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TCF Financial (NYSE:TCB)

Q4 2013 Earnings Call

January 29, 2014 9:00 am ET

Executives

James E. Korstange - Senior Vice President and Director of Corporate Communications

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 of Lending, Executive Vice President of Lending and Director

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

James Costa - Chief Risk Officer

Analysts

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

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

Stephen Scinicariello - UBS Investment Bank, Research Division

Nicholas Karzon - Crédit Suisse AG, Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Lana Chan - BMO Capital Markets U.S.

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

Dan Werner - Morningstar Inc., Research Division

Thomas Frick - FBR Capital Markets & Co., Research Division

Operator

Good morning, everyone, and welcome to TCF's 2013 Year End and Fourth Quarter Earnings Call. My name is Jamie, and I will be your conference operator today. [Operator Instructions]

At this time, I would like to introduce Mr. Jason Korstange, TCF Director of Investor Relations, 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; Mr. Earl Stratton, Chief Operations Officer; Mr. Jim Costa, Chief Risk Officer; and Mr. Mark Bagley, Chief Credit Officer.

During this presentation, we may make projections and other forward-looking statements regarding future events 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 year-end and fourth quarter earnings release for more information about risk and uncertainties which may affect us. The information we'll provide today is accurate as of December 31, 2013, and we 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 by discussing 2013 and fourth quarter highlights, Mike Jones will discuss credit and expenses, Craig Dahl will provide an overview of lending, Tom Jasper will review the recent branch realignment, deposits, fee generation and capital, and Mr. Cooper will wrap up with a summary of 2013. We will then open it up for questions.

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

William A. Cooper

Thank you, Jason. TCF reported another pretty good quarter and a pretty good year. I'll make 2 general points about the year. First of all, the restructuring that TCF did in 2012 has clearly worked, giving us a superior net interest margin, one of the best net interest margins in the banking business. And continuing low interest rates have proven the wisdom of that transaction. And secondly, that TCF's reinvention, if you will, has worked as well. The significant investments that we made into new businesses is really starting to pay dividends as reflected in this year's earnings, in particular in the quarter.

Earnings per share were $0.82, that's up from 67% -- that's up 67% from 2012 core earnings, a very strong performance. The net interest margin was 4.68%, that's up 3 basis points from 2012. We're one of the very few banks in the country that's -- it has increased its net interest margin in the quarter, which we did. And we're in the very top-tier net interest margin rate. And I'll get into why that is in a couple of minutes.

Our core revenue of $1.2 billion, up 3.2% from 2012 and that core revenue number is also one of the strongest in the banking business.

Credit continued to improve. The credit in our legacy home equity portfolio continued to improve and our credit in our other businesses has stayed pristine. Provision for credit losses of $118 million was down 52% from 2012. The over 60-day delinquencies is only $30 million, that's down 68%. And non-accrual loans are at $277 million, and that's down 27%.

We had strong originations in our lending, which, again, demonstrates the strength of those new businesses that we have founded over the last several years. They increased $1.3 billion, or 12.5% (sic) [12.4%] from 2012. The average deposits are up over $1 billion, 8% from 2012. We've made significant investments in TCF's risk management systems, with the hiring of Jim Costa and Mark Bagley, and the filling out of those divisions with more and stronger risk and credit operations up and down the bank, which is an ongoing process.

For the quarter, the earnings per share was $0.22, up $0.07 or 46% from 1 year ago. That $0.22 would've been $0.03 higher, except that we closed a number of 46 branches in our supermarket network, kind of retooling that operation. The cost of that closure was about $0.03 in the quarter. We would -- should see significant reductions in operating expenses in 2014 and subsequent years as a result of that retooling. And there's probably some more things to come in that, not only in the branch system, but other areas in the bank as well.

Core revenue of $306 million, that's up 1.5% from 1 year ago. In the quarter, provision for credit losses is $22.8 million, that's down 53% from the fourth quarter of last year. And loan and lease originations increased $213 million, up 7.5% (sic) [7.4%]. And average deposits were up over $600 million, 4.5% (sic) [4.4%].

Some good news for us this year is that the OCC lifted its regulatory order on TCF's BSA program, and my personal opinion is that we, today, have the strongest BSA program of any bank in the country as a result of the work we did in connection with clearing that order. And clearing that order, there's a number of banks that are just entering that of those issues are really just starting to address them. It is good for TCF to be on the back-end of that, rather than the front-end because the regulatory scrutiny, an impact of weaknesses in that area are going to become bigger and bigger as we move along.

The core revenues on Page 5 of the deck, $306 million and, again, you can see the strong net interest margin. The revenues are strong as a result of the continuing growth in our very good margin loans and the continuing drive down of deposit rates. The margin is constantly impacted, while we remain in this very low interest rate environment with the prepayment of higher rate loans as that has continued -- that has significantly moderated because we simply don't have that many of those left to go, which is one of the reasons why we saw some improvement. And I'll remind everybody that we predicted that our net interest margin would even in at somewhere around 4.60%, which is where has even in there.

