TCF Financial Corporation
Q1 2018 Earnings Call Transcript

Published: 23 Apr 2018

[Operator:]

Good morning, and welcome to TCF's 2018 First Quarter Earnings Call. My name is Jamie, and I’ll be your conference operator today. [Operator Instructions] Please note today's conference call is being recorded. At this time, I’d like to introduce Jason Korstange, TCF’s Director of Investor Relations to begin the conference call.

[Jason Korstange:]

Good morning, everyone and thanks for joining us for the TCF’s first quarter 2018 earnings call. Joining me today will be Craig Dahl, Chairman and Chief Executive Officer; 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 provide an overview of our first 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 will open 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 that actual events or results may differ materially Please see the forward-looking statement disclosure in our 2018 first quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of March 31, 2018, and we undertake no duty to update the information. I will now turn the conference call over to TCF Chairman and CEO, Craig Dahl.

[Craig Dahl:]

Thank you, Jason. Good morning everyone. I’ll start out here on Slide 3, our first quarter themes. We delivered a strong start to our year in the first quarter with a continued focus on our four strategic pillars, which drove profitable growth and improved financial performance. Reported net income of $74 million up 59% compared to the first quarter of 2017 and diluted EPS of $0.39. Our first quarter results included a onetime reduction in net income available to common stockholders of $0.02 per share related to the redemption of our Series B preferred stock, which took place on March 1, 2018. During the quarter, earnings continued to benefit from our asset sensitive balance sheet as recent interest rate hikes positively impacted loan and lease yields. In fact, on a year-over-year basis, our loan and lease yield expansion exceeded our deposit cost expansion and as a result, we've been able to maintain a strong interest margin. We also made progress in driving efficiency improvements across the organization as revenue growth exceeded expense growth driving reduction in our efficiency ratio year-over-year. The runoff for the auto finance portfolio is progressing as expected, and with the runoff being reinvested into our investment and loan and lease portfolios, but note that we are still only a 120 days in. We also maintained our strong and stable credit quality performance during the first quarter and continue to reduce the risk profile of our balance sheet, primarily through the run off of the auto portfolio. Net charge-offs declined on a year-over-year basis excluding the impact of the consumer real estate non-accrual loan sale, which took place in the first quarter of 2017. While net charge-offs in our non-auto businesses totaled just nine basis points in the first quarter of 2018, down from 16 basis points in the first quarter of 2017. Lastly, we continue to execute on several capital initiatives including the repurchase of additional shares as part of our $150 million share repurchase authorization and we also completed the redemption of our Series B preferred stock which will result in a reduced preferred stock dividend expense beginning in the second quarter. Going forward, we expect that we may see opportunities for additional capital initiatives as our risk profile improves. Brian will talk more about this later in the presentation. I'm very pleased with our start to 2018 as we continue to execute on our four strategic pillars. We saw many encouraging trends in the first quarter that support our outlook for improved returns on capital moving forward. Turing to Slide 4, our revenue summary. We continue to see strong year-over-year revenue growth while generating higher quality revenue with net interest income becoming a larger portion of the total. The increase in net interest income is being driven by higher average yields on loans and leases and loan and lease growth. Our net interest margin increased 13 basis points year-over-year demonstrating the true assets sensitivity of our balance sheet. Strong leasing and equipment finance revenue of $42 million in