increase in loans occurs before revenues as well. So, those things tend to get frontloaded and the revenues appear subsequently.

[John Arfstrom:]

Okay, thanks for the help.

[Operator:]

Your next question comes from the lane of Emlen Harmon - Jefferies & Company

[Emlen Harmon:]

Good morning. Tom, maybe just a couple more questions on the fee front and what you’re seeing so far in the overdraft product. I mean, with the customer choice product, have you started to get a sense for the number of customers who are sticking with the per-item fee versus those who are opting back in. Back into the daily-balance fee?

[Tom Jasper:]

It’s really early to be making any predictions around that. You know, there was some acceptance around that product by customer base. And you have to remember that, you know, not every customer is going to have an opportunity to even think about that product, you know, on a monthly basis. So, we’re less than 30 days into it, and so we continue to educate our customers around a (inaudible) offering, what it’s about. We’ll probably have more information on that over the coming quarters, but we really think the product gives our customers a good choice based on; what is your income, how did that income come into their account, how often are they paid. All of these other types of things that they need to consider in terms of managing their finances, what kind of service do they want from the bank, in that regard.

[Emlen Harmon:]

I guess the next question I have for you. On the auto loan growth obviously saw a nice wrap-up in the first-quarter. Can you maybe give us a little bit of collar on terms of what you expect for growth-rates on that? What portfolio going forward?

[Tom Jasper:]

Craig, do you want to address that one?

[Craig R. Dahl:]

We’re really not disclosing expected growth rates, but I would say that the level of originations are expected to increase in each quarter through the rest of the year.

[Emlen Harmon:]

Okay, thanks I appreciate it.

[Craig R. Dahl:]

And we originated approximately $200,000,000 in the first-quarter.

[Operator:]

Our next question comes from the lane of Ericka Penala – Bank of America/Merrill Lynch

[Ericka Penala:]

Good morning. I hate to ask about fees again, but I just wanted to make sure I understood sort of the chronology of what’s been happening. So, obviously there’s some seasonality that’s based into that $42,000,000 number. But that also reflective of A) was that reflective of the impact of the daily-negative product? And is it because that product generated less revenue for TCB, or is it because that product caused some customers to switch banks?

[William A. Cooper:]

Both.

[Emlen Harmon:]

Okay. And you mentioned that there’s going to be the typical pickup in terms of seasonality, but you mentioned you just changed the short order at the end of the quarter. Is that going to prevent that $42,000,000 from increasing significantly next quarter? Or where are your thoughts in terms of what the revenue give-up is from going to, you know, across the time the transaction is done from high to low?

[William Cooper:]

It’s really hard to put a number on that. The short order was not a factor in connection with daily overdraft. That short order is no longer. It’s now frowned on in the regulatory world. There’s been a lot of lawsuits about it and so forth. We’re not subject to those. It’s kind of a mixed bag of apples and oranges. It would be difficult to give you one number that would really describe that. The best I can give you is that the second-quarter will give you a better run rate. We’ll have a full quarter of pretty much the way the world is working in that connection, and you’ll be able to get a better feel for it. And we’ll have a better feel for it at that point. The one thing I can tell you is the short period results that we’ve had so far in this quarter are encouraging in that connection. But it’s really a 30/60 day poll that you really need to see in terms of the way those things operate, and we’re not there yet.

[Emlen Harmon:]

Got it. And this is my last question. I noticed that there was a tic-up in home equity in (inaudible) this quarter. Did this have to do with the new guidance with regard to classify and performing seconds that are behind a troubled first as non-performers?

[William Cooper:]

Mike, do you want to address that?

[Michael Jones:]

No, that didn’t have a significant impact on us. We actually made some policy changes in the fourth-quarter that addressed many of the items in the regulatory bulletin that was released in February 2012 around this issue. And then after review of that bulletin, we believe there’s no significant impact to the corporation.

[Emlen Harmon:]

Got it, thank you.

[Operator:]

Your next question comes from the lane of Chris Gamaitoni – KBW

[Chris Gamaitoni:]

Good morning guys. A question on the Trucks Redemption. Now that your balance of your structure is done, how are guys thinking about potentially the Capital Treatment Event later this year or next year?

