TCF Financial's (TCB) CEO William Cooper on Q2 2014 Results - Earnings Call Transcript

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 |  About: TCF Financial Corporation (TCB)
by: SA Transcripts

Operator

Good morning, everyone, and welcome to TCF's 2014 Second Quarter Earnings Call. My name is Jamie, and I’ll 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

Good morning. Mr. William Cooper, Chairman and CEO, will host this conference. Joining Mr. Cooper will be Mr. Craig Dahl, Vice Chairman; Mr. Tom Jasper, Vice Chairman; Mr. Mike Jones, Chief Financial Officer; Mr. Earl Stratton, Chief Operations Officer; and Mr. Jim Costa, Chief Risk 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 second quarter earnings release for more information about risk and uncertainties which may affect us. The information we will provide today is accurate as of June 30, 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 second quarter highlights, Mike Jones will discuss credit and expenses, Craig Dahl will provide an overview of lending, Tom Jasper will review deposits and capital and Mr. Cooper will wrap up with a summary. And we will then open up for questions.

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

William A. Cooper

Thank you, Jason. TCF had another good quarter, reported net income of $53.1 million which is up 37% from a year ago. Interesting fact, that 53 million is the highest quarterly income since the fourth quarter of 2007 or really in terms of the financial crisis, so we basically recovered from that crisis, if you will.

Our earnings per share were $0.29. That’s up 38% from a year ago quarter. Revenues were 310 million. That’s up almost 3%. Loan and lease originations stood at 3.5 billion, up almost 9% from a year ago. And deposits stand at 14.8 billion, up about 5%. Provision for credit losses was 9.9 million in the quarter. That’s down almost 70% from a year ago. And nonaccrual loans and leases were down 6.5% from a year ago.

Return on assets which is a key metric in the banking business was at 1.17% for the quarter. That’s up 27 basis points. And our return on tangible common equity which is also a key metric is at 12.72%, up 282 basis points from a year ago.

On a year-to-date basis, we earned almost 100 million; 97.8 million, up 42%. Earnings per share at $0.54, up 46%. Revenue of 615 million, up about 4%. Loan and lease originations for the six months, 6.6 billion, almost 12% increase. Deposits up 4%. Provision for credit losses was down 66% and net charge-offs were down 48% to 35.8 million. Return on average assets for year-to-date was 1.09%, up 29 basis points and return on tangible equity was 11.82%, up 300 basis points.

We had good strong margin. The fee income in the quarter was impacted by – we had slightly less loan sales in the quarter generating lower gains on sale. However, at least partially this is seasonality but we had to increase banking fees, deposit fees due to seasonality. And we have growth in servicing fee income that’s occurring as we’re servicing the loans that we’ve been selling over the last couple of years, which is another revenue source of TCF.

The net interest margin was impacted by a couple of things working in different ways, but we pretty much maintained our net interest margin rate at 4.65% just down slightly from 4.66% in the prior quarter and that was due to a change in the mix with higher average balances in higher yielding businesses and it was offset somewhat by very competitive pricing out in the banking market in all of our businesses.

As you can see, the noninterest income, we have a lot of diversity in that income, much more diverse than it used to be in the past and very strong noninterest income. If you compare us to our peers, our peers are banks between 10 billion and 50 billion, the way we measure it. In terms of our financial metrics, we come up very strong on all of these measures.

As a percent of average assets, our net interest income is 4.34% as compared to 2.98%; noninterest income over 2%, 2.21% versus just over 1%. Total revenue was 6.55%. Pre-tax pre-provision profit which is a key indicator of core earnings in the banking business were at almost 2% and the banking industry is 1.56%. And return on average assets year-to-date was 1.09% versus 0.98%; on a quarterly basis, it’s almost 20% higher return on assets than our peers.

Our net interest margin 4.66% versus 3.38%; yield on loans is higher; yield on securities is higher and the rate on deposits is lower, all those things contributing to that significantly higher net interest margin.

One of the key reasons that our margins are higher is the mix difference. TCF is kind of like a 1950s bank, if you will. Our loans are 86% of our assets versus our peers in 65% and that’s funded almost exclusively with deposits and equity; deposits being 78% of assets. We’ve only got a small amount of borrowings. We’re basically a core deposit funded institution along with having strong equity.

With that, I’ll turn it over to Mike who can talk a little bit about credit.

Michael S. Jones

Thanks, Bill. Turning to Slide 7 on credit performance. TCF continues to receive profitability leverage from credits through the first half of 2014. And as I talked about before, since third quarter of 2012 the trend of TCF credit performance has seen linked quarter improvement as the two portfolios; consumer and commercial that were negatively impacted by the economic downturn have seen significant improvement over the last seven quarters while our national lending businesses; Auto Finance, Leasing and Equipment Finance and Inventory Finance continued to outperform as they did through the economic downturn.

