TCF Financial Q3 2007 Earnings Call Transcript

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TCF Financial Corporation (TCB) Q3 2007 Earnings Call October 23, 2007 11:00 AM ET

Executives

Jason Korstange - Director of TCF Corporate Communications

Lynn Nagorske - CEONeil Brown - President and COO

Tom Jasper - CFO

Earl Stratton - CIO

Tim Bailey - President and CEO of TCF National Bank

Analysts

Jon Arfstrom - RBC Capital Markets

Steven Alexopoulos - J.P. Morgan

Todd Hagerman - Credit Suisse

Scott Siefers - Sandler O'Neill

Gary Townsend - FBR Capital Markets

Ken Usdin - Banc of America Securities

Ben Crabtree -Stifel Nicolaus

Robert Rutschow -Deutsche Bank

John Fox - Fenimore Asset Management

Michael Cohen - Sunova Capital

Andrew Marquardt - Fox-Pitt Kelton

Operator

Good morning, and welcome to TCF's 2007 Third Quarter EarningsCall. My name is Eric, and I will be your conference operator today. All lineshave been placed on mute to prevent any background noise. After the speaker'sremarks, there will be a question-and-answer period. (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 thisconference. Joining Mr. Nagorske will be Mr. Neil Brown, President and ChiefOperating Officer, Mr. Tom Jasper, Chief Financial Officer, Mr. Earl Stratton,Chief Information Officer, and Mr. Tim Bailey, President and CEO of TCFNational Bank.

During this presentation, we may make projections and otherforward-looking statements regarding future events or the future financialperformance of the company. We caution you that such statements arepredictions, and that actual events or results may differ materially.

Please see the forward-looking statements disclosure containedin our 2007 third quarter earnings release for more information about risk anduncertainties which may affect us. The information we will provide today isaccurate as of September 30, 2007, and we undertake no duty to update theinformation.

Thank you, I will now turn the conference call over to TCF'sCEO, Lynn Nagorske.

Lynn Nagorske

Thanks, Jason, and good morning. TCF reported its thirdquarter earnings today. EPS for the third quarter of 2007 was $0.48 per sharethat compares to $0.51 in last year’s third quarter, a decrease of $0.03, or5.9%. Net income for the quarter was $59.1 million compared to $65.9 millionlast year’s third quarter, that’s a decrease of $6.8 million or 10.3%.

Return on assets was 1.55% for the quarter and return onequity was 23.39% for the quarter. And those ROAs and ROEs rolled down from theprior year, and my judgment continue to remain strong in this very difficultand challenging operating environment.

Significant third quarter transactions, in the 2007 quarter.We sold mortgage-backed securities and incurred a gain of $2 million pre-tax,that’s a penny per share after tax. Net gains on sales of real estate relatedto our branch repositioning of $1.2 million pre-tax, that’s a penny per shareafter tax. And we had favorable income tax adjustments of $2.6 million aftertax or $0.02 earnings per share. So those transactions all totaled aggregate$0.04 per share.

Last year’s third quarter, we had a gain on sale of realestate of $1.2 million that rounded down to no impact on earnings per share,and we have favorable income tax adjustments of $1.1 million after-tax or apenny earnings per share.

It's also worth noting for comparability purposes that lastyear's third quarter included of an additional $4 million or approximately$0.02 earnings per share of accelerated education loan sale gains due tolegislative changes. Well, that's an operating income item. I do believe that,that should be pointed out for comparability purposes.

Net interest income for the third quarter was $137.7million, that's up $2.7 million or 2% from the third quarter of last year, andup $279,000 or 0.2% from the second quarter of 2007. The net interest marginfor the third quarter of this year was 3.90%. That compares to last year'sthird quarter of 4.11%, so it's down 21 basis points. And the second quarter of2007 was 4.02%, so we're down 12 basis points from the second quarter.

The third quarter of 2007 continue to be a difficultoperating environment for all banks, but in particular with the yield curveinverted and we experienced intensified deposit pricing, particularlycertificates of deposit and very volatile credit markets. We continue to bedisciplined in our deposit pricing. However, this has impacted our depositgrowth. And Tom Jasper will provide additional comments in this area at theconclusion of my remarks.

Fee income for the third quarter, total banking and feeincome was $109.5 million, that's up $1.3 million or 1.2% from last year'sthird quarter. Fees and service charges were $72 million, that's up $1.2million or 1.7% from last year's third quarter. And I should point out thatbanking fees and service charges from the third quarter of last year included$1.4 million in fees from our sold Michiganbranches which needs to be considered for comparability purposes. Card revenues$25.7 million, that's up 5.5%.

Leasing had a very strong quarter, primarily driven byincreased sales-type and operating lease revenues. We had fee income of $15.1million, that's up $1.7 million or 13% from the prior year's third quarter.

Other category in 2007 was $1.8 million, that's a decreasefrom last year's third quarter of $4.9 million. That includes the acceleratedlevel of education loan sales, which I had previously discussed.

