Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

William A. Cooper - Chairman, Chief Executive Officer

Neil W. Brown - President and Chief Operating Officer

Gregory J. Pulles - General Counsel and Executive VP

Jason Korstange - Director of IR

Thomas F. Jasper - Executive Vice President and Chief Financial Officer

Earl D. Stratton - Chief Information Officer

Analysts

Andrew Boord - Fenimore Asset Management

Ben Crabtree - Stifel Nicolaus

David Rochester - FBR Capital Markets

Heather Wolf - Merrill Lynch

Jon Arfstrom - RBC Capital Markets

Ken Zerbe - Morgan Stanley

Philip King - Trufton Investment Management

Rob Rutschow - Deutsche Bank

Scott Siefers - Sandler

Steven Alexopoulos - JP Morgan

Todd Hagerman - Credit Suisse

TCF Financial Corporation (TCB) Q4 2008 Earnings Call January 22, 2009 11:00 AM ET

Operator

Good morning and welcome to TCF’s 2008 year-end and fourth quarter earnings call. My name is Luray (ph) and I will be your conference operator today. (Operator instructions) At this time I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference call. Please go ahead, sir.

Jason Korstange

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Neil Brown, President and Chief Operating Officer; Mr. Tom Jasper, Chief Financial Officer; Mr. Earl Stratton, Chief Information Officer; and Mr. Barry Winslow, Vice Chairman.

During this presentation we may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are predictions and that actual events or results may differ materially.

Please see the forward-looking statement disclosure contained in our 2008 year-end and fourth quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of December 31st 2008, and we undertake no duty to update the information.

Thank you and I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

William A. Cooper

Good morning. Looks like at least in terms of today’s earnings report we’re maybe the best dog in the pound. We earned $1.01 for the year and $0.20 for the quarter. Net income was $129 million for the year, $27.7 million for the quarter. Our net interest margin was $391 for the year or $384 for the quarter. We grew our loans over 10% this year, $1.2 billion. Our reserve for loan losses stands at 1.29 and our charge-offs were about 1% for the quarter and 82 basis points for the year, which is a fraction of our competitors. We did buy TARP money to the degree of $360 million, which did have an impact in the fourth quarter because we had to accrue the dividend, which is at 5% after tax while we didn’t have the opportunity to play that money within that two month period. We’re extremely well-capitalized in every category including about a 6% tangible common equity level. We declared our $0.25 dividend payable February 27th and our Return on Equity for the year was 11.5% now, that’s not anywhere near what are standards have been in the past, but again not too bad.

As I’ve mentioned in the press release in my quote (00:07:32), I just like to mention a few things as to why TCF continues to be profitable. Tom, how many quarters, straight quarters we’ve been profitable now?

Thomas F. Jasper

55.

William A. Cooper

This is the 55th consecutive quarter of profitability at TCF. And the reason for that in this very difficult time is that we didn’t engage in a lot of the activities that the rest of the business engaged in. We never made any subprime loans. We never bought mortgages from brokers. We have no option arms, teaser rates. And we don’t make loans out of our market. We don’t have any low-dock or (inaudible 00:08:16) loans, or all those other risky mortgages. We kept all in our balance sheet the loans that we originated so basically we ate what we chew. We have no auto or credit card portfolios, so we don’t have that creeping problem in our portfolio that many other banks do. We have no (inaudible 00:08:16) commercial paper. We don’t own, we’ve never owned any Fannie Mae or Freddie Mac preferreds, trust preferred securities or BOLI or bank owned life insurance. We don’t have any derivative contracts.

The higher charge-offs that we have at TCF are primarily due to the imprudent behavior of our competitors in the subprime market, which poked a hole in the housing bubble and what is in my judgment the ill-advised monetary policy that created these bubbles both in the oil and commodities in particular the housing markets. We remained profitable, solidly capitalized and we remained ready. I think we’re in the minority here to take advantage of prudent growth opportunities and all of our important categories of assets and liabilities continue to grow.

I mentioned early, we paid our dividend at $0.25 and our projections looking at of the future, we don’t project earnings in particular about our projections. Things could get worse, no question about it. But our projections are that we’ll be able to continue that dividend and as a matter of fact I believe we’ll be able to accumulate enough tangible capital on the TARP to pay the TARP off in five years without having to raise additional capital. That’s not a promise and it’s not even a projection. It’s what our number show.

