TCF Financial Corporation
Q4 2015 Earnings Call Transcript

Published: 28 Jan 2016

[Operator:]

Good morning, everyone, and welcome to TCF’s 2015 Fourth Quarter Earnings Call. My name is Jamie, and I’ll 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. 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 and Treasurer; Mr. Mike Jones, Executive Vice President, Consumer Banking; 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 the 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 2015 fourth quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of December 31, 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. Dahl will begin with the discussion of highlights, revenue, loans and leases and credit. Mr. Maass will discuss expenses, deposits, interest rates and capital. Mr. Dahl will then provide closing comments and open it up for questions. I will now turn the conference call over to Chief Executive Officer, Craig Dahl.

[Craig Dahl:]

Thank you, Jason, and good morning. Before going through the slide deck, I’ll comment briefly on the fourth quarter results. TCF reported earnings of $0.29 per share and a return on assets of 1.08%. Our debt interest margin did trend down slightly but remained strong at 4.35%. In addition, our total revenue of $321.3 million was up 2.4% from the total revenue in the fourth quarter of 2014. Our period-end loans were $17.4 billion, which was up 6.3% from year-end 2014. Now turning to the slide deck, starting on Page 3 with some observations from the fourth quarter. We announced and implemented our key organizational changes which sets us up to execute against our four strategic pillars in 2016. We have continued strong originations which has a positive effect on our total revenue and options. We reported an improved operating leverage for the quarter and our diversification philosophy allows us to continue to report strong credit quality. Turning now to Page 4, this slide indicates how we are well-positioned in the banking industry. The bullet points on the right lay out our positive differences with higher margin due to both more loans than our peers and a higher yielding portfolio. Next, we have more non-interest income as a percentage of average assets due to a large and diversified base of revenue sources. And lastly, we simply fund more of our loans with deposits than our peers do. Page 5 highlights our full year 2015 compared to the full year 2014. I will remind you that we use the colors of a stoplight - red, yellow, green - to indicate the favorable or unfavorable nature of the direction of the year-over-year change. And as you can see, all of our comparisons are green. Our loan and lease originations were up 13.1% to $15.3 billion, our average deposits were up 6.7% to $15.9 billion. Our provision for credit losses was down by 44.7% to $52.9 million and our period-end loans were up 6.3% to $17.4 billion. As you can see on the bottom of the page, revenue, our ROA, tangible book value per common share and return on average tangible common equity were all increased over ‘14. And our earnings per share at $1.07 was an increase of 13.8%. Turning to Page 6, once again, all comparisons were favorable to last year, including our non-accrual loans which were down 7.5% to $200.5 million. Turning to Page 7, fourth quarter revenue highlights. We have also indicated in the upper right of the slide which of the strategic pillars these pages reflect. We offset most of the margin compression with good loan growth across multiple segments and our non-interest income was aided by increased servicing fee income. The diversification tables on the right side of the page show how broad-based our interest income and non-interest income are with no asset category equal to 20% of our total interest income and over seven categories of non-interest income. Turning to Page 8, the loan and lease portfolio which is reflective of our diversification pillar. These data points will be very familiar to our long-time investors as we showed growth of 6.3% and maintained our nearly equal wholesale/retail split. Our auto portfolio moved up as expected to 15% of the total and no asset class is greater than 25% of the total. Having this diverse of a loan portfolio allows us to originate where we want to rather than we are forced to due to market conditions. Turning to Page 9. The next two pages will reflect our fourth quarter originations and ending balance sheets compared to last year and the full year compared to last year. For the quarter, originations were up 11% at $3,845 billion. And our annualized portfolio growth rate prior to loan sales was 22%. Once again, our quarterly growth by portfolio was up in ever asset class except for inventory finance where it was basically flat. We sold fewer loans in the fourth quarter, which is a positive for our margin in 2016. Turning to Page 10, this is the full year origination comparison. The originations were up nearly 12% for the year and solidly up in all asset classes. These two slides demonstrate our many robust origination platforms which gives us tremendous flexibility when executing our hold and sell strategy. The basic themes for the full year remain the same as the quarter with an annualized growth rate before loan sales of 23% and over $1 billion of loan growth from the prior year-end. Turning to Page 11, loan and lease sales and revenue. Looking at the chart in the upper left, you will see that loan sales of $673 million. We sold a similar amount compared to the fourth quarter of ‘14 and the third quarter of 2015. We’ve completed another auto securitization in the quarter which was our third in 2015 and fourth overall, and had a very strong quarter of consumer real estate loan sales as well. I will remind you that the flexibility comments on the second bullet on the right are all meaningful to us in our decision-making. It gives us options for our diversification decisions, our own concentrations of asset classes and geographies, it supports our capital and liquidity strategy and execution, and it provides additional revenue both from gain on sale and servicing fee income. Turning to Page 12, our managed portfolio. Our service for others book now exceeds $4.3 billion and you can also see that our servicing fee income was $8.6 million for the quarter compared to $6.4 million for the fourth quarter of 2014. Turning to Page 13, our loan and lease yields. We have done a great job in holding our yields during this low rate environment. Our diverse mix of assets allows us to have only one basis point of decline in the quarter which was identical to the third quarter performance. We continue to maintain a significant yield advantage compared to our peer group and stay disciplined. Turning to our credit performance on Page 14, all four of these boxes help us to report there is no credit story at TCF. Sixty-day delinquencies were down to only 11 basis points and are a good predictor of near term credit performance. Provision was up to $18 million; however, charge-offs in the quarter were up only $2.7 million from the prior quarter and our charge-off ratio was at 29 basis points for the quarter. Our non-performing assets also trended down to 1.43% at quarter-end. Turning to Page 15, our net charge-off ratio. Here, we detailed the percentage by asset class and you can see the auto charge-off rate, which for us peaks seasonally in the fourth quarter, was down from last year at 75 basis points. And other than a small bump-up in leasing and equipment finance, all other asset classes were down from last year-end. The charge-offs are performing in the low end of our expected range. And with that, I’ll turn it over to our new Chief Financial Officer and Treasurer, Brian Maass.

