TCF Financial Corporation
Q4 2016 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Good morning and welcome to TCF's 2016 Fourth Quarter Earnings Call. My name is Jamie and I will be the conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer period. [Operator Instructions] Please also note that today's conference is being recorded. At this time, I'd like to introduce Mr. Jason Korstange, TCF Director of Investor Relations to begin the conference call.

[Jason Korstange:]

Good morning. Mr. Craig Dahl, Chief Executive Officer, will host this conference. Joining Mr. Dahl will be Mr. Tom Jasper, Chief Operating Officer; Mr. Brian Maass, Chief Financial Officer; Mr. Mike Jones, Executive Vice President Consumer Banking; and Mr. Bill Henak, Executive Vice President Wholesale Banking. During this presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the Company. We caution that such statements are predictions and that actual events or results may differ materially. Please see the forward-looking statement disclosure in our 2016 quarterly earnings release for more information about risks and uncertainties which may affect us. The information we provide today is accurate as of December 31, 2016, and we undertake no duty to update the information. During our remarks today, we will be referencing a slide presentation that is available on the Investor Relations section of TCF's website, ir.tcfbank.com. On today's call Mr. Dahl will begin with a discussion of the highlights revenue, loans and leases and credit. Mr. Maass will discuss expenses, deposits, capital and interest rates and Mr. Dahl will then provide closing comments, and open up for questions. I will now turn the conference call over to TCF Chief Executive Officer, Craig Dahl.

[Craig Dahl:]