the first quarter continues to be a strong driver of non-interest income and now makes up 37% of the total. The strategic investments we are making in this business are resulting in operating lease growth, which creates more consistent net leasing revenue. We have added a new view on the bottom right portion of the slide netting out the operating lease appreciation of $17 million in the first quarter, which results a net leasing non-interest income of $25 million. This is an increase of $8 million in net leasing non-interest income on a year-over-year. Going forward, we would expect quarterly 2018 net leasing non-interest income to be between $24 million and $28 million, keeping in mind that a portion of the revenue remains customer driven. Turning to Slide 5, our loan and lease portfolio. Our well-diversified loan and lease portfolio grew 7.8% on a year-over-year basis driven by continued growth in our wholesale portfolio. Inventory finance, which has its seasonal peak in the first quarter had very strong growth with balances up 21% year-over-year. This was driven by almost equal growth in both existing programs and new programs. We expect to see a seasonal decline in these balances in the second quarter consistent with prior years. In addition, leasing and equipment finance balances increased 9.1% while commercial balances were up 8.9%. As I mentioned earlier, the auto finance portfolio run-off progressed as expected during the quarter with balances down $360 million and now making up 14% of the loan and lease portfolio. With the full year of 2018, we continue to expect between $1 billion and $1.5 billion of auto portfolio run-off. We are continuing to see growth opportunities in our non-auto portfolios as our year-over-year growth was 8.9% with mid-single digit growth expected for the full year of 2018 excluding auto. Turning to Slide 6, our loan and lease yields. Our strategy of competing as experts in focus segments, our pricing discipline and increases in short-term rates continue to drive our strong yield performance. The loan yields increased 54 basis points year-over-year driven by increases in all of our loan and lease portfolios. As a reminder, the greater than usual linked-quarter yield expansion and inventory finance in the first quarter of 2018 was due to the one-time impact of a program extension which reduced the yield by approximately 30 basis points in the fourth quarter of 2017. Excluding the auto portfolio, yields expanded by 43 basis points year-over-year. We continue to execute our business plan with a diversified loan and lease portfolio, pricing and credit discipline as non-auto loan yields in the first quarter were 5.53% with net charge-offs of just nine basis points. Slide 7 here is a focus on our digital banking. Before I turn it over to Brian, I want to talk about the investments we’ve made here. As we’ve mentioned previously we completed the successful launch of our digital platform in 2017 which provides enhanced digital features including thumbprint and facial recognition, mobile deposit capture and advanced budgeting tools. We are continuing to shift our investment from branch to self-service channels to align with customer preferences. In fact, since the beginning of 2012, we have significantly reduced our branch account, increased our ATM fleet, including 284 image enabled ATMs all are growing deposits by $6.5 billion. The response from our customers has exceeded our expectations as four times as many concurrent users are now utilizing the digital platform since the launch. In addition, the number of deposits made via digital and ATM channels has increased 119% year-over-year, while digital account openings have increased 51%. We believe that not only does this platform put us in a strong competitive position with our peers, but complying with our focus on the customer experience it will allow us to retain the existing customers and create new banking relationships. We have seen so far as the checking account attrition has declined since the first quarter of 2017. As our strong deposit franchise continues to become more valuable, these investments are providing better growth opportunities moving forward. And I'll remind you, our account is still free. I’ll turn it over to Brian.