The Page 6 of the deck is kind of interesting. This is the report we show each quarter. It contains some financial indexes on TCF is compared to our peers. We used third quarter numbers for our peers because we don't have all the fourth quarter numbers, but its -- I don't think it changes the answer. And what it really says that -- what this analysis is, we have a higher margin because we have more loans and less securities, and our loans have a higher yields, and the cost of our deposits is lower and we're funded basically to the inch degree with deposits with only very low level of borrowing. And we have a lot more fee income because of the various businesses that we have that generate fee income.

So as a percentage of average assets, not earnings assets, so as you can see the net interest income at 4.39% versus 3.05%, the core non-interest income, 2.20%, fee income versus 1.14% and revenue of over 6.50%, that again is the -- I believe, that is the strongest revenue number as a percentage of assets in the banking business and our core pre-tax pre-provision return of over 2% is also the strongest in the banking business. That strong quarter core earning number is starting to more and more drop to the bottom line as we continue to make significant improvements in our provision for loan losses.

On the -- traditionally, we're looking at net interest margin of 4.68% versus 3.43%. Our yield on our loans of 5.27% versus 4.78%, and I wouldn't say that it's because we have riskier loans, it's because we're in businesses that require more work to be the fair way to put it to gather that lending business. Yield on our securities is higher and the rate on our deposits is lower.

And as you can see, TCF has loaned up 85% of our assets or loan versus 64% in our peers, that's 20% higher. And we fund almost all of that with either deposits or capital basically, and we're at very low level of borrowings. And that balance sheet structure, which is, I believe, the all-traditional structure of banking, where you -- your asset side is full up of loans and you fund that with core deposits, TCF looks a lot like a 1950s bank, if you will, in that connections.

With that, I'll turn over to credit quality.

Michael Scott Jones

Great. Thanks, Bill. Turning to Slide 7. Credit continued to improve in the fourth quarter, and TCF saw a year-over-year credit improvement across the organization, especially as Bill mentioned in the 2 portfolios that were impacted the most by the economic downturn, Consumer and Commercial.

In 2013, the consumer portfolio benefited from a rise in home values in our major markets and a decline in the overall incidence of default. This resulted in nonperforming loans which we categorized as non-accrual loans and other real estate loans, decreasing approximately $38 million or 12%. Over 60-day delinquencies decreased also, approximately $65 million or 73% from 2012. This bodes well for future quarters as lower delinquency is our leading indicator to overall better credit performance.

Net charge-offs decreased $90 million, or 50% from 2012, and are driving closer to pre-crisis type levels. On the commercial side, nonperforming loans and assets decreased 60% year-over-year, as the special asset team has done a phenomenal job this year working problem assets out of the bank.

As Bill mentioned, leasing and equipment finance, auto and inventory finance continued their consistent credit performance with 7 basis points of delinquency and 15 basis points of charge-offs.

Turning to Slide 8, where you can see the fourth quarter trend on nonperforming assets, delinquencies and charge-offs. All metrics are demonstrating positive trends, with charge-offs up slightly in the quarter, as one large commercial charge was charged off against a reserve established in previous quarters, not having an impact on the provisions.

With that, I'll turn your attention to Slide 9, which discusses non-interest expense. As we've mentioned in our third quarter earnings call, we have started the process of looking at opportunities to optimize our expense base, and the previous announced branch realignment is a good start to that overall initiative. Tom Jasper will discuss the impact of the branch realignment in more detail a little later in the call.

As we look at our opportunities going into 2014, one of those opportunities is to continue to leverage the expense base, making the organization more efficient. As we've discussed in previous calls, our long-term goal is to have total non-interest expense as a percentage of total average assets close to 4%, and we are poised to make good progress towards this goal in 2014.

With that, I'll turn the call over to Craig Dahl.

Craig R. Dahl

Thanks, Mike. Turning to Page 10. We've elected here to show that year end totals for the last 5 years, and you can see the portfolio transformation that has occurred with a significant mix change in overall loan growth. Just pointing out a couple of these factors, you can see we ended the year at over $15.8 billion, with reduced consumer concentration from 50% to 40% over those periods.

Inventory finance is now consistently at 10% of the overall portfolio, and auto finance grew to 8% at year end. Going forward, we will continue to diversify this loan and lease portfolio across these segments and markets. And we talked here that our multiple business segments given us options on where to go. However, we're always interested in growing all the portfolios on the right terms. Annual loan growth for the year was 2.7% despite the $1.7 billion in loan sales.

Turning to Page 11. We have a new slide that highlights our diversity within the asset classes. This loan and lease portfolio granularity shows our wholesale and retail mix across our asset classes. Again, we have strong diversification and a disciplined consumer book. Lastly, our total home equity balance is $2.3 billion, with only 10% reaching maturity or draw period prior to 2021, which gives us significant run way.