[Brian Maass:]

Thank you, Craig. On Slide 16, non-interest expense highlights our strategic pillars of profitable growth and operating leverage. During the quarter, we continued to drive down our expenses as a percentage of total average managed assets, now at 3.65%. Also, as you can see, we’ve generally had consistent or flat NIE expenses over the last four to five quarters. The most significant change during the quarter was the $7.6 million decline in compensation and benefits expense primarily related to non-recurring items, including the annual pension plan valuation adjustment resulting from an increase to the discount rate. This decrease was partially offset by a further increase in operating lease depreciation, which we view as a transactional expense as it has offsetting revenue component in leasing revenue which is a part of non-interest income on the income statement. In the quarter, leasing revenue totaled $32.4 million which is an increase of approximately $5 million or 19% over third quarter. Our goal is to slow the growth of our expense base as we move into 2016 and generate operating leverage as we continue to generate asset growth. Slide 17 highlights our core funding strategic pillar. Average deposits have now increased 21 consecutive quarters. These deposits are the primary funding source for our loan and lease growth. Checking account attrition continues to improve while over 90% of our deposits are insured by the FDIC. Average deposit cost increased 4 basis points during 2015 due to special campaigns for certificates of deposit and money market accounts. In a competitive market, organic growth can have a higher acquisition cost but it also creates long term value and better liquidity for the bank. Turning to Slide 18, you will see why we are well-positioned for rising interest rates. First, 81% of our assets are variable or adjustable rate or short or medium duration fixed rate. These can reprice quickly in a rising rate environment. In fact, we expect 56% of our loan and lease balances to reprice, amortize, or pre-pay in the next 12 months. Finally, 61% of our deposits are low or no interest cost with an average balance of $9.9 billion and an average cost of just 1 basis point in the fourth quarter of 2015. As we think about the impact of rising interest rates going forward, we do expect to see a positive impact given that we are an asset-sensitive bank. However, there are various factors that may put additional pressure on the margin, such as level of competition and portfolio mix changes. Thus, the all-in impact of rising rates should result in an increase to net interest income as opposed to a lift in margin. Turning to Slide 19, highlights our strong capital position. Capital ratios have remained relatively stable year-over-year as earnings accumulation continues to support asset growth. We also declared a common stock dividend of $0.075 per common share on January 22nd. With that, I will turn the call back over to Craig Dahl.

