TCF Financial Corporation
Q2 2008 Earnings Call Transcript

Published: 23 Jul 2008

[Operator:]

Good morning and welcome to TCF Second Quarter Earnings Call. My name is Eric, and I will be your conference operator today. [Operator Instructions]. At this time, I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference call.

[Jason Korstange:]

Good morning. Mr. Lynn Nagorske, CEO, will host this conference. Joining Mr. Nagorske will be Mr. Neil Brown, President and Chief Operating Officer; Mr. Tom Jasper, Chief Financial Officer; Mr. Earl Stratton, Chief Information Officer; and Mr. Tim Bailey, President and CEO of TCF National Bank. During this presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are predictions and that actual events or results may differ materially. Please see the forward-looking statement disclosure contained in our 2008 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 30th, 2008 and we undertake no duties to update the information. Thank you, and I will now turn the conference call over to TCF's CEO, Lynn Nagorske.

[Lynn A. Nagorske:]

Thank you, Jason, and good morning to everyone. TCF reported its second quarter earnings today in a very difficult and challenging environment. TCF reported EPS of $0.19 a share, net income of $23.7 million that resulted in performance ratios of return on assets of 0.58% and return on equity of 8.57% of the quarter. All of those numbers and ratios are down significantly from last year's second quarter. Significant items in the quarter which are spelled out in the release, 2008 second quarter, we had mortgage-backed security gains, pre-tax of $1.1 million, after-tax of $700,000, which was a $0.01 earnings per share positive impact. We also had changes in our state income taxes and tax adjustments, which totaled $5 million after-tax or $0.04 negative impact for a combined EPS impact of negative $0.03. Last year's second quarter included gains on the sales of real estate, pre-tax of $2.7 million, $1.8 million after-tax or a $0.01, positive impact earnings per share and favorable tax adjustments of $1.9 million or $0.02 favorable earnings per share for a total of $0.03 positive. Our net interest income during the second quarter was $151.6 million, that's up $14.1 million or 10.3% from the second quarter of 2007 and up $8.7 million or 6.1% from the first quarter of 2008. Our net interest margin for the second quarter of 2008 was 4% and that's a 16 basis point increase from the first quarter of 2008, which I view as a very positive result. Our fee income in the second quarter, banking fee income was $106 million that compares to $108.7 million in the second quarter of last year, a decrease of $2.7 million or 2.4%. On the categories, fees and service charges was $68 million during the quarter that compares to $71.7 million from last year, a decrease of $3.8 million or 5.3%. Most of that impact was a result of the economic fiscal stimulus package, which has resulted in increased balances in our checking accounts and more instant rates for service charges. Card revenues were $26.8 million, up nearly 8%. Leasing and... it was up $14 million, a decrease of $1.1 million or 7.6% that almost entirely consisted of sales-type revenues, which are customer-driven and lumpy in nature. Total fees and other revenues was $121.5 million as compared to $126.9 million, which was a $5.4 million decrease or 4.2% decrease from the previous year. I've already mentioned the gains and the sales of the mortgage-backed securities, which is $1.1 million. Branches during the quarter, we opened four branches, two traditional, two supermarket. For the remainder of the year, we expect to open four additional branches, one traditional, in Arizona and three supermarket branches. Our assets for the quarter, we had very good asset growth overall. Average assets were up $1.4 billion or 12.8% in the second quarter of 2008 compared to the second quarter of 2007. Consumer was up 12.5%, commercial was up 9.6%, leasing was up 18.6%. Our liabilities also grew, in terms of average liabilities are up $405 million or 4.2% from the second quarter of 2007. We saw a nice increase in savings and we saw declines in certificates of deposit in certain other market rate categories due to our disciplined pricing. The average rate for deposits, which really shows you the value of our retail franchise, 1.47% during the quarter and that compares to 1.99% in the first quarter of 2008 and 2.4% in last year's second quarter. Non-interest expenses were up 3.8% from the second quarter of last year, very well controlled. Provision which was the big story for the quarter, during the second quarter, TCF recorded $62.9 million in provisions for loan and lease losses that compares to $13.3 million in last year's second quarter. Our provision exceeded our charge-offs by $36.3 million which is a reserve bill and that resulted in an increase in reserve to $133.6 million or 1.03%. Our loss provisions this quarter exceeded the previous quarters as the residential real estate markets and economy continued to deteriorate. We should also point out that we were more conservative in our judgments, particularly as it relates to the home equity loans taking the charge-off trends we saw in the second quarter, we moved our reserves to the upper end of our range of loss estimates, and this resulted in a larger reserve bill than previous quarters. We believe this is a prudent action to take given the uncertain outlook for housing, and it strengthens our balance sheet albeit at the cost of earnings. Home equity charge-offs during the second quarter were $13.9 million or 82 basis points that compares to the first quarter of this year of $9 million or 55 basis points with a 27 basis point increase in our home equity charge-off rate on a linked quarter basis, and those higher charge-offs were primarily due to the depressed real estate market conditions, which I'd mentioned especially at Minnesota and Michigan. Commercial charge-offs during the quarter were $8 million and the largest charge-off there was $4 million which related to homebuilders and one... and that compares to $1.1 million in the first quarter of this year to $43,000 in last year's second quarter. Non-performing assets increased during the quarter, $160.4 million that compares to $134 million at the end of the first quarter, approximately half of that increase of $26 million was related to the home equity loans and also first mortgages. Over-30-day delinquencies were 0.94%, up from 0.83% at the end of March of this year, and I would point out that over-90-day delinquencies, which is what many banks only report were 0.2%. Those delinquency figures I mentioned exclude non-accrual loans, which are reported separately. On the capital front, we remain well capitalized. TCF's total risk-based capital is 10.86%, which is $104 million over the stated excess... over the stated well-capitalized requirements. And as I noted in our release, TCF is not repurchasing shares at this point in time. So I think that pretty well summarizes the quarter. At this point in time, I'll open it up for questions. Question and Answer