In accordance with our compensation program, this isn’t anything new at TCF. In accordance with our compensation policy, our people receive no bonuses and as chairman and chief executive, I have neither a salary nor a bonus. Sometimes I think at least relative to 2008 I was over paid as of the performance of the bank. And to be frank with you, I’d be very happy if we stop talking about 2008 and start talking about 2009.

Our net interest margin was $593.7 million, that was up $43 million for the year. That’s about an 8% increase. The 3.91%, that by the way is about 50 basis points higher than our average competitor; that net interest margin rate. This kind of like about the same with 2007. For the quarter we were up $7.5 million, above 5.5%; 3.84% versus 3.83% last year and there’s a degree of seasonality in it. What’s happening in the market place relative to margin is deposit pricing has not come down as much as interest rates and we’ve been aggressive in terms of our pricing. As a matter of fact, I think in the first half, in the first two weeks of this year our deposits we up something like $250 million, core deposits. We’ve been aggressive on pricing and we’re growing deposits, but it’s more expensive, but we’ve been able to get better yields on our assets.

Our non-interest interest is something worth talking about. It was $474 million for the year. The big thing that’s happening in our deposits surge (ph 00:12:07) charges, we’re growing our checking accounts particularly since we started the premium programs, which are expensive in our P&L. We’ve had very good growth in our checking products. Neil, you we’re mentioning that was, new accounts were up by how much?

Neil W. Brown

New checking account productions since we started our new and unique marketing campaigns are up 35% over prior periods.

William A. Cooper

But what’s happening on the other side is due to the economy is that people are doing fewer transactions. They’re buying fewer things, they’re writing fewer checks and their debit card transactions are smaller, which drives that income and so forth. So even though our base is growing, fee income has been pretty flat again because of the nature of the economy and higher unemployment and basically the fear factor.

We are confident as the economy improves at some point, I’m not gonna guess when that is, but when the economy improves then higher checking account growth which is preceding into this year will drive that fee income back to our growth mode.

We opened 11 branches during the year, which is a slower De Novo expansion than we’ve had in the past; five traditional branches and six supermarkets. We’ve opened since 2003 a 115 of our branches, which is a 25% of our portfolio of branches and what that means is we’ve got a growing branch opportunity in terms of the De Novo expansion we’ve done in the past.

We slow the De Novo expansion for two reasons. One, just because of difficult times and two, and this may or may not happen, but we think there may be some opportunities to expand branch systems through acquisitions particularly in some of the supervisor deals. I’m not dropping a shoe here. We don’t have any big on the table, but we think that there might be an opportunity to expand through that method as opposed to De Novo the way that we’ve done it historically. If that turns out not to be true, we’ll go back the old fashion De Novo expansion and we have a pretty significant Land Bank and it’s also an opportunity to buy land pretty cheap.

Our Power Assets, which is basically our loans grew $1.3 billion, 11% from 2007. Consumer loans were up $600 million or about 10%; equipment finance 18%; in commercial loans we’re up, increased $310 million in 10%, so we’ve had strong growth on the asset side. The competitive situation where we no longer have to compete against the WaMus in the Net Cities (ph 00:15:06) and the other incompetent competitors; there’s markets available today that we weren’t in the past because of these conduits and so forth and we’ve been able to improve our pricing.

There’s a lot of talk in the media on how we used the TARP. First of all, when money goes in it stays in, but we’ve already lent the majority of that TARP money out and our plan is to lever that equity in the same fashion that we would lever any of our equity.

We’re up about a $180 million, about 6% from the third quarter of 2008. One of the things I will mention in terms of the consumer portfolio or home equity portfolio, I think we added about a billion dollars in that portfolio, a billion three or something?

Unidentified Company Representative

Originations (inaudible).

William A. Cooper

Originations of a billion three and in 2008; the 2008 vintage, the loans we originated in 2008, we have charged-off $270,000, a fraction of our basis point. And what that shows you is number one, the effects of not having to compete with illogical competition and two the fact that home values, I know you now read this in the newspaper, but home values and the inventory of unsold homes and so forth is stabilized largely in our market place. And without falling home values, the credit quality of our new originations is considerably improving and the mix in that portfolio between the 6/06 and’07 vintages where we’ve had the biggest portion of home values that makes us changing. I would guess by the end of next year, over 30% of our portfolio will be 2008 and 2009 originations, which should continue to improve the metrics in that portfolio as a whole. Now again I’ll mention to you, there’s no subprime in there. These are all good credits. And a lot of things are going out on that. I think something like two-thirds of the bankruptcies that we’ve had in home equity portfolio, people have never been delinquent. They’re current. These are different quality of borrower that you’ll see in the rest of the business.

