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TCF Financial Corporation (NYSE:TCB)

Q4 2011 Earnings Call

January 24, 2012 11:00 a.m. ET

Executives

William A. Cooper - Chairman and CEO

Barry N. Winslow - Vice Chairman of Corporate Development

Mr. Neil Brown - Chief Risk Officer

Thomas F. Jasper - Vice Chairman of Funding, Operations and Finance

Craig R. Dahl - Vice Chairman of Lending

Michael S. Jones - Chief Financial Officer

Earl D. Stratton - Chief Operations Officer

Jason Korstange - Director of TCF Corporate Communications

Analysts

Jon Arfstrom - RBC Capital Markets

Steven Alexopoulos - J.P. Morgan Securities

Ken Zerbe - Morgan Stanley

Connor Fitzgerald - Bank of America Merrill Lynch

Chris Gamaitoni - Compass Point

Emlen Harmon - Jefferies & Company

Steve Scinicariello - UBS Securities

Tom Alonso - Macquarie Securities

Ken Barger - FBR Capital Markets

Andrew Marquardt - Evercore Partners

Andrew Boord – Fenimore

Peyton Green - Sterne Agee & Leach

Tony Davis - Stifel Nicolaus

Operator

Good morning and welcome to TCF’s 2011 Year End and Fourth Quarter Earnings Call. My name is Christy and I will be your conference operator today.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. (Operator Instructions)

At this time I would like to introduce Mr. Jason Korstange, Director of TCF Corporate Communications to begin the conference.

Jason Korstange

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Barry Winslow, Vice Chairman of Corporate Development; Mr. Neil Brown, Chief Risk Officer; Mr. Tom Jasper, Vice Chairman of Funding, Operations and Finance; Mr. Craig R. Dahl, Vice Chairman of Lending; Mr. Mike Jones, Chief Financial Officer and Mr. Earl Stratton, Chief Operations Officer.

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 our forward-looking statement disclosure contained in our 2011 Year End and Fourth Quarter Earnings Release for more information about risks and uncertainties, which may affect us. The information we will provide is accurate as of December 31, 2011 and we undertake no duty to update the information.

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

William Cooper

Thank you, Jason. TCF reported its 21st consecutive year of net income at almost $110 million for the year, $0.71 per share. We reported our 67th consecutive quarter of net income for the quarter at $16.5 million or $0.10. TCF's fourth quarter was impacted by the first full quarter of the driven amendment, which reduced our fee income on debit cards by almost 50%, which impacted us almost $15 million for the quarter.

Although, almost all of our credit metrics improved in 2011 including in the fourth quarter, TCF is still impacted by higher than normal provisions and particularly in our home equity portfolio and commercial lending portfolios. Our specialty financed portfolio has continued to have excellent credit quality.

Historical lower interest rates have had a negative impact on our net interest margin as loans have refinanced that at lower rates than they had previously. All that being said, we have some very positive events in 2012, as we previously discussed, we signed an agreement with VRP on our inventory finance business that should originate over $600 million of new loans, variable rate, good yielding loans in 2012, a newly acquired auto finance subsidiary has started to originate loans in 2012 and we will add significant amount of lending outstandings in 2012 as well.

Both of those areas to a greater or lesser degree as I mentioned earlier, expenses tend to come first, revenue is later as we ramp up the expenses of origination in support of those portfolios put provisions on the guideline provisions as the loans grow and as they stabilize they become more profitable.

Net interest income was about flat with 2010 at about $700 million and pretty much flat for the quarter as well as compared to 2010. Our fee income on deposits was down year-to-date for 2010 about 17% largely due to the Durbin amendment, Reg E and other factors and it was down in the quarter by 23%.

Deposit fee income obviously for us, which includes debit card income, continues to be a challenge due to the regulatory changes and customer behavior changes as well as what's going on in the market place. This is much changing environment. Deposit fees were innovating in deposit fees, in pricing and structure, aims or work in progress, people are changing their behaviors and it will continue to be an issue in 2012 particularly in the first quarter of 2012. But, we have got a laser focus on this area and we are making significant changes to this significant progress.

Leasing fee income at $89 million year-to-date and $18.5 million for the quarter, its interesting now exceeds debit card revenue, which shows you the diversification that’s occurring in our P&L and balance sheet as we expand into new businesses.

Loans were about flat down just a little for the quarter year-to-date, credit quality metrics continue to improve with continued improvement in classified assets, non-accrual loans et cetera, however, as I mentioned earlier it still remains an issue as particularly we still have low but stabilizing home prices. A little about TDR, TDR is by the Trouble Debt Restructurings and that means where we made some compromise with the borrower as it relates to interest rate but not principle or other terms and loan, but not principle.

Performing consumer TDRs have a yield at 3.7%, the carrier reserve at 3.5% and our are only 7%, which is of fraction, a tiny fraction of how that stands in nationally in terms of consumer TDRs. Commercial TDRs again is similar kind of thing, we made some kind of compromise on the interest rate or other terms and conditions, but not principle, has a yield of 5.6% and all of our commercial TDRs are current.

