TCF Financial Corporation
Q3 2012 Earnings Call Transcript

Published: 26 Oct 2012

[Operator:]

Good morning and welcome to TCF’s 2012 Third Quarter Earnings Call. My name is Michelle and I’ll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions) At this time, I’d like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference call. Please go ahead sir.

[Jason Korstange:]

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. 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 our remarks today we will be referencing a slide presentation that is available on our Investor Relations section of TCF's website ir.tcfbank.com. During this presentation, we may make projections and other forward-looking statements regarding future events or 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 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of September 30, 2012, and we undertake no duty to update the information. On this morning’s call Mr. Cooper will give us the third quarter highlights, Mr. Jones will go over the credit, followed by Mr. Dahl, which will go on lending and Mr. Tom Jasper then deposits and fee regeneration. Following that Mr. Cooper will have a summary and we will follow that with question-and-answer period. I now to the conference call over to the TCF Chairman and CEO, William Cooper.

[William A. Cooper:]

Thank you, Jason. Third quarter highlights, TCF had net income of $9.3 million or $0.06 a share. On a core basis, after some of the transactions, non-recurring transactions that I will discuss in the future, we earned about $0.18 a share. The net interest margin was 4.85% that was up 89 basis points from the third quarter of 2011 and about flat with the second quarter. Pre-tax pre-provision profits were $115.8 million and that's up 10.3% from the third quarter of 2011. Total loans and leases of $15.2 billion increased 6.1% from September 2011, were up 7% for the second quarter. We’ve had some very positive initial results from the rollout of our Free Checking which makes us optimistic that decision was the correct one. Total deposits of $13.7 billion increased 11.4% from third quarter of last year. Gains on sales of securities were $13 million. Gains on sale of consumer real estate were $4.6 million and we had our regular gain on the sale of auto loans of $7.5 million in the quarter. Some of the non-recurring items, we adopted the accounting methodology driven by regulatory bankruptcy clarification that was issued by the OCC and we booked a $31.5 million additional provision in our consumer lending area and we put $103 million of loans on a non-accrual basis. These were loans going back originated medium, originated as long as 10 years ago where the customer filed Chapter 7 bankruptcy and did not reaffirm their debt. However, they continue to make their mortgage payment and live in their house, some 90% – over 90% of these loans are current. We aggressively addressed the commercial credit area in this quarter as well and we took a $15 million increase in the commercial provision and we charged-off some $20 million in the quarter as well aggressively addressing commercial credit issues. Numbers absent with these unusual items of the change in OCC clarification, our consumer's real estate over 60-day delinquencies decreased from the second quarter. The consumer real estate non-accrual – again excluding that change were down 7% from the second quarter and consumer real estate charge-offs were down 10% from the second quarter. So basically our consumer area it continued to improve. Commercial classified assets decreased some $80 million from the second quarter and real estate owned decreased some $5 million from the second quarter. Some revenue highlights. First of all we had a 14-year high in the net interest margin rate of 4.85%, which is again one of the highest in the banking business. And as I mentioned, it was up 89 basis points from the third quarter. So we’ve had a very strong revenue growth. The net interest income is up 14% from a year-ago. The strong revenue growth and strong net interest margin and so forth is due to the restructuring that we did in early part of the year as well as the balance sheet shift into higher yielding loans that’s been occurring over the year. If you look at our peer analysis, these numbers are compared to total assets not earning assets, but we’ve had – we have very strong revenue as a percentage of assets, it’s 6.7%. Our peer’s banks between $10 billion and $50 billion in the second quarter were 4.39%. So we are 2.31% on assets higher in connection with revenue and our pre-provision profit is 2.59% as compared to 1.54%. So we’re 1% higher return on assets in terms of our pre-provision profits and what that demonstrates is the strong core profitability of the bank. Again you look down, you can see some of the reasons for that are much stronger net interest margin at 4.85% versus 3.58% and the fact that we’ve a higher percentage of our assets in loans than our peers at 85% as compared to 65%. And basically our margin in pre-provision profits are stronger because we have more loans and less lower yielding securities and we have a higher level of fee income because of the nature of the businesses both on the deposit and the asset side of the bank. So with that, I will turn it over to Mike Jones for a little discussion on credit.

