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TCF Financial Corp  (NYSE:TCF)
Q3 2018 Earnings Conference Call
Oct. 22, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to TCF's 2018 Third Quarter Earnings Call. My name is Denise, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions) Please note, the conference call is being recorded.

At this time, I would like to introduce Mr. Tim Sedabres from Investor Relations to begin the conference call.

Timothy Sedabres -- Investor Relations

Good morning, and thank you for joining us for TCF's third quarter 2018 earnings call. Joining me on today's call will be Craig Dahl, Chairman and Chief Executive Officer; Tom Jasper, Chief Operating Officer; Brian Maass, Chief Financial Officer; Mike Jones, EVP of Consumer Banking; Bill Henak , EVP of Wholesale Banking; and Jim Costa, Chief Risk Officer & Chief Credit Officer.

In just a few moments, Craig, Brian and Jim will provide an overview of our third quarter results. They will be referencing a slide presentation that is available on the Investor Relations section of TCF's website, ir.tcfbank.com. Following their remarks, we will open up for questions.

During today's presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the Company. We caution that such statements are predictions and that actual events or results may differ materially. Please see the forward-looking statement disclosure in our 2018 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we'll provide today is accurate as of September 30, 2018, and we undertake no duty to update the information.

I would now like to turn the call over to TCF's, Chairman and CEO, Craig Dahl.

Craig Dahl -- Chairman and Chief Executive Officer

Thank you, Tim. Good morning, and thank you all again for joining us today. I will be speaking from side 2, our third quarter themes.

I'm pleased to report another strong quarter of financial performance as we produced net income of $86 million and diluted earnings per share of $0.51. Our strong results this quarter were highlighted by positive operating leverage, the stable net interest margin, improved mix and growth of earning assets, continued reduction of our risk profile and improving returns on capital.

First, we continued to deliver positive operating leverage. I've talked all year about our focus on improving our efficiency ratio. Our third quarter efficiency ratio of 67.4% was down over 100 basis points year-over-year and was our lowest reported efficiency ratio over the past several years. On a year-to-date basis, our efficiency ratio was 67.5%, in line with our full year guidance. We've been able to lower the efficiency ratio while generating strong revenue growth along with a more stable asset mix, all while making investments in people and technology that position us to grow the business going forward.

From a revenue standpoint, we saw strong year-over-year growth, driven by both net interest income and non-interest income despite lower gain on sale and servicing fee income. On the expense side, we are investing in our digital banking strategy, enhancing our overall customer experience and building out our TCF Home Loans business with the addition of key talent. We believe our investments in TCF Home Loans will support our branch network, fill the gap that has existed in our suite of products and will help to better serve our customer needs. Overall, we have made good progress on improving the efficiency ratio during '18 and this will remain a key focus for us as we move forward.

Secondly, our net interest margin was stable in the third quarter. Despite the continued remix of our balance sheet, we were able to maintain a strong net interest margin of 4.66%, down just 1 basis point from the second quarter. As we talked about last quarter, we have several moving pieces that impact our net interest margin on both sides of the balance sheet.

First, our asset sensitive balance sheet has resulted in strong loan and lease yield performance as rates have risen, especially in our variable rate portfolios for both balances and yields. Second, the seasonality of our inventory finance business results in various fluctuations in our net interest margin. Third, our retail focus deposit base continues to be a real differentiator for us compared to our peers. As rising deposit costs have become a key focus for banks, given where we are in the interest rate cycle, we have been able to outperform from a deposit cost standpoint due to our large granular retail deposit base. We are not immune to rising deposit costs, but as commercial deposits are repricing much faster than retail, we are seeing the benefit of our retail-focused deposit base, especially given the relatively slow pace of the current tightening cycle.

And lastly, the remix from higher-yielding auto loans to lower-yielding securities is providing a headwind to the margin. That said, it is important to keep in mind that this shift is also resulting in improved capital efficiency and reduced credit, operational and liquidity risks. Our focus is not on managing toward a specific level of net interest margin. We view the margin as more of an outcome of the strategy we have in place in order to drive higher returns on capital.