Deposits are over $10 billion, an increase of $304 million. There’s some seasonality in those numbers that when deposits grew and shrink, but basically we’ve had very good growth in deposits. And as I mentioned to you, even in the first two weeks of this year, we’re up about $275 million. There continuous to be a flight to quality in my opinion, in our product structure and pricing structure and marketing strategies, we’re growing core checking, savings, deposits, which is our bread and butter at a far better rate than we have in years at this point.

The non-interest to expense; the best way to explain non-interest to expense is we’ve had an increase in premium expense, which will pay dividends over the years with increased fee income and margining come from the balances. But our regular operating expenses are essentially pretty flat. We’re paying higher FDIC premiums, again paying for the sins of our competitors. I think TCF over the years, if you take (inaudible 00:18:51) of money and it’s paid over a billion dollars in the FDIC fund and has never collected a nickel. But we’ve kept our compensation expense pretty flat and our occupancy is only the degree that we’ve opened new branches and our expenses are under excellent control. And as I’ve mentioned we didn’t pay bonuses, which were accrued up and we got an opportunity to back some of those off. It’s saturous (ph 00:19:19), so I think in the operating expense side we’ve got that under pretty good control. At the same time we’re adding lenders. We’re growing our bank and so forth. But we found ways to keep control on those expenses in other ways.

On the credit side, in the fourth quarter we increased our reserve from the loan losses, from $159 million to 172 million. We charged-off $33 million and took a provision of $47 million. Our reserve for loan losses at 1.29%, that’s a ratio to net charge-offs at 1.3%. So we think we’re pretty well reserved. We have consistently built our reserve (inaudible) would doubled it. I think it around $80 million at the beginning of the year. It’s now $172 million.

Our charge-offs, we were in the fourth quarter a 137 basis points on consumer as compared to 123 in the third quarter, a modest increase. Commercial was 41 basis points, commercial business 2%. Of that commercial business, that is in the leading indicator. We allocated and reserved up problem assets particularly in our home building portfolio in the second and third quarter and the charge-offs come after the provisions.

Leasing is at 64 basis points, again very modest. And that portfolio continues to hold up very well. And our overall charge-off rate for the quarter was about 1% up modestly from the third quarter and again a fraction of what’s going on in the rest of the industry.

Speaking of the commercial portfolio, our primary problems in the commercial portfolio resided in the home building portfolio and that was primarily in Michigan, which is our toughest market. We only have $93 million of those and $23 million of them are non-performing, $25 million of them.

And we have significantly reserved of written down those portfolios. The remaining of that portfolio is current, it’s not delinquent. The issue in the commercial, we think we’ve identified most of the big problems. They are undoubtedly gonna be more things that we haven’t seen, but we looked at every big potential problem credit once a month. I go over them in detail; if it’s appropriate we allocate reserves but we end up taken a back. Usually we’ve already taken the loss when we liquidate it. So I’m cautiously optimistic on that portfolio. And one of the things I can say with some assurance, that’ll make my lawyers nervous here, but I don’t see there’s a big snake crawling out in that portfolio. We know what’s there and we’re gonna have some more charge-offs, but it isn’t gonna be like in a lot of these other portfolios.

Our equipment finance, again that portfolio held up very well. One of the things that’s not your typical equipment finance portfolio. I think the average size loan we make there is something like $80,000; average outstanding around $50,000. It’s got the low delinquency; it’s a very good portfolio. We have excellent people in that area. It’s not a residual play and that kind of stuff. It’s secured lending basically few new (ph 00:23:09) home cars, cement trucks, etcetera, hospital equipment, all kinds of different. It’s a very diversified portfolio and it’s held up very well.

One of the things I say about delinquencies, the over 30 days delinquency was only up three basis points, 1.10 to 1.13 and are over 90 was only up one basis point from 0.27 to 0.28, which is usually the only ratio that people disclose.

Our non-performings are up from 200 to 234, but again I’ll point out, at TCF non-performing assets are what happened, not what’s going to happen. Delinquency is a better measure with us in connection with what’s happening in our portfolios.

Capital, were currently at 8.92% and stock holders equity in about 6% intangible common equity . Our risk based capital tier one is 11.79 and our total capital is 14.65, so we remain very well capitalized.