If you look at the right top or left top section of this slide, 60 plus delinquency, our leading indicator for future credit quality remains flat with the last three quarters at a low level of around 18 to 19 basis points. In the lower left-hand section, nonperforming assets continued to decline. Nonperforming assets decreased 5 million in the quarter or 1.4% and decreased 19.3 million or 5.6% from a year ago.

On the top right-hand section, provision for credit losses was down 4 million in the first quarter and down 22.7 million from the second quarter of 2013. As you can see on the page, this was driven by a decline in charge-offs resulting from improved home values and a reduction in incidents of default which also drove reduced reserve requirements in our consumer portfolio. Another leading indicator of TCF’s credit quality is the level of classified assets which decreased 9% from the first quarter levels.

Turning on to Slide 8. Noninterest expense ended the quarter at 213 million, a decrease of 1.8% on a linked quarter basis. This decrease was driven by the realization of the benefit of the branch realignment and the reduction of foreclosed real estate and other credit costs as property values continue to increase and overall credit improves as we discussed on the earlier slide. Noninterest expense as a percentage of total average assets owned and serviced for others ended the quarter at 3.97%.

As you will see in this quarterly earnings slide deck as well as release, we have broken out more information around fees, expenses and levels of assets associated with servicing loans for others. This has become an important profitability driver for the business as we continue to sell loans and retain servicing.

TCF will look to continue to find ways to optimize expenses leaning on this momentum that we have achieved in the second quarter. Additionally, as I mentioned in previous earning calls, we will look for noninterest expense as a percentage of average owned assets to come down as growth in our national lending businesses provide economies of scale.

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

Craig R. Dahl

Thanks, Mike. We’ll start on Slide 9, the loan and lease portfolio. This shows the wholesale retail mix by asset class, the same trends here from our prior quarters. There is decline in consumer real estate percentage and increasing auto with our planned expansion and the consistent wholesale portfolios.

The ending balance at June 30 is affected by run-off of our inventory finance portfolio from its seasonal peak at the first quarter. And this slide does not include the held for sale assets which were at 311 million at quarter end.

Turning to Slide 10, loan and lease sales. We believe these have been a core competency since the fourth quarter of 2011. It gives us flexibility to the organization through product and geographic concentration, capital liquidity and of course an additional revenue source. On the bottom we break out the gains from our two main asset class sales.

Slide 11 is our managed portfolio which shows the level of portfolio for both our retained and serviced for others. And you can see we ended the quarter with serviced for others of 2.6 billion and our portfolio loans and leases including held for sale of 16.5 billion.

Turning to Slide 12, the loan and lease balance rollforward. Once again, we had strong originations in the quarter. The annualized growth rate shown in the mid box on the left is 12% prior to loan sales. Our consumer real estate had strong year-over-year performance in these market conditions and all areas had consistently good performance. We believe this slide highlights our strength and diversity across multiple asset classes.

Turning to Slide 13, our loan and lease yields. We continue to be pleased with our consistent performance aided by our multiple asset classes. Focus on niche lending markets and maintaining our origination levels with expected pricing ranges and good credit quality.

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

Thomas F. Jasper

Thank you, Craig. If I can turn your attention to Page 14, talk a little bit about the deposits. TCF continues to fund the growth of its loan and lease portfolio through deposit generation. The consistent performance of our lending platform has created a strong demand for deposit growth from TCF retail branch system, and the team has been very successful on meeting that demand as evidence by 15 consecutive quarters of deposit growth. Average cost of deposits in the second quarter of 2014 was 24 basis points. That’s up just two basis points from the first quarter and down a basis point from the prior year quarter.

Turning to Page 15, on capital. TCF’s increased earnings continue to have a positive impact on the company’s capital ratios. All five ratios presented on Page 15 have shown increases on a linked quarter basis as well as meaningful changes on many ratios on a year-over-year basis. TCF’s Tier 1 common capital ratio is currently at 9.82%. The common stock dividend of $0.05 per share was declared by the Board of Directors on July 21.

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

William A. Cooper

Some other key metrics that I think are worth mentioning is again the year-over-year loan growth rate which is strong and should be improving but also a number that I pay a lot of attention to is something we refer to as the capital accumulation rate, and really what that means is our return on tangible capital that is generating a growth in tangible capital and up and above our dividend. And a growth in capital at those levels indicates the ability to grow your balance sheet and maintain your capital levels.

We think we have good strong capital at today’s levels and our capital accumulation rate has exceeded our asset growth rate which has contributed to that growth in capital going forward, and I consider that to be a very strong metric in the banking business.

The other thing is the growth in the tangible book value per share which is up from $8.47 to $9.35. A lot of banks in today’s environment are measured as an index off of tangible book value. We’re currently I think somewhere around 1.75 times book value. As you grow that book value, you grow your shareholder wealth. And that price to tangible book value is very often determined by your return on tangible equity which is at 12.72% which is a very strong ratio as well.