[William A. Cooper:]

Well, you know those (inaudible) are callable in August of 2013 in any case, the event has not occurred yet that would allow us to collar them. And we’ll simply continue to evaluate what action we’ll take on that as we go forward. We don’t even know for sure how those things are going to be treated from a capital point of view. There’s perhaps some music that they’re going to get treated as (inaudible) as capital for a longer period of time, or whatever. But the answer is, they were there for a while, we couldn’t collar them if we wanted to. And we’ll just play it by ear and make a decision, how we handle that going forward.

[Chris Gamaitoni:]

On the (inaudible) growth, Bill maybe you can offer a little bit of help on the growth expected in leasing equipment finance kind of going forward. I know you commented on the Gateway, but what about the leasing?

[William Cooper:]

Craig, you want to deal with that one?

[Craig Dahl:]

I think you should see it continue to hold, I guess I’d call it hold-serve on the levels on balance sheet as our originations have now overtaken that accelerated runoff from the acquired portfolio portion. So, we’re looking for steady levels and growth for the remainder of the year.

[Chris Gamaitoni:]

Last question. What’s the tax rate we should be using in going forward?

[William Cooper:]

What’s the tax rate? I don’t know.

[Mike Jones:]

I think, you know the first quarter is indicative of what you would expect for the remainder of the year.

[Operator:]

Your next question comes from the line of Dan Werner of Morningstar Equity

[Dan Werner:]

Good morning, my question’s related mostly to the Gateway acquisition. It looks like your – you’ve added addition dealers this first quarter, can you kind of give me a sense of what your plan are in terms of adding more dealers and as you add them are you evaluating them based on how much volume you’re getting from or what kind of process do you go with that?

[Craig R. Dahl:]

This is Craig Dahl, we’ve had an increase of about 1200 dealers since the acquisition closed in November. Those are primarily due to the expansion of the sales teams as we’ve moved into more markets. As it relates to the dealer evaluation, our model is to create lots of dealers and do small amounts of transactions with lots of dealers for the regional and in transactional diversification. So we’re not looking at the dealers to try to look up a market share for them, we’re looking for dealers that can source on a continual basis, two to three transactions per month to our sales teams.

[William A. Cooper:]

And I’ll just add to it, the Gateway is a new business for us and we are attempting to be very prudent in connection with how – I mean we’re on that thing, like white on rice in with connection with review of what we’re doing and how we’re doing it there to make sure we don’t get ahead of ourselves. Furthermore and it just kind of goes without saying you can grow that thing fast and lose money for a year or two years while you pour on the overhead etcetera or you can have a more moderate growth and move it into profitability faster, which is a consideration as well. So you’re going to continue to see good strong growth there but we’re going to be careful not to trip on ourselves and do something that would make a mistake in that area either.

[Dan Werner:]

Okay and then lastly, also related to Gateway in terms of the compensation expense from fourth quarter to first quarter, obviously it increased partially to Gateway. Could you kind of break out how much of that 13 million due to Gateway?

[William A. Cooper:]

One of the things I’ll mention to you is there’s a seven million dollar credit, I believe, isn’t there?

[Michael S. Jones:]

It’s a four million dollar credit that we took in the fourth quarter related to the pension. There’s a reset, as everybody in this room knows and on the call knows, of payroll taxes. So that’s seasonality for the first quarter impacted around four million and then auto-finance impacted the quarter over quarter increase about an additional four million.

[Dan Werner:]

Okay, thank you.

[Operator:]

You’re next line of questions come from Chris Gamaitoni of Compass Point.

[Chris Gamaitoni:]

Good morning, thanks for taking my call. It looks like in the quarter the average rate of the auto-finance was about seven five for the yields?

[William A. Cooper:]

That would be right.

[Chris Gamaitoni:]

Can you just give me an idea of the type of quality or the FICO scores you’re originating? That’s about a 650ish, 640ish product typically on a national rate basis.