Thank you, Jason. Good morning and thank you for joining us today. Before we discuss our fourth quarter results and future outlook, I’d like to make a few comments regarding the civil lawsuit filed by the CFPB last week. Unfortunately after months of ongoing discussions, we were unable to reach a resolution regarding our overdraft opt in program. I want to make it clear that we believe our overdraft protection opt in program compiles with the letter and spirit of all applicable laws and regulations at all times and that our customers elected to participate in the overdraft protection program knowingly and voluntarily. We value our customers and have a deep understanding of their banking needs and how they use our products and services. We disagree with the claims made by the CRPB and we intend to defend ourselves accordingly. Sweeping conclusions based on summary comparisons with larger banks do not account for differences in business mix and demographics. Our full media statement and fact sheet regarding this matter are available on our website and beyond that it is not our practice to comment on ongoing litigation. So moving to Slide 3, we look at some of our key observations from 2016. I'm pleased with our results overall as we reported net income of $212 million, an increase of 7.6% compared to 2015. Our performance in 2016 reflected the benefit of our diversified business model, our continued focus on meeting our customers financial needs while market volatility and softness in the auto lending industry provided some near term headwinds, our long term results continue to be driven by our commitment to our four strategic pillars. The diversity of our business mix allowed for improved annual results with strong growth in wholesale banking mitigating the impact of continuing run off in consumer lending as inventory finance grew 15%, leasing and equipment finance grew 8% and commercial grew 4.5% for the year. Credit quality performance remains very strong overall and our loan and lease origination capabilities continue to be a competitive advantage for us. This will continue to serve as a primary catalyst for ongoing improvements in both growth and profitability. Improved operating leverage remains a big focus for us as we look back on 2016 and I'm pleased with the success we achieved around the strategic pillar. Revenue growth outpaced expense growth by over $36 million in 2016 despite the headwind of a declining net interest margin. The strength of our deposit base in terms of its granularity and focus in core transaction accounts have been once again become a source of relative strength as we appear to be nearing an end to a prolonged period of very low rates. Slide 4 shows key 2016 financial highlights compared to 2015 with trends remaining very positive. Loan and lease originations increased 10.3% year-over-year while average deposits were up 7.2%. We also saw nice increases in revenue and book value per common share. ROA of 1.05% increased two basis points while return on average common equity declined six basis points. Credit has performed at an exceptional level as non-accruals declined 9.5% year-over-year. The 24% increase in provision was largely driven by the overall growth of the loan and lease portfolio and additional reserve coverage in the auto portfolio. Slide 5 shows similar trends when comparing fourth quarter 2016 results with fourth quarter 2015, we will review these quarter results in more detail throughout today's presentation. Looking at Slide 6, total revenue in the fourth quarter of 2016 increased 1.8% compared to last year driven primarily by higher net interest income. Our net interest margin which is one of the highest in the industry remained relatively flat for much of the year but declined four basis points in the fourth quarter to 4.3% primarily due to the seasonally lower yields in inventory finance and run off in our first mortgage portfolio. On the right side of the slide, you can see the level of diversification we have from both the interest income and non-interest income perspective. TCF is not overly dependent on any single revenue source which prevents challenges in one business from overly impacting consolidated results. Turning to Slide 7, our commitment to diversification is further evidenced in the mix of our loan and lease portfolio. Year-over-year growth in our loan and lease portfolio was 2.3% or just over $400 million. This was driven by the previously mentioned growth in inventory finance, leasing and equipment finance and commercial. The overall growth was partially mitigated by the continued run off in the first mortgage portfolio. Excluding this run-off portfolio, the remaining balance has increased 5% in 2016. As we have previously mentioned, the growth of auto finance would continue to slow in 2016 compared to prior years and we expect that trend to continue with balances remaining relatively flat in 2017. As we move into 2017, the commercial portfolio is an area we could see additional growth. We have been very selective in this portfolio in recent years as pricing and structured competition in the commercial market were intense and we foresee better growth opportunities in other asset classes. Today the commercial market is becoming more favorable and we have capacity to grow unlike some other banks. We have been very active during 2016 and adding new commercial bankers in select markets and are optimistic about the opportunities we are seeing. Credit discipline remains a core competency at TCF and these new opportunities will not represent a departure from our proven level of conservative banking. At this point, the rate cycle you should expect the trend of a gradual shift in our portfolio towards more wholesale assets to continue, we would also expect that an improving overall economy can enhance the growth rates in our wholesale businesses. Slide 8 highlights our ability to continuously generate strong loan and lease originations. Our 2016 originations increased 10.3% from 2015. In addition we saw increases in multiple asset classes. I talked earlier about the advantages our unique business model provides. It all starts with our ability to generate strong loan and lease originations, we have multiple origination channels that create flexibility while allowing us to maintain our discipline in price, structure and credit quality. Slide 9 provides an overview of our loan sales which increased by over 40% in 2016. In this period of low rates, we were able to recognize significant value by leveraging our origination capabilities into the secondary markets. However as I mentioned earlier, the relative profitability in the secondary market for auto loans has declined significantly in recent periods. These markets conditions have resulted in lower gain on sales spreads that challenge the effectiveness of our originate to sell model in auto. If negative market conditions persist we will manage to a different outcome, better pricing could offer the potential for improved performance for – us in this business. On Slide 10 you can see that our Service for Others portfolio grew 28% in 2016 with an average balance of $4.9 billion. Our loan and sale and servicing strategy which include both consumer real estate and auto generated $125 million of revenue in 2016 through gains on sales and servicing fees. Our servicing revenue has steadily grown each of the past few years and increased 29% to 40 million in 2016. Slide 11 highlights a strong yield performance despite a low rate environment. While our yields have remained steady through much of the year we did see six basis points of compression quarter-to-quarter. After a typical seasonal uptick in inventory finance yields during the third quarter yields came back down in the fourth quarter. Overall, we are unable to achieve consistent loan and lease yields through a combination of diversification and disciplined pricing. Turning to Slide 12 you can see the – after several years of improvement overall credit quality has stabilized. Our 60 day delinquencies remain very low at 12 basis points. Provision increased to $66 million in the year largely driven by the overall growth of the loan and lease portfolio and additional reserve coverage in the auto portfolio. Non-performing asset levels continue to decline as well due to improving credit quality trends within the portfolio. Taking a more detailed look at our net charge-offs on Slide 13, you'll see total net charge-offs declined two basis points year-over-year to 27 basis points and remain in the low end of our expected range. We saw continued strong performance in our wholesale portfolio with just six basis points of net charge-offs. This will benefit us as wholesale becomes a larger portion of our total portfolio. Consumer net charge-offs increased just two basis points year-over-year to 53 basis points. This again demonstrates the benefit of our portfolio diversification while auto net charge-offs increased 1.09%, consumer real estate net charge-off declined to 0.17%. As we mentioned last quarter the increase in auto net charge-offs was expected due to seasonality. Our current performance – all that remain in line with our expectations given the softening of used car valuation With that I'll turn the call over to our Chief Financial Officer, Brian Maass.