One of the things people I asked about the dividend in terms of, we earned our dividend in 2008 and we’re optimistic about that going in to 2009. And people tend to compare the dividend to the earnings per share number, we have a lot of numbers that go in to our common capital that don’t run to the P&L. Tom, why don’t you mention what that is and what it looks like.

Thomas F. Jasper

If you look at the net income available to common stockholders for the year of 2008 was a $126.5 million but then we generated internally common capital of an additional $32 million in 2008 that comes in the form of stock that we issue for our employees stock purchase plan. The effect of some amortization of stock compensation; we issued a warrant in connection with the TARP. In the year we also had some benefits related to stock comp in total. We generated $32 million of internal generated capital which we mean, if you look at our total internally generated common capital for the year is about $158 million against the dividend of $126 million or about 80% for the year.

And that percentage, by the way is pretty consistent with our pay-offs. The difference being is the most years TCF has been buying its stock back. Even though I would like to do it at these prices, the TARP prohibits us from doing that and plus it isn’t obviously the most prudent thing to do. But many of those credits to capital are like income tax that on the generally accepted accounting principle, we got the income tax. We got the benefit of the generally accepted accounting principles, forces you to run it through the capital accounts rather than the P&L. But it does raise our capital, our common capital. And many of those things are recurring in nature particularly from the 401-K and for the TCF’s stock. But we remain optimistic on our dividend, you never know what’s gonna happen. And we also never know what’s gonna happen in this regulatory world relative to that stuff. But we remained confident the way we are.

The other thing in terms of our confidence on where we are, because we don’t have a credit card portfolio or an auto portfolio or a bunch of derivatives or a bunch of securities that need to get written down the market; and a screwy mark-to-market rules if they run around these days etcetera. We pretty well got our arms around what we got and where it’s going. There aren’t snakes crawling around that where things could get significantly worse in portfolio that haven’t been a problem in the past. So, again we feel pretty good about that.

William A. Cooper

That’s pretty a much of a long and a short of it. I’ll just mention that, you know I came back as CEO six months ago. I think we’ve got the strongest management team here at TCF; motivated people, interested and own a lot of the stocks etcetera than we’ve had in the last 25 years since I’ve worked here. They’re motivated. Everybody wants to forget 2008 and go into 2009 because we think there’s a lot of opportunities for us going forward as a healthy institution that’s profitable and doesn’t have the same degree of credit problems than others do. So I remain optimistic and we’re having a lot of fun here.

With that I would open up the questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we’ll now begin the question and answer session. (Operator instructions) Our first question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead sir.

Jon Arfstrom - RBC Capital Markets

Thanks. Good morning guys.

William A. Cooper

Good morning. I think you have been the first questioner as long as we’ve had a profitable quarter.

Jon Arfstrom - RBC Capital Markets

Jason likes me. Question for you, I guess maybe the largest question in terms of the impact on your numbers is the consumer portfolio. And you alluded to a home price that starting to stabilize in your market. Can you maybe give us some qualitative thoughts and how you feel about loss as going forward in that portfolio? Maybe not getting better, but you feel like there’s more stress coming or starting to flattened out.

William A. Cooper

One of the things they’re a number, and I didn’t bring those numbers along, but is it really interesting to see in all of our market areas Homes for Sale have declined significantly. And most of those Homes for Sale are bank-owned. But it’s just like any other market when the supply goes down, the price goes up. And with the very low interest rates now in terms of getting long-term fixed rate mortgages and at a higher rate than everywhere else, but flatter for us and when we look at the data and so forth of what’s happening with the level of home prices and the inventory of homes for sale and so forth.

It might get a little worse, and particularly in certain categories as they try and liquidate their huge portfolios of low-priced homes in the inner cities and surrounding areas. You may see more depreciation there, but we’re not there as much.

Jon Arfstrom - RBC Capital Management

Okay. Thanks for that. And could you update us on the dollar amount of the second lien home equity portfolio that sits above a 90% combined LTV?

William A. Cooper

Tom, do you have that number?

Thomas F. Jasper

No, I don’t. We don’t report out on the LTVs. On our second mortgage portfolio approximately 17% of our second mortgages fall behind the TCF first mortgage.

William A. Cooper

One of the things about that LTV stuff, we have 100,000 mortgages. We know what the LTV was when we originated and we go through a review of updating that information but frankly no one, including us, has a real good handle on what LTVs are within individual categories based on what home prices are today. We never made over 100% loan-to-value stuff; ours were always under a particular category.