[Craig Dahl:]

Thank you, Brian. Turning to Slide 20 which is our strategic pillar summary, I think this shows our diversification strategy is playing out well in the margin and our credit performance. We continue to originate at a high level with broad-based success. We did reflect a better focus on expense initiatives, although we were aided by some non-recurring items which, in my experience, typically go against you, so we’ll take that on the plus side. And we continued our streak of deposit growth which continues to play a key role in funding our asset growth. And with that, I’ll turn it over for questions.

[Operator:]

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions] Our first question comes from John Armstrong from RBC Capital. Please go ahead with your question.

[John Armstrong:]

Thanks. Good morning, guys.

[Craig Dahl:]

Good morning.

[John Armstrong:]

Good morning. This may be for Mike or Tom or Brian, but just a question on the funding side. Obviously loan production and growth is still strong and the loan yield are pretty stable, but curious what you guys are thinking about funding priorities for the loan growth. I see that CD costs are up a bit and the money market balances are up, but that’s pretty flat. But maybe talk a little bit about the plan for the coming year to fund the growth and then also what that might mean for the margin outlook.

[Mike Jones:]

John, this is Mike Jones. Yes, I’ll talk a little bit about it. I think what we’ve tried to do is be really intentional on how we go about gathering deposits, taking into consideration the impact of that deposit-gathering on disintermediation in the low cost deposits that we already have. I think what we’ve been very successful at doing is gathering certificates of deposits that allow us to renew those at a much lower rate and then cross-sell other products into that as those renewals come. So we like what we’re doing from a positioning standpoint around that product. Additionally, if you look at the money market product, what we’re doing there, historically, we haven’t had a balance in that product across the deposit products. So we felt like we needed that product offering out there. It also gave us the ability to market that with a checking account as well, so gathering two accounts versus just the one. And we believe that they’re very complementary with that. I think prospectively as we look out, we’re going to continue to be intentional and dynamic around it, focused on the markets where we can gather the deposits at the lowest cost possible, as well as account quality where we can gather quality accounts that are going to be there for the long haul and benefit the institution.

[John Armstrong:]

And then, Brian, just chime in into the margin outlook and rates. I think are you saying you expect some stability in the margin, maybe a little bit of loan yield lift offset by a little bit of funding cost increase. Is that the way we should read your comments?

[Brian Maass:]

Yes, I think that’s the way you should understand it. While we expect to benefit from the rising rates, there’s other factors that play in the margin, right, as far as portfolio mix changes, the shape of the curve. If we weren’t growing our balance sheet, you would probably see flat increasing that interest margin. But because we are adding loans and we are growing, the loans that we are putting on the balance sheet today are coming out at today’s interest rate environment. So when you take into account kind of the new volume and mix changes that we’re seeing as announced [ph], I’m more confident that you’ll see improving net interest income, as well as our ability to improve our return on tangible common in this higher rate environment.

[John Armstrong:]

Okay. All right, that helps. And then maybe Craig or Jim or Mark, I know you know this, but there’s a lot of focus on auto credit in the marketplace and your auto numbers look good and I understand it’s seasonal. But it’s probably one of the top things that people are going to begin to look at. How are you feeling about auto credit in general, anything out there on the horizon that causes you to pause a bit or are you still feeling good about it?

[Craig Dahl:]

No, I still feel good about our auto portfolio. And in fact, as I indicated, we seasonally usually have an uptick in our charge-off rate and the uptick was less this year than the prior year. So we have good metrics. We’ve got a great management team. We got a lot of consistency in our sales team and origination strategies. We’ve slowed the number of new dealers just basically because we have a significant penetration now. So there’s a lot less what I’ll call variable in our origination and a lot more consistency. And obviously the early indicators of delinquency and those kind of items have continued to trend positively for us. So we read, as you do, all of the headlines and all of the pending doom that’s in that portfolio and we’re just keeping our eye on it.