Branches during the quarter, we opened three branches; onetraditional, one supermarket, and one campus. We plan on opening six more inthe fourth quarter of this year, four traditional and two supermarkets.

Our assets for the quarter, we had good growth. Our averageassets were up $815 million or nearly 8% from the third quarter of 2006, andnow totaled $11.1 billion. That was led by consumer, which was up 10.6%,commercial was relatively flat due to heavier than anticipated pre-payments,and leasing was up 13.5%. We continue to believe we're booking good qualitybusiness in growing our balance sheet.

Power Liabilities for the third quarter of 2007, averageswere up $367 million or 4%, to $9.7 billion. And I must point out in thatcalculation, I'm excluding the Michigandeposits, which we sold in the first quarter of 2007. During the quarter,increases in market rate sensitive premier categories and CD's were offset bydeclines in non-interest bearing deposits.

Overall, deposit rates for the third quarter of '07, 2.48%.Those are averages for the quarter that compares to 2.4% for the secondquarter, and 2.22% for last year’s third quarter.

Expenses, this is a very well controlled category, and weare pleased by our performance in this area. They are down 0.1% for the quarter,that’s corrected down, and that excludes operating lease depreciation, up 0.2%in total.

Credit quality, 2007 third quarter net charge-offs at TCFwere $11.1 million or 0.38%, that compares to last year’s third quartercharge-offs of $4.9 million or 0.18%. So, we had an increase there of $6.2million, of which $4.3 million was in home equity.

Home equity charge-offs for the third quarter of '07 were 38basis points compared to the second quarter of '07 of 30 basis points, and thethird quarter of '06 of 12 basis points.

The provision for the third quarter of 2007 was $18.9million. That’s up $13.6 million from last year’s third quarter. The maincomponents of that, as I mentioned, were increased home equity loancharge-offs, and the resulting increases in the loan loss reserves from theslowdown in the housing markets. And occurred primarily in Minnesotaand Michigan,and that totaled $8.6 million, of which $4.3 million was in increase incharge-offs.

We also had changes in reserves for individual commercialand leasing credits of $3.1 million, compared to the prior year's thirdquarter. And the remainder of the increase in the provision is really just dueto growth provisions and other miscellaneous items.

As a result of all those actions, our reserves strengthenedin the third quarter, and now total 63 basis point or $74.6 million. That’s anincrease of 5 basis points from June of '07 or $7.8 million. And our coverageratio, that’s the allowance, led by charge-offs is 1.7 times. It's actuallygreater than two if you adjust that for overdrafts, which are moretransactional based charge-offs.

Delinquencies in the quarter increased slightly to 0.63%,and they were 0.51% at the end of June, 0.63% at the end of last year. Most ofthe increase from the second quarter was in home equities. We also saw a smallincrease in leasing and equipment finance.

I should point out, although I've mentioned this many times,that at TCF in terms of our home equity loans we don't have, we have done nosub-prime lending programs. We have now 228 ARM loans that we all read a lotabout. No option ARM loans, no loans originated with teaser rates. Our variablerate loans have interest rates tied to the current prime rate. And over 99% ofour loans are in states where TCF has branches.

In response to the market conditions that we haveexperienced over the last 12 months, TCF has continued to adjust itsunderwriting guidelines for home equity loans. In general, these ongoingchanges have had the impact of increasing burrower FICO score requirements,lowering loan-to-value ratios and requiring more appraisals to verify thecurrent value of the home.

Moving on to capital TCF continues to be well capitalized.We repurchased some 350,000 shares in the third quarter, at an average cost of$24.97 per share and we have 5.5 million shares remaining in our repurchaseauthorization.

I will now turn it over to Tom Jasper who will makeadditional comments related to TCF's net interest margin, and then we'll openit up for questions. Tom?

Tom Jasper

Thank you, Lynn.The margin rate from the second quarter to the third quarter decreased 12 basispoints from 402 to 390. Approximately 4 basis points of the decrease in themargin rate was related to a $374.5 million or 2.7% increase in total interestearning assets that was funded with higher cost long-term borrowings.

In the middle of the quarter, in response to the volatilecredit markets and changes in the LIBOR rate, TCF entered into $700 million ofnew long-term borrowings at a weighted average rate of 4.73%. These borrowingsdid create some excess cash that was invested in overnight investments andthese investment positions decreased the margin rate, but did have a positivecarry in the quarter.

Changes in the mix of both non-interest bearing and interestbearing deposits caused the margin rate to decrease approximately 6 basispoints. A portion of this mix change in interest bearing deposits was seasonalin nature. In addition, the repricing of certain liabilities, primarily premierchecking and premier savings decreased the margin in additional basis points.In many of our markets, we've encountered increase competition in depositpricing. Also, the increase in non-performing assets from the second quartercaused the basis point reduction in the margin rate.

Overall, the Fed's decision in September to reduce the fedfunds target rate by 50 basis points will have a slight favorable impact toTCF's net interest income and margin going forward.

With that, I believe we can hold up the call for questions.

