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Executives

James E. Korstange - Executive Officer

William A. Cooper - Chairman, Chief Executive Officer and Member of Executive Committee

Michael Scott Jones - Chief Financial Officer and Executive Vice President

Craig R. Dahl - Vice Chairman and Executive Vice President of Lending

Thomas F. Jasper - Vice Chairman and Executive Vice President of Funding, Operations & Finance

Analysts

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Lana Chan - BMO Capital Markets U.S.

Jessica Ribner - FBR Capital Markets & Co., Research Division

David J. Long - Raymond James & Associates, Inc., Research Division

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

TCF Financial (TCB) Q1 2013 Earnings Call April 19, 2013 9:00 AM ET

Operator

Good morning, and welcome to TCF First Quarter Earnings Conference Call. My name is Sarah, and I'll 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.

James E. Korstange

Good morning. Mr. William Cooper, Chairman and CEO, will host this conference. Joining Mr. Cooper will be Mr. Barry Winslow, Vice Chairman of Corporate Development; Mr. Tom Jasper, Vice Chairman of Funding, Operations and Finance; Mr. Craig Dahl, Vice Chairman of Lending; Mr. Mike Jones, Chief Financial Officer; and Mr. Earl Stratton, Chief Operations Officer.

During this presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are predictions and that actual events or results may differ materially. Please see the forward-looking statement disclosure contained in our 2013 first quarter earnings release for more information about risks and uncertainties which may affect us. Information we will provide today is accurate as of March 31, 2013, and we will undertake no duty to update the information.

During our remarks today, we will be referencing a slide presentation that is available on our Investor Relations section of TCF's website, ir.tcfbank.com.

On today's call, Mr. Cooper will begin with first quarter highlights; Mike Jones will discuss credit and expenses; Craig Dahl will then provide an overview of lending; Tom Jasper will review deposits, fee generations and capital; Mr. Cooper will wrap up with a summary; and we will then open up for questions.

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

William A. Cooper

Thank you, Jason. First of all, I'd like to just give our condolences to the people of Boston for the terror they had to deal with. Makes all of this somewhat -- sound somewhat unimportant, but life does go on.

TCF reported income of $25.5 million for the quarter. It is compared to a loss last year of $308 million, which included a restructuring charge, if you all recall, of some $295 million.

Earnings per share were $0.16. That would compare to a core earnings of $0.08 last year, up 100% from prior year, before the balance sheet restructuring charge.

The net interest margin is 4.72%, up 58 basis points from the first quarter last year, largely reflects the benefit that we got from the restructuring, as well as the growth of strong margin assets.

Our pre-provision profit of $87.7 million is up 24% from last year, which shows a very strong improvement in core earnings.

Provision for credit loss is at $38 million. It's down 20% -- 21% from last year, showing what I will talk about more in a few minutes, a consistent improvement in our credit.

Over 60-day accruing delinquent loans decreased by $15.5 million; that's a 16% decrease. Nonaccrual loans and leases and other real estate owned decreased $61 million, which is a 13% decrease from a year ago. All -- those are all leading edges of credit showing consistent improvement.

Average loans and leases increased $792 million; that's a 5.5% increase from a year ago. And deposits increased $1.8 billion, which is a 14.5% increase from a year ago. All very core strong improvements.

Our revenue at $292 million was about flat with previous quarters. The revenue was impacted by the somewhat seasonal and lumpy nature of our fee income in our equipment finance area. It tends to go up and down quarter-by-quarter. There doesn't appear to be any real trend in that big change, and we would expect, on an annual basis, to see that number be more normalized. Seasonality of deposit account fees that the first quarter is usually the weakest quarter. But also, there's been a significant decrease in the number of transactions per account, as people appear to have cut back on their spending as a result of the fiscal crisis, the higher tax rates or what. We're not really sure what's caused it. We've seen it in our -- performance of our retailers as well, but there is something going on there in the first quarter relative to the buying transactions. And from a positive point of view, the sale of our consumer real estate loans and auto loans, which are reoccurring transactions that contribute to fee income.

The net interest margin was impacted by, as happening in all banks is the continuing very low interest rates, which is -- puts a margin compression on loans, as loans reprice, new loans come in at lower rates. And we had a higher amount of liquidity at the end of the quarter than we normally had, which has some impact on that number as well.

One of the things that I think is quite important to point out is how TCF is positioned relative to its midsize competitors. Our core earnings capacity is still substantially higher than our peers. When you compare it to the banks between $10 billion to $50 billion, TCF is $20 billion. If you look at their performance in 2012 and compare it to our first quarter, you see some numbers as follows. For instance, our net interest income percentage of total assets is 4.36%, as compared to our peers of 3.28%. Our fee income is 2.03%, as compared to 1.24% in our peers. This gives us a revenue number of 6.40% versus 4.52%. TCF is a revenue generating machine.

