TCF Financial Corporation
Q3 2008 Earnings Call Transcript

Published: 23 Oct 2008

[Operator:]

Ladies and gentlemen, please continue to stand by. Your conference will begin momentarily. Once again please continue to stand by and do not disconnect. Thank you. Good morning and welcome to TCF’s 2008 third quarter earnings call. My name is Vince 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’d like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference call. Please go ahead.

[Jason Korstange:]

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Neil Brown, President and Chief Operating Officer; Mr. Tom Jasper, Chief Financial Officer; Mr. Earl Stratton, Chief Information Officer and Mr. Barry Winslow, Vice Chairman. 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 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we provide today is accurate as of September 30, 2008 and we undertake no duty to update the information. Thank you and I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

[William A. Cooper:]

Thank you, Jason. TCF reported today an earnings per share of $0.24. That’s up 26% from the second quarter. And as a matter of fact, looking at the various releases, I think we’re one of the very few banks in the country that increased their earnings from the second quarter to the third quarter. Net income was 30 million, up 27% from the second quarter. Our net interest margin is 3.97, pretty flat. Net loan and lease charge-offs were 26.8 million, flat from the second quarter, 0.82 versus 0.84% and I think that’s a pretty unusual performance as well. I think most banks are up. Provision for loan losses were 52 million down from 62 million and you can see at a provision of 52 million and a charge-off of 26 million, we continue to increase the reserve to - it now stands at 1.21% of assets at September 30th. Again, I think we’re one of the few banks that actually reduced its provision quarter to quarter. Average power assets increased 1.4 billion or almost 12.5% from the third quarter of 2007. We’ve issued a $115 million of trust preferred securities, significantly increasing our capital accounts. And we remain well capitalized and exceed all the minimum capital levels by a substantial amount. The relatively good performance, and I wouldn’t call it good performance, but relatively good performance that we had was the result of both the things we did and the things we didn’t do. The things that we didn’t do is we never had any subprime lending program. We never made option adjusted ARMs or loans with teaser rates. We didn’t securitize any of our loans or participate in any credit derivatives or any other derivatives for that matter. We didn’t have any investment in Fannie or Freddie nor do we own any trust preferreds of any other bank. So we skipped many of those big problems of the banking industry had as a whole. And as I mentioned, we continue to be well capitalized and we’re primarily funded with deposits and we have lots of liquidity. We’ve remained profitable and continuing—as a matter of fact, increasing our profitability in this market. All that given, we are not separate from the economy as a whole. Falling home prices have impacted us. However, on the optimistic side, it looks like in most of our markets, the home prices have stabilized. If the economy gets worse as many are predicting that may change but at this point, that’s an optimistic side. Our net interest to income was 152 million and that’s up 10% from a year ago and is a pretty strong performance. Our banking fee income was $109 million and that was up, also, from the second quarter at $106 million. All of those are good core performance levels and our fee income on average assets today is very significant, remains very strong. TCF has slowed its De Novo expansion. Although we continue to buy land for the point at which we decide to increase De Novo expansion again and because of the fact that properties now are much cheaper than they were in the past. In the third quarter, we opened one supermarket branch. For the remainder of the year, we plan on opening one traditional branch and two supermarket branches. Again, that’s a slower growth in De Novo than we’ve had in the past and it’s simply a result of prudence in connection with uncertainties about the economy and so forth. Given that, our De Novo expansion continues to pay dividends. Our new accounts, a number of deposit accounts in our De Novo banks increased by almost 20% from a year ago and total fee income increased by 17%. Deposits increased by 17% in most De Novo banks. So that continues to be a feeder of our growth. The average power assets grew 1.4 billion or almost 12.5% from the third quarter of 2007. Consumer home equity loans increased 624 million or 10%. Commercial loans $384 million and 13% and leasing and equipment finance increased 363 million or almost 19% from last year this quarter. The current situation with power assets are loans basically is that because of the damage that’s been done to the rest of the banking industry and because of liquidity issues that they’re experiencing. The current situation with power assets are loans basically is that because of the damage that’s been done to the rest of the banking industry and because of liquidity issues that they’re experiencing. TCF looks at, because we’re well capitalized and continue to be profitable - we look at this as an opportunity and so even though loan demand is down from previous periods, there are less players and less logical players. We’re not competing against the WaMus and the IndyBanks and so forth that used to roll through here and screw up the market. So we’re able to grow our loan portfolios at better spreads and better terms and conditions than in prior periods and in fact, that’s what we’re doing. And I’d like to remind everybody that our consumer loans, our home equity portfolio, almost 65% of those loans are first mortgages which is also unique in the business. Our average rate on deposits, we currently have about $10 billion in deposits. It went down from the second quarter, 147 to 134 and down from the third quarter of last year, 248 to 134 and that’s a good sign as well. Average power liabilities, deposits, core deposits for the third quarter had a rate of 134 and an increase of 337 million or 3.5% from the third quarter of 2007. Now there’s also major changes that are going on in the deposits side. In the middle of this banking