Turning to Page 12. The loan and lease balance roll forward shows our annual strong originations with new volume of $12.1 billion and growth prior to loan sales of $2.2 billion. The box on the right highlights our continued ability to grow where the market opportunities are and not push for growth in overly competitive markets because that's the only segments we have.

In summary, we continued strong originations, with diversity across the asset classes, continued to demonstrate our originate-to-sell capability, and we demonstrate our capacity for earning asset growth.

Turning to Page 13. Loan and lease sales. It's now a core competency and revenue stream inside TCF. Once again, we sell to manage concentration, product and geographic risk, as well as for additions in non-interest income. Our total loan sales more than doubled for the year and, includes a nonstrategic portfolio sale from our Commercial portfolio.

Turning to Page 14. Loan and lease yields, we do show some continued decrease, but those decreases are consistent with our risk profile for each segment. Once again, looking at the peer group average comparison, we're significantly ahead of them once again.

Lastly, turning to Page 15. The impact of a rising rate environment. This slide shows the diversification of our portfolio with 76% of our assets either variable or short and medium duration, and 71% of our deposits are low or no interest cost in the quarter, with an average balance of $10.3 billion and only 5 basis points.

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

Thomas F. Jasper

Thanks, Craig. Turn your attention to Page 16. We'll talk a little bit more detail about the branch realignment. As part of our ongoing effort to optimize the branch system at TCF, during the fourth quarter, we executed on agreements where we will be consolidating 46 branches by the end of the first quarter, 37 of those are in-store branches that are located in our Lakeshore, Chicago market, and then 8 in-store branches and one traditional branch in Minnesota. The more majority of these branches are located within 5 miles of the existing TCF branches, and then as a result of that, we expect that we'll have minimal deposit losses as a result of this branch realignment.

In total, the chart related to this activity in the fourth quarter, as was discussed earlier, was about $9 million, which was about $0.03 in the quarter. We expect that the impact of this on an ongoing basis will have a significant impact in the savings around operating, the branch system, and the payback on these consolidation activities will be less than 12 months. In addition, on an ongoing basis, we're going to continue to look at ways to optimize our branch system and our ATM network. We expect a portion of the savings related to these 46 consolidated branches will be invested into our online, mobile and ATM network going forward.

If you turn your attention to Page 17. From a deposit standpoint, year-over-year, we had tremendous activity as a bank. 8% growth in deposits from average balances from 2012 to 2013, while we reduced the cost of those deposits by 5 basis points. Average total deposits have increased for 9 consecutive years and their funding asset growth at TCF.

Checking account growth was significant during the year, 3.1% for 2013, really impacted by the reduction in attrition that occurred, which was down 8.6% compared to 2012. Fees have stabilized since we reintroduced free Checking at the midpoint of 2012. From a quarter perspective, fourth quarter deposits were just up slightly at 0.3% as we utilize excess cash from the third quarter to fund loan and lease growth in the fourth quarter. The cost of deposits went from 27 basis points to 23 basis points in the fourth quarter.

If you turn to Page 18. Really from a capital ratio standpoint, if you look at the quarterly results, we're up in all capital ratios from the third quarter to the fourth quarter. The annual results, which are reflected in the earnings release, are even more significant as we continue to grow capital across the organization.

With that, I'll turn the call back over to Bill Cooper.

William A. Cooper

I'd just say, in summary, when you look at 2013, in connection with looking out over the -- in the future, one of the observations that I'll make is that, I think, TCF and other mid-sized banks perhaps are today sitting in the kind of the sweet spot of banking, if you will. Throughout my entire career in banking, the largest banks have had significant competitive advantages over mid-sized banks. They have been permitted to operate with lower capital in many ways higher risk profiles, and with the 2 big de-failed [ph] designation, they've been able to borrow money almost with a quasi-government guarantee, and their cost of money has been cheaper.

With the changes in Dodd-Frank and Basel and higher capital requirements and so forth, those competitive advantages in our biggest competitors have -- are starting to change. They're going to have to operate with even higher capital ratios, and the Basel rules and so forth are going to impact them in some more ways that are going to require them to keep more capital in some of their risker businesses.

A lot of rules that are applied to banks $50 billion and larger will and should come down to mid-sized banks, because they're just prudent in connection with the way you're managing your businesses, the stress testing and so forth, are all things that innovations that are really, in many ways, positive to the banking industry in connection with measuring your concentration risks and so forth. But they're going to be applied in a much more draconian manner in the bigger banks than they are in the mid-sized banks.

In any case, what that kind of leaves us with -- we don't have -- when people compare our peers, they look at other banks between $10 billion and $50 billion. That isn't who we compete against. We compete against the largest banks in the marketplace. We have the -- by far, the biggest market share, and those banks are going to be required to compete in a more difficult environment. And I think it's optimistic for mid-sized banks.