One of the things I mentioned by the way, you know, portfolios are new origination because of the decline of the rest of the world’s origination in this market, we were able to significantly tighten our credit and still grow those portfolios and so we’ve lowered loan to values and installed higher credit standards and so forth and are still able to grow that portfolio. And so the portfolio that we’ve originated over the last year is clearly superior to the portfolios we’ve originated because we don’t have to compete against a logical competition any longer.

Thomas F. Jasper

Hi, this is Tom. I would add that about 65% of our consumer home equity portfolio is first lien position.

Jon Arfstrom - RBC Capital Management

Yes. Okay. And one last one here, you mentioned that deposit growth accelerated recently. Are you adding deposits at higher rates still at this point versus the fourth quarter average, and would you happen to have that December margin by any change?

William A. Cooper

I think our deposit rates overall – the cost of our deposits is relatively flat. It may be up a couple of basis points and it’s come down a couple of basis points this year so far. A lot of that has to do with mix. When you throw zero interest checking in there, it drives down the levels, but we never engaged in this big high rate CD market like the rest of the business does. That’s why our deposits, when you look at then over the year, don’t look as good but because we did not compete with the 5%, 6% that was being paid by Net, Citi and the rest of those folks in our markets.

Neil W. Brown

Bill this is Neil. I would just add to that. We’ve significantly reduced our pricing on the CDs recently and we can’t stop the money from coming into the bank.

Jon Arfstrom - RBC Capital Management

That’s good.

William A. Cooper

We’re selling Fed funds. We have no short-term borrowings and we’re selling Fed funds and so we’re very liquid. Our deposit growth is funding our loan growth and we also have lots of other liquidity. We have lots of collateral that’s unused that we could use for borrowing purposes if we so decided, so our deposit growth and loan – both deposit growth and loan growth look pretty strong.

Jon Arfstrom - RBC Capital Management

Okay, great. Well thanks, guys, I appreciate that.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos with JP Morgan. Please go ahead.

Steven Alexopoulos - JP Morgan

Hi, everyone. I’m trying to get a sense of the workouts on the second lien portfolio and I’m curious when you are seeing defaults there where you don’t on the first, you know are you intending to buy out the first and then go through foreclosure? Are you being required to modify the terms or are you tending to just write off the loans?

William A. Cooper

Tom, why don’t you respond to that?

Thomas F. Jasper

This is Tom. When we have a second that’s not behind our own first in a lot of the markets b based on what’s happened on the price deterioration, we’re having a significant amount of walk-aways or where we’re writing off essentially the entire balance of that second. We’re not buying out the first of a third party on our junior mortgage portfolio.

Steven Alexopoulos - JP Morgan

Perfect. I’m curious when you look at the pattern of overdraft fees is there any evidence that customers are getting a bit more sensitive to the fee just given what’s going on with job and wage cuts?

William A. Cooper

I don’t really think that’s the case as much as it is overdraft fees, but overdraft fees and debit card fees which are a big component of our fee income driven by the volume of transactions, and the volume of transactions in checks, ACH payments, debit cards, et cetera is down – and a first time in my career that it’s down.

And that means people are simply buying less. And we pay a lot of attention to those ratios and how that works and that appears to be the driver of it. Now if you want to call that more caution they’re not spending as much money, I guess you could call it that. But it doesn’t seem to be a change in behavior or being more prudent about NSF fees or anything like that. It’s more of a just they’re spending less so they have fewer incidents.

Steven Alexopoulos - JP Morgan

Just one final question, when you look at the Alco model, should we expect the margin to compress at about a similar pace in the first quarter or was a lot of that captured here in the fourth quarter?

William A. Cooper

You know, basically all in my estimation is that because we are able to get better spreads on the asset side and we’re paying more on the liability side because there’s more competition in the world today for deposits as a result of everybody becoming a bank these days that those two things will largely offset each other and that the margin rate might go up a few basis points or down a few basis points but I don’t see much change in it one way or the other and the improvement in the margin we’re going to get is from the improvement in the size of the balance sheet and the changes in the mix.

Steven Alexopoulos - JP Morgan

Perfect. Thanks.

Operator

Thank you, sir. Our next question comes from the line of Terry Mcevoy with Oppenheimer and Company. Please go ahead.

Terry Mcevoy – Oppenheimer & Company

Thanks. Good morning.