[Michael Scott Jones:]

Thanks, Bill. I’m on Slide 7 of the deck if you’re following along. As many of you’re aware in the third quarter the OCC came out with clarification guidance on how to account for consumer loans subject to a bankruptcy discharge. Under this guidance these loans once discharged are deemed to be collateral dependent written down to their fair value and placed on non-accrual, regardless of their delinquency status. So, for TCF as of September 30th, loans totaling about $157 million were impacted resulting in a $31.5 million pre-tax charge or $0.13 after-tax on a diluted basis. The vast – as Bill mentioned, the vast majority of these loans were current and have been current for some time. 82% of these loans that were impacted were first mortgages and 18% were second. Based on this current performance of these loans, we would expect to recover these charges over the future periods. As Bill mentioned, excluding this guidance adoption consumer non-accruals were down 7% and charge-offs were down 10% on a linked-quarter basis. So some positive movement there on the consumer side excluding this guidance adoption change. In addition, in the quarter, we aggressively addressed commercial credit issues where we believe we’re better positioned as an organization to work the commercial non-performers out of the bank, so significant progress from that perspective as well. We continue to have solid credit performance across all of the national lending businesses with charge-offs in these businesses at very low levels. So, with that I will turn it over Craig to talk about the lending businesses.

[Craig R. Dahl:]

Thank you, Mike. We are on Slide 8, which is the lending and this slide highlights the portfolio growth as you can see, it’s 8% on a year-to-date basis. We’ve been continuing to grow the national lending businesses and repositioning the consumer and commercial books and both of those books have excellent credit metrics from 2010 forward. In addition, our concentration mix continues to improve with consumer real estate another – down from 49% to 44% on a concentration basis. We accomplished the 8% growth while selling just under $600 million of the portfolio for gains during the quarter. Turning to Slide 9 on originations, this is nine months on a year-to-date basis compared to last year’s nine months on a year-to-date basis. Before I address the slide, I want to point out that the velocity of fundings and pay-offs in our inventory finance business makes that number a little different context to the rest of them, however, the box highlights the change in volume from year-to-year. With that said, you can see that all of the lending businesses are ahead of last year. And I would like to point out as well the commercial banking originations we’re enjoying significant improvement. Turning to Slide 10 on the yield basis, we’re still maintaining a very good yield on the entire book, keeping in mind that the auto finance originations are all in this current interest rate period. The quarter-to-quarter change was only a slight reduction from 5.52 to 5.50 based on the mix as seen on Page 27 of the earnings release. So as you can see all the lending segments are contributing to this yield performance. And with that, I will turn it over to Tom Jasper.

[Thomas F. Jasper:]

Thanks, Craig. If you turn to Page 11, I want to cover up a little bit on what’s going on in deposits and fees. If you look at the top of the slide, it shows a trailing five quarter view of net fee income and net fee income is defined as our fee and service charges, the card revenue and ATM revenue, led us our cost related to marketing and premium expense. Net fee income was down $2.8 million from the second quarter and that was driven by the loss of the monthly maintenance fee when we move back to Free Checking. This net shortfall we expect will be filled over the coming periods by a growth in quality checking accounts and new product initiatives. The launch of our Free Checking product has been in line with our original expectations and we’ve a significant effect, an increase in production from the second quarter. Attrition rates in our Checking portfolio have declined in consecutive quarters and that has been driven by the changes that we’ve made in the product over the last year including the change from the daily negative charge to the per item charge as well as the switchback to Free Checking. The attrition changes have been in line with our original estimates with our move back to Free Checking. And the impact of all of this, increase in production and a decrease in attrition has caused a net growth in our checking base from second quarter to the third quarter. I want to say that the growth in the checking account is a key component to our overall strategy in order for us to grow revenue within our business we have to grow this net base of accounts. Moving onto deposits, you can see that deposits grew 4% from the second quarter to the third quarter. That’s eighth consecutive quarters where we have grown positive. We’re looking for stable, predictable growth in deposits to keep up with what’s going on in our lending business. You should expect that additional growth in deposits is going to come at slightly higher cost of total deposits and we’re going to grow that book. If we move to Page 12, I want to cover off real quickly the change in our marketing approach. You can see on Slide 12 the difference over a five quarter view in our marketing expenses versus premiums. Going back to the third quarter of last year where we almost had – where we had $7 million in premium expense compared to just $0.5 million in the third quarter of 2012. Overall, our investment in marketing is going to be based around trying to drive our brand and target quality relationships not just volumes of sales. I would expect that over time, we’re going to focus on the frequency and the clarity of our communications to promote cross-selling and retention of accounts and in addition we’re going to continue to make investments in product development and channel enhancements as these are key components to our strategy as well. We have to be keeping up with everything that’s going on in the market in order to compete for accounts. If you turn to Page 13, there is a high level summary of our capital ratios from the end of third quarter compared to second quarter. We’re going to continue to build capital through retained earnings in future quarters, and of note, during the quarter, the comment period for the Basel III proposed Basel III Rulemaking was – has recently closed. Those comments are in and that does not scheduled to start phasing in until 2014, but we would expect based on the comment periods and comments that were inserted into that process, there will be some changes in that proposed Rulemaking and we will communicate on that at a later date. With that, I will turn it back.