The provision for loan losses remained at above historical levels, elevated levels along with charge-offs for the year and for the quarter. I remain optimistic on that going into next year, I believe that our specialty finance area will continue to have very good credit quality and we should see some improvements over the balance of the year in the other loan categories.

Deposits grew some $650 million for the year and we dropped our average rate on deposits at the end of year was only 29 basis points that rate obviously isn’t going much lower, but we made a lot of progress are valuable and dynamic deposit generation capacity really remains touched.

We continue to see disruptions in our checking business as we innovate in product pricing and product structure, as I mentioned earlier again that remains a work in progress.

Operating expenses are flat year-to-date and for the quarter and that’s really a little misleading because we put on some significant operating expenses in our auto business and in our inventory finance business as we gear up for some of these new businesses that are coming on as well as a lot of expenses associated with the new world of banking from a regulatory point of view, which means that we have cut our operating expenses in some of our more mature business that’s why we have increased the operating expenses in our growing businesses.

We grew our capital for the year over $400 million in 2011 and we have the highest capital levels in our history, we have 9.9% common equity and 8.4% tangible, I think that stands up against just about any bank in the country.

We also have over $1 billion, I think it’s a $1 billion and $400 million in liquidity at December 31, 2011, that’s again the most liquid that we have been in our history and I think that’s up something $800 million or $900 million for the year.

All in all 2011, was another in a series of difficult years in banking, particularly retail banking obviously given our business model of some of the regulatory changes that occurred in the falling home prices has impacted us more than it has on other businesses.

With all of that the economy appears to be improving and home values have at least stabilized in some of the markets its looks like they are coming back. Interest rates will rise again, I will say this, banking regulations are here to stay and maybe that isn’t all a bad thing either. We are just going to have to deal with those regulations in a realistic manner.

We continue to reinvent the bank; this is my third reinvention going from a failed drift to a bank now to a much different kind of bank by diversifying our asset portfolio particularly into specialty finance, innovating on our liability side from our previous business model as we continue to manage that structure in a much evolving area and expanding our national platforms where we are now doing a lot of our lending on a national platform basis as opposed to just in our market area. And, we have reorganized the bank to fulfill those goals.

And overall, l think, looking into 2012, I look at 2012 as a building and investing and innovating year where we rebuild TCF's new business model into a much more profitable bank than we have seen 2011.

With that I would open it up to questions.

Question-and-Answer Sessions

Operator

(Operator Instructions) Your first question comes from the line of Jon Arfstrom of RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Hi, good morning guys. Can you hear me?

William Cooper

Yes, I can hear you.

Jon Arfstrom - RBC Capital Markets

Okay, good. The banking fee line of $51 million of banking fee line, just it was lower than I thought it was going to be, obviously it's not a disaster but then I thought. Curious how you guys see that line relative to your expectations and maybe give us an idea of the outlook and kind of what worked and what didn’t in terms of the new account structure?

William Cooper

I'll turn that over to Tom Jasper to respond.

Thomas Jasper

Yeah, this is Tom Jasper. Really, when you look over the changes in fee and service charges from year-over-year to quarter-to-quarter there is multiple factors that are impacting that and a lot of that has been customer behavior that’s happened throughout the year as we have seen customers keeping more balances in their accounts and that has a positive impact on our margin but does have an impact on fees. We talk about the innovation that we are taking on here and it really is a work in progress. We piloted the new product in Michigan, made some pricing structure changes to it before rolling into the other markets to starting the fourth quarter and we have been really in a process right now, listening to our customers and monitoring what's going on in the marketplace and with competition and that we are designing some changes as it relates to our products to give our customers additional options.

The overall rollout with this new product, we also rolled out some changes in our fee waiver criteria as it relates to checking and both of those items are new overdraft product in the fee waiver criteria or having a negative impact on attrition on the accounts and associated impact on fee revenue. So, we expect to rollout some additional options to our customers later during the first quarter which should improve the second quarter metrics.

Jon Arfstrom - RBC Capital Markets

Are you growing accounts, I mean, you talked about attrition but, talk about the process of opening accounts or you able to open accounts for this product, is it easier to just confusing the client?

Thomas Jasper

I don’t think it's really an impact. When you look at table 7 in the release you can see there from a checking production standpoint, checking production year-over-year from 2010 to 2011, we are up. It's really not an issue at the account opening desk, but between the new fee waiver criteria and the implementation of the new overdraft, we are seeing increased attrition and that’s impacting the account base.

Jon Arfstrom - RBC Capital Markets

So, the tweaks are designed to reduce that attrition?

Thomas Jasper

That’s correct.

Jon Arfstrom - RBC Capital Markets

Okay, go ahead.

William Cooper

What we are doing is, we really are listening to our customers at this point, there is a fair amount of innovation in this and TCF has done a lot of innovation in checking and deposits over the years and not surprisingly we made some changes, a lot of people like it, some people don’t. so, we are trying to figure out what it is that people don’t like, don’t like to develop options that makes it more power ball to them and we are in the process of making those changes.