Next, we saw average year-over-year earning asset growth of 4.6%, despite the continued run-off of the auto finance portfolio. As a result, we are seeing a more favorable asset mix evolving toward more capital-efficient assets. This is evident given our declining auto balances which are now down $925 million year-to-date, right in the middle of our full year guidance and are being reinvested into both securities and other loans and leases.

Given our strong diversification of loan and lease portfolios, we have the opportunity to be more selective where we grow without having to stretch on price or structure in order to produce growth. We compete as experts in multiple diverse segments, which provides us with a competitive advantage in the market. In inventory finance, we continue to see strong growth, both through our expansion of existing programs as well as new program. In leasing and equipment finance, we maintain a strong backlog and also believe there are more portfolio purchase opportunities out there as interest rates rise and non-bank specialty finance companies see additional pressure on their margins.

On the commercial side, we have great teams in place that are generating new business with strong originations although in total commercial growth has been somewhat muted by higher payoffs. That said, we are being disciplined and thoughtful given the current competitive environment, and I'll remind you, it only represents 23% of our total loan book.

Finally, as I mentioned earlier, we are building out our TCF home loan business, which we expect to have more of a full year impact as we move into 2019.

Fourth, we continue to reduce our overall risk profile during the quarter. This is coming in a variety of ways, including the remix of the balance sheet as the auto portfolio run-off is reinvested into securities and loans, which has resulted in a lower percentage of risk-weighted assets.

We are also seeing stable credit quality across our portfolios. Nonperforming assets declined year-over-year as we completed another non-accrual sale during the third quarter. Net charge-offs, excluding auto and the recovery from the non-accrual sale, remained stable at just 10 basis points annualized. While we are actively monitoring delinquencies, which are a good early indicator for many of our portfolios, we are not seeing early warning signs to date. As I mentioned, we are being prudent as we look at the competitive landscape, especially in commercial real estate. We recognize the loosening of pricing structure and, given our diverse lending businesses, we do not need to stretch in commercial to generate growth.

Fifth is our improved return on capital. I think we've been very clear throughout '18 in highlighting our focus on improving return on capital. We were successful again in the third quarter with return on average tangible common equity of 15.8%. Our year-to-date adjusted ROATCE of 14.5% is above the top end of our target range for '18. Our focus on this area is playing a significant role in the strategic decisions we are making internally regarding capital allocation.

It is important to recognize that we are improving our return on capital while maintaining higher capital ratios and a reduced risk profile. During the quarter, we repurchased over 900,000 shares at a cost of $24 million. Although this pace was slightly slower than in prior quarters, we would expect to remain active in buying back our stock, given the current valuation. All of these highlights demonstrate our focus on driving returns for shareholders.

Standing here today, with one quarter to go in '18, we have made significant progress as evidenced by our financial results. We remain focused on continuing to grow our core businesses, funding that growth with core deposits, being disciplined on expenses, while still investing in our businesses in '18 and beyond.

Our focus on ROATCE and efficiency ratio will not change as we feel these are the most important metrics for us, both as operators of the Company and as stewards of shareholder capital. These targets are important to us as they demonstrate our commitment to improving in these areas, which we believe are key to driving shareholder value over time.

As I look at all of the hard work being done across our organization, I'm optimistic about the outlook for our businesses and believe our diversification provides us with the opportunity for sustained growth as we are not tied to any one market or geography. Let me remind you that our footprint cover some of the top metro markets, including Minneapolis, Chicago, Milwaukee, Detroit and Denver. In these markets, we operate branch locations in the consumer banking space and have end market commercial banking teams for both real estate and C&I. Each of these markets has its own dynamics today, whether it's the strength of the economy in Denver and Minneapolis, where in Minneapolis-Saint Paul, for example, we have the lowest unemployment rate in the country among large MSAs at just 2.5%.

In Chicago and Milwaukee, there has been quite a bit of competitive disruption due to recent M&A activity that brings with it its own set of opportunities. Add to that the continued resurgence going on in Detroit, which has been well publicized. So from my view, these are a great set of markets to drive our business growth from and, coupled with our national lending platform, gives us ample opportunity to continue to grow the franchise.

With that being said, I will now turn it over to Brian to provide more detail around our third quarter financial results.