crisis, we found a lot of our competitors paying illogically high interest rates because they needed to for liquidity purposes particularly in the CD market. We opted not to participate in that competition for two reasons. One, we thought it was unprofitable deposits and two, we didn’t need the money. And so we did not, but what is clear is that going forward with the change in the banking world, that deposits are going to be perceived as a better source of funding as we’ve perceived it throughout our careers. And the average rate on deposits spread the treasuries, et cetera is probably going to be higher. So we’re going to get higher spreads on assets and pay higher costs for deposits. Indeed our goal is to grow those deposits as the opportunities arise. On the expense side, our expenses were up 5% from the second quarter, 9% from a year ago and there’s some unusual items that make that up. Non-interest expense totaled 177 million, up 14.8 million, 9% from the third quarter ’07 and $8.9 million or 5.3% from the second quarter 2008. Our regular compensation remained relatively flat and we had kind of the ordinary control of operating expenses that we’ve had in the past. The big difference was in advertising and promotions which increased $6.8 million or 125% from the third quarter 2007 and that’s basically marketing dollars that we’re spending in connection with checking accounts. Even though that is expensive and flows to the P&L in that way, our checking account growth of new checking accounts increased 23% from the second quarter; in other words, the number of checking accounts. So indeed that promotion is working and unfortunately, the way that works the expense comes first, the revenues come later but we think it is a good investment where the revenues that we get from those checking accounts over the pool will far exceed the cost of bringing them in. Other expenses increased 6.7 or 17.8 primarily due to the 3.4 million increase in foreclosed real estate expenses and property taxes and so forth in connection with working through our home equity portfolio and we had a severance and separation cost of $4 million that will not recur. As you all know, the Visa had settled with Discover. The way that those settlements work is that that settlement cost will be allocated to the member banks. We have an accrual for that. We had previously set up an accrual for that. We don’t know what that settlement cost is. We don’t think it’s going to be a material amount but we didn’t mention it in the release as something that is coming down the pike. I think we have $3.9 million accrued and best guess is that maybe we’ll need a million more or something like that but frankly, don’t take that for gospel because we don’t know. So we think that’s going to be a fourth quarter event. In terms of credit quality, as I mentioned earlier, our charge-offs were flat and that was essentially a mix change. The home equity portfolio increased slightly from 82 basis points to about 1% while at the same time commercial went from 86 to 39. Commercial went from 174 to .05. And leasing equipment and finance went from 55 to 42. So we had a mix change in terms of our charge-offs. We’re a little discouraged and unhappy that our consumer charge-offs continue to rise. We had a lot of indicators that showed that flattening. It’s probably an impact of the slowing economy and higher unemployment. Delinquencies had flattened for several months. They picked up a little. We continue to be optimistic about that portfolio, however, in connection with it, improving in the near future. We increased the allowance from 103 of loans to 121 and our coverage ratio, which means if you divide our annualized charge-offs into our reserve, we’re at 1.5 and that’s up from 1.3, so we’re a little more conservative in our reserving. As I mentioned, delinquencies continue to rise. Our over 90 day delinquency went from 28 million to 34 million, which is a modest increase and the rate went from 22 basis points to 27 basis points. Non-performing assets went up from 160 to 200 million and that’s basically a good piece of that is the workout of that Michigan residential portfolio we’ve identified the problem loans there, to put them on non-accrual. We wrote many of them down in the second quarter and some of them in the third quarter, but that increase isn’t necessarily indicative of future charge-offs. We think at least that we’ve taken a pretty conservative position on that. There may be some come down the road, but we think we have our arms pretty well around that and it mostly is centralized in Michigan, which has had a—it isn’t having a recession, it’s having a depression. In terms of the new capital program that the feds have announced, 250 billion. I’m sure you’ve all read, where the top largest banks were invited to participate in the face of a guillotine, if you will. And we are also being invited to participate in that. We are reviewing the details of it, which interestingly enough, we still don’t have. It would be 5% preferred stock for five years. That goes to 9% after five years and it would also contain some warrants, which would be slightly dilutive. But we don’t know what other terms and conditions are associated with it. The long and the short of it is we will evaluate that program. It may an offer you can’t refuse, but also it may be too good to not refuse. In general, my philosophy on capital, particularly inexpensive capital like this, we could not raise capital like this in the markets with this structure. And in general, my kind of philosophy is that you should raise capital when you can, particularly in uncertain times. That’s not a signal that we’re going to, but it’s a signal that we might. That’s our story and we’re sticking with it and I will open up to questions.

[Operator:]

Thank you, sir. (Operator Instructions) Our first question’s from the line of Steven Alexopoulos with JP Morgan. Please go ahead.

[Steven Alexopoulos:]

Hey, good morning, everyone.

[William Cooper:]

Hi.

[Steven Alexopoulos:]

Bill, could you break out, speaking of Michigan, the total loans that you have in Michigan and then maybe the amount of home equity loans that you guys have there?

[William Cooper:]

Tom, do you have those numbers? I might mention on the Michigan consumer loans, those charge-offs, delinquencies and so forth, appear to have flattened, but at a quite high rate. But we’re looking for those numbers.