[Brian Maass:]

Thanks, Craig. Talk a little bit about the deposits on Page 8. Our average deposits increased 7% or $1.2 billion on a year-over-year basis. If you look at on a linked quarter basis, our CD concentration declined to 27% and that's really due to the auto run-off, reducing our need for CD growth. Also on the linked quarter basis, our average interest rate on deposits is up only four basis points, again driven by more growth in our savings and checking and decline in average balances of CDs in the quarter. Going forward on deposit growth, we expected to be more driven by core checking and savings balances and we expect our CD growth to continue to moderate. As interest rates increase, we are seeing some competitive impact on deposit costs, but the retail nature of our deposits is helping to mitigate. Finally, as we mentioned last quarter that we were closing five branches, we did complete the closure of those branches, two of them happened late in Q1 and three happened in the beginning of April. Turning to Slide 9, we continue to realize a positive impact from our asset sensitivity as rates increased. If you look at the chart in the upper left, you can see the positive impact the higher rates is having on our variable rate loans. And you can see they're all up between 64 and 74 basis points on a year-over-year basis. And not only are we experiencing yield expansion in these categories, but these are also the loan portfolios that are growing. You can see there is $8.8 billion at the end of Q1, that's up 11% versus last year and all of our variable rate loans now make up a greater percentage of our total loans that’s at 46% this year versus being only 44% last year. On the upper right-hand side looking at deposits, you can see our composition of deposits is really helping us mitigate the increase in deposit costs as rates go higher. You can see in the red circle there on the right, you know over the last 2.5 or 3 years now we've seen a 150-basis point increase in rates. And you can see our total cost of deposits over that time - same time period is up only 21 basis points. So, when you put those two things together and you look in the lower left, you can see our net interest margin trend, on a linked quarter basis, we actually round up up two basis points versus the fourth quarter. We had expected it to be down a couple of basis points. We do have a couple of headwinds on our net interest margin. Part of that was going to be - as we, you know, the change in gross of our tax exempts, as well as the auto run-off, both of those into our investment portfolio, both of those were headwinds. But those were more than offset by higher rates on our variable rate loans, as well as the seasonal growth in inventory finance. Going forward, several factors will impact our margin over time. One is going to continue to be the reinvestment of our auto finance portfolio into other loan and lease categories, as well as the investment portfolio, but we do expect additional rate hikes to help partially offset this headwind. In addition, we expect our margin to be impacted by the seasonality of inventory finance. We do expect those balances to decline in the second quarter as they do every year and margin will also be impacted by the growth in mix changes in our loan and lease portfolio, as well as the composition of our deposits, and then depending upon what happens on pricing. But overall, we're more optimistic about our net interest margin than we even were last quarter and that's really based upon the strong Q1 performance that we have. Turning to Slide 10. Expenses were well controlled in the first quarter. As expected, if you look at Q1 of 2018, we had $229 million of expenses, which is down from last year, which was $233 million. Going forward, when we look at second quarter and third quarter of 2018, we expect those to be flat versus the prior year. So, probably somewhere around the $220 million and for fourth quarter, we’re expecting obviously to be less than they were last year with all the one-time charges, but it probably will be up a little bit from second quarter and third quarter so may be in the $225 million to $230 million range. When you look at operating lease depreciation which is the red bars in the chart, you can see that that did increase from $11 million last year to $17 million this year. But as Craig mentioned on Slide 4, that was more than offset by the growth in operating lease revenue. So just a reminder, that these expenses really are a transaction expense against the revenue and Craig gave guidance as to where we think those will be on a net for the remaining quarters in 2018. So overall, we still expect our efficiency ratio to be in at a 66% to 68% range for the full year of 2018. Turning to Slide 11. On capital, we continue to maintain strong capital ratios, even after our recent capital initiatives this quarter. We did repurchase almost 2.6 million shares during the quarter at a cost of $57.6 million. We still have about $83 million remaining of our $150 million authorization that we announced late last year. As you can see, we’re running ahead of schedule on our buybacks, and we do expect that this program could complete itself sometime in the third quarter versus before what we are saying it might maybe over the entire year 2018. In addition, we completed the redemption of our Series B preferred stock on March 1, that did have a $0.02 negative impact on the first quarter, but now we will see $6.5 million worth of annual savings that will start here in the second quarter. In addition, you know we've spoken frequently about kind of our four uses of capital being we can use it for organic growth, we can use it for dividends, we can use it for stock buyback, as well as corporate development type of initiatives. You’ve seen us now with our strong capital position deploying capital in all of those areas. And lastly, we expect that we may see more opportunities for additional capital initiatives as managing our capital levels will continue to be a focus for us in 2018, as well as in 2019. And with that, I will turn over to Jim to talk about credits.

[Jim Costa:]

Thank you, Brian. If you can turn your attention to Slide 12, we’ll take a broader look at the overall credit quality trends. We’ll start up with the delinquencies, you can see we ended the quarter at just 10 basis points, which is relatively flat on a year-over-year basis. In fact, 60-day delinquencies have remained below 15 basis points for the last 10 quarters and if you were to exclude auto, delinquencies have remained at 10 basis points or lower for the last seven quarters. In addition, following a typical seasonal trend, auto delinquencies have come in four basis points on a linked quarter basis. NPAs have declined 16% ending the quarter at $144 million, and provision also remained flat compared to the first quarter of 2017. It did decline 49% on a linked quarter basis due to decreased net charge-offs and leasing and equipment finance, as well as increased reserve requirements and inventory finance in the seasonality of auto. Excluding the impact of non-accrual sales in the first and third quarters of 2017, net charge-offs have remained stable as well. If you turn to Slide 13, we'll take a closer look at the line level detail by business and the net charge-offs. On Slide 13, you can see the benefit of our diversification philosophy is remaining evidence as the net charge-off ratios remain strong across the entire portfolio. Including the wholesale portfolio, we had just six basis points in the first quarter overall. If you look at the bottom of Slide 13, excluding the recoveries from the non-accrual loan sales last year, our core lending platforms that’s an operating at very low levels of charge-offs as Craig has mentioned which is nine basis points of charge-offs in the first quarter and in a range of just nine to 18 basis points over the last year. Overall, we're very pleased with the credit quality of our portfolios. Now I’ll turn it over to Craig.