Brian Maass -- Chief Financial Officer

Thank you, Craig.

Starting on slide 3. You can see that we have continued to make progress in driving operating leverage as our efficiency ratio of 67.4% in the third quarter declined 105 basis points year-over-year. Revenue growth of 6.5% year-over-year, which outpaced core expense growth of 3.4%, which excludes operating lease depreciation. The revenue growth came equally from net interest income and non-interest income. We saw a slight increase in our core expense base on a linked quarter basis, which we indicated on last quarter's call could happen as we continue to make investments in the business. We believe we can manage toward additional operating leverage and an improved efficiency ratio over time.

Turning to slide 4. Our net interest margin was stable despite the balance sheet remix as the margin declined just 1 basis point linked quarter to 4.66%. As Craig mentioned, there are a number of factors that affect our margin in each direction, which we have laid out for you in the bottom-left corner of the slide. During the third quarter, we saw margin pressure from higher funding costs, seasonally lower inventory finance balances and the mix shift from auto into securities. Additionally, we benefited from higher earning asset yields, including the full impact of the June rate hike as well as seasonally higher inventory finance yields.

Our net interest margin has continued to outperform expectations so far this year. That said, we remain cautious around both promotional and non-promotional deposit costs. Over the past 100 basis points of rate increase, our total deposit costs increased just 21 basis points. As we have said previously, we expect the next 100 basis points of interest rate increases to likely be more expensive than the last.

Lastly, we have included some information regarding our variable-rate loans tied to the LIBOR index. 48% of our loan and lease balances are variable and adjustable rate, and of these, approximately 55% are tied to LIBOR.

Turning to slide 5. Third quarter earning asset yields of 5.36% were up 29 basis points year-over-year despite the run-off of the auto portfolio as loan and lease yields continued to expand. Loan yields increased 42 basis points year-over-year with all loan and lease portfolio showing stable or growing yields. Our strategy of competing as experts, along with our pricing discipline and increases in short-term rates continued to drive a strong yield performance. Our securities yields are also increasing as new purchases in the third quarter had an average tax equivalent yield of 3.4%, up slightly from last quarter and above the blended portfolio yield of 2.71%.

Turning to slide 6. As rising deposit costs continued to be a focus across the industry, the value of our retail-focused deposit base is becoming more clear as 83% of our average deposit balances are consumer related. After increasing only 2 basis points in the second quarter, our deposit costs increased 7 basis points in the third quarter. The largest increase this quarter was from CDs as more came up for renewal, which will be at higher current market rates.

As I mentioned earlier, we expect upward pressure on deposit costs going forward due to competition as well as our low non-CD deposit beta to date. Over the past year, we have only seen a 13 basis point increase in non-CD deposit costs, which will likely increase in future periods. Rates on the CD book were 1.56% for the third quarter, while the average cost of all other deposits was 0.24%.

From an average balance standpoint, our deposits continued to grow: up 3.6% year-over-year, with checking and saving balances up 9.3%. We would expect these core checking and savings balances to be the deposit growth drivers going forward. As the auto portfolio continues to run off, the cash generated provides a good source of liquidity and lessens our need to raise promotional CDs.

Turning to slide 7. Average earning assets increased 4.6% year-over-year, including the run-off of the auto portfolio. What is important here is the improving mix shift toward more capital efficient assets as we have grown earning assets. Auto has declined from 16% of earning assets a year ago to 11% currently, while the securities portfolio has increased from 8% to 12%. As a result of this mix shift from auto to both the securities portfolio and other loans and leases, our risk-weighted assets as a percentage of total assets has begun to decline. We expect increasingly more capital efficient assets and a lower risk profile to help us drive higher returns on capital moving forward.

Turning to slide 8. Loan and lease balances increased 2.5% year-over-year, excluding the auto finance portfolio, driven by growth in inventory finance of nearly 12% and commercial of over 7%. The run-off of the auto finance portfolio also continued, with balances down $328 million during the quarter and $925 million year-to-date, right in the middle of our guidance of $1 billion to $1.5 billion of run-off in 2018.