Our adjusted pretax pre-provision profit is at 1.92% versus 1.67%. The things that cause that is number one, we have a higher percentage of our assets in loans than our peers. We're at about 85%; they're about 65%. And we fund our loans with core deposits. We're up about 77% of assets are funded by our core deposits. In addition to that, we have a higher net interest margin, a higher yield on loans, higher yield on securities and a lower rate on deposits. And all of that makes our core earnings stronger.

And as we continue to see the improvements in the provision for loan losses with improving credit and as we continue to lever our operating expenses with growth in our asset side of the business, we will continue to see TCF's core earning capacity come to the fore.

With that, I will turn it over to Mike Jones, and he'll talk about some of the credit quality highlights.

Michael Scott Jones

Thanks, Bill. Turning to Slide 6. We continue to see improvement in our credit metrics. We have experienced a nice positive trend, as home values have improved in all of our markets. Over 60-day delinquencies for consumer are down 15% from fourth quarter, coupled with the $38 million decrease in non-accruals in REO. We did execute within the quarter a portfolio sale of REO properties that helped us drive these results. Consumer net charge-offs decreased 10% from the fourth quarter levels. And with home prices improving, we're optimistic that will continue.

On the commercial side, nonaccrual and REOs came down 14% from fourth quarter levels. And our leading indicator for commercial, the level of classified assets that we have in our book, was down $44.8 million within the quarter.

On the Leasing, Auto and Inventory Finance businesses, we continue to see strong credit performance there, with net charge-offs within the quarter at 17 basis points and delinquency at 5 basis points.

Turning to Slide 7. Here, you can see on this slide the continued positive momentum that we have around our credit metrics, with all trending down over the last several quarters. Nonaccrual loans and leases and other real estate, down; over 60-day delinquency, down; and then net charge-offs, down as well over the last several quarters.

Turning to Slide 8. This is the S&P/Case-Shiller home price data for our markets. As you can see, home prices are showing improvement in all of our core markets. Minnesota, Detroit and Phoenix all experienced good increases, January 2013 over January 2012. But Chicago being our slowest improving market at 3% increase, January 2013 versus January 2012. As these trends continue, they will have a positive impact on the consumer portfolio credit performance.

Now I'd like to turn your attention to core operating expenses as seen on Slide 9. Clearly, our focus in 2013 will be to grow the revenue into our expense base. For the quarter, compensation expenses were up as we continue to build out our Auto Finance business and the impact of -- in the quarter of the payroll taxes. Additionally, as I mentioned earlier, the portfolio sale of REO properties has also had an impact on the overall expense base by the acceleration of expenses where taxes, closing costs and commissions related to that portfolio sale were pulled forward into the quarter.

With that, I'll turn it over to Craig Dahl to talk about our lending portfolio.

Craig R. Dahl

Thank you, Mike. I'll start on Page 10. We got a couple of views of our portfolio here: one that outlines our 5 businesses and asset classes and one that also outlines our wholesale and retail split. As you can see, we now have wholesale assets of 53% and retail assets of 47% and the concentration of consumer mortgages continues to decline down to 42% of the total book compared to 44% a year ago. Now we ended the quarter with $470 million of net growth.

Turning now to Page 11. This slide details our loan and lease originations. And it also details our origination strength and diversity. I would like to point out a few things on this slide. First, the year-over-year comparison is impacted by the accounting for the BRP portfolio purchase from last February. On an apples-to-apples basis, we were roughly flat for wholesale originations and up in retail originations. Second item to point out is the rapid turnover of our asset class. While this is -- this number is also impacted by the inventory finance portfolio, our auto and leasing and equipment finance also have predictable amortization. The $2 billion of runoff results in $657 million of portfolio increase, which is then offset by the $470 million of loan sales. So as you can see, we had an active quarter from both origination and loan sales, with some first quarter seasonality.

As I discussed last quarter, the asset sale is part of our core strategy. And we will sell assets to help manage asset concentrations, manage geographic concentrations and to sell for gains to help fund the infrastructure expenses -- expansion of our growing businesses.

Now turning to Page 12. This outlines our asset sale results. You can see the auto and consumer real estate sales and corresponding gains are pretty evenly split between the 2 asset classes. We have built a very efficient asset sale capability, building off of our base from auto finance and look to continue with both existing and expansion buyers.

Turning to Page 13. This is the 5-quarter view of our yields. And once again, our portfolio of diversification and asset category expansion allow us to largely offset much of the yield decrease from our older and amortizing portfolios. The impact of the low-rate environment has been negated by the changing mix that continues into the first quarter.

So with that, I'll turn it over to Tom Jasper.

Thomas F. Jasper

Thanks, Craig. Let me draw your attention to Slide 14, as we look at deposit generation in the quarter. You can see deposits were roughly $14 billion at the end of March, up 14% over the first quarter of last year and up 2% over the fourth quarter of 2012. With that growth, you can see that average cost, at the bottom of the slide, has been roughly the same over the last 5 quarters, down just a little bit in the first quarter of 2013.

