TCF Financial Corporation
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Good morning and welcome to TCF’s 2014 Fourth Quarter Earnings Call. My name is Jamie and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer period. [Operator Instructions]. At this time I would like to introduce Mr. Jason Korstange, TCF Director of Investor Relations, to begin the conference.

[James Korstange:]

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Craig Dahl, Vice Chairman; Mr. Mike Jones, Chief Financial Officer; Mr. Jim Costa, Chief Risk Officer and Mr. Mark Bagley, Chief Credit Officer. During this presentation we may make projections and other forward-looking statements regarding future events for the future financial performance of the company. We caution you that such statements are predictions and actual events or results may differ materially. Please see the forward-looking statement disclosure contained in our 2014 fourth quarter earnings release for more information about risk and uncertainties which may affect us. The information we will provide today is accurate as of December 31, 2014, and we undertake no duty to update the information. During our remarks today, we will be referencing a slide presentation that is available on the Investor Relations section of TCF’s website, ir.tcfbank.com. On today’s call, Mr. Cooper will begin by discussing full year and fourth quarter highlights, Mike Jones will discuss credit and expenses, Craig Dahl will provide an overview of lending deposits and capital, and Mr. Cooper will wrap up with the summary. We will then open it up for questions. I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

[William Cooper:]

Thank you Jason. I think this is my 111th quarterly earnings call. I am happy to report that TCF again had an excellent year. One of the highlights in the quarter which I will talk about is a minute is TCF’s liquidation of its remaining residential TDR portfolio and I will talk more about that in a second. If you turn to page 5 of the slide deck, talked about the year, and this does include the cost of that sale of the TDRs that I mentioned in the year. Even with that we are at $0.94 which is up 14.5% from the year ago. Revenues were over 1.2 billion which is up 3.5%, loan and lease originations, 13.5 billion, up 12.5%. That is one of strongest increases in loan originations in the banking business. Deposits were up over 5% to 14.5 billion -- 15 billion. Provisions for credit losses were down 20% to 95 million and that includes sale of that TDR portfolio I mentioned. Non-accruals were down 22%, 200 million. Return on assets were pretty close to 1% and indeed would have been 1% without that transaction, but even with that up 9 basis points. Return on tangible equity over 10%, up 50 basis points from a year ago. So, all strong improvements in credit, improvements in margins, improvements in income as compared to the prior year. When you look at the quarter, we are $0.12 a share in the quarter before the sale of TDR portfolio, which I’ll talk about in a minute. We would’ve earned $0.29 as compared to $0.22 a year ago, which would have been a 13% increase. But after the sale of the TDR portfolio, we earned $0.12. Again the quarter revenue was up 2% over 300 million; loan originations at 3.5 billion up 12.5%; deposits 15.3 billion up 6.5%. Provision for loan losses was up as a result of that TDR transaction. But good news is that nonaccrual loans and leases were down to 22%. Our return on assets was only 53% basis points after that TDR sale, but would have been 112 basis points without that transaction and that compares very favorably to the 90 basis points that we had a year ago. You turn to slide 4, it kind of outlines the differences of the impact on earnings per share and return on assets and return on tangible equity for both the year and quarter and you can see the impact that the transaction had underneath the share, etc. Page 3 of the slide, called reduced balance sheet credit risk. What TCF did over the years? TCF had a large well-structured high-credit residential portfolio, all of which we booked into our portfolio, we originated ourselves all within our market areas. We had an average FICO score of 720, average loan to value is just over 80%, etc. And like all banks we were impacted by the falling home values and the reduced credit of our borrowers. TCF in a successful attempt to keep people in their homes for many more -- they just want to borrow, would come to us and ask for help because they were having employment problems and their house value had gone down, etc. We reduced interest rates on a significant number of mortgages to keep people in their homes. That effort was a huge success. We kept thousands of people in their homes as a result of doing these transactions. However, as a result of that we ended up with this large portfolio, which is classified as TDR, which means Troubled Debt Restructuring, which has an odd arcaneaccounting associated with it. It’s a long term fixed rate portfolio. The performing portfolio had a maturity as 27 years and interest rate of only 3%. So, it was not certainly a profitable portfolio. The credit on the portfolio improved considerably and was continuing to improve, but it was kind of a last wastage of the home crisis on TCF’s balance sheet. In the face of what appears to be a rising interest rates at some point later this year, a higher interest rate environment would make these assets worth even less. And if rates went up 200 or 300 basis points significantly less then we determined that this was a good opportunity where we were and what we believe was the trough in interest rate to liquidate this portfolio. We liquidated the portfolio and took the loss. We added some extra reserves to make our balance sheet even more conservative; keep our reserve for loan loss at over a 1% level for the bank as a whole and exited this portfolio. The way I look at this, this is the last chapter of the residential home crisis as related to TCF. Some significant improvements that we have in the portfolio, it reduces our nonaccrual and accruing TDRs from 5.16% of the portfolio down to 2.5%. And TDR residential loans including nonaccrual TDR loans decreased from 611 million down to somewhat less than 200 million. The impacts of this sale are as follows. First of all, it will improve the net interest margin in subsequent years because we will redeploy these assets into asset categories that have a yield higher than 3%. TCF doesn’t originate anything at the 3% level. So, we will see an improved net interest margin in the future. We also significantly reduced operating expenses. We sold these mortgages, servicing release, and there is a fair amount of work to service these mortgages just because of their kind of the arcane nature, and we reduced that operating expense that's probably around 5 million a year. And we believe we have reduced our regulatory FDIC cost, etcetera, by another 9 million a year. So, we should have better improved net interest margin, reduced operating expenses. And so, we think this payback on this transaction is somewhat less than 3 years and it will be accretive in 2015. So we cleaned out the portfolio of the remaining wastage of the great depression home crisis. And I'm very happy to have accomplished that. Without the cost of doing this, our earnings per share in the quarter would have been $0.29, which would have been another strong quarter and that is our core operating earnings for the quarter. All of our capital metrics remained very strong and the other positive in this thing we believe this is a somewhat of a speculation, but it’s my judgment, the best place to be in this interest rate environment we have sold a very long-term fixed rate assets and have shortened our asset maturity and what makes us even more, we will benefit even more from a rising rate environments than we would have otherwise. In terms of revenue, the revenue was $314 million. You can see the breakdown of the revenue numbers of net interest margin. Rate was down slightly. Part of that is just simply that continue very low rate. We also had a one-time transaction in connection with the extension of a contract with a very large customer in our inventory finances which is a one-time event that probably had an impact of around 5 basis points on the margin in the quarter. That is a one-time event. We had simply the impact of lower interest rates as well, in terms of that impact. At 449 TCF is in the top 5% of midsize banks of net interest margin of any other midsized banks. You can see the very significant diversification that we have in connection with both our interest income and our noninterest income and that gives us a lot of safety, if you will, in connection with having a very diversified revenue source coming from lots of different places including gain on sale of loans. Page 8 compares us to our peers. And again this includes the numbers from the restructuring that I just mentioned and you can see that we have a higher net interest income, higher noninterest income, higher revenues in total, higher return on assets, yield on assets and loans is higher, and cost of our deposits is lower, which is a very nice place to be in the banking business. We have a higher percentage of our assets and loans and the reason for that is we have significant loan origination capacity. As a matter of fact we have capacity that we not only can fill up the balance sheet, we have capacity to sell loans and take gains in the various categories which I will get through in a minute. Most of our loans are funded by core deposits. 90% of TCF’s deposits are ensured deposits; which means they are relatively small deposits. The good news about them is 40% of those deposits are checking, which means they are not susceptible to rising interest rates the way other deposits are, another 40% of savings, so less susceptible. So a rising interest rate environment will move the yields on our assets significantly faster than it will on our liabilities. Our return on tangible equity is at 10%. That would be moving up into the 11% and 12% range as compared to our peers. With that I will turn over to Mike.