[Neil Brown:]

Excuse me, this is Neil. I don’t have the exact numbers in front of me, but it’s approximately a billion dollars of commercial loans and a billion dollars of consumer loans.

[Steven Alexopoulos:]

I’m curious, Bill, with the economy weakening here, when you think about the overdraft business, do you expect to see the frequency of overdrafts pick up or in your experience, do people tend to get more sensitive to that fee? How do you think about that here?

[William Cooper:]

Frankly, I don’t know. That business, frankly, overdrafts, to the degree they occur are a function of, more than anything, a volume of transactions. And to the degree people are buying more, there are more overdrafts. It’s just kind of a direct thing that works to the degree the volume of transactions go down, overdrafts go down and we’ve seen some of that. But, the economy, etcetera doesn’t seem to drive that as open and down over the years as simply the volume of transactions.

[Steven Alexopoulos:]

And maybe just one final question, looking at the composition of the reserve, it looked like there was a notable increase in the reserves for commercial business loans. Does that reflect a broad based view you have with concern there or is it specific to a couple of credits?

[William Cooper:]

It’s specific to a couple of credits.

[William Cooper:]

It’s specific to a couple of credits.

[Steven Alexopoulos:]

Okay. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Ken Zerbe, with Morgan Stanley. Please go ahead.

[Ken Zerbe:]

Thanks. I know you guys seem pretty optimistic that the worst of the credit crisis is behind you or, at least, that things are stabilizing, but if the economy does goes into a recession and unemployment goes up to 7% or above, how would that affect your second lead in the commercial portfolios? I’m sure you guys have probably run some sort of sensitivity analysis on that.

[William Cooper:]

If the economy gets considerably worse, there will be deterioration in that portfolio. However, that portfolio is more driven, in particular, our portfolio, is more driven, the losses in it, are more driven by the home values. Now, that could switch around. It is clear that if we get into a deep recession, we’ll have more charge-offs everywhere and so will everyone else. It is extremely difficult to quantify that. We don’t have the charge-offs that the rest of the banking industry has now and if things get worse, we’ll get worse. But we think everybody will get worse more than us and we’re not looking at any catastrophe mode, just that it might get worse.

[Ken Zerbe:]

I understood you. I think the general consensus that we’ve heard so far this season is that the economy is getting worse going forward, but we’ll see.

[William Cooper:]

We’ll see.

[Ken Zerbe:]

The second question I had just in terms of the advertising expense. I understand where you’re coming from in terms of advertising driving revenues on the checking side. Does that imply, though, that we should see advertising sustained at these higher levels because if it is so good for revenues, isn’t it something you want to continue or are you done with these promotional expenditures?

[William Cooper:]

Well, one thing that’s clear is that what we’re doing works and the checking account growth for us is a key to a lot of our business. It increases non-interest checking. It increases fee income. It increases consumer loans because we get new customers. It increases savings account balances, etcetera. It’s a very key thing and it increases fee income down the pole. What I can tell you is this investment, if our deposit world works in the future as it has in the past, has very high returns and it’s very similar to ennoble expansion, if you will. In which case the losses come first and the revenues come later. We have been successful in this. It’s working. New accounts are up 23% from the second quarter and we did some of this in the second quarter. So, we’re having very strong and good results and as long as that continues, we’re going to continue and, matter of fact; we’re going to examine other methods of going at the thing in the same way.

[Ken Zerbe:]

Okay, so a $12 million run rate there might not be unreasonable.

[William Cooper:]

That’s right. It might not.

[Ken Zerbe:]

Understood. Alright, thank you much.

[Operator:]

Thank you. Our next question’s from the line of David Rochester, with FBR Capital Markets. Please go ahead. David Rochester - FBR Capital Markets Hi, good morning, guys.

[William Cooper:]

Hi. David Rochester - FBR Capital Markets Could you update us again on the dollar amount of home equity loans sitting above a 90% CLTV, just according to the data you’ve got right now?

[William Cooper:]

Two hundred and thirty million.

[David Rochester:]

Great and how does that compare to last quarter?

[Neil Brown:]

This is Neil Brown. Let me give you those numbers as it relates to the LTVs based on the values as of origination. The total balance of those loans, many of which are first mortgages is 1,683,000,000 and that’s down 148 million from the beginning of the year. But, if you look at the exposure, the amount of dollars on those loans that are secured by the value of the property in excess of 90%, of that number’s 223 million, which is down 40 million from the beginning of the year. So, those balances continue to decrease.

[David Rochester:]

Okay, thank you for that. Just on the CNI side, I had a follow-up on a question earlier from the NPA perspective, those that jumped up about 15 million, could you give some color on that increase? Was this granular? It sounded like maybe it was just a couple of credits, maybe what industries those reflected and were those primarily Michigan as well?

[William Cooper:]

We re-structured our work-out divisions to the way we used to operate it back in the former banking crisis, Savings and Loan Crisis. In connection, we’ve centralized that business and we’ve pulled it out of the banks and have done a very aggressive, in-depth review of all of our credits. And we are aggressively moving those things forward through the process of non-accrual and real estate and etcetera. That aspect is what’s gone on in that connection and these things go through a cycle. They get delinquent. They become non-accrual and then they become real estate and then they go out the bank. They’re written down with allocated reserves or actual write-downs through that process and most of these loans get written down before they get to real estate, if you will.