William A. Cooper

Good morning

Terry Mcevoy – Oppenheimer & Company

On that last issue, the slowdown in debit card usage and check activity in the fourth quarter. Was it consistent throughout the quarter or did it really happen in the month of December just surrounding the holiday season

William A. Cooper

Earl, you’ve got a feel for that?

Earl D. Stratton

I would say there was obviously more in the holiday season because there is typically a larger increase in the moths of late November and all of December but the trend continued throughout the quarter.

William A. Cooper

As a matter of fact it’s been a trend for the last six to nine months and it was a worsening trend into the third and fourth quarter.

Terry Mcevoy – Oppenheimer & Company

And then just looking at third quarter to fourth quarter deposit trends, the one area that showed growth was this other savings. Could you just remind us what specifically is in that category?

Earl D. Stratton

Passbook savings, power savings, what we call power savings.

William A. Cooper

We developed a new product and some new selling mechanisms and that product is cooking, and its regular savings.

Terry Mcevoy – Oppenheimer & Company

And then the last question, you’ve been generating $2-$3 million dollars of investment/insurance fees a quarter – now that's gone to zero. Is there any offset on the expense side from basically exiting those businesses and the branches?

William A. Cooper

Yes. Neil, you’ve got anything.

Neil W. Brown

This is Neil Brown. The investments and insurance business bottom line was about a $1 million profit for 2008 and so there is a significant amount of expenses associated with that business. We’ve stopped selling those products in our branches but will continue to receive trailer income and we redeployed our energies in the branches to the more profitable deposit-gathering activities.

Thomas F. Jasper

That’s one reason why we think deposits are up.

William A. Cooper

That is the right answer, plus the fact which insurance companies’ annuities do you sell these days.

Terry Mcevoy – Oppenheimer & Company

Understood, thanks a lot.

Operator

Thank you, sir. Our next question comes from the line of Ben Crabtree with Stifel Nicolaus. Please go ahead.

Ben Crabtree - Stifel Nicolaus

Good morning and thank you. And Bill, some of us are as old as you are.

Neil W. Brown

I was thinking of you when he said that.

Ben Crabtree - Stifel Nicolaus

Just actually a couple kind of points about maybe were non-recurring items. Could you kind of explain what went on – what was behind the securities gains?

William A. Cooper

Well, you know, TCF has historically had securities gains and we basically play that market virtually our entire securities portfolio, if I’m correct is above water right now. We have a profit in our securities portfolio and we frankly we like securities and when the rates are high enough like over 6% generally we buy them. And when rates get low enough and we see an opportunity we sell them. And it doesn’t mean we have a trading portfolio or anything like that, but we basically take a look at these and we make a judgment as to when it’s a good idea to buy something and when it’s a good idea to sell something and that’s really the long and the short of it.

Ben Crabtree - Stifel Nicolaus

And would that imply that you would not be too inclined to leverage up the TARP money with the investment portfolio but you’d wait to do it with longs?

William A. Cooper

You can absolutely be sure of that. I would like the balance sheet at TCF to have the best mortgage backed securities and more deposits and less borrowings.

Ben Crabtree - Stifel Nicolaus

Okay.

William A. Cooper

One of the things that’s really clear when you look at our balance sheets with us being largely deposit funded and not have a lot of these particularly exotic investment portfolio, people don’t really realize that raising money on deposits has a lot of really positive impacts on you, particularly you don’t get into the same liquidity crisis, but also because it’s cheaper funding you don’t have to go out the sub prime route, et cetera to get decent yields and you end up with better credit quality in general.

Ben Crabtree - Stifel Nicolaus

All right.

William A. Cooper

But we would like to proceed down that vein.

Ben Crabtree - Stifel Nicolaus

A small point, I am assuming that the 30 plus day number you provide includes the 90 plus days?

William A. Cooper

Yes.

Ben Crabtree - Stifel Nicolaus

The severance charge in the fourth quarter, I guess I wasn’t expecting it to be that large. Is that going to be – was that largely a one-time thing? Is it going to be continuing into the New Year?

William A. Cooper

Will not continue into the third New Year, I don’t believe.

Ben Crabtree - Stifel Nicolaus

And then the last question of that nature is the tax rate. I guess I’ve never been able to predict your tax rate, but the compensation issue here maybe you could explain that in English.

William A. Cooper

The compensation is …

Neil W. Brown

Well, when we had the – this is Neil – we had payouts from our deferred comp plan and the company gets a tax benefit associated with the appreciation on the assets in that plan over the years.