[Michael Jones:]

Thanks, Bill. Turning to slide 9. A leading indicator for future credit performance within the bank delinquency continues to improve ending the fourth quarter at 14 basis points. Provision for the fourth quarter was impacted by the writing down to fair value, the consumer TDR portfolio that Bill mentioned and discussed earlier, by 18 million. Additionally the TDR sale provided market information that was utilized during the quarter to evaluate the adequacy of the allowance related to the remaining portfolio along with our continued conservative approach to credit this resulted in an additional provision of about 22 million. If you eliminate these charges from the provision for the quarter, provision was 15.6 million for the quarter compared to 15.7 million in the third quarter of 2014 and 22.8 million for the fourth quarter of 2013. Nonperforming assets defined as nonaccrual loans and leases and other real estate loans decreased 61 million within the quarter with approximately 19 million coming from normal workout efforts and the other 42 million coming from the TDR portfolio sale. Nonperforming assets as a percent of loans and leases plus other real estate loan dropped below 2% for the first time since 2008, ending the quarter at 1.71%. Net charge-offs in the quarter declined 26 basis points from 66 basis points in the third quarter to 40 basis points in the fourth quarter. And if you turn to page 10, what shows a little bit more detail on net charge-offs by each of the different businesses, you can see the performance of the last five quarters with charge-offs down 26 basis points on a linked quarter basis and 36 basis points year-over-year. Our legacy businesses of consumer and commercial continue to improve with the fourth-quarter charge-off percent at 66 basis points and 12 basis points respectively. Our national lending businesses that have performed throughout the downturn continued to have strong credit performance. The auto-finance business continues to mature and was impacted within the quarter by seasonality where charge-offs tend to increase in the fourth and first quarters and balance out in the second and third quarters. We still believe that the charge-offs are range bound for this business around 75 basis points on an annualized basis. If you look at the annual charge-offs for the auto business in 2014, it ended at 66 basis points for the year. Turning to slide 11 you can see the significant improvement in asset quality related to the sale of the TDR. The sale of the TDR portfolio significantly improved our nonaccrual loans and leases and recurring TDRs as a percentage of total loans and leases at 2.50%. This is down almost 340 basis points from our two-year median average. This transaction will result in improved portfolio composition and lower credit and operating costs in the future periods. Turning to page 12. We continue to look for ways to optimize expense to enable leveraging of our asset growth across the businesses. If you look back to a year ago and you look at the increase on a year-over-year basis and you take out the one time pension plan evaluation adjustment that we had in the fourth quarter of 2014, expenses on a year-over-year basis are relatively flat and this is with an increase of almost 2 billion in managed assets that are serviced and tailed on our balance sheet and off balance sheet that we continue to service. We will continue to see leverage in the FDIC expense line due to the improvement in credit quality and the sale of the TDR portfolio going into 2015. I’ll now turn the call over to, Craig Dahl.