[Brian Maass:]

Thank you, Craig. Turning to Slide 14, non-interest expense increased 1.2% in the fourth quarter of 2016 compared to the prior year and just 1.7% in 2016 compared to 2015. Meanwhile 2016 revenue increased 4.1% this demonstrates our continued focus on creating operating leverage. Overall the efficiency ratio declined below 69% in the fourth quarter of 2016. I’ll remind you that our goal is to optimize and manage expenses based on our revenue growth. We continue to work on initiatives internally that help us achieve this goal going forward. For example, we will be closing 10 in-store branches in Minnesota early in the second quarter. This coincides with an extension of our Cub Foods contract that we signed recently. Similar to other brands rationalization initiatives. We will reinvest the savings into our digital channels and new products as we aim to improve the customer experience an increased the efficiency over time. Slide 15 shows our deposit mix which is the primary funding source for our loan and lease growth. Average deposit balances have increased 4.8% year-over-year including checking account balances which were up 6.4%. In fact this increase has occurred while we have been implementing our brand rationalization strategy over the past few years. Overall 2016 deposit growth continued to exceed average loan and lease growth. In addition, the average interest cost for our deposit declined two basis points compared to the third quarter as CD balance declined. Turning to Slide 16, all of our capital ratios have remained strong and earnings accumulations increase our tangible book value per common share 7% in 2016. We declared a common stock dividend of $0.750 per common share earlier this week. Given our capital position our executive management team and board continue to evaluate capital deployment options that include dividend increases, stock buybacks, organic growth and corporate development. Slide 17 demonstrates how we are well prepared for rising interest rates given our mix of short-term and variable rate loans. I’ll remind you that deposit composition provides a competitive pricing advantage in rising rate environment. With the most recent rate hike we would expect margin trends to begin to stabilize. With that, I will turn the call back over to Craig Dahl.

[Craig Dahl:]

Well thank you, Brian. Slide 18 provides a recap of our strategic pillars. We continue to generate strong loan and lease originations that provide, portfolio diversification and revenue growth, although maintaining credit quality discipline. Our origination capacity also provides flexibility to adjust as a composition based on changing market conditions. We have diverse revenue sources that are flexible as we look to drive profitable growth moving forward. We are making strides from an operating leverage perspective but also continuing to invest in our businesses. Finally, we continue to maintain a retail deposit base that supports our loan and lease growth and provide a competitive pricing advantage in a rising rate environment. We do all of this with a strong enterprise risk management and credit culture. Turning to Slide 19 as we look ahead to 2017, our four keys here would be listed out. Number one, is to optimize our diverse in loan and lease origination platform to grow asset classes that will drive profitability. We’re going to continue to leverage technology to create new product and service solutions that meet the financial needs of our customers and drive operating efficiencies. We have a continued emphasis on talent management which is extremely important with our diversified business strategy and we expect to benefit from a more favorable operating environment. Our focus is the same superior and sustainable financial performance. Let me close by saying the fourth quarter presented unique challenges for TCF. However I am confident and disciplined by which we make decisions here at TCF and I’m optimistic about the opportunities in front of us. I expect the challenges confronting our business model to continue to lessen and the strength of our funding base and loan origination capabilities to continue. I also want to express my sincere appreciation for all of the efforts of our team members in 2016 as they work hard to create great customer experiences every day. I'm looking forward to 2017. As we open it up for questions, I'll remind you that our media statement and Fact sheet regarding the CFPB matter are available on our website. Yes, open it up for questions sorry thank you.

[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. Probably guess that I'm going to ask about auto. You look at your numbers and everything looks good. It was actually a good quarter except for that auto gain line and some of the charge-off numbers, and I guess I don't know if it's Mike or Craig, maybe just talk about the main drivers of that weaker auto gain number in Q4. And is that an aberration or is it something that you feel is more permanent?

[Craig Dahl:]

It wasn't a result that where we were happy with. Our gain on our sales strategy has not produced a consistency we’ve been looking for. And so we're going to take a look at that I mean what the investor desires what our advisors what their views are, what our own outlook is all kind of goes into this quarterly strategy. So with that I kind of turn it over to Mike and may be talk more about the specifics.

[Mike Jones:]

Yes Jon, this Mike as Craig mentioned these reduced gains in the quarter on auto driven by market conditions were definitely below our expectations and where we feel they need to be from an acceptable return standpoint. However as we've gone throughout this year, we’ve kind of seen consistency in the volume of loan sales on the auto side but really changing market conditions that have contributed to the kind of reduction in the gain rates and those market conditions include the rising interest rates specifically since the election and going from the third quarter into the fourth quarter. We've seen kind of some increase supply kind in the secondary market and then changing views on auto credit side, many market constituencies including rating agencies. I think if the negative market conditions persist, we'll need to manage to different outcomes and while we were committed to the platform, the securitization platform in the fourth quarter if we cannot generate an acceptable return, we’ll need to shift to kind of our strategy. And John as you probably heard on other financial institution cause, it's a tough operating environment for the auto industry and while that provides diversification for us, we need to balance that with the other pillar that we have and that's profitable growth. So, I think in Craig's statement that he kind of opened the call and we talked about it stabilizing and not being as much of the growth story as we go forward. And when we talk about stabilization it makes up only 15% of our portfolio and that’s been pretty consistent. And then the last thing I would say, I’m confident the management team can manage to different outcomes if this negative market conditions persist and that’s including pricing and credit or levels of originations.