[Operator:]

[Operator Instructions]. Our first question comes from Dave Rochester with FBR. Please go ahead.

[David Rochester:]

Hey, good morning guys.

[Lynn A. Nagorske:]

Good morning.

[David Rochester:]

You talked in the release about managing asset growth to maintain or improve capital levels. Are you saying that you're thinking potentially about shrinking the balance sheet?

[Lynn A. Nagorske:]

We've had very good growth in the last couple of quarters and we are going to slow that down. We're doing that to manage our capital levels. I don't anticipate we're going to shrink the balance sheet, but I do expect that you'll see slower growth as we go forward.

[David Rochester:]

Okay. On the credit front, would you happen to have the total dollar amount of home equity exposure over 90% CLTV level. I think last quarter it may have been... I wanted to say $200 million to $300 million or something like that. Do you happen to have that figure?

[Lynn A. Nagorske:]

That I don't have it right in front of me, although I will tell you that that figure is down, I believe about $30 million from the previous quarter.

[David Rochester:]

Okay. Very good. And in terms of the C&I deterioration from first to second quarter, I know you had mentioned that that was primarily in Michigan. Could you talk about the types of businesses, where they primarily small businesses and in what industries?

[Lynn A. Nagorske:]

If you're looking at our potential problem assets, which were one of the few banks that reports that number, but we've consistently reported, those are really our watch list credits. And I would say the increase there is really related to a couple of categories; one, companies that are related indirectly to the housing market and that could be a lumber company or a construction company that might be doing cement or excavation. And then secondly commercial real estate in the Michigan market. So, that's really the best summary I can give you.

[David Rochester:]

Okay.

[Lynn A. Nagorske:]

And most of those credits as you've seen during the years they're well-secured, we're primarily a secured lender. And we're being vigilant about updating our appraisals for values. And so just because they go on the list and doesn't necessarily mean that we'll have a loss as it relates to those credits. Those are credits that we're monitoring more intensely and working with a borrower to come up with a solution.