[Craig Dahl:]

Thanks Mike. I will turn to slide 13 which is our loan lease portfolio. TCF strategy of diversification continues to play out as our TDR sale further reduced our concentration of consumer real estate exposure which is now been reduced from 49% at year-end 2011 down to 35%. The predictable increase in our auto loans maintains our good wholesale-retail mix at 53% and 47%. Our year-over-year loan and lease growth was 3.5%. Re-leasing and equipment finance portfolio grew by 9.2% in the year. Our inventory finance portfolio grew by 12.8% over the prior year end and our auto finance increased by 54% from the prior year end. Turning to slide 14, in this slide, our loan and lease sales, and does exclude our TDR sale. It represents a fairly consistent trend when you account for our securitization from the third quarter. I will remind you that loan sale provides diversification of product and geographic concentration management, in addition to supporting our capital and liquidity positions and providing additional revenue. The chart on the right gives you visibility to the servicing revenue and the total impact of two revenues from our loan sale activity. Turning to slide 15, our managed portfolio, it shows that our total management loan book now exceeds $20 billion with our service for others now at 3.4 billion. This produce servicing fee income of 6.5 million in the quarter and $1 billion of loan sales provided 19.1 million of gain. Turning to slide 16, loan and lease balance roll forward, I would ask you to look inside the top orange box on the left and see that our fourth quarter originations were up 12.6% to 3.5 billion with consumer real estate, auto, and inventory finance having strong quarters. Our ending loan balance was impacted by the 405.9 million of TDR loan sold as well. Turning the slide 17, the full year loan and lease balance roll forward. You will see that originations are up 12.2% for the year, and our gross gain that is before loan sales, was 22% for the year. The box on the right shows that all of the asset areas had full year increases in originations. Turning to slide 18 our loan and lease yields. Our yields continue to hold up after consideration of the nonrecurring inventory finance adjustment. The program nature of our asset classes in conjunction with our strong pricing discipline continues to pay off. As a note the fourth quarter inventory financial was consistent with the fourth quarter yield of 2013. Turning to slide 19, our deposit generation. As you can see on a year-over-year basis we had no change to our deposit cost is we produced our 17 consecutive quarterly average balance increase. We continue to see checking account attrition improve, and 89% of our total deposits are ensured. Turning to slide 20; our capital position. We continue to maintain strong capital as our earnings accumulation supports our level of asset growth. And with that, I’ll turn the call back over to Bill Cooper.

[William Cooper:]

Again, I think we had a strong core quarter and a strong core year and 2014 was a transitory year where we took the proceeds, of you will. There is some very significant investments made in prior years in connection with expansion, expanding some of our core businesses and we now are in a situation. We have a strong enough loan originations that we can make decisions based on risk parameters of what we want to put in the balance sheet and what we want to sell, the gains we want to take, or the gains we want to hold and we have one of the strongest names as margins in the business which will improve when and if interest rates rise, and I believe it is getting closer to when interest rates rise today. We have a very strong capital accumulation rate. The capital accumulation rate is a demonstration of our ability to grow the balance sheet by retaining assets that we so desire and maintaining our capital ratios at those levels. We can see the very strong improvement in the tangible book value per share which is a common metric in connection with, comparison with where your stock price should be, your return a tangible equity and your book value per share and the indexes associated with, to that our common metric, and working at stock appreciation and we are reaching towards levels that I believe should see improvements in the stock price as a result of that. We have much stronger return on assets than our peers and I believe that in coming years that keep continuing to improve and our return on tangible equity at 10%, we are reaching up to the 12.5% in the top quartiles of banks in terms of return on tangible equities. Our credit metrics are now very-very clean. I think we’re going to see charge-offs levels, a fraction of what we have in this year and going into next year. We have strong reverse and strong businesses particularly growing businesses have demonstrated very significant strength. Even the auto business which inherently has a higher charge-off rate were at 60 basis points for the year. Bank owned auto business charge-off at maybe 120 for the year. So the credit metrics and that’s in our half of our peers in connection with the strong credit. And we have increased our origination capacity significantly in that area. So again, I am pretty happy of what’s happening. We’ve got good strong deposit growth, good strong loan growth, significant improvement in core earnings capacity and significant improvement in the basic metrics performance overall. And I believe that were running a safe well-capitalized core deposit funded bank without a lot of magic, no subprime or any of that kind of thing in the balance sheet. And I am very pleased to see where we are at the end of 2014. With that, I would just open it up for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Jon Arfstrom at RBC Capital Markets.