Again, they see this strongly increases returns on average assets now at 1.17% and return on common equity at 10.99%. And again as I mentioned in the beginning, TCF has basically returned to the profitability level before the financial crisis in the fourth quarter of 2007 and we’re now presenting very strong metrics in connection with all the basic measures of the banking industry.

With that, I will open it up to questions.

Question-and-Answer Session

Operator

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

Jon Arfstrom - RBC Capital Markets

Thanks. Good morning, guys.

William A. Cooper

Good morning.

Jon Arfstrom - RBC Capital Markets

Maybe Bill or Craig just – Bill you made a comment about the strong and sustainable growth and how it should be improving, and then Craig you talked about some of the production numbers. Is there a way for you guys to splice how much of that you think is new hires and maybe deeper penetration by your guys versus what the markets are giving you in general economic improvement? Does that make sense?

William A. Cooper

Yes. I’ll say something about it and Craig can expand on it. In most of the cases what we’ve had – we’ve built some national platform businesses that are operating on a very satisfactory basis. And in our [ROU] (ph) auto business, inventory finance businesses and so forth, what we’re seeing there is deeper penetration. We’re doing more business with the same people or in the auto business we’re doing with more dealers and deeper into more dealers. A fair amount of the operating expense increases occurred in those areas is occurring now on the servicing business because it cost just as much to service a loan we own as to service a loan we’re servicing for someone else. The difference is it’s popping up in revenue and you can see that in some of the revenue indexes where our fee income is now over 2% of assets. And so it’s really an expansion of the investments that we’ve made in the past and the leveraging of those investments. Craig, do you want to add to that?

Craig R. Dahl

Yes. This is Craig Dahl. John, I would say that primarily it’s more from the strength of our core origination teams than it is from what would be new teams. And I think the exception there is possibly auto but we’re still within a – not that much, greater than we were a year ago from origination by a quarter standpoint. So again, I think it’s strength of our core markets.

Jon Arfstrom - RBC Capital Markets

Okay, good. And then I guess Mike Jones ties into a question on expenses. Is everything from the branch closures reflected in the expense run rate? And curious if there are any other expense pressures out there? Bill referenced servicing and things like that, but I’m just curious what you’re thinking on expenses?

Michael S. Jones

Yes, I would say John that – this is Mike – that we have fully in there the benefit in the second quarter of the branch realignment, so that’s fully in there and in the run rate as we go forward. And I think some of the things that I think from an expense optimization standpoint we are looking at some things, but some of those things may take a little bit of investment to make that will get a greater return over time. So that would be the only thing I would say as you look at the run rate on a go-forward basis what type of things can we invest in for the future that will give us a greater benefit over a longer period of time.

Jon Arfstrom - RBC Capital Markets

Okay, but nothing major is what you’re saying.

Michael S. Jones

No.

Jon Arfstrom - RBC Capital Markets

Okay. And then Bill just one more bigger picture. You talked about this Q4 of '07 number and you guys have obviously been through a lot the last five years and things gone pretty well. In your mind what’s left to do in terms of the reinvention of the company that you talked about over the past few years? Do you think the work is largely done and it’s just kind of letting it run at this point?

William A. Cooper

No, essentially it’s never done and really this is kind of third reinvention in my banking career here. But the world continues to change in lots of very basic ways. The way customers do business, the technology changes and so forth. And the truth is you’re never done in terms of this constant reinvention of the way you do business. I’ll say this. The big investments that we made several years ago in terms of – on the asset side of the business in particular we are now reaping the benefits of that. But that doesn’t mean to say that we’re not constantly looking at other avenues in improving the avenues that we’re doing business in today.

Jon Arfstrom - RBC Capital Markets

Okay. All right, thank you.

Operator

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

Emlen Harmon - Jefferies

Good morning. Just the reserve release in the quarter seem to come largely against the consumer real estate book. Could you talk a little bit – and the allowance there still looks to be pretty high, over 2.5% against that book. Can you talk a little bit about just the outlook for reserve release there? And can we expect a provision to run meaningfully before charge-offs over the near-term here?

Michael S. Jones

Yes, I would say your last point there – this is Mike Jones – is the key number to focusing on I think as we go forward, the provision is going to be more tied to that charge-off number and we look for that charge-off number to continue to improve. And the reserve levels will be a reflection of home values and the amount of incidents of defaults that we see. We have a pretty robust process here as we look at reserve levels where we’re looking historically over time on what’s happening as well as what we think is going to happen going forward into the future. So that’s really going to be dependent on how those two metrics kind of perform over the next six to 12 months.

William A. Cooper

Only thing I’ll mention in that is that we’ve attempted to maintain the environmental reserves based on – for instance in the auto business there’s lots of things going on in that business. There has been in the industry a degradation of pricing and in structure and so forth that gives you a little caution on it. So we build environmental reserves above the formula reserves to kind of reflect that particular census in newer business with us, and the same thing in commercial. So it isn’t just the formulistic formula and obviously when economies are better, there is pressure on reducing reserves which in a lot of cases is a mistake. And so we’re going to attempt to be as conservative as we can. And I’ll mention something about the provision in general. We had a very – I think we’re at 9.9 million for the quarter. That’s kind of bumping around the bottom or where that’s ever going to be and it probably is – we’re going to see some quarters which are a little higher and maybe some quarters a little lower, but I would anticipate seeing that same kind of reduction in the provisions that we’ve seen in recent quarters.

Emlen Harmon - Jefferies

There’s not a whole lot of room left to go there. And then I apologize if I missed this earlier, but we did actually did the auto sales down a bit this quarter and it seems like the trend there has been kind of up over the last couple of years. Was there an environmental effect there or was that just something kind of an internal maternal decision that you guys are making?

William A. Cooper

It was an internal decision and we were involved in some other asset disposition issues and so forth, but it was more internal. And we are in a fortunate position as a bank. We’ve got a very strong capital accumulation rate and so we have the capacity to grow within our capital structure and perhaps to do some other things with that capital in the future. Our capital accumulation rate is probably stronger than we want to grow the bank frankly, but we also have because of our strong loan origination we can make some judgments as to what I want to put in the balance sheet and grow the balance sheet and burn up capital, take additional risks as opposed to what I would like to sell in the market and take gains and build capital. So that’s a judgment call we make as a management team quarter-by-quarter and we have some longer term pro formas of the way we would like to see that evolve in the future. But as I said before, the positives associated with that is the strong return on casual capital of 12.7% today, strong return on assets, strong pre-provision return on assets and strong originations which gives us the flexibility of managing all of that to reduce risk, manage risk and grow profitability. All of those things we now have the capacity to do.

Emlen Harmon - Jefferies

Great. Thank you for taking the questions. I appreciate it.

Operator

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

Ken Zerbe - Morgan Stanley

Great, thanks. I guess first question is in terms of the auto securitization, if things go well there how much flexibility do you guys have to accelerate auto originations to do more securitizations in the future or you pretty much tapped out at your current run rate aside from normal growth?

William A. Cooper

I’ll say this about the securitization, the really good thing about that is it opens up another avenue. This is the first securitization that TCF I think has ever done. And it opens up and we’ve had – we’ve developed the expertise to get it done here and it opens up the ability of another borrowing source as well as another gain on sales source. We do have over the pole increased origination capacity. As I mentioned, there is a lot of competitive things that are going on in the auto business right now that maybe don’t make a lot of sense. We’re not going to participate in that and it won’t last. There would be some impacts going forward. But we do have additional origination capacity. And then it just becomes a decision as to do we sell it in the traditional markets that we’ve used or do we use securitization. Craig or Mike, do you have a comment on it?

Craig R. Dahl

Yes. This is Craig Dahl. Let me add. We do not see the use of securitization as a funding tool as a reason to accelerate our growth. We’re on a planned expansion and we’re going to continue that planned expansion.

Ken Zerbe - Morgan Stanley

Understood. And can you remind us why do auto securitizations versus doing whole loan sales of the auto loans, what’s the benefit to you guys one way versus the other?

William A. Cooper

Diversification of capacity, that’s the important thing, is that most of our loan sales are to other financial institutions and we’ve developed an expertise in doing that. A contact we have a group of people to do it, there’s a lot of appetite out there but we would prefer to have alternative sources just like we do a lot of things. And so it simply opens up an alternative avenue if the appetite in the different place is slipping. It’s not at this point. But you want to have all of the appetites available that you can.

Michael S. Jones

Ken, just to add – this is Mike Jones. I mean the first one is the most difficult one putting the documentation in place, getting all of the processes and the controls and those type of things ready to go. And once we get that in place, which we did, now the subsequent ones going forward will be much earlier to execute on and now we have that source for us.

Ken Zerbe - Morgan Stanley

Okay. And then a final question. Bill, you mentioned a couple of times the capital accumulation rate and obviously that you’re growing more capital faster than you can redeploy the loans. Is dividends still or dividend hikes still the primary source or would you actually start to potentially consider a buyback?

William A. Cooper

I’m not a big fan of stock buybacks to be honest with you. One of the things that tended to happen in the banking industry is when the banks can buy the stock back they’re buying at the peak of the economics and they’re buying it back at the highest prices. When you should be able to – when you’d love to buy it back is when the economy is not doing well and your stock price is poor but that is a point where you can’t buy it back. So you end up –the industry as a whole has ended up buying the stock back at high prices and not being able to buy it back at low prices. And I would prefer to return capital over the pole either through the reinvestment of the capital. I’ll give you this view in terms of dividend versus reinvestment. If you can earn over 12.5% on your capital and it comes back at 1.75 times book in terms of stock appreciation but tax deferred as opposed to paying it out as a dividend taxable, I think a combination of those things is the sensible thing. It’s possible and even likely that if we continue down this vein, the dividend will increase but I would prefer to use it – a good piece of it in capital to grow the bank and grow the stock price. I know it’s a complicated answer but it’s a complicated question.

Ken Zerbe - Morgan Stanley

That helps. All right, thank you very much.

Operator

Our next question comes from Keith Murray from ISI. Please go ahead with your question.

Keith Murray - ISI Group

Thanks. Good morning.

William A. Cooper

Good morning.

Keith Murray - ISI Group

Just one question on the year-over-year banking fee trends, it looked like fees and service charges were under some pressure and then card and ATM revenue were flattish. Just curious, are you seeing a change in customer behavior something like the fee and service charges or is there some other dynamic going on there?

Thomas F. Jasper

This is Tom Jasper. It looks like from a customer – from the spending standpoint relatively on typical transaction size and the amount of transactions are relatively flat versus competitive periods. From a seasonal aspect, we always have an increase in spending from first quarter to second quarter and that always will get back a little bit. But the biggest change year-over-year is just on the average balance and the checking accounts. On a per account basis, the average balances are up over 4% year-over-year and that’s having an impact as it relates to fees.

Keith Murray - ISI Group

Do you think that’s by choice? Meaning are people just trying to avoid overdraft consciously or they’re just putting more money into the accounts?

Thomas F. Jasper

When we look at it, it’s a little bit to the quality of the accounts that we have and we’re focused on trying to generate quality accounts. And so quality accounts are going to hold higher balances and that’s part of the equation. Bill, do you have something you want to add?

William A. Cooper

I’d just say we’re talking about it earlier, behavior is changing. The way people manage things, information is so much more accessible than it was in the past and it allows people to manage their affairs in a much more up-to-date manner. You can pull your balance online at any point and so forth. And I think what’s going on with this target thing and with the frauds and so forth is frightened a number of people and I think they’re utilizing cash more. We’re thinking about some programs associated with that to relieve some of that angst. But it is clear that people have moved more to cash. The other thing that’s occurred is the Durbin Amendment has impacted the industry as a whole, the banking industry in connection with how debt cards work and the incentives used, debt cards and so forth. So that has had not only a reduction in the revenue but it’s knocked a lot of people out of the banking world because they don’t want to pay fees and so forth. So the thing is like I mentioned earlier, it’s in a constant change and we just have to keep up with the change in connection with the way people are doing business.

Michael S. Jones

This is Mike Jones. The other thing that I would just add to that and I think that that’s why if you look back on Slide 5 of the deck that we presented from, you can see the diversification that we’ve developed of the alternative revenue sources over and above fees and service charges. So that allows us, as we go forward, to grow our revenue from other sources.

William A. Cooper

We talked about the earnings going back to the fourth quarter of 2007 the impact on TCF of the financial crisis, we had a credit issue just like other banks did although on average it was significantly lower. The change in the Durbin Amendment, Reg E customer behavior and so forth basically took $100 million of fees out of TCF’s revenue base. And as Mike mentioned, our reinvention of the bank was to find ways to replace and account for the changes in the regulatory world and customer behavior world that had occurred as a result of that.

Keith Murray - ISI Group

Thanks. And then just on the loan yield outlook, it looks like most of the categories outside of consumer real estate saw a decline sequentially. Do you feel like we're getting to a point of seeing some stabilization on loan yields or do you expect some continued pressure?

William A. Cooper

Well, there is continued pressure. I’ve been thinking this for quite some time but there is at least some indication now with the end of the tapering at the fed level and now some kind of a [head nods] (ph) that maybe rates are going to rise. That would reverse that. In general, TCF will do we believe better in the net interest margin than a higher rate environment than a lower rate environment because of the stability of the cost in our deposit funding. But on the other hand out there, there’s a lot of competition for loans and a lot of price competition and that is continuing and I don’t – at this point I don’t see an end in that at this rate environment. It continues to go on.

Keith Murray - ISI Group

Great. Thank you.

Operator

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

Steven Alexopoulos - JPMorgan

Hi. Good morning, guys. I wanted to follow up first on the auto securitization comments. Huntington talks about needing to get to at least 1 billion to have a successful auto securitization. What are your thoughts on the size here of your initial one?

Michael S. Jones

Steve, this is Mike Jones. I think we got – we did 250 million, so we think that that was a very nice size for us and allowed us to kind of pull in some accounts that have kind of a threshold of 250 million out in the marketplace. So we were very pleased with that size. I mean naturally as you go up, there are some fixed costs associated with the securitization and the more you can leverage those, the better. But we have alternative channels to sell these loans in that are just as economic or something better than a securitization would be. So what we’re trying to do is balance those channels to provide the most economic benefit for the organization.

Steven Alexopoulos - JPMorgan

So, Mike, what are the gain on sale margins on a 250 million securitization?

Michael S. Jones

I mean we don’t publicly – as a private 144A securitization but you can see what the overall gain percentages as we publicly announce those numbers in the third quarter.

Steven Alexopoulos - JPMorgan

Okay. And as you use these, will this result in less auto ultimately held on balance sheet?

William A. Cooper

No. Again, let me just say that that is metric that we work with. How much asset growth do I want and what kind of assets? And vis-à-vis how much I want to sell? And as I mentioned earlier, we have the flexibility of making those judgments, so we can sell more and keep more of whatever. We make those judgments basically quarter-by-quarter and year-by-year. But just having an additional avenue doesn’t mean that we’re going to sell more, it just means we may sell it in a different manner.

Steven Alexopoulos - JPMorgan

Okay. And what were – I see the change in auto originations. What were the auto originations in the quarter?

Craig R. Dahl

Yes, this is Craig Dahl. They were 687 million in the quarter.

Steven Alexopoulos - JPMorgan

Okay. Thanks, Craig. And one follow up – second question unrelated to that. The seasonal bounce back in service charges was a little bit less than I was expecting given what happened with the weather in the first quarter. Was it less than you guys were expecting? And secondly, Huntington talked about – not to go back to that, but they talked about consumer confidence improving in the second quarter. Looking at the recovery in service charge revenues, it doesn't seem consumers are feeling better. What are you seeing there?

Michael S. Jones

Like I said before, I think the larger impact that we experienced is related to the average balances – the average change in average balances per account which has a direct impact. We’ve seen from a spending standpoint that there is some stabilization from the customer base as it relates to spending, but that stabilization was offset by an increase in average balances per account.

Steven Alexopoulos - JPMorgan

So it’s not a volume issue, Mike?

Michael S. Jones

No.

Steven Alexopoulos - JPMorgan

Okay. Thanks for the color, appreciate it.

Operator

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

Bob Ramsey - FBR Capital Markets

Hi. Good morning, guys. As you think about the loan growth outlook, obviously you've had really strong originations and have been selling a lot of that production. Is it your expectation for portfolio loan growth to sort of stay in the kind of 3% to 4% year-over-year range we’ve seen in recent quarters?

William A. Cooper

As I mentioned earlier, that’s a metric that we work on quarter-by-quarter. This is kind of the exchange of funds on selling loans versus keeping them. If I sell a loan and take a gain; I haven’t burned up capital, I’ve created capital, I’ve reduced risk and I’ve created a revenue stream with the servicing. If I put the loan on the balance sheet, I’ve increased risk, I’ve used up capital and I don’t have that fee income revenue stream but on the other hand I have the margin growth. And so it’s a metric that we simply – we’re managing and frankly evolving because now for the first time in connection with where our financial metrics are, we now have options in that connection. And there is a benefit to having margin which is more stable than over a longer period of time but contains more risk. One of the big criteria in terms of what we own and what we sell is the management of concentration risk, geographic risk, credit risk in terms of FICO scores and so forth. So it is a moving target and so I think maybe we’re moving more towards a bias given where our capital levels are and our capital accumulation rates are, but growing the asset a faster rate and perhaps having less as a percentage at least of our origination gain on sale. Craig, you want to add on that.

Craig R. Dahl

Yes, this is Craig Dahl. I would say there are a couple of things on that 3% to 4%. First of all, I commented on our inventory finance business had a seasonal peak at the end of the first quarter. And if you look in the earnings release, the difference between our average balance in the quarter and ending balance is quite significant as that winter product liquidates out and the spring product that goes out is also sold. And in addition that 3% doesn’t take into account the increase in the held for sale of auto that was over 300 million at the end of the quarter. So the 3% or 4% is not really our active number right now.

Bob Ramsey - FBR Capital Markets

Okay, although the auto securitization – I mean you all continually are selling or securitizing auto loans, so that's an ongoing piece of the business for TCF, right?

Michael S. Jones

Yes. This is Mike Jones. The only difference I would say is we have historically sold in the third month of the quarter. So what happened was we pulled those loans into held for sale in anticipation of the securitization happening in the first month of the quarter where historically we’ve sold in the last month of the quarter. So it did pull forward or out of current portfolio about 200 million of assets.

Bob Ramsey - FBR Capital Markets

Got it, okay. That's helpful. And then the only other question I've got, I know you all highlighted that there have been some special CD, money market campaigns. Just curious if you all are working to sort of extend the duration of some of the deposits or what exactly you all did this quarter on the CD, money market side?

Thomas F. Jasper

This is Tom Jasper. We’re running multiple campaigns in different markets that are really focused around a very good money market product and some additional CD specials. And we look at it really, Bob, market-to-market. So if we have less competition in a market on the CD front, we’re going to be more competitive there to try to get our market share. And if we think that we can do something unique in a market with the money market account, we’re going to look at that. So we are looking at the duration. We are attracting new deposits into the bank with some of these specials which is the idea in addition to getting some more wallet from our existing customers. We’re bringing in new customers on the deposit standpoint and giving us the ability to cross-sell them into other accounts. But from where we’re at right now, we’re still having success in the markets. And the duration of our loan portfolio is such that we really don’t have to look for really long duration deposits. It’s a relatively short duration loan portfolio. And so with the CD products and the savings products, we get pretty good coverage as it relates to a match funding concept.

William A. Cooper

The other thing I’ll mention is, you mentioned extending the maturity of your deposits with CDs. What really extends the maturity of your deposits is checking and savings, particularly checking. That money doesn’t go up in rate at all and it has a very low interest sensitivity. And the same thing with savings, something like 90% of TCF’s deposits are insured deposits which means they’re relatively small balances and less hot money. And so what really makes our deposit funding not very rate sensitive is the big percentage of retail checking and savings money in those totals.

Bob Ramsey - FBR Capital Markets

No, I can certainly appreciate that. It just looks like there was more growth on the CD side this quarter and so was trying to get a handle on what was driving that. And I guess so it sounds as if the promotions were not focused on longer CD terms, it still would have been relatively short CDs?

Michael S. Jones

More in the 12 to 18-month range.

William A. Cooper

And it’s really a funding play not an interest rate play.

Bob Ramsey - FBR Capital Markets

Okay, understood. Thank you, guys.

Operator

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

Michael Perito - Keefe, Bruyette, & Woods, Inc.

Good morning, guys. This is Mike Perito stepping in for Chris. A quick question on the branch closures. I understand that they were obviously closed because the deposits per branch were probably not in line with what you guys were expecting. But has the retention or outflow from those been as you guys anticipated or more or less?

Thomas F. Jasper

This is Tom Jasper. We’re actually outperforming what we modeled when we modeled out the branch closures on both the attrition on the checking account base and the attrition related to the deposit dollars. So we’re performing better than that and collecting that data to make sure that we understand it, as it relates to what does that mean to managing our distribution network on a go-forward basis.

William A. Cooper

I think that since Durbin, there’s been 9,000 branches closed in United States. And I think that cost something like 100,000 jobs. And one of the things that’s happened as we’ve talked about before is that the revenue associated with an average account is less. There’s been a huge transfer of wealth from low income people to big retailers as a result of the Durbin Amendment. And that revenue reduction has resulted in a closure of branches throughout the banking system simply because a branch with lots of little accounts and not a lot of money is not as profitable as it used to be before the reduction in the Durbin Amendment.

Michael Perito - Keefe, Bruyette, & Woods, Inc.

Okay, thanks. And then one quick question on auto lending. I believe in your 10-K filing, you guys mentioned that you have about 8,000 plus dealers across the country currently. Can you remind us your vetting process for these dealers and how often you revisit the activity at the specific dealers, just from a risk management perspective?

Craig R. Dahl

This is Craig Dahl. We have a dealer management credit process. All the dealers basically go through a probation or a period based on the quality of originations and follow-up on titling, first payment default, et cetera. And then those are reviewed annually as well by the same credit department.

Michael Perito - Keefe, Bruyette, & Woods, Inc.

Okay. And are you guys – you remain comfortable with your exposure in this space? I mean there's been a little bit more – I'd probably classify it as rhetoric recently on auto lending and especially subprime. But I know in the past you guys have said you were comfortable with your exposure. Is that still the case today?

Michael S. Jones

Yes, that’s still the case.

Michael Perito - Keefe, Bruyette, & Woods, Inc.

Okay. Thanks for taking my questions, guys.

William A. Cooper

I’d just mention that there has been a lot of changes in the terms and a lot of people have gone way down in the FICO scores and so forth. TCF has not changed its credit metrics in connection with the auto business since we’ve been in the business.

Operator

Our next question comes from Andrew Marquardt from Evercore. Please go ahead with your question.

Andrew Marquardt - Evercore Partners

Good morning, guys. Just wanted to follow on, on the balance sheet trends and the net interest margin. Can you just help us understand – still some asset pressure going on and then a slight uptick on funding costs in terms of CDs. Should we still think about NIM pressure overall continuing to decline and maybe still bottoming in the 4.60 range, as I think you've previously talked about or could it be less pressure now or maybe a little bit more? How should we think about it?

William A. Cooper

We get frankly a little surprised that given what’s around in the marketplace that our margin has held up as well as it has. And like we said before, some of that’s kind of a mixed change that’s going on. But those pressures continue. Now to some degree most of the higher rate loans that were going to run out of the bank have run out of the bank but not all of them. And almost without exception a new loan that’s going on today has a rate that’s lower than a loan that paid off that we’ve made years ago. And so we still have that margin pressure and particularly in the commercial side of the business. I mean we’re seeing people out there at 1.40 over LIBOR doing significant deals that I don’t know where they’re making their money to be honest with you. But it would not be a mistake to think that there is still going to be some moderate pressure on that margin rate in the future if rates don’t rise and the economy stays where it is. Is that fair to say, Mike?

Michael S. Jones

Yes, I think that that’s right, Andrew, and I think if you think about the 4.60 level, I mean we kind of talked about that bottoming out. We talked about that number probably over a year and a half ago, right? And I think if you look at over that time period the amount of competition, the increase in the competition and the competitive nature of the environment that we’re operating in has increased significantly over that period as well. So I think those are things that are changing that may impact that number.

Andrew Marquardt - Evercore Partners

Okay, so it could be a little bit greater pressure. And then in terms of the deposit growth and the campaigns, do you still have a target of ultimately getting to 100% loan to deposit ratio versus your 110-ish today?

William A. Cooper

We don’t look at that as the same metric that a lot of people do. When you look at the numbers that we have, 85% of our assets are loans and 80% of our deposits or our funding is deposits along with 10% capital gets you around 90%. If you’re going to be a bank that’s primarily a lender, you’re going to have that kind of a loan deposit situation. But basically we’re funding our loans with our deposits and capital to a maximum degree. And you can improve that by going off buying a bunch of mortgage-backed securities. I’m not sure that that would make us a better bank. It certainly would make us less profitable. It certainly wouldn’t make us safer in my judgment. That’s not a metric that we look at. What I’m interested in is that my deposits are insured deposits. In other words the core and they’re basically funding the loan portfolio and that my borrowings are at a relatively low level because that to a significant degree tends to be a harder form of money and more risky form of money particularly in the liquidity crisis than core deposits. So that’s not a metric that we follow a lot.

Andrew Marquardt - Evercore Partners

Got it. That's helpful. Thank you. And then my last question was just switching gears to expenses. Just noticed how expense control has been quite good and maybe you had mentioned how kind of leveling off here, perhaps after the improvement in the branches helped the bottom line there recently. But then also noticed in your slide deck, one of the metrics that you've long looked at, expenses to assets, it looked like maybe were a tweak on the base to be expenses to assets plus servicing portfolio. So you’re kind of at your 4% target that you've long looked at. Does that kind of imply that you’re kind of where you need to be or where you should be and that the expense flexibility and maybe the improvement in that ratio from here is really going to be more top line driven?

William A. Cooper

I think it should continue to improve. I think there’s more room there.

Andrew Marquardt - Evercore Partners

On absolute expenses?

William A. Cooper

Well not absolute as a percentage of assets, even assets on the balance sheet because of leverage of our businesses, as we grow the assets around the operating expense level.

Andrew Marquardt - Evercore Partners

So is that target still valid, that 4% or is there a new target on that?

William A. Cooper

The increase in the servicing for others which has an expense but is in the average base has kind of changed that metric which is the reason we showed this that way. We had a model which was based on the way we did business a year or so ago, two years ago, that model has changed because of the significant expenses associated with servicing. And we’ll update that model at some point in connection with how that works. A better way perhaps of looking at that is as a burden expense. In other words, you take the expenses minus the fee income is the percentage of assets and which direction is that going, because that takes into consideration the fees that we’ve got for the servicing for the loans that we have out there that is increasing the expense base, but more to come on that. But that ratio by itself is not as meaningful as it was in the past.

Andrew Marquardt - Evercore Partners

Got it, thanks. That's helpful. Thank you.

Operator

Our final question for today comes from Terry McEvoy from Sterne Agee. Please go ahead with your question.

Terry McEvoy - Sterne Agee & Leach

Hi. Thanks. Good morning.

William A. Cooper

Good morning.

Terry McEvoy - Sterne Agee & Leach

I have a question on the consumer real estate loan sales. As credit quality has improved for that portfolio and there's a market for scratch-and-dent or re-performing loans, are you selling loans out of different buckets that maybe a year ago there was not a market for? And how has that impacted the gains?

William A. Cooper

All of the consumer loans that we’re selling are new origination. So we’re not selling bump-and-dent or any of that business at this point. And we’ve seen reductions in our first mortgage portfolio primarily through the amortization pay downs, but we have not at this point and that isn’t to say we wouldn’t at some point. And I think in the past we’ve sold some nonperforming loans out there, but there’s nothing in current quarters in that.

Michael S. Jones

This is Mike Jones. I would say that the market has gotten a lot better, a lot tighter on what people are paying for scratch-and-dent. But if you look at our 10-Qs and you’ve looked at the past performance of our TDR portfolios, they performed very, very well. So what we struggle with is paying for somebody else’s return when the asset is performing well on our balance sheet.

William A. Cooper

We tend to take a loss to improve the optics, not the economic reality and TCF tries to operate on economic reality not optics.

Terry McEvoy from Sterne Agee & Leach

Understood. And then maybe one last question. If I look at your FDIC insurance expense versus your peers and run through the formula, you do run at a higher run rate. And as your balance sheet in terms of capital levels improve and credit moves in the right direction as well, does that dollar amount go down over time to move closer to peers?

William A. Cooper

We can hope.

Terry McEvoy from Sterne Agee & Leach

Okay. Thank you.

Operator

Ladies and gentlemen, at this time we’ll end today’s question-and-answer session. I’d like to turn the conference call back over to Mr. William Cooper for any closing remarks.

William A. Cooper

Thank you. As I said again, I think we had a pretty good quarter. I’d like to thank everybody for their long-term investment in TCF to-date.

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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