Looking ahead to the fourth quarter, we expect strong origination volumes to continue, especially in leasing, which tends to see higher volumes late in the year. In addition, our consumer real estate first mortgage portfolio, which had been declining, saw a modest growth during the quarter. As we reinvest the auto run-off into longer-duration assets, both in securities and loans, we could see consumer real estate balances increase modestly going forward. We expect this remix activity would continue to increase our return profile and capital efficiency. As Craig mentioned earlier, we continue to have a diverse set of loan and lease businesses with the capacity to grow.

Looking at slide 9. We have seen year-over-year growth in non-interest income, along with a more favorable mix toward higher-quality income. Gain on sale and servicing fee income now make up just 13% of non-interest income, down from 16% a year ago. This growth in non-interest income is also happening while our servicing fee income is declining due to the auto run-off. Total servicing fee income of $6 million declined $4 million year-over-year. Keep in mind that $4.4 million of this servicing fee income is related to auto loans serviced for others. This will eventually go to zero as the servicing book runs off. However, we still have an additional $1.6 million of non-auto related servicing fee income.

The growth in leasing and equipment finance non-interest income is helping to offset the loss of gain on sale and servicing fee income. We saw leasing non-interest income, net of the operating lease depreciation, of $25.5 million in the third quarter, up from $18.4 million a year ago. This line has stabilized over the past several quarters.

With that, I'll turn it over to Jim Costa to cover credit and risk.

James Costa -- Chief Risk Officer, Chief Credit Officer

Thanks, Brian.

Turning to slide 7. You can see that we are continuing to reduce the risk profile of the balance sheet as the auto portfolio runs off. Overall, as Craig as indicated, credit quality remains stable. Nonperforming assets of 59 basis points declined 18 basis points year-over-year. You may recall that we moved $37 million of consumer real estate non-accrual loans to held-for-sale during the second quarter and we completed the sale of these loans in the third quarter.

We did see a small uptick in NPAs during the third quarter, driven by higher consumer real estate non-accrual loan balances, again resulting from the sale, and an increase in other real estate owned balances. The increase in REO was primarily due to the addition of one of our corporate operation centers we are now marketing for sale.

60-day delinquencies remain stable at just 12 basis points, down 1 basis point from a year ago. You will note delinquencies, excluding auto, have remained at 10 basis points or lower for the last nine quarters. Provision for credit losses came in at $2.3 million for the quarter. This reflected a $6.6 million recovery related to the consumer real estate non-accrual loan sale as well as the continued run-off and maturation of the auto finance portfolio.

Lastly, we are seeing improved liquidity at balance sheet remix progresses as well as a loan to deposit ratio which now stands at 100% as of September 30.

Turn to slide 11. We are continuing to see favorable impact that our diversification model is having on our credit losses. Net charge-offs, excluding the consumer real estate non-accrual loan sales and the auto portfolio, were just 10 basis points. As you can see, the majority of our net charge-off dollars are coming from the run-off of the auto portfolio, with just $14 million coming from non-auto portfolios.

Overall, we remain very pleased with our credit performance and don't see any story from a credit quality perspective.

With that, I'll turn it back to Craig.

Craig Dahl -- Chairman and Chief Executive Officer

Thank you, Jim.

I'll bring it to slide 12 here, our return -- improved return on capital. We talked a lot this morning about our focus on improving our return on capital and not only have we been successful in increasing it in 2018, we've done so with a higher capital ratio and a lower risk profile. In addition, as I mentioned earlier, we did repurchase over 900,000 shares of stock during the quarter, and have a $141 million of our share repurchase authorization remaining as of quarter-end.

Turning to slide 13. I want to draw your attention to the 2018 targets we provided earlier this year for adjusted ROATCE and efficiency ratio. The purpose of providing these targets was to highlight the metrics we are managing toward and those we feel are important to driving shareholder value going forward.

For the full year '18, we have been targeting ROATCE of 11.5% to 13.5%, adjusted for the CFPB settlement, and we are exceeding this year-to-date at 14.5%. We have also been targeting a 2018 adjusted efficiency ratio of 66% to 68%, and our results are in line with this range at 67.5% year-to-date. I continue to be pleased with our execution against these targets and I look forward to updating you again next quarter.

