TCF Financial Corporation's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.22.14 | About: TCF Financial (TCB)

TCF Financial Corporation (NYSE:TCB)

Q1 2014 Earnings Conference Call

April 22, 2014 09:00 AM ET

Executives

James Korstange - Director of IR

William Cooper - Chairman and CEO

Mike Jones - CFO

Craig Dahl - Vice Chairman of Lending

Tom Jasper - Vice Chairman of Funding, Operations and Finance

Analyst

Jon Arfstrom - RBC Capital Markets

Scott Siefers - Sandler O'Neill & Partners

Emlen Harmon - Jefferies

Dave Rochester - Deutsche Bank

Steve Scinicariello - UBS Investment Bank

Steven Alexopoulos - JPMorgan

Bob Ramsey - FBR Capital Markets

Chris McGratty - KBW

Keith Murray - ISI Group

Stephen Geyen - D.A. Davidson

Operator

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

James Korstange

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 for the future financial performance of the company. We caution you that such statements are predictions and that actual events and results may differ materially.

Please see the forward-looking statement disclosure contained in our 2014 first quarter earnings release for more information about risk and uncertainties which may affect us. Information we'll provide today is accurate as of March 31, 2014 and we undertake no duty to update the information. During our remarks today, we will be referencing a slide presentation that is available on the Investor Relations section of TCF's website, ir.tcfbank.com.

On today's call, Mr. Cooper will begin by discussing first quarter highlights, Mike Jones will discuss credit and expense, Craig Dahl will provide an overview of lending, Tom Jasper will review deposits and capital and Mr. Cooper will wrap up with a summary. Then we will open it up for questions. I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

William Cooper

Thanks Jason. TCF pretty much hitted on all pistons in this quarter, we recorded net income of $40 million or $0.24 a share, that $0.24 is up from $0.16 a share a year ago. Our return on assets was 1%, up from 70 basis points a year ago. Return on tangible equity was 10.89, up from 7.60 a year ago and our charge-offs improved considerably at 43 basis points as compared to 106 a year ago. And our net interest margin stayed pretty flat with the prior quarter at 466.

As I said earnings per share were $0.24, up 50% from a year ago. Our provision for credit losses was 14.5 million, down 62% from a year ago. Loan and lease originations were very strong, up 15% at 3.1 billion in the quarter. Revenue was up 4.4% to 305 million. Non-accrual loans and leases were down 22% from a year ago at 266 million. And average deposits which funded our asset growth were up 3.5% to 14.5 billion.

As I mentioned, we had a good strong revenue during the quarter. One of the strongest net interest margins in the banking business at 4.66%. We had strong loan and lease sales, 260 million of auto loan sold and 347 million of consumer real estate, second mortgages that we sold. That is a business that TCF has developed over the years and it’s evolving into a reoccurring strong revenue source for TCF and we do have an option depending on capital, balance sheet management easy to put these assets in the balance sheet or sell them and take gains. First quarter revenue was impacted by increased net interest income from -- due to the growth of the balance sheet and increased sales of loans generating sales on sale on gains on sale.

One of the things that these loan sale levels really demonstrate is the significant asset loan generation capacity that TCF has developed over the last couple of years in connection with the reinvention of the bank. We still have some pressure on the net interest margin rate from these continuing low interest rates but we've offset that with balance sheet growth.

If you compare TCF to its peers, which is banks, publicly traded banks between 10 billion and 50 billion the way we measure it, it’s really interesting to see the way we've evolved and changed as compared to our peer banks. Our net interest income as a percentage of average assets is 4.3% as compared to 3.05% and our non-interest income is 2.2 as compared to 1.13 giving us the strongest -- close to the strongest revenue percentage in the banking business at over 6.5% as compared to little over 4% for our peers. That generates really strong core earnings at TCF with our pre-provision profit which puts us in the top quartile of banks, a 188 is compared to 154 for our peers. Some of the reasons for that are that; number one, TCF is lent off, we 86% of our loans and our assets and loans as compared to only 65% for our peers funded with core deposits at 78% and over 80% of those deposits are insured deposits, in other words, the small balance core strong deposits as compared to a lot of more hot money in some of our peers.

We have a relatively low level of borrowings and a strong equity position. We also have higher yields on our loans, higher yields on our securities and we pay a lower rate on the deposits which is what generates that strong net interest margin.

With that, I'll turn over to Mike.

Mike Jones

Thanks Bill. Turning to page six on credit performance. TCF continues to receive profitability leverage from credit in the first quarter of 2014. Since the third quarter of 2012, the trend at TCF’s credit performance has seen linked quarter improvement as the two portfolios consumer and commercial that were negatively impacted by the economic downturn has seen significant improvement over the last six quarters while our national lending businesses of Auto Finance, Leasing and Equipment Finance and Inventory Finance continued to outperform as they did through the economic downturn. 60 plus delinquencies are leading indicator for future credit quality remains flat with the fourth quarter at a low level of 19 basis points.