[John Armstrong:]

Yes, okay. And you have seen the delinquencies start to come back down from you talked about seasonality?

[Craig Dahl:]

The seasonality was in a charge-off rate which usually ticks up in the fourth quarter. And that, like I said, was slightly less this year than a year ago. And we’re well within our range on that portfolio as well.

[John Armstrong:]

Okay. All right, thanks, guys.

[Operator:]

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

[Ken Zerbe:]

Great, thank you. Actually, I just want to stay on the auto piece just for a minute. A lot of your other bank peers are already pulling back, some of them pulling back for several years, some are just starting to pull back some of the big midcap bank lenders. I get that you’re not seeing anything yet, but given comments by like Santander or Santander consumer and as I think you put it, the pending doom in the auto portfolio, what would cause you to change your mind? Like at what point would you stop growing the auto portfolio? Or do you just need to see meaningfully high losses first and then you’ll slow down? I’m just trying to understand the outlook, not so much what you’re seeing currently.

[Craig Dahl:]

Well, those are strategic decisions that we are making literally real-time, all the time. And we have a tremendous amount of experience in monitoring portfolios and monitoring leading and lagging indicators. And so we would have to start to see those, basically those leading indicators, start to change before that would cause a change in our strategy. So I can’t really disclose exactly what it would be, but those are all sort of multiple points that we’d be monitoring on a portfolio basis. But at 15% of our portfolio, it’s not overweighted for us. And so we’ve had these discussions at the rate of growth in our portfolio when we had no portfolio up to now. And this has been an extremely well-managed and a well performing portfolio. So we have that discipline, we think, in it today.

[Ken Zerbe:]

Understood. Maybe if you can remind us, and again, I’m not trying to compare you versus other banks who are pulling back in auto but is there anything different about your portfolio, either the management versus other banks or the quality or the metrics or the focus or target market that would help differentiate your portfolio versus some of the other larger midcap bank portfolios that would allow you to continue to grow versus them, I guess?

[Craig Dahl:]

Every portfolio is different. And so if your first comparison is to us to Santander, we’re not even in the same hemisphere of the FICO band, us compared to them. So that’s a totally offsetting comparison. Each of the other banks have probably more new cars than we do. We’re about 75% used, 25% new. Our average transaction size is only 20,000. We have, we believe, the right metrics around monitoring this portfolio. And so, each one is different. And we haven’t seen any deterioration in the portfolios versus our vintage expectations. And again, it’s 15% of the portfolio. It’s not 30% or 40% of the portfolio.

[Ken Zerbe:]

Okay, thank you.

[Operator:]

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

[Scott Siefers:]

Good morning, guys.

[Craig Dahl:]

Good morning.

[Scott Siefers:]

Just a couple of questions first on auto. Just as it relates to preferences to portfolio then [ph] versus offload then [ph], just I’m curious to hear your thoughts. I mean, I know you make the decision really every quarter, but just given that there’s been so much pressure on the margins and sales and securitization. What is the pressure as you sort of weight the decline in profitability of stock reimburses that pressure it would create on your loan deposit ratio for holding them on balance sheet?

[Craig Dahl:]

Yes, Mike Jones, pick that one up.

[Mike Jones:]

Yes, got it. I would that our strategy has been consistent and it will remain consistent. We look at it on if you look back on the slide that we talked about it, we look at it from three different sides, right? So we looked at it from a capital and funding perspective and where we’re utilizing that capital and allocating that capital for on balance sheet growth. We look at it from a concentration perspective and a risk management standpoint and managing concentration in that portfolio. And we talked about that. Craig talked about that a little bit earlier about how much it makes up only 15% of the total portfolio. And then the final thing is kind of the earnings and the consistency of those earnings. I think what I would remind you of is the flexibility and the optionality that we have in our revenue sources that allows to go where we can gain the most revenue through the cycle. And you saw in this quarter where we sold more consumer real estate loans than we sold auto loans. And we have that ability to kind of flex that up and down depending on the market to get the best executive for the company.

