TCF Financial Corporation
Q4 2017 Earnings Call Transcript

Published: 30 Jan 2018

[Operator:]

Good morning, and welcome to TCF's 2017 Fourth Quarter Earnings Call. My name is Jamie 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] Please note today's conference call is being recorded. At this time, I’d like to introduce Jason Korstange, TCF Director of Investor Relations, to begin the conference call.

[Jason Korstange:]

Good morning, everyone. And welcome to TCF's fourth quarter 2017 earnings call. Joining me today will be Mr. Craig Dahl, Chairman and Chief Executive Officer and Tom Jasper, Chief Operating Officer; Brian Maass, Chief Financial Officer; Mike Jones, EVP of Consumer Banking; Bill Henak, EVP of Wholesale Banking; and Jim Costa, Chief Risk Officer and Chief Credit Officer. In just a few moments, Craig, Brian and Jim will be providing an overview of our fourth quarter results. They will be referencing a slide presentation that is available on the Investor Relations section of TCF's website ir.tcfbank.com. Following their remarks, we'll open it up for questions. During today's presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and actual events or results may differ materially. Please see the forward-looking statement disclosure in our 2017 fourth quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of December 31, 2017 and we undertake no duty to update the information. I will now turn the conference call over to TCF’s Chairman and CEO, Craig Dahl.

[Craig Dahl:]

Thank you, Jason. Starting out here with 2017 observations. We continue to operate with a focus on our four strategic pillars. Diversification, profitable growth, operating leverage and core funding. This has allowed us to generate momentum that is taking us into 2018. As expected, our fourth quarter results had a lot of noise as several significant items impacted results. We reported net income of $101.4 million, up over a 102% year-over-year with diluted earnings per share of $0.57, up 111% year-over-year. This included a $131 million benefit, or $0.77 per share related to tax reform and $88 million pretax charge, or $0.48 per share related to our decision to discontinue indirect auto loan originations in December. And $13 million pretax impact or $0.05 per share related to other items including a contribution to the TCF Foundation, one time bonuses to team members, five planned branch closures and an inventory finance program extension. Looking at 2017 as a whole, we were very pleased with the progress we made and the momentum we generated as the year progressed. During the year, we completed various portfolio purchases, acquired two businesses, launched a share repurchase program and refinanced our Series A preferred stock. We also improved our risk profile in 2017 with a significant decreased in both non-accrual loan and leases and other real estate owned. Our revenue grew 4.5% compared to 2016 including a $42 million reduction in gain on sales revenue during the year. As expected, we also saw mid single digit loan and lease growth with balances up 7.1%. In addition, we successfully introduced a new digital banking platform that has been well received by our customers. Slide 4, biggest development during the fourth quarter was our November decision to discontinue indirect auto loan originations beginning December 1st of 2017. This resulted in pretax charge in the fourth quarter with two components. $73 million charge related to goodwill and other intangibles, and $14.8 million restructuring charge items such as severance, asset impairment and lease termination write-offs. The after-tax restructuring charge was $9.1 million which was within the range we announced back in November. Approximately one third of the Gateway's workforce was immediately by the decision primarily in the sales and originations functions. As we've previously stated, we feel there are better opportunities to deploy our capital and earn higher returns for our shareholders by reinvesting in other asset classes and optimizing our capital. We announced $150 million share repurchase program as part of this change. In 2018, we expect to see somewhere between $1 billion to $1.5 billion of organic run-off of the auto portfolio. Overall, we believe this strategy of reinvesting the run-off of the auto loan balances into the investments and the loan and lease portfolio will lead to both earnings improvement and in reduced risk profile. Slide 5. The other significant development during the quarter was the enactment of the Tax Cuts and Jobs Act in late December. As I mentioned, this resulted in a net tax benefit of $131 million due to the repricing of our net deferred tax liability position, which was primarily generated from accelerated tax depreciation on our leasing portfolio. We expect our effective tax rate in 2018 to decline to between 23% to 25%. This assumes a reduction of approximately 11% compared to the corporate tax rate reduction of 14%. We were pleased to give back some of these tax benefit to our team members and communities through one-time bonuses to eligible team members and a $5 million donation to the TCF Foundation. In addition, we have the opportunity to deploy the additional capital created by tax reform in organic loan and lease growth, dividend increases, stock buybacks, corporate development or investments in the business including technology. Our recent capital actions in addition to giving back to our team members and communities, today we are pleased to announce several capital actions as a result of our current capital position and our expectations of future earnings levels. First, TCF's Board of Directors declared a quarterly common stock cash dividend of $0.15 per share, doubling our previous quarterly cash dividend. Second, we'll be redeeming the 6.45% Series B preferred stock on March 1st, 2018. The redemption will result in one-time reduction to net income available to common stockholders of approximately $3.5 million in the first quarter. However, as a result of the redemption, we expect an annual after-tax expense savings of approximately $6.5 million beginning in the second quarter. These capital actions follow our $150 million share repurchase program that was previously announced in the fourth quarter and demonstrates our commitment to deploying excess capital with the focus on improving shareholder returns. Slide 7. We continue to see strong revenue growth with increased predictability as net interest income is becoming larger portion of revenue. The increase in net interest income is driven by higher average yields on loans and leases and loan and lease growth. In fact, our net interest margin increased 27 basis points year-over-year, further demonstrating the true asset sensitivity of our business model. Noninterest income was impacted strong leasing and equipment finance revenue driven by the leasing company acquisition which took place late in the second quarter, partially offset by the expected reduction in gains on sales and servicing revenue. Looking at the loan and lease portfolio, we indicated our expectation for mid single digit loan and lease growth, which we achieved as a portfolio balance increased 7.1% year-over-year. We continue to see strong growth across the wholesale businesses as inventory finance increased nearly 11%, leasing and equipment finance nearly 10% and the commercial 8.5%. Auto finance remains at 17% of the portfolio but will decline going forward as a portfolio continues to run-off in 2018. On the yield side, with the increases in short term rates, our strategy of completing as expert in niche segments and our pricing discipline continue to drive our strong yield performance. Loan yields increased 53 basis points year-over-year largely due to increasing yields in our variable and adjustable rate portfolios, including consumer real estate, commercial and inventory finance. In addition, we are seeing yield increases in some our fixed rate portfolios as new loans are coming at higher rates than those that are running off. Our loan and lease yields further demonstrate the value of our diversified business model. With that I'll turn it over to Brian Maass.