Question-and-AnswerSession

Operator

Thank you, sir. Ladies and gentlemen, at this time we willbegin the question-and-answer session. (Operator Instructions) Our firstquestion comes from Jon Arfstrom with RBC Capital Markets. Please, go ahead.

Jon Arfstrom - RBCCapital Markets

Thanks. Good morning guys.

Lynn Nagorske

Good morning, Jon.

Jon Arfstrom - RBCCapital Markets

Tom, just to follow-up on your, some of the margininformation. The $700 million in new borrowing is the entire amount incrementalor did that replace something?

Tom Jasper

It replaced, a portion of it replaced short-term borrowingsthat we had in place, about $250 million in short-term borrowings, and the restof it was incremental.

Jon Arfstrom - RBCCapital Markets

Okay. So the 415 incremental is for loan growth?

Tom Jasper

Correct.

Jon Arfstrom - RBCCapital Markets

Okay. When you made a comment about change in reserves forindividual leasing and commercial credits, can you go into a little more detailon that?

Tom Jasper

As I mentioned, the change from last year's third quarterwas about $3 million. This year we had an increase in specific reserves forselected loans of $2.1 million, and last year we actually had a release ofspecific reserves of $900,000. So that was a credit, if you'll have it, andthat's from some favorable work-outs.

In terms of the specific reserves this year, they are reallyestablished for - we have about $30 million of outstandings in homebuilders in Michigan. These arestill in performing status in the third quarter, but looking at that situation,we believe they are appropriate to establish some reserves for those. Andreally, in leasing it's a number of smaller credits, there is no individualstory there.

Jon Arfstrom - RBCCapital Markets

Okay. Due so, I understand it clearly, is the $3.1 millionnew for the third quarter? That's part of the higher provision rate that wesee?

Tom Jasper

Yes.

Jon Arfstrom - RBCCapital Markets

Okay. And is this something where you looked at the entireportfolio and you said, we need $3.1 million more or are they just two specificthings that stuck out?

Tom Jasper

These were really specific situations when we analyzed thosereally on an ongoing basis each month, we continue to get new information, interms of appraisals, a borrower's condition, in terms of their financialstatements, their operating strategies for those companies. So, it’s really arecognition of all of those things.

Jon Arfstrom - RBCCapital Markets

Okay. And then, another question on the overall loan lossprovision, in terms of your model. What’s the largest driver of the increase?And what I am getting at, is it the future outlook for losses, or is it theactual losses that you are posting each quarter that’s driving it higher?

Lynn Nagorske

Well, it’s a combination of those two things, John. One is,really the charge-offs that you make, need to be replaced in the reserves, andhome equity is a big driver of that, because we have increased charge-offs andunder our formula, that means our guideline, historically based experiencerates, have increased and that requires you to increase your reserves. So, it'sreally the combination of those two things, and then on specific credits, asthey deteriorate, you analyze that situation and if your collateral value isless than your loan balance, we are obviously requiring reserves for thosesituations.

Jon Arfstrom - RBCCapital Markets

Okay. And then one quick question on the REO category. Ithink in the past, maybe Neil had talked about the flow in terms of number ofhomes coming in and out each month in REO. I'm wondering if you could providean update on that, and the also an update on the large REO credit?

Lynn Nagorske

I am going to let Neil Brown handle that. Neil?

Neil Brown

Thank you, Lynn.If you look at the consumer REO portfolio, what happened in the third quarteris we started with 108 homes that we owned; we added 82 homes and sold 73homes. So, we ended the quarter with 117 properties, which is up 9 from the beginningof the quarter. In addition to the properties that we owned there is thecustomers who were in the foreclosure process, where there has been share ofsale.

But the customers still occupies the house and it'll be aperiod of time before we get the home or the customer may redeem it, and thosehomes in foreclosure, in addition to the REO was 131 homes at the end of thethird quarter, which is down from 150 at the beginning of the quarter. The netwere in total it was 248 versus 250 down 10 properties.

Jon Arfstrom - RBCCapital Markets

Okay.

Neil Brown

Although we still have, with current conditions that we aredealing with going forward.

Jon Arfstrom - RBCCapital Markets

Okay. And then the large REO credits that’s in there.

Neil Brown

The one large REO properties, the $13.8 million property,that’s in the foreclosure process and no real developments on that property.And that redemption period ends in April of 2008, so there is a period of timeyet for that to possibly be redeemed.

Lynn Nagorske

That’s a commercial real estate loan located in Minnesota.

Jon Arfstrom - RBCCapital Markets

Okay. Thank you.

Operator

Our next question comes from Steven Alexopoulos with J.P.Morgan. Please, go ahead.

Steven Alexopoulos -J.P. Morgan

Hi. Good morning everyone.

Lynn Nagorske

Good morning, Steve.

Steven Alexopoulos -J.P. Morgan

Couple of questions, first we have had several banks thisquarter talk about hiring of commercial lenders from south after the BOA dealclosed. Have you guys been able to take advantage of that at all, you know,with hiring of commercial lenders or prospects?