[Scott Siefers:]

Okay. All right, that’s helpful. Thank you. And then switching gears, well, I wondered if you guys could provide any update or just discuss your thoughts on the CFPB’s concerns on opt-in requirements for you guys, if you could disclose the last quarter in the queue. I’m just trying to sort of figure out if it’s a small issue that’s just related to kind of wording within the kind of listing [ph] documents or if it’s a sort of a broader behavioral thing that CFPB might have more concern with. How are you guys thinking about that and ultimate resolution?

[Craig Dahl:]

Well, as you know, there is very little public historical reference documentation around these issues. So these are just our views. Number one, I mean we believe we have a strong compliance culture so that we start everyday with that approach. We have provided our response to the CFPB in November and we have received no indication regarding what the timeline would be for the resolution of that. So really, I can’t give you much color other than that.

[Scott Siefers:]

Okay. All right. Fair enough. Thank you very much.

[Operator:]

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

[Steven Alexopoulos:]

Good morning, everybody. Just one technical question on expenses. How much was the pension valuation adjustment on the fourth quarter?

[Brian Maass:]

This is Brian. I don’t think we have the specific number that’s out there. And we weren’t really going to focus on the specific non-recurring items that are within there. But if you look at page 16 and you look at on that page our growth in average assets both for ourselves as well as what we service for other, it was up 8% on a year-over-year basis. And if you actually - what I can tell you from a number perspective is you’ll get our core - our core competent benefits expense on a year-over-year excluding non-recurring items. The growth in that was about 2% on a year-over-year basis. So what we’re showing is that we are getting operating leverage out of our expense base even though on a non-recurring basis, it is up a little bit. But we did add 1.8 billion in assets that’s both on our balance sheet as well as what we’re servicing for others.

[Steven Alexopoulos:]

Okay. But this is not clearly a good run rate for us to be thinking about on comp moving forward.

[Brian Maass:]

What I would say is, based on how we’ve described the fourth quarter, the non-recurring items that are there, a better benchmark is probably looking at the other course.

[Steven Alexopoulos:]

Okay. Okay. To follow up Scott’s question, so you guys are great loan originations in 2015. Given your comments on how you’re planning to manage the portfolio, is mid single digit on balance sheet loan growth reasonable again in 2016?

[Brian Maass:]

From my perspective, right, we had about 6% loan growth in 2015. I think in the past, we’ve kind of given a 5% to 10% which is a pretty wide range. I think 6% is a reasonable expectation for 2016.

[Steven Alexopoulos:]

Okay, that’s helpful. Then finally on auto, can you guys help us think about the origination breakdown in 2015 into major buckets being superprime, prime, subprime? Just approximately how those broke up.

[Craig Dahl:]

Well, we do originate in all of those segments.

[Steven Alexopoulos:]

Okay. So I guess you don’t have a breakdown on at least what would have been subprime of those?

[Craig Dahl:]

No. But haven’t changed really our mix and we haven’t changed as Mike already said, we haven’t really changed our sales strategy. So we’re just monitoring the performance of the ventures that we are very comfortable with.

[Steven Alexopoulos:]

Okay. And just last technical one. So net charges were up in auto. You described that as seasonal. And that does seem to be the case if you look back at prior years. What exactly drives seasonality in net charge and also in auto loans in the fourth quarter?

[Craig Dahl:]

I don’t have a good answer for you on that. We’ll do a little work on that. But it’s really it’s just been the nature of our originated book since going back to 2012.

[Mike Jones:]

Yes. Just to expand on that, I would say that it’s just kind of consumers actually going into the holidays and their preference on where their spending their cash and their savings associated with that. As you know, in that auto finance, if it gets 60 days delinquent or acting on it and quickly going after it. So they make certain choices as they go into that quarter and we have to react accordingly.

[Steven Alexopoulos:]

Okay. I appreciate the comments.

[Operator:]

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

[Jared Shaw:]

Hi, good morning. Thanks for taking my question. Just to close a loop on the auto side, when you look at the base of your dealer network, I think it was somewhere around north of 10,000 different dealers. Are you still growing that base at the same rate you run your overall portfolio? Or should we expect to see you start to produce more paper from an individual dealer as opposed to growing the network of dealers over the next year?