With that, I will open it up for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And your first question will be from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning. Brian, maybe a question for you on the margin. Can you give us an idea of some of your near term and longer term thoughts on the margin? There's lot of moving parts here but you're talking about obviously maybe a little less asset sensitive going forward. But at the same time, some good growth in core checking and savings on one side and then you have the asset mix shift on the other side. So give us an idea of how you want us to think about the margin trends.

Brian Maass -- Chief Financial Officer

Yes. Appreciate the question, John. This is Brian. What I'd say is the margins really outperformed from where we thought it. Would have started at the beginning of the year -- there has just been a lot of positive things as far as rate increases that have helped in the extra growth that we had in inventory finance earlier in the first half that have really helped kind of maintain the NIM at I'd say a really high level. We have -- we are seeing deposit costs increase like everybody else. Ours has been very, I'd say, muted, was up 7 basis points this quarter. As we go forward, we're going to continue to see the mix shift in balances right from auto and so the securities portfolio, so that continues to be a headwind. The rest of our portfolio -- we do -- we don't really have sequential growth in our loan balances, as you know with inventory finance. So now we're going to get into the period where inventory finance balances start to grow again in fourth quarter and into Q1. So that obviously has impacts on the net interest margin. As Craig mentioned, we are trying to manage to a specific outcome on the net interest margin. It really is a combination of all of the other things. But that being said, we're only down 1 basis point in the third quarter. I don't know if we can maintain it at this exact level. When you think about some of the incremental growth that goes on the balance sheet, it's now all accretive to the net interest margin yield that we have. So I do think that our net interest margin will come down a little bit over time, but I don't think that says that we are not asset sensitive. If we just stayed in the things that we have and we continued to reprice, we would -- can see -- we would see positives impacts on the margin.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, good. That helps. And then obviously you had the seasonal headwinds on inventory finance and obviously auto. But it feels like you're saying the pipelines are stronger going into Q4. And maybe Craig, I'm just wondering if you're seeing the typical inventory finance lift, and then maybe touch a bit on the -- some of the leasing backlog as well you talked about.

Craig Dahl -- Chairman and Chief Executive Officer

Yes, this is Craig. So you are exact -- I mean, those are going to be my comments. I mean the fourth quarter is typically our strongest quarter of originations in leasing and equipment finance, and we would expect that to be there again. I would remind you we're fighting a little bit of the run-off of the portfolio we acquired a year ago that's getting diluted as far as its impact. So we're looking positive there. I would -- I would also point out in the commercial book that if you look at those five quarterly balances in the earnings release, we've been able to maintain that portfolio, and that's due to a great job of originations. And we have not been reaching on credit of our price in those and we're really pleased with how that book has performed. Inventory finance is really going to be driven by those customers and the shipment of the winter product and so that is expected, again, to give us lift into the fourth quarter. So when you look at our books -- and then Brian comment a little bit about our consumer real estate maybe being at least holding serve on the first side and having some additional increases on our HELOCs. So I think our outlook is pretty good for the fourth quarter based on where we sit today.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. Thank you.

Operator

And the next question will be from Nathan Race of Piper Jaffray. Please go ahead.

Nathan Race -- Piper Jaffray -- Analyst

Hey, guys, good morning. I want to start on the share repurchases in the quarter. Obviously stepped down a little bit relative to the pace you guys were on in the first half of this year. So just curious if there's anything to read in terms of -- you guys are seeing increased opportunities in terms of portfolio acquisitions or if we should maybe expect the rate of buybacks to step up into 4Q and 2019 as well.

Brian Maass -- Chief Financial Officer

Hi, Nath (ph), this is Brian. What I'd say on that is if you -- our share price on average was higher in the third quarter than it was in Q1 or Q2. So we did have a lower amount of purchases. As you note, there's many different variables that can affect the kind of speed and timing of our repurchase, but the share price is one of those variables. It is lower now than it would have been kind of on average in the third quarter. So that does seem attractive. Market conditions as well as other capital growth opportunities can also impact the pace, but generally speaking, didn't necessarily have a specific target in mind as far as how much or when this is going to end, but we see it -- where the share price is, we see it as an opportunity.