As you can see in the lower left hand section, non-performing assets continued to decline. They declined approximately 16 million in the quarter and was down almost 85 million from a year ago. On the upper right hand corner, provision for credit losses to continue to have improvement on a linked quarter basis down 8.3 million from the fourth quarter of 2013 and down almost 24 million from the first quarter of 2013.

As you can see on this page, this was driven by a decline in charge-off rates especially in the quarter decreasing from a fourth quarter 2013 level of 76 basis points to 43 basis points in the quarter. Another leading indicator for TCF’s credit quality is the level of classified assets, which declined 13.6% from a fourth quarter 2013 level of 285 million.

Turning to Slide 7, non-interest expense ended the quarter at 217 million which was actually an increase of 2.6% when you adjust the fourth quarter numbers for the one-time branch realignment charge. This increase was driven by increased staff levels to support our growth of our auto finance business and our investment and risk management. The increase was also impacted by the seasonality of payroll taxes that occur in the first quarter. Non-interest expense as a percent of average assets ended the quarter at 4.67%. TCF will continue to look for ways to optimize expenses leaning on the momentum of the completion of the branch realignment in the first quarter of 2014. This was completed at the end of the first quarter and provides benefit throughout the remainder of 2014 and into the future.

Additionally we look for non-interest expense as a percentage of average assets to come down as growth in our national lending businesses provide economies of scale.

I will now turn the call over to Craig Dahl.

Craig Dahl

Thanks Mike, we’ll turn into Slide 8, which is the loan and lease portfolio. This shows the wholesale and retail mix of the portfolio. We continue on our path of further diversifying the mix for the reduction in the consumer real-estate books and slight increases in our inventory finance and auto finance. I would also highlight the third bullet point on this slide which shows that we annualized loan growth of 9.3% even with 620 million in loan sales in the quarter.

Turning now to Slide 9, which is our loan and lease roll forward, we show a strong origination momentum and even our consumer real-estate was only down 16 million in the quarter versus the prior year. I would look at the annual growth rate here in the middle of the page which shows after run-off and before four loan sales our portfolio increased 26% at the end of the first quarter and after the loan sales we ended at 16.3 billion. This highlights our diversity across asset classes which continues to reduce our concentration risk. We also have our loan sale capability which is now a core competency within the businesses.

Turning to slide 10, these are loan and lease yields, we breakout all of our asset classes here. We have a slight decline in yields of 6 basis points but we are maintaining our credit boxes in all of our segments. So, this is well within our expectations. I would point out that there is a very competitive marketplace however TCF continues to focus on niche lending markets and maintaining our origination levels, expected pricing and good credit quality.

With that I will turn it over to Tom Jasper.

Tom Jasper

Thank you, Craig. If I could direct your attention to slide 11, little bit of discussion on deposit generation. We continue to grow deposits to maintain our strong liquidity position on the balance sheet and look to fund our loan and lease growth through deposit generation. You look at the results, for the first quarter deposits grew approximately 300 million or about 1%, 1.1% quarter-to-quarter and then they are up about 3.4% year-over-year and that’s 14 consecutive quarters that deposits have grown. And during the quarter, the average interest cost on deposits was at 22 basis points, down from the 26 basis points for all of last year as shown on the slide.

Checking account attrition decreased almost 2% compared to the first quarter of last year. We're having, maintaining strong diversity in our deposits across all of our markets through various initiatives market to market based on our competitive position within those markets. When you look at the fee revenue that we reported for the quarter there is -- it is a result of a strong decline in customer transaction activity beyond what we would call the normal seasonality that you see from fourth quarter to first quarter. And I would just comment typically what we would see is anywhere from perhaps 13% to 16% in terms of a year-over-year. If you look back historically at our results, that’s been the type of decline that we've seen from the fourth quarter to the first quarter. And the decline that we experienced this year which is a result of potential several factors including some weather conditions and heating cause and impacted consumer spending, was more than 16% almost 17.5% from fourth quarter to first quarter.

You turn to slide 12, as Craig mentioned, we had very good loan growth from a fourth quarter to first quarter and you can see our strong earnings that we reported for the quarter helped us to hold our capital levels with just a slight decrease from fourth quarter from to the first quarter. So, strong earnings helped that support and we would expect that we have a significant traction as it relates to the future growth and being able to maintain strong capital levels going forward.

And with that, I will turn the call back over to Bill Cooper.

William Cooper

All right. Just open it up to questions.

Question-and-Answer Session

Operator

And ladies and gentlemen, at this time we'll begin the question-and-answer session. (Operator Instructions). Our first question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead with your question.

Jon Arfstrom - RBC Capital Markets

Question for may be Craig or Bill on the consumer and auto production and gains. It was obviously a pretty strong quarter, just curious if you think there was anything unique that occurred in Q1 to drive that type of production? And do you think that this type of a gain level is something that is sustainable or repeatable for the company?

William Cooper

I will turn it over to Craig in a second but I don’t think there is anything unique in it other than we have continued to increase our origination capacity. And there has been some margin pressure in the auto portfolio. Some in the industry have changed their underwriting standards, we have not and we're simply going deeper in our existing dealerships and increasing our origination capacity in the more dealerships and that has increased origination (buy-ins) [ph]. Craig you want add anything there?

Craig Dahl

No, Bill that pretty much covers it.

Jon Arfstrom - RBC Capital Markets

So in terms of the $12 million consumer, call them long-tail gains that you feel like that type of number is something that you can continue to hit, I know it will be volatile from quarter-to-quarter but that feels like it’s a result of your boom in the business?

William Cooper

Jon, the gain on sale of the loans both auto and real estate, first of all, our ability to sell those assets gives us the ability to manage concentration risk, manage the growth of the balance sheet, manage capital, eventually it will be a factor in the way we look at dividends and dividend increases and so forth. But one thing I will mention to you, there’s been a number of questions about those gain on sale of loans, these are good loans for sale and some categories of it we would prefer over the long run probably, will not be in our balance sheet, the lower FICO auto loans for instance. But to the degree we decided not just our loans, they stay in the balance sheet and generate good strong margin over time.

And so it’s kind of like pay me now or pay me later and the whole calculation of whether you keep these loans or sell them. If we sell them, it doesn’t use any capital, it goes into capital as a matter of fact and we mitigate risk, we don’t have risk of loss in the future on those loans and we have stronger earnings to the degree we put them in the balance sheet, we improve our margin dollars over time and increase the core earning capacity of the bank.

The answer is whether these are sustainable in today’s economy, absent significant changes in the world, yes, they are sustainable. We have a market out there of buyers who don’t have loan origination capacity. And we have developed an expertise in terms of tapping that market. And so we have strong origination and a market to buy them, and so we don’t see any reason why that couldn’t or shouldn’t continue in the future. Craig you have anything to add on?

Craig Dahl

No, I mean we look at earnings, we look at concentration levels, product levels and overall loan when its regarding as it relates to capital and that’s how we make our decisions.

William Cooper

It has increased our flexibility of managing the bank in some very significant ways. We can manage credit risk, concentration risk, asset liability mix, and so forth. It has been a big attribute that’s very positively impacted our ability to manage the bank.

Jon Arfstrom - RBC Capital Markets

Okay, good. And then just one quick one for Tom. I appreciate the commentary on weather Tom and that sequential decline. Anything that you’re seeing, you talked about higher account balance for example, anything that you see that prevents the typical Q2 balances, is there any change in behavior patterns there?

Tom Jasper

I think that our expectations would be that you would see the typical change from first quarter to second quarter. We’re seeing larger balances in the accounts. That’s part of what’s going on. In terms of our average retail account, year-over-year the balance, average balance is up about 5.5%. And then you can see the impact of the energy costs really coming through on the size of the typical transactions, whether they are card transactions, checking transactions or what have you, average transition size is up 3% year-over-year. And so those are things I think are related, a little bit to the weather, there is some income tax return increase in balances that generally hits in the first quarter. I think that might have been pushed out a little bit later in the first quarter versus earlier in the first quarter. But to answer your question, I don’t see any reason why we won't expect the typical changes going from first quarter to second quarter.

William Cooper

In the short-term, John looking at this quarter so far which we are not very far into, but we’ve seen improvements that would indicate that what you've indicated will happen.

Operator

Our next question comes from Scott Siefers - Sandler O'Neill & Partners. Please go ahead with your question.

Scott Siefers - Sandler O'Neill & Partners

I was wondering if you could just talk about the expenses a bit more, just specifically you’ve got sort of the tradeoff between the benefits of the branch rationalization presumably being more visibly felt going forward given when they were completed. And then still at least some level of ongoing investments and call it strategic build out. How do you see those (payment) [ph] are going and I guess specifically to the extent you can comment on it, do you think you can bring down expenses from this quarter’s, call it $217 million level.

Mike Jones

Scott this is Mike Jones, I think how you have to think about it is you have to look at it as we placed it on that slide on Slide 7, as a percentage of average assets, because if we continue to grow the balance sheet, we’re going to be adding resources to kind of support that growth. And what we hope for is at a lower level of ads so that we get more leverage as we move out. I think, if you think about the auto finance business over the last two quarters I think they have done a great job of getting the sales organization and that infrastructure calls to kind of where we want it. So I think you’ll see a little bit more investment in that as we go through ’14. But hopefully that will get to the point where we’ll see a lot more economies of scale.

And one of things that we’ve talked about on the first quarter call or the fourth quarter call was having that level progressively come down throughout the year. If you back out fourth quarter that one-time charge for the branch realignment and you take that as a percentage of total average assets, it's pretty flat with the first quarter. So I think as we go into Q2, you’ve got the momentum of the branch realignment, you have got auto finance getting to scale, you’ll see some leverage points in that percentage come down throughout ‘14.

Scott Siefers - Sandler O'Neill & Partners

That’s helpful and I appreciate it. And then if I can switch gears just a little. So just on trends generally improving in the past however there you've at least kind of talked conceptually about pros and cons of additional bulk loan sales, I guess, one, given that trends are improving on their own, do you feel any compulsion to do something like that or just broadly -- how are you thinking about maybe offloading some of the legacy assets that are -- legacy problem assets, I should say they’re still with you?

William Cooper

We constantly evaluate that in the marketplace for it and when the judgment point is -- when the economic value as we see it of the asset that we have after its credit impact whether we can sell those that’s somewhere near those levels, right now the buyers' appetite for those things, they’re demanding a return that’s bigger than we’re willing to pass on, in other words a loss that’s bigger than we’re willing to take in connection with just simply holding on to those assets and (let them go) [ph]. The other thing that’s happening, most of our nonperforming assets are residential real estate in orientation and we continue to see strong improvements in those areas where the home value is rising and the economy improving and so forth. And so when a buyer looks at it based on history, we look at it based on where it’s going, it simply hasn’t been a desirable transaction, but we do constantly monitor that. Frankly, there isn’t as much of that left, it is running off and improving in its credit. And so I would say that it’s less likely that we'll be doing a transaction of that type in the future, but not impossible.

Operator

Our next question comes from Emlen Harmon from Jefferies. Please go ahead with your question.

Emlen Harmon - Jefferies

I was hoping we could talk about the charge-off rate a little bit, I think it was Mike had mentioned to kind of expect similar levels of losses going forward the next few quarters here. I was hoping you can just kind of confirm that but then also could you give us a sense of kind of what underlying trends could be by loan category because it does feel like maybe there is some room for you guys to move down further on the resi side of things, but maybe there is an offset in some other categories there?

William Cooper

The charge-off levels, the sales (of main bulk) [ph] of our charge-offs reside in the residential portfolio which is still a larger portfolio as a percentage in our balance sheet from a concentration perspective. The other businesses are charging off at substantially better rates and all indications are that again if the world doesn’t change that should continue. The residential portfolio, as I mentioned, home prices are still improving although at a slower pace and the quality of the consumer world is getting better as the economy improves although slowly, and so it wouldn’t surprise me to see continuing improvement in the residential charge-off rate.

And I don’t see anything on the horizon that would move the charge-off rate in the rest of the portfolio. All the portfolios as they mature and ours is maturing is pretty much there, but it reaches a kind of a charge-off rate and kind of moderates there that we may have just a little bit more to hold there might come up a little if it follows the curve, with the expected curve on that, but nothing substantial for where it sits right now. So, I think it’s possible and maybe likely that we’ll see some improvement, at 47 basis points that’s pretty low. It’s kind of at the high end of our peers and I do think over time it could improve somewhat, but there isn't much to go at 47 basis points.

Emlen Harmon - Jefferies

Got it. Okay, thanks. Then I heard your comments just a couple of minutes ago about how to think about the expense run rate relative to assets. I was hoping just in terms of the comp expense increase in the first quarter, could you give us a sense of just like how much of that explicitly was FICA versus kind of an increase in production or other com percent that you might have?

William Cooper

Yes, I mean, if you think about it, about 4 million, 4.5 million was kind of FICO payroll tax related.

Emlen Harmon - Jefferies

Got it. And so other increases there are essentially, increase in production and kind of the auto or the secondly in portfolio and any kind of [indiscernible] you have to support infrastructure, would that be a fair way to think about it?

William Cooper

Yes, that’s correct.

Emlen Harmon - Jefferies

Okay, thanks.

William Cooper

Another thing to take in to consideration when you look at operating expenses as a percentage of assets, we have -- how much loans are resurfacing 2 billion, 2.3 billion. We’re servicing 2.3 billion of loans that we’ve sold and there we’ve got, that’s been a profitable business for us and so forth but there is a cost of that as well. If we were to put those in the balance sheet, it would have significantly driven down our expenses as a percentage of assets, instead of that we sold them and took the gains and we have a servicing cost and a servicing revenue associated with it.

Operator

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

Dave Rochester - Deutsche Bank

(Now to deliver) [ph] the expense trend questions but could you talk about the absolute dollar expense trend going forward? It seems like we've had seasonal item that’s pretty meaningful at 1Q, you potentially see a step down in 2Q as a lot of that rolls up plus you got the benefit from the branch closures in there, maybe just a comment on that?

Unidentified Company Representative

Yes, I mean I think we expect expense level will be dependent kind of on the growth of the businesses and that’s a kind of tie-back to what we talked about or I talked about a couple of minutes earlier. But that’s really what’s going to drive it from that perspective is how much expansion do we have around the auto business as well as we continue to make investments in risk management and how those progress throughout the second and third quarter. So, it’s a little hard to say absolutely that that total non-interest expense would ultimately tick down in the second quarter because of those factors.

Dave Rochester - Deutsche Bank

Got you. And just on the auto side, was just wondering how many more teams you plan to hire this year, if you can just update us where you are in that process and then talk about how many dealerships are now part of the network and what the ultimate target is now?

Craig Dahl

This is Craig Dahl. We're pretty close. We are right about there as Mike indicated on sales team expansion and obviously there is a period of time before they get to the optimal level of originations but we are real close. We are over 8,800 dealers at this point now, so we are continuing our path up and again our new teams are some new states but also expansion within existing cities as well.

Dave Rochester - Deutsche Bank

Great, thanks. And just one last one, you mentioned that you expect core fees to bounce back to typical amount in 2Q from 1Q, but the starting point in this 1Q is just a little bit lower than what we’re looking at may be a year ago. Do you think that fees can play a little catch-up and rebound to levels that could get you may be closer to a stable on year-over-year basis in 2Q? Are you are expecting we settle in may be a little bit lower than the year ago period just given the average balance is a little bit higher now than some stuff you talked about?

William Cooper

It’s been a hard call on that. The best I can say about it is, if you look at the first part of this quarter, I am a little more optimistic but there's been trends there. People -- very interesting trends that I think are very economy driven. People in the last couple of years actually have done fewer transactions and by about 8% wasn’t it, some number like that, and so forth. There was a kind of sea change of the middle-class and the way they were handling their financial affairs, you could see it in a lot of other ways in terms of those change in their balance sheet and so forth, that does appear to be changing in a very short term. And a lot of our fee income on the liability side is driven by the number of transactions and we're seeing some improvement in that. So, I can be a little optimistic but it has fooled me in the past.

Operator

Our next question comes from Steve Scinicariello from UBS. Please go ahead with your question.

Steve Scinicariello - UBS Investment Bank

Just curious to get some color on kind of the composition of loan growth from here I know this quarter obviously strong inventory finance in auto. Do you expect those still to be the key drivers as you look throughout the rest of the year? Are there some other areas even if it’s from reduced run-off that might step-up and be contributors as you look ahead into ‘14?

William Cooper

Well, we don’t really predict our balance sheet growth on this call, but I think you are correct in assuming inventory finance and auto will be the two leading ones. Inventory finance, it’s we talked many times here, seasonally this is the high point on the balance sheet however when you look, it’s up 10% year-over-year. So, we're getting growth within the programs and we're getting some dealer expansion as well. So, we're happy with the pace there. We believe that a lot of our -- as Mike commented on our classified asset reduction, a lot of our commercial problems are gone and that those assets are new originations are not migrating down there. So, we do see commercial sort of holding serve there and then leasing and equipment finance, we've talked historically, we made portfolio acquisitions which when you stop making them, they burn-off faster than your core originations, and so despite I would say not double-digit increases in originations were up 8.5% year-over-year on that from leasing and equipment finance and we can see a continued migration through the year of increases on a year-over-year.

Steve Scinicariello - UBS Investment Bank

Great. And then just a question to just spice up the opportunity on the further penetration of the dealer networks that you have going. Just kind of curious kind of where you are in terms of that penetration level, where you wanted to be and whatever metric you want or can give on that just to give us kind of that size or potential opportunity you still have to go to expand those relationship with the dealers that you even have.

Unidentified Company Representative

I mean we have been adding roughly 500 dealers a quarter over the past few year and when continue to see that level of expansion for the next couple of quarters at least, the opportunity is, our model is not based on bringing sort of a majority of business from any dealer we have, we use a diversification model here just like our other businesses which is by dealer type, by state and so we’re looking again to continue just to I guess improve the penetration in existing dealers adds to our origination there too. So I don’t know we’re probably 80% or 90% of the way there on our dealer expansion at this point.

Operator

And our next question comes from Steven Alexopoulos from JPMorgan. Please go ahead with your question.

Steven Alexopoulos - JPMorgan

Maybe I’ll start on the loan yield pressure. Looks like on top of loan yields coming down across categories, the mix shift into auto is also weighing on the loan yields. Can you help us think about I guess your 9% loan today, where that goes? How much pressure that should weigh into overall loan yields giving your lowest yielding loan category. And maybe provide color, what was the yield on the 3 billion of total originations this quarter? Thanks.

William Cooper

Well I don’t have that data point, they are on -- they are different models so I don’t have a consolidated yield for the originations. But first of all I think you need to look at I think TCFs yield on its auto book versus our competitors and we believe we’re comfortable where those auto yields are on our whole book. And all of our models take into account the asset growth within the auto business and we’re comfortable as I said that our originations are solid. Our pricing is what we've expected and plan to have it and our credit quality remains very good in these national lending businesses. So we don’t really see a change in our model as we roll forward in ’14.

Unidentified Company Representative

Let me add something to that in terms of our strategy in the auto business. TCF has sold off the lower FICO scores in general. And those loans generally have a higher yield. But it isn’t like we didn’t earn something out. You really have to take loan sale gains into consideration when you look at the yield, if you will of that business, which has been strong. And the somewhat lower yield in that business for us is because many of our competitors are putting most of those loans and a matter of fact in many cases the majority of their origination is in those lower credit quality loans. So you really have to take the gains on sale in consideration when you look at the line of business overall.

Steven Alexopoulos - JPMorgan

So when you have, maybe just the auto finance to follow on that, what was the typical yield of what you held in portfolio this quarter, just for auto?

William Cooper

I don’t really have that number to be honest with you. I just don’t have it, we have that, I don’t have it.

Unidentified Company Representative

If you look, you look on there, that’s the loan and lease yields that we articulated on the earnings slide is held for investments. So that is the average yield of the portfolio that’s held for investment. The only other thing that I would add most of the loans that as we mentioned before, the lower FICO loans that we’re selling out into the market place go directly into loans and leases held for sale. And you could see the yield comparison on that and I think that that kind of solidifies what Bill was talking about, for those loans are at much higher yields than the ones that we’re maintaining on our balance sheet. The trade-off there is the risk associated with it. We believe that the higher FICO scores allows us with lower charge off rates and lower provision based on what’s held for investment.

William Cooper

The other thing I want to mention, the auto business is that over the next couple of years say, there are some we believe technology improvements on origination and servicing that can improve our operating expenses in that business as it stabilizes and that is on our agenda and it's things that we’ll be working on in the next year or 18 months.

Steven Alexopoulos - JPMorgan

Maybe just one more for you there Mike or Tom. Regarding the branch realignment, now you’ve closed up 46 branches, any update on customer attrition that maybe impact your deposits or fees? Thanks.

Tom Jasper

This is Tom Jasper. Today, we’ve done a good job as it relates to the expected, when we did the announcement in the fourth quarter we expected a certain level of deposit runoff and we’ve experienced less than that, but that’s really the period as I think we’ve talked about in the past that period from announcement to the branch closures which happened late in the month of March. So the more significant period is probably the next 60 to 90 day period as the branches have been closed, we have ATMs in those branches, but right now what I would cherish, we’re outperforming the original model both on account attrition and as it relates to expenses related to closing the branches

Operator

Our next question comes from Bob Ramsey from FBR Capital Markets. Please go ahead with your question.

Bob Ramsey - FBR Capital Markets

Hey, good morning guys. I just wonder with the auto portfolio if you could give a little more detail and remind me what is the used versus new split and what is sort of the FICO range that you guys are retaining for the balance sheet?

Craig Dahl

This is Craig Dahl. The new used is it’s about 20% new and 80% used, and our weighted average FICO on book at March is (790) [ph].

Bob Ramsey - FBR Capital Markets

Great and obviously you guys have still got sort of a lot of room to go before you start to bump up against your sort of concentration limits. I am just curious is that the goal though overtime is to grow the auto book to be roughly 20% of loan mix or how do you think longer term about where you want auto to be on the balance sheet?

Craig Dahl

We do a lot of work on concentration in terms of how much you want to have of any particular thing, and one of the things is you don’t always get to choose that if you will, I mean, some things go well in some periods and some things go well in others. I think 20% is, I can’t give you that number off the top of my head but 20% seems like a reasonable level for the balance sheet in that category. I mentioned about auto loans and things change, you really have to be careful to the way the stuff works but it’s interesting, there is a report that came out the other day on who pay -- what consumers pay first and the loans categories that they pay first is car loans. And they pay it before their home mortgage loan and they pay it before their credit card loan. And the reason for that is it is people who figure out things about homes, you could kind of leave your home and go rend a home or whatever. When you misbehave in the car loan business, you lose your car fast and penalty is significant when you try and get another one and it’s extremely difficult to live in today’s world without a car. And so car loan is one of the reasons we win in this business and it has pretty good yields. We hired a first class, we bought, a first class group of people that have a lot of experience in this business.

It has operated other than the marketplace pushing margins down somewhat and that’s a temporary phenomenon in my opinion, but we this thing has operated pretty much right on the slot of what we expected to happen in terms of the business and so far we believe it is a very satisfactory business and a significant positive expansion and a win a long way to diversifying our balance sheet.

And if you want to talk about concentration just a second, if you look at midsized banks in particular, the various business that TFC has now with inventory finance, auto finance, equipment finance, commercial real estate, commercial capital funding et cetera we have now one of the most diverse balance sheets all over the country. We don’t even have a geographic concentration anymore, all over the country in various kinds of businesses that really gives us from a credit perspective and concentration perspective, one of the best balance sheets and the best balance sheet capacities in the business and you put on top of that our loan sale capacity that we developed, it really has expanded and improved that whole situation as compared to our peers.

Operator

Our next question comes from the Chris McGratty from KBW. Please go ahead with your question.

Chris McGratty - KBW

Dahl, the 9% loan growth in the quarter, I was wondering if you could offer any opinion how this may or may not affect your deposit gathering, so as you are going forward, you spoke in the past about your loan to deposit comfort but we’re north of 1.10. And there has been some rumors in Chicago that the branches maybe up for sale. I wondering if you could offer any update on capital use and potentially deposit acquisitions?

Craig Dahl

Well, I am not quite -- we answered a number of questions there, but we do have significant deposit growth capacity within our existing system as it's been evidenced by the growth the growth we just seen. And albeit it's probably somewhat higher cost and that by the way would be, that is another aspect of driving down expenses, operating expenses because both on the asset and the liability side, to the degree you can grow a balance sheet and you lever operating expenses.

In terms of deposit acquisitions, we constantly look at that, we don’t need them right now. At some point because we can grow deposits and manage that within our system but at some point that indeed may be an option via financial institution that didn’t have desirable assets necessarily but had deposits and deposit generation capacity might be an option. Tom, you want to add anything to?

Tom Jasper

Sure. Chris, Tom Jasper here. Couple of things to keep in mind is as it relates to what impacts our deposit growth strategies, you get to things like how much balance sheet liquidity do we maintain quarter-to-quarter and then we look at the balance sheet projection. So, one thing that happens in the first quarter is that inventory finance has a seasonally high amount of balance growth. They are going to create their own liquidity in the second quarter as some of those balances come back in, so we don’t necessarily grow deposits for where is that at any one quarter end. We're looking on projecting, so if we don’t anticipate that inventory finance is going to grow again in the second quarter, if we were to anticipate that which we don’t, of course we would potentially add more or look for more deposit growth in the first quarter versus what we are able to achieve in the first quarter of ‘14. So, it really is about the projections that where the balance sheet is going in and seasonality and inventory finance is a big item for us that we watch closely.

We of course watch our liquidity levels and then the impact of the loan sale strategy is something new that is impacting our deposit strategy. So, in terms of being able to project where loan sales are going quarter-to-quarter and in the future is having an impact as it relates to how much we want to grow.

That all being said, I think Bill is absolutely correct in terms of our confidence both in the markets that we're in and our team and their ability to raise deposits. We're confident in that but it’s really about that projection as it relates to future balance sheet growth and we kind of plan our attack as it relates to which markets, which products will look to grow deposits in, in 2Q, 3Q, 4Q, in advance of getting to those periods. So, we're looking at that and watching that and look to execute on it over the rest of the year.

Chris McGratty - KBW

Okay. Just one follow-up on the dividend, Bill, how should we be thinking about any change at some of yesterday’s announcement [indiscernible], how should we think about any change over the course of the year in the dividend policy?

William Cooper

Well, I will say this we are evaluating that issue, when you look at what our returns are on capital amount and our asset growth capacity and so forth. The concept as to whether how much you want to take earnings and payback to dividends or how much you want to reinvest in the balance sheet and what's the best thing for the shareholder and that connection is something that we are evaluating right now.

Clearly, TCF has a capacity to pay higher dividend with our return on equity and our return on assets and so forth. But is it better, and we're one of the very few banks out there that has asset generation capacity to utilize increases in capital through earnings and we have the ability to manage it. We can sell it or keep it and so the dividend paying capacity is determined by managing that aspects of the business as well. So, I think it’s clear that if we have the capacity to raise the dividend but its -- and maybe that’s in our future, but it is something that’s subject to a lot of analysis and thought.

Operator

(Operator Instructions). Our next question comes from Keith Murray from ISI. Please go ahead with your question.

Keith Murray - ISI Group

Thank you. Just touching on the NIM for a second, can you just give us your view on where you think it might bottom? I know you have mentioned continued loan yield pressure. It looks like you also were able to bring down your average interest cost again this quarter. What’s your outlook on the NIM there?

William Cooper

Well I will say this, there isn't much room on the interest cost anymore because there isn't very much and it’s constantly surprising -- surprise me that we have been able to even drive that thing down. Certainly there isn’t much left there in terms of improvement, continued low interest rates and the marketplace, one of the things that’s happening in the loan marketplace is that the huge desire of competitors for loan growth, has pushed on yields and loans in lots of different categories. We've been lucky or smart in connection with some of the businesses that we're in. I mean you take inventory finance that’s not a business that everybody in the world is in or car loans or equipment finance and so forth. All of those have had some of the same kinds of pressures, but if rates continue to stay very low, we're going to see some more pressure on the margin and we’re probably not going to be able to offset all that with reduced interest expenses, just not going to happen.

Keith Murray - ISI Group

Okay. And then just following up on the dividend question. When you look at the balance sheet you look at TCF overall, what do you think is sort of the right tier 1 common capital number to run the business at?

Unidentified Company Representative

That’s a judgment that’s based on analysis as well in terms of our judgment associated with what’s the risk in the portfolio. Frankly some of the work that we've done in our stress testing which started off as a regulatory requirement and is more at least at TCF into also a management tool of what would happen if things really went bad and how much capital do you need in that connection which also drives to some degree of concentration limits in the various categories of assets.

We think we were well capitalized now and we think we more than passed those tests and so I would say that probably where we’re at is probably where we should be, so in terms of our tangible capital levels.

Let me add something else on the dividend. If you can just think about this calculation, what appears to be happening in the world today is that to the higher return on tangible capital you have the higher price to book you get in your stock to the degree. And we’re from -- based on what we see could happen, we’re approaching maybe two times book in terms of our stock price.

To a degree our retained capital and put it in the balance sheet, if that translates to two times book in the stock price, that’s a better exchange [indiscernible] than getting a $1 dividend tax of 25%, $0.75 left over, it’s gaining at $2 level versus $0.75 level. And that’s the kind of thought process that we’re going through in connection with deciding what we want to do.

TCF is in the enviable position of having asset growth and deposit growth capacity that we can wrestle with that and we can manage it around loan sales and other things as well. And so we get to decide what’s the best thing for our shareholder and what’s the safest thing for our capital in connection with how we manage that. And that puts us in somewhat of a unique position in the banking world.

Operator

Our next question comes from Stephen Geyen from D.A. Davidson. Please go ahead with your question.

Stephen Geyen - D.A. Davidson

I apologize if I missed -- if you had the conversation on this or if you had covered it before. But the commercial portfolio, just curious, it’s been fairly stable the last few quarters, if you look back over the last couple of years there was kind of a downward trend. But can you talk a little bit about what you are looking at today? What interests you with the type of credits that you’re looking at and maybe where you’re finding those across your footprint?

Unidentified Company Representative

Sure, one of my comments earlier in the call was that we have had significant reduction in problem assets and commercial which has brought the overall level down and we have not had current originations migrate into that. TCF operates with more than our commercial real estate portfolio a strong sponsor models. So we’re worried as much about the sponsors as we are about the asset side. We have seen opportunities in senior living, some multi-family, student housing and again we’re more -- excuse me, we’re more worried about the sponsor typically than we are on the project itself.

Stephen Geyen - D.A. Davidson

And any chance of losing anything big to the long-term financing or is it pretty well set?

Unidentified Company Representative

Well that’s been ongoing for really the past two years. So there is significant, both from the GSEs and from insurance which that funding had receded from the market during the downturn and then comes back with a vengeance after that well. So that’s been ongoing for the last two years. We don’t see it as a new risk to our outstanding.

William Cooper

I might say on that, one of the things has occurred obviously there has been a big refi in the commercial real-estate business and frankly one of the things about our origination capacity remains strong, it gets mashed by the refi that’s gone on the industry and a lot of that is going on, I mean we see it, I mean our competitors are offering rates. I am sure they say this about us, but they are offering rates you wonder why they would because how do you make money at these levels. You price something at 140 over LIBOR where -- what's your margin? 140. And we see a fair amount of that. But one of things that has occurred is that as the portfolio has turned and its refied out and because of the stronger sponsors in this, our portfolio has gotten better.

We have a better commercial real estate portfolio today, far better commercial real estate portfolio in terms of the quality of the portfolio we had a couple of years ago. It hasn’t grown but it isn’t the marketplace you want to grow, it is the one business that along with our corporate lending that we stick to our markets in. And so it’s a business that we compete within those markets and it kind of limits your origination capacity, it’s also the one business that’s negotiated a loan at a time as compared to our other businesses so it is subject to a lot of margin compression as compared to our other businesses. Keeping it relatively flat in my judgment has been a real accomplishment and at the same time we significantly improved the credit quality in it which over the full means it’s going to a nice profitable portfolio.

Unidentified Company Representative

The only thing I would add Dahl is that there has been ongoing a shift from fixed to variable in the portfolio, however, with the constant indexes there hasn’t been any changes, so that’s not really seen. And when rates do eventually move, there will some uptick in that as well.

Stephen Geyen - D.A. Davidson

Any loans at the floors right now, do we need to see some kind of uptick in rates before we get some benefit?

Unidentified Company Representative

As there are some loans at floor, but that percentage has been coming down pretty well over the last four to five quarters.

Stephen Geyen - D.A. Davidson

Any estimate what that might be?

William Cooper

We don’t have that number in front of us, sorry. It’s not a significant story.

Operator

And ladies and gentlemen, we’ve reached the end of today’s allotted time for the question-and-answer session. And at this time, I will like to turn the conference call back over to management for any closing remarks.

William Cooper

I’ll just make a couple -- by the way, I think this is my 105th earnings release, which means I’ve been in this business a long time. We really passed some very significant benchmarks in this quarter. We earned over 1% on assets which used to be a very strong benchmark in the banking business, still is. We think we can do even a little better on that. A return on tangible equity is almost 11%, charge-offs less than 50 basis points which is kind of our benchmark, still a very strong net interest margin at 466.

So a lot of really good core things happened. Our loan growth, double digit loan growth which is again unique in the banking business et cetera, and some of the big investments at TCF made over the last couple of years and some of the big strategy changes that we’ve made are really paying out dividends in this quarter and we expect to see continue over the next couple of years. With that, I will just say thank you very much.

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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TCF Financial (TCB): Q1 EPS of $0.24 beats by $0.01. Revenue of $304.68M