Jon Arfstrom - RBC Capital Markets

I'm sure there are other questions in the queue, but just Tom, a quick update on the trust preferred redemption potential and then any thinking you might be doing on your home loan bank borrowing?

Thomas Jasper

Well, we don’t, in terms of the trust redemption issue, the first item there would be a capital treatment event, which hasn’t come out of the Fed, so the rule writing that would be required to trigger the capital treatment event and to really trigger our process around the redemption has not occurred, so that’s expected to occur in 2012, but we can estimate that date as the amount of work that’s coming out of Dodd-Frank that needs to come out of the Fed as significant and its unpredictable as it relates to the timing.

In terms of Federal Home Loan Bank, in terms of the outstanding, in terms of our borrowings with the Federal Home Loan Bank, I don’t see any significant changes in that borrowing level throughout 2012.

William Cooper

This is Bill Cooper, I might say that one of the major impact on our profitability is the relatively long-term nature and higher cost of borrowings, as we mentioned in previous calls that is a center of focus and there are number of options that we are looking at in connection with how we can reduce that cost or mitigate that cost. But, we are not making any announcements or I'm not dropping any shoes, I just let you know that it is under review.

Jon Arfstrom - RBC Capital Markets

Okay, thank you.

Operator

Your next question comes from the line of Steven Alexopoulos of J.P. Morgan Securities.

Steven Alexopoulos - J.P. Morgan Securities

Hi guys. For my first question, how much was the gain related to the re-measurement of the retirement benefits in the comp?

Michael Jones

Yeah, this is Mike Jones. In the fourth quarter the result was a decrease in comp and benefits of about $4.4 million.

Steven Alexopoulos - J.P. Morgan Securities

Okay. And, how should we think about a run rate for expenses particularly given comments around building out a new highest tide to building out the asset based lending niche?

Michael Jones

This is Mike Jones again. I can give you a kind of a feel what went on from third quarter to fourth quarter that gives you a feel of what's going on in the P&L around core operating expenses. In the fourth quarter as I mentioned, we had the impact of $4.4 million in the pension accounting change. Additionally in the fourth quarter we had about $2 million of transactional expenses that will not repeat as we go forward into first quarter in 2012. When you look at the two growth businesses within the quarter there was an addition of expenses of about $3 million for Gateway and the BRP ramp up and that will be continued in the run rate as we go forward. As Bill mentioned, those expenses are coming before we put on those assets as those ramp up into 2012.

Steven Alexopoulos - J.P. Morgan Securities

And just a question on credit, at a conference you guys talked about a couple of large commercial credits to work out over the next few quarters, did you get that done in the fourth quarter or is there any carryover into the first quarter?

William Cooper

I would say, we made a lot of progress and that remains to be seen whether we worked it out, but we did a lot of progress, it would be best answer.

Steven Alexopoulos - J.P. Morgan Securities

Okay, thanks a lot.

Operator

Your next question comes from the line of Ken Zerbe of Morgan Stanley.

Ken Zerbe - Morgan Stanley

Yeah, thanks. Just wanted to go back really quick to the deposit service charge comments of how it's driving or your changes of driving customer efficient. I guess, if you can be a little more specific, as I guess the negative bounce product was supposed to be certainly not negative, in terms of I think I'm saying with impact and it seems like it’s a good product that people would want. Is that product specifically driving customer attrition or is there other products or changes that are more responsible for the attrition?

William Cooper

There were certain attribute of that product that work real well with most customers, there were some attributes in it. Frankly, what has happened there is because there is a daily fee associated with it, with people who only have only liquidity event a month, it makes it more difficult for them to deal with their account and that’s caused a lot of behavior changes and so forth. And so, the things that became apparent and this is what happens when you innovate, there is things that became apparent as we spread this among the rest of our markets that weren’t apparent in the pilot and the way it has impacted customers and we are now evaluating that listen to our customers in making those changes. And, this is what happens when you change pricing particularly in innovative way and we are as a real emphasize, we are listening to what people don’t like and figure it out how we can change it so that everybody likes it.

Ken Zerbe - Morgan Stanley

Understood, okay. And then any updates in terms of your thoughts on share repurchases given sort of the near term decline in the balance sheet, but obviously the longer term growth opportunities you have?

William Cooper

I would say, this is about share repurchases. TCF did a lot of that in earlier years and I would have to say in error. I consider at this point to be more financial engineering than I would rather utilize capital in business growth than increase earnings per share by buying stock back. And that is our present goal, we expect to grow the balance sheet with some of these new specialty finance businesses that we have in the future and that’s the way I would like to utilize capital as opposed to the share repurchases.

Ken Zerbe - Morgan Stanley

All right, great, thank you.

Operator

Your next question comes from the line of Erika Penala Bank of America Merrill Lynch.

Connor Fitzgerald - Bank of America Merrill Lynch

Hi, this is Connor Fitzgerald for Erika.

William Cooper

Hi.