Those deposits, one of the interesting aspects is non-interest-bearing deposits are up 5.4% over the first quarter of 2012, but also up 4% -- 4.2% over the fourth quarter of 2012, up 5% -- 5.5% over the first quarter of 2012. We've really been able to execute on getting deposits through our markets out. We're performing at a high level around deposit-gathering, trying to match the need of the lending business.

If I could draw your attention to Page 15. I'd like to talk a little bit about net banking fee generation. Let me change the slide just a little bit to show the impact of the fees that we were receiving or the fees that we forewent as related to going back to free checking. Our fees and service charges for the quarter, $57.2 million, as shown on the first line, versus $56 million, net of those fees related to free checking. That's up $1.2 million year-over-year. When you look at the net fee income absent the fees from returning to free checking and the marketing and deposit account premiums, you can see that our fee revenue was down $7.1 million from the fourth quarter of 2012 to the first quarter of 2013.

We would have expected about a 4% to 5% decrease in fees related to seasonality between the fourth quarter and the first quarter. And what we saw in actual was materially more than that from fourth quarter to first quarter. And the reasons are, as Bill mentioned earlier, we can't necessarily drill to any one of these items, but there has been an impact related to consumer spending, as we've outlined on the bottom of the page, and consumer confidence.

In addition, you can see the impact -- we can see some impact from payroll tax increase for our -- the consumer accounts, the delay in tax refunds into those accounts, as well as the weather impact in our markets has slowed spending. We continue to look at this.

The biggest driver in our view is average number of account or average transactions per account from period-to-period. We saw from the first quarter of last year to the first quarter of this year about a 10% decrease in the average transactions per account. We would expect to see some improvement in that going forward as the economy recovers.

I go to Page 16. These are our capital ratios compared to the fourth quarter. You can see increases in all of the capital ratios except for total risk-based capital, and that was driven by the phase out of a small amount of sub debt on the books, otherwise, a modest improvement in those capital levels, as we've focused on building capital through retained earnings on a go-forward basis.

With that, I'll turn it back to Bill Cooper.

William A. Cooper

Okay. In summary, some things you can really see that is going on at TCF. First of all, we sold $500 million of loans in the first quarter and still grew our loans. We've sold loans all year long and increased our loans by almost $800 million over a year ago. We have a very strong lending origination capacity that we've developed in various areas of the bank.

Credit is improving. The trends are indicating that they will continue to improve, particularly on the consumer side. The auto, inventory finance, equipment finance areas and so forth continue to have a pristine credit -- very low charge-offs, delinquencies, nonperforming and everything else. The improving home values is the biggest driver in that, and that appears to be continuing.

We continue to build a very strong revenue base, diversified revenue base with loan origination sales, which also allows us, by the way, to mitigate our credit risk and diversify geographic risk by our ability to sell asset generation. And we continue to have good strong loan growth.

Our number of checking accounts continues to grow. When the retail sales volumes come back to more normal levels, a higher number of accounts will generate higher level of fee income, and we expect to see that in subsequent quarters.

So we -- through the balance of the year, what we expect to see is continuing what has started in the first quarter, which is the growth at core earnings, improvement in credit and continuing loan growth, continuing deposit growth.

So with that, I would open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jon Arfstrom with RBC Capital.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Probably a question for you, Craig, on the consumer loan sale gains. So obviously, a good number for the quarter, but I'm curious how you view that business going forward, how we should look at it, in terms of the gain levels in the future. And I guess the reason I asked this is that there's maybe a little more volatility in fees this quarter than we're used to. And I -- Bill has warned us for years about the lumpiness of leasing. But it looks like auto is on a trajectory up. And one of the lines that I think we're all having trouble pegging is that consumer loan sale gain line. So I'm just curious how you view that business and how you make the decisions in terms of when to sell the loans and what can we expect for gains going forward.

Craig R. Dahl

This is Craig Dahl. John, the level of asset sales is really dependent there on a couple of factors: number one, our overall hold position in consumer; number two, our geographic concentrations based on the originations that we're getting; and then third, basically, the level of infrastructure expansion that's required to support that growth. Now inside our consumer business, there's not as much expansion. We have a substantial factory, basically to support that origination. So those are the 3 factors that would go into our level of sales. I would say -- and also, I guess, a fourth factor would be the appetite of our buyers. And in this quarter, there was a significant appetite. And I would expect the second quarter to be slightly less than the first quarter.

William A. Cooper

John, I would really like to help you with your model on that, but unfortunately, it's another one of those lumpy things. And what we can say is that, particularly on the real estate side of finding markets to sell our real estate origination loans is really good news. Number one, it generates fee income; and number two, it allows us to increase origination because we can diversify by geographic risk. And that means that we can grow in markets that we were going to slow because of the level of the risk in a certain geography and take a gain as opposed to margin that we would normally have. So -- but I would love to tell you, "Gee, it's going to grow 2% a year or something," but it is going to be lumpy. But what we do expect to happen is it to continue to be a core earning capacity at the bank.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

And do you expect quarterly gains here? It's just perhaps the level or the amount that you sell that will be variable?