[David Rochester:]

Okay. Very good. Thanks, guys.

[Lynn A. Nagorske:]

Welcome.

[Operator:]

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

[Steven Alexopoulos:]

Hi, good morning, everyone.

[Lynn A. Nagorske:]

Good morning.

[Steven Alexopoulos:]

First question, were you're seeing defaults on the second lien home equity? Can you gives us a sense... what portion of these are you going through with the foreclosure? What percent you're just writing the loan off?

[Lynn A. Nagorske:]

I'm going to turn that over to Neil Brown to answer.

[Neil W. Brown:]

Yes. This is Neil, the... I don't have the specific percentage, which you're referring to, but there are several cases where we do not foreclose out our first interest. But I will mention that... about just under 20% of the second mortgages that we hold are behind our own first mortgage. So, we're in a better position to make those decisions on those... but there are a number of losses in the second portfolio where we're walking away from our interest.

[Steven Alexopoulos:]

Okay. If I could... I know it's small but what was the balance at the end of the quarter of the residential construction and land development loans, and how much of that [inaudible] was in Arizona?

[Lynn A. Nagorske:]

The balance of that residential homebuilders was approximately $100 million, that's directly [ph] total year. None of that is in Arizona but about 45 million of that is in Michigan.

[Steven Alexopoulos:]

And just one final question, looking at the 5 million linked-quarter decline in the comp expenses, there was a lot larger than we've seen in other second quarters. Just maybe you can give some color on the decline in this 84 million, a good run rate here.

[Neil W. Brown:]

We're up, this is Neil, there is a... several actions that we're taking... have taken to reduce comp that the two largest of which are one we've... we've shut down the supermarket branches, 12 of our 14 supermarket branches in Colorado, and moved those customers' accounts into a nearby traditional branch. Most of that activity took place right at the end of the quarter and slipped into the first week of July. So, you won't see the impact of that until the second half of the year but that was a total of 88 positions and then we've also reduced our consumer lending sales force and back-office approximately 100 positions since the beginning of the year, mostly in the second quarter. So, you'll see some of the benefit of that going forward. Other items in the comp expense include some incentive compensation in which we made some adjustments there in the second quarter to reduce that. There's not, I 'm not going to make a prediction on exactly where that number is headed in the second half of the year but we're taking some actions to reduce that and there will be some less expense related to the some less asset production going forward.

[Steven Alexopoulos:]

Okay. I promise this will be the last question. Given the commentary on the increased state income taxes, what's the good tax rate to assume going forward?

[Lynn A. Nagorske:]

I'm going to turn that over to Tom Jasper.

[Thomas F. Jasper:]

As it relates to our income tax rate, we had developments in the quarter in regards to state income tax matters as it relates to the new tax legislation and the elimination of certain benefits as it relates to TCF's REIT. When you net to it, the end result is if you take out the change of the deferred tax increase and the increase of in the first quarter income taxes that we've recorded in the second quarter, we get to about a 34.5% effective tax rate and we'd expect that the rate going forward to be around 35%.

[Steven Alexopoulos:]

Perfect. Thanks, guys.

[Lynn A. Nagorske:]

You're welcome.

[Operator:]

Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

[Jon Arfstrom:]

Good morning, guys.

[Lynn A. Nagorske:]

Good morning, Jon.

[Jon Arfstrom:]

Just a follow-up on the Potential Problem Loans is that... how many credits were in that commercial real estate categories, is it a few or several that [inaudible] in an increase.

[Lynn A. Nagorske:]

Jon, it's a pretty good dispersion of our credits, Jon, and the largest relationship would be in the $20 million category, and there is a couple of dollars and the rest of them are all significantly less than that what the average product being in the $2 million to $4 million range.