[William Cooper:]

The biggest category of problem loans that we have is in the home building industry and particularly in Michigan. The good news about that is we don’t have very much of it. My recollection is about 100 million.

[Neil Brown:]

Ninety-five million.

[William Cooper:]

Ninety-five million, so we don’t have very much of it, but just about everything we got turned into a problem because the falling new home sales and because of the depreciation of the land that screwed those loans.

[David Rochester:]

Okay, so if I’ve seen that most of that increase in the CNI reserve, that 4 million and change should be applied to the increase here and it looks like a severity that you’re preparing for of roughly 30, 32%. Is that accurate, roughly?

[Neil Brown:]

This is Neil again.

[David Rochester:]

I’m just looking at the pure CNI, NPA is a 16.5 million.

[Neil Brown:]

The biggest piece of that includes a business in Chicago that we’re working through the issues on that one. We’ll probably work through that in the fourth quarter.

[William Cooper:]

And that’s liquidation. That’s a liquidation situation.

[David Rochester:]

Okay.

[William Cooper:]

And we think we have that written down to the liquidation value.

[David Rochester:]

Got you, just one last and real quick, on the leasing non-performers, those look like those were up a little bit as well. Are you seeing additional weakness, maybe in the construction equipment segment or is this reflecting other areas as well? Do you have a sense for any geographic color here too?

[William Cooper:]

There’s no geographic color to that. It is in certain segments, to the degree we’re having any problems. First of all, our leasing business has held up very well. There’s not much things coming down the pike on that. The things like cement pumps, which are million dollar machines. There are people that own those. The people that owe them money aren’t paying them, if you will. Now, those are very valuable pieces of equipment and so they’re well collateralized. But, the construction side of the business, to a degree, there’s a softening is probably where the softening is at this point.

[David Rochester:]

Are you seeing valuations on those collateral hold up fairly well so far or are you starting to see some weakness there?

[William Cooper:]

So far, they’ve held up well.

[David Rochester:]

Okay. Great, thanks guys, I appreciate it.

[William Cooper:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Scott Siefers, with Sandler O’Neil. Please go ahead.

[Scott Siefers:]

Good morning, guys.

[William Cooper:]

Hi.

[Scott Siefers:]

Let’s see, Bill, you talked on the deposit side about the competition on things like CD’s, for example, I was hoping you could expand a little and talk on just a premier products, both the checking and the savings. It looks like that’s, at least, most recently where a lot of the dollar value of deposits are coming out of, just wondering if you could talk sort of about what your strategies are there, what kind of dynamics you’re seeing, etcetera.

[William Cooper:]

On the power products, Premier Savings, Premier Checking and those products, we probably were too conservative in terms of the rates we were paying on those products and where that came out is back in the beginning of this crisis, those rates got pushed down to help improve profits and so forth and they probably got pushed down too far. We had some run-off in that business. Also, to some degree, we have a number of deposits, a lot of deposits over $100,000 and now the new insurance goes to 250, but people diversified those deposit products around. They moved them to various different banks. We had more than our share of that and so; we got some of that of people being prudent on where they had their deposits. That’s been alleviated since the higher insurance product as well. Since that time, particularly the top tiers crank those rates up and we’re hoping and I’m optimistic that we’ll reverse those trends going forward. As I mentioned earlier, it’s just clear what’s going to have to happen. If you want to go deposits, you’re going to have to market and you’re going to have to pay. One thing I will mention, with the bank money coming into the banks and the WaMus of the world and the Indy Macs disappearing and so forth, that deposit pricing, that outrageous deposit pricing, is beginning to ebb along with the lower Fed prices. It looks to me like what the Feds are going to do with that money is they’re going to put it in the banks that don’t need it and then they’re going to put pressure on the banks that they feel need to make a big change and I think that crisis pricing from a liquidity point of view and with the loosening up and the guarantees on various funds and so forth, we look to that moderating. But, in any case, we’re going to pay more for deposits. We’re going to grow deposits and we’re going to continue to pay premiums and do advertising for checking and grow that base as well. But, it’s going to be more expensive.

[Scott Siefers:]

Okay, perfect. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jon Arfstrom, with RBC Capital Management. Please go ahead.

[Jon Arfstrom:]

Thanks. Good morning guys.

[William Cooper:]

Hi Jon. This is the first time you didn’t get to ask the first question. What happened?

[Jon Arfstrom:]

I don’t know what happened. My estimates were too high. In terms of the reserve, you built it quite a bit over the last two quarters and 121 is obviously as high as you’ve ever had it. Do you feel like that’s enough the way the portfolio sits right now?