In terms of looking forward and looking at the year, we saw significant continuing improvements in our credit metrics, and I expect to see that happening as home prices continue to improve. We're 95% of the way through our commercial issues that were largely a result of the recession. And our legacy portfolio, home equity loans is down considerably and is in less difficulty because of the improvement in home values or lower incident rates, lower levels of bankruptcies and so forth. And we expect that to continue. Our -- the business is that we entered at high cost and lots of work are really starting to pay dividends. We're still not all the way there.

We haven't -- we are on the balance sheets of some of these businesses to absorb the incremental operating expenses that we put on, but we've made a lot of progress in that connection. And we expect to continue to make progress in that next year. TCF is a lending machine. We have the capacity from a few banks in the country that has the capacity, not only to grow loans, but to also originate and sell loans to manage our risk and to take gains. And we're very positioned, well positioned for rising rates.

Our deposit portfolio is relatively rate insensitive, and our asset portfolio is either very -- is variable or has a short duration. And so a rise in interest rates would improve TCF's very strong net interest margin even more. And I think inevitably that we're moving in that direction.

We have a lot of revenue diversification. We're in a lot of different businesses, and the both in the margin side and the fee income side of the business, we have significantly diversified our fee income out of being almost exclusively deposit level into other businesses. And TCF has a lot of opportunity in the operating expenses side, both to lever the existing operating expenses with our ongoing asset growth, driving down those expense ratios. And looking at as we just did with the consolidation of the 46 branches, ways of doing business more efficiently, we have of those relatively higher operating expenses. We've had is both a problem and an opportunity going forward.

So I remain optimistic. Maybe the most optimistic I've been. We've got what appears to be an improving economy. We sit here in the sweet spot of banking. Our credits are improving and again all of our core businesses are strong and improving. So I remain optimistic.

With that, I would open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jon Arfstrom from RBC Capital Markets.

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

Just a question on the expense goals, maybe Bill or Mike. You've talked about the 4% in the past and, obviously, the branch realignment is the first big step, and, I guess, I'm curious if you have a timeline in mind in terms of how you get to that 4% -- when you get to the 4%? And how much of that is expense versus revenue growth?

William A. Cooper

Since it's a very difficult question. I'll turn it over to Mike Jones.

Michael Scott Jones

Jon, I'll give you a couple of points here, and I don't think that we're going to put an exact time horizon on it. But think of it this way, right, if you look back over the last couple of years and you look at total non-interest expense as a percentage of total average assets, it's increased over the last couple of years. And even if you look at the quarters in 2013, they've slowly -- they increased as well. I think what you'll see in '14, that trend go the other way. So I think what you're going to see is positive movements each quarter as we go into 2014, moving closer towards that 4% level.

The other thing that I would add and give you a little bit of information, I think, as you get -- as we complete the first half of 2014, I think we'll have the majority of our sales team on the auto finance side in place. That, we believe, we have the appropriate coverage across the U.S. to achieve the asset size and levels that we wanted to achieve around the auto finance business. And that takes almost 9 months for those sales teams to get up and be at the most efficient level. So they're still going to be leveraging as we get into the second half of '14 and into '15. But we're going to see positive movements towards that 4% in '14.

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

And the assumption is that the branch realignment costs will be in the run rate by the end of Q2 -- or Q1?

Michael Scott Jones

Yes. I'd say that most of those things will be close towards the end of 1Q. So as you go into 2Q, they should be in the run rate.

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

Then just one credit question if I may. Credit looks fine in general, but I notice there is a bit of a trend in nonperforming loans in the consumer book. Is there anything going on there? Anything notable?

William A. Cooper

We changed. We became a little more conservative in the time level of when we put a loan on non-accrual in the consumer portfolio, but it didn't -- it's interesting you can see it from a -- we had somewhat of a boost in non-accruals because we accelerated that, and at the same time, we had a reduction in delinquencies because it took the thing out of delinquencies. But in reality, that is not signaling in deterioration of the credit. It's just a change in the method.

Operator

Our next question comes from Chris McGratty from KBW.

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

Maybe, Mike, for you. You guys have talked about how you are much more loans as a percentage of assets than your peers. But your loan-to-deposits 1:10, I've asked in the past. I was wondering if you can comment about this ratio going forward, understanding you'll eventually begin to portfolio more auto loans. And also kind of in the context, one of your Pennsylvania peers this quarter said that they need to get it down from 105% to 100% by the end of the year. So not sure if it's regulatory for them, but just, Bill, I'm interested -- Bill or Mike, I'm just interested in your take here.