[Brian Maass:]

Thank you, Craig. On Slide 10, on deposits, average deposit balances in the fourth quarter increased 6.3% year-over-year, primarily driven by growth in promotional CDs, used to fund a recent leasing portfolio purchase. We also saw strong growth in our core deposits as checking and savings balances increased 5.9% and 10.1% respectively. Despite growth of over $1 billion in average deposit balances, as well as several interest hikes, we have been able to manage our deposit cost very well with an increase of just 11 basis points in our average interest cost year-over-year. Going forward, we would expect moderating CD growth with deposit growth being driven by our core checking and saving balances. We continue to be very pleased with the granularity of our retail deposit base and how it is performing with the rise in interest rates. Finally, we are closing five branches in the first quarter. Turning to Slide 11. The chart in the upper left shows rising interest rates are having a positive impact on the variable and adjustable rate components of our loan and lease portfolio. This has been the main contributor to our increases in both net interest margin and net interest income. In addition, the chart in the upper right shows the expected fourth quarter seasonal decline in inventory finance yields, driven by the mix of loans, as well as a one time impact of a program extension. This seasonality resulted in the typical fourth quarter pressure on the net interest margin which declined 4 basis points on a linked quarter basis, but increased 27 basis points year-over-year due to rising interest rates. Over time, I'd expect our net interest margin rate to decline from its already high level as we have run-off of auto loans and growth in investment portfolio, as well as tax related yield adjustments to tax exempt earnings assets. However, we still retain our asset sensitivity position and will benefit from higher interest rates. Turning to Slide 12 on noninterest expense. Noninterest expense included several significant items in the fourth quarter. Other non interest expense included pretax charges related to the discontinuation of auto loan originations totaling $88.2 million. As well as the $5 million contribution to the TCF Foundation. Also including were additional expenses related to branch closures, marketing and IT spend during the quarter. Compensation expense was impacted by higher incentive compensation accruals and one time employee bonuses. Operating lease depreciation remained at the expected levels following the leasing company acquisition in the second quarter. This was offset by higher expected levels of leasing and equipment finance noninterest income. With the discontinuation of auto loan originations, we believe we are poised to generate positive operating leverage going forward with the continued revenue growth and stable to slightly declining expenses in 2018. We believe the expenses are well controlled and that we'll be able to leverage the benefit of our recent activities. Turning to Slide 13 on capital. We continue to maintain strong capital ratios as a result of earnings accumulation and the impact of tax reform. Over the past two years we have spoken frequently about how we evaluate four potential usage of capital. Organic growth, dividend increases, stock buybacks and corporate development initiatives. Given our strong capital position, we've recently executed in each of these areas. Capital optimization initiative will remain a key focus for us in 2018. With that I'll turn it over to Jim Costa.

[Jim Costa:]

Thank you, Brian. All right. We turn to Slide 14; we can take a look at credit quality trends. Overall, the credit trends remain positive. Over 60 day delinquencies remain flat on a year-over-year basis. Nonperforming assets continue to steadily decline while provision expense increased approximately $2 million year-over-year. Net increase was primarily due to increase in net charge-offs in the leasing and equipment finance portfolios. Net charge-offs increased 11 basis points year-over-year due to increase levels in leasing and equipment finance and auto finance. These increases were partially offset by decline in consumer real estate. You turn to Slide 15, we look more at charge-offs. As you can see in the table the benefit of our diversification philosophy is evident in our net charge-offs ratios. As the increases in charge-offs and one asset class are often offset by improvements in another. As the auto balances run-off, the overall risk profile of our loan and lease portfolio should improve. In fact, excluding the auto finance portfolio, total net charge-offs would have just 18 basis points in the fourth quarter. Overall, we remain pleased with our credit performance. Turning over to Craig.