Nathan Race -- Piper Jaffray -- Analyst

Okay, got it. And Craig, any updated thoughts on what you're seeing in terms of portfolio acquisition opportunities and the like?

Brian Maass -- Chief Financial Officer

I mean, the -- we're totally focused on any kind of opportunity as I've commented frequently. These lenders are fixed rate lenders, and when their deposit -- their borrowing costs start to move, their margins get compressed. And also, we're still in the benign credit period as you've seen by our results. So there's plenty of opportunity out there. It's just finding the right transactions. But if I were to put it in an order of priority, organic growth is clearly our most preferred, and the ability to acquire a platform would be the second that we'd be looking at. And lastly would be portfolios. And I think you're seeing a little bit of the impact. We've really benefited from the portfolio we acquired last year but once it goes away, you have to replace it either with other-- either with stronger organic growth or with other portfolio opportunity. So we're aware of those and we're working on those, but there really isn't anything to announce right now.

Nathan Race -- Piper Jaffray -- Analyst

Okay, got it. Great. And if I could just sneak one last one in on expenses. Obviously, you had a little bit of step-up this quarter and I'm just curious if there is any costs associated with that operation center that you guys moved into OREO (ph) that may have inflated expenses on the occupancy side this quarter or in any other category. And just how we should be thinking about expenses in the fourth quarter and 2019 as the auto portfolio continues to run off as well?

Brian Maass -- Chief Financial Officer

Yes, this is Brian. Expenses were up a little bit on a linked quarter basis. On the O&E side, as you mentioned, we did have some higher maintenance and repair costs related to one of our operation center building, so that was included in that number for the third quarter as well as -- we continue to have some IT investments, both in our digital banking platform as well as other initiatives that we're working on that will both improve customer experience as well as reduce long-term costs.

Nathan Race -- Piper Jaffray -- Analyst

Okay. Thanks for the color.

Operator

The next question will be from Scott Siefers of Sandler O'Neill & Partners. Please go ahead.

R. Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Good morning, guys. Guess I wanted to just follow up on that expense side. So the third quarter's $246.5 million rough base of costs may be a little higher than what I would have expected, although Brian, you had noted some of the tech investments could elevate things a little sequentially in the third quarter. I mean, are costs going to grow from here or can you take them down absolutely from the $246.5 million. In other words, are they going to be on an upward trend -- so regardless of what happens or as the auto sort of interest structure needs wane, can you actually take that base down on an absolute basis?

Brian Maass -- Chief Financial Officer

Yes, this is Brian. We're not necessarily trying to manage to a specific number. I think expenses are well controlled where we are in here. We are choosing to make a couple of investments in the business, and we think that those will provide us growth in revenue in the future as well. We are really trying to manage the things on an efficiency ratio basis and continuing to show improvements in our efficiency ratio over time, where it's not necessarily going to be quarter-to-quarter. Some of our businesses as you know are seasonal, so we don't necessarily have sequential results always. But I do think that we can continue to have improvements in our efficiency ratio over time as we look out into next year.

R. Scott Siefers -- Sandler O'Neill & Partners -- Analyst

All right. And then if you guys quantified what you think the FDIC costs can go away (ph) next year, what their quarterly or annual impact to you guys just from that?

Brian Maass -- Chief Financial Officer

Yes. I didn't really -- I don't have any specifics to say on FDIC expense as it relates to next year.

R. Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Okay. All right. Sounds good. Thank you very much.

Operator

The next question will be from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. Just one quick follow-up on expenses. I believe last quarter you talked about expenses ex leasing depreciation hitting somewhere between $225 million to $230 million in the fourth quarter. Is that still good or any change to that?

Brian Maass -- Chief Financial Officer

Yes, this is Brian. I mean, as I kind of said in the last question, not really trying to give a specific target on the expenses. They're going to -- I think they're well controlled. They're going to move around within a few percents of kind of where we wound up third quarter, but I'm not really going to get too specific as to the exact dollar amount, I guess.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And just taking a step back, so you talked about time deposits coming in. Can you talk to in terms of -- as you think about deposit growth, yes, there will be a mix shift, but the ability to still grow core checking account deposits, is that something that we should think about or given where the rate cycle is it's hard to grow those balances going forward?