William A. Cooper

One of the things, if you look at our balance sheet, that loan-to-deposit ratio, if you are essentially loaned up, our deposits are about almost 80% of assets. Capital was another 10%. So we're funding all of our assets virtually with deposits today. And that's really the key. It's not what that level is. Most of the banks have a good loan-to-deposit ratio, not because they have a lot more deposits, it's because they don't have very many loans. And I don't know that there's a significant reason to be more invested in investments than in loans. I -- particularly today, investments have a lot of risk associated within in connection with the mark-to-market risk in a rising rate environment. I would argue more risk than you do loans.

And in addition to that, our loans have a lot of liquidity in them. In particularly, if your investments go underwater, they become less liquid in connection with your willingness to take that into a liquid position, you slow down lending at TCF and the cash flow will roll in, significantly it creates a lot of liquidity in the bank. So that ratio will, all by itself, I think, for a bank, that is essentially loaned up and deposited it up is a kind of a meaningless statistic.

The other point I want to make on the deposit side is some 90% of our deposits are insured deposits. In other words is less than $250 million or $250,000. That means it's not hot money. It doesn't move. And you don't need to cover it from a liquidity perspective, I think the last go-around, as a matter of fact, every go-around since we have in FDIC is demonstrated that insured money doesn't move. And so I don't pay as much attention to that. I don't believe we're under any pressure to change that and I don't think anybody would agree -- I think no one would say, "Let’s make fewer loans and put more investments on the portfolio to improve your deposit -- loan-to-deposit ratio." I don't think it will accomplish anything.

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

Okay. Understood. And maybe just a follow-up on capital, Bill. Can you talk through your capital priorities for the year? Do we get a look at the dividend? Do you look at buying something potentially given your capital levels have rebuilt since the restructure?

William A. Cooper

We look at capital generation the -- in terms of dividend or whatever it -- in connection with how much capital do I need to support the growth of my business. And if, to the degree I'm growing loans, and I don't sell them, and I grow the balance sheet, I use that capital to support that growth, and I think, in general, shareholders would approve that, with that as long as you're getting the kinds of returns that we're getting out of that, that kind of growth. But we evaluate that regularly. The -- I wouldn't say that we go out and buy something just to utilize the capital. And I also am not a big fan of stock buybacks in particular. The industry tends to buy the stock when it's high because you can. The question of a dividend is something that the Board looks at each quarter in light of the things I just discussed.

Operator

And our next question comes from Steve Scinicariello from UBS.

Stephen Scinicariello - UBS Investment Bank, Research Division

Just given the significant transformation you guys have made this year, just kind of curious, as you look ahead, what are kind of the main drivers, main kind of goals for '14? I mean, when I looked at the balance between wholesale and retail, about 50-50, do you feel that's going to stay around 50-50? Or is there an opportunity to migrate that one way or the other as you look ahead?

William A. Cooper

For one thing, you don't really get an opportunity to pick that. Some things grow faster in some periods and other things grow faster in other periods. I like the 50-50 retail wholesale mix. I think it's a healthy mix for a mid-sized bank. Fortunately, it looks like that mix isn't going to change much. We've got good opportunities for growth in the auto business, which is retail, and we have good opportunities for growth in some of our wholesale businesses. So I think, we probably -- I think looking forward in the reasonable future, we'll probably going to see a pretty balanced growth between those 2 segments.

Operator

Our next question comes from Nicholas Karzon from Crédit Suisse.

Nicholas Karzon - Crédit Suisse AG, Research Division

I guess first wanted to start off on the fee income side, with the consumer real estate sales, they were a little bit higher quarter-over-quarter. I'm just wondering how you're thinking about retaining those loans versus selling them into the market.

William A. Cooper

I think, on the consumer -- on a real estate side, we may -- looking into 2014, be keeping a few more of those than we have in the past. And that's based on a review that we've done in connection with some concentration risk as particularly as it relates to geographic risk and so forth with an improved appetite, if you will, to keep some of that stuff on the balance sheet. On the auto side, we'll continue to sell the loans that we've always sold, which is those below a certain FICO score and so forth. But I think it's possible and maybe a likely that we'll be keeping, we'll slide more into keeping more of the real estate loan origination in 2014 in future years.

Michael Scott Jones

This is Mike Jones. The other thing that I would add is over the last year or so, I believe Craig and his team have done a really nice job of building out the investor base for these loan sales. And as you look from quarter-to-quarter, it's dependent on one, the appetite within the market, as well as the appetite within those investors. And we keep building that book of investors as we go forward, and that happens in the fourth quarter.

William A. Cooper

I'll say this about loan sales. In this kind of -- this is -- if I sell loans and I do it properly, which we do, and I take a gain, what has happened is I have increased capital, book to profit, and I haven't leveraged my capital. And if I put it in the balance sheet, over the pool, I'll make more money. But I've taken on more risk because I take the risk that something goes wrong in that category and I'm using up capital. And so you kind of there's a balance between the two in connection with what you want to do in your evaluation or what's the better thing to do, and those evaluations can change with the economics or what we believe is happening in the economics overall.