[William Cooper:]

I’m certainly not going to say no. We do. And one of the things, those reserves are built at least partially off of models. And I’m not a big fan of those models but that is the way it’s done these days. And those models tend to look through the rear view mirror. And so they tend to predict in the future what happened in the past. And so to greater or lesser degree back a few years ago they gave you too optimistic of an indicator. And now they’re probably giving you too pessimistic of an indicator which tends to bias us into doing that. I don’t think we’re going to have charge-offs at the same levels on the loans that were—consumer loans that were originating today that we did in 2006/2007. But we’re booking those same reserves on those loans. I don’t think this recession is going to be that deep or that long. They pushed a lot of money into this economy. Even this 250 billion is going to go into the economy. The feds lowering rates, they’re probably going to lower rates again next week. I think that this recession, my humble opinion and I, gee I don’t know for sure, but it isn’t going to be as deep or as bad in particularly in the markets that we’re in as some others see it.

[Neil Brown:]

Jon, this is Neil. I would just add to that that we’ve always been good at identifying problem loans quickly and we’ve added a lot more resources to doing that. And we’ve got reason to believe that we’re better at that than our peers in terms of recognizing problems quickly and dealing with them.

[Jon Arfstrom:]

And then in terms of the delinquency trends you touched on in a bit earlier bill but they’re up 20, 25% sequentially. It’s still not a huge number but is this something that you think leads to higher charge-offs or, Neil, do you feel like kind of up and out policy can keep it in this 85 basis point range?

[Neil Brown:]

Well the nature of our portfolio, this is Neil again, almost all of our loans are secured. There is collateral there. We are seeing some increase in values and residential properties in a couple of our markets. So a delinquency or a non-accrual or any other credit metric that you look at doesn’t necessarily translate into a loss. Having said all that I’m not spiking the ball and saying things are going to turn around this quarter.

[William Cooper:]

Generally probably with us, delinquencies are a better indicator than non-performing because of the nature of our portfolio. And delinquencies rising like that are not a good sign. One of the good signs is it’s in the over 30 day bucket and not as much in the over 90 day bucket. And so people are falling behind a little but they’re catching up if you will. And that’s a good sign, or a moderating sign in that trend I guess.

[Jon Arfstrom:]

And then just one follow-up on a comment that you made, Bill, maybe for Tom, how’s the balance sheet positioned? We got 50 basis points recently and I know historically you’ve been maybe neutral to slightly liability sensitive. Can you just comment on where you sit today?

[William Cooper:]

Are you kind of coming in and out, are you asking where our asset liability mix is?

[Jon Arfstrom:]

Yes, exactly.

[William Cooper:]

Tom you want to comment on that?

[Thomas Jasper:]

We’re still looking at being liability sensitive and as we look at the GAAP we continue to monitor that. And I think one of the big things for us is going to be looking at, we’re looking at increasing levels of variable rate, loan production and consumer home equity. That’s been increasing as rate’s been coming down. So that’s helping to moderate what’s going on within the GAAP. But we’re going to continue to grow deposits as Bill mentioned. And we’re going to look at to grow that within checking and savings. And so that’s going to put some additional pressure there.

[William Cooper:]

I might mention, too, that as in the past, a significant portion of our variable rate loans, both commercial and consumer, have floors. And so to a degree the feds lower rate, we’re not as rate asset sensitive in a falling rate environment as we are liability sensitive. One thing I will mention is, and this isn’t just us, it’s everybody, the markets are so screwed up in terms of pricing, LIBOR has been really odd. I think it got to 6% at one point, didn’t it? I think it’s around 3.5 now or something like that. But the normal spreads in how things work and particularly when you drop them in these models, your interest rate risk come up with odd answers. And they may be the right answers given the way some of this works. But TCF is mostly susceptible to prime, to some degree to LIBOR, and then frankly home loan bank borrowing rates. Those are the key metrics that move our—if rates, it would be we’re liability sensitive. And that should say that if rates fall our margins should improve. Typically what happens when rates fall, prepayments accelerate. I don’t think that’s going to happen in this scenario.

[Jon Arfstrom:]

Alright, thanks a lot.

[Operator:]

Thank you. Our next question’s from the line of Heather Wolf with Merrill Lynch. Please go ahead.

[Heather Wolf:]

Hi good morning. Bill, I just wanted to follow-up on your comments regarding the fact that you’re seeing wider spreads. If I looked at the average balance sheet it looked like a lot of your loan yields were down. I’m just curious what is offsetting sort of the wider spreads that you’re getting.

[William Cooper:]

Well that was more of a rate situation. Tom, do you want to respond to that?

[Thomas Jasper:]

Yes, as rates as fallen we’ve just seen continued, especially within the home equity, when rates fell at the beginning of the year we saw a portion of our production from the first half of the year. So it’s a big portfolio and so we’re going to have to see some additional production as it relates to that. But we’re really trying to move off of those base treasuries as an index as there’s been this huge flight to quality and seeing the investments and treasuries lower those rates. We’re trying to mark the rates where we think the market can bear and we can grow the balance sheet. So it’s going to take some time for it to be reflected in those numbers as the portfolio churns.

[William Cooper:]

A good example of that, you can see what happened to deposit rates. It went down from 268 or whatever it was to 134 from a year ago. And so most of that lower rate situation was a falling rate environment, not a spread situation. Plus the fact our more aggressive stance on lending is basically 90 days old. I did want to mention, by the way, in the delinquency numbers we had a relatively large commercial loan of over $8 million that went over 30 days for three days, whatever it was, a week. It went in and went out. It was kind of a technical thing that kind of ballooned those numbers a little bit.