[Craig Dahl:]

Thank you, Jim. So looking at our 2018 operating outlook. As we look ahead to 2018, we expect to redeploy run-off from the auto portfolio into the investment portfolio and existing loan and lease portfolios. With loan growth primarily coming from our wholesale portfolios. We will continue focus on organic growth and will pursue opportunities for loan and lease portfolio purchases similar to the leasing portfolio purchase we completed in the third quarter that fit our risk reward profile. With our auto and first mortgage portfolio is running-off, we would still expect earning asset growth due to growth in our investment portfolio but minimal overall loan growth in 2018. Overall, our focus is on improving shareholder return not simply on growth which is consistent with our strategic pillar of profitable growth. From a deposit standpoint, we look for the moderating CD growth with additional core deposit growth. As a result, we would expect a reduction in our loan to deposit ratio. We also expect continued revenue growth with stable or slightly declining expenses as auto finance operating revenues and expenses decline. We look for higher leasing noninterest income; however, it will be partially offset by higher operating lease depreciation. Overall, we are targeting a full year 2018 return on an average tangible common equity in the range of 11.5% to 13.5%, compared to our average over the past five years of approximately 10%. Similarly, we are targeting a 2018 full year efficiency ratio in a range of 66% to 68% compared to our average over the past five years of approximately 70%. We are very optimistic about the position we are in as we begin 2018. We will continue to focus on our strategic pillars in 2018. Our diversification strategy gives a strong flexibility and showing its value in terms of our strong overall credit quality. We will continue to place an emphasis on generating profitable growth in 2018 as earning asset shift primarily from auto finance loans to investment portfolio. We feel we are in a good position to improve operating leverage through overall revenue growth and cost takeout from our auto strategy. From a core funding standpoint, we like the retail deposit composition we have. We expect a slightly more favorable mix of deposits in 2018 as we focus on core deposit growth resulting from the digital banking investments we've made. I feel we have positioned ourselves very well coming out of 2017 as we've been able to put excess capital to work. I am excited about our outlook and ability to improve returns for our shareholders. I'll now open it up for questions.

[Operator:]

[Operator Instructions] Our first question today comes from Jon Arfstrom from RBC Capital Markets. Please go ahead with your question.

[Jon Arfstrom:]

Thanks. Good morning, guys. Question on expenses Brian is probably for you, appreciate all the guidance in terms of the efficiency ratio but maybe help us a little bit with the starting point. It seems like expenses were even when you carve up in nonrecurring items little bit heavier in Q4. Do you want to us revert back to Q2, Q3 type run rate as a starting point or is there anything else going on?

[Brian Maass:]

No, it's a good question, Jon. So when we say, let me kind of clarify what we mean by flat to slightly down expenses. Obviously, fourth quarter we had a lot of elevated expenses. So I'd say don't look at that quarter as kind of from a run rate perspective but if you look back to Q1 and Q2 and Q3 of this year and you are trying to project where we are going to be for Q1, Q2 and Q3 of 2018, I'd look at those on a year-over-year basis and say, that's really where our guidance is coming in when we say flat to slightly down, as you need to look on quarter-over-quarter basis relative to those first three quarters.

[Jon Arfstrom:]

Okay. Okay, good, that helps. On the revenue side, Craig, you and Brian both touched on this little bit but on the auto run-off $1 billion to $1.5 million, it's a higher yield I guess, how do you really want to put that to work and I guess obviously the securities portfolio is the default but what's the likelihood of that $1 billion and $1.5 billion could be loans, it could be leases, it could be portfolio acquisition. How do you want to us think through that?

[Brian Maass:]

Yes, Jon, this is Brian. So what I'd say on that is we are expecting lease in 2018 that good portion of that run-off could wind up in the investment portfolio. So that has some impacts overall for the top line revenue. You'll see the interest rate on the investment portfolio will be less than the interest yield that we are getting on the auto loan but you got to look at it kind from a complete picture perspective. There is some offsetting expense production, as well as it's going to consume a lot less capital. So it's bringing up a lot more capital in the organization. So that's partially how we are contributing to lower efficiency ratio as we get into 2018.

[Jon Arfstrom:]

Okay. And, Craig, just likelihood of portfolio acquisitions. Is there money in motion and the opportunity that see some of these again in 2018?

[Craig Dahl:]

Yes. Jon, as we talked last year, there has been opportunities but really we weren't able to meet our risk reward profile. We continue to have opportunities from time to time and that still remains the biggest part of the equation. We are not just going to add portfolio to grow. We got to make sure that it's not going to change our business model. It's going to be consistent with how we originate and service our own portfolios.

[Operator:]

Our next question comes from Ebrahim Poonawala from Bank of America/Merrill Lynch. Please go ahead with your question.

[EbrahimPoonawala:]

Good morning, guys. I just want to follow up in terms of redeployment of the cash flows into the securities book relative to what you talked about bringing down the loan to deposit ratio. I am just wondering in terms of as you think about the cash flow like do you think you could pay down some of the CDs and bring down the loan to deposit ratio and it's still probably accretive to ROE or is that --is that math doesn’t work?

[Brian Maass:]

So couple of questions. This is Brian. What I'd say from deposit expectation is we did have an increase in CDs in the fourth quarter and I would call that somewhat situational right. We used that funding as part of the purchase of the leasing portfolio that happened at the end of the third quarter. So kind of our guidance says you look at deposit on a go forward basis is going to be that you are going to see slowing CD growth or actually could come down a little bit. And you are going to continue to see true core checking and savings growth like we saw in 2017. So that will continue -- so that will moderate I think some of the -- what you see is kind of situational spike in the deposit cost in the fourth quarter. On the asset side, like I already said we'll see a shift there from loan into the investment portfolio. So the combination of those two things is what we think will contribute towards a declining loan and deposit ratio in 2018.