William A. Cooper

Yes.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Okay. And then one question for Tom. I appreciate the comment about, typically, you'd see a 5% decline, just due to typical Q1 seasonality. Are you expecting a typical rebound in Q2? Or does this kind of consumer hangover continue into Q2?

Thomas F. Jasper

There doesn't appear to be a real emphasis as it relates to consumer spending going up. And if you look at some of the retail sales numbers, and it's just coming out from some of the major retailers, you can see that there's an impact. And so -- there's not a lot sitting here to give us a lot of confidence that it's immediately going to bounce back as it relates to Q2. But what we do know, John, is that we are -- we're getting it done on the account side. So the good news is account attrition has again decreased for the fifth consecutive quarter. Account production is up, as you know it on Slide 15, it's up 5.2% over the last 3 quarters on average. So we're getting it done on a number of accounts. And that will have an impact, but the ability to predict how much that's going to bounce back and when is tough. And as we look at -- as we're sitting here in a foot of snow in Minnesota this morning on April 18, there are other factors that go into this that slows spending that we have to control.

Operator

Your next question comes from the line of Scott Siefers with Sandler O'Neill.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

I think my -- so my first question was just on those foreclosed OREO costs that ran through noninterest expense. So I guess, do you anticipate doing sales like you did of the consumer properties regularly, or just kind of an unusual item, and that will let that OREO costs line fall back down materially? I think if you x out the noise, maybe it's been running somewhere in, call it, like the $7 million range. Or could we even drop below that because you had accelerated some of those costs?

William A. Cooper

We continue to investigate the possibilities of that, and it is opportunistic. One of the things that has happened is because of the improvement in home values, the market for that kind of activity has improved considerably. And there's a possibility that there would be the sale of a different kind of asset, nonaccrual loans, REO, TDRs, all of those different kinds of assets. There's a possibility of sales occurring in the future as that market improves. But I can't really give you good guidance on it because you negotiate each one of those transactions one at a time.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Yes, okay. All right, I appreciate that. And then, just separately, I was hoping a little color on the margin. Maybe it came down, let's say, a little more quickly than I had anticipated, and at least some of that seems due to the higher level of liquidity that you have in the first quarter. I guess just would be curious about how you're feeling about the outlook, and I think in the past, you've talked about sort of a 4.60% bottom for the margin. How do you feel about that number in light of where we are now?

William A. Cooper

We made a little progress. We bumped down the deposit rates a few basis points as well, which will help the very low rates. It's just -- there's not much you can do about it. We got loans that are coming off at 6.5% and going on at 3.5%. And now we've got asset generation capacity of assets with very good margins, which is why our overall margin rate is so much higher than our peers. But it would be probably appropriate to think that we're going to continue to see a couple of basis points -- several basis points a quarter, assuming that interest rates stay where they are, to continue to knock off that margin. Mike, is that fair to say?

Michael Scott Jones

I think that's true.

Operator

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

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Mike, on the OREO sale in the quarter, what were the amount of expenses that ran through that credit-related expense associated with this specific transaction? And I guess, can you remind us how big the portfolio sale was?

Michael Scott Jones

Yes, I think we gave it in the earnings release, it was about 184 properties that we pulled forward, and it pulled forward about $1.5 million of expenses.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And on the auto portfolio, can you remind us how large you're comfortable, I guess, growing this over time, and then, I guess, when you could get there?

William A. Cooper

I'd say that chart where we show the 50% breakout at TCF between wholesale and retail is a percentage breakout that I'm very comfortable with. For a regional bank to have half of its assets, retail, and half of it's wholesale, to the degree that, that make up changes between residential and auto, I think that's healthy. I think TCF has had too big a concentration in residential-related properties throughout our history; it used to be 85% of our balance sheet. We constantly monitor what concentrations we look for in all the different categories. I can tell you that we expect to see continuing growth in that area and it can position a bigger percentage of our portfolio than current positions.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Great. One last one for you -- for Bill. Your ROA targets you've talked about in the past, I think you've talked about a 1.20% ROA, and you've kind of walked us through how you get there. Can you maybe give us an update on whether you think that's still achievable? And then has the timing at all been pushed out or pulled forward?

William A. Cooper

Yes, I think that's still achievable. The -- we're there generally in a revenue generation capacity. We've got some ways to go in levering the operating expenses, growing -- we're continuing to grow operating expenses faster than the assets in the margins et cetera, because you put the expenses on first, and the assets and the revenue come in second. That leverage appears to be continuing. And then the provision for loan losses, which has to come down, and that appears to be happening as well. And when we look at our base case and our goal of where do we get there, we see continuing progress, and we can see clearly where we believe we'll reach those goals, yes.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

And then is that a 2015 event, 2014 event?

William A. Cooper

Well, I don't -- I hate to give you that. We have pro formas going forward. Certainly, within those timeframes we would hope.

Operator

Your next question comes from the line of Erika Penala with Bank of America.