[Jon Arfstrom:]

Okay. I mean, the gain number is a big line for you. Last year the $35 million in gains, maybe $0.12 or $0.13. I guess what you're saying right now you haven't seen changes yet that make you feel comfortable enough to say that this is just an aberration. Is that fair?

[Mike Jones:]

That's fair.

[Jon Arfstrom:]

Okay. The other part on auto that you talked about seasonality. Do you think that these charge-off numbers can reverse course or at least start to stabilize?

[Mike Jones:]

John, this is Mike again. I think there is a couple factors. We're impacted by the industry trends around overall collateral values and kind of general economic conditions that are impacting kind of the auto market. The other dynamic that we have is the portfolio from an age standpoint continues to increase and it increase the age of the portfolio by another month going into the fourth quarter. So that if you think about it right the losses become higher as the portfolio little bit ages. Additionally there is seasonality to our book and kind of our peak points our third quarter and then fourth quarter even higher than that. So, if you look at the seasonality for December for both delinquency and charge off, there are about 29% and 27% respectively above the average for the year. So, that gives you kind of a feel for what happens from a seasonality standpoint. So we would expect those to come off this kind of high wire markets as we kind of go into the first quarter coming off that seasonality. The other thing I would say John and how we kind of look at this and we kind of tie it back to the pillar of diversification right and if you look at the consumer book on a year-over-year basis that's only up 4%. So I think the diversification of our portfolio with the consumer residential coming down has offset that the increase in the auto portfolio as well so, I just like to add that comment.

[Jon Arfstrom:]

Okay. Last question here. If the market does not improve, is this the product that you would feel comfortable holding on your balance sheet? I know it's a decent sized piece of your balance sheet but if the production is still there, is this a category that we could see grow on your balance sheet?

[Craig Dahl:]

I think I have - talked about over the past two quarters about our view on this segment about trying to maintain profitability not necessarily overall growth in the portfolio. We don t expect it to grow in 2017 but have – again using the diversification that we continue to have. We’re not going to use just one quarters worth of data we’re going to monitor, we’re going to continue and as I Mike said if these conditions say they same we’re going to manage the different outcomes so that would – that’s really what I can say about it at this time.

[Jon Arfstrom:]

Okay. All right. Well, thank you for taking those questions. The rest of it looks good this is just the one, the big issue that I think everybody has, so thanks for taking the questions.

[Operator:]

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

[Ken Zerbe:]

Great. Thanks. Might as well carry on with the auto questions. Craig, you've talked in the past just about improving the profitability of the auto portfolio, right? And obviously moving down market, doing less of the prime, doing more of the not as good prime stuff. I guess the question I would have, is there any way -- how should we think about profitability? As I look at loan yields, so I guess page 11 of your slide deck, the yields have gone down, the charge-offs have gone up, as the profitability for the segment, presumably using those measures would actually have declined. Whether sequentially or year over year it doesn't really matter. It's still lower. On a go-forward basis are you able to provide enough information for us to see how profitability is improving in auto? Or is it just credit -- charge-offs are probably the best measure to look at?

[Craig Dahl:]

Well first of all I have not said that we’re going to less and better credit quality and more in lower credit quality we basically just talked about adjusting the mix of our overall origination and possibly doing fewer at the high end but not necessarily more at the low end so want to clarify that.

[Ken Zerbe:]

Sure my mistake I apologize.

[Craig Dahl:]

Okay. And then secondly that auto finance if you only are taking the yields provision and operating expenses and you take gain on sales totally off there then you’re not really seeing what’s the true profitability of the – portfolio is. Now that’s where the surprise came to us in that fourth quarter from – as compared to other numbers and so that’s the evaluation going forward. If can’t maintain the level of gain on sales for this size of the business then we’re going to again manage the different outcomes we’re not at that position yet.

[Ken Zerbe:]

Got you. Okay. All right. No. That helps. And then, just a quick one, looks like the tax rate was a little bit higher this quarter. Is there anything unusual in there?

[Mike Jones:]

No there is nothing, it was slightly higher this quarter but I would expect it to our normal effective tax rate will still be in that 34.5% to 36.5% range on both.