[Ebrahim Poonawala:]

And what is this translated into Brian as you think about what it means for the margin? Is it sort of -- and I know the seasonality, a lot of moving pieces. But is it fair to say that you should be able to maintain the margin in this four mid 50s level, 455 around plus or minus or do you expect it to be meaningfully higher or lower relative to that?

[Brian Maass:]

Yes. I mean as you know, we have a really high net interest margin rate at it sits today with some of the activities that we talked about it could see -- you'll likely see the net interest margin rate come down slightly over the course of 2018 as we have a shift from the run-off of the auto loans which are higher yielding from an interest income perspective relative to the portfolio that it will be going into. But, again, we are looking at it on an all end basis not just what's happening to the net interest margin rate. So even though the net interest margin rate might be coming down as we go through the course of 2018, with offsets in expenses and potentially in the provision and the fact that it's going to use less capital, again we think these are the drivers that's going to lead us to a better efficiency ratio and higher returns on our capital.

[Ebrahim Poonawala:]

Got it. And just a separate question I think bigger picture just strategically means the auto business we've gone through some strategy shift over the last 12 months. As you think about all the business lines today, do you think the make up of the business is where you wanted to be other than any portfolio acquisitions you make? Or could we see other strategic actions where you maybe right size or exit certain additional businesses during the year?

[Craig Dahl:]

This is Craig. No, I think the strategic review; we went through all of our businesses at the time we made the decision on the auto business. And so we are confirming our strategy on the other businesses. My only comment on portfolio acquisition is they have to be consistent with the businesses we are in and so not looking for a new asset class to enter through acquisition basis.

[Ebrahim Poonawala:]

Understood. And given sort of the run we had in the stock like what's the propensity to utilize that buyback as opposed to just keeping up some dry powder for --as you mentioned in the strategic portfolio opportunity?

[Craig Dahl:]

Yes. We think we can do both.

[Ebrahim Poonawala:]

Okay. So means I think just in terms of the stocks right now from a valuation perspective you feel good about sort of executing on the buyback authorization?

[Craig Dahl:]

Yes.

[Ebrahim Poonawala:]

Perfect. Thank you so much.

[Operator:]

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

[Ken Zerbe:]

Craig, good morning. I am so hesitant to try -- I don't want to ask the same question again that everyone seemed to be asking, but if we step back like with revenue running off and auto running off, I mean is it fair to say that TCF is basically decided to be like a leasing, equipment finance some commercial type company? And I want to compare you guys to something like CIT versus more of traditional bank but when you think about like just really long-term like who are you as a bank? Like what do you want to be as a bank?

[Craig Dahl:]

Well, this is Craig. I mean when you look at the loan and lease portfolio, certainly the run-off of auto changes slightly the consumer percentage but we still are at the end of the year 25% of the portfolio in the mortgage business. So it's not like we are abandoning that part of the segment. In addition, we have well diversified beyond leasing and equipment finance with the strong inventory finance portfolio and our commercial portfolio which is traditional primarily commercial real estate a lot in a footprint and all sponsors in our footprint. So we still believe that we are just as strong and just as diversified exit auto as we are with it included.

[Ken Zerbe:]

Okay. That helps. And then just in terms of the -- in the slide deck you talked about the meaningful earnings improvement as you exit auto, just to be clear that it sounds like, and correct me if I am wrong but is the meaningful earnings improvement due to things like you are going to redeploy the capital into repaying debt or buying back shares, is that where you get most of the improvement from or was there something specific with auto?

[Brian Maass:]

It's a combination of both right. I mean we are seeing reinvestment of -- with a lot of capital. I mean we still have a lot of capital invested in the auto business. And what we've said is that the returns that we are getting on the capital net business, we think we can earn more not having the capital net business. So as we make this shift, partially into the portfolio and partially taking some of that capital and doing as buyback, partially using some of that capital to reinvest in other loan growth, we think that over time you are going to see our return on capital going higher and that's partially the new guidance that we are giving you is, that's new guidance right. We've been averaging around 10% return on capital. We think it should be somewhere between this 11.5% and 13.5% on an on going basis. So some of it is the capital action but it's really the shift of having a lot of our capital be in that business and being able to shift and deploy it elsewhere in the organization.

[Ken Zerbe:]

Got it. And just to be super clear that higher ROATC target that includes the benefit of tax reform maybe a percent or two is that fair?

[Brian Maass:]

Correct. Yes, I mean also 1% and 1.5% of that can be tax reform so that's why we got a range in there. There is lot of uncertain items that I say and that are why we got quite wide range. We don't know how many interest rate hikes are going to happen in 2018. So if we get more interest rate hikes and we are able to retain a lot of the tax benefit we could be closer to the higher end of that range. If some of that gets competed away or we don't get many rate hikes, we could be closer to the low end of average.

[Operator:]

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

[Scott Siefers:]

Good morning, guys. Just want to ask another question on the margin I guess. So when you think about the margin declining slightly through the course of 2018 with all these moving parts, does that incorporate any interest rate increases into it or is it sort of the margin in all else equal environments? And then what overall in your view happens to TCF's rate sensitivity as it relates or as a result of this mix changes over the course of next year?