[Jon Arfstrom:]

Question for you Craig, two things, just in terms of the origination growth of 12% year-over-year? How much runway do you have left in terms of what you’re seeing today? Can you keep up that pace? And then the other part is how long do you think it will take you to sell up the bucket of the 400 million sold.

[Craig Dahl:]

We see the trends continuing and you can see that the fourth quarter was actually the sales, origination increase was actually higher than the annual increase. So we still see a similar runway for 2015 and worked starting all of our options regarding the liquidity that was generated from the sale. I will ask Mike Jones to comment on a couple of items too, please.

[Michael Jones:]

Jon, this is Mike. How we ran and looked at the payback analysis and we will be putting there for less than three years. We took a more conservative approach that Craig didn’t have to invest that cash into the businesses. So that three-year payback and accretion in 2015 is calculated based on just us investing in investments like mortgage-backs and the things that we currently do today with the yield somewhere between 2% and 3% from that standpoint. So if Craig is able to and our intent would be to invest that in the businesses to originate more to deploy that utilization of cash and it’s incremental to those numbers that you and Bill talked about earlier.

[William Cooper:]

This is Bill Cooper. Let me add something. One of the good things about being where so much of our business is structured, most of our businesses are national in nature now. And so the markets are big. The auto market is huge market. We’re less percent 1% of the auto market. The equipment finance business, the inventory finance business etc. are vast markets that which we share little tiny pieces as opposed to where you stick in your marketplace how much apartment construction loans can do. And so we do have the capacity to increase origination in virtually all of those businesses and over the whole of those things in the asset carriers.

[Jon Arfstrom:]

That helps, and then Mike, just another follow-up on the accretion. When you say a three-year payback, what is the hurdle? Is it this $0.17 in provisions? Is that the right number in terms of how you’re determining the hurdle?

[Michael Jones:]

Yes. I think you can look at it that way or you can look at it separately, right? So if you look at kind of $0.09, there is particular reduction in expenses that Bill alluded to earlier associated with that. It’s the redeployment of those assets and then if you look at, kind of our loss emergence period that if the additional provision somewhere being in that 12 to 18 month timeframe, right? You can look at it that -- both of those are within those three-year payback window.

[Jon Arfstrom:]

So this is something, maybe it’s not quite as much in ’15 with some benefits certainly from expensive, and as you lever up you get more. I guess, what I am trying to get out is, is this something you feel as accretive to the current run rate, the way we said looking at 2015?

[Michael Jones:]

Yes. I think if you would look at, I will turn you back, Jon, to page 4. We’re currently, if you would take those unusual items in the fourth quarter in 2014, just to return on average assets 112 and year-to-date is 111 and we don’t make forward projections around what ‘15 results are going to be. That’s where we sit today and this transaction is accretive in ’15. So I think the company is well positioned and we’re heading in the right direction.

[William Cooper:]

One thing Jon, I mentioned, interesting parameter the way we look at it. TCF is in the very tough quartile of pretax pre-provision return on assets and slightly lower in that in the return on assets, the difference being the provision for loan losses. This is the kind of a last wack at that. And those two numbers were going to start to merge in connection with our core operating performance. So you can kind of get a feel for that. Our pretax pre-provision return on assets is over 2%. I think best of our peers, I think we’re in the sixth or fifth highest in the banking business and the only ones that are close to us are credit card banks.

[Operator:]

Our next question comes from Ken Zerbe from Morgan Stanley. Please go ahead with your question.

[Ken Zerbe:]

In terms of the additional 21.8 million of provision expense you guys took, was that just related to the remaining TDRs and MPLs in the portfolio? Is that more of a broader whole look at your entire portfolio?

[William Cooper:]

It went to that remaining portable.

[Ken Zerbe:]

Just the TDRs, okay. And then can you just give a little more information, what are the discussion about the program extension and inventory finance, just trying to understand what that is?

[Craig Dahl:]

This is Craig Dahl. It was one of our major programs which we extended for three additional years in exchange for a payment. However the structure of the compensation went through the margin rather than operating expenses based on the nature of it. So there isn’t anything unusual about it other than it did affect margin in the quarter.

[William Cooper:]

But this is good news. It’s a 3 year extension of an excellent contract for us.

[Ken Zerbe:]

Got it, so did it also take down, or how much did it take down net interest income by?

[William Cooper:]

About 5 basis.

[Craig Dahl:]

5 basis points in total and about 30 basis points in the inventory finance number.

[Ken Zerbe:]

Sorry, I was meaning in terms of the dollar amounts?

[William Cooper:]

I don’t really have those numbers.

[Craig Dahl:]

Yes, we aren’t going to disclose the dollars. We just gave you what the impact is on that margin.

[Operator:]

Our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.

[Jared Shaw:]

Looking at the gain on sale excluding the loan sales, looks like the margin -- gain sale margin came in pretty significantly this quarter, is this really a new normal or what drove the decline on the gain on sale margin? Was it really the mix or is it more of market?