[Jon Arfstrom:]

Okay. And you don't think there is anything to read into that, it's just--

[Lynn A. Nagorske:]

I would just say that we're in a very difficult economic environment. And what you tend to see is certain of these companies have some stress in their businesses, which results in a tightened debt service coverages and perhaps they have some liquidity events that can happen because of the credit environment. Our underwriting on these things, as we believe are well secured. That doesn't mean we won't take any losses in this category. But, we believe we're well secured in these categories and that should mitigate our losses.

[Jon Arfstrom:]

Okay In terms of the... Neil, can you give us that REO velocity like you've typically done, and I know REO isn't up that dramatically. But can you update us on how that looks?

[Neil W. Brown:]

Yes, Jon. This is Neil. The consumer lending ROE of activity in the second quarter, we started the quarter with 130 homes and we added 94 homes that compares to adding 87 in the first quarter. So, it wasn't a significant increase in the addition there, and the sales of homes was 69 homes. So we ended the quarter to 155 homes, and that sales activity compares to 78 sales in the first quarter. I don't view that as a slow down in sales. We actually had a bulk sale in the first quarter and didn't have one in the second quarter, but when you look at the activity there we're pretty efficient once we get the keys to the house. And we generally sell it in just over five months time period in a very difficult market.

[Jon Arfstrom:]

How you feel about pricing... deteriorating?

[Neil W. Brown:]

Well, the cornerstone of our consumer asset quality has been over many years modestly priced homes in the Midwest and unfortunately the values of those homes today are significantly impacted by the sub-prime financial institutions that have large inventories that they need to sell, and so the values are definitely deteriorating or significantly less from what they used to be, particularly at the lower end price market. That's also driving some of our increased severity of losses when we do have a loss.

[Jon Arfstrom:]

Okay, and then just one question maybe for you, Lynn. Any lessons learned or things to take away on consumer behavior from some of the activity you're seeing in, debit cards, debit charges?

[Lynn A. Nagorske:]

On the debit card and service charges, the consumer is still, likes the debit card and they are using it, and we are seeing on transactions count continue to increase. The ticket size is up approx to say to like $37 per transaction, but we have seen the larger transactions and also the checks were down for this quarter, and I think that's in a result of the economic activity that's out there and consumers are pulling in their horns a bit.

[Jon Arfstrom:]

All right. Thank you.

[Lynn A. Nagorske:]

As I mentioned also, we think that there was an impact on our deposit service charges as a result of the economic stimulus package and that appears to be abating as the early signs that we see in July, that's not a prediction, it's just a... what we see so far.

[Jon Arfstrom:]

Okay, thanks.

[Lynn A. Nagorske:]

Welcome.

[Operator:]

Our next question comes from Matthew O'Connor with UBS. Please go ahead.

[Matthew O’Connor:]

Hi, everyone.

[Lynn A. Nagorske:]

Hi, Matt.

[Matthew O’Connor:]

How much of the $100 million homebuilder exposure was already on non-performing and then how much is on in the potential problem bucket?

[Lynn A. Nagorske:]

Hang on one second, and we'll get you that. I think most of the Michigan exposure is on one category or another. I've got... of that $100 million, $19 million is on non-accrual and $22 million would be in the potential problem category, in addition to that.

[Matthew O’Connor:]

Okay. And then just separately, any comments on reserve levels going forward as we think about provision versus charge-offs, obviously liability this quarter, you've filled quite a bit last couple of quarters, but it still looks low versus a lot of other banks at about 1% of loan share, do you expect some more increases in back half of the year?

[Lynn A. Nagorske:]

Well, I expect that our provisions will exceed our net charge-offs as we go forward in future quarters, but I don't expect the same reserve bill level that we saw this quarter. I think that will be more akin to whatever increased rate is in the home equity loan charge-offs.

[Matthew O’Connor:]

Okay. And then just lastly in the net interest margin, nice expansion, good deposit volumes, obviously, how should we think about that going forward?