Lynn Nagorske

That’s really a situation that's ongoing there. We certainlyhaven't made any big announcements. And I am not going to make any bigannouncements today. But rest assured that situation we are constantly lookingat people and we are looking at customers and we are looking at ways that wecan opportunistically take advantage of that situation.

Steven Alexopoulos -J.P. Morgan

Okay. From a big picture perspective line, do you see thereis an opportunity for you, maybe to build out your commercial business a bitmore?

Lynn Nagorske

Any time you have that kind of disruption, the answer isyes. And so, whether we need more lenders? We'll obviously add them if we cantake advantage of that situation, but certainly from a customer's standpoint,that's always a good opportunity.

Steven Alexopoulos -J.P. Morgan

Okay. Can you talk for a minute-you had strong growth in thehome equity, and the junior linked portfolio. From what markets were yougetting that growth from in the quarter?

Neil Brown

This is Neil. Really, we are seeing a strong growth in theconsumer portfolio, in most of our markets, other than Michigan where we are intentionally slowingdown little bit on the production levels there. But, we did see increase forthe first time. If you look on page 21 of the earnings release, the variablerate consumer loan portfolio increased by $34 million on a average balancebasis during the quarter, which is the first time we've seen an increase inthose variable rate loans in the several quarters.

Steven Alexopoulos -J.P. Morgan

And that’s' across the board ex-Michigan especially. Okay.And just finally, we talked about what your branch plans for the fourth quarteras you look at into '08, what are you thinking for new branches and maybe evennew markets potentially?

Lynn Nagorske

This is Lynn.I think our plans there have been announced previously, but we'll do fivetraditional branches next year in 2008. Where three of those in Arizona, two in Coloradoand its likely we'll have three to four supermarket branches, those would be ineither Chicago or Minnesota with our supermarket partner. Andthere will be no new markets next year.

Steven Alexopoulos -J.P. Morgan

Great, thank you.

Operator

Our next question comes from Todd Hagerman with CreditSuisse. Please, go ahead.

Todd Hagerman -Credit Suisse

Good morning, everybody. Lynn, I was wondering if you could give alittle bit more color in terms of the past two trends that we saw this quarter,in particular, just the first lien product, I noticed that, again thedelinquency trends were up sequentially. And then just dollar wise, they wereup about 50% year-over-year. Just give a little bit more color, just in termsof geography, the outlook there; do you see that pace accelerating over thenear-term?

Lynn Nagorske

We did see an increase at quarter-end in those categories,and I'm just looking for the stats here, maybe Neil, you have those?

Neil Brown

Well, the consumer home equity portfolio, the delinquenciesare up, some $11 million for the quarter versus the last quarter. Frankly, mostof that increase or more than half of it is in Minnesota. So, in terms of the early stagedelinquencies and non-accrual loans, the increases there have generally beenfor most part limited to Minnesota and Michigan.

But if you look at the additional color on the creditquality of the consumer home equity loan portfolio, I'm happy that we stuck toour knitting over the years, as Lynnmentioned earlier in terms of not getting involved in sub-prime lendingprograms, or ARMs, or teaser rates etc, etc.

Over, 99% of our customers, current none of our customershave any issue with regards to retaining their home, because their mortgage wasa bad mortgage to begin with or because their payments were increasing. All ofour loans are either fixed rate loans or variable rate loans tied to prime andin which case those payments are decreasing, not increasing.

But what happens if our portfolio is, it’s not an issue ofunderwriting, it’s an issue of our customers, like everyone else, softer lifeevents, whether it’s divorce or medical issues or loss of job or whatever, andin those situations they sometimes have trouble holding onto their home.

Years ago, last year and prior years, many of the times thatour customers faced these issues, they were able to get out of their home rightside up, and move on with their lives. And today, an increasing number of thosecustomers, are having to deal with those issues and also deal with their home,and because of the pressure on home values because of the subprime market. Andmore often we are taking some losses on those loans, so just to give you somenumbers on that.

This year year-to-date, we had 527 loans where we suffered aloss. Last year that number was 241. When you look at the increase in thecharge-offs in our consumer home equity portfolio, about 70% of the increase isdue to just increased incidents. Albeit relatively small, 527 homes are on aportfolio of roughly a 100,000. And about 30% of the increase is due toincreased losses when we do take a property back. There's the loss on eachproperty is up about $8,000 from a year ago.

Tom Jasper

I think the other thing that is also disclosed in the pressrelease. So, we did break out our first mortgage liens and junior liens toprovide a little more transparency in response to whatever your questions. So,I hope you find that helpful. But if you look at the delinquency increase over30 days, and compare the prior year, much of it is in the first mortgage liens.And these are loans, where a lot of it is 80% loan-to-value. So we have seen anincrease there in that category.

Our second mortgages-that category is up $2.5 million overthe second quarter of '07 and it's worth nothing that, that’s about a third,36% of our portfolio, the average loan size. There is about $34,000, and abouta third of those junior lien positions are actually seconds on our first whichlessens the risk in that category.