[Ken Zerbe:]

Got you. And then a last quick one, how much did the pension evaluation adjustment add to earnings?

[Mike Jones:]

Yes, so that wasn’t adjustments in the fourth quarter you can see when you look at our expenses it was about $2 million that contributed so that’s part of the reason that's why earnings down in the quarter.

[Ken Zerbe:]

Thank you very much.

[Operator:]

Our next question comes from Bob Ramsey from FBR. Please go ahead with your question.

[Bob Ramsey:]

Hi, guys. So still on auto, I'm just curious, I mean it sounds like the market conditions maybe haven't changed much yet because you don't sound very confident. Just wondering if you had any sort of sense of how we should think about the first quarter, understanding the rest of the year is probably pretty difficult to predict?

[Craig Dahl:]

Bob I mean the process we’re going through would be very similarly and I apologize if we don’t serve confidence so, but really it starts with the origination levels and mix and then what we’ve been approaching on how are – portfolio sales are going to occur whether it’s securitizations or whole loan sales and we do and assessment on that and that process is continuing here in the first quarter. Mike you’ve any other comment on that.

[Mike Jones:]

No I think that’s right.

[Bob Ramsey:]

Okay. Is there any reason to think that the gain on sale margin would be any different in the first quarter than the fourth? I guess just looking at market conditions?

[Mike Jones:]

I think this is Mike Jones I think the focus for us as we go into the first quarter is look to more of the whole loan sales then it would to the securitization on marketplace which we executed in the fourth quarter. As I think we’ve talked about in the past are best execution on the auto side would be the whole loans first and then securitization second. So I think right now our approach is to work with several different investors kind of around the whole loan purchases versus and arranging the securitization market in 1Q that would be kind of our preference.

[Bob Ramsey:]

Okay. All right. Fair enough. Maybe shifting gears to net interest margin. Was the movement in the fourth quarter purely seasonal? Or was there anything else that sort of impacted the margin?

[Brian Maass:]

This is Brian what you do see is that seasonality of inventory finance yields is coming down in the fourth quarter so that’s what pull that down in the fourth quarter. But we are beginning to see our net interest margin stabilize as we look out to 2017 with this most recent rate hike that came in December. So I think you kind of look even back over the last four years right our net interest margin has declined from 4.8% to around 4.3% that it’s at today and even over the last few quarters I have been guiding it down three or four basis points of the quarter all year long. But we do see that starting to safe less as we begin the 2017 with this most recent rate hike. Couple other positive things that out there when you look at inventory finance yields or you look at the even the variable portion right of our consumer real estate portfolio we have hired yields that we start 2017 than we start at 2016. So I think that’s a good thing towards our net interest income as well as towards the net margin as well as there is other portfolios that we have I’d say fixed rate side where we’re starting to see kind of stabilization where new loans are come on rates very equivalent to the loans that running off. So again I’m optimistic kind of on the margin side you have to keep it all in perspective but we start off with the 4.3% margin but I’m optimistic that we’re going to see some stabilization there as we’re going to 2017.

[Bob Ramsey:]

Okay. And stabilization is great. Do you think with one more increase we'll start to see a little expansion? Or do think that it will take more than one?

[Brian Maass:]

If we get – it depends kind of – it depends on a lot of factors right it’s not just what happens to the fed funds the matters that we kind of get, a shift in the whole curve or not so we do have some exposure obviously in the variable rate but it matters kind of what happens to the – five year rate part the curve as well. But no we get multiple rate hikes in 2017 I could see our net interest margin increasing.

[Bob Ramsey:]

Okay. Great. Thank you for taking the questions.

[Operator:]

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

[Dave Rochester:]

Hi, good morning guys. Back on the expenses, that $2 million reduction from that pension adjustment, just wanted to clarify, that's a one-time benefit for 4Q right, that doesn't carry forward?

[Brian Maass:]

Correct yes, that’s just one-time kind of mark-to-market item that comes through the fourth quarter but overall when you look comp and benefit expenses for the year they have been come down right we have as we’ve been able to rationalize our branches in fact you can really see details but underlying salary as component of that are down both on quarter-over-quarter basis and year-over-year. So there is some other adjustment that go through that line obviously.

[Dave Rochester:]

Absolutely. Then you've got the branch consolidation coming up. I'm just curious, with that work that you've got coming up, what is your outlook for expense growth this year? I know you had sort of guided to a 1% to 2% type growth expectation for last year, do you think that holds this year?