[Brian Maass:]

Yes. That's a great question. This is Brian. Obviously, there are a lot of things that are going to impact the net interest margin rate as we go through 2018. So it's hard to forecast and I think you can understand that. But we do have the change -- you kind of look at it by the components to really kind of trying and break it down. So when you look at the change in business that's going on right just inherently you are going to have less auto loans, those are at 5 plus percent you are going to see them going into investment portfolio which is going to be at lower rate. So inherently that's a headwind to a margin perspective. Obviously, the other loans that we have on the balance sheet, a lot of them are variable or adjustable rate. If we get interest rate hikes, they will be lifting so that's going to be positive to the loan yields overall. But again it's going to be offset by the decline in the auto loans. So that when you push those things together we expect there would be some decline in the net interest margin rate. There is also the impact of what happens to yield, what's happen to the shape of the curve, if how much of the tax reform gets competed away, so that even if we get interest rate hikes, will you be able to realize a 100% of them. So there are different impacts that are going to present themselves. So we'll see how 2018 plays out. But I am saying is that we have a really high net interest margin rate. I think we are going to end the year still with the very high net interest margin rate relative to our peers, but we could see that rate coming off. We are not trying to manage necessarily to maintain the highest net interest margin rate. It's okay if it comes off a little bit. What we are more focused on is what is it mean to the bottom line of the organization? What is it mean to net income? What is it mean to EPS? What is it mean to our return on capital overall?

[Scott Siefers:]

Okay, all right, thank you. And then if I can jump to through preferred redemption. Are you guys planning to replace that instrument with any new instrument or is there a reason to believe they are just the $4 million; $6.5 million would be able to drop to the bottom line?

[Brian Maass:]

Yes. This is Brian. At this point in time we do not have plans to replace the Series B. Obviously, its market that's open and available to us and if need that some point in the future, we can always access it. But at this point we do not have plans to reissue or refinance that.

[Scott Siefers:]

Okay, perfect, thanks. And if I can sneak one last one in. When you talk about the $1 billion to $1.5 billion auto portfolio run-off through. Is that just natural run-off or would you anticipate or is there some prediction for selling some amount of loan - of auto loans in there as well?

[Brian Maass:]

Yes. This is Brian. So the $1 billion to $1.5 billion reference is really just the expectation of normal run-off of the portfolio and does not contemplate any loan sales.

[Operator:]

Our next question comes from Dave Rochester from Deutsche Bank. Please go ahead with your question.

[Dave Rochester:]

Hey, good morning, guys. On the expense guide, what is the actual dollar amount of expense savings you are expecting to get from auto that you bake into that guidance this year? And for your efficiency ratio guidance what do you assuming for interest rate hikes?

[Brian Maass:]

So couple things. So on the expense guidance; we don't necessarily break it down by business. We never have the for the auto business. So you kind of have to look at in the aggregate so I am looking at slide 12, again I look at Q1, 2017 is kind of the guide towards Q1, 2018 and say that they are going to be flat to slightly down from that level in the aggregate. And from -- so that's kind of my answer on that one. From an efficiency ratio perspective, obviously, there is a range there. So similar to kind of my comments around the range of return on capital is going to be depended upon what happens with taxes on the revenue line, what happens with interest rate, we will have some impact and that's why there is range there.

[Dave Rochester:]

And on rate hikes specifically just all else being equal, you guys still see yourself getting benefit from rate hikes right? Each 25 basis points add what to the NIM in your estimation.

[Brian Maass:]

Yes. So overall right if you -- if we didn't have auto running-off and we didn't have kind of that shift in earning assets taking place and you look that what else is on the balance sheet right. So all of our other loan categories, they will continue to benefit from increasing interest rate. All those variable rate portfolios and we still think, I mean we are happy with the way our deposits have performed with rates being now up over 100 basis points. We still think we are going to be able to outperform with interest rate hikes on the deposit side. So I consider us to be asset sensitive and we'll benefit from increasing rates but you have to take into account also that now you got this change in business which is going to have some impact on the net interest income as well.

[Dave Rochester:]

Right, now that makes sense. Where are you guys seeing securities reinvestment rate these days and generally what are you guys purchasing?

[Brian Maass:]

So what we would see is similar to the composition of our portfolio today, we would see some of that going back into 20 to 30 years agency MBS. If we continue to see longer term yields go up, that's going to have a benefit for us. We don't have a lot of long duration assets today. So as the long right of the curve goes up, that's where we are going to look towards our reinvestment rate and that will take place over the course of the year. So if rates go up over the course of the year that will be a further way that we can benefit.

[Dave Rochester:]

With your guidance effectively for loan growth or loans to remain fairly flat I guess with the mix shift that's going on. How are you thinking about earning asset growth for the year just in the context of the NIM compression that you are talking about? Are you still -- you are expecting to get earnings asset growth I'd imagine, is that right?

[Brian Maass:]

Yes. This is Brian. I'd say I expect I'd say moderate overall earnings asset growth.

[Dave Rochester:]

So a mid single digits kind of range?

[Brian Maass:]

I'd say that's a reasonable range compared to where we have been.

[Dave Rochester:]

Okay. And sorry just one last one on capital. Are you guys still expecting to complete the share buyback by year end?

[Brian Maass:]

This is Brian. At this point in time that plan that we announced is the plan that we are still on. And we expect to complete that over the course of 2018.