Nicholas Karzon - Crédit Suisse AG, Research Division

And then as a follow-up. The charge offs in the auto portfolio were a little bit higher. And I understand there's some seasonality there. I think they were about 68 basis points at quarter on an annualized basis. What do you think a normalized charge off range is there given the credit quality of the portfolio?

William A. Cooper

It's hard to say. I don't think anything of note happened in that, maybe a little maturity in the portfolio might have affected that more than anything. Because that's a relatively new portfolio, but it is starting to mature because we've been in the business now for a good 2 years, and the average turn in that is only about 3 years. But there's nothing going on there. What the average charge off rate is, I'm going to guess it's somewhere between 50 and 75 basis points, which is, by the way, better than our peers, but that's what we think it will be.

Operator

Our next question comes from Terry McEvoy from Oppenheimer & Co.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Could you just talk about the seasonal impact in Q1 that you would expect within that service charge line? And with higher balances and fewer transactions, does that line start to smooth out or do we still see the volatility that we've seen in the past?

William A. Cooper

Tom, you want to answer?

Thomas F. Jasper

Yes, this is Tom Jasper. You're right on, Terry, in terms of we generally see the balances in checking rise during the first quarter, and it does have and it has had over the years, an impact on the amount of service fee revenues. So we see a decrease in the first quarter, and then we see that come back a little bit in subsequent quarters. So you should expect to see that again this year in terms of seasonality of banking fees in Q1.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

And then just as a follow-up. There's an article yesterday about the target breach, another Minneapolis company. And your name was mentioned where you're simply replacing the cards. And, I guess, from the big picture, how were you thinking about more of those types of situations, minimizing risk to your company and any additional expenses going, going forward?

William A. Cooper

Well, that's a complicated topic. One of the things that I'll mention is it really shows the incorrectness of the Durbin Amendment, which largely revolved around who pays fraud cost in the fraud prevention. And let me mention by the way, the cost of fraud prevention is far higher than the cost of fraud because if you do fraud prevention correctly, you don't have as much fraud. If you don't do it, you get a lot of it, but it's a real cost. And that refusal of the retail industry to pay the banks to support strong fraud prevention things in the business is really -- the retailers got about, I think, $20 billion of additional revenue in that thing. It's pretty clear that they didn't spend it on fraud prevention.

And as you can tell, I'm a little irritated by the whole thing as to why I'm paying for the breach of the retailers around the country. But it's a war with the people that are rating these companies around the country. It is interesting to note, and I think this has a lot to do with the controls that the regulatory system required the banking industry to put into its systems that these breaches are occurring in retailers and not banks. And I feel that the banking industry has some very strong controls in this, and I feel like the rest of the industry has potentially some very big holes in it. But we have been proactive and we were one of the first, I think, to announce that we're going to reissue the cards, and we did that to protect our customer. It cost us some money to do it, but we did it because we don't want our customers to be defrauded or inconvenienced any more than necessary.

Operator

And our next question comes from Lana Chan from BMO Capital Markets.

Lana Chan - BMO Capital Markets U.S.

I noticed on the yield table that the investments in other yields went up pretty nicely in the quarter. What drove that?

William A. Cooper

Mike?

Michael Scott Jones

Yes, I would say that what drove that was we used excess liquidity within the quarter basically to fund the asset growth within the quarter versus going out and borrowing or raising deposits.

Lana Chan - BMO Capital Markets U.S.

Okay. And on the expenses, I think you had mentioned that part of the cost savings from the branch realignment would be reinvested. Any idea sort of how much ballpark and are there additional cost savings to be had from just getting out of the OCC order?

William A. Cooper

Well, there's ongoing expenses in connection with BSA in the industry as a whole and at TCF. And we paid our penalty associated with the BSA order and that's over. But we are in a very significant efficiency mode in the BSA where we got a very good system where we're identifying the things we should be identifying. A lot of those systems are still fairly manual, we're making some big changes that -- that can, hopefully, make that more efficient. Jim, do you have any comment you want to make on it?

James Costa

No, I would just say what while we're looking for efficiency, it's not at the expense of control. So we're very proud of the investments that we've made, we've been recognized with the talent that we've gathered and the accomplishments having to consent to what are left. But there's always an opportunity to see if we can do what we're doing more efficiently. But we very much appreciate the heightened expectations for BSA, and accordingly, we are not in any way going to back off the strength of the program in an effort to find the cost to save opportunity. We'll have a reasonable balance between the 2.

William A. Cooper

One other thing I mentioned by the way that heightened operation of BSA has caught some very bad people in some very significant ways. We've identified some people doing some things that are very bad related to -- communicated that to enforcement agencies, and we have been lauded for their ability to stop some very bad guys doing some things that they shouldn't be doing as a result of this in heightened procedures. Tom, did you want to add something?