[Lynn A. Nagorske:]

I'll pass it on to Tom Jasper

[Thomas F. Jasper:]

Matt, this is Tom. The margin in the second quarter, the rates in our deposits decreased 52 basis points compared to our power assets where the yields only went on 30 basis points, and we've maintained some discipline, deposit pricing on... especially in our premier and our CDs in the quarter. And the margin rate did improve due to an increase in the average balances of some of our consumer variable rate loans that are at a contractual floor, and some of the pricing on our assets. So when we look at it, that's a good improvement in the quarter. The challenge is going to be around future actions of the Fed and our ability to maintain the deposit pricing in a competitive environment. So, and I would think that we're not going to see a significant of a movement in the margin going forward.

[Matthew O’Connor:]

Okay, will the buyers still be up or you just hope to keep it relatively steady?

[Lynn A. Nagorske:]

I would say relatively steady. We are, on the pricing front, on the asset side, working to increase our spreads and be picky on credit and on the deposit side, we are certainly managing that, and being very disciplined and particularly in the market rate products although we see in some markets, so we clearly have some fierce [ph] competition.

[Matthew O’Connor:]

Okay. Thank you very much.

[Operator:]

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

[Scott Siefers:]

Good morning, guys. I guess, Lynn, you had made that comment early on in just in regards to increasing the last potential for home equity, I guess toward the high end of the range. Are you comfortable sort of disclosing where it was, where you moved it to, and then I guess beyond that, what would happen or what would have to happen from here on now with the unemployment, additional ex-percent in housing price declines, et cetera, for you guys have to potentially revisit that again?

[Lynn A. Nagorske:]

Well, that's an exercise that we go through every quarter and update it based on what's actually happening out there, and for the activities, if you look at the reserve levels, I think they are in the release, what's the page, guys? It's on page 19 in the release. You can see at the end of March, we are at 0.58% and we've read [ph] that to 1.04% and our charge-offs went from, I think, 55 basis points to 82 basis points in the quarter, and we have a number of different ways we look at that. We start off with our historical loss rate experience and we've migrated over the past year to the most recent periods because those have the highest rates and we have a number of models, which all of them have their strengths and limitations that we used to test or confirm those results, and it just seemed to us that it will be prudent to increase it more towards the upper end now. That doesn't mean that range can't increase. It would probably increase more likely to be or longer if whatever happens with the charge-offs as we go forward, and I think the good news there, if there is any good news, in this housing market, is that we have seen some stabilization of our 30-day delinquencies in our home equity loan portfolio and that's probably the best leading indicator that we can give you.

[Scott Siefers:]

Okay, perfect. And then just I had a separate question. You guys have made a number of capital comments in the release, and my guess is just on the dividend that you guys suggested don’t change the policy there. What are sort of the main factors that you are thinking about when you make that statement, I guess, from the way I looked at it obviously the provision was quite high this quarter, so hope we won't have a repeat of that, but potentially we could be bumping up against a pretty high payout ratio for some period of time, if housing stays weak. How are you thinking about that dynamic?

[Lynn A. Nagorske:]

When we looked at the things that we mentioned in my code in the release and reviewed that with our Board and to just kind of go through those, the first one is our capital status and when you look at TCF's capital, where we exceed the stated well-capitalized regulatory ratios, and we look at our anticipated earnings and also how fast we want to grow the balance sheet. And as I mentioned we are slowing that. You'll see most of that slowdown in the consumer home equity segment in order to maintain on process and improve those ratios. But those are the things that we've looked at, we think our... like our position that we're in, and in terms of being well-capitalized, we don't, as I mentioned in the release, I expect to raise any additional equity offering which would be dilutive capital and with dilute our shareholders. We are looking at a doing a trust preferred which is a tax deductible hybrid capital type structure and we have capacity to do that unlike many of those larger banks that are out there, and so we're currently reviewing that which would strengthen those capital ratios, and if we so chose to increase our growth rate in the balance sheet, but I'm not signaling that we're going to put the pedal for the metal in terms of balance sheet growth, we have a fairly cautious outlook today.