Erika Penala - BofA Merrill Lynch, Research Division

Thank you for the color that you gave us on the consumer spending trends and the seasonality, but as you look out in your budget for the rest of the year, is a $45 million run rate, specifically just in the fee and service charges line, achievable, given the revitalization of your -- sorry, of your deposit base versus reintroducing a free checking product?

Michael Scott Jones

When you look at the trends, we have to continue to build on the account growth. And so one of the things that we've looked at, Erika, is -- what we understand about what's going on in the account base is the reduction in the average transactions per account is not being driven by the quality of the accounts. We believe the quality of the accounts that we're putting on are strong accounts. And that gives us some confidence going forward that we can build a higher generating base. And so that's a very key aspect related to the fee generation on an ongoing basis. But we are looking at the consumer and the spending habits, et cetera. And we're looking that these run rates can go up, but we're going to need some help from the spending of the consumers in order to get there. So we're working off of the number that you mentioned, and that is where we're kind of looking at over the rest of the year.

Erika Penala - BofA Merrill Lynch, Research Division

Got it. And on Slide 13, I appreciate the breakout of the yield for the different loan categories, and it seems like there's a lot of stability, obviously, in consumer real estate and inventory finance. In auto, commercial and leasing and equipment finance, could you give us a sense of where your new bookings are coming in relative to the yield that you disclosed on your books?

Craig R. Dahl

Yes, this is Craig Dahl. I think it's important to note that in our fixed rate lending, which is our auto finance and leasing and equipment finance, these are index based. So it is expected that the runoff assets will have higher yields than the new business because they're the same quality in turn. So there isn't any change in what we're underwriting there. It's really based on overall market conditions. And we would be right just under basically the numbers that are stated on first quarter yields, while originations are just under that for our full positions.

William A. Cooper

I might mention, in terms of the yields on assets, one of the things that's kind of masked in this is the shortening of the maturity of our asset portfolio. In general, shorter maturity assets have a lower yield than longer-term assets. And the auto business, the inventory finance business, the equipment finance businesses and so forth, all have either variable rates or fast turns, very fast turns. And so our -- the intra-sensitivity of our asset portfolio is increasing, which gives us, in our judgment, a lot of -- we pay a price of that in terms of the yield on the assets, but we will reap the benefit when rates rise.

Erika Penala - BofA Merrill Lynch, Research Division

Got it. And just one last question, and more of a strategic one for you, Bill. It feels like the tone of this call, despite the dropoff in fees, is very positive in terms of the direction the company is headed. And credit quality is healing, the loan growth is good. And you mentioned your origination yields are not that far below your book yield, so it seems like your margin could hit a pretty high bottom over the next 3 quarters. And yet many investors I talked to are long your stock because they think that you're going to sell the company. I guess could you give us updated thoughts, given the progress that all of you have made in this company, what your thoughts are in partnering with another bank?

William A. Cooper

Every time I comment on this, I get 50 calls from reporters and [indiscernible] I said we're going to sell the bank. Our position on selling the bank has not changed in 30 years. The -- I don't own all the bank and neither do the other people in this room. We represent the shareholders. And to the degree that somebody made an offer to TCF that we thought was in the best interest of shareholders, in other words, it was an offer better than we thought we could get to in a reasonable way risk-adjusted and so forth, we would consider that offer. That doesn't mean -- there's no book out on the bank. It's not for sale in that fashion. But we always keep an open mind. And when investment bankers are viable, people want to have a conversation, we have a conversation for them, and we have done that for 30 years, and we will continue to do that. So there's really no new news in that story. The other side of that is that we have to understand that it's a difficult market in connection with mergers and activity. And from a regulatory point of view and a lot of other things, the biggest banks are probably out of that market in terms of from an acquisition point of view with the too-big-to-fail banks and so forth. So -- but nothing has changed in that. We will listen to anybody and hear what anybody has got to say.

Operator

Your next question comes from the line of Steven Alexopoulos with JPMorgan.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

This is actually Preeti Dixit on for Steve. In the release, you cited customer-driven events as driving the lower leasing and equipment fees, did you see a pullback in corporate investment spend in the first quarter? And if so, do you get this on to the temporary?

Craig R. Dahl

This is Craig Dahl. I do believe that it's temporary and -- but it's hard -- our leasing and equipment finance portfolio and the technology sector is fairly small, so it's hard for us to draw a conclusion based on our small set of accounts.

William A. Cooper

But there was and has been some feeling of a softer economy in all of those segments of the business, so it's just fair to say.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Okay. And was the decline through the quarter, or was it more heavily weighted towards January?

William A. Cooper

I don't know. It's very difficult to say. The flow -- we've got a pretty good backlog in equipment finance and so forth. And the flow appears to be pretty good, but there -- but it's a monthly flow. It doesn't ebb and peak on a monthly basis, much.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Got you, fair enough. And then, could you give some color on the average yield of the consumer real estate loans that were sold, and maybe what the asset quality of the portfolio was like?