[Craig R. Dahl:]

That is not were the originations have come up to this point. We’ve had over 50% of our originations have been above 700 FICO scores.

[William A. Cooper:]

One of the things you should remember that this is all used card paper – almost all used card paper. So it would be an apple and orange to compare it national.

[Chris Gamaitoni:]

I think previously you said you’re looking for two to three deals a month from a dealer. Generally what makes a borrower or two choose you instead of larger money center bank?

[Craig R. Dahl:]

This is Craig Dahl. That’s a good question. The issue is the borrower does not choose us, the dealer chooses us. So these are indirectly sourced, so our relationships are with the dealers and we use a sales team that covers up to a 150 dealers per sales person in a market. So they’re handling their relationship and over 50% of our originations come from over the weekend.

[Chris Gamaitoni:]

Okay, thank you.

[Craig R. Dahl:]

The other thing I would add, excuse me this is Craig Dahl again, is the margins a little bit complicated because we are holding assets up until the middle of the third month and then making our sale in the middle of the third month. So the average balance and all those things kind of leads to some funny math in the early stages of that balance sheet growth.

[Chris Gamaitoni:]

Over the poll, the rate on those would probably not be that high, would be fair to say?

[Craig R. Dahl:]

That’s correct.

[Operator:]

Your next question comes from the line of Steven Guy with Stifel Nicolaus.

[Steven Guy:]

Good morning, just curious I guess you had commented on the non interest margin and maybe what the level might look at going forward then. Just curious what the margin might’ve been in the first – at the end of March – for the month of March.

[William A. Cooper:]

We think it would be fair to say that our non-interest margin would exceed 4.6% for subsequent quarters.

[Steven Guy:]

Okay, and maybe a clarification on the consumer real estate TDR’s. The press release noted that 56% those TDR’s were permanent modifications. Is that assuming the five year term for the modifications or the life of the load?

[William A. Cooper:]

They’re generally five year terms

[Steven Guy:]

Next question, the increase in managed loans of Gateway was less than the loans sold and loans repaying. Just curious if some of the loans solding, include servicing or if the servicing is released.

[William A. Cooper:]

No it does not.

[Steven Guy:]

So if you can help me reconcile what the difference is between the two is then, as far as the actual –

[William A. Cooper:]

I’m not sure what numbers that you’re alluding to or pointing to. So I guess what we’ll do is follow up with you after this call on that.

[Steven Guy:]

Okay, and [inaudible] income, will that increase with growth and the business? I’m just curious what percent might be retained, I guess. In previous comments you had indicated that we could expect some gains early on to offset some of the expenses you build out the business and just trying to figure out how we might be able to model that going forward?

[William A. Cooper:]

A number of impacts on that, one of them is to cover the operating expenses as we mentioned. In addition to that there’s a credit decision, we may decide to sell certain credit parameters as opposed to other. Over time I expect we will be able to engage in different – these are whole owned sales, presently. It’s possibly and perhaps likely that we’ll be looking at some kinds of securitizations in this as well. So depending on how all of that works going forward, I can’t give you a real good answer on it because it really depends on what happens in the market place. How well it proceeds and so forth, but you can pretty well be sure of the auto-portfolio will continue to be a fee income generator along with a margin generator in subsequent periods. Craig is that fair to say?

[Craig R. Dahl:]

That’s correct.

[Steven Guy:]

Okay, thank you.

[Mr. Neil Brown:]

Steve this is Neil Brown and I’m the auto loans servicing. The servicing number includes loans owned as well loans serviced for others. So the increase in the servicing includes the sale plus the growth in the balance sheet and the payoffs.

[Steven Guy:]

Okay, got it, okay that makes sense. All right thank you.

[Operator:]

Your next question comes from the line of Paul Miller of FBR Capital Market.

[Paul Miller:]

Thank you very much, on your charge off, I mean on your asset quality stuff, everything has remained relatively stable or flat but your charge offs really took – really did fall. Can you just add – I mean should we expect charge offs to uptake or should it continue to trend down? And what was the main reason of why it fell so much?