Brian Maass -- Chief Financial Officer

Yes, this is Brian. No, I mean, if you look at on a year-over-year basis, we're up 10%, average growth in non-interest bearing deposits. So we are growing accounts. We are growing those balances. We're focused on growing our core checking and savings accounts. You've seen our CD balances kind of flat line, I'd say from last year. We can certainly use that on a promotional basis if we need to augment for a portfolio purchase or something, but what we're focused on in this meanwhile while we've got liquidity coming off of the auto portfolio, we're really focused on growing our checking and savings account balances. And I think we've shown that over the last year.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And if I can sneak in one more on -- just for Craig. There's been a lot of concern around housing slowing down. Some of the industrials have been acting quite poorly recently. Just in terms of as you look through your businesses, do you see -- I mean, there has been a lot of this late cycle concern. Are you seeing that in the customer dialog as you look into 2019 or do you expect 2019, where things stand today, to be another good quarter from a growth standpoint?

Craig Dahl -- Chairman and Chief Executive Officer

Yes, I think the seasonality of the fourth quarter will, I think, offset some of that negativity that maybe has been around there. We have -- as I mentioned in my comments, we've really had consistent delinquency performance going back like 15 quarters or 12 quarters on our overall delinquency rate. So we have not seen anything start to move. And I'll also remind you, I made those comments about the different markets we're in. We're very diverse in our commercial real estate book as well, so it's not like we're sitting here with $1 billion of apartments in Minneapolis. They're spread across our footprint and including some other markets where we've followed our developers there. So I'm not seeing -- I'm looking for a good quarter in the fourth quarter, again, led by the seasonality of inventory finance and equipment finance.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks for taking my questions.

Operator

The next question will be from Jared Shaw of Wells Fargo. Please go ahead.

Jared Shaw -- Wells Fargo -- Analyst

Hi, good morning. Just looking at the leasing and equipment finance revenue, when you look back over the last few years third quarter's actually been a decline. What happened this year, where we saw some strength there on a third quarter basis? Is that just a shift in seasonality or more a function of growth overall?

Craig Dahl -- Chairman and Chief Executive Officer

No. I think the real reason is the acquisition of that platform that we announced in the middle of last year, which gives us a more defined set of operating lease revenues and expenses on these newer transactions. And so it's that activity that's going to bring a more consistent and have -- there's still going to be customer volatility, but we're going to have more of a percentage that's going to be from a fixed repayment and amortization standpoint.

Jared Shaw -- Wells Fargo -- Analyst

Okay, great. Thanks. And then as you talk about the continued de-risking of the balance sheet and growing the securities portfolio, where should we see the securities go as a percentage of assets and so how you feel comfortable with that?

Brian Maass -- Chief Financial Officer

Yes, this is Brian. So as I said in my remarks, it has increased on a year-over-year basis from 8% to 12%. What we've said as the auto book runs off, we are planning to put a lot of those proceeds into the securities portfolio, at least initially. And if we see another or better alternative use of that cash and capital, we can redeploy it into something else. But we noted that where we started off from an asset liquidity or from a securities portfolio perspective was pretty -- was beneath where our peers where. Our peers are probably closer to 18%, so we feel like we've got runway to continue to add securities there if needed.

Jared Shaw -- Wells Fargo -- Analyst

Okay. And then -- looking at that and tying it into the deposit question, with the loan to deposit ratio here at over 100% and you haven't really done much on the promotional CD side, could you see a desire at some point to -- in addition to the growth of the core checking and savings accounts, look to grow the time deposits here as a way to maybe bring in new customers and lower that loan to deposit ratio? Are you comfortable with the overall structure right now?

Brian Maass -- Chief Financial Officer

Yes, this is Brian. What I'd say is, I'm very comfortable with our liquidity position overall. You can see asset liquidity on balance sheet has increased. But also, you have to look at kind of our liability liquidity. We have lots of -- we don't have any short-term borrowings. We don't have any repurchase agreements. We have lots of liability liquidity. We've got over $2 billion of funding available to us from the Federal Home Loan Bank. So we've got plenty and available liquidity to us. We don't necessarily manage to a specific loan and deposit ratio that has come down over time. But we have a lot of capital and liquidity because kind of referring back to what Craig mentioned, for a portfolio purchase would be no problem for us.