[Brian Maass:]

What I would say is – we don’t really have a specific target we did say for this last year that it would be 1% and 2% and it did come in at 1.7%. As we look towards next year I think what we’re committed to is looking at how much revenue is growing and making sure that revenue just continues to grow faster than expenses I don’t have a specific number to give you on that side but we’re focused on making sure that it’s not growing more than what revenue is growing.

[Dave Rochester:]

Okay. Great. And then just a switching back to the NIM discussion, it sounds like you're not expecting really NIM expansion with this December rate hike, but if we continue to see more rate hikes through the year we could potentially get some with the second or third rate hike, is that right?

[Brian Maass:]

That’s correct.

[Dave Rochester:]

Okay. Great. And then just switching to auto, hate to belabor the point here, but following up on the previous question, are you possibly considering pairing back that platform a bit, reducing costs there?

[Craig Dahl:]

Yes this is Craig. I mean we would be considering all of our alternatives, if we're going to make a change in strategy and again as we're going to determine where we believe that the market conditions are going to permit us to go and if they are going to continue on the way they looked in the fourth quarter then we are going to go a different path.

[Dave Rochester:]

Okay. And then, just one last one, just given the outlook for a flat auto book this year, how are you thinking about loan growth overall for 2017? Are you thinking that the mid single-digit pace of growth is still achievable with a flat auto growth? Or are you thinking maybe a low single-digit growth is more likely?

[Brian Maass:]

Yes this is Brian. I would say mid single digits is probably a good outlook for 2017, even if auto is flat as it was this year, you look at our wholesale businesses, they grew 8% on this year which was good and we are optimistic that if we have some fiscal policy changes, faster economy or some individual or corporate tax changes that we're going to see a faster growing economy. So we think there is additional growth ahead for those businesses as we look towards 2017.

[Dave Rochester:]

Okay, great. Thanks guys.

[Operator:]

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

[Steven Alexopoulos:]

Hi, good morning, everybody. Out of the $35 million of service charges in the quarter, how much of that was from overdraft?

[Brian Maass:]

Steve we don’t report that line externally on our earnings and releases.

[Steven Alexopoulos:]

Okay. Is there a way to potentially frame though how much of that could be at risk, given the CFPB lawsuit?

[Brian Maass:]

I mean at this point, that would be very difficult to predict again I think we stand behind as Craig mentioned in the opening around that we feel that our opt in program is fair and we're going to continue with that.

[Steven Alexopoulos:]

Okay. Is their investigation only to overdraft fees or are they also looking more broadly at sales practices and incentives?

[Tom Jasper:]

Hi, this is Tom Jasper, you can read the bureau's release, you can read our media statement other than those things Steven when I kind of comment around litigation items.

[Steven Alexopoulos:]

Okay. Okay. And then not to beat a dead horse on auto, but while you guys are evaluating the market it wasn't clear to me, are you still currently originating that product or have you taken a pause here?

[Tom Jasper:]

No we are continuing to originate the product.

[Steven Alexopoulos:]

Okay. And then, just one last one, on the deposits, you guys cite in the release a time deposit promotions, could you give some color on the promotions you've been running and how you're thinking about deposit betas this year? Thanks.

[Brian Maass:]

Yes, so this is Brian. I would say when I say there is we have been able to when you look overall for the year right we had $500 million growth in deposits, we have had about $400 million in loans and we are trying to manage kind of deposits to make sure that we're funding our sheet with it. So as part of that, we have been able to manage some of our promotions down and also maintain our pricing discipline, so that is why you saw couple of basis points improvement overall in our deposit cost, we feel really good kind of above our granular retail deposit base where two rate hikes in and we have seen very favorable performance out of our portfolio in fact of the $500 million increase on a year-over-year basis, $300 million of that came from checking balances, so the stable part of our base continues to grow.

[Steven Alexopoulos:]

Okay. And do you have any update assumption for 2017 on the overall deposits?

[Brian Maass:]

No I don’t have specifics data assumptions, we think we will benefit kind of with the retail deposit base that we have, obviously as you get towards the third and fourth rate hike of 100 basis point increase note the payers will start to go up but so far we have seen really good performance on our book.

[Steven Alexopoulos:]

Okay. Thanks for all the color.

[Operator:]

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

[Jared Shaw:]

Hi. Thank you. Just closing the loop on auto, you had said that the part of the deterioration or part of the increase in charge-offs was just the portfolio aged. When you look at the individual vintages or vintage years, are those performing as prior vintage years entered the same aging, or are they actually deteriorating within the vintages?