[Operator:]

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

[Emlen Harmon:]

Hey, good morning, everyone. Just a couple questions on credit. Auto charge-offs rates should we expect those to continue to trend at directionally from here as the run-off portfolio season? And I also noticed equipment finance charge-offs looked a little elevated this quarter? Was there anything unique in there and just how should we think about that run rate going forward?

[Jim Costa:]

Sure. This is Jim. Thank you for the question. Yes, there is a two things that are going to influence the auto charge-offs rate. One is the factor it's run-off portfolio so the seasoning of the portfolio will continue to increase for a little while. And also there is some seasonality that showing up here at the end of 2017. So I'd say due to seasonality as well as the absence of new in flow, of new auto assets you would see some modest increase in the charge-offs rate in auto. As it relates to the leasing portfolios, couple things going on there. We did have a one time charge or one asset that we took a charge on and that's not systematic indicator in any regard. And then we did have some losses that were anticipated through the purchase of leasing portfolio in the third quarter. Other than that there is not really a story in the equipment leasing portfolio.

[Emlen Harmon:]

Got it, thanks. And then Brian wants to hit just on deposit pricing quickly. In addition to this increases would expect given that the fund, the equipment finance purchase, I did notice that the rate on savings were up. So what's the pricing strategy there and how do you -- is that mostly related to new customers, existing customers? How do you feel like you have to price that book with more the growth coming from the checking and saving side of things?

[Brian Maass:]

Yes. So this is Brian. So couple things there. So we talked a little bit about the promotional CD growth. There is some promotional savings as well. I mean that's partially how we get new customers into there which also have to look at just the core checking growth on year-over-year basis for some $340 million or around 6%. So we continue to have through core checking account growth and as we look forward to 2018, we are going to continue to see growth in checking and savings balances as well.

[Operator:]

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

[Steven Alexopoulos:]

Hey, good morning, everybody. I want to start regarding the decision to exit the auto business. Do you guys explored selling the business? Trying to figure out why this is a better option than just selling it.

[Craig Dahl:]

This is Craig. I mean we reviewed all of our options regarding the business and we believed based on the state of the market at the time that this is the best long-term strategy for us.

[Steven Alexopoulos:]

Okay. Okay. Craig as we think about this book shrinking over time, you will naturally become more concentrated on leasing equipment financing inventory over time and given the diversification strategy you talked about quite a bit, from a longer term view are you considering alternatives to fill the hole the auto books going to create over time or is this just going to be filled with equipment and auto finance?

[Craig Dahl:]

No. I think you have contrast short term earnings asset strategies and long term earnings asset strategies. So in the short term this is we believe the best for return on our capital but long term we would continue on the diversification path that we believe in so.

[Steven Alexopoulos:]

Okay. And then just final one, what's this specific reserve on the auto book? Is that runs down? How should we think about the need for quarterly provision? Thanks.

[Jim Costa:]

Well, we got a couple of things going on there, of course. So as I mentioned the asset quality, we did see some elevated losses. So we provided for that and also as we mentioned in the third quarter there was a provision for -- there was a provision for the Hurricane reserve. Okay, so as of the quarter we had 136 basis points and what I would say is that feels appropriate and adequate for the risk that we've seen at portfolio today. Our expectation is that the losses will diminish as the portfolio shrinks. And so on the outlook basis, I'd say that the reserves would be largely consistent where they are today but in the longer term they would continue to decline on a dollars basis.

[Steven Alexopoulos:]

Okay. So if we think about the reserves, are it safe to assume specific just to auto and the run-off book that you'll consume that over time as that portfolio winds down and won't create an opportunity to release reserves? Is that correct?

[Jim Costa:]

Yes. I think that's right. But again this is something we revisit every quarter, Steve, and so we take a look at how the asset quality is performing, what the balances are, what the environmental factors are. And we certainly believe that the reserve that held today is adequate for what we see in front of us for the next 12 months. That's generally the way that we approach the reserve. It does have some customization by asset class but for the auto book that's largely going to hold for the next 12 months.

[Tom Jasper:]

Hey, Steve, it's Tom Jasper. I'd just point you to page 18 of the actual release; there is a breakdown of the allowance by each one of the categories. And you can see the composition at 90 basis points in total and auto finance at the end of the year being 157. So that details in the back of the release.

[Steven Alexopoulos:]

Right. I mean I was trying to get at it. This was an opportunity to release reserves specifically what you just called out but it doesn’t sound like it is.

[Craig Dahl:]

This is Craig. I would say not in the short run. I mean we would put the reserve position and we are going to monitor how the run-off goes and how losses going. And I would also to you and others, the percentage has become less relevant as the portfolio comes down and the absolute dollars become more relevant. So that's what we would be tracking and talking about on a go forward basis as well.

[Operator:]

Our next question comes from Nathan Race from Piper Jaffray. Please go ahead with your question.

[Nathan Race:]

Hey, guys. Going back to the expense discussion, just curious with some of the costs that you are going to realize from the auto wind down, are you guys going to be maybe reinvesting some of these cost savings at perhaps higher rate-- perhaps you expected to go into this year and the let tax reform -- because I know you guys are kind of tightening the belt on some items heading into 2017 after the auto wind down was announced in January.