[Heather Wolf:]

Okay. And then just a follow-up on the deposit trends. I also noticed that your retail non-interest bearing deposits were down quarter-over-quarter. Is that a function of the economy? Do you think there’s any kind of flight to big if you will going on in that product category?

[William Cooper:]

There may be but most of that money with us is relatively small. It’s a huge number of relatively small accounts. And there is a seasonality in it. The stimulus checks were in the second quarter, came out and that kind of boosted up average deposits per account. And they spent it. And those average accounts came down a little bit. But we don’t see any, other than that, really see any real trends in that situation. Our average deposits per account have stayed pretty stable absent that.

[Heather Wolf:]

Okay. And then just one last question. I was intrigued by your comment that you’ve been invited to participate in TARP. That’s something I know we’re hearing from the big banks but not many of your peers. Can you tell us a little bit more about any indications that you’ve gotten from the treasury?

[William Cooper:]

What’s been communicated to us through our regulators is that we would qualify. That’s been communicated in an informal fashion. And that’s as much as I can say about it.

[Heather Wolf:]

Okay, that’s great. Thank you very much.

[William Cooper:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from the line of Rob Rutschow with Deutsche Bank. Please go ahead.

[Rob Rutschow:]

Hey, good morning. I guess a couple questions on deposits. Is the advertising you’re doing geared toward the sort of Joe Lunch-bucket type of deposits or more towards higher tier deposits?

[William Cooper:]

The marketing is more towards Joe Lunch-bucket or Bob the Plumber.

[Thomas Jasper:]

Joe the Plumber.

[William Cooper:]

Joe the Plumber. The higher tier amounts doesn’t really take much marketing. You pay the rate you get the dough. And so we’re raising the top rates and the top tiers even for the bigger dollar customer. And we also are aggressively going after that good old fashioned cash book account. Most of our competitors have a significant amount of what’s called legacy deposits. And that means savings accounts they’re paying a half percent on. There’s a big bundle of that money out there. And we’re aggressively, we’ve got some marketing and premium programs designed at that money as well.

[Rob Rutschow:]

Okay. That’s helpful. In terms of the non-performing assets I think you’re 30 and 90 day past due would seem to indicate fourth quarter we’ll see a higher level of non-performers. Can you comment on maybe the first or second quarter of next year and what your expectations are and sort of what sort of assumptions you’ve built into that?

[William Cooper:]

Our expectations are, this is not a prediction , is that loan charge-offs have stabilized and will stabilize and get better going into 2009. That’s our expectation. Whether that occurs, only a crystal ball will say but that is our expectation.

[Rob Rutschow:]

Would you expect that non-performers to continue rising into next year?

[William Cooper:]

I really can’t on the commercial side, and even the leasing side, we think that we have identified most of that. Now that being said, somebody can go south and you can get an addition. But I’ll say this. I don’t think it’s going to, if it rises I don’t think it’s going to rise as fast or as much. That’s my guess. And the sweat just broke out on everybody’s brow here so in terms of those. But those are just my intuitions.

[Neil Brown:]

This is Neil again. There’s one phenomenon in Chicago, in Illinois in particular where the foreclosure laws are different and we have mostly first mortgages. As those mortgages go through that process they stay in non-accrual longer and then they go to REO for a shorter period of time. So it’s just a kind of a classification issue relative to foreclosure laws.

[William Cooper:]

And frankly in Chicago because those are first mortgages and more purchased mortgages, our charge-offs on those are smaller.

[Rob Rutschow:]

I guess one follow-up on that is, were there any loan sales during the quarter and how generally are your dispositions going?

[William Cooper:]

No, there were no loan sales. As a matter of fact we’re looking at – there are a number of financial institutions around the country experiencing liquidity and capital issues and we’re being invited to look at various kinds of portfolios in connection with acquiring portfolios of businesses that we’re familiar with.

[Rob Rutschow:]

Okay. And just the last sort of longer term question, you talked about your models and how they’re sort of backwards looking. Should we take that to mean that the reserves, in a more normal scenario, might be at a higher level in the future?

[William Cooper:]

You can pretty well assume that generally. I think it’s going to be wise in the future to have a more conservative position on reserves in connection with the way the regulatory world is going to work for some period of time. And I think the issue with the SEC, I think it was a huge mistake, what they did in connection with telling people that they couldn’t keep cushions in their reserves. I mean, they even fined somebody for that. I think the banking regulators will take those reigns more strongly and I think you’re going to see a general higher level of reserves in the banking business on a pretty consistent basis going in the future and for us.

[Rob Rutschow:]

Okay. That’s great, thank you.

[Operator:]

Thank you. Our next question’s from the line of Todd Hagerman with Credit Suisse. Please go ahead.