So, overall, while we have seen an increase in thesecategories, our delinquencies are 0.62%. I said 0.62. I mean, we are seeingsome that are being disclosed out there that are many multiples of that number.So, this is still a high quality portfolio in my opinion.

Todd Hagerman -Credit Suisse

Okay, and just a follow-up there, again. I think youmentioned that more than a half came out of Minnesota, and you talk about these lifeevents, if you will. And is there anything more to read into what's developingin Minnesotaand is there anything more to read into this than just kind of naturalportfolio seasoning within that market, and you are underwriting? How should wethink about this going forward, just in terms of the absolute flows, particularlyas you mentioned that first product, first lien product?

Lynn Nagorske

I don't think there is any newer news that we are disclosingtoday. Certainly the trends that everybody has talked about around the country,we have not been immune to those, and our two markets which we have had themost difficulty, and have been Minnesota and Michigan. And I wouldsay that the Minnesotamarket, it's spotty, it's not a home value decrease across the board. Itappears to be in selected areas and suburbs, and so that's about all the colorI'd provide on that.

Todd Hagerman -Credit Suisse

Thanks very much.

Operator

Our next question comes from Scott Siefers with SandlerO'Neill. Please, go ahead.

Scott Siefers -Sandler O'Neill

Good morning guys. I was just hoping to revisit the marginfor a second. I mean Tom, at the end of your commentswhen you made note about that the Fed easing and you said that would have apositive impact on the margin. Was that sort of net margin should receive apositive impact or did that not incorporate? Some of the things that pressuredin this quarter, and so it struck me that some of those dynamics will probablycontinue, unless we got a change in the macro environment. So, I'd just becurious to get a little more color on that?

Tom Jasper

Clearly looking at that and takinga look at the portion of our balance sheet, that's variable in nature on theassets side, and so taking into account the portion of the variable rate homeequity loans and that balance, and really the common is around to our effortson prudently managing down the pricing on our variable rate liabilities. And so,we made some changes in pricing those liabilities in the quarter but inresponse to what happened on the 18th of September. But on a go forward basis,you have to be careful when you make those changes that you don’t have balancesrun out of the bank.

And so, while we made some changesin the third quarter, there is going to be some additional changes in thefourth quarter and those changes on the liability side should offset favorablywhat's going to happen on the variable rate pricing on the assets.

Scott Siefers - Sandler O’Neill

Okay.

Lynn Nagorske

This is Lynn.I would add a couple of things to that. In terms of things that we're seeing, itwill take some time for these to show up actually in the margin, but we haveseen spreads widen on the consumer lending front as we've gone through thequarter, and so, I would consider that to be a positive aspect.

We've seen prepayments start to decrease in the commercialloan side, and so, we do expect to see some growth in the fourth quarter andbeyond there, and that’s really due to the conduits drying up and some of ourcompetitors pulling back, particularly in apartment loans in this market, whichis giving us some opportunities and some very good credit.

Offsetting that has been on the deposit side, where we'veseen really some more intensified pricing, particularly in the Chicago market, particularly in CDs. And so,that's a negative trend in terms of the spreads in that category although wehave seen some abatement of that recently. So, the Fed change certainlyimpacted that, and we've been working diligently to lower deposit rates andprotect our margin.

Scott Siefers - Sandler O’Neill

Okay. Thank you very much.

Operator

Our next question comes from Gary Townsend with FBR CapitalMarkets. Please, go ahead.

Gary Townsend - FBRCapital Markets

Hi. Good morning. How are you gentlemen?

Lynn Nagorske

Hi, Gary.

Gary Townsend - FBRCapital Markets

Could you discuss that we're seeing of course, netcharge-off annualized rates moving up, perspectively where might we expectthose to top out as you look at your portfolios?

Lynn Nagorske

Well, I don't think we're going to start the prediction businesstoday. So, I'm not going to predict what the future trends would be. I thinkyou have to look at delinquencies, which did go up a little bit in the quarter.Mostly in first mortgage home equity loans, where we are in a better securedposition. And then as Neil pointed out, we've actually had a small decrease inthe real estate in judgment which is a positive factor. So, where all that goesin the market place, I think it is yet to be seen.

Gary Townsend - FBRCapital Markets

It would be reasonable, would you agree, for the trend tocontinue for a while more?

Lynn Nagorske

I certainly wouldn’t be surprised if we saw our charge-offrates continue to creep upwards, as they have been. But none of the statisticsthat we have disclosed indicates it’s going to be a dramatic increase.

Gary Townsend - FBRCapital Markets

Fair enough. Thank you for your comment.

Operator

Our next question comes from Ken Usdin with Banc of AmericaSecurities. Please, go ahead.

Ken Usdin - Banc of AmericaSecurities

Thanks a lot. Lynn, just to follow-up on that last point, ifyou are not seeing a tremendous amount of increases in the loss content, doesthat mean that you are increasingly comfortable with where the reserve is? Itlooks like you did increase your allowance in some of the loan categories.