[William A. Cooper:]

The Page 14 kind of gives a summary that I mentioned earlier of our core diluted earnings per share of $0.18 and the unusual items that occurred during the year. The commercial credit aggressive workout, the gains on securities, the gain on the sale of the consumer real estate and the implementation of the new bankruptcy related regulatory guidance. And so basically our core earnings before some of those non-recurring items was $0.18 a share. If I had to summarize the quarter, as a matter of fact the year –as we had previously said, 2012 was going to be a reinvention restructuring year for TCF and indeed that is what has turned out. Some of our new businesses, the auto business is now contributing significantly to the profitability of TCF and improving our loan growth in our margins and so forth, the inventory finance growth is contributing in the same manner. Our revision in our deposit side of the bank in connection with the return to Free Checking is showing the dividends that we expected to see and we will see the benefits of that in coming quarters. And in general, in all areas of the bank, we saw continuing improvement in the provision for loan losses. As I mentioned earlier, TCF’s pre-provision profitability is one of the strongest in the banking business and we’re going to, in my opinion, see improved provisions in the balance of the year and going into next year that will really in my opinion demonstrate the earning power of the bank. With that, I open it up to questions.

[Operator:]

(Operator Instructions) Your first question comes from Jon Arfstrom from RBC Capital Markets. Your line is open.

[Jon Arfstrom:]

Thanks. Good morning, guys.

[William A. Cooper:]

Hi.

[Jon Arfstrom:]

Couple of questions. Follow-up on Mike Jones comments. You talked about eventually recovering the provision charge that you took this quarter. I'm guessing you guys are pretty intimate with these loans. Is there any way to estimate a timeframe where you think you might get some of this $31 million back?

[Michael Scott Jones:]

That’s kind of difficult to say. Clearly we will start getting recoveries in October on second loans that have been charged off 100% and are still receiving some sort of principal payment on kind of closed in seconds. But it will be dependent on kind of how the loans progress over the period of time.

[Jon Arfstrom:]

Okay. And then Mike you also talked about a decrease in the future level of provisioning, and I guess what I’m trying to get at is what is the base? Because I look at last quarter and you had a $54 million provision, you had about $10 million in what I call nonrecurring items in that and this quarter you have the $31 million plus another $15 million in what you call the commercial aggressive actions in the commercial book, which puts you at around $50 million. So when you say future loan-loss provisioning will decline, is the $45 million to $50 million base, the base that we should be using?

[Michael Scott Jones:]

I’d say that range is kind of as you look out in the short-term a good range to be utilizing.

[Jon Arfstrom:]

Okay. And then just one more for Tom, on the Consumer Banking fee line, you guys did not give us the monthly maintenance or the maintenance fees from last quarter. Can you give us that and if you won’t give us that what did the core banking fee number do? Was it up, down, flat?

[Thomas F. Jasper:]

Jon, this is Tom Jasper. When you look at the number and if you back out the change that occurred within marketing and premium, I talked about that $2.8 million difference. Basically if you look at the line item on a standalone basis, the vast majority of the change quarter-to-quarter was built by the reduction of the monthly maintenance fee.

[Jon Arfstrom:]

Okay. So nothing material, but we could assume maybe flattish?