Connor Fitzgerald - Bank of America Merrill Lynch

Just a quick question on your securities portfolio yield, it performed pretty well given some of the compression we have seen in other banks and specially the language around pickup and prepayment fees. Can you talk about what you are buying there and how you are seeing prepayments impact your portfolio?

Michael Jones

Sure, this is Mike Jones here. We didn’t have any purchases in the quarter, we did have some sales. Really our portfolio is a makeup of AAA products if any and Freddie mortgage backed securities and the yields that we currently in the portfolio are really around the average at this point.

Connor Fitzgerald - Bank of America Merrill Lynch

Okay, thanks. And then, just going to credit, can you just talk about some of the credit trends you are seeing in your Reg E portfolio, just noticing the pickup in 60-day post delinquency there?

William Cooper

One of the things I would mention about that in terms of that 60-day delinquency there is a fair amount of seasonality in even day of the week in that, but it is a delinquency as of a day. And, I wouldn’t if somebody else might correct me on this, but I call that a trend. Neil, do you want to comment on that.

Neil Brown

Well, this is Neil Brown. I mean, the other trends we are seeing in consumers is reduced levels of real estate owned. We are selling pretty faster than we are acquiring them and non-accruals are also generally flat quarter-to-quarter from a year ago. So, the trend lines are generally stable, slight improvement of sub carriers.

William Cooper

The other thing on consumer I would say is that, I believe that when you look at what TDR is troubled at restructuring some consumer loans at TCF are perhaps considerably different then you see in other banks. TCF never engaged in any subprime lending and these are customers, these are pretty good customers, all first mortgage customers, all good, have had excellent credit in the past and we are making a compromise with them to save them in their homes. As I mentioned earlier it has yield of 3.7% and so it’s a fairly DC yielding product and I think it would be a mistake to draw the same conclusions on our TDR portfolio that you see in others. I think, other TDR portfolios and consumers and other banks have significantly higher delinquency charge offs et cetera than ours do.

Connor Fitzgerald - Bank of America Merrill Lynch

All right, thanks for taking my question.

William Cooper

Yes.

Operator

Your next question comes from the line of Chris Gamaitoni of Compass Point.

Chris Gamaitoni - Compass Point

Thanks for taking my call. I was just wondering if you could update us on your guidance of Durbin recapture given the bank fee decline this quarter?

William Cooper

Well, as we have said in the past, we don’t expect to mitigate Durbin just by finding more fee income on checking accounts. As I mentioned earlier, our leasing company fee income now exceeds card income, years ago that was zero. And so, we are looking at a lot of different kinds of expense cuts, by and gross changing and pricing and so forth and as we have said it’s a work in process that’s going, we are going to work on dealing with over next four quarters in a lot of different areas.

Chris Gamaitoni - Compass Point

Okay. And then, just on Gateway and BRP, you mentioned $3 million of expenses within the quarter. Where do you foresee that ramping up as production increases and how does like incentive comp force origination volume work, I guess as a give and take that where we can think that related expense goes to?

William Cooper

Craig, do you want to handle it.

Craig Dahl

I'm quite sure I understood your question, you ran out a little bit. What is specifically?

Chris Gamaitoni - Compass Point

There is $3 million in Gateway or BRP within the quarter, where can we see that $3 million going in the future is that flat, is it going to get five?

Michael Jones

Okay. Chris this is Mike Jones, I will just kick it off and then I will turn it over to Craig to talk about the ramp up. Just keep in mind that we acquired the Gateway acquisition in November 30, so there is only one month worth of expenses in that $3 million so that number will be larger as we go into the first quarter and the rest of the year and then I will just turn it over to Craig to talk about that kind of the ramp up from the asset side.

Craig Dahl

Yeah, the staffing required to bring onboard BRP is primarily behind us. So, we do not expect the level of expense in inventory finance to continue to have a quarter-to-quarter increase because the people are in place. The assets will start coming in February. As it relates to Gateway there will be sales team expansion and credit team expansion throughout 2012. However, as we have indicated with the comment, we are going to use a syndication strategy as well to help us fund some of the ramp up of that business line.

William Cooper

I might say in terms of the Gateway, although we are newly married and so there is still lot of sex appeal going on there. At this point we are very pleased with what we bought and we are very optimistic and we expect Gateway to be profitable in 2012.

Chris Gamaitoni - Compass Point

Yeah, thank you very much.

Operator

Your next question comes from the line of Emlen Harmon of Jefferies & Company.

Emlen Harmon - Jefferies & Company

Hi there, good morning.

William Cooper

Hi.

Emlen Harmon - Jefferies & Company

Just on the commercial losses, you had noted that you think there may be a little bit more pain there, you are still evaluating the situation. To give us a sense of that’s kind of you are still working to, trying to figure out what the losses there, there potentially a couple other credits to go and maybe just give us a little bit more color about kind of like loan types and geographies in terms of what's causing the problems?