But, looking at some of the smaller buckets, even likeconsumer, other and commercial business, where the percentage of loan lossreserve actually went down sequentially. So, can you just bring that togetherfrom an expectation of losses that maybe directionally, be going up with acomfort on where you stand as far as the reserve is considered?

Lynn Nagorske

Well, our credit quality continues to remain very good in myjudgment. Although we have had increases in charge-offs, and increases indelinquencies. But we are in the midst of a very significant housing slowdown,and 0.38% charge-off ratio on home equity loans is a pretty good performance inthat environment.

To date, our commercial portfolio, we haven’t really had anycharge-offs. We have had a very modest amount and certainly that’s not going tobe zero, going forward. Some of these situations that we reserved for willultimately be worked out. And we will have some charge-offs on those. But wethink we have provided for those at this point in time.

Ken Usdin - Banc of AmericaSecurities

Can you size for us the size of your residential builderbook?

Lynn Nagorske

You know there are a number of different components in therethat add that up in terms of high aggregated. But it's less than $100 million,in total that includes all the different categories of condo construction,residential construction lines, to builders, and residential land development.

Ken Usdin - Banc of AmericaSecurities

Okay. And then finally, can you speak about - I know youpotentially had some additional land and branch sales pending. You took a smallamount this quarter do you know approximately the magnitude that you might beexpecting in the FORCE?

Lynn Nagorske

Well, I think we disclosed earlier in the year that thattotal might be $0.05 earnings per share impact for the year. Some of whichwe've already taken. I am not going to give you a specific number, because withreal estate transactions, they have to close before you can count them. And Iwould tell you, there are a number of them which are under purchase agreement,the due diligence is proceeding. And it could exceed that $0.05 number ifeverything came to provision.

Ken Usdin - Banc of AmericaSecurities

Okay. And then could you just remind us with all of thattypes of gain be included towards the profit plan, as you have talked about,and give us clarity on that over the year?

Lynn Nagorske

Well, in terms of, I assume you are asking about incentivesand stock grant?

Ken Usdin - Banc of AmericaSecurities

Right.

Lynn Nagorske

Performance and whether it counts there, and I'll just beconsistent with the guidance I provided during the entire year. Which is inputting together our annual plan in terms of the bonus incentive compensationcomponent, the Michigansale, which occurred in the first quarter of the year? And real estatetransactions were for non-transactions and so they are included in thatcalculation. In terms of the stock grant which is the second component of incentivecompensation that will be subject to determination by our Board of Directors.

Ken Usdin - Banc of AmericaSecurities

Okay, thanks a lot, Lynn.

Lynn Nagorske

Yes.

Operator

Our next question comes from Ben Crabtree with StifelNicolaus. Please, go ahead.

Ben Crabtree - StifelNicolaus

Cheers, thank you. Good morning.

Lynn Nagorske

Hi, Ben.

Ben Crabtree - StifelNicolaus

A couple of questions, I've figured out that it's easier toguess interest rates than your tax rate. What's the outlook for the fourthquarter? Are we going back to that normalized number or something like 32.5% to34% that you've talked about in the past?

Lynn Nagorske

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

Tom Jasper

Yes. Ben, as it relates to what happened this quarter, wehad some favorable developments as it relates to some uncertain positions andsome changes in tax laws that cause that the income tax expense should bereduce by $2.6 million. The effective tax rate in the third quarter if you takethose items out would have been 34%. So that's really when you look at it on ago-forward basis, I would be looking at it net of what happened in the quarterin that 34%.

Ben Crabtree - StifelNicolaus

Okay, thanks. In terms of, I've looked at your interestrates, you ALCO process, would you not kind of normally and consistently befairly asset sensitive over a 30, 60, 90 day basis. So were the Fed to cutagain, it might negatively impact margins for the first quarter, that hadhappened?

Lynn Nagorske

That's a good point Ben and it kind of refers to GAAP whichis the difference between your assets that reprice in your liabilities. At aone year level, it's actually negative or liability sensitive, but in the60-day bucket, we're actually assets sensitive because of a large number oftime-based loans, or what that points out, is that in the event there'll bedecline in short-term interest rates which would result from Fed changes. Weneed to look through some of our deposit categories, some of those werenon-maturity products, and changed the pricing on those to offset the impact ofthat. And that's largely what we've done through the third quarter and what'scontinuing today.

Ben Crabtree - StifelNicolaus

Okay. Then, maybe some background on your occupancy sort ofcost in the fourth quarter, you're opening a bunch of branches in the fourthquarter. You're also relocating and remodeling a bunch of them. Is this goingto be a, I assume these class will all be capitalized?

Lynn Nagorske

Correct.

Ben Crabtree - StifelNicolaus

Is it going to have a significant impact on occupancy costgoing forward?

Neil Brown

Ben, this is Neil. The new branches we open up will have ofcourse, an increased level of occupancy expenses associated with those branchesonce they do open up. But generally speaking, that's a month and a half out ofthe year in terms of when we our opening was up in the fourth quarter. Theremodelings that we're doing are really for the most part, supermarketbranches, where the remodeling cluster, $300,000 to $400,000, it's that much.