[Todd Hagerman:]

Good morning everybody. Just a couple questions for you. Bill, first off, just in terms of capital. As you think about, I think you’ve talked about with the recent trust referred that you raise and now contemplating the TARP program. How do you now think about the appropriate capital levels for the company on a go forward basis and aspirations to really kind of grow the balance sheet in a much more meaningful way? How should we think about kind of the adequate capital levels going forward?

[William Cooper:]

Well there’s really a number factors in that. There’s the capital level that we as businessmen think is adequate, the capital level that the regulators think is adequate, and the capital level that the investment community thinks is adequate. The regulators are telling us even with this TARP program that they’re not changing their expectations about capital levels. In other words they’re saying we’re not giving you this capital and telling you you can’t lever it. And there’s a good reason for that. One of the goals of this TARP program besides stabilizing the banking business is that this money will get lent out and it will improve the economy. So our rule of thumb is—and by the way we don’t—we have regulatory, what they call risk based capital which puts mortgages in at 50%. The Fannie and Freddie was in at 25%. These are regulatory fantasies in connection with capital levels. What matters is tangible equity capital, in our judgment. And we’ve operated for 25 years with a goal of keeping that around 6%. Now the trust preferreds have an equity characteristic in connection they’re there and they provide protection for depositors and regulators. And so you can decide where that fits. But the most important capital level that we’re interested in is tangible equity capital.

[Todd Hagerman:]

And so you would again, with your growth aspirations, you would continue to kind of keep that in mind? Even though, again just in terms of your leverage, that the preferred perhaps coming in wouldn’t necessarily change that or cause you to increase that kind of cushion?

[William Cooper:]

Well it might. In these tougher economic times, looking at things, storm clouds on the horizon, it isn’t a bad idea to have a little more capital. And so within the short range certainly. There’s two things that can happen with that capital if indeed we do it. One is that we can lever it up, in other words grow our deposit base, grow our loans, grow the bank, and utilize that capital leverage in that fashion. And the second one is, and this is, I’m not making an announcement here, please understand me. But is that one of the other reasons they’re putting this in there is to deliver up failing banks. And indeed if we could find particularly a deposit franchise that appealed to us and particularly in our markets I wouldn’t totally rule that out either.

[Todd Hagerman:]

Are you still though shying away from an absolute kind of bank acquisitions if you will?

[William Cooper:]

We’ve – as you know we haven’t done any of those in a long time and basically because we always thought De Novo expansion was more efficient, better returns. On the other hand in this market that may be a different situation. As these banks get put out in the marketplace, these failing banks if you will, the internal rate of return on some of these deals can be substantially better than they were when everybody was paying four times a quarter.

[Todd Hagerman:]

Terrific. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Ben Crabtree with Stifel, Nicolaus. Please go ahead.

[Ben Crabtree:]

Yes, thank you. Good morning. A couple of questions, a couple that are maybe follow-ons, Bill you talk about a substantial chunk of variable rate loans being at floors. Any guidance as to what amount that might be?

[Thomas Jasper:]

Yes, the amount on the consumer portfolio, Ben this is Tom, it was a billion two at the end of the quarter. And then with the recent announcement, that’s going to put roughly another $250 million into the loans at the floor category.

[Ben Crabtree:]

Okay. We’ve talked about this in the past but obviously losses are made of both frequency and severity. And given your comments about some of the home values showing signs of flattening out, if we’re not in a severe recession do you think it’s mostly a frequency issue now versus a severity issue?

[William Cooper:]

Well it’s not the end or even the beginning of the end. It’s the end of the beginning to quote, who was it? Churchill. Yes, home prices, one of the things about the home prices that people don’t realize is when they talk about home prices dropped 10% for instance, in our markets in particular, low priced homes dropped 25% because that’s where the subprime lenders played mostly. And that was also a market that we’re in because of who we bank to a significant degree. And so that really significant drop in home values had a big impact on us. And a house that was maybe selling for 150,000 is now selling for 90,000. One of the things about that, that drives that home values is there are a whole bunch of people, good credits, who can buy a house at 90 that couldn’t buy it when it was at 150. And so there’s demand there now and so you can liquidate those homes because there’s now a new supply of buyers. And plus you can get a long-term fixed rate loan at a pretty low historical rate today. And so I’m somewhat optimistic in connection with our ability to liquidate homes at a reduced charge-offs than we’ve seen in the past.

[Ben Crabtree:]

And you’d indicated that some of your markers were showing signs where the values had stabilized. Just wondering if you could kind of hit the main markets and tell us which ones are still eroding, which ones are stabilizing?

[William Cooper:]

All of them appear to be stabilizing with the exception of Arizona which we don’t have anything in and Michigan, which things are still look like they’re deteriorating now. Interesting enough, they’re deteriorating but our credit hasn’t. We don’t know why that is but home values are still deteriorating. And they might get worse with what’s going on with General Motors and Chrysler and all that business. If they come together there’s going to be some more job losses and so forth. But I would say other than Michigan, all of the home values that we’re looking at with the most current data we have, in fact home values are up a little, a couple percent.

[Ben Crabtree:]

Okay. Another question about the checking accounts on the retail side. And you talked about the fact that stimulus check moving out, account for a lot of the dollar amount of retail non-interest bearing declining. Just wondering, and the same time you talked about recent success with opening up new accounts. Was there a drop in number of checking accounts in the third quarter?