[Scott Siefers:]

All right. Great, thank you.

[Operator:]

Our next question comes from Terry McEvoy with Oppenheimer. Please go ahead.

[Terry McEvoy:]

Good morning. Just a question, could you compare and contrast your Minnesota home equity loans with those loans you have in Michigan in terms of delinquencies and charge-offs, and I guess what I'm getting at our conditions in Minnesota starting to look like one would assume they have looked for quite some time in the state of Michigan?

[Lynn A. Nagorske:]

No, I don't think we disclose those individual statistics but clearly our worst state has been Michigan. That is in a deep recession related until what's happening in the auto industry and the indirect impact of that, we don't have any direct auto exposure but we do see more job losses from our home equity customers in that market than we see elsewhere. Minnesota has not been as that as Michigan but it's been certainly a different environment than we've seen here in the past 25 years, and so that's our second worst state and the two states that are below the mean, if you want to look at it that way our Lakeshore which is Illinois and [inaudible], Wisconsin for us and our Colorado market.

[Terry McEvoy:]

And then out of the $2.7 billion of commercial real estate loans, I know you talked about Michigan homebuilder exposure. What's just the total commercial real estate loans in the state of Michigan?

[Lynn A. Nagorske:]

It's about $929 million.

[Terry McEvoy:]

Perfect. Thank you.

[Lynn A. Nagorske:]

Welcome.

[Operator:]

Our next question comes from Jason Goldberg with Lehman Brothers. Please go ahead.

[Jason Goldberg:]

Thank you. I guess... most have been addressed, but, Lynn, when you talked about delinquencies kind of ethnic portfolio in aggregate, I was hoping maybe you could speak to what you are seeing in terms of a home equity book? I know [inaudible] kind of pointed to, maybe some positive signs in that front in terms of kind of rate of increase slowing and just may be some more granular out there?

[Lynn A. Nagorske:]

Okay. If you look at the end of June, our over-30-day delinquencies were $65.9 million and compared to the end of March it was $65.5 million. You can see it was relatively flat. First mortgages were $51 million, and I'll give you the ratios for these dollars in just a second. That compares to $50 million [ph] at the end of the first quarter. Junior liens were $14.8 million as compared to $15.4 million. So that's relatively flat. In terms of the ratios, first mortgage liens, 1.17%, that's exactly the same numbers what it was in terms of 30-day delinquencies at the end of March. Junior liens, 0.61% and they were 0.64%. So, that, if there is a glamour of good news there, I think that's it that tells you you're going to have less incidence for at least not as an accelerated rate of incidence got to going forward.

[Jason Goldberg:]

Okay. I guess, looking at that, I guess, you would think I guess at least the rate, it sounds like the rate of increase in terms of home equity losses should begin to have?

[Lynn A. Nagorske:]

That would be our hope, and I think there will be less next quarter than what we saw this quarter, but I don't think it would be fair to conclude that we bottomed out at this point in time.

[Jason Goldberg:]

Right. Helpful. Thank you.

[Lynn A. Nagorske:]

You're welcome.

[Operator:]

Our next question comes from Ben Crabtree with Stifel Nicolaus. Please go ahead.

[Ben Crabtree:]

Yes. Thank you. Good morning.

[Lynn A. Nagorske:]

Hi, Ben.

[Ben Crabtree:]

A small question, maybe... a couple of small questions. I was... it's not a big deal, but I was little surprised by the strength in ATM revenues, that's kind of have been a declining line for a while, anything unusual going on there?

[Lynn A. Nagorske:]

Nothing unusual.

[Ben Crabtree:]

In the other non-interest expense category, I think you alluded to some costs of closing down, the last part of the closing down of the Colorado branches, any guidance in terms of what that number might have been in the quarter?