[Mark Nyquist:]

This is Mark Nyquist, the charge offs in the quarter were really a little –with the commercial charge offs in particular be a little lumpy so you can have a quarter where a certain transaction or a couple transactions run through so that – as it relates to the quarter that’s part of it. Also if you could – you could look in the leasing business, for example, and you can see that what happened there is the gross charge also came down quite a bit because you can look at the performance and in the book but there was pretty strong recoveries, in fact very strong recoveries and that book. So it – the commercial impact is a little lumpy.

[William A. Cooper:]

If you had to push through the credit metrics in general, we saw moderate improvement, would be the best way to pull it, which is what we’ve seen in the past. The numbers kind of bounce around as Mark mentioned in connection with reserve something up in one quarter and you charge it off in a subsequent quarter and maybe you have a recovery and those numbers bounce around. But in general our specialty finance businesses all continue to have very good credit. The home equity business things are slowly improving as home prices have stabilized, and we’ve seen some encouraging signs there. And our commercial stuff is, as we’ve just said, it’s just lumpy. Something happens, you make a decision, circumstances change, you add a provision, you do a charge off. One of the things I can tell you is that in the commercial side of the business, almost all of our problems are several years old and in general we’re seeing more upgrades than downgrades and again I would describe it as a moderate improvement and we’re hopeful that we’ll see better than moderate improvements in the last half of this year. Is that fair to say?

[Thomas F. Jasper:]

Yes, this is Tom Jasper, I would just – Paul, you know, just point you back to the five quarter chart and I think if you look at that after the last five quarters, that commercial line and where it moves around, you can see that there is historical – some ups and downs are related to that number that described exactly what Bill said.

[Paul Miller:]

And then a follow up question on the HELOC stuff and you said it was not the uptake in the HELOC delinquency was not related to any new guidance or anything like that. But do you know, I mean I don’t think – correct me if I’m wrong but I don’t think you own a lot of the first liens where you own the second and my guess is some of those HELOC’s are first liens anyway. But if you find that the first lien is not performing do you classify or move on the second lien?

[Michael S. Jones:]

Yes we do, this is Mike Jones.

[Paul Miller:]

And how difficult is it to find out what the first lien is, Don or –

[Michael S. Jones:]

I mean, you know the information isn’t perfect around it but there are something that does flow to us that we can rely upon, like a foreclosure notice or something to that nature. The delinquency status and that type of information is a little bit more difficult to get your arms around based on not having perfect clarity and perfect transparency to the information that’s provided to the agency that track that data.

[Paul Miller:]

And then if a loan is modified, are you contacted to at least to modify the second or you might not even know the first is modified.

[William A. Cooper:]

We only modify first.

[Paul Miller:]

You only modify first, what happens if somebody owns a second lien and modifies it and you own – somebody owns the first lien and modifies it and you own the second, does that really come up a lot?

[Operator:]

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

[Steven Alexopoulos:]

Good morning every one, I would like to start on attrition. I mean, just looking at the numbers would seem that you’ve lost a substantial number of customers. I was looking at the service charges down 30%, or around there over the past two quarters. Can you give us a sense as to what actual customer attritions look like?

[Earl D. Stratton:]

This is Earl Stratton . You know, it’s very difficult to track an attrition back to a common factor, or it’s roots, but whenever you make changes in a product you see consolidation, you see some customers choosing to do other things. So, the attrition you are seeing there is a result of price changes that happened in the time period, and the customer behavior, and consolidation of account, but there is no real way to come out and tell you this much is that, and this much is the other. We see accounts lower but transaction volume up.

[Steven Alexopoulos:]

Okay, I mean, do you have the number of how many checking accounts you’ve lost say since the third quarter in total?

[Earl D. Stratton:]

I don’t have that number right off the top of my head, no.