[Michael Jones:]

Yes, I think it is was. This is Mike Jones. I believe it’s more of kind of what the mix is and then you have to of course back out the laws associated with, the TDR portfolio sale which was about 4.8 million. Additionally I think what you got to take into consideration respectively is we started re-originating mortgage loans in our branch to add another products that to try to enhance our product offering to the branch network. And that’s being performed through the correspondent lending relationship. So those assets are not maintained on our balance sheet, however generate the income associated with it and run through that gain on sale loan as well. So that impacted the fourth quarter as well.

[Jared Shaw:]

Okay, and looking at the allowance level here, 1%, given the growth buckets were you are seeing more of your growth, where would you ultimately like to see, not so much the provision but the reserve as a basis of the loan portfolio going forward?

[William Cooper:]

Well, you can see on that schedule that we have that shows where our charge-offs are at the various categories. The reserve calculation is obviously a summary calculation of what your loss characteristics are of the various categories in your bank. One of the things that has gone on and we reacted to it is that there has been a more conservative loss emergence period that’s been installed in the generally accepted accounting principles which means it used to be everything was one year reserve, now that some of these things are more than one year. We’ve accounted for that as well and adjusted that. But the reserve levels of our bank aren’t just a number of what you would like it to be as a minimum or whatever. It is a complicated calculation as to drive-through, a lot of constant or analysis or what your portfolio looks like. So to something degree of credit continues to improve You could see that you could see that reserve from down of credit. It goes the other way, you could see the reserve levels coming up. So I don’t really have a wish list there. Obviously we just want credit to be better. But the reserve level itself is reflection of what’s happening. What we think is going to happen, not some basic wish list number if you know what I mean.

[Jared Shaw:]

And then finally on the, looking at the FDIC cost this quarter, down about 5 million, when you mentioned the additional 9 million savings due to the sale of the TDRs, is that additional savings beyond what we this quarter? Or is it some of the quarter cost this quarter reflect that?

[Michael Jones:]

Yes. So what Bill was alluding to was kind of the reduction in the run rate prospectively.

[Jared Shaw:]

Starting in first quarter.

[Michael Jones:]

That’s correct, and there was a catch-up in the fourth quarter because the FDIC is kind of on a one quarter lag, so there was a third quarter and fourth quarter adjustment that was accumulated, so you are not going to see kind of the 2 - 6 level run rate prospectively but you will see something significantly less than the 73 - 74 level that we’ve been running in historical quarters.

[Operator:]

Our next question comes from Dave Rochester from Deutsche Bank. Please go ahead with your question.

[Jared Shaw:]

I was just wondering at the inventory yields impact that you saw from that expense item this quarter, was that just going to impact this quarter or is that a sustained impact to that yield going forward so we should start with this lower yield in our projections?

[William Cooper:]

No, that only affected this quarter and we would expect it to return to historical levels in the first quarter.

[Dave Rochester:]

And then how large was that FDIC insurance catch-up this quarter?

[Michael Jones:]

If you look at it on a normalized basis, fourth quarter will be close to around 5 million.

[Dave Rochester:]

So in terms of the run rate savings, you’re talking that’s up at 73 level going forward, right?

[Michael Jones:]

That’s correct.

[Dave Rochester:]

Okay, great, and sorry for this but how large was that one-time pension expense adjustment of quarter you’ve talked about?

[Michael Jones:]

It was close to 2 million.

[Dave Rochester:]

And I guess it’s bigger picture and you guys generally don’t talk about levels but I figure I'd ask anyway. As you are looking out into 2015 regarding total expenses do you think you can keep them flat versus 2014 and if you can just comment on where you are in the process of the regulatory compliance build out if you think you are in the last stages of that?

[William Cooper:]

Regulatory compliance of what?

[Dave Rochester:]

Build out, just building out systems and hiring people.

[William Cooper:]

I think from the regulatory point of view, yes we are way down the path on that. And most of that is already reflected and as a matter of fact we are hopeful on some things, like for instance BSA. We’ve made significant automation changes there that we hope can make those areas more efficient. But I think we did the vast bulk of build up in connection with risk in BSA etc-etc in 2014. We may still have some additions in ’15 though. Hopefully those can be offset by improvements and efficiency as well.

[Dave Rochester:]

So as you are looking at expenses next year, do you think you could potential actually hold them flat to the core numbers you reported in ’14?

[William Cooper:]

One of the things about that is the way we have to look at that. When you look at the growth of the balance sheet, that’s one factor, but you have look at the growth of the servicing portfolio as well which is a expense-latent function. Now we get a servicing fee that pops up into the revenue line with that, but to the degree, I’ve now got about $3 million of loan and servicing. It doesn’t matter when you own then or sold them in service and you got that operating expense, but that operating expenses is more than offset by the servicing income. So the degree we continue to grow that we’re going to continue to see some growth in operating expenses. We’ve not driven that number down below 4% on both managed and owned assets and we hopefully can continue to drive it down further, that’s the best way we look at that in terms of how that compares to what the assets that we’re managing under it, if you follow me.

[Operator:]

Our next question comes from Steven Alexopoulos from JP Morgan, please go ahead with your question.

[Steven Alexopoulos:]

I wanted to start with a few questions on the TDR sales, just running through the math, you sold 406 million. You had 77 million provision, took another 18 million provision. Sold that at 5 million loss, you say it works out to around 25% haircut. So my question is why so Steve given only 40 million, so these were nonperformer? And on prior calls you guys have commented that even though there were TDR, didn’t really imply they were low-quality.