So, the additional cost associated with those branches willnot be significant. And now we have some relocations, and we also have someconsolidations where we're consolidating some old tired branches into a nearbynice branch, disposing of the old branch and that will reduce our occupancyexpense. So, I don't expect to see a significant increase in the fourthquarter.

Ben Crabtree - StifelNicolaus

And, in terms of what you're doing in the supermarkets. Areyou picking up additional space or additional functionality? What’s allinvolved there?

Neil Brown

It’s really working with our supermarket partners as theyare making changes to the stores, and in some cases it is a remodeling of ourexisting footprint with new equipment and so forth. And in other cases, it isactually relocating the branch to a different space inside the store. Thisdepends on what their overall remodeling activity is.

Lynn Nagorske

Most of that, Ben, this is Lynn, its really being driven byour supermarket partner and they are remodeling their stores to obviouslyimprove the customer experience and improve their grocery store margins by thetype of products that they are doing. And when that happens, they typically askus to remodel and spruce up our branch. Sometimes they ask us to move it. It’snot really a space increaser for us it’s really just sprucing up the branch.

Ben Crabtree - StifelNicolaus

Okay. And then the final question is, could you talk at allabout the decline in non-interest bearing deposits? Is that a decline inchecking accounts, or is it a more of a dollar amount per checking accountfunction?

Lynn Nagorske

At this stage, if you look at the quarter, there is someseasonality involved in that, but because of same impact, it happened last yearin the third quarter of 2006. So, we see a modest decrease in a per accountbalances, we also see some migration, which is happening to higher interest,more market rate-sensitive deposits. So, it's really a combination of all threeof those things.

Ben Crabtree - StifelNicolaus

Okay. Thanks.

Lynn Nagorske

You're welcome.

Operator

Our next question comes from Rob Rutschow with DeutscheBank. Please, go ahead.

Robert Rutschow -Deutsche Bank

Hi. Good morning.

Lynn Nagorske

Hi Rob.

Robert Rutschow -Deutsche Bank

I guess the first question is in regard to the commercialreal estate. You haven’t really had any charge-offs there, and someone earning,if you sold any NPAs or what the outlook is there, and if do experience losses,will that require you to change your reserve calculations?

Lynn Nagorske

To date, we have not sold any charge-offs if or problemassets. So, none of our activity has come from that. In terms of the future, ifwe work those out, and many times they work out, and we get paid the entirebalance, because of our lending clause, however these are primarily allsecured, all in our foot print. And that certainly helps us in terms of workingit out. As I said before, we will have some charge-offs in this category, butthese are specific reserves on individual credits, and that wouldn'tnecessarily change the formula.

Rob Rutschow - Deutsche Bank

Okay. Andon the home equity side, I guess we are seeing higher levels of charge-offsthere. I am just wondering, if you could tell us what your peak level of lossexperience has been in the past? And is that incorporated in the modelcurrently?

Lynn Nagorske

Our peak charge-off experience, we are incurring that rightnow. And so we are at the peak today.

Rob Rutschow -Deutsche Bank

Okay. And then last question there was a new story in lateSeptember, about a possible sale of the bank I am just wondering if you cancomment on that at all?

Lynn Nagorske

We don't comment on market rumors and I am not going tocomment on that today.

Rob Rutschow - Deutsche Bank

Okay. Thankyou.

Lynn Nagorske

Welcome.

Operator

Our next question comes from John Fox with Fenimore AssetManagement. Please, go ahead.

John Fox - FenimoreAsset Management

Hi. Good morning everyone. I was just wondering if you couldcomment a little bit more on the debt financing that you did? Could you justtalk about, now given that we are in a possibly a cutting mode with the Fed,why put on long term debt, and just talk about the major liabilities that yourefinanced?

Lynn Nagorske

Tom you want to handle it?

Tom Jasper

Well, the nature of the liabilities, the short-termborrowings, extending those into the $250 million saved us about 90 basispoints in the rate. As it relates to at the time, this is a really a prudentdecision to make sure that we have the borrowings in place to facilitate balancesheet growth going forward.

And that was really a conservative decision on our part tomake sure that we had a necessary amount of debt in place. And I think itreally depends when you look at what's going to happen going forward. We aregoing to make those decisions around what we anticipate balance sheet growthbeing, but we’ve experienced good power asset growth, and we want to make surethat we're positioned for that.

John Fox - FenimoreAsset Management

Okay. So, I understand you, that the rate on this new debtis actually lower than the old $250 million short-term debt?

Tom Jasper

That’s correct.

John Fox - FenimoreAsset Management

Okay. Thank you.

Lynn Nagorske

What really happened there in that exchange of points isthat we looked at a huge disruption that was happening in the debt markets, andwe saw LIBOR creep; I think it got to 582.

John Fox - FenimoreAsset Management

Right.