[Lynn A. Nagorske:]

If you look at other non-interest expense, there is really a couple of things. One is our REO expenses, which are related to our preprocessed and foreclosed assets, we did have about $3 million increase over last year's quarter. Some of which relates to property taxes that we paid on or the VAT taxes on properties we repossess. And then the other part relates to really to severance. There is about $1.1 million in severance in there for the quarter, Ben.

[Ben Crabtree:]

Okay, and then, just to return to the issue of the day, I guess. If... maybe I'm searching too hard for a positive here, but if the delinquencies are flattening out that might suggest that frequency is perhaps going to settle out here. So the question becomes severity. Are you in... I've noticed some of the headlines about the number of houses for sale in the market here at least having a little bit. Wondering if you're seeing any signs that your lost severity is at least not getting worse?

[Lynn A. Nagorske:]

I think, it would be pretty mature to conclude that, although, I think that we are discussing a previous question that it looks like the rate of increase is slowing.

[Ben Crabtree:]

And the severity has a lot of frequency?

[Lynn A. Nagorske:]

In the severity, yes and frequency.

[Ben Crabtree:]

Yes, okay, thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Rob Rutschow with Deutsche Bank. Please go ahead.

[Robert Rutschow:]

Hi, good morning. I apologize if you've already said this, but directionally next quarter should we expect the overall provision to be up or down, do you have a feel for that?

[Lynn A. Nagorske:]

I think I've already addressed that, and I did indicate that we expected our provisions to exceed our charge-offs, but the reserve build would be smaller than this quarter.

[Robert Rutschow:]

Okay. You talked about changing your loss assumptions and maybe as a follow-up to Scott's question, can you tell us what your peak home equity loss assumptions are at this point?

[Lynn A. Nagorske:]

I think you have to conclude that they're embedded in the reserve rate, which for home equity loans is 1.04%.

[Robert Rutschow:]

Okay. You mentioned also that the stimulus checks had decreased deposit fees, and then, I think, obviously it looks like they maybe helped growth in deposits. Can you tell us what you're seeing so far in the third quarter, sort of how those the stimulus checks are flowing through the deposit line? And then secondly, is it your expectations that the deposit fees would rebound once those checks sort of work their way through?

[Lynn A. Nagorske:]

Well, as I've already indicated, we did see a decrease in the instance during the second quarter and we tracked those relentlessly in comparing to every statistics, you might imagine in prior periods. And we saw a clear impact of that and early indications are which is not a prediction in July as it's bouncing back at the end of this stimulus packages are happening.

[Ben Crabtree:]

Okay. And should we expect commensurate [ph] to drop off in deposits in the third quarter?

[Lynn A. Nagorske:]

Little less clear as to what will happen there. I think in this environment it's pretty clear that the consumer is being more conservative with their spending and keeping additional balances in their account. I think it's up something like $140 or $160 per account since the end of the year and up maybe $40 in account, we have an awful lot of checking accounts, so to remind you. And so we're seeing increases in balances. I wouldn't attribute it all of those to the fiscal stimulus package, I mean, some of it's just consumer behavior in terms of these higher gas prices and groceries. They're reviewing what they spent and being more careful.

[Ben Crabtree:]

Okay. And the last question, I think this is the first quarter and quite a while you haven't had some sort of gain on sales, should we expect that to resume next quarter in terms of properties or sort of non-operating type income?

[Lynn A. Nagorske:]

That would not be a good expectation.

[Ben Crabtree:]

Okay. Thank you.

[Lynn A. Nagorske:]

You're welcome.

[Operator:]

Our next question comes from Todd Hagerman of Credit Suisse. Please go ahead.

[Todd Hagerman:]

Good morning, everybody. Lynn, just a couple of very quick questions. How much was the restructured credit in the quarter, and if you could talk a little bit more... or maybe Neil, just how the restructuring process comes into play because it relates to both the home equity, as well as the commercial real estate portfolio?

[Lynn A. Nagorske:]

Todd, could you elaborate just a little bit on that question? I'm not sure I understand that.