[William A. Cooper:]

Jon, I would like to address that question a little bit more on the provision. We’ve had now three straight quarters of significant improvements in charge-offs on the consumer side of the bank. And the consumer side of the bank is where, it’s really the story, in credit in TCF. The national businesses continue to have record low charge-offs, delinquencies, et cetera. I believe that we have made very significant progress on the commercial side of the bank and we don’t have, in my opinion, I don’t – I can’t recall a classified non-performing loan that was made during or after 2010. And so I’m looking out over to the balance over the next year, I expect to see improvements in that line quarter-by-quarter.

[Jon Arfstrom:]

Okay. Thank you.

[Thomas F. Japer:]

Hey, Jon.

[Jon Arfstrom:]

Yeah.

[Thomas F. Japer:]

It’s Tom Jasper. Just to follow-up on your question, I want to be specific on the numbers here. So, if you look at the fee revenue the fee and service charge number from June, $48.1 million versus $43.8 million in the third quarter.

[Jon Arfstrom:]

Yeah.

[Thomas F. Japer:]

So that change which is about $4.3 million. The vast majority of that change is just the elimination of the monthly maintenance fee from quarter-to-quarter. And I’ll just remind you that over the pull that monthly maintenance fee we had seen declines – predictable declines in that in customers, some customers unwilling to pay that charge over the pull, so while that number, that fee – that monthly maintenance fee number was higher in the past, the predictability of that number – we saw that number going down and that moved our change to free checking. But that in effect is what's driving the change.

[Jon Arfstrom:]

Okay. Thank you.

[Thomas F. Japer:]

Yeah.

[Operator:]

Your next question comes from Erika Penala from Bank of America Merrill Lynch. Your line is open.

[Erika Penala:]

Good morning. My first question is a follow-up on credit. I think we expected the increase in charge-offs in the provision like we’ve seen in other banks. But (indiscernible) over the guidance, I guess the way its laid out if you just oppose to charge-off any loans even if its performing down to collateral values under Chapter 7, and so, I guess I am not understanding why the increase in NPLs quarter-over-quarter, because I suspected that like we’ve seen in other banks, the charge-offs number wouldn’t go up, but the NPL number shouldn’t go up, right because theoretically you would have written it down to collateral value.

[William A. Cooper:]

The guidance is that you write it down to collateral value minus the selling cost and you put the balance on a non-accrual status. That’s the guidance and that’s the increase. And I assume everyone is doing it that way, although I don’t know.

[Erika Penala:]

Okay. And you didn’t give us an update this quarter, but were there any changes in movement within your consumer TDR portfolio that was impacted by implementing this regulatory guidance?

[William A. Cooper:]

Some of the loans that were in our consumer TDR portfolio were Chapter 7 bankruptcy loans and were impacted in the manner that we discussed, yes.

[Erika Penala:]

Okay. And just a quick follow-up question on the margin, clearly the yields on your national lending business are quite strong. Could you give us a sense of what the origination yields are that are coming from that platform?

[William A. Cooper:]

Well the – I would say the origination yields on all of the platforms are down slightly with interest rates, but not as much as other businesses. So I would say that probably in the equipment finance area we’re seeing more yield pressure than we are for instance in the inventory finance or the auto business although we’re seeing some there as well. So it’s – and where the biggest impact is, frankly is in the commercial side of the bank where there is a lot of competition for credit.

[Erika Penala:]

Got it. Was there anything unusual on the consumer real estate side in the yield; I noticed the yield went up 10 basis points? Was that just some noise in terms of some of the TDR reclassification?

[William A. Cooper:]

I think it’s – some of our originations in the second mortgage world in that area have probably contributed somewhat to a mix change that improved the yields somewhat for consumer.

[Erika Penala:]

Okay, got it. Thanks.

[Operator:]

Your next question comes from Stephen Geyen from Stifel Nicolaus. Your line is open.

[Stephen Geyen:]

Hey, good morning. Bill, this is – I think in part you already answered this question, but I just want for a little bit of clarification. I’m curious about the underlying trends in commercial loans, new non-accruals, inflows I think you had said that you had seen no new classified for the most part since 2010. Was that correct?

[William A. Cooper:]

Loans originated since then, yes.

[Stephen Geyen:]

Okay. But overall what are the trends over the last quarter?

[William A. Cooper:]

I think in general – we aggressively addressed in the commercial area in connection with how we address those programs and it accelerated a lot of things in that area. I am optimistic that we’ll see much better performance in that area in the coming year.