[William Cooper:]

It carried at 3% interest rate. That’s the primary. They are part of the -- effective mark on this when you sold it, was as [inaudible], it was a 27 year 3% interest rate asset. And so a significant portion of the valuation of this was the interest rate level. I could have matched that and sold 400 million of 6% residential loans and take in a $50 million gain. And when you sell assets, credits are taken into consideration but interest rates are also taken into consideration. So that valuation was partially and interest rate valuation. That’s one of the reasons we decided to do it now because that loss what we’ve gotten considerably bigger after interest rates had risen. That answer your question?

[Steven Alexopoulos:]

Well, could you provide what was the credit market then?

[William Cooper:]

It wasn’t sold that way, in other words, the bidders -- I didn’t say G, I’ve given you so much for the loss here and so much for the credit here, what we do know is that the number that they came up with was a combination of the mark from a credit perspective and the mark from a interest rate perspective, and so it’s really a combination of both. But I can’t give you the specifics of what it is.

[Steven Alexopoulos:]

So what’s the current balance of TDRs in the reserves that are on those today?

[William Cooper:]

Of the residential TDRs?

[Steven Alexopoulos:]

Yes.

[William Cooper:]

We have about a little over a 100 million of performing TDRs and we have a 23% reserve on those. And we have another group of nonaccrual TDRs, you know that number? That’s about 80 million of not performing TDRs. Some of that is the bankrupt loans that are kind of under the OCC accounting for this, they are kind of a prominent TDR. And some of them are nonaccruals working through the system. One of the things I will mention on that is that as a result of the portfolio we sold the pipeline of nonaccruals has been considerably reduced and the pipeline to new TDRs has been considerably reduced and we expect to see those nonaccruals that came out of this portfolio over the next 12 months to come down considerably as well with an additional improvement in the credit metrics.

[Michael Jones:]

Steven, I will just add that the nonaccrual portions are marked down to fair value less the cost to sell so those would be marked to the valuation and what our estimate would be to dispose those out into the market.

[William Cooper:]

The remaining portfolio just mentioned, a good portion of the remaining portfolio, we didn’t keep because it had bad credit or whatever. We ended up keeping them because they had oddities in the servicing for the portfolios and the buyer did not have the capacity to service those particular kinds of loans. They were odd balls in that connection, but they weren’t worse credits. There was nothing like that in that. We may in the future find somebody that can handle those oddities or even sell them, and we keep the servicing or whatever, but the portfolio that we retained wasn’t that dregs that somebody might assume.

[Steven Alexopoulos:]

Just one question on the reserve. Can you help reconcile the change quarter-over-quater, because it looks like there was more going on beyond just provision and charge-offs?

[William Cooper:]

I don’t imagine what else could go on in that reserve.

[Steven Alexopoulos:]

We just looked at where you ended the third quarter and what you provided and charged-off, the decline is substantially below that. I imagine the TDR sales were a part of that. But even that couldn’t tie in.

[Michael Jones:]

Yes. The TDR was a large portion of that as we transferred the portion of reserve associated with these assets to help for sale. That was transferred out of provision or of the allowance into the value or the mark-to-market value of those assets. So that is the other chunk.

[Steven Alexopoulos:]

And just one final one. You guys seem to always have a pretty good pulse on consumer trends. Are you seeing a pickup given the fall off in oil prices and are you seeing a benefit from some of your specialty businesses play out from that?

[William Cooper:]

I will say yes to that. In addition to that, consumer credit got better. In other words, even those people that are performing consumer loans, their ability to pay their mortgages has gotten better, but the answer is that is yes. I think that lower oil prices have had a significant improvement in people purchasing other kinds of consumer goods and so forth and we can see that in our numbers. Would you agree with it?

[Craig Dahl:]

Yes. This is Criag Dahl. Yes, I would Bill. The other thing our portfolios especially vehicles and construction are going to have lower operating costs and that will be a benefit to their P&Ls as well

[Operator:]

Our next question comes from Scott Siefers from Sandler O’Neill, please go ahead with your question.

[Scott Siefers:]

I was hoping, I’m trying to get just the all in potential earnings benefit from the TDR sales? I was hoping you could provide maybe order magnitude that you would expect the credit cards to improve as a result of this sale? It sounds like in the aggregate, you got maybe 14 million or so potential expense savings, then if you’re able to deploy the liquidity, maybe another $6 million or $7 million pickup on NII. What’s kind of the all in credit cards improvement that you would expect following the sales?