[Todd Hagerman:]

Yes, I think in the first quarter, you guys had about $15 million or so in restructured credit. I think most of that was flowing through in terms of the home equity bucket and then again here in the second quarter, you, there is a footnote that suggests the part of your $25 million of consumer home equity includes some restructured credit. If you get could just kind of dive into that a little bit?

[Lynn A. Nagorske:]

Got you.

[Neil W. Brown:]

Todd, this is Neil. And that $15 million is $25 million at the end of June and what really was taking place there was, we established a health program with our customers where we would offer payment relief typically in the form of some interest rate reduction for a period of time only or regain employment or whatever. And so we've done that. The early part of this year and into the second quarter, quite frankly we have decided that program is not working as well as we had originally intended. So we don't expect to see much of that going forward.

[Todd Hagerman:]

Okay. Is that partly a function of just kind of where the real estate values are going?

[Neil W. Brown:]

Yes.

[Todd Hagerman:]

Okay, great. Thanks a lot.

[Operator:]

Our next question comes form Ken Usdin with Banc of America Securities. Please go ahead.

[Kenneth Usdin:]

Thanks. Good morning. Just one question. Over the last quarter or so in your calls, you have talked about the obvious pulling of the branch build-out program and you had talked about potential to consider doing small acquisitions. So I'm just wondering if you could update us on your thought process there and what you may be contemplating?

[Lynn A. Nagorske:]

Well, as I mentioned for the balance of this year, we're going to do four branches, which is one traditional in Arizona and the three supermarket branches. I think the very most that you should expect in this environment next year, very most would be two traditional branches in Arizona, and I think it's possible that we'll even differ those into 2010, and then that would just leave us with whatever is happening with our supermarkets partner in terms of their piece of expansion, which might look somewhat like this year a modest growth there. We are spending some capital expenditures in terms of remodeling, particularly our supermarket branches where our partner remodeled their store, we've remodeled our branch and that's kind of what's going on there. But a very modest, if any, de novo growth on the branch side for next year.

[Kenneth Usdin:]

Got you. And Lynn, you had mentioned previously that you would consider looking at that potential view, I think remembering from the last call or two, is that still in the thought process or is that pretty much off the table given the environment?

[Lynn A. Nagorske:]

I think in this environment, we're house building our capital, protecting our dividend, and it has to be an awful good deal before we would take a look at it.

[Kenneth Usdin:]

Thanks a lot, guys.

[Operator:]

And our next question comes from Lana Chan with BMO Capital Markets. Please go ahead.

[Lana Chan:]

Hi, good morning. I had one question on the loan loss reserve. When I look at the break-out between the loan segments, it looks like the reserve allocated to each segment increased in every category except for commercial real estate, but that's where you saw the biggest increase in potential problem loans this quarter. So I was wondering if you could address that.

[Lynn A. Nagorske:]

Yes. The... again how we've build those reserves is our... we look at our guideline historical charge-off rates to review the specific credits, which will include the potential problem loan and with that, [inaudible] Lana, is that those are well secured those credits and didn't result any individual specific reserves.

[Lana Chan:]

And could you remind us just in terms of the portfolio, what the average LTVs are in the commercial real estate?

[Lynn A. Nagorske:]

In that commercial real estate, our underwriting practice is for a permanent loan, 80% loan to value, the construction loan will be 75% and the land would be 65%. So it would follow those guidelines.

[Lana Chan:]

Okay. Thank you.

[Lynn A. Nagorske:]

You're welcome.

[Operator:]

And this does conclude our question-and-answer session. I would like to turn the call back over to Mr. Nagorske for any concluding remarks you may have.

[Lynn A. Nagorske:]

Well, I would like to thank everybody for listening in on the call and supporting TCF. Thanks a lot.

[Operator:]

Ladies and gentlemen, this does conclude the TCF Financial Corporation's second quarter earnings conference call. I'd like to thank you for your participation and you may now disconnect.