[Stephen Geyen:]

Okay. And Tom, you talked about the marketing expense, the $4.3 million in the quarter. Is this kind of a good run rate going forward?

[Thomas F. Japer:]

Yeah, I think it’s closer to the norm. There’ll be some variability in it, but that’s a pretty good number.

[Stephen Geyen:]

Okay. And another question for you there, just curious about the CDs, the CDs are up quarter-to-quarter and again last quarter as well, but how do you look at this going forward to fund growth?

[Thomas F. Japer:]

Our approach, we look at it by market both in terms of products and individual markets, and so we have active campaigns that are going on within for savings balances, CD balances et cetera. We’re also looking at other alternatives as it relates to funding the balance sheet. So, on a go forward basis, if we think we have a better market opportunity with the CD product in the given market and a savings product, that’s what we're going to promote to try to attract the balances, but we’re being very conscious of trying not to lay on any too – too much of any one product especially considering where things are at, looking at when those products could roll-off as it relates to CD. So, we’re being very conscious of that, but it’s going to be a mix of different types of products over the coming year and we’re really looking for stable growth quarter-to-quarter despite the fact that some of the growth in the lending businesses have seasonality in it. We’re not going to be able to match that seasonality perfectly over a 12 month period.

[Stephen Geyen:]

Okay. And the last question; just curious about the potential for inventory finance, the new relationships; are you getting looks at new possibilities out there?

[William A. Cooper:]

Craig you want to handle that?

[Craig R. Dahl:]

Yeah, this is Craig Dahl. Yeah there are opportunities really in all of our segments although there is not anything that I’d say is eminent for a program at this time.

[Stephen Geyen:]

Okay. Thank you.

[Operator:]

Your next question comes from Christopher McGratty from KBW. Your line is open.

[Christopher McGratty:]

Good morning guys. Bill, given the shift in the loan portfolio for past couple of years, how are you thinking about, maybe I’ll ask the provision question a little bit different. How are you thinking about normalized provisioning rates as a percent of loans kind of once credit normalizes?

[William A. Cooper:]

Well, that’s a complicated question. We provide on loan growth in a formula basis, but it’s done differently based on the different categories of loans. So, if you’re asking me what the provision would be going forward, that’s a pretty difficult number to put a finger on, but obviously the thing that’s driving provisions today is charge-offs. When the charge-offs comes down and then you have normal provisions for loan growth then obviously the provision levels are significantly lower, but I can't put a finger on exactly in this conversation on that answer.

[Christopher McGratty:]

Okay. The service charge comments, I guess point blank, do you expect the service charges to grow from here on out as the free checking is fully incorporated in the numbers?

[William A. Cooper:]

Yes.

[Christopher McGratty:]

Okay. And then the last one, I missed it, the consumer TDR number I knew it was 466 in the second quarter maybe within the release, but could you tell me what the consumer TDR number was in the quarter?

[Michael Scott Jones:]

Yeah, I don’t have that right at my finger tips. So, Jason will follow-up with you after the call.

[Christopher McGratty:]

Okay.

[William A. Cooper:]

And again the loans from those bankruptcy issue all go into the TDR category, isn’t that correct?

[Michael Scott Jones:]

Non-accrual TDR.

[William A. Cooper:]

Non-accrual TDR category. I’ll answer an earlier question by the way, somebody asked, is some of this going to come through the P&L in the future? In one way or another it will come back through the P&L in the future, either through charge-offs that we’ve accelerated as a result of these charges or recoveries that will occur when people pay on amounts that we’ve charged-off where there is no charge-off. So, in effect all of this in one period or another will return through the P&L.

[Christopher McGratty:]

Thanks.

[Operator:]

Your next question comes from Steve Scinicariello from UBS. Your line is open.

[Stephen Scinicariello:]

Good morning everyone.

[William A. Cooper:]

Hi.

[Stephen Scinicariello:]

So, given the significant true-up that you guys put through for the guidance here; how much kind of bankruptcy related charge-offs would you expect kind of going forward then?

[William A. Cooper:]

Well it’s again a very difficult number I don’t – Mike do you have it.

[Michael Scott Jones:]

Yeah, I mean if you look at what we could provide you as directionally is what we took within the quarter that related to Chapter 7 bankruptcies was in the $1.5 million range for the quarter. So, that’s what we have currently in the run rate.