[Craig Dahl:]

Thanks, Jim. I'll take you to Slide 14, which is our 2018 strategic themes. I'm very pleased with our strong first quarter results and how we’re positioned for the rest of the year. As I take a broader view of where you want to go in 2018 a few themes do come to mind. First, we're continuing to reduce the risk profile of the balance sheet driven by primarily by the run-off of the auto portfolio, which we expect to lower our credit, operational and liquidity risk over time. Eliminating the portfolio with the highest net charge-off and reserve levels will reduce our overall risk all else being equal. We will be able to reduce our operating risk as we exit the more volatile auto finance business and associated secondary market, which has already had the added benefit of improving the quality of our revenue. We also have more liquidity with the run-off of that portfolio, which reduces the pressure to pay out for deposits. Second, as I look at the rest of the organization, I am very encouraged by the opportunities we have in our other businesses. We continue to have a strong growth and profitability outlook in our commercial banking and leasing and inventory finance businesses. In our consumer real estate business we have an opportunity to see additional gain on sale revenue or balance sheet growth as our new TCF home loans business matures. This is in addition to the flexibility we already have to hold ourselves our second mortgage originations, as we look to optimize returns in the business. We expect mid-single digit loan and lease grow excluding auto in 2018 with continued investment portfolio expansion. Keep in mind we have a very strong deposit franchise that has become more valuable in the current rising rate environment. In addition, our new digital banking platform continues to be well received by our customers as evidenced by the significant increase in usage, since its launch in 2017. Our teams are executing well and meeting the changing needs of our customers and I look forward for this to continue as we move the business forward. Finally, as we've been saying over the past several months, our primary focus is on improving return on capital and we are on track to do just that. Last quarter we provided 2018 ROATCE guidance in the range of 11.5% to 13.5%. With the auto portfolio run-off meeting expectations over the past several months and the expectations for additional rate hikes, we are now more confident in our ability to achieve a full-year ROATCE in the upper half of our target range. And in addition, we remain confident in our full-year 2018 efficiency ratio target of 66% to 68%. Keep in mind that an addition to targeting significant improvements in ROATCE and efficiency in 2018, we expect to achieve this with a more efficient use of capital and a reduced overall risk profile for the organization. I'm very excited about the outlook of our organization as we narrow our strategic focus to the areas that we believe will drive shareholder value. And with that, I'll open it up for questions.

[Operator:]

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

[Jon Arfstrom:]

One of the loan growth categories that stood out was inventory finance. Craig, you touched on them a little bit in terms of the regular seasonality, but there were some other elements that I think took that growth rate up. Can you give us a little bit more information on the big drivers there?

[Craig Dahl:]

I think, I identified in my comments, Jon, that the growth was both from expansion of existing programs and the addition of new programs. And I think that continues to be an opportunity for us inside this asset class.

[Jon Arfstrom:]

And would you say the new programs, was it maybe an equal split or did that drive more of the growth?

[Craig Dahl:]

It was an equal split and I would say, probably less of it is seasonal to this part of the year and more of it was just the addition of the outstandings.

[Jon Arfstrom:]

And then Brian, maybe a question for you, it's really the flip side of that question. We have the expected auto run-off, and then we have the seasonality in inventory finance. So, there's a bit of a loan headwind I guess in your earning asset next, next quarter. How do you want us to think through, you know margin, earning asset mix, net interest income for next quarter?

[Brian Maass:]

So, I would say, if you're looking in our net interest margin and there is a lot of different factors that are mixing in there, right. So a couple of that you saw in Q1, just - these are talking about what happened and harder as we kind of go forward. But you know, in Q1 a couple of headwinds on our net interest margin rate as I talked about you know the tax exempts, you know changing gross up was probably three basis point headwind in Q1. The run-off of the auto portfolio into the investment portfolio was probably at three basis point headwind. You know that's going to cumulatively get larger as you go through the year, right because we only had $360 million of auto that ran off in Q1 so that second three basis points will cumulatively have a bigger impact as the quarter's progress which is partially when we are talking last quarter. You know I said that there would be some potential pressure on the margin over time meaning that that would build over time. However to the extent that we have interest rates going higher, you know as I said, there is a chance that those you know can offset it. So if I was to stand back and look at, it's easier for me to kind of speak to at even on our full year guidance. Last year we were at $454 million for full year. I think there's a chance that these other offsetting factors and possibly even make it so that our net interest margin stays flat on a year-over-year basis or we'll only see a couple of basis points off on that. So I think that's a good thing. You know it's partially it’s due to the higher rates, partially it’s due to this composition of having more variable rate assets. We continue to be very focused on maintaining price on the deposit side, but we know as we go forward on deposit cost, we’ll also see some additional pressure.