William A. Cooper

In general, they were too over-prime and they were pristine credit quality.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Okay. Were these sort of large bundles, or much more granular in terms of the packages you sold?

William A. Cooper

I'm not sure what you mean by that.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Like were they fairly large bulk sales?

William A. Cooper

A couple of sales; just a couple of sales.

Operator

Your next question comes from the line of Lana Chan with BMO Capital Markets.

Lana Chan - BMO Capital Markets U.S.

Could you give us an idea of how the loan pipeline looks at the end of the quarter, especially on the backlog on leasing and equipment finance?

Craig R. Dahl

Just one second, we're looking that number up. The backlog at the end of the quarter is about $225 million, so it's fairly consistent. Our originations were consistent with our levels over a year ago, and we had basically record originations. So we're fine with where we sit today.

Michael Scott Jones

I apologize for that, that $225 million was just part of leasing. Total leasing backlog was $550 million, which was up about almost $25 million from year-end.

William A. Cooper

Did you get that?

Lana Chan - BMO Capital Markets U.S.

Yes.

William A. Cooper

Okay.

Lana Chan - BMO Capital Markets U.S.

And then on the expenses, could you quantify how much the seasonal increase in personnel was from FICO and all that?

William A. Cooper

I'd say this, I think the biggest piece of it is from the continuing growth of our asset generation businesses. What the FICO number, Mike, do we have the number?

Michael Scott Jones

Yes, I mean, that typically runs every year, and depending on kind of where the expense base is, between $3 million to $4 million increase from fourth quarter to first quarter.

Lana Chan - BMO Capital Markets U.S.

Okay. And just the last question on the auto business. What's your sort of view on the new CFPB guidance on the individual auto business, and...

William A. Cooper

We're watching that issue carefully. We have, what we believe, prepared for it. It is not clear what the guidance is, to be frank with you. But we are following it. We've hired consultants. We've done lots of work. We think we're -- we have prepared ourselves the best way possible to deal with whatever guidance does become clear. But at this point, it's -- we don't really know how the whole thing stands. What I'm talking about is these issues of fair lending as it relates to the auto business, which is what that revolves around. But it's a emerging issue, and we don't really know how it works. I would say, my personal opinion is that we've addressed it very aggressively and are probably ahead of that curve.

Operator

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

Jessica Ribner - FBR Capital Markets & Co., Research Division

This is Jessica Ribner for Paul. We were actually just wondering about your expense base and how you see that developing going forward. I mean, we've seen it a lot at the regional banks this quarter, spend saving initiatives, and, I'd say, meaningful declines in expenses. And we were wondering if you were going to follow suit and what your plans were there.

William A. Cooper

One of the things about expenses at TCF, for instance, we're down I think -- is it 700 people? We're down 700 people in our retail branches, as we've made those systems more efficient. And I mean, we haven't made big announcements in that like many others. We've just crunched it down and made it more efficient. But at the same time, we've been growing our revenue generation businesses, and we've been using that savings largely to change the revenue generation capacity of the bank. And that's what I mentioned in connection with -- an important number for us is expenses as a percentage of assets. We want to drive that number down to around 4% over time. It's 4.30%, 4.40%, I think, presently. And where we plan on doing that is we put people on in these asset generation businesses, and we expect to grow the portfolios around those people. And that's what would drive those numbers -- drive that ratio down as we grow the balance sheet.

Operator

Your next question comes from the line of David Long with Raymond James.

David J. Long - Raymond James & Associates, Inc., Research Division

I just wanted to go back to the OREO discussion from earlier, and you guys talked about the improving home values and you expect that to continue, yet it looks like you're still taking losses on some of these OREO sales. And looking at some of your peers that have reported, we've seen some gains there at this point. So if your expectation is for continued appreciation in home values, I just want to see your rationale for continuing with the OREO sales right now.

Michael Scott Jones

I think there's a couple of things going on in that line item. You got to remember that it's more than just the consumer book. So that line item's also impacted as we try to get these commercial loans out of the bank. And over the last several quarters, we've been very active in trying to do that. I would say that overall, in general, that line item was impacting the quarter based on the velocity that we're seeing in getting out, not only just on the portfolio sale of OREO that we did, but also on our overall book, as those markets continued to improve. So we are clearly focused on moving these assets off of the bank's balance sheet and investing that capital in the growth businesses that Craig talked about. So we are going to aggressively go after and move these things outside of the bank.

Operator

Your next question comes from the line of Peyton Green with Sterne Agee.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

I was wondering if you can talk a little bit about the revenue versus the overhead on the auto business. I mean, we can all see, I guess, or figure out what the spread income is based on the portfolio size; we can see the gains. But I guess, going back to third quarter of '11, you had about $169 million in expenses and if you back out OREO and your FDIC insurance expenses, and that's up to about $186 million in the first quarter. How much more marginal spending do you have to grow the infrastructure of that business to support the volume of loan sales that you wanted to achieve your whole portfolio level going forward, what's the timeframe?