[Stephen Scinicariello:]

Okay. Now that’s very helpful. And then so, under the new guidance, since I guess payment status doesn’t seem to matter anymore. Is foreclosure really the only means to remove these loans from non-accrual status or is there some other criteria that you can pursue as well?

[William A. Cooper:]

There is at least some possibility that these loans can return on a cash basis accrual as well, but that guidance is not clear yet. So we’re working on that.

[Stephen Scinicariello:]

Got you.

[Michael Scott. Jones:]

You’re correct. The only way to get it out of that non-accrual status would be foreclosure.

[Stephen Scinicariello:]

Got it. So does this force you to change any kind of behavior to kind of speed up these recoveries then or not?

[William A. Cooper:]

Well I think it does change the way we deal with it, given that it is already been written down to collateral value minus selling cost, there is certainly less incentive to work with the customer in terms of late concessions and so forth given that the loan is already been written down.

[Stephen Scinicariello:]

Right. Now it makes sense. Thanks very much guys.

[Thomas F. Jasper:]

Steve?

[Stephen Scinicariello:]

Yes.

[Thomas F. Jasper:]

This is Tom Jasper. So the other option other than foreclosure is looking at sell – you could sell the loan. So that and in terms to say that the only option is to go through foreclosure. The other option to leave non-accrual would be if we sold the loan.

[William A. Cooper:]

Yeah, but I think it will be a market for them.

[Stephen Scinicariello:]

Yeah that would make sense given what's going on here. Great, thanks very much guys.

[Operator:]

Your next question comes from Emlen Harmon from Jefferies. Your line is open.

[Emlen Harmon:]

Good morning. With the reintroduction of the free checking product, I mean you had a month now to kind of see what the customer inflows are. Could you give us a sense, is that product appealing to a kind of a broader base of customers given that few banks are out there offering free checking these days and just have you started to see kind of a shift in the customer base that, that attracts?

[Thomas F. Japer:]

This is Tom, I won't say that there is really been a shift, but it does appeal to a wide base within the markets that we serve.

[Emlen Harmon:]

Okay, thanks. And then, just a quick one on the mortgage sales in the quarter; could you give us a sense just kind of how you identified the loans that you sold, and I know you kind of called the sales out as a one-timer, but is there potential to do some of that in the future as well?

[Michael Scott. Jones:]

I mean we still – this is Mike Jones, we still have approximately $550 million to $700 million depending on the purchases that we made kind of in October of mortgage security portfolio. Really what we focused on is what we looked at were some of the higher pre-paying pools that because of where the market stands and kind of where rates are, some of these pools were prepaying at a quicker pace. So, that’s really kind of where we focused it in on kind of eliminating some of that pre-payment risk in that portfolio and realizing that gain at a good time for the organization.

[Emlen Harmon:]

So that's the securities portfolio specifically, but I guess you guys also sold the chunk of loans out of the consumer mortgage book as well, right?

[Michael Scott. Jones:]

Yeah, that was a kind of a non-core book that was part of a legacy portfolio that was part of TCF mortgage from several years back. We weren't originating into that book and where that book was just basically running off. So, we believe that it was an opportune time to divest that book now.

[William A. Cooper:]

This is Bill Cooper. There will be, we believe some sales out of our home equity book origination as well that will work to balance where our exposure is, but we expect to have some gains on that sale of that business in next quarter and subsequent quarters as well.

[Emlen Harmon:]

Got it. All right. Thanks guys.

[Operator:]

Your next question comes from Tom Alonso from Macquarie. Your line is open.

[Thomas Alonso:]

Good morning guys. Just kind of circling back onto the securities book, is this sort of a good size to think about that balance on a go forward basis? Did you expect to kind of add to that?

[Michael Scott Jones:]

This is Mike Jones. I think that it's at a good size right now. Clearly we believe it's a good investment for our liquidity position. It may go up and down as our liquidity – asset liquidity needs go up and down based on kind of where our risk profile sits and kind of where our asset and liability position sits.

[William A. Cooper:]

This is Bill Cooper. We worry a little bit about the mark-to-market risk in securities portfolios given the very low rates that you can add to those portfolios at today and the new rules basically – proposed new rules basically push those things with capital and we are concerned that when rates rise assuming they do and I assume they do, well – that the park on those things will be for some banks a significant risk.