[Craig Dahl:]

This is Craig. I mean, it's one thing to say you’re asset sensitive and it's another thing to be asset sensitive and I think you're starting to see that. And the other thing I'd point out is the value of our diversified model. We're not only relying on a single or couple of asset classes. We've got a lot of levers there that we can pull.

[Jon Arfstrom:]

And I guess Brian, it’s this - we’re probably likely to see a bit of a bigger step up in the securities portfolio this quarter, is that a fair assumption?

[Brian Maass:]

I’d say we’ll continue to build, right. I think as we - we haven’t changed the strategy there. So, as we continue to have the $1 billion to the $1.5 billion run-off of auto, you know some of those proceeds at least initially could wind up in the investment portfolio, so that will cumulatively have a larger impact as we progress through 2018. And you’re correct that we will see a building of the investment portfolio over time.

[Operator:]

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

[Scott Siefers:]

Maybe for Jim, I was just hoping if you could touch on the decision to and provide relative to charge-offs this quarter. Is that something that that's going to be you know transitory to the first quarter, I noticed for instance you guys had net recoveries in a few of the consumer portfolios or just given the improving risk profile of the company as a whole, do you think there is an opportunity to just continue to draw down the aggregate reserve?

[Jim Costa:]

The first quarter was a little bit unique, we had some storm-related losses that were through the portfolio, we had the seasonality and inventory finance, and we also had some charge-offs in the fourth quarter, which were not evident in some of the wholesale businesses in the first quarter. So, that all provided for a relatively favorable outlook in terms of provision in Q1, I wouldn't take Q1 as being a forecast going forward, however.

[Scott Siefers:]

And then, if I can jump also to - I just want to make sure, I understand the guidance as well. I mean, you’re talking about I think you guys have said flat year-over-year cost in the second quarter and third quarter, which in the aggregate was come out to about $220 million. Are guys were running closer to like a $230 million, $235 million last year which would imply that the number would actually sound fairly significant. Did I understand that correctly? And so, in other words as we look in 2Q and 3Q, that’s an all-in, non-interest expense base of $220 million?

[Jim Costa:]

It’s a good question. Let me clarify in that, so the $220 million that I mentioned for 2Q and 3Q is for our core operating expense so that’s excluding operating lease depreciation. So it's kind of those numbers that we have in the bottom half of the page there, that's relative to the $229 million that we had at Q1. So we see our expenses are seasonally higher in Q1. So we see them coming down from the $229 million level that we had in Q1 to around $220 million for the second quarter and third quarter excluding operating lease depreciation.

[Scott Siefers:]

So basically just gross that up for the estimate of operating lease depreciation that’s the all-in number that...

[Jim Costa:]

Correct.

[Operator:]

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

[Dave Rochester:]

On your efficiency ratio guidance that you’re feeling better about right now, does that include the stable NIM that you mentioned for 2018 versus 2017?

[Brian Maass:]

That's correct.

[Dave Rochester:]

And then for the next hike, I was just curious what your expectation for the impact on the NIM, X all the portfolio dynamics you're talking about. So I guess for the second half of the year, if we get the June hike or whatever?

[Brian Maass:]

Yes, I mean obviously you know being able to speak to the full year guidance knowing that we really got Q1 behind us and that was at $459 million. So we continue to see really good discipline on our deposit pricing. So that continues to help us you know we will have some factors that drag on the net interest margin, but we think if we can come back to even close to where we had it last year at that $454 million or even $450 million, right somewhere in that range. When we stand back and look at even it proves that even with these headwinds the asset sensitivity is helping offset that as rates go higher. And when you stand back and think about being able to generate that at the same level of NIM as we end 2018 versus where we started, there's also with the asset mix change that took place. We've also driven a lot of capital efficiency within the assets that are there, as well as we're going to have a higher credit quality portfolio as we end the year versus where we started as well.

[Dave Rochester:]

Are you guys assuming more rate hikes occur in 2018 in your efficiency guidance?

[Brian Maass:]

Yes. We're assuming, I'd say probably on market guidance that there's going to be at least a couple more rate hikes.

[Dave Rochester:]

And then for your - the securities that you bought, do you have the just the overall yield on those and where you've seen the yields today?

[Craig Dahl:]

What I would say is from a yield perspective I think our Q1 purchases were around 3.1%. As I’ve mentioned before we're predominantly buying 20-year and 30-year agency MBS, so it's more skewed towards the long run of the curve. I’d say at the moment rates are probably slightly higher than that as they ticked up here in the last couple of days.