Ben Crabtree - Stifel Nicolaus

Okay.

William A. Cooper

The county rules let you book a debit to the tax expense and a large credit to equity. It doesn’t make a lot of sense but that’ what we had to do. It’s one of those things that’s like a positive to equity that doesn’t run through the P&O.

Ben Crabtree - Stifel Nicolaus

And should we view that as a non-recurring item?

William A. Cooper

Yes.

Ben Crabtree - Stifel Nicolaus

Great. Thank you.

Operator

Thank you, sir. Our next question comes from the line of Andrew Boord with Fenimore Asset Management. Please go ahead.

Andrew Boord - Fenimore Asset Management

Hey guys, I have a couple of questions. Not to be rude but you keep talking about deposit growth and the non-interest bearing deposits really haven’t grown in quite some time. Is that because the average balance per account is still trending down and we should see that up to resume growing again some day or is there some other part of an explanation that I don’t quite understand.

William A. Cooper

Neil, do you want to address that?

Neil W. Brown

Thanks for asking the question. We’ve never been more optimistic about our deposit growth in years and it’s not just hope. You actually have to look at the growth that occurred in the fourth quarter when you compare September 30 numbers to December 31. Deposits went up $393 million during the quarter.

Much of that late in the quarter, but you’ll see that in the average balances in the first quarter of this year. Some of the balance change in managers bearing deposits – a combination of some high balance money moving into interest-bearing funds and then the issue we talked about earlier – our vast majority of low balance customers with those accounts are making less money and spending money and just have less money and that too will change.

Andrew Boord - Fenimore Asset Management

Okay and I appreciate that. That’s exactly what I need to know. And then you’ve had really interesting numbers the last few early calls on the homes you’ve bought into – I guess repossessed – and the number of homes you sold and what not, and I just wondered if you had that this time.

Thomas F. Jasper

Yes, this is Tom. At the end of the third quarter, our total residential from the residential real estate that we had was 295 units. We’re up 11 units in the fourth quarter and finished the year at 306 properties at the end of December.

Andrew Boord - Fenimore Asset Management

Okay. And the number of charge offs is essentially pretty flat, is that fair to say, Tom?

Thomas F. Jasper

No. From quarter to quarter the severity of the charge off got a little worse. I would just add around our activity in the fourth quarter we sold, you know, almost 100 homes in the quarter and we’re managing a relatively low count of properties compared to a lot of our competitors. And that's an advantage for us as our teams are able to get their hands around each and every property in the markets.

William A. Cooper

I'll give you an idea of that, I think we own about 30 or 40 homes here in Minnesota, that's fair. There's a bank competitor here that owns over 1000.

Andrew Boord - Fenimore Asset Management

Wow.

William A. Cooper

I think we're in (inaudible) fairly large mortgage lender, and what are we, 37? There are 37 banks that own more homes than we do. That gives you an idea of the nature of the problem that we have versus others.

Andrew Boord - Fenimore Asset Management

That one competitor over 1000 homes, would that be an existing somebody who hasn't been seized by the government?

William A. Cooper

Yes, absolutely.

Andrew Boord - Fenimore Asset Management

So far anyway, as of 11:52 Eastern, they have not been seized?

William A. Cooper

We were just talking about that. I was talking to our DP guy. I have a screen of the stock prices of all the banks that I follow, and I asked them to send somebody to take the dead ones out of there because they clutter it up. I can't even get all of the live ones on the screen anymore; so in a weird world.

Operator

Thank you, sir. Our next question comes from the line of Justin Maurer with Lord Abbett.

Justin Maurer - Lord Abbett

Good morning, guys. Bill, you probably won't touch this with a ten-foot pole but I thought I'd ask given the senatorial situation in your state, just a couple of thoughts of mortgage cram-down. Obviously you guys have strong position with your first, but even some of your seconds and how that potential cold be affected. But also there's a lot of controversy of course swirling around deposit service charges and user credit card fees and so on; and just your thoughts on either of those if you care to?

William A. Cooper

On the NSF (inaudible), there's been a lot of talk about that. The Fed shelves that whole thing. There is nothing currently active in that vein that I'm aware of. Greg, are you aware of any?

Gregory J. Pulles

Our proposal is in Congress.

William A. Cooper

There are some proposals (inaudible), right. But I don't at this point consider that to be the hot issue. Remember a few years ago when they were talking about ATM fees?