[Thomas Alonso:]

Understood. That makes a lot of sense. And just to kind of, and I hate to keeping going back to this, but just to kind of connect all the dots on the OCC stuff and the new guidance. So, basically your non-performers are going to stay elevated for longer because it's harder for you guys to work this stuff out, not working stuff out, but you have to kind of keep them there and they’re paying. As they pay, you're going to get recoveries and then your choice like you were talking about before is to find a buyer for these 'non-performers' and/or foreclose on the customer. Is that kind of – am I connecting the dots right there?

[William A. Cooper:]

Well, the third option is simply to sit on them and let them continue to pay or foreclose over time. If you look at the way these things are, we don’t – as I mentioned earlier, we don’t know what the guidance is in connection with REIT. We're taking these things through a cash flow accrual basis. We still haven't. That isn't clear yet, although we're getting some guidance that indeed that will be permitted, but we don’t know on what criteria. And then as we say, if you wrote down the second mortgage to zero which many of these we did; all payments on them will come back as recoveries until we stop paying or they’re paid off. On the loans that you just put on non-accrual and if you leave it on non-accrual, all their payments go to principal until the principal is gone and then after the principal is gone then you start to book recoveries. So, it’s a mix bag of items. Now what I will say in terms of looking at that, there is $100 million of this on $18 billion balance sheet. It isn’t going to shake – going forward it isn't going to shake the profitability one way or the other. It shook the profitability in a quarter because a lot things condensed into a single quarter in connection with this guidance, but going forward it isn't going to be that bigger deal quarter-after-quarter.

[Thomas Alonso:]

Okay. And then I guess, just one kind of bigger picture question in terms of sort of competition for checking accounts and for free checking accounts, sort of given what you've seen some other players do and kind of the move by American Express with their Bluebird product; do you think that, that is kind of a competitor to you guys or is that something that is a different customer segment that they’re going after?

[Thomas F. Jasper:]

This is Tom. When we look at those types of products and how they’re sold and where they’re sold and what kind of privileges and rights that are attached to them, there is some competition related to that. We still think our product is very competitive versus that type of product in the market and so, we're aware of those types of products and we're looking at what they mean to our base and look into – what it means to our product line up as well. But I don't view that as a serious competitor against the free checking product.

[Thomas Alonso:]

Okay, great. Thanks very much for that.

[Operator:]

Your next question comes from Terry McEvoy from Oppenheimer. Your line is open. Terry McEvoy - Oppenheimer & Co. Thanks, good morning. Was the favorable response to the rollout of free checking seen in all of your core markets and I'm specifically asking about Chicago. If I go back last year when the single daily fee product was rolled-out in Michigan where there was some traction, but then unfortunately less success in other markets?

[Thomas F. Jasper:]

No, I would say that it's been favorable in every market. Terry McEvoy - Oppenheimer & Co. Great. And then just a second question. I think Mike said on the last conference call pro forma Tier 1 common under Basel III about 150 basis point reductions; does that continue to be your view and expectations today?

[Michael S. Jones:]

Well, this is Mike Jones. I would say that that would be correct if the guidance was adopted as originally proposed. I think what we’ve done in the last 90 days just focused on commenting and getting our views to the industry groups that are commenting around this. We believe that based on that, that those proposed guidance are not going to stand as proposed and hopefully we will have some changes in those as they get finally rolled-out. As we come closer to that clearly we've thought about and talked internally around mitigation strategies of the proposed rules, but we’ll finalize those plans as we get final rules out of the agencies. Terry McEvoy - Oppenheimer & Co. Great. Thank you.

[Operator:]

Your next question comes from Andrew Marquardt from Evercore Partners. Your line is open.

[Andrew Marquardt:]

Thanks, good morning guys. Just want to circle back on the margins and can you talk about how, I was just hoping pretty well this last quarter, can you help us understand the degree of pressure we should think about going forward, and maybe remind us, I think you had previously talked about on a core basis maybe 460 ranges. Does that still hold given everything that's now happened?