[Brian Maass:]

Yes. This is Brian. What I'd say from an expense perspective is even as we talked about over the course of 2017, we had some level of increased technology spend, it's not as if for done there and I think it's not we are done from a technology perspective. So we expect a healthy level of investment to continue in 2018. We introduced a new digital banking platform and are got initial functionality. We expect to continue enhancing the functionality of that over time. We expect to continue investments and technology to improve customer experiences as well as we are going to use technology to create longer term efficiencies from a back office perspective. But the guidance that I gave you as far as expenses being flat on a kind of quarter-over-quarter basis, fell slightly down in corporate that higher level of investment.

[Nathan Race:]

Right, got it. And then just stay on the auto shift for a second. I think at the end of the third quarter you guys had about 760 FTEs, just curios what that number is at the end of the fourth quarter and kind of where you expect that number to go as the unit winds downs 2018 and 2019?

[Brian Maass:]

Yes. This is Brian. So the one comment we made as you know about a third of the employees or about third of the workforce is gone as of today, you'll see some decline over time as we have a large servicing book there and that servicing book continues to run-off. There will be some changes there as well over time.

[Operator:]

Our next question comes from Lana Chan from BMO Capital Markets. Please go ahead with your question.

[Lana Chan:]

Thanks. Good morning. Just a few questions. One on auto. Should we think about the servicing book and related revenue to be declining at the similar pace to the run-off of the auto loan?

[Brian Maass:]

Yes. This is Brian. If you look in release now we have servicing revenue combined for both auto as well as our consumer real estate portfolio. But if you look from a quarterly basis, there is a pretty good trend there of that declining and I expect that trend will continue as we go through 2018 as that servicing book decreases.

[Lana Chan:]

Okay. Thank you. And then just one follow up on the margin. Did you give the expected FTE adjustment impact from tax reform? I may have missed it.

[Brian Maass:]

I didn't. That's -- I didn't actually specifically talked about. So that is probably about 4 basis points on our net interest margin, just the impact of the tax on equality process [Indiscernible]

[Lana Chan:]

Okay. And then you also mentioned the fourth quarter was an inventory finance yield, there was an impact from a new program renewal. Can you quantify how much that impacted the inventory finance yield in 4Q?

[Brian Maass:]

Yes. The yield was probably impacted by about 30 basis points in the fourth quarter.

[Lana Chan:]

Okay. And is that related to just overall competition in the space?

[Brian Maass:]

No. It has to do with an extension of a program.

[Lana Chan:]

Okay. And then just last from the -- in terms of the ROATC goal, as you give a state portfolio with auto run-off, what would be the appropriate capital levels for TCF over the long term?

[Brian Maass:]

Yes. This is Brian. So we really don't have a target or an optimal capital level to give you. We feel though that even with all of the capital actions that we either started or that we announced today, that we will still retain a very strong capital position. And that's something that we'll continue to evaluate with our Board over time. And we'll try and provide more guidance on that as we go through 2018.

[Operator:]

Our next question comes from Matthew Keating from Barclays. Please go ahead with your question.

[Matthew Keating:]

Yes. Good morning. Thank you. So just to be super clear on the company's 2018 financial targets both ROATC and efficiency ratio. The high end of those target assuming, is that three rate hikes this year and the low end would be assuming no rate hikes? Is that the right interpretation of how you are thinking about those two metrics?

[Brian Maass:]

No. But that's specific because there is any number, this is Brian, there is a number of items that we kind of made reference to. But, yes, I think you are thinking about it right. If we get three or four rate hikes, you are at the higher end. If you get to one or two hikes, you are closer to the low end. But there are other items that are in there as well, as far as [Multiple Speakers]

[Matthew Keating:]

I mean I guess the reasons I was asking was the expectation for the auto exit to drive meaningful profitability improvements. And if we look at the fourth quarter of this year and sort of use the midpoint of the company's 2018 effective tax rate already around -- in 12% plus range and so to the extent that you are going to see meaningful profitability improvements from the auto finance exit. Is that more in --towards the end of 2018 and 2019 and beyond, is that the way we should interpret those auto exit related profitability gains?

[Brian Maass:]

Again, this is Brian. What I'd look at is our return on capital range even the last three years is probably been closer to 10%. So as we get into the 11% and 13.5%, that's meaningful improvement from where we've been operating, as well as if we get tax impact it gets it even further.

[Matthew Keating:]

Okay, that's fair. Going back to the auto sort of impact of no new auto originations on provisions. If you look historically with the past few years, the auto business has been the lion share of the company's overall provision. So as you think about dollar provision in 2018, would you expect that to below 2017's level given the lack of auto originations, there will be additional provision for exiting portfolio but how do you think about the impact there? Thanks.

[Jim Costa:]

This is Jim Costa. I think directionally you are looking at it correctly. But again at $22 million provision this quarter we think that that's consistent with the risk that we are holding on the balance sheet today. And of course as Chairman Dahl mentioned, that portfolio is in run-off mode and so balance is declined -- the reserve levels from a dollar standpoint and the provision of course will follow in line.

[Matthew Keating:]

Okay. My final question would be I am sure you are happy it hasn't been brought up yet but the CFPB obviously you have a new head here, couple of points, can you provide any update on the status of the legislation or litigation at this point with the CFBB? Thanks.

[Tom Jasper:]

Matt, it's Tom Jasper. So we don't have really any update from the motion, it dismissed from September, that's the most recent update as it relates to the case. We are still in the discovery phase and as we stated in the past, we are not going to disclose anything around the litigation with bureau other than to say that in general we are always open to a settlement and we are just mindful, we are not going to get into a rich discussion of that today.