Thomas F. Jasper

Yes, this is Tom Jasper. Lana, as it relates to the cost saves that are part of the branch consolidation, we also announced during the quarter that we added 52 ATMs in the Chicago network in the elevated train stations around town. And so we won't get into giving you an individual estimate related to whether mobile investments are online or ATM. I would just say that you should expect that, over 2014, we'll have additional announcements that will show that that investment is taking place, whether that be an upgrade on our own online banking system, mobile platform or the ATM network. But for the purposes of quantifying those investments, we don't do that on the call.

William A. Cooper

One of the things I mentioned about retail deposits in the branch system is that it is in its -- it looks the weakest today that it's ever looked because of the very low interest rates. When the interest rates rise, I saw an interesting analysis the other day that showed that the value of the deposits going up by about 35%, simply if you look at the forward yield curve, and it's a mistake to look -- to make decisions on branches in this interest rate environment, without taking into consideration the likelihood that those deposits will be more valuable and those branches more profitable when rates rise. And I think the transaction that was recently done by U.S. bank in Chicago kind of demonstrates that that's a forward-looking thing associated with their judgment as to what deposits are going to be worth, not necessarily what they're worth today.

Operator

Our next question comes from Scott Siefers from Sandler O'Neill Partners.

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

Just a couple of small questions. I guess, first one, how large was that single net charge off that you guys referred to in your earlier comments that you had previously reserved for?

Michael Scott Jones

Yes, we don't talk about individual charge-offs, but if you look at kind of where our charge-offs for commercial ran in the third quarter and the second quarter, I think you can kind of give you some direction on that.

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

Okay. That's perfect. I appreciate that. And then I think you ended up closing more branches than you had originally announced last month. What changed between now and then and, I guess, you've given a lot of color on efficiency that you've, that's already taken place and that you would anticipate. But is that kind of it for the branch side?

William A. Cooper

I would say this, we're constantly trimming and pruning. And so that announcement we made was a bigger announcement but we're constantly opening a branch, closing a branch in various places. And that's, the additional, was simply additional trimming, if you will.

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

That sounds good. I appreciate it. And then final question. So obviously, you were able to utilize some of the access liquidity, I guess, that cash at the Fed that you had in the third quarter. Is there additional access that you could continue to drawdown? In other words, I think you've talked quite a bit about that 4.60% margin level, but if there's some excess liquidity in there, could you maybe stay a little higher for a little longer on the margin?

Michael Scott Jones

I would say no. I think in the fourth quarter, we utilized what we could from an excess liquidity. I think we're comfortable with the asset liquidity out there. As you look at '14, I think the composition of that liquidity is an opportunity for us potentially to take a look at between cash and marketable securities. But we're really comfortable where the liquidity sits at this point in time.

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

And final one, so the $6 million in other noninterest income was a couple of million higher than it typically runs. Was there any anything unusual in there? Or is that a decent run rate going forward?

Michael Scott Jones

No, I think what's included in there was the -- you're talking about the noninterest income in the other line. Yes, what included in there was the gain associated with the commercial sale. So that impacted, and that was about $1.5 million.

Operator

Our next question comes from Dan Werner from Morningstar.

Dan Werner - Morningstar Inc., Research Division

On the branch realignment for the 46 there to be consolidated, did you or will you provide a deposit amount that is impacted?

Thomas F. Jasper

No, we just -- this is Tom Jasper. We just don't expect it to be significant, but we're not giving out an assumption as it relates to what we expect the run off to be.

William A. Cooper

We'll be -- we don't believe it will be material. As a matter of fact, we think that we'll be able to keep, first of all, it isn't all that much that's the reasons why we picked those branches. But we expect that we'll be able to keep for us, very significant portion of it because we have a continuing presence in the marketplace.

Thomas F. Jasper

This is Tom Jasper. I think there's 2 factors. One is what Bill just alluded to as it relates to the proximity of our other branches and the networks that we have, the other is our product, and that we believe the free checking product is one that customers want, and there's broad appeal on that the customers are willing -- would they want to maintain that product and they're willing to move from one branch to the other to keep that product in their portfolio.

Dan Werner - Morningstar Inc., Research Division

Okay. And I think, Bill, you alluded to this earlier. Is it possible to have another round of branch realignment or consolidations before the end of the year?

William A. Cooper

Well, there's nothing on the radar screen particularly on that at this point of that same magnitude. But as I mentioned, we're addressing -- it's not only do we close a branch, but is there a way to reduce the operating expenses associated with the branches that we have, particularly as it relates to real estate, and we've already done a lot in terms of the staffing levels, because people visit a branch less often than they used to. And so there's a lot that's already been done and some yet to be done. Tom, do you want to add on it?

Thomas F. Jasper

Yes. This is Tom Jasper. I would just add that over the course of '14, I would expect that we'll continue to look for opportunities. To use Bill's analogy around pruning here and there, but we really are going to spend a significant amount of time focusing on improving the customer experience in the branches that we already have. And so the level of investment that we have there is going to pay dividends as it relates to earnings as well, and we expect to do both over the course of 2014. And we expect our team members will execute on that.