[William A. Cooper:]

I think a good way to look at the margin – if you look at the quarter, our interest income is around $220 million and our interest expense is $20 million. As you can tell there isn’t a whole lot of room to drop interest expense. With the QE3 I guess, and lower rates in general, rates on just about everything have come down a bit. Now at the same time we’re having mixed changes in our different categories of assets are going on the books at higher yields than some other categories that are going down. But given continuing long-term period of low interest rates the balance sheet – all balance sheets in the banking business will lose that rates to some degree and you will see some reduction in the net interest margin. It's difficult to say exactly what that's going to be, because again we don’t really know what's going to happen with those rates and in those different categories, but it’s fair to say and fairly likely that you will see some reduction in the net interest margin at TCF and the banking industry as a whole. It’s just mathematics.

[Andrew Marquardt:]

Any sense of magnitude near-term and is the 460 still valid or is that kind of off the table given QE3, et cetera, that everyone is facing?

[William A. Cooper:]

I think if rates stay where they’re for a while that’s probably still a pretty good guess.

[Andrew Marquardt:]

Okay. And then just on the Free Checking initiative, I think you had mentioned that you’re having net checking growth, the attrition has slowed or has been reduced dramatically. Can you just give us a flavor, are you having net checking growth now on a quarter-to-quarter basis or month over month, how do we think about it?

[Thomas F. Jasper:]

This is Tom Jasper, Andrew. We did have growth from the end of the second quarter to the end of the third quarter and it is a combination both in an increase in production. But for two consecutive quarters we've had decrease – a decrease in the attrition rate, so it’s a combination of the two and we did seen that growth.

[Andrew Marquardt:]

Got it. And should we now think about this deposit service fees coming in at 43.5-ish as kind of a new starting point, kind of a bottoming here and it should improve from here given that increase in net checking accounts?

[Thomas F. Jasper:]

I mean that’s the goal. I mean to grow it from where it’s at. There is seasonality every quarter in terms of what’s happening within those fees and those numbers get impacted by number of processing days and everything else, but in general, yes this is where it’s going to grow the base and as we grow that base, we’re going to both look to grow those fees and introduce new products and potentially create additional fee revenue.

[Andrew Marquardt:]

Got it. Thank you.

[Thomas F. Jasper:]

Yep.

[Operator:]

(Operator Instructions) Your next question comes from Peyton Green from Sterne Agee. Your line is open.

[Peyton Green:]

Yes, good morning. Bill I was wondering if you could comment a little bit on the expense side. I mean, the expense numbers certainly were better in the quarter and I was just wondering, I mean, was there a little bit of an aberrational move compared to the growth that you’ve been posting or what’s your outlook might be and as the outlook for ’13 becomes a tougher revenue year are there any obvious levers that you can pull?

[William A. Cooper:]

The growth businesses have been where we’ve had headcount increases, the auto finance business, the inventory finance business and so forth. We’ve done a pretty good job at cutting staff levels in overhead areas and in the retail side of the bank where people visit branches less than they used to and some culling of unprofitable branches and so forth. And in the consumer lending area, where we’ve changed our strategies in terms of how we originate loans and so forth. And so – and what’s happening now hopefully is that we’ve got most of that passed us and we are having the balance sheet in effect grow up around those operating expenses. We will continue to see further reductions in some of those other areas and some increases in those growth areas that I mentioned. But what hopefully is happening and we can see that in this quarter is the growth of the balance sheet around on operating expense level.

[Peyton Green:]

Okay. And then Tom, in terms of the new initiatives that are referenced in the slide deck, what – when would you expect those to start to take hold and how significant might this be to non-interest income or spread income?

[Thomas F. Jasper:]

I am looking at that as looking out into the first quarter of next year and I don’t expect that any individual product is going to be a homerun on a revenue basis; it’s going to be a number of products where we’re going to try to add incremental revenue. There is not a silver bullet around any individual product.

[Peyton Green:]

Okay. And then the last question is on credit, I mean, to have a successful 2013, do you expect a gradual improvement on the consumer side or do you expect something a little bit more dramatic given that this year has generally been disappointing?

[William A. Cooper:]

We can hope that the improvement that we’ve seen over the last several quarters continues going into 2013.

[Peyton Green:]

Okay. Thank you very much.

[Operator:]

I have no further questions in queue. Mr. Cooper, I turn the call back over to you for closing remarks.

[William A. Cooper:]

Thank you very much and have a good day.

[Operator:]

This concludes today’s conference call. You may now disconnect.