[William Cooper:]

Let me say, this is about the TDR portfolio, the accompaniment in that TDR portfolio was very arcane and it isn’t a typical loan reserve calculation. And so how that relate, how that flows through the provision line is really take a doctorial that we don’t really have that time to go over here. But this was the worst credit portfolio that we had. And I will say this is about this portfolio as a whole. We can declare victory on the portfolio. The way TCF handle these customers, I mean these are the Norwegians and Minnesota and Wisconsin who think it is a moral sin not to pay you. And they will pay you if they can. And they were in buying their home, the house value was below than mortgage. The wife lost her job etc, but they are good people, they had great credit before this crisis hit. And we worked this out for these people. We kept thousands of people, three or four thousand people in their homes as a result of it. We saved their quality of life in doing it. At the same time probably saved the bank $100 million in losses. If we have liquidated these loans at the bottom of the credit crisis were home values were down 40% and so forth, I am going to estimate we have taken a $100 or $150 million more losses. So, I’m going to declare victory both from a moral perspective in terms of how TCF treated its customers to a much more significant matter, a lot of work you had to do on these things. Every one of these loans were re-underwritten and monitored and lot of them didn’t make it and flow through the P&L as an eventual loss. But this was the worst credit quality portfolio that we were dealing with and we’re very happy to declare victory on the housing crisis of 2008 and move on. And our credit is going to look considerably better in subsequent years than it has in past years as a result of this transaction.

[Scott Siefers:]

Okay, I appreciate that color and then kind of a long reliance and what you said about it as being soft of the worst step that prepped over, I think one of the questions that I get or have gotten, there had been kind of periodic special credit issues in your guys results, so that you feel like if there’s anything else or is this sort of the final swing, sort of special legacy credit issues?

[William Cooper:]

I am not going to say there is never going to be anything else, but I will say this. I don’t know about anything else. And I probably would, I think from a credit perspective, now there is things going on in the world that oil prices are falling, and so forth. Who knows where that could slide out somewhere and [inaudible] but we don’t think we have much of any of that exposure or whatever but we think right now our credit is back to pre-crisis levels.

[Scott Siefers:]

Okay, perfect. And then maybe just switching gears on final question. So if you axe out the inventory finance program and factored call right around the 455 margin, what are you seeing as kind of the main puts and takes, in other words, what’s the margin outlook? Would there be some modest continued pressure or any sense you could sort of hold it here as you redeploy the funds on TDR etc?

[William Cooper:]

It’s about five basis points on the inventory finance, but another three basis point as a result of increased liquidity primarily through this sale where we got four basis points for this money was in the bank. The others, continuing pressure on margins for everybody as a result of these continuing very low interest rates and we can see it’s chipping off a couple of points per quarter if that rate things continues, is that fair to say, Mike?

[Michael Jones:]

Yes.

[William Cooper:]

But not anything material, and we think if indeed they do raise rates in the middle year, it sounds like they are doing, that would have a positive impact on us because our assets are so rates sensitive -- I mentioned this about our margin rate. We are extremely rate sensitive. We have a lot of variable-rate assets and we have a lot of assets that turn fast and we pay a price for that. I could easily go off the rate cycle today and get a higher margin which many of my competitors have done. But we stayed short and patient waiting for these rates to rise. It’s been very expensive for us. But when they indeed do we’re going to have it. We already have one of the best margins in the banking business and it’s going to get even better.

[Scott Siefers:]

Okay, and actually just one final one back on, kind of a credit, I think you guys have to talked about sort of 50 basis point kind of normalized provision to asset number, does the sale of the TDRs, has that changed that at all or is that still the target for you?

[William Cooper:]

I think we can do better than that. We are currently doing better than that. Our charge-off rates are currently 40 basis points. And that was before the sale of TDR portfolio. For 20 years TCF never charged-off 25-basis points. And I think, I am optimistic that we can see very good quality in coming years. To me that the marketplace stays where it is.

[Operator:]

Our next question comes from Chris McGratty with from KBW, please go ahead with your question.

[Chris McGratty:]

Criag and Mike, obviously you guys are mid-western bank. You have some national businesses. In your prior slide deck, [inaudible] identify some exposure in your leasing both to Texas. Bill you [inaudible] but not have any meaningful, could you guys elaborate on maybe exposure to the energy sector whether its direct or indirect?

[William Cooper:]

We don’t have any exposure per say, I think have one commercial loan that might be classified direct for $10 million to $20 million which we’re watching. It is difficult that you turn away. Indirect exposure is, for instance we have a bank in Colorado, but we don’t make any loans to the energy and it’s in Denver which isn’t where the energy is and so forth. And we’ve got some car loans in Texas and so forth but. So it is extremely difficult to tell. I would say this, and the balance, I think we have far less energy exposure. We don’t have any energy division, we haven’t focused on energy suppliers, we don’t have anything in North Dakota or Montana etc. So we’ve gone through and done an exhaustive review just to double check. That review made me feel good.

[Chris McGratty:]

Okay, very helpful. Mike on the CD portfolio, you grew it a little bit in ’14, in the past you talked about some promotions that you may have done. I am wondering if you guys are still doing some deposit promotions and what might be the terms and rights you guys are offering to them.

[Michael Jones:]

I think one of our objectives is clearly to fund the asset growth with deposit and for us to do that we’ve got to be competitive in the marketplace that which you saw in 2014 being executed on is targeting the right markets to offer the right rates in the right product. Additionally I think what we been trying to do is offer products that also provide us the opportunity to bring on multiple accounts. So with that said offering them a money market competitive rate in the marketplace to bring them in but linking that to a checking account as well. So you bring your transactional business so you can get to the money market rates. So we have been doing a lot of that to try and bring in high quality customers into the branch network versus just offering them a competitive rate. We will continue to do that you know as we go into ’15 to support the asset growth.