William Cooper

Well, let me say this, most of the problems we are working on are problems that have been around here for some time. And, as a typical environment, you got a problem with credit, you got a borrower who has been feeding it and we are continuing to restructure to strengthen it and then occasionally a borrower stops, either because he can't or won't in which case the status of the deal changes or somebody losses a big tenant or gets a big tenant, it's different. And, there is no real concentration, I don’t believe of any particular kinds of credit, almost all of them are commercial real estate and there is (one Zs, and two Zs) if you will, I am familiar with them all, basically. I know what they all are and I know what the story is in all of them and it’s a little hard to predict, a lot of it depends on what happens to economy and a lot of it what happens to particular credit. Craig do you want to add something?

Craig Dahl

Yean, this is Craig Dahl. The other thing I would say is, in our consumer leasing and inventory finance book we have relatively small exposures and they are much more predictable to forecast and discuss. In commercial it’s the only asset category we have that has more large exposures and I would say that the numbers don’t necessarily reflect the amount of success we had in the fourth quarter just based on some of the size that are moving from category to category, but when you look at accruing TDR as a non-accrual, we are not disappointed in the transaction success we had in the fourth quarter.

Emlen Harmon - Jefferies & Company

Okay. And just quick housekeeping, if I may. You noted in the earnings release that about $400 million in, I guess managed portfolio of Gateway, would you just give me a sense of what portion of that is on the balance sheet, if any?

William Cooper

Mike, you want to handle it.

Michael Jones

At the end of the year there is probably, we sold the majority of the originations for the month of December and there was probably about $5 million on the balance at the end of the year.

Emlen Harmon - Jefferies & Company

Okay. So, the remainder of that portfolio is just strictly the remainder of $400 million and strictly managed them?

Michael Jones

Correct, the majority, almost all of that is managed at this juncture. Now as we stated before, as we move into 2012, we are going to move more to and originate the whole type model and those balances will grow over the year.

Emlen Harmon - Jefferies & Company

Okay, great, thank you.

William Cooper

Yes.

Operator

Your next question comes from the line of Steve Scinicariello of UBS Securities.

Steve Scinicariello - UBS Securities

Good morning everyone.

William Cooper

Good morning.

Steve Scinicariello - UBS Securities

Yeah. Just wanted to ask about how big kind of the specialty finance business can get as a percent of the portfolio, I mean, the yields are attractive, the credit metrics are attractive right now, inventory finance, leasing and equipment totals about a quarter of the portfolio. Well, I'm just kind of thinking full word, how big could these get and how big would you want them to get?

William Cooper

Let me say this in terms of or kind of reinvention of the bank and where I see as fitting into the banking world today as a regional bank. TCF had a philosophy for a long, long time of lending only in a market areas and matter of fact; we were structured as banks by individual market.

The world has changed and our biggest competitors in the banking business is today are the J.P. Morgans and the Bank of Americas and Wells Fargo of the world. All of whom are lending off of national platforms. And so, if you look at our inventory finance business, years ago we were financing retailers, all of those loans years ago were done by a local bank with that retailer. The equipment finance loans that we do today; years ago some local bank was financing that equipment with their local customer. And now, the bulk of the banking business is being done off of national platforms and we talk about specialty finance, really it's not a lot of difference then the lending that we have done in the past, it’s a difference in the way that lending is done today. And, how our competitors do it and I believe that with regional banks, regional banks that are going away attempt to just finance themselves through lending in their market areas are going to have a problem in connection with how much of that business is being sucked up by the big banks that are doing business within their markets and how that business has changed.

And so, we have changed our business to accommodate that and now our equipment finance, our inventory finance, our new auto finance and even some of our residential finance businesses are now being done more off of the national platforms so that we can compete effectively with those bigger banks. And so, it is a evolutionary thing that I think is going to go on and those banks who can do it are going to prosper as regional banks and those that don’t are going to have a problem over the pool.

Steve Scinicariello - UBS Securities

That will make sense though we should probably expect that to maybe go up, maybe a third of the portfolio kind of overtime or is that feasible?

William Cooper

Lending on off or national platform, with the exception of commercial and commercial real estate which still is mostly a local market lending business, most of those are going to evolve more and more to national platform lending. Craig, is that fair to say?

Craig Dahl

Yeah, that’s right Bill.

Steve Scinicariello - UBS Securities

Okay, got you. And then, lastly just in terms of kind of pipeline for BRP and Gateway, you mentioned that $600 million of BRP, you still combine, still thinking that $1.5 billion to $2 billion over the course of the year, still on track for that?

William Cooper

I think, we have said in the past, we think BRP will be in the $600 million level. It remains to be seen how well this auto business is doing, but as I said we are kind of in love with it, right look. It looks; we are very pleased with what we have bought. This is such a really good deal for us, we bought this national platform in the second largest consumer lending business in America with guys with a lot of experience, all these dealership, relationships and so forth, but without a funding source. And, its sitting there, ready to go as opposed to attempt to do this thing from the noble perspective and we are really optimistic in it. It’s the second largest lending business behind our residential lending and we were sitting there with none of that. So, we are anticipating that we can grow assets in a much more satisfactory manner in 2012 and future years working off of those businesses.

Steve Scinicariello - UBS Securities

Okay. Thanks so much guys.