[Dave Rochester:]

And then just one last one on the fee income side, I just wanted to make sure that I understood the guidance, right there and I heard it right. Were you saying that leasing and equipment finance fees should decline to the $24 million to $28 million level, is that right?

[Brian Maass:]

Correct. So if you look at it where it was for Q1, we were at $25 million and we're basically saying which was higher, the guidance is for the remaining quarters that will be somewhere around net basis that $24 million to $28 million.

[Operator:]

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

[Chris McGratty:]

Craig, maybe on the inventory finance, I think, in the release you talked about change into the reserve methodology. I’m interested in kind of what you guys are assuming today versus previously? And how we should be thinking about charge-offs in that book over the cycle? Thanks.

[Craig Dahl:]

Sure. I'll have Jim comment first and I'll come in and close that out, okay?

[Jim Costa:]

Sure, Chris, I appreciate the question. Yes, so inventory finance has been performing very, very from a credit standpoint for the long-haul and that has factored into our assessment of the overall credit profile. Also the growth that we've seen in the first quarter came with a mix of assets that attract a lower overall rate. So, you put that together and it provides a favorable lift in terms of the reserve requirements quarter-over-quarter.

[Tom Jasper:]

But, Chris if you were to look back in inventory finance, I mean, we have annual charge-offs of 7 basis points inside this business. And so, we're still well reserved at the levels that we're currently at.

[Chris McGratty:]

And in terms of reserving - do you reserve - it’s 50 basis points they go with the cycle of their own. 50 basis points or losses today are 7 basis points, but how should we think about just normalized looking out a couple of years?

[Craig Dahl:]

I think, if you look at the history that we’ve done in the earnings release that’s probably reflective of what you might see going forward. Again, the first quarter did bring in assets that attracted lower overall rates so that may lower our outlook a little bit. But, we want to make sure that we're adequately reserved and the history has been really strong in this portfolio. So, we think if you look back over our history, roughly 50 basis points would seem to be a reasonable outlook.

[Chris McGratty:]

And then, maybe on the tax rate a little bit lower I would imagine due to the seasonal benefit from stock options. Is 23% to 25% still the right number we should be using in perspective?

[Brian Maass:]

23% to 25% for the full year is what you should expect it and yes. There was a favorable impact from equity-based compensation in Q1 that drove it down to that 22% level.

[Operator:]

Our next question comes from Kevin Reevey from D.A. Davidson. Please go ahead with your question.

[Kevin Reevey:]

So with the success of the rollout of your digital banking platform, how should we think about your branching rationalization strategy looking out over the next 12 months? I know you've announced a couple of branch closures there or any more on the horizon?

[Craig Dahl:]

You know we've announced many branch closures over the last three years. And so there's not going to be any acceleration of that part of the strategy. We continue to support our branches, our customers continue to use the branches. We just need fewer of them overall. But I would say right now Kevin, I’m not going to change the pace of that closures there.

[Kevin Reevey:]

And then on the capital actions front, it sounds like you're going to be more aggressive this year with the early close out of your remaining buyback. Any other capital actions we should expect on the horizon?

[Brian Maass:]

You know what I would say is you know we're still only the 120 days into the run-off of auto. So that's going to continue to play out over time. The only thing that - the only change I'd say from where we were 90 days ago as we do see you know on a slightly higher pace on the buyback and we can see that ending in the third quarter versus before we’re saying it might have been to the end of the year.

[Operator:]

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

[Nathan Race:]

Going back to the securities reinvestment conversation, Brian I appreciate your commentary on kind of where you're putting on the securities currently. Just curious, if over the last course of your thoughts on the product types that you guys want to reinvest in, has changed from your previous comments, which I think were mostly around to Agency pass-throughs and the like?

[Brian Maass:]

What I would say is, you know almost all of our purchases in Q1 here were 20-year and 30-year is Agency MBS, we’d add a small amount of munis. I don't see that changing – that strategy changing at this point in time. So I think that's where we're going to continue to be focused.

[Nathan Race:]

And then just kind of changing gears and think about capital, another we're kind of 120 days in the auto shift. Just curious, if you guys have any updated thoughts on kind of where you'd like to see your targeted capital ratios either on a TCE or CTE1 basis trend over the next 12 months to 18 months?