Michael Scott Jones

I think -- this is Mike Jones here, Peyton. I think that we're clearly not at a scale level at that business. I think that it's another, probably 15 to 18 months, as we get to scale in this business. And I think you'll see expenses kind of marching up gradually over that time period as we add additional sales team to kind of generate that volume and get that business to the scale that we would like it to be. You've got to remember that we bring on a sales team day 1 and then it's 6 to 9 months before that sales team is fully effective and running at the pace that we expect them to run at. So there is a front-loading of those expenses over the next several quarters so we get that teams to the level that we need to generate the scale for that business.

William A. Cooper

But given that, even with scaling up in that, that has been a better than 1% return on asset business for us over recent quarters.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. And then I think, Bill, you mentioned that the leasing and equipment finance revenue would normalize, but what does normalize mean? Is that versus the $90 million or so a year that you've booked over the last 3 years? Or is that getting back to kind of a $20 million to $23 million quarterly rate from the $16 million that you posted in the first quarter?

Michael Scott Jones

Yes, I think it's getting back to more the $20 million to $23 million rate that we've posted historically on a quarterly, quarterly basis. Again, those are customer-driven events, so some quarters maybe pushed up prior -- higher than that and some maybe a little bit lower than that, but we think that on a normalized basis, that's a pretty decent run rate.

William A. Cooper

There was a little bit, by the way, of acceleration into the fourth quarter out of the first quarter, where people took actions because they were concerned about the budget crisis, some changes that might happen in the tax code, et cetera, et cetera. So we pushed some first quarter stuff into the fourth quarter. We didn't, customers did, that impacted that first quarter as well.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Do you think it also is going to affect the second quarter, or do you see a pretty big swing back?

William A. Cooper

It's lumpy. It's just very difficult to say. It's customer-driven. They tend to be bigger transactions, so it's difficult to say. The -- there is also, I would say, in general, less impetus to do this when rates are as low as they are. It's a complicated reason why it works that way. But it -- very, very low rates discourage people from these kinds of transactions in the leasing business.

Operator

[Operator Instructions] Your next question comes from the line of Andrew Marquardt with Evercore.

Andrew Marquardt - Evercore Partners Inc., Research Division

I want to go back to the margin commentary and the comment about several basis points under pressure quarterly as long as this environment persists, did I understand that properly? And it sounds like so that would kind of imply that you'd, at least for -- in this environment, you're kind of below through your prior view of kind of stabilization of 4.60% before you need to have high rates, I guess, to get back to that. Is that fair?

William A. Cooper

I think if I understood you that it -- what tends to -- what is happening over time is that the negative impact of the higher rate loans going off, it's mitigated. They all go off. And you end up with a kind of a core margin based on your deposit funding, your borrowings, et cetera. And that is starting to occur, and if -- and it's our estimate if all of that washed out and stabilized and rates stay where they are for a significant period of time, we'd normalize and stabilize that around a 4.60% margin. Is that fair to say, Mike?

Michael Scott Jones

Yes, I think that, that's fair to say. I think the other dynamic that has come into play is our capability to generate fee income related to selling some of our originations. And the mix of that sale will have an impact on a go-forward basis. So that's just one other dynamic that comes into play that I may highlight to you. But I think Bill is right on from the standpoint of we still believe that the 4.60% range around that level is kind of a bottom out point for us.

Andrew Marquardt - Evercore Partners Inc., Research Division

Got it. That's helpful. And then in terms of overall balance sheet growth, how should we think about it, I guess, in the context of the consideration of these additional loan sales?

Michael Scott Jones

I think -- this is Mike Jones here. I think -- again, I think we're going to be active in managing the portfolio on a go-forward basis. Loan sales are going to be core to our fee generation and core to our business model. It's hard for me to say at this juncture those levels because I think to go back to what Bill discussed that it will be a little bit lumpy based on those kind of 3 or 4 things that kind of -- Craig laid out for you around managing exposure, not only from an asset class, but a geography perspective as well, and then the appetite of the investor base that are investing in this asset class.

Andrew Marquardt - Evercore Partners Inc., Research Division

Okay, that's helpful. And though -- that aside maybe, I mean, you do have pretty good asset generation, I mean, will the balance sheet and the loan growth be kind of low, mid-single-digit this year, maybe x that? Or how should we think about that?

William A. Cooper

I think that's probably not a bad bet.

Andrew Marquardt - Evercore Partners Inc., Research Division

Okay. And then in terms of credit quality, this quarter, you released some reserves. Is that a trend that we should continue to expect given improving credit trends? Or is it -- when should we think about potential growth reserve build because of the growth?

William A. Cooper

I wouldn't -- I actually call that a reserve release because we didn't actually do that...

Andrew Marquardt - Evercore Partners Inc., Research Division

No, not this quarter -- okay, go ahead.

William A. Cooper

Yes, we didn't really release reserves in the traditional sense. Mike, do you want to comment on that?

Michael Scott Jones

Yes, I would just say, we evaluated on each quarter. And as we continue to have positive trends in the net charge-off, naturally, the reserve levels will come down.