Operator

Your next question comes from the line of Tom Alonso of Macquarie Securities.

Tom Alonso - Macquarie Securities

Good morning, gentlemen. Most of my questions have been answered. Just two sort of quick, I guess, modeling question. The link quarter increased in goodwill, I assume that’s related to Gateway?

William Cooper

Yes.

Tom Alonso - Macquarie Securities

Okay. And then, just on the tax rate that was just driven by the lower pre-tax number this quarter, it was little lower, it went 27 versus been running in the 30s, the 36% range just curious if there is any sort of one-time as in air that was just a lower pre-tax number?

William Cooper

Mike, you may know.

Michael Jones

No real one-timers in that number.

Tom Alonso - Macquarie Securities

Okay, thank you.

Operator

Your next question comes from the line of Paul Miller of FBR Capital Markets.

Ken Barger - FBR Capital Markets

Good morning, this is Ken Barger filling in for Paul Miller. Sort of quick question on wise initiatives that you are putting in place, what point you see, do you see this quarter as the inflection point or when, a lot of things start to pick up in the next quarter or do you see that coming down later in 2012, when a lot of the lending really start to picking up?

William Cooper

When you refer to, this as you mean on the asset side?

Ken Barger - FBR Capital Markets

Yes.

William Cooper

Craig, do you want to?

Craig Dahl

Yeah, I thought Bill did a good job and he is preamble of talking about, we have not only had the expenses, but we cannot forget guideline reserves that come with those increased asset levels. So, I would look at the second half of the year.

Ken Barger - FBR Capital Markets

Thank you.

William Cooper

I think, to put it, I hate to make predictions in a conference call on our results. But, we are hopeful that this fourth quarter and the first quarter of next year are inflections in terms of asset growth, fee income, structure, credit quality and so forth. We are hopeful and optimistic that description of those as inflection points would be accurate, but I am not going to predict that.

Ken Barger - FBR Capital Markets

Thank you.

Operator

Your next question comes from the line of Andrew Marquardt of Evercore Partners.

Andrew Marquardt - Evercore Partners

Good morning guys.

William Cooper

Hi.

Andrew Marquardt - Evercore Partners

Just wanted to circle back on the fees and I am just making sure I understood on the fee and service that came in at $51 million this quarter. Should we think about that now given the change of behavior, is that now kind of new starting base to grow off of in terms of a run rate for now?

William Cooper

It's difficult to say, we are continuing to make changes in the first quarter. As I said before, the fourth quarter and first quarter maybe the inflection points on that, but I am not going to predict what they are because it is a work in process and its changing and we are making changes in that. So, I wouldn’t as far as to say categorize it as you did. No.

Andrew Marquardt - Evercore Partners

Okay. And in terms of commentary early on in the call in terms of characterizing this year as a building, investing, innovating year, how should we think about that in terms of incremental spend above and beyond what you have talked about in terms of Gateway et cetera?

William Cooper

Incremental spend, well, Tom do you want to?

Andrew Marquardt - Evercore Partners

Expenses going to be moving higher from these levels above and beyond what we already know about in terms of Gateway because of the need to respond to change in behavior?

Thomas Jasper

I don’t think that there is, other than the expansion businesses that we are in, this is Tom Jasper, I am sorry. Other than the expansion businesses that we are in, we don’t anticipate a significant in the expense structure of the rest of the organization with the exception of perhaps looking at the credit related metrics that appear in non-interest expense. We will see some change in that over the coming years as the number of properties and those kind of things. But, in terms of the operational cost, I don’t see a significant change versus where we are at right now.

William Cooper

I will say there has been a, it's kind of invisible in the numbers because of the changing nature of what's going on. As I mentioned, we got businesses are growing, but we have taken a big swat out of expenses in the brand system for instance and in our home equity lending the visions et cetera. So, we are attempting to pay for a significant portion of the growing businesses that we have by taking it out of our more matured businesses.

Thomas Jasper

Andrew, this is Tom. One last comment, you have to, thinking about the, back to your question on investment. In terms of levels of investment, I would look at things like the deposit account premiums that level of those that we have during the year, those kind of things will continue to look for flat our opportunities reduce expenses throughout the year and looking at trying to normalize that. But, in terms of pure costs that are meant to acquire accounts or acquire loans or grow the business, I would expect that would be similar year-to-year.

William Cooper

The other observation I will make for whatever its worth, TCF did a lot of the noble expansion in previous years. And, one of the things that’s happening when you look at expenses as a percentage of deposits or the percentage of assets, a lot of that noble branches almost all of them are continuing to grow and so the expenses as a percentage of deposits or assets shrink as we grow up in those noble office, virtually half of our offices were built new and say the last 10 years.

Andrew Marquardt - Evercore Partners

That’s helpful color, thanks for that guys. Last question I had was on credit quality, sorry if I miss this. But, was there any commentary in terms of charge off rate from here 163 basis points, should improve from here and how should we think about kind of normalized losses overtime given the kind of the remix in the balance sheet?