[BrianMaass:]

What I would say as far as, we don't have necessarily a targeted capital ratio or our goal to tell you today. But based on our commentary, we do view ourselves as having very strong capital ratios and we're - it's something that we're going to be looking at is how we can manage our capital levels, it’s going to be a key area of focus for us over the next couple of years as getting to the right level there.

[Craig Dahl:]

I wanted to just comment too, you know that the investment or increasing investments in the portfolio is really just our baseline activity, and the first quarter outside of the inventory finance business is not really a big organic loan growth period. So we would be looking as we move forward to increase loan growth opportunities and in our other platforms and remain opportunistic of own portfolios that may or may not come through the rest of the year.

[Operator:]

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

[Ken Zerbe:]

Just come back to the preferred stock redemption, I guess how do you guys think about press just part of your overall capital structure? Like, is there plans to issue additional press to kind of get that back up again to take advantage of lower rates before they go up or just kind of how are you thinking about the capital stock? Thanks.

[Craig Dahl:]

At this point in time, we view ourselves as having some amount of excess capital, right, both just kind of our expectations from an earnings perspective having the lower tax rates, as well as the you know capital impact that we had as a result of the tax reform that took place at the end of last year. So, this was a way for us to take out a higher piece of preferred stock at the point in time. We did have the opportunity to refinance some of our other preferreds in the middle of 2017, so the piece of preferred that we have that’s remaining we feel really good about you know is at 5.7% you know fixed interest rate for five years. So, we think that's - perpetually at 5.7% with the option to call that at that point in time. So, we feel really good about that being part of our long-term capital. At this point in time, we view ourselves as having excess capital you know somewhere down the line. You know is there an opportunity to optimize the capital stock and have a little bit more of preferred again that's possible. But, it's not something that I see in the near term.

[Operator:]

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

[Lana Chan:]

Just wanted to follow up on the early question about the provision and the reserves, especially around the auto reserve which I think is about $46 million at the end of the quarter. How should we think about that as the portfolio runs off? And you know just I guess that net-net, when you look at the provision for 2018 I assume that it should be meaningfully lower than 2017, is that correct?

[Jim Costa:]

It depends on what you’re talking about. Thank you, Lana. This is Jim Costa. Whether we’re talking about a rate or dollar, so obviously the portfolio itself is shrinking so the overall reserve level will decline commensurate with the portfolio. However, I do want to point out that you're seeing some seasonality show up in the reserve levels. You're also seeing some mix relative to where we were year-over-year so that's driving it. Additionally we did have this portfolio of impact because it has a national presence. It was part of the hurricane in the fall, both Irma and Harvey and so that's showing up over time. So there's a few parts that are moving. What we're not going to do is go light on reserves because we're running the portfolio. So I want to - don't want you to set an unreasonable expectation, we're going to set the reserves every quarter at a level that's appropriate for the risk that we see at that time and the risk that we saw this quarter is where we set the reserve. And so there will be things going forward in terms of quality changes and seasonality that will impact that.

[Lana Chan:]

And my second question is around expenses again partly around auto. Is there - do you see opportunities to further reduce expenses from your current expectations, is that business as you're getting you know through some of the initial run-off of the portfolio? And you know - how much are you spending for digital at this point?

[Brian Maass:]

On the expense side you know we have you know already taken out, you know quite a bit of expense and personnel out of the gateway business, as well as we've had some branch closures over time, so those are some expense savings that we've had. Those will - we don't break out specifically, those dollar amounts you’re seeing it in the aggregate. We will continue to see some expense decline over time in the auto business, but you shouldn't expect that there's going to be a big drop anywhere, it's going to just be one of those things as the servicing book goes down over time, there will continue to be some of offsetting expense reduction. However, on the other side there are some - there's a handful of items that are offsetting some of those expense reductions, hence my guidance of saying that it will be flat versus last year. And those are things that are helping to produce revenue. So from a leasing perspective, we bought that platform in the second quarter of last year. We bought Rubicon to focus on mortgages in the fourth quarter. Now that's TCF Home Loans, as well as when we refer to some of the investments that we are making in technology we continue to have high level investments. We don't specifically break out what a specific project is that we’re spending on, but the guidance that I gave takes all of that into account.

[Operator:]

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

[Steven Alexopoulos:]

I wanted to first follow up on the inventory finance growth in the quarter. Could you give more color on the new programs that you actually added in the quarter?