[William A. Cooper:]

It is fair to say, that as a result of pricing changes that are occurring in the industry as a whole, it’s interesting, it’s one of the impacts of the Durban Amendment. A significant number of people have left the banking system, and the – are simply operating on cash to avoid service charges and so forth within the system. And indeed, we’ve had attrition. I’ll say this also, that we’ve been – we were impacted by some of these changes more significantly than other banks, and we have been attempting to deal with that. And some of this has been an experiment, and some of it has worked and some of it hasn’t worked. Higher attrition, indeed, was an impact. It’s something that we’re focused on laser-like because it’s not our history to do that, to have those situations. We’ve always been very successful with this retail side of the banking business. We think we’ve got very significant solutions in connection with what we’ve already announced, and we have some subsequent solutions that we are looking at real hard that will bring forth over the balance of the year to stem that tide and reverse it.

[Steven Alexopoulos:]

Okay, that’s awful.

[Thomas F. Jasper:]

Yes, the only thing I would add to that Bill is – Steve, this is Tom Jasper. You know, when you look at the – in terms of the monthly maintenance fee and the product, you know, to the extent that customers couldn’t meet the minimum criteria around activity, you know, those are lower activity accounts. So, those – that’s where we’ve seen the most activity in terms of attrition, has been in the lower activity accounts, and our primary focus is on opening higher – the high-quality, you know, where we have higher amounts velocity through the accounts, you know, that’s our focus from the sales standpoint. So, really, that has been the primary area, and that is where we are focused on – trying to make sure that for that customer set, on a go-forward basis, how can we manage, or maintain the account to enter into a relationship with customers that where they feel they are getting a product that works for them and works for the bank.

[Steven Alexopoulos:]

Got you. I’m going to shift gears for a second. Looking at loans of a billion dollars, or just over that this quarter, how much balance sheet capacity would you guess you have given your current capital level?

[William A. Cooper:]

Well, we got to grow capital along with loans, and you know, they best way to grow capital is to grow earnings. But, you put your finger right on it, the – you got to grow capital at the level that you are growing loans.

[Steven Alexopoulos:]

Do you think internally, Bill, that you’ve generate enough capital to support this kind of a loan growth?

[William A. Cooper:]

Yes, we are optimistic of that. And if, you know, that is all part of a capital management dividend policy, going forward. I’ll say this, I don’t think we are going to have a billion dollar a quarter growth in loans either. So…

[Steven Alexopoulos:]

All right, maybe the follow up on that, historically you guys were a very high ROE bank, now you have less reliance on fees in the mix, right, asset-based lending is really the primary growth vehicle. Bill, how do you think about this bank long term from an ROE. perspective?

[William A. Cooper:]

If you look at our core earnings, which is commonly referred to as earnings before bad stuff if you will, but if you look at a 460-plus net interest margin, a stabilized earnings level of what we have in retail banking with the changes that have come down the path, TCF still has the potential of being, in my humble opinion, of having a superior return on assets and a superior return on equity. As compared to most banks, by the way, if you look at most banks we care – we have more loans on the balance sheet. We’re a lending, deposit gather institution, as opposed to a borrowing, investment institution. And loans, and in the way the world works, you require more capital in terms of from a regulatory capital perspective. But, the – you can push those numbers yourself into a normalized provision level, an improved net interest margin. I see us getting back to a superior return on assets, a return on equity level in coming years.

[Steven Alexopoulos:]

Okay, thanks for all the color.

[Operator:]

Your next question comes from the line of Andrew Marquardt of Evercore Partners.

[Andrew Marquardt:]

Good morning, guys. Just going back to the margin commentary that – getting back to, I think you said, 460 in future periods. I just want to understand, when you restructure the balance sheet there is talk about this having a positive impact to the tune of 95 basis points or so in terms of improvement on the margin. And I believe that, you know, when you were talking, the basis, you know, was off of 4Q, 392, which puts you to closer to 490-ish – 480, 490-ish type margin pro forma. What happened between that kind of benefit from the amounts you’re repositioning to now kind of thinking about 460, or and I missing something?

[William A. Cooper:]

I don’t think you’re missing anything. Mike, do you have anything?

[Michael S. Jones:]

No, I think, you know, if you look at the 460 number, that’s – Bill, I think that’s something that we can achieve over a long-haul period, you know, over 2012 and going into 2013. I think you’ll see, you know, us pushing north of that number in the second quarter, and third quarter, but I think over a long haul, that’s kind of where we feel the bench mark in what we are trying to beat for the longer period.

[Andrew Marquardt:]

Okay, got it, thank you that’s helpful. And then lastly on credit, you know, the reserve bill this quarter was probably a little greater than what I thought, how should we think about reserve bill going forward for incremental loan growth that you are putting on – you know, with the reserve build, do you still reserve – coverage came down a little bit, how should we think about – is this a good level in terms of the reserve build, that we should think about going forward, or…

[William A. Cooper:]

The – I will let Mike handle that, or Mark, but you know, we apply a guideline reserve to loans when they go on the books, and it’s a different guideline reserve depending on the type of loan that it is, and that is a portion of that increase in the reserve in its totality, and that would continue going forward. But subsequently, provisions get created through charge offs when indeed they occur. The – Mike do you want to add anything?

[Michael S. Jones:]

Yes, I would add to Bill’s comment – this is Mike Jones – is that you have to remember where the growth in the quarter came from, it came from, you know, very high quality from a credit perspective, especially finance businesses and inventory finance and auto finance, and I think if I turn yourself to page 22 of the earnings release, you can see actually our coverage ratios increased on our consumer and commercial portfolio. And it’s basically due to the mix on an overall basis why the allowance for loan losses coverage has a percentage of portfolio decline.

[Andrew Marquardt:]

Okay, great, thank you.

[Operator:]

(Operator Instructions). Your next question comes from the line of Peyton Green of Sterne Agee.

[Peyton Green:]

Good morning. Three questions. One, how would you handicap the odds that deposit fees go down versus up in the second quarter?

[William A. Cooper:]

I’m not in the business of handicap. As we’ve said, as I’ve said, I’m optimistic of what’s going to happen in that in subsequent quarters, but I’m not a prophet.

[Peyton Green:]

Okay. But I mean, that’s better than when you discussed the balance sheet for structuring a short time ago. Is that fair to say?

[William A. Cooper:]

I'm not sure what you mean by that, but…

[Peyton Green:]

I mean, it seems like the guidance previously was we don’t know when they’ll buy them. We know they’re going lower, I guess. Are they just a little bit of a change in tone, I guess?

[Tom Jasper:]

Peyton, this is Tom Jasper. I think that’s fair to say. Basically, at that point, when we did the restructuring, we hadn’t made the changes in the product and so those happened subsequent to the balance sheet repositioning. So the guidance that we got there, I think you’re right on. I think, you know, it’s been 30 days since then. I think you’re hearing something different today.

[Peyton Green:]

Okay. All right. And then the second question is, if I look at the average earning asset base of about 17.5 billion in the first quarter, backing out the securities that are gone and adding back the loans that showed up, you still have about an 825, $840 million decline slated for the second quarter, all else equal. Is that about right?

[William A. Cooper:]

Can you walk through that again? I don’t think we’re following.

[Peyton Green:]

Yes. Okay. I mean, the difference between the period end and loan balance versus the average for the quarter and the difference between the period end securities balance versus the average, basically, the timing of when the loan showed up and when the timing of when the securities were sold implies that there’s about another 800 million in shrinkage net on the balance sheet late quarter, in the second quarter. Is that a fair way to think about it?

[Tom Jasper:]

I think that that’s – I think that that’s directionally correct. We, you know, we sold 1.9 billion of securities available for sale and those only came out about 18 – 18 days in the quarter. So you’ll have those out for the full quarter in the second quarter. So that is directionally correct.

[Peyton Green:]

Okay. And then with the deposits that you assume, has that closed yet? And what will you do with those funds?

[William A. Cooper:]

There’re not closed yet and it simply goes into the funding. On a short-term basis it would pay off short-term borrowings. And eventually going to loan funding.

[Peyton Green:]

Okay. And then – I guess the third question is really a bit more in depth, but thinking about what’s happened over the past couple of years, if we go from ’09 to ’11, or even the first quarter of ’12, I mean, you’ve had a drop in deposit in card revenue of 100 million to 55 million, or a $45 million drop over that timeframe, yet expenses are only down about 22 million over that same timeframe. When is it time to think about resizing the branch and kind of getting the infrastructure in scale with the new environment that seems likely to persist?