William Cooper

Well, it times it over whatever time you mean. Again, we hope that indeed there is some inflection points here. The home equity portfolio in particular, I would categorize that as when we have charge offs in that area, what happens is when a bad thing happens to a good person and I think we have it almost as much, I think we still have a hundred thousand loans, isn’t that pretty close to that. And so, it’s a pretty large group and statistically what's happening in today's market where you have people whose home values aren’t worth they were, but they were good credit, good people, but statistically what happens is they get divorced. Somebody looses the job, somebody gets hurt or whatever and within this economy that very often results in a problem that we didn’t used to have because of the home value situation. That is improving overtime simply because the economy is getting a little better, home values have stopped falling, and in some it's gotten a little better. The economy has gotten a little better and so forth. And, as that improves we expect that to improve as well.

Our new loan origination, loans that have gone on since 2009, I think we are charging off about 8 basis points, which is what that charge off rate used to be for TCF and that portfolio was close to 30% of the portfolio, do they Mike. Pretty close to 30% and it continues to grow as the old one shrinks and the new one grows and so just that mixed change all by itself well contribute to improve the credit. Tom, do you want to add something?

Thomas Jasper

Actually, I don’t want to add on that. I just wanted to clarify a comment that we had early, we had a question as it related to the effective tax rate and I just wanted to clarify that, our effective tax rate for 2011 is a good base line for 2012 in total. But, the quarter did have unique item in it, but the year that effective tax rate for the full year is a good baseline for next year, thanks.

Andrew Marquardt - Evercore Partners

Okay, thanks guys.

Operator

Your next question comes from the line of Andrew Boord of Fenimore.

Andrew Boord – Fenimore

Yeah, hi guys. I'm glad here about the new specialty lending that’s great. But, if you could comment a little bit on the two pieces of business show off and how big does and how much of balance has yet to run off?

Michael Jones

Hi, the amount of business, part of it was transferred from a loan outstanding to a service portfolio, so we replaced net interest income with non-interest income in that case and that’s fairly consistent. The other one was about a $140 million of assets.

Andrew Boord – Fenimore

Okay, great. And second question, if you allow me the second one. The liquidity is obviously very high, is that a new normal or is that just sitting there until the new businesses ramp up, how should we think of that?

William Cooper

Tom, you want to comment on that?

Thomas Jasper

Yeah, when you look at the level of liquidity that we have at the end of the year, you could expect that will come down in the first half of next year as we grow some of these businesses and so you should expect that the net interest margin rate as we replace that liquidity that generally is making a very lower rate as we held it and reinvested into the growth businesses have a positive impact. So that should trend positively on the net interest margin over the first couple of quarters of next year.

Craig Dahl

This is Craig Dahl. The other thing I would say is, it's unusual to have as predictable of asset growth as we would have and some of that liquidity is the anticipation of what we believe is very predictable asset growth.

William Cooper

The other thing of liquidity let me say that in the banking if anything has been shown to be true in history a lot of financial institutions get into jam in difficult times not because of earnings or capital or whatever, but simply liquidity. And, we are still in uncertain times, you got all the stuff going on in Europe, we still don’t know how that is going to impact things here in the United States. And, in liquidity levels and the banking industry and at TCF can go up and down with that. Right now, there is still one of the things that can happen in this environment is, which happened in 2008 as you recall, there is the ability to get liquidity and the banking industry can become difficult. And so, it's prudent at this point to carry more liquidity. We are probably carrying more now than we need, but liquidity levels and the banking industry are probably permanently going to be higher, but they are higher now and these still uncertain times and appropriately higher.

Andrew Boord – Fenimore

All right, thank you guys.

Operator

Your next question comes from the line of Peyton Green Sterne of Agee & Leach.

Peyton Green - Sterne Agee & Leach

Okay, good morning. A few questions, one with regard to Gateway, with a loan to deposit ratio of 117%, how much would you be looking to stretch going forward and what would you expect their production volume to be versus what it was historically, how quickly can they ramp?

Thomas Jasper

Yeah, this is Tom Jasper. Really from a funding perspective we would expect the growth that we achieve in Gateway to be funded by either excess liquidity that we are already carrying on the balance sheet or deposit growth.

Peyton Green - Sterne Agee & Leach

Okay. And then, so I mean, if the loan to deposit ratio went up to 125% that they wouldn’t necessarily bother you?

William Cooper

It would, but we don’t expect that to happen.

Peyton Green - Sterne Agee & Leach

Okay. And then, in terms of residential portfolio, and I guess looking at it in the aggregate what would you expect the run-off rate to be over the next couple of years possibly as incomes improve, unemployment continues to improve slightly and maybe even residential valuations bottom out stabilize, is that still going to be a pressure point volume?

William Cooper

See, TCF used to have 85% of its balance sheet as our heritage in our residential loans. We are now down below 50%. 50% is still too high. We are in the process of changing in that area as well what kind of residential loans we want to have in our balance sheet and where we get them. Residential loans overtime will shrink down, will continue to shrink, but I would anticipate the charge-offs and provisions will shrink and its profitability will rise even with a smaller portfolio.