[Craig Dahl:]

No, we’re just under 12,000 dealers now. So we are still continuing to add dealers but not certainly at the same percentage rate that we were prior to that. But the originations still require seasoning because the new rep into a market is going to take 90 to 120 days to get up to any kind of a decent flow. And we think it’s going to probably take within that first year to get to the optimal flow. And so the dealer expansion and rep expansion kind of go hand in hand on that. But like I said, we’re still adding dealers but not at the same rate, percentage rate that we were previously.

[Jared Shaw:]

Could we see a change in the strategy at all where you would start to take more paper than you historically have from individual dealers or is that more just, like you said, more the seasoning of the reps that will drive that?

[Craig Dahl:]

I’m not going to tell you the number but we monitor the number of dealers that we do more than five deals in a month and it’s a very low number. I mean our strategy of diversification that we talked about in the total is still very relevant in the auto business. And it’s not based on going into a dealer and taking a third of their volume. We’re looking for a couple of transactions from all of our dealers every month. That’s been our approach. And that’s really worked well for us. And we do not see changing that.

[Jared Shaw:]

Okay, great. Thanks. And then shifting a little bit to the funding side and looking at the growth in the CDs over the last few quarters, are you trying to focus an extension in the duration on the CD portfolio or is that more customer preference driving that? And what should we expect to see in terms of both growth of CDs as well as is there an expectation for a change in the duration of the CD portfolio as we come into 2016?

[Brian Maass:]

This is Brian. What I would say relative to our CD growth, we haven’t really changed the duration of the CDs that we’re offering. And I’d that somewhat is customer-driven, where they want to be on the curve and where kind of interest rates are at. I would also want to point out - and obviously, we did have CD and money market growth in 2015. But we also did see growth in our average deposit balances related to non-interest bearing accounts. Some of that comes from new accounts. A lot of it is augmentation or growth in average balance of our existing accounts. So that was probably in the neighborhood of 250 million in 2015. And I think going back to what Mike said in regards to our promotional CD growth, this is the way that we can attract new retail customers to the bank. That’s promotional rate in some ways, we would deal with our customer acquisition cost in a way that - and then there’s [indiscernible] environment, it’s an effective strategy at getting these new customers.

[Craig Dahl:]

This is Craig. The only thing I would add to that, we can predict our loan balances very accurately, what are our originations, what are our payments, what are our pre-payments, what are our loan sales, what are our ending balance is. But non-interest bearing consumer checking adds in flows [ph] like in water in the bottom of your bullet years. You can be having a good day or a bad day, we’re going to need to be more predictable in our funding but our strategy, we believe we’ll have those rides up as we gain more customers, as our average balances increase. And so we believe that’s not a permanent strategy.

[Jared Shaw:]

Okay, great. Thank you.

[Operator:]

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

[Emlem Harmon:]

Hey, good morning guys.

[Craig Dahl:]

Good morning.

[Emlem Harmon:]

Could you help us understand some of the components in the leases this quarter? Looked like that was pretty strong. I’m not sure if there are any particular contracts or maybe recoveries on equipment or anything that helped that line out. We just kind of like to understand the trend there quarter-over-quarter.

[Craig Dahl:]

Well, it was a good quarter. We talked about this really since I joined the call probably five years ago. These are unpredictable. They’re customer-driven. And they do tend to trend up in the fourth quarter as customers tend to maybe reposition some of their assets either with returning some equipment or renewing some equipment or even buying more equipment. So again, they’re all customer-driven. It would be the high-end of our expected range. And we talked about more of that annualized 100 million being that sort of our run rate there.

[Tom Jasper:]

And Emlem, it’s Tom Jasper. I would just add to Craig’s comments reflecting back on Brian’s comments from earlier on non-interest expense. The operating lease revenue portion of the non-interest income around leasing did increase quarter-over-quarter as you can see, the corresponding increase that happened in NIE around operating lease depreciation. So a portion of that increase is related to the operating lease revenue which is a little bit more predictable.