[William Cooper:]

No. We increased checking accounts in the third quarter and by a substantially better higher level than we have in a long time.

[Ben Crabtree:]

Great, okay. Fairly obviously to everybody, you haven’t earned your dividend in two quarters. Any comment you want to make about the stock, the cash dividend?

[William Cooper:]

Well we just declared it. We don’t intend to cut that dividend. One of the things in this TARP program, if indeed you participate in it, is that you will not be permitted to raise your dividend for a three year period as that is currently drafted or brought back to stock.

[Ben Crabtree:]

And the last question relates to again some of these very unclear government programs. But it would appear as though there might be a chance to issue some guaranteed government debt which even after the guaranteed fee might be relatively cheap money. Do you have a fair amount of debt coming due within the relevant time frame and how does that program look to you?

[William Cooper:]

I don’t think we’ll participate. We may opt into some of these things in terms of the ability to do them, but I don’t see the need for us to participate in those. One of the things I will mention, it’s kind of off-point from your question, but one of the things that we are doing is we’re—all of our mortgage backed securities are vanilla Fannie, Freddie government guaranteed securities if you will. We have a couple of billion dollars of it. Our goal would be to shrink that portfolio by as much as $1 billion perhaps and to pay down borrowings accordingly and shrink the balance sheet. If I shrink mortgage backs by $1 billion I have in effect raised 60 million of capital if you follow me.

[Ben Crabtree:]

Yes.

[William Cooper:]

And mortgage back spreads the profitability of that although it’s very safe, you have prepayment risks and et cetera in it, though that’s the lowest spread business that we’re in. We did sell off some of those in the third quarter and the fourth quarter and we’ve got some more maturities of borrowings coming up. And we’ll probably be selling off some more in terms of reducing borrowings and reducing the investment portfolio.

[Ben Crabtree:]

Okay great.

[Thomas Jasper:]

Ben, this Tom. As it relates to that portion of the government program for guaranteeing the debt, that’s really intended for banks that are having liquidity problems and having problems rolling their debt. That’s not a situation that applies to us. We’re not having those concerns and that part of the program is really intended for those banks that are more in a liquidity crisis mode.

[William Cooper:]

We have a significant dollar amount of collateral at the Federal Home Loan banks and at the fed and so forth that we’re not borrowing on. And that’s $2 billion.

[Thomas Jasper:]

Two billion at the Federal Home Loan bank and an additional amount of 600 million at the fed.

[William Cooper:]

Yes, so we have basically 2.5 billion of collateral available to borrow at which is much more liquidity than we need. So we’re in a very good position from a liquidity point of view. And basically we don’t need the government’s help in our situation. And it really shows you the value of having a retail deposit franchise – particularly our kind of retail deposit franchise.

[Ben Crabtree:]

Right. Okay, thank you very much.

[Operator:]

Thank you. Our next question’s from the line of Andrew Boord with Fenimore. Please go ahead.

[Andrew Boord:]

Yes, hi guys. One of the nice data points you put in here is potential problem loads. It was nice to see that go down. I’m just not sure how to reconcile that with NPAs going up and I’m wondering if maybe there’s some definition issues here that I’m missing.

[William Cooper:]

Well we’re one of the very few banks that puts that number in there. And it – what you might call watch list loans. And it is not a good indicator of loan problems. It is an indicator but not a good indicator of what’s happening with credit overall. And matter of fact we ticked around not putting that in there anymore and we said the folks decided if we didn’t everybody would go oh, what are you hiding, you know? Why did you change that? But all it really is is what some of us call the stair list. And it’s not delinquent, it’s not a problem, but it’s in an industry—say for instance it was in a lumber business. Well that’s related to the lumber business, construction business. It’s fine, it’s paying, it’s current. But we’re watching it closely. And that’s the kind of credits that are in that.

[Neil Brown:]

Andrew, this is Neil. The way to reconcile those numbers when you look at it is the decrease in potential problem loans was reflected in the increase in non-accruals.

[Andrew Boord:]

Okay.

[Neil Brown:]

But the good news is the potential problem loans didn’t increase.

[Andrew Boord:]

Got you. That’s what I was looking for. And the $100 million in commercial real estate, is that where the lumber stuff shows up?

[Neil Brown:]

No. The lumber’s not included in residential development.

[Andrew Boord:]

Oh, okay. Well I remember you talked in the past about some Minneapolis area lumber companies. I wasn’t sure where those show up in the numbers. Okay, well thank you guys.

[William Cooper:]

You’re welcome.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn it back to Mr. William Cooper for any closing remarks.

[William Cooper:]

Well I’d just like to thank you all. One of the things I would like to remind you all too as well is that TCF still has a significant short position. I think the last numbers we saw were 22 million shares. The good news about that is one of these days they’re going to have to cover. So with all that, thank you very much. Bye now.

[Operator:]

Thank you ladies and gentlemen. This does conclude the TCF Financial Corporation third quarter earnings conference call. ACT would like to thank you for your participation. You may now disconnect.