Lynn Nagorske

During the quarter and we wanted to take that LIBOR pricingrisk out of our balance sheet. And so, we lengthened the maturities of someborrowings and entered into some new ones. We also saw a lot of instability inother institutions, such as Federal Home Loan Bank and getting your advances ina prompt and timely fashion.

So, we basically eliminated our short-term borrowings, tookout the LIBOR risk. Now these borrowings on average are going to be a couple ofyears. It could be called at that point in time. If they extend longer, we'recomfortable with the rates that we have, but with ours and prudent too makesure we had good liquidity. And reduce that LIBOR risk and we have excellentliquidity at TCF

John Fox - FenimoreAsset Management

Okay. Thank you.

Lynn Nagorske

Welcome.

Operator

Our next question comes from Michael Cohen with SunovaCapital. Please, go ahead.

Michael Cohen -Sunova Capital

Hi. Thanks for taking my question. Quick question is, youkind of think about sort of your market area and where you are, you hadmentioned, I guess since you weren't necessarily looking at anything, view interms of kind of organic growth, are you guys looking at anything, maybe on theacquisition front or maybe even to add to some of your present and some of yourexisting markets on an acquisition basis?

Lynn Nagorske

Well, in terms of acquisitions, we haven't changed our viewof those. We continue to look at them. And, it's always been in the past thatour de novo growth has been at a lower cost and a higher return to ourshareholders, which is why we have opted to do that. We've slowed our de novogrowth in terms of branching as a result of this very difficult and challengingenvironment, which seemed like it was prudent to do that for our shareholders.

And we've got plenty of platforms so to speak, there we cangrow if we don't open new additional branches, because of the newness of thosebranches. So, I think we've got room to grow there. We look at other things,opportunistically if they come about, but as of today there is really no changein our appetite.

Michael Cohen -Sunova Capital

And within a context of that appetite, I mean geographicallyrecognizing, is there some market segments that you guys are in that have alittle bit more economic challenges than others. Is it safe to say that youmight avoid acquisition in those markets or is it more of those could be someof the cheapest markets to roll out?

Lynn Nagorske

No, I think if we did acquire anything at this stage, itmight be on the asset side and particular in our leasing and equipment finance,where we have done something like that in the past. And so, again, I don’t wantto overplay that acquisition opportunity. We have plenty of work to do herewith what we have, and if we see something that looks attractive, we’llobviously take a look at it.

Michael Cohen -Sunova Capital

And then last question. It seems like the pace of yourbuyback activities slowed a little bit quarter. Can you talk about what’s goingon there? What your outlook for buyback is on a go-forward basis? I mean,should we see that pick back up, or is there kind of a target capital ratiothat you think where buyback slows or accelerates?

Lynn Nagorske

Neil, do you want to handle that?

Neil Brown

Yeah. Excuse me, this is Neil. We continue, the strategythere is unchanged. I think makes a profit, pays it up to the holding company,we pay our shareholders a dividend of some of the balance sheet gross, and usethe remainder for the stock buyback. We are studying carefully our capitalstructure, and we are looking alternative generic forms of capital.

Currently, all we have is common stock. Those are maybe atransaction down the road where we have an opportunity to increase that buybackprogram above and beyond the normal routine earnings type buyback.

Michael Cohen -Sunova Capital

Great, thank you.

Operator

Our next question comes from Andrew Marquardt with Fox-PittKelton. Please, go ahead.

Andrew Marquardt -Fox-Pitt Kelton

Good morning, guys.

Lynn Nagorske

Hi, Andy.

AndrewMarquardt - Fox-Pitt Kelton

I think you said that home equity losses were right now atpeak levels, at about 38 basis points. But then I think, I also heard you guyssaying in response to another question, that those losses are still good. Canyou in the context of saying that we are in the midst of a significant slowdownin housing. Can you help me understand when is 30 basis points, where couldthat go to and help me understand when it's not good. What level could weexpect to see such losses in this asset class? Thank you.

Lynn Nagorske

Well, the previous question was, what was our highestcharge-off rate that we had experienced, and I responded that today we are atour highest peak levels, and really what's changed that Neil mentioned, thesearen’t really underwriting gaps of any sort, it’s that we are in a situationwhere we have an over supply of homes in our markets.

And to the tune those burn off, those market prices willreturn to more customary levels or even appreciate slightly, and we'll seethose losses abate. That's been the biggest thing that's changed at TCF overthe past 18 months in terms of our home equity production, and that home price,guys, what happens with future changes in the response to the market conditionsis really what's going to drive that, and we'll answer your question.

Andrew Marquardt -Fox-Pitt Kelton

Okay. Thank you.

Operator

(Operator Instruction) At this time I am showing noadditional questions in the queue. I'd like to turn the call back over tomanagement for their concluding remarks.

Lynn Nagorske

Well, thank you all for participating in the call today, andhave a good day.

Operator

Ladies and gentlemen, this does conclude TCF's 2007 thirdquarter earnings conference call. You may now disconnect, and we thank you forusing ATT teleconferencing.

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