[Emlem Harmon:]

Got it. Thanks. And then just a question on the equipment on the provision, you did increase the allowance this quarter, I think by about 5 million bucks, ex the TDR sale last year, kind of the first time you’ve done that in a while. Is there a specific portfolio that you guys are sitting more reserves aside for or is there kind of an economic area where you’re a little bit more concerned right now?

[Craig Dahl:]

No, there is not story there. I mean really we did have significant growth in the portfolio and we are still reserved that 90 basis points. And that’s just the math, the outcome of the math of those two things.

[Emlem Harmon:]

Got it. Okay, great. Thanks.

[Operator:]

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

[Dave Rochester:]

Hey, good morning guys. Back on the auto, sorry to beat a dead horse here. But just given the back drop that’s been discussed and with your continued confidence of the portfolios, just curious if you still feel comfortable growing that concentration uniquely from here. I think you said in the past you can take that up to maybe 20% of the book. Do you still feel that confidence and the credit on that to do something like that?

[Craig Dahl:]

Well, I mean as I indicated, we’re not making those decisions on an annual basis. We’re making them real-time throughout the year. And part of that is the outcome of our expected origination. And part of that is the outcome of origination of other segments as well. And so we’re going to continue to monitor every one of these portfolios for those leading indicators. But we’re comfortable with our origination sort of the credit box that we’re using right now.

[Dave Rochester:]

Okay. And then just switching to expenses, the commentary that you just gave in terms of looking at the other quarters. Are you saying that the range that I can get from looking at the other quarters at 2015, the 222, the 224 in a core basis, is that good expense run rate going forward into 2016?

[Craig Dahl:]

I want to start this that you’ve got - we really want and we’ve been breaking out this operating lease depreciation item because again as we refer it, it’s transactional. My ROAs and leasing are actually better and my operating lease transactions and our finance transactions. So I always want - so that 222, I want it, or 223, whatever that is, I want to start making those references without the operating lease depreciation in it.

[Dave Rochester:]

Yes, okay.

[Craig Dahl:]

Okay. Go ahead Brian.

[Brian Maass:]

And what I was just going to add, Dave, is when I was referring to the - looking at the previous quarters and kind of the 2% kind of year-over-year basis without non-recurring items, I was really looking at just that the core comp and benefits line. And I think what we say is that it’s going to depend on how much managed asset growth we have. So if we have - if we don’t have the same amount of managed asset growth, then obviously the comp plan will be managed appropriately.

[Dave Rochester:]

Great. All right. Thanks, guys, I appreciate it.

[Operator:]

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

[Chris McGratty:]

Hey, good morning everybody. Maybe a question on capital. Your stocks in a little over tangible book and your capital levels are pretty robust. What’s the thought of a buyback here?

[Craig Dahl:]

We’ve had a pretty common answer on this. We discuss this with our board all the time frequently and certainly within our formal meetings and our capital planning. And so all things are being considered as we kind of rollout into sort of what’s the new normal for bank stocks.

[Chris McGratty:]

Okay.

[Craig Dahl:]

Brian?

[Brian Maass:]

I think what I also was going to say is, right, we’re comfortable with our capital levels today. But I think as Craig is saying, we’ll just to continually evaluate the economic outlook, where our own loan growth comes in for the year and how our capital is growing. I think it’s prudent for us to understand where share price is and where our plan growth rate is. And we have to make sure we’re getting the right return on our capital. And I think we can think about that.

[Chris McGratty:]

Okay. But I don’t think you have a buyback authorization today. Is that correct?

[Tom Jasper:]

I believe that’s correct, yes.

[Chris McGratty:]

Okay. Maybe one more if I could. The tax rate was also a little light - I’m sorry.

[Tom Jasper:]

No, I believe that we do have a buyback authorization that is in place, that’s dated. But we haven’t actively been using that.

[Chris McGratty:]

Okay.