[William A. Cooper:]

Well, let me say this about that. You know, that – the Durbin pack doesn’t encourage any particular expense associated with it. Our retail banking network, which may – which is currently less profitable than it was as a result of some of those changes is still very profitable. And we look at the profitability of branches branch by branch. If we have a branch that doesn’t make money, we close it or sell it. The branches that we have as an overwhelming majority are profitable. They may be a little less profitable than they were, but it doesn’t make sense to close them and shuck that profitability in it’s totality. And so, you know, there’s things that we’re doing – we have reduced the operating expenses because we always do that. But this thing doesn’t signal a basic restructuring of our retail network. Tom, do you want to add anything on it?

[Tom Jasper:]

The only – this is Tom Jasper. The only thing I would add to that is, you know, as we analyze the fleet and we look at where we’re going now with the balance sheet reposition, is that certain branches are going to be better funding type branches for us than checking account originated branches. So when you look at the [inaudible] revenue line, you can focus on what are those branches, you know, specifically the in-store branches which are very cost efficient to run for us and can [inaudible] checking accounts. But we – in terms of the traditional branches, certain branches have a better funding base, potential funding base for us. Then when we look at the loan growth activity, to the extent the branches throwing off a lot of fee revenue but are still good savings and CD oriented branches. We’re going to continue to invest in those branches to make sure that we can fund our loan growth going forward from a retail deposit base.

[Peyton Green:]

Okay. And then I guess a little bit of a follow up to that. On an operating basis, what should we expect in terms of deposit account premiums in advertising and promotions going forward?

[William A. Cooper:]

What you can expect is that it will change.

[Peyton Green:]

Okay. I mean, materially or does it stay kind of in status quo for a couple more quarters until you see what’s happening or do you lift those to spur account activity?

[Tom Jasper:]

This is Tom Jasper. We’re looking at all the aspects around account acquisition. You know, one of the things that’s going on is the – in terms of looking at our customer base and what’s going on, most of our focus has been on the nature of the product. We don’t have an issue as it relates to our ability to sell it. So it’s, you know, and our sales force is one of the best sales force in the banking industry around getting out and opening new checking accounts. The issue is – continues to be the product. So we’re going to look at that line and the as Bill said, there’ll be changes going forward as we evaluate the best way to communicate to the market the value proposition of our checking base.

[Peyton Green:]

Okay, great. Thank you very much.

[Operator:]

Your next question comes from the line of Matt O’Connor of Deutsche Bank.

[Matt O’Connor:]

Hi. I’ve got two more questions if you don’t mind. The first, as you’re trying to figure out the underlying new trends ex the balance sheet repositioning, it does seem like there’s a little bit of pressure and I guess I was looking at the inventory finance bucket that would include the BRP Loans. And so those come on at a lower rate when there’s some premiums that you might have paid to bring them on? Is seems like the go-on rate might be around 4 ½ or 5%.

[Craig Dahl:]

This is Craig Dahl. Yes. If you remember, we originated many of those loans directly from the dealers themselves and they are also from the seasonality, many are in the manufacture’s period, which have a lower rate as well. And so that yield is expected to migrate up over the year.

[Matt O’Connor:]

Okay. And I guess separately, the pending deposit deal, if that’s replacing some of the short-term borrowings, I guess that might be a couple or few basis points [inaudible], although it’s obviously better funding. Is that fair?

[William Cooper:]

It’s fair. That’s fair.

[Matt O’Connor:]

Okay. All right, that’s help. Thank you.

[William Cooper:]

I might mention those deposits have a longer term than short-term borrowings as well. I mean, it’s a less flexible and longer-term funding source and short-term borrowing.

[Operator:]

There are no further questions at this time.

[William Cooper:]

Very good. Thank you very much.

[Operator:]

Thank you for participating in today’s conference call. You may now disconnect.