[Mike Jones:]

This is Mike Jones. As you have seen kind of in the auto industry right, I mean we are not immune to that, so as that progresses those vintages are going to be impacted on what is going on in the auto industry and itself and if you look at kind of on a year-over-year basis, charge-offs and delinquencies have increased in the auto industry. So I would say that those vintages have been impacted, the more recent vintages have been impacted by that.

[Craig Dahl:]

This is Craig. The only thing I would add is when we are talking about time and book it is more about the fact that our new originations have slowed so that this vintage becomes more of the percentage of the total than have we had 8% growth rate, it would be that aging would be offset by the increase in the new book. Does that make sense?

[Jared Shaw:]

Yes absolutely.

[Craig Dahl:]

Okay.

[Jared Shaw:]

That's good color, thanks. And then on the inventory finance it looks like obviously good growth there. Did you see any impact of a pull forward into fourth quarter with the expectation for higher rates? And as corollary to that, how does the pipeline look as we're going into the first quarter here?

[Craig Dahl:]

Well those are all good questions. We do have primarily a variable rate asset here, so we will it will move with change in the indexes, so that is a positive for us. In addition, the first quarter is our - as you always talk about is our seasonal peak in this book and it's due mostly to the types of products and the seasons that these products bring. There is always going to be some carryover of snow product by the end of March, there is always going to be - and I would say renewed shipment activity in ATVs and there is always going to be the bigger shipments in Lawn & Garden. So our expectation for the first quarter continues along our seasonal average which is our highest quarter. And also here Jared I'm trying to point to that year-over-year comparisons are best in inventory finance not because of that seasonality, so not taking a linked quarter growth but looking at March to last March and June to last June. Okay.

[Jared Shaw:]

Great. Thanks and then just finally, can you talk a little bit about what you've seen in terms of deposit retention? I know it's maybe a little early but from some of the branch consolidation closures that you've already had and the shift to digital have you been able to -- have you been happy with the retention of those deposits? Along the lines of what you thought? And as we look at these closings coming up, should we expect to see similar results in terms of deposit retention?

[Brian Maass:]

Yes so this is Brian, we have been very pleased with the results on closing those branches and the results, I would say despite the closures that we've had this year and I would say in previous years this year alone overall we saw our balances in our supermarkets even increased in 2016, so we haven’t seen, it is within our expectations and we think it is doing well.

[Craig Dahl:]

Yes the other thing that I would add is you currently seen a shift in the retail banking and the banking industry kind of around convenience and it is being redefined and it is being redefined as digital where people want to bank when and where they want, so branches are not as dominant as they were in the past around servicing those customers needs. So we are making those investments and making those shifts to ensure ourselves that we keep pace with our customers needs.

[Jared Shaw:]

Great, thank you.

[Operator:]

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

[Chris McGratty:]

Hi good morning, everyone thanks for taking the question. Craig, maybe on the strategy, the -- so you guided last quarter to slower balance sheet growth for auto and this quarter the disclosure on commercial growth picking up, if you kind of net those two together how should we be thinking about overall portfolio growth? Is this still kind of a mid single-digit outlook? I'm just trying to gauge the pace of the commercial industry.

[Craig Dahl:]

I will let Brian cover that.

[Brian Maass:]

Yes. So this is Brian. Yes I would say mid single-digits is what we guide for next year. Again auto was flat in 2016, we did have run off of our consumer real-estate portfolio. As we look towards 2017 - and our wholesale businesses this year grew 8% and when you look at some of the potential tailwinds to the economy we see no reason why those businesses couldn't potentially grow faster next year that’s how we get to mid single digits.

[Craig Dahl:]

And the other thing Chris I were point out there is, the commercial activity those are significantly different transaction sizes than in our the rest of our national lending businesses which tend to have really transaction sizes less than 300,000. So, we could create some scale there faster with - then we can at some of our other segments.

[Chris McGratty:]

And this is -- is this commercial or commercial real estate? I'm just trying to gauge.

[Craig Dahl:]

Yes, it’s primarily commercial real estate.

[Chris McGratty:]

Okay. In terms of - if I could ask a follow-up on operating leverage given the comments you described in your prepared remarks, I guess how quick is this recalibration if there is one or the shift in strategy that you're kind of undertaking with the auto? My sense is the first half of the year might look a little bit soft from a operating leverage, but potentially if and when it sorts itself out you might get kind of operating leverage in the back half of the year. Is that a fair assessment of what your intentions are?

[Brian Maass:]

This is Brian what I will is I don’t necessarily view it on a quarter-to-quarter basis right. I mean our overall trend is that we want to ensure that as we are growing revenue in the bank that we are not growing expenses fast and that’s what we're going to continue to trying to do over the long term.

[Chris McGratty:]

Okay, thank you.

[Operator:]

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

[Kevin Reevey:]

Good morning guys. So I think Craig in your opening remarks, you talked about 2017 and you're seeing - you expect growth in your markets. What specific markets do you expect to see the most growth in your franchise?

[Craig Dahl:]

Okay. Are you speaking to the deposit side or you speaking to the lending side?

[Kevin Reevey:]

The lending side.

[Craig Dahl:]

Well I mean that the three portfolios that we highlighted would be our expectation. The leasing and equipment finance, inventory finance and commercial and those are commercial being primarily a regional and the other businesses on a national basis. I would always try to stress on this that those business are all demand driven. We’re not creating supply there. We’re following those markets and those manufactures and those programs and so we’re still very confident about growth in all three of those of all segments.

[Kevin Reevey:]

And then on the deposit side, where are you seeing the growth from a regional standpoint?

[Craig Dahl:]

Brian or Mike.

[Brian Maass:]

Yes, this is Brian. I don’t I say it's across the footprint, I don’t think there is anyone region that would standout today.

[Kevin Reevey:]

Okay. And then - go ahead.

[Brian Maass:]

I think that’s right. I think if you look at kind of our biggest market from a population standpoint, Chicago is our biggest opportunity but again that's probably the most competitive as well so, that's the other factor that I would just add to Brian’s comment.

[Kevin Reevey:]

And then, how should we think about provisioning going into the first quarter and then the remainder of 2017? Obviously the fourth quarter of this past year was an anomaly.

[Craig Dahl:]

Well, the further items I mentioned just previously not sure if you were on but our increase in inventory finance so we do have a seasonal increase - further large seasonal increase in outstanding and so our guideline reserves around the inventory finance business do the lot in the first quarter. We would have a seasonal expectation that are charge offs in auto would trend down from the fourth quarter that would be our typical pattern and that's something that will be monitoring throughout the first quarter. The others you see are fairly benign is when you add up all the total so.

[Kevin Reevey:]

Okay, great. Thanks.

[Operator:]

[Operator Instructions] Our next question comes from Ebrahim Poonawala from Bank of America. Please go ahead with your question.

[Ebrahim Poonawala:]

Good morning guys. Most of my questions are asked, just one follow-up question on what's the level of operating leverage we should expect if you do decide to pare back that business in terms of the securitization platform? Like is it going to be materially in terms of how we think about its impact on expense growth this year, even if you do it later in the year?

[Mike Jones:]

This is Mike Jones. I would go back to Brian's comment, trade in and the whole pillar around operating leverage and our strategy there is to grow revenues faster than expenses and we will - I can't execute against that strategy.

[Ebrahim Poonawala:]

Understood. Okay. And I'm sorry if I missed this earlier but what are we looking at in terms of what are the terms that we should follow to get a sense of whether this environment is improving or not, related to your ability to ratchet up sales or securitization?

[Mike Jones:]

This is Mike Jones as I would repeat kind of what we said kind of earlier when we made some comments right, so if this negative market condition persists going into the first half of 2017, we'll need to manage two different outcomes. So we are going to take it as we go into the first quarter and making sure that if we need to make adjustments in this business based on kind of the market conditions in the loan sales then we will do so.

[Ebrahim Poonawala:]

Got it. And just quickly touching upon capital, I know you mentioned when you were going through the slides around potential capital allocation on dividends and buybacks, I would appreciate if you can give us your thought process around both of those in terms of dividends? Is there a specific payout ratio that you are targeting in terms of buybacks, is it going to be more opportunistic or if you don't see balance sheet growth shaping out as you expect, that's where you might divert some capital towards some buybacks?

[Brian Maass:]

Yes, this is Brian. As I said in my remarks we continue to evaluate all of those options. I'm more optimistic about potential growth as we look towards 2017 or potentially improving economy. But we’ll evaluate all those options besides organic growth as far as dividend increases, as well as stock buybacks.

[Ebrahim Poonawala:]

All right, thank you.

[Operator:]

Ladies and gentlemen, we 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. We'd now like to turn the conference call back over to Mr. Craig Dahl for any closing remarks.

[Craig Dahl:]

Well, thank you for joining us today. I'm pleased with our overall results of 2016 and optimistic about our opportunities in 2017. We will remain focused on our four strategic pillars as we execute our profitable growth strategy, while continuing to make key investments throughout the organization. I look forward to keeping you updated on our progress. Thank you.

[Operator:]

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