[Operator:]

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

[Chris McGratty:]

Hi, good morning. Thanks for taking the question. Brian or Craig on the capital benefit in the quarter from the DTL, I want to make sure this played role in the previously announced buyback or was it more of factor behind this quarter's dividend announced and the Series B reduction?

[Brian Maass:]

This is Brian. It was not a factor in the previously announced stock buyback because it wasn't announced when we did that. So that was really related to the run-off of the auto portfolio and the capital that we expected to free up over the course of 2018 as a result of that. I'd say, no, the redemption of the Series B preferred that has some impact as result of having an extra $130 million of capital as we ended 2017. And I'd say from a dividend perspective, that's really more of -- that's one time impact that happened in fourth quarter. That's more just our confidence around our capital position around as well as our earnings outlook on a going basis.

[Chris McGratty:]

Great, thank you for that. Given the outlook, the constructive outlook that you are providing on the underlying business, how are you guys and kind of the de-risking that's been going on with auto? How are you guys thinking about the Series C?

[Brian Maass:]

This is Brian. Now the Series C we just issues so I expect that stay up standing for at least five years until it becomes available.

[Chris McGratty:]

Got it, got it. And then finally I may have missed it Brian in the remarks about the loan to deposit ratio. Did you give a specific ratio that you were hoping to achieve by the end of the year?

[Brian Maass:]

I did not. We basically said that we think it's in decline from where it's at and partially that's just due to the some of the shift from some of the low run-off and some of the investment portfolio.

[Operator:]

Our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.

[Tim Braziler:]

Hi, good morning. This is actually Tim Braziler filling in for Jared this morning. First question on consumer loan sales pretty strong increase there quarter-over-quarter. I guess so what's the pipeline looking there and what's the broader strategy like in that business? Was any of that increase in relation to the declining auto sales? Are you trying to supplement some of that or was the clearly an element of the demand in the quarter?

[Mike Jones:]

This is Mike Jones. I think it was just an element of the kind of the demand in the quarter. In 2017, we sold pretty close a $1 billion in consumer, maybe a little bit over that. On the home equity side and then we supplemented that with our corresponded relationship. And then as we go forward additionally with the acquisition of Rubicon mortgage and going to market as TCF home loans, there is really an opportunity for us to strengthen our position in the first mortgage space within our footprint. So we are looking forward to that as we roll into 2018.

[Tim Braziler:]

Okay, that's helpful. And then apologies if I missed this but looking at the other expense line backing out the goodwill impairment and some of the restructuring charges still little bit elevated. Anything you can outline item and I am assuming much of that is coming off in the coming quarter to get here kind of flat year-over-year guidance.

[Brian Maass:]

Yes, this is Brian. What I'd say in the other expense line it's up mostly due to the condition -- discontinuation of auto finance and the charges associated with that. But we also did have the additional donation to the TCF Foundation, so this $5 million as well as we had cost with the five branch closures that we talked about, as well as I think I mentioned slightly higher IT and marketing expenses within the quarter.

[Tim Braziler:]

Okay, thank you. And the just last one for me. Looking at the deposit base, I guess first when did the promotional CD run-off and as you look at your kind of core deposit base ex the CD that have been put on in the back end of the year, what's trend there? How if the deposit betas reacted thus far and what's your outlook and expectation for deposit betas in 2018?

[Brian Maass:]

Yes. This is Brian. What I'd say it's lot of the CD that were put on during the course of third quarter, probably between 6 and 18 months maturity. There is run-off portfolio that we purchased so there is some matching that goes on there. I'd say absent and kind of that first or that situational need for some promotional CDs. I'd say the rest of the book is behaving I'd say exceeding our expectations. As they had really well over 100 basis points increase and I think as rates continue to go up, we will see some increases in interest expense. And the cost of those deposits, but again I think it's going to be very measured and I think we are going to be able outperformed the peers for the vast majority of our core book.

[Mike Jones:]

Yes, this is Mike Jones. The only thing that I would add is if you look at kind of checking on a year-over-year basis, 6% increase in that balance is there so we are really focused on new customer acquisition and how can we provide solutions to those customers in both our checking and savings products that allow us to grow the core deposits into 2018 and 2019.

[Operator:]

And our next question is a follow up from Ebrahim Poonawala from Bank of America/Merrill Lynch. Please go ahead with your follow up.

[Craig Dahl:]

This will be our last question as we have come to the end of our time. So go ahead.

[Ebrahim Poonawala:]

So very quick I think Matt touched upon my question. In terms of the CSPB pending sort of -- I get that we will get a settlement, should we still anticipate any impact to your fee revenue, if and when that settlement happens or not?

[Tom Jasper:]

Yes. This is Tom Jasper. As I said earlier, we are not going to discuss the nature of our any -- of our outstanding litigation with the bureau at this time. So we are not going to comment on that any further.

[Operator:]

And ladies and gentlemen thank you for your questions today. Should any investors have further questions, Jason Korstange, Director of Investor Relations will be available for the remainder of the day at the phone number listed on the earnings release. And now like to turn the conference call back over to Mr. Craig Dahl for any closing remarks.

[Craig Dahl:]

Well, I just want to say thank you to all for participating this morning. And we appreciate your interest and investment in TCF. And have a great day.

[Operator:]

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.