[Tom Jasper:]

This is Tom Jasper. I just want to correct you on that. And I think the other thing, Chris, is we did get to increase the common dividend in the last quarter. So we didn’t improve that return to our shareholder and we’ll continue to evaluate the benefit of that. But your point is taken wrong and we understand that as management team and the board and we’re going to continue to look at what opportunity exist to optimize our capital, to optimize the return to our shareholders, to our capital base.

[Chris McGratty:]

Understood. That’s helpful. Thank you, Tom. And just on the tax rate, how should we be looking at for 2016?

[Tom Jasper:]

So this is Tom Jasper. We did the extenders package that went through. So we have legislation that really caused to change our tax rate in the quarter that caused that tax rate to dip back down. But historically, we kind of looked at in the effective tax rate between 36% and 38%.

[Chris McGratty:]

Great. Thanks, Tom.

[Operator:]

[Operator Instructions] Our next question comes from Bob Ramsey from FBR. Please go ahead with your question.

[Bob Ramsey:]

Hey guys, I just wanted to touch a little bit more on expensive. If I understood you correctly, the core comp line was up 2% year-over-year and as the world looks today, that’s a fair rate of increase for that line in 2016. Is that a fair synopsis of what you said?

[Brian Maass:]

I don’t want to be too specific on that but I think it’s going to be relative to the growth. I mean if we’re growing our assets on balance sheet and we’re growing our servicing book, we’re wanting to get operating to get operating leverage for the company, so we’re going to be closely monitoring that line. But if we are a growth company, potentially you’re going to see some growth in that line whether it’s 1%, 2%.

[Bob Ramsey:]

Okay. And was there anything unusual on the occupancy and equipment line? It bounced up from last quarter. Obviously, it had been higher at the start of the year. But curious if that’s a good level to build off of.

[Brian Maass:]

I don’t think there was anything too unusual in that line in the quarter.

[Bob Ramsey:]

Okay. And can you remind me about what we should expect for the first quarter seasonality? I know that seasonally, it’s a stronger quarter for comp cycle and everything else.

[Craig Dahl:]

I think that’s what I would say is that be mindful of Q1. It’s usually slightly higher than the other quarters.

[Bob Ramsey:]

Can you quantify the magnitude of the seasonal increase or just to past years maybe?

[Craig Dahl:]

I would look to past years.

[Bob Ramsey:]

Okay. Okay. I’ll do that. The other question I have for you, I was wondering if you could talk a little bit about auto gain on sale margins. It looked like the volume of auto on sale in the quarter was down about 37%, but the line item for gains was down more like 70 and this was kind of curious why there was so much of a divergence between the two.

[Brian Maass:]

What I would say is in fourth quarter, we did choose to sell a little bit less when we did our securitization. Our market conditions were more volatile than they had been in previous quarters. I think part of that volatility was the rate uncertainty that was in the market. This was kind of heading into the December [indiscernible]. In fact, as you know, there was a pull beyond the market. But I think that was an inaugural issuer. Fortunately, the benefit we now have is that as Craig said, we’ve issued there to four securitizations over the last 18 months. We have a following of investors and are building a track record. As Mike alluded to also earlier, we’ll continue to reevaluate how much we bring to securitization market versus how much we’re going to do at the hold on sales. And one other point I guess to mention is that was probably already previously mentioned is that we did use the opportunity to sell more consumer real estate loans in the fourth quarter. And there we hit strong demand, allowed us to realize higher gain from that portfolio versus third quarter. I think it kind of get back to the core theme of diversification, right? We’ve got the benefit of diversification of product as well as diversification of sales channels.

[Bob Ramsey:]

Okay. So we think about there being some given and take then between those two gain on sale lines and if you’ve got more limited opportunity given market conditions for one on one quarter, you’ll look offset it with the other?

[Brian Maass:]

Yes. I think exactly. I mean I think that we’ve got optionality there as far as what we keep on balance sheet versus what we saw.

[Bob Ramsey:]

Okay. All right. Thank you.

[Operator:]

Ladies and gentlemen, thank you for questions today. Should any investors have further questions, Jason Korstange, Director, 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 back over to Mr. Craig Dahl for any closing remarks.

[Craig Dahl:]

Well, we appreciate your interest in our stock and we appreciate the questions. And hope you have a great day.