[Chris McGratty:]

Great one last one for you Bill, I believe correct me if I am wrong, your contract with the company ends at the end of the year, I am interested we haven’t see any full announcement, an extension or a succession but wondering when we may the public markets kind of going to give the update there. Thanks.

[William Cooper:]

It something that our board working and I think we haven’t made that formal decision yet however I think it’s in the near future.

[Chris McGratty:]

Great. Thanks guys.

[Operator:]

Our next question comes from Emily Harman from Jeffries. Please go ahead with your question.

[Emlen Harmon:]

Hey, good morning. So couple of follow-ups on the NEM. I guess Mike first -- how quickly do you expect to redeploy funding freed up by the TDR sale, and some of that principle will go into loan, but any color you could give us there would be helpful. And then also just bigger picture you guys in your earnings release noted continued environmental pressure on yield. Just in helping us understand how that translates to the NEM, which portfolios are most susceptible to yield compression?

[Michael Jones:]

This is Mike, so I will talk a little bit about redeployment, what kind work we put in the analysis on kind of the payback in the accretion for 2015 numbers that you talked about we look to redeploy that [indiscernible] first half of 2015 probably more heavily towards end a first-quarter quarter. So if you think about it fully reinvested, as we go through and definitely fully vested by the end of the second quarter from that standpoint. If you look at on the yield alternate Howard Craig that talk about what he’s seeing out in the lending businesses and there is susceptibility to continued environmental pressures around the yields.

[Craig Dahl:]

I would say that the commercial portfolio and auto portfolio have the most competition in them, however the other portfolios we have great discipline around that and if you look the year-over-year change in that it’s not nearly as much. So we think we are pretty well-positioned on that as I commented in my speaking points.

[Emlen Harmon:]

Got it. Thanks. Just to follow up on the auto business. One of your peers, smaller bank, had exited or exit of the indirect auto business today the operating margins on the business weren't justifying the potential risk there anymore. Obviously you guys are a larger player than they were so there's more scale, but could you talk a little bit about kind of expense excuse me compliance investments that you needed to make the last couple of years and how that's changed since you first entered the indirect auto business.

[Michael Jones:]

Well, we bought and intact auto finance team. So they had investments already made in the business and certainly with our rollout of our enterprise risk strategy, we have expanded that but most of the expense that gone into that business is around the servicing side of the business and we have now filled out our production team and credit teams. We feels good about what that is, we have solid origination plans, we believe the most of the investment there, the incremental investment and servicing is behind us. Now as we continue to add assets and as Bill commented, where steel servicing about 1.7 billion service for other so we are building a servicing platform that’s much bigger than our current but what would be able to support a much bigger unbalanced portfolio as well. So we think we are pretty good shape at this point but there’s been a significant investment made.

[Craig Dahl:]

Jones I think what you’ll see going into 15 more leverage operating leverage in this business and which you have historically seen in prior years as we build this up to a more scale business forms.

[William Cooper:]

I think, like a lot of things the auto business not recognizing the cost management requirements necessary and we see saw it happening in provided people jump in [indiscernible] go out few years screwed up I believe. And there is a similar kind of thing; you are see people actually invest business as well. We have very-very good management, this business we have a unique model in connection with most of our long are used cars, you get a little more yield in a used car. We have a scale in connection with the operating expenses and we have an excellent reputation, our auto business one a national award for service, just recently and it is a great business for. The margins have been constricted but we are managing in that and it is still very profitable business for us and we are very pleased to be in it. Out of business is one of largest consumer businesses, out there and it has a lot of positive characteristics, the portfolio turns fast, you have got collateral, we are doing it all over the country, we have got diversification all over the – from a credit perspective. It is real good business with us and from a credit perspective, one of the things that people found at in the retail work is that [indiscernible] and my house is a little bit of 18 months and [indiscernible]. Whereas you start paying on your car 60 days later, somebody takes it ways, you take a [indiscernible]. If we are trying to get another car selling across 18% that you stiff somebody and so the credit metrics in the auto business even through the credit crisis was very strong and continue to be very strong and so we like the business a lot.

[Emlen Harmon:]

Thanks for taking the questions.

[Operator:]

Ladies and gentlemen, thank you for your questions today. Should any investors have further questions, James Korstange, director of Investor relations will be available for the reminder of the day at the phone number listed on earnings release. We now like to turn the conference go back over to Mr. William Cooper for any closing remarks.

[William Cooper:]

I will just again say that this is kind of a closing remarks a lot of ways, this closes a chapter of [indiscernible] from connection with the great housing prices in my opinion and we not have significantly diversified our balance sheet we disclosed the credits that they have most significant credit risk in the lowest yield and I look at this as being a real turning point and we can again really focused our efforts in terms of growing the balance sheet and putting out in a really good quality of assets and so forth without battling from all points things that are occurred as a result of housing crisis. So I remain a very optimistic and I am real proud with the performance with the guys this year. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.