Justin Maurer - Lord Abbett

Yes.

William A. Cooper

Nothing ever happened, you know what I mean? In terms of the cram-down, for those of you who don't know what that is, they're talking about legislation that would – when a borrower declares bankruptcy, the judge would be able to reduce the dollar amount of the mortgage to the value of the home, which in today's market they can't do.

Now first of all, we do a lot of that already. They're called short sales. So if the borrower's got a problem and we think he can continue to pay, we don't want to take the house back and sell it, we'll write the mortgage down to a value and work it out. And so that already happens to a significant degree.

In my judgment, it's an ill-advised plan. And where it's really going to hurt is the credit card and the auto loan areas because now somebody that has got a problem with their house is going to have to file bankruptcy and get rid of their credit card and their auto loan in hopes of getting a cram-down of the mortgage.

If you remember reading about it, it was Citicorp that negotiated this with Congress. Now there's a bunch of wise men. I wonder if Rueben got into that deal. The rest of the banking industry weren't exactly all thrilled with Citicorp. Citicorp is now a wholly owned subsidiary of Congress. They've replaced Fannie and Freddie. They do as directed.

But the rest of the banking industry has a different opinion on how that works, and if they focused it on subprime loans alone, which is the current proposal by the ABA and so forth, that wouldn't have much if any impact on us. But the long and the short of it, nobody knows what's going to happen. A lot of that is just political rhetoric. And so it's something to watch, but we don't know.

Operator

Thank you, sir. Our next question comes from the line of Lana Chan with BMO Capital Markets.

Lana Chan – BMO Capital Markets

Hi, good morning. I wanted to talk about the commercial real estate loan growth. It was very healthy this quarter. I want to see what geographies or in terms of underwriting are you doing in that portfolio right now.

William A. Cooper

It's in virtually all of geographies with the exception of Michigan, where we're basically not doing that kind of lending in Michigan at this point because of the uncertainty of that market. And Arizona, we don't have a commercial lending operation in Arizona. But it's fairly well spread around Chicago, Wisconsin, Minnesota, Colorado a little bit spread. And a lot of it is just regular old commercial real estate, good strong deals with good strong borrowers.

Thomas F. Jasper

As a function of what you were mentioning, we're seeing stronger credits come at us because there's not the liquidity and the conduits and the other securitization markets where they might have gone for lower rates. Now they're coming back to the banks because they don't have those options open to them, so we're seeing stronger deals, better prices as Phil mentioned earlier in the conversation.

Lana Chan – BMO Capital Markets

Okay, and could you show us what kind of underwriting you are doing in that portfolio in terms of LTVs and debt service coverage ratios?

William A. Cooper

That's a pretty complicated question. One of the things I can say is we've been able to tighten all of those. And we're typically doing 70% loan to values and 120 debt service coverages and personal guarantees and the firstborn child.

Lana Chan – BMO Capital Markets

And then I don't know if I missed this, but what was exactly the severance charge for the fourth quarter?

William A. Cooper

How much was it or what was it?

Lana Chan – BMO Capital Markets

How much was it in terms of dollar amount?

Thomas F. Jasper

This is Tom. The amount in the quarter was $3.8 million.

William A. Cooper

And that was largely, by the way, that investment product stuff in the braches to the degree we let people go there and some cutbacks that we did in Michigan, most of that was.

Operator

Thank you, ma'am. And ladies and gentlemen, that does conclude our question-and-answer session. I'd like to turn the conference back to Mr. Cooper, Chief Executive Officer, for any closing remarks.

William A. Cooper

I'd like to thank everybody, particularly those of you who have stuck with us. It's been a very, very difficult time in the banking business and it certainly isn't over. But we remain optimistic and we're going to go out there and slug it out and grow our balance sheet. By the way, I mentioned something about acquisition; you're not going to see us buy one of these big sick institutions and get indigestion, because basically I don't believe you can do the due diligence on them. And I don't think it's an appropriate way to burn up our capital.

If we can find some depository situations out in the world, we'll do it. If we don't, that won't be the end of the world. So we're just going to slug it away out and do the things that we're doing. We think the economy will improve at some point and we'll get back to the levels of performance that we've seen in the past. With that, thank you very much.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the TCF Financial Corporation Fourth Quarter and Year-End Conference Call. (Operator instructions) Thank you for using ACT Conferencing. Have a pleasant day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TCF Financial Corporation, Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts