TCF Financial Corporation
Q3 2015 Earnings Call Transcript

Published: 22 Oct 2015

[Operator:]

Good morning. And welcome to TCF’s 2015 Third Quarter Earnings Call. My name is Jamie, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] At this time, I’d like to introduce, Mr. Jason Korstange, TCF’s Director of Investor Relations to begin the conference call.

[Jason Korstange:]

Good morning. Mr. William Cooper, Chairman and CEO will host this conference. Joining Mr. Cooper will be Mr. Craig Dahl, Vice Chairman and President of TCF Financial Corporation; Mr. Tom Jasper, Vice Chairman; Mr. Mike Jones, Chief Financial Officer; Mr. Jim Costa, Chief Risk Officer; Mr. Mark Bagley, Chief Credit Officer; and Mr. Tom Butterfield, Chief Information Officer. During this presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are predictions and that actual event or results may differ materially. Please see the forward-looking statement disclosure contained in our 2015 third quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of September 30, 2015, 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. Cooper will begin with an introduction, Mike Jones will discuss third quarter highlights and expenses, Mark Bagley will discuss credit quality, and Craig Dahl will provide a business update and closing comments. We will then open it up for questions. I will now turn the conference call over to TCF Chairman and CEO, William Cooper.

[William Cooper:]

Thank you, Jason. This is, I think, my 106 quarterly earnings release, if memory serves me right, 104 of them were profitable, including this one. We earned $0.29 a share, which is pretty much spot on what the street has at, one-tenth on assets, return on assets. I think we are still in a similar environment that we have seen over the last year or so, although very low interest rates that’s put pressure on margins in -- across banking industry. The -- as you will see in data as we talk about it later, our operating leverage continues to improve and we have got very strong loan origination in all our categories, which gives us a lot of flexibility in connection with managing our balance sheet from a concentration point of view, geographic point of view, with the ability to sell certain categories of assets or booking in the balance sheet and indeed we have been successful in that connection with all loan sales and securitizations, and that continues to be a core competency that or even improving on this as we go forward into coming years. Our credit quality remains low, I think, we charged up 23 basis points this quarter, and I think that’s the lowest charge-off rate since 2007. So we have got stable and good credit quality. We remained well-positioned for rising rates and we will talk about that a little bit later on, but basically we have a very rate sensitive asset portfolio and not very rate sensitive on deposit portfolio. And we were not -- we are also announcing that we are increasing our dividend by 50% to $7.05 and this is first increase in quarterly dividend and since when?

[Mike Jones:]

2008

[William Cooper:]

Since 2008, all that being good news. Page four of the deck kind of shows our comparison to our peers. It’s a second for our peer comparison. But as you can see in all the key metrics, TCF outperforms it peers. We have higher net increase income, more fee income, higher revenue, a substantial amount, higher return on assets, yield on our loans is higher and the cost of our deposits is pretty low. And one of the highest net interest margins in the banking business at 4.40%, albeit where that margin is continues to come under some pressure because of continued low interest rate. You can see how our balance sheet is structured differently then our peers, TCF balance sheet is 85% loans, as compared to 65% for our peers and we fund that with 80% of them our balance see core deposits. Those core deposit over 90% of those deposits are FDIC insured, which demonstrates that they are relatively small balance not hot money brought in by our core banking operations, which is really important thing in the banking industry in connection with a stability of your funding sources and it’s one of the reasons why our deposits, why our cost of funds is much less rate sensitive than a lot of other banks and we have only got a little over 5% in borrowings. And so we feel like we are -- it’s a pretty good quarter. And with that, I’ll just turn it over.

[Mike Jones:]

Thanks, Bill. If you move to slide five, which shows our performance for the quarter comparing third quarter 2015 results with third quarter 2014 results. Loan and lease originations continued to be strength for the organization, up nearly 12%. We will continue to look to fund our loan and lease growth through core deposits and average deposits were up 5.4% on a year-over-year basis. While this core deposit growth is at market rates, it will positively position the company for the future as we enter into a rising rate environment. We have a great franchise with the large portion of our deposits in low or no interest cost products. Credit metrics continue to be stable and provide leverage to the profitability in the organization with provision down 36% and non-accrual loans and leases down 25% on a year-over-year basis. Revenues are down slightly driven by reduction in gain on loan sales within the quarter as fewer loans were sold out into the marketplace. Turning your attention to slide six. Third quarter results were relatively flat on a linked-quarter basis with earnings per share at $0.29. Revenues were down slightly in the quarter compared to second quarter, offset by positive results around credit. Credit on a linked quarter continues its positive trend. And Mark Bagley, our Chief Credit Officer will talk more in detail about credit later in the presentation. Return on average assets finished the quarter at 1.10%, unchanged from second quarter. And we continue to grow our tangible book value per share generated by the positive core earnings from quarter-to-quarter. Turning to slide seven. Third quarter revenue was impacted by higher average loan and leases balances in our auto finance business, which was offset by the seasonal reduction in our inventory finance business. Bank fees and service charges strengthened on a linked-quarter basis, up nearly 2%. However, still was impacted by consumer behavior changes, as well as higher average checking account balances per customer when you're looking at that line item on a year-over-year basis. Revenue was also impacted by decreased gains from slightly reduced loan sales. We did execute within the quarter our third securitization in the auto space. Net interest margin decreased in the quarter to 4.40% as we saw continued margin compression as the higher yield in first lien consumer real estate book continue to run off. And we originate loans in this competitive low interest rate environment. If you look at the right side of the slide, this continues to show the foundation of our business model. Diversification across our revenue source is both in the earning assets that generate our interest income and the fee income generated by both side of the balance sheet. Turning to slide eight, non-interest expense as a percentage of total average managed assets decreased again this quarter as total non-interest expense decreased $1 million. A couple key points to keep in mind when looking at expenses for TCF is the fact that we have for one, a business model that naturally requires higher comp and ben as our loan and lease portfolio makes up 85% of total assets. And this compares to the peer level of 65%. Additionally, we have a large service portfolio for others. And secondly, our operating lease depreciation, which we view as a transactional expense as this expense line item has an offsetting revenue in non-interest income on the leasing revenue line. With that said, as we move forward to the future quarters, we will continue to look for ways to optimize the expense base at TCF through leveraging asset growth and automation. But as you can see from this slide, we have maintained expenses pretty flat over the last five quarters while growing assets over that same period around 5%, generating some positive operating leverage for the company. We still have some work to do in this area but we are making progress. With that, I'll turn the call over to Mark Bagley, Chief Credit Officer, to talk about credit.

[Mark Bagley:]

Thank you, Mike. As mentioned, the stability of credit quality continues. On slide nine, beginning with the top left chart, our 60 plus day delinquencies for 17 basis points for September 30, 2015 consistent with credit a year ago were up from 10 basis points at June 30, 2015. This increase was associated with delinquencies that have been brought current subsequent to quarter end. Nonperforming assets were $265 million at September 30, 2015. It was a decrease of $78 million from a year ago, relatively flat with the prior quarter. The decrease from a year ago was primarily due to the residential real estate TDR sales that occurred in December of 2014, which included $40 million in non-accrual loans as well as improved credit quality and continued efforts in working out our problem commercial loans. The provision for credit losses was $10 million for the third quarter of this year, down from $16 million at third quarter of the prior year and $13 million on a linked-quarter basis. The decrease in both periods was driven by improved credit quality in both the consumer and the commercial real estate portfolios. As Bill mentioned, the net charge-offs were 23 basis points for the third quarter of 2015. It was down from 66 basis points for the third quarter of 2014 and 41 basis points for the second quarter of 2015. Turning to slide 10. You’ll see that the decreases in net charge-offs were primarily driven by improved credit quality and the consumer real estate portfolio and the consumer portfolio when compared to second quarter of 2015. I'd like to now turn the call over to Craig Dahl.

[Craig Dahl:]

Thank you, Mark. I'll start with slide 11, which is our diverse loan and lease portfolio. This slide highlights our levels of diversity, first with our 53% wholesale, 47% retail mix and next with our six different asset types. As you can see no single asset class is greater than 25% of the total portfolio at September 30th and our year-over-year loan and lease growth was 5.1%. You can also see the slight increase in the auto portfolio to 14% at the end of the quarter. Turning to slide 12, loan and lease balance rollforward. Once again we have strong originations in the quarter at $3.9 million and that our loan growth prior to loan sales would have been 22%. The box on the right shows that our consumer real estate and inventory finance led the way in our year-over-year quarterly comparisons but once again our increase was broad-based across nearly all of the origination segments. Turning to slide 13, the loan and lease sales and revenue. TCF’s origination capacity gives us the option to hold or sell auto and consumer real estate loans, which we believe is unique to our business model. Now there are clear benefits to selling these loans, including the diversification of the product and the ability to manage geographic concentration, their support for our capital liquidity positions and it provides an immediate revenue source. In addition, the sale moves credit risk off our balance sheet and we believe we hold minimal operational risks. Now the benefits of holding these loans on the balance sheet would include clearly an improved net interest margin and revenue stream over time. We will be able to better leverage our capital and operating expenses on balance sheet and it would increase our revenue over the term of the loan. So the gain on sale of auto becomes breakeven just over one year and our breakeven on our consumer real estate sales is just under one year. So we look to balance the benefit of these options when determining the magnitude of our loan sales on a quarter-to-quarter basis. And having these options, we believe puts us in a position of strength. You can see that loan sales were $703 million in the quarter including our third auto securitization as Mike has commented on. Turning to page 14, our managed portfolio. It now exceeds just over $4 billion and in the quarter, our servicing fee income was $8 million and the loan sale of gains that we’ve already talked about were just under $18 million. Turning to slide 15, which is our loan and lease yields. We showed very little decline from the linked quarter, only a 2 basis point change. This continues to be a source of strength as our diverse portfolio allows us much more pricing flexibility than many of our competitors. The increase in the inventory finance was due to the seasonality of the portfolio and the stage of the loans within individual program status. Turning to page 16, which is our deposit generation. We now have increased total deposits for 20 consecutive quarters, which continues to fund our asset growth. We also continue to see improvement in our attrition rate and our FDIC insured deposits remain at the 90% level. Turning to page 17, our positioning for rising interest rates. Really just three comments here. 81% of our assets are variable or adjustable rate, or short and medium duration fixed rate and 62% of our deposits are low or no interest cost, with an average balance of $10 billion and average cost of only 2 basis points for the third quarter. We've also added additional data points that we would expect 55% of our loan and lease balances to reprice, amortize or prepay in the next 12 months. Turning to slide 18, our capital position. All ratios stayed virtually the same or increased slightly, as once again our earnings support our asset growth. And I'll remind you that we did announced a dividend increase on October 19th to $0.075 per share. Page 19 is our summary and this slide represents the four colors that I focused on your during our Investor Day earlier this year. Number one pillar is diversification. We really highlight that with no single asset class greater than 25%, and our diversification also has resulted in a stabilization of a credit quality. Pillar number two, profitable growth. Our strong loan and lease originations continue. We are holding our own on the margin. International lending growth has resulted in increased fee revenue opportunities that we continue to capitalize on. Pillar number 3, operating leverage. Mike did a good job of covering our expenses as a percent of total average assets and average service for others continues to decline and we are focused on expense initiatives. And number four, lastly our core funding. Again, 20 consecutive quarters of funding deposit increase. So, all of these are executed under a strong enterprise risk management and credit culture. And with that, I'll open it up for questions.

[Operator:]

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

[Jon Arfstrom:]

Thanks. Good morning.

[William Cooper:]

Good morning.

[Jon Arfstrom:]

A question maybe for Tom or Mike. Just a question on the funding equation. Obviously, we’ve seen the deposit costs start to creep up a little bit and the CD balances go up. But give us -- and you have the loan production on the other side. Just curious how you guys are thinking about the funding equation going forward and where you seeing the opportunities there?

[Tom Jasper:]

Jon, it is Tom Jasper. So, we’ve looked at the money market product as an increase year-over-year. If you look at the balances in money market that’s been a real strategic item for us and we expect that to pay dividends down the road. We continue to look for spots in the market on CDs where we believe we can position ourselves a little bit different than our competitors. But as Mike stated in his comments, the growth is coming at that market rate. So, we continue to find pockets of success, market-to-market and we look to continue to grow in the various forms, looking between savings, CDs and the money market. And we started enjoying an increase in our checking balances. So that has been a significant item for us. Mike covered it in the checking -- in checking, we are up, I think on balance, year-over-year almost 10% on the non-interest-bearing retail side. So it has been a competitive market. We are seeing other banks that are pushing to increase deposits. So, we are in a competitive environment. And I would expect that the growth that we are going to achieve is going to be coming within a market price point.

[Jon Arfstrom:]

Sure.

[Mike Jones:]

Jon, this is Mike. The only additional thing that I would add, we just have a great team and if we can get that customer in the door, we have great success in cross-selling other products to them, as well as renewing those customers for longevity in those CD products. So that’s the other thing I would add there.

[Tom Jasper:]

This is Tom again. That’s really that opportunity down the road, both on money market and on CD. They are little bit different in terms of the products and how they work. But adding the balances now, it gives us the opportunity to have a lower priced deposit down the road as we look to manage the relationship and the pricing on the products.

[William Cooper:]

The other thing, John -- by the way, I think this is the 106 question you have asked too. As I mentioned earlier, we have a very low level of borrowings. We have a lot of collateral and so we have, as a backup there, a significant amount of unused borrowing capacity so we can kind of manage that in terms of what’s the best way to fund the bank loan forward.

[Jon Arfstrom:]

Okay. Good. And then just follow-up on that, Mike. How are you thinking about the margin? It seems like there is movement in the asset yields from quarter-to-quarter, but I guess my sense is there is probably a bit of pressure on that. Do you feel like they're still a fair amount of margin erosion to go longer-term and can you keep net interest income flat to up?

[Mike Jones:]

Yeah. I think there is two dynamics that will go on there. I think we are in this low rate environment and each quarter as they push out the potential raising rates, that continues to have pressure on the margins. And then the second thing is just the amount of mix of business that we have and the runoff of that first-lien mortgage book at much higher rates and then we are adding originations at current market rates. And when you have concentration, not concentration but a focus on growing some of those other platforms like inventory finance and auto finance, they bring in a different yield mix.

[Jon Arfstrom:]

So, I guess reading between the lines, the message is still, unless we get rates it’s still modest sequential pressure each quarter. But with the production maybe there is a little lift in that interest income, is that fair?

[William Cooper:]

Jon, to some degree, there were 6% first mortgages, which didn’t go away for a long time because they couldn’t -- aren’t going away now. And we are running off the first mortgage portfolio, I think is down $500 million for the year. At 5.25% on average, so there is just that. But there is very little opportunity to increase yields. Anyway, you can improve the mix. Our second mortgage portfolio is at 550 and we can continue to grow that and that should be helpful going forward. But if everything else stays the same reaching up what, you’re going to see a little nick on the margin quarter after quarter in the whole banking industry and us too.

[Jon Arfstrom:]

Okay. Got it.

[Craig Dahl:]

I think your comments are directionally, correct. I mean, if you look at year-over-year right on slide seven, net interest income is up $2 million on a year-over-year basis but margin is down 20 basis points. So we’re originating out, that’s where we’re putting more assets on and the erosion in the margin and keeping that net interest income growing.

[William Cooper:]

The other thing is -- and we have -- as I mentioned earlier and Craig talked a little bit about this, we have the option of changing our mix a little bit in connection with putting more on the balance sheet and maybe taking less gains to improve that margin and the exchange of pumps and the pros and cons that Craig mentioned in terms of doing that.

[Jon Arfstrom:]

Okay. Thanks a lot, guys.

[Operator:]

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

[Bob Ramsey:]

Hey, guys. Thanks for taking the question. Just sort of thinking about the deposit fees and charges, I know you all mentioned in the release that I guess change there really sort of for the continued customer preference and the way people are better managing accounts. What is the best way to think about that on a go forward basis? Is flat fair? Do you think there will be some downward bias on that over time or how should we think about that? Could it be better than flat?

[Tom Jasper:]

This is Tom Jasper. So in terms of the pressure, we’ve seen this trend and I want to predict the change in the trend that significant until we start to see some improvement quarter to quarter. Though on an average balance basis, our average checking account, the retail free checking account, the balances are up 11% year-over-year and that change customer is keeping more money in their account is having an impact as well as other things that are driven by technology and balance awareness etcetera. So we’re seeing those changes. I just hesitate to make a prediction of where that can go. We’ve seen our attrition rate really slow so there is a two-part equation here which is both accounts and as it relates to the activity. But until we start to see some trendline that says we’re near the bottom, I don’t want to say you could expect that we’re at the bottom beginning this quarter.

[Bob Ramsey:]

Okay. Fair enough. Shifting to the expense front, I know you guys have sort of talked about efforts to get positive operating leverage. It looks like your operating expenses both in the third quarter and year-to-date are actually growing a little bit faster than revenues and I can appreciate it’s a tough revenue environment. But just kind of curious what opportunities are there? And if rates aren’t going to rise or are not going to get sort of build up by the fed, what can you do to improve the profitability and the efficiency at TCB?

[Mike Jones:]

Yeah, I think this is Mike Jones. I believe that we’ve definitely had a focus on expenses and I think you’ve seen that over the last couple of quarters and us trying to maintain and that kind of that 225 -- 220 to 225 level while growing the balance sheet to get leverage. I think as we roll into '16, we’re putting out targets to each of the different businesses and pushing each of the different businesses to think differently about operating leverage on how they could maximize that. So we’re getting more focus on it down at each of the individual businesses level. So I think rolling into '16, we’re trying to position the organization to get more from that.

[Bob Ramsey:]

Okay. Is it -- I mean, is it -- I guess it’s so pretty gradual shift though, I mean is the goal really to keep expenses in that same area and just leverage the expenses off of it, or can you do anything to bring the absolute expense level lower?

[Mike Jones:]

Well, I think in a business that’s trying to position itself to grow the balance sheet, we’re just going to naturally have expenses that slowly increase to the fact that we have to service the loans and leases that we’re putting on the balance sheet. But what we’d like to see is more where the expenses are kept at that kind of that 1% to 2% growth level and we’re growing the balance sheet in that 5% to 10% range and getting the operating leverage prospective. So that’s how I’d think about it and look at it.

[William Cooper:]

The problem we have now in connection with that form really is and it’s again something what’s going in the banking industry if you go, the way what’s happening with margin with interest rate, you can grow the balance sheet and not increase the balance.

[Bob Ramsey:]

Right.

[William Cooper:]

But you’re going to increase the expenses in terms of expenses of servicing and so forth. The good news assuming that it happens and I assume that it will at some point. When rates move, we will get paid for that, that balance sheet growth that we have will increase the margin faster than the loan growth when and if that occurs.

[Bob Ramsey:]

Okay. Thank you.

[Operator:]

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

[Dave Rochester:]

Hey, good morning, guys.

[William Cooper:]

Good morning.

[Dave Rochester:]

So just a follow-up on your expense comments there. So I understand what you’re saying, it sounds like that 1% to 2% or low-single-digit expense growth rate is something that should be expected for 2016?

[Mike Jones:]

Yeah, I mean, it’s hard to predict, this is Mike Jones, it’s hard to predict kind of where those levels shaked out based on the amount of assets and the balance sheet growth that we obtain in the marketplace because to some degree it’s kind of tied to what we can garnish from that marketplace. But I think directionally, that’s correct.

[Dave Rochester:]

Okay. And then switching to credit, you guys noted the net charge-offs were much lower in the junior lien bucket, was there a big uptick in recoveries in that, or do you think you maybe were closer to more normalized level charge-offs for the portfolio?

[William Cooper:]

In the second market portfolio?

[Dave Rochester:]

Yes.

[William Cooper:]

Our second market portfolio has not been an issue and charge-offs that I was referring to that loan portfolio holds.

[Dave Rochester:]

Yes. It was down nicely this quarter, so I was just wondering if this is a good level going forward if you’re seeing enough improvement in that to have confidence in this new lower level.

[William Cooper:]

It’s so low now that any little hiccup would bounce it up and down if you follow me.

[Dave Rochester:]

Okay.

[William Cooper:]

We don’t see anything coming down at this point. We are not in the energy business for instance so we don’t expect to see any of that stuff happening and my judgment and Mark can comment on this, but all of the basic parameters in credit remain stable to improving. Mark?

[Mark Bagley:]

This is Mark Bagley. To Bill’s comment, we’ve seen improvement obviously in that portfolio right over the period of time that we display and expectations are that we will continue what we got at.

[Dave Rochester:]

Great. And then just your comments on loan growth of 5% to 10% which you guys have talked about before, is that a decent rate of growth that we could expect to see just going forward in the 2016 as well?

[Craig Dahl:]

Yes, this is Craig Dahl. That’s there and the only thing I would add is my traditional commend regarding the seasonality of inventory finance, that’s going to have a different peak than the rest of our portfolio, but that is still we believe in our sites across a multiple asset classes.

[William Cooper:]

And again, we have a flexibility of that growth rate in connection with what we decide to sell versus what we decide to keep.

[Dave Rochester:]

Okay. And then just one last one, could you just update us on your thoughts on the closer look the regulators are taking on the auto side and how comfortable you are with your business given that greater scrutiny?

[William Cooper:]

One thing and I’ll turn it over to Craig in a second. One thing I’d like to point out is again our model in the auto industry has not changed or tweaked. We haven’t extended maturities. We haven’t gone down the credit pipe. We haven’t done where we sell off most of the FICO or certain scores as we have and so forth. And I think there has been some changes in that in the industry as a whole that maybe concerned the regulators or others, but that has not occurred at TCF. Craig, do you want to comment?

[Craig Dahl:]

Yeah. I would confirm what Bill talked about using the same model. We don’t compete on structure or price necessarily. We believe we’re competing primarily on service and our level of expertise and ability to execute within the business model. So we have not changed our terms. We have not changed our LTVs and we’re comfortable with our own portfolio at this time.

[William Cooper:]

And TCF is charging off almost 50% of what the industry average is in the auto business today, which kind of shows you the difference in our model.

[Dave Rochester:]

Great. All right. Thanks, guys.

[Operator:]

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

[Emlen Harmon.:]

Good morning. Look like sold a little bit less under the consumer real estate book this quarter, maybe more went on balance sheet. Earlier you spoke about you have the option to go either way there and then earn back periods around a year. Has that equation been changing at all for the consumer book that lead you to put more of that on the balance sheet than you had previously, and just kind of one of the factors that can push that one way or another?

[William Cooper:]

That’s really what Craig mentioned before, there is frozen comps that we manage in connection with few concentration risk, a few adopt geography or the mix in the balance sheet or whatever. When you take a gain, you improve capital. You don’t need the funding. There is all kind of good reasons to do it, but you only get to gain once. If you put it on the balance sheet, we break even in a year but the auto loans stick around for three years. There are new second mortgages sticking around for years and give you a longer stream of earning. The other hand, it stretches their earning stream out as opposed to taking into the front end, so we manage that. Our second mortgage business has been a great business for us. And there maybe in the future for us a little more appetite to grow that balance on the balance sheet as opposed to sell it off. Craig, do you want to expand on it.

[Craig Dahl:]

Yeah. This is Craig Dahl. The only thing I’ll add is that we’re going to -- by holding a second mortgage, we’re going to get additional margin but it can be sold at a later date. I mean that’s going to have roughly a more of a fixed outstanding versus the amortizing nature of the auto loan, which if you were to wait two years to sell an auto loan, it would be nearly gone. So that’s the other thing it gives us. As we talked about the option to hold it and whether that hold is a temporary hold or a permanent hold, those are all decisions that we can make on a go-forward basis as well as in the correct period.

[William Cooper:]

The other thing about the second mortgage is they’re collateral. They can be used as collateral for borrowings so they can become self funding if indeed that’s what you want to do.

[Emlen Harmon:]

Okay. Great. Thanks. I had that, just that one. Thank you.

[Operator:]

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

[Chris McGratty:]

Hey, good morning, everyone.

[William Cooper:]

Hi.

[Chris McGratty:]

Mike, I want to follow-up on the -- or Tom, maybe on the promotional or the deposit gathering strategies. Can you maybe specify the rate that you’re offering kind of currently the markets offering in terms of CD in the market? And where the competition is coming from as well as how much -- how long you’re going out in terms of duration?

[Mike Jones:]

Yeah. As it relates to the duration, we’ve been anywhere between 12 months and 18 months, actually little bit shorter than that, 10 months out to 18 months on duration of as it relates to CDs. And the competition, the pricing for us is one that we have to look at market-to-market, so different competitors in different markets are in different products. And so our leading price products have been anywhere between, depending on the market in 90 basis point to a 120 basis points depending on the product. And so the marketplace as it relates to the bigger banks and some of the LCR as it relates to building their liquidity, that’s been an impact to us as we see larger competitors with longer rate. But the benefit for us has been that mix if you look at the slide, you can see that we’re looking at getting greater diversity between product sets and that’s going to give us optionality going forward between CDs, money markets and savings as it relates to pricing and individual markets with product. So we see differentiation between competitors that are in some markets, not in all and that’s going to be our advantage. But we continue to grow the book. We continue to cross-sell into it. But the price -- the market pricing has picked up year-over-year.

[Chris McGratty:]

That’s good color. Just a technical one and then I’ll jump back. The yield on the inventory finance book has been bouncing around. It picked up fairly nicely this quarter. Is there anything unusual in this quarter or is this kind of the starting rate for going forward?

[Craig Dahl:]

No. Chris, this is Craig Dahl. There is a second level of rate adjustment where it’s in the manufacture, free interest period to the dealer and went it goes on to the dealer's book. So it’s kind of the age of the book at the particular quarter end. As we start to ship heavier in the fourth quarter than that will actually lower the yield for awhile. So that’s why that bounces around quarter-to-quarter.

[Chris McGratty:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Jared Shaw from Well Fargo. Please go ahead with your question.

[Tim O'Braziler:]

Hi. Good morning. This is actually Tim O'Braziler calling in for Jared. The first question on the auto sale, this is the second consecutive quarter that you chose to go the securitization row, maybe just talk to the dynamic there? Is there a lack of demand in the traditional kind of secondary markets there that put pressure you to go to keep securitization and just kind of what the expectations are there going forward?

[Mike Jones:]

Yes. This is Mike Jones. I would say that we try to balance across the different execution strategies to ensure ourselves that we position ourselves well within each of the different execution. So I wouldn’t say that there was a lack of demand and the wholesale market, we continue to kind of build out that channel and delivery for that. But we saw the opportunity to do another transaction out into the marketplace and we took advantage of that so.

[Tim O'Braziler:]

Okay. That’s good commentary there. And then just looking at your security deal, those from the potential on the current quarter basis, given the commentary to kind of lower -- for the longer type environment, is there an opportunity to extend some duration on the security book?

[Mike Jones:]

This is Mike Jones, again. Yeah. We have taken a look at expanding that a little bit. Again, as we went into 2015, we continue to become more and more asset sensitive because of the duration of the assets that we were originating. We balanced some of that by extending a little bit on the investment portfolio from a duration standpoint based on where we are in an interest rate cycle.

[Tim O'Braziler:]

Okay. And can you disclose what the increase in duration was on a linked quarter basis?

[Mike Jones:]

I don’t have that figure right in front of me for the complete duration. But we focus on more, kind of putting investments on the balance sheet, closer to the kind of the six to seven average life versus -- historically, I think the portfolio was closer to kind of that four or five.

[Tim O'Braziler:]

Okay. That’s good color. Thank you. And then just I guess one last question maybe for Mark. If you look at the reserve ratio of third quarter at 90 basis points, kind of how do you look at that going forward? Is that going to remain purely formulated, or is there a level that you are going to be a little reluctant to go on this?

[Mark Bagley:]

Sure. When we look at the reserve ratio on a monthly basis, we are going to continue to maintain new healthy reserves, given the overall uncertainty that exist in today’s environment. And continue to make the decision consistently with what we have historically relative to where we sit from a reserve perspective.

[William Cooper:]

Things aren’t going to be as good as they are. So, we are going to be improving naturally.

[Craig Dahl:]

Yeah. This is Craig Dahl. I would add to, I mean, we take a bottoms-up approach, not a top-down approach because we have such a line of different asset types so.

[Tim O'Braziler:]

Great. Thank you.

[Operator:]

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

[Craig Dahl:]

No. Thank you for your participation and look forward to seeing you soon. Bye.

[Operator:]

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