[Craig Dahl:]

I’d turn that one over to Bill Henak, Head of Wholesale.

[Bill Henak:]

The programs that were added are there some specialty finance programs that we’re working in branch sensitive mobility, auto transfer, inventory finance program and there is a couple of exclusive programs in the marine business as well and those programs are both rolled out in the middle of last year and they're ramping up this year or they started in December of last year and they started to ramp up. So both of those, those types of programs and we continue to have other programs in the pipeline.

[Steven Alexopoulos:]

And these are loans that you're originating, you're not acquiring any of these, correct?

[Bill Henak:]

No, these are all organic growth programs.

[Steven Alexopoulos:]

And then given that you have new programs how should we think about the seasonal decline coming in 2Q, should it be fairly typical or not as pronounced given these new programs you now have?

[Brian Maass:]

We’ve continued to add other programs in previous years as well. So I would look at the majority of that increase, a lot of that increase that happened in Q1 is seasonal. So you should see a lot of that coming down from a reduction perspective. So when you are trying to think about what the 2Q level should be, I would guide you towards looking at 2Q of last year and then think about you know some level of 8% to 10% potential higher than that.

[Steven Alexopoulos:]

And then just a quick follow-up question on capital. Did I hear correctly in your prepared comments that you might explore additional opportunities beyond buybacks to deploy capital?

[Brian Maass:]

It wasn't specific to being -- I’d say the general comment, I'll let Craig get on this, it just - we’re making the observation that we feel we have very strong capital ratios, you know we are going to consider all of our uses of those capital whether it's you know organic growth, corporate development, dividend, stock buyback.

[Operator:]

And our next question comes from Jared Shaw from Wells Fargo. Please go ahead with your question.

[Jared Shaw:]

On the deposit side on the competitive nature of the market right now, are you seeing more pressure geographically and locally from local competitors or are you seeing some pressure from maybe, a national platform and more indirect on the deposit side?

[Brian Maass:]

It depends on which market you're in, so there's definitely a differences in the different markets. And we do see a number of new promotional rates that are being hung out there. Again, for us it's we have some portion of our book that's in promotion. We definitely see the growing part of our book being checking and savings. In fact if you look at our average checking balances, total checking balances year-over-year they are up 4.7%. If you look at just our retail only non-interest-bearing portion we grew that $300 million on a year-over-year basis. And again, we've added these new digital platforms. It’s not for us, it's not just for our customers I should say, it's not necessarily just about the rate, the rates are important but it's also what other functionality and features and customer experience can they have when they come to us. We're focused on improving all of those things. And we think that's going to help us continue to outperform on the deposit side.

[Operator:]

[Operator Instructions] Our next question comes from David Chiaverini from Wedbush. Please go ahead with your question.

[David Chiaverini:]

I had a follow-up on inventory finance. With the new programs especially finance, auto transfer, marine transfer I was curious do these businesses have a similar risk profile as the legacy business?

[Craig Dahl:]

Yes, they have very similar risk profiles of the other parts of the businesses including manufacture, support and deal or underwritten transactions, so very similar.

[David Chiaverini:]

And given that the yields came in a little bit lower on these newer programs, is it fair to say that the risk profile is actually improved somewhat?

[Craig Dahl:]

Well, I think we've gone through on one-on-ones with most of our investors regarding the manufacturer period and the dealer period. So as assets are shipped in the manufacturer period, the rate is lower. So it's more due to the freshness of the receivable than it is the risk profile of the receivable.

[Jim Costa:]

I'll just add one comment. These are businesses and programs we've been in, so we know the asset class, we know the industries. I would just say that what came out in Q1 is more weighted towards businesses that have a relatively lower risk profile. The overall business as you can see from the history has got a very low risk profile. But within that range what came on in Q1 was something I again we’re familiar with as well as something that’s relatively lower. So to an extent, your question yes I would say affirmatively, yes, but it's not that it's new.

[Operator:]

And ladies and gentlemen, that will conclude today's question-and-answer session. I'd like to turn the conference call back over to Craig Dahl for any closing remarks.

[Craig Dahl:]

Okay, thank you. Before signing off, I want to express my gratitude to all of my fellow TCF team members who really have been focused on delivering an exceptional customer experience at every opportunity. We've got great feedback from our customers on these recent changes that we’ve made throughout the organization. So, thanks to the team. And with that, thank you all for listening this morning and we appreciate your interest and investment in TCF. Thank you.

[Operator:]

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