William A. Cooper

That's a really good point. And really what that means is that we intend to be selling more products in our branches. And we've already started doing some of that, and we're going to do more of it and, hopefully, and we believe this will be the case. That will make our branch system even more profitable than it is today.

Dan Werner - Morningstar Inc., Research Division

Does that mean giving your branch manager specific goals in terms of what you expect of them out of product sales?

William A. Cooper

Well, let me assure you they already have those goals. They're just going to get goals for new stuff, too.

Operator

Our next question comes from Bob Ramsey from FBR.

Thomas Frick - FBR Capital Markets & Co., Research Division

This is actually Tom Frick for Bob. Just a question for you on your branch strategy. I was wondering if you could remind us how many in-store branches you have remaining in your footprint after the realignment? And then what is your strategy with those in-store branches going forward?

William A. Cooper

Well, we, in terms of the overall reductions, I'm not sure exactly what the number is going to be by the end of March as off the top of my head. But from an ongoing basis, we like the partnership that we have with Jewel and Cub around the in-store strategy. It's been good to us over the years and we expect it to continue to pay dividends. We have a long term agreement with them, and that will continue to look for opportunities to partner with him where appropriate on the in-store. So this is no way backing off in-store in terms of our future strategy.

This is just more pruning around certain branches where we think the level of investment required to run the branch isn't the best use of the bank's capital on an ongoing basis versus other investments. At the end of the day, I would expect that we're going to still look for opportunities whether we deal within the branch system or the ATM network to look for opportunities on in-store that makes sense in addition to campus banking opportunities.

Thomas Frick - FBR Capital Markets & Co., Research Division

Great. That's some good color. And then kind of switching gears, your auto loan book grew kind of almost 20% quarter-over-quarter, is up 130% year-over-year, net of loan sales. I was wondering if you could give us a little color about the competition that you're seeing in that marketplace. And what is the potential opportunity for you guys within that asset class?

Craig R. Dahl

This is Craig Dahl. It's obviously very competitive environment right now. Many lenders are reentering the auto market, and we have also auto sales on a continued upward tick. So it's very competitive. Now as it relates to our ability to originate more within one quarter versus the next, Mike's already commented on the build-out of our sales teams and our expansion, now we're in 45 states, and we're having good success as we move up the number of dealers within those states. As it relates to the optimal waiting of auto in that, again, that's kind of as we're rolling forward our asset mix, and you saw that on Slide 10, I believe, we're at that 50-50 retail, wholesale. That continues to move up within the retail side as our reliance on the consumer and mortgage product is reduced over time and on a strategy that we announced previously, so...

William A. Cooper

I'll mentioned, just through the -- there has been, I would call it, degradation of the standards in the auto industry. People are extending maturities and moving around in the credit cycle and so forth. And it's partly a result of the pressure on pricing. TCF is not engaged in that. We have taken the pain in the pricing, if you will, that's gone on without degradation of our standards associated with credit in the business.

Thomas F. Jasper

This is Tom Jasper. Tom, just for your benefit, we would expect that at the end of the first quarter, the supermarket in-store branches would be approximately 180 branches.

Thomas Frick - FBR Capital Markets & Co., Research Division

Thank you for that number. And then one last question. Bill, to your point about kind of pricing. Loan yields declined just 5 basis points on the overall book sequentially this quarter. I was wondering if you could help us think about kind of your outlook for loan yields and maybe about NIM more broadly over 2014.

William A. Cooper

I think assuming stable interest rates, which I don't think is a good assumption, but assuming stable interest rates, I think net interest margin could bounce around a couple of basis points, but should be fairly stable. Mike, would you agree with that?

Michael Scott Jones

Yes.

William A. Cooper

I remind you, again, I can take my head off to Mike here, he predicted this a year ago, this 4.60% net interest margin rate, everybody scratched their head about where he came up with it but it turned out to be right. And in terms of a lot of -- there's a lot of mix changes that are going on. And as I mentioned, one of the -- if you look at our mix of loans, we've got categories of loans that have pretty good yields in them. And what's mitigated is those 7.5% mortgages paid off and are gone. And most of that has happened, and that 7% apartment loan reified at 4%, and so forth, and most of that is done. So what we don't have is that pounding into the net interest margin of the higher yielding assets that prepaid and went away. Most of that has already occurred.

Operator

[Operator Instructions] And ladies and gentlemen, we've reached the end of our allotted time for today's Q&A session. At this time, I would like to turn the conference call back over to Mr. William Cooper for any closing remarks.

William A. Cooper

I'd just like to thank everybody for their attention. And as I said, I remain optimistic, as optimistic as I've ever been about our prospects. I think our business model is working as planned. Thank you.

Operator

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

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