Thomas F. Jasper

Yes, this is Tom Jasper. The -- one thing I'd to add to that is you have to look -- keep in mind around our commercial portfolio, as we identify problem credits, we do build up reserves on those credits, and then we do take charge-offs in subsequent periods. So you'll see from fourth quarter to first quarter that we did see some reserves decreasing in the commercial book, but that's really driven by some of the charge-off activity that we took not around any other type of release.

Andrew Marquardt - Evercore Partners Inc., Research Division

Got it, that's helpful. And then just lastly, just back to deposit service fees seasonally low this quarter and then customer behavior changing a little bit. How should we think about -- I mean, is this is kind of the new kind of base run rate that we should think about growth from here in terms of the $39 million for the quarter?

Thomas F. Jasper

This is Tom Jasper. I think you have to still take into account that it was a seasonally low period, so we would expect that the seasonality increases would take place. But we're -- in terms of returning the impact of what we saw in the first quarter and saying that, that won't occur in the subsequent quarter, we still have issues around consumer confidence, et cetera. So seasonally adjusted, this quarter's number is a good number as we look ahead until we see some changes in consumer behavior, which we're hopeful that, that can happen. But until it happens, we got to expect some similarities in the numbers.

Operator

Your next question comes from the line of Peyton Green with Sterne Agee.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Just a couple of follow-ups. Tom, perhaps you could talk maybe about going forward, just -- I mean, not just the deposit fees, but other activities that you're trying to drive revenue out of the branch network and what the prospect is for that over the course of this year. And then the second question would be, I was wondering if you all had the gross originations on the residential paper, not just the volume that you sold in the first and fourth quarters, but the actual originations.

Thomas F. Jasper

Peyton, it's Tom Jasper. So as it relates to your first question, a couple of things. One is, we do expect to continue to grow accounts, and I would expect -- we did see a little -- an increase in our marketing. And I would expect that we're going to have a similar level of marketing and even potentially just a little bit more as it relates to activity between now and the end of the year, as we believe there's an opportunity to get accounts. And I think there's -- that potential exists in our branches. And our people in the branch system are performing at a high-level now. And we can expect that the summer months, which are better -- our best producing months for new checking accounts, that we can increase our production as we go into the summer with a free product that we did not roll out until midsummer of last year. So there's -- we're bullish as it relates to that item. As it relates to other activity, those -- as it relates to other types of products and services and other things we're focused on, a lot of things right now around the customer experience, we're -- and we're trying to put ourselves into position between now and the next couple of quarters to make some improvements in our online and mobile channels for our customers to improve their experience with the bank and other -- some other initiatives that maybe aren't going to necessarily impact the fee revenue line directly but are going to have an impact as it relates to account attrition and net account growth on a go-forward basis. And at a later date, as various initiatives that will generate new revenue become closer, you could expect to hear from us as it relates to those. But there's nothing imminent right now of a serious magnitude in terms of new products that you'll see in the next quarter that would impact fee revenue.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. And then on the origination volume?

William A. Cooper

What was the question?

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Oh, on the consumer real estate loans, I mean, you mentioned that you sold $279 million in the first quarter and about $26 million in the fourth, but what was the origination volume?

Michael Scott Jones

Yes, the origination volume in the first quarter was $341 million.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. And is that something -- I mean, do you expect that volume to grow, or is that the capacity of the system? What's the prospect for that going forward?

Michael Scott Jones

No, we expect that number to grow.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. And then, I guess, we're just...

William A. Cooper

It's another area we're putting resources in.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. So was the talk about the auto loan piece, that might slow? Maybe I misheard you earlier.

William A. Cooper

No, I don't -- we don't -- I don't see either one of those slowing.

Peyton N. Green - Sterne Agee & Leach Inc., Research Division

Okay. So you would expect momentum to remain pretty good at the auto and the consumer real estate loan sales.

William A. Cooper

I would say auto is maybe a little slower because car sales have been a little weaker, but not much. We're continuing to see growth. Mike, did you want to...

Michael Scott Jones

Yes, just let me just clarify, Peyton. We would see that the originations of those businesses continue, but what we talked about was the level of sales may slow -- be a little bit slower in the second quarter versus the first quarter in the amount that we sell. I just want to make sure that you're clear on that one.

William A. Cooper

One other thing I'd mention on the branches, by the way, it's just -- as an aside, it's interesting, we did an analysis. We look at our branches as a profit center. The profitability of our branches increases by about 50%, with a 1% general increase in interest rates. I mean, the nature of our deposits, that big 0 interest checking portfolio and a very low cost savings portfolio, which is the vast majority of that deposit base, does not move up very fast. Some of it doesn't move up at all with generally higher interest rates.

Operator

And at this time, there are no further questions. We would like to turn the call over to Mr. Cooper for any closing remarks.

William A. Cooper

Thank you very much. We appreciate your attention and particularly on a very difficult day. What's happening around the world. So thanks again.

Operator

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

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