Peyton Green - Sterne Agee & Leach

Okay. And then, is there any thought to closing any of our branches, meaning deposit fees are down $20 million to $25 million from peak, part fees are $13 million or $14 million from peak, it certainly seems hard to observe these in the current environment or any prospect of environment?

William Cooper

We evaluate that all the time, we do have very good profit centers systems and we know what the profitability of very single branch. And, we evaluate that. And, our brick and motor branch, we are constantly making tweaks like that, moving branches and opening and closing branches and so forth and in general, in our supermarket branches what tends to happen is a unprofitable branch is in a unprofitable supermarket and the supermarket tends to close that supermarket which allows us to close our branch at the same time.

Even our branch system, our retail branch system has been profitable, even with these changes and even where we are they are just real profitable. And so, there is no baby and bath water there in connection with branch closing.

Peyton Green - Sterne Agee & Leach

Okay. Last question, what's the yield that you would expect to take on loan volume with Gateway?

William Cooper

With the asset yield, I think the current yield on the loans there is 7%.

Craig Dahl

Yeah, this is Craig Dahl, it's highly dependent on the basic vehicle score range that we are originating in and Bill's number is accurate as we sit one month into it.

Peyton Green - Sterne Agee & Leach

And charge-off rate with that?

Craig Dahl

Zero.

William Cooper

It remains to be seen. But, we would expect, one of the things I would think in the Gateway thing that we can do because of our lower funding cost then they have is tend to move up more into the prime businesses and offer prime loans with better credit quality. Now, their credit quality has always been very good and I will give you this, this may not reflect the world going forward, but I think, their last 12 months their charge-offs were about 40 basis points.

Peyton Green - Sterne Agee & Leach

Okay, great. And then, Bill, in transforming the company for the third time as you mentioned, what's the reasonable timeframe, is it three years, five years how long did you hope to be done?

William Cooper

Well, in our fast paced world today maybe you are never done. I mean, maybe constantly evolving, particularly in the financial world as technology and so forth continues to evolve, I think this is a longer term, we have reorganized the bank into our new reinvented structure and we are very pleased with that reorganization, it is really bearing fruit. And, it would be fair to say that we are probably in our goals now, we are in a three year plan, would be the best way to put it.

Peyton Green - Sterne Agee & Leach

Okay, great, thank you very much.

Operator

Your next question comes from the line of Tony Davis of Stifel Nicolaus.

Tony Davis - Stifel Nicolaus

Yeah, just a few wrap up guys for Craig. I wonder where the, leasing backlog end of the year?

Craig Dahl

We are looking.

Tony Davis - Stifel Nicolaus

I know back it was September, has there been any significant change. Second, why you are looking GEU recently acquired a deposit franchise, Herds is making noise about fanning into add into new verticals, you had $140 million you talked about. I am just wondering Craig from a competitive environment, how you feel about the business today versus say last summer a year ago?

Craig Dahl

This is Craig. I feel just as positive today as I did a year ago. We are not concerned about, we have competition in all our markets and so there really hasn’t been any change to the marketplace dramatically from this point. In addition, we have maintained our liquidity throughout the entire downturn in the economy and have grown assets significantly while almost all our competitors have shrunk assets and so we are very optimistic about where we sit in all of our business line.

Tony Davis - Stifel Nicolaus

What if any banking services are you achieving the best cross sales in specialty finance customers, providing color on that or any penetration you are getting there?

Craig Dahl

That’s a good question. This is the first time that TCF had the products to basically cross sell multiple into a customer and so commercial banking, inventory finance and equipment are all three working together today around enterprise solution and we are very pleased with our early progress keeping in mind its very early.

Tony Davis - Stifel Nicolaus

Okay, thank you very much.

Thomas Jasper

Tony, its Tom Jasper, just as it relates to the backlog, at the end of the year the backlog is a $521 million versus at the end of the previous year which is up above from $477 million at the end of the previous year.

Tony Davis - Stifel Nicolaus

And while I have just one follow on. Your asset sensitivity positions of passionate item where are you?

Thomas Jasper

Well, I will let Mike answer that question.

Michael Jones

This is Mike Jones. We are at approximately about a 11% on the one year gap, that’s up from the third quarter based on the run-off of some of the fixed rate product and the origination and variable rate product. We look that to come down as we go into 2012.

Tony Davis - Stifel Nicolaus

Good deal, thanks.

William Cooper

One other things on the equipment finance by the way, I will mention, TCF equipment finances over the year has bought portfolios and we tend to buy those portfolios sometimes as the business acquisition and sometimes it's just a portfolio acquisition. Our core originated business actually did better than it looks because of the run-off of some of the portfolios that we acquired. We actually grew that business in a much more satisfactory way and the number would just, okay.

Tony Davis - Stifel Nicolaus

Thanks.

Operator

I would now like to turn the conference back over to Mr. William Cooper for any closing remarks.

William Cooper

I would just thank all of you for your participation and have a good day.

Operator

Thank you again for participating in today's conference call, you may now disconnect.

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