Craig Dahl -- Chairman and Chief Executive Officer

I just wanted to add a couple of things or two. We don't see the loan-to-deposit ratio as a governor to our business. So we talk about that a lot. And I know that I've talked to most of you regarding our senior funding process, where our fundraising and our lending activities are totally linked and -- and we're not asking the retail bank to go out and raise CDs if we don't have a need for them. And I think that's -- I think kind of talks about the efficient funding model that we do have.

Jared Shaw -- Wells Fargo -- Analyst

Great. Thanks a lot.

Operator

The next question will be from Chris McGratty of KBW. Please go ahead.

Christopher McGratty -- KBW -- Analyst

Good morning. Thanks for the question. Brian, on the margin, do you happen to have where the spot deposit costs was on September 30?

Brian Maass -- Chief Financial Officer

I don't know that number off the top of my head.

Christopher McGratty -- KBW -- Analyst

Okay. I can follow up offline. Maybe Craig for you, in your capital remarks, you talked about portfolio acquisitions and growth. I don't think I heard anything about potential depository acquisitions or thoughts around there. As I'm interested in if anything's changed there, if that is a strategy you would consider looking at and if so, kind of profile of a desired institution if you could draw it up?

Craig Dahl -- Chairman and Chief Executive Officer

I think I've been consistent that platforms and portfolios are more likely for us other than any other form of M&A, and that remains our point of view at this time.

Christopher McGratty -- KBW -- Analyst

Right. And then, Brian, the tax rate, is the third quarter about the go-forward rate we should be using?

Brian Maass -- Chief Financial Officer

Yes. I think we're right in the middle of our kind of 23% to 25% guidance. So we didn't have a lot of unusual items. We had more -- more of those items in kind of the first half of the year. So yes, this is a good run rate going forward.

Christopher McGratty -- KBW -- Analyst

All right. Thanks a lot.

Operator

The next question will be from Kevin Reevey of D.A. Davidson. Please go ahead.

Kevin Reevey -- D.A. Davidson -- Analyst

Good morning. So, getting back to expenses, the comp and benefit expense came in a little higher than we were looking for. Is that driven mostly by the continued investment in TCF home loan business or is there something else going on there, and is that a good run rate to use going into the fourth quarter?

Brian Maass -- Chief Financial Officer

This is Brian. What I'd say there is, you're correct. We are continuing to build out some talent on the TCF home loan side. I would say, this quarter we also did have slightly higher medical claims as well, large medical claims in there. In addition, we do have slightly higher branch wages in there too, on a go-forward basis.

Kevin Reevey -- D.A. Davidson -- Analyst

And then related to the recent disruption in Minneapolis and Chicago, can you talk about some of the opportunities that you're seeing there?

Craig Dahl -- Chairman and Chief Executive Officer

Well, it's still, I guess too soon to call that. I mean -- but we would be interested in both customer opportunities and individual or platform opportunities. And so we're actively engaged in those discussions currently, but there isn't anything to announce at that point.

Kevin Reevey -- D.A. Davidson -- Analyst

And just from an organic basis, can you elaborate there at all?

Craig Dahl -- Chairman and Chief Executive Officer

Specifically on commercial or auto (ph)?

Kevin Reevey -- D.A. Davidson -- Analyst

Commercial -- yes, commercial specifically.

Brian Maass -- Chief Financial Officer

Yes, I think I'm pleased by holding serve on the balances that we have. It's taken a strong origination group. This team has been -- most of them have been with us now for over two years and we're really pleased with both the activity and the engagement level we have by this group. So our outlook wouldn't be any different in the fourth quarter than it's been in the short run, so --

Kevin Reevey -- D.A. Davidson -- Analyst

Great. Thank you.

Operator

The next question will be from Dave Rochester of Deutsche Bank. Please go ahead.

David Rochester -- Deutsche Bank -- Analyst

Good morning, guys. On the expenses, again -- sorry to revisit this. I know you don't manage to a dollar amount, but just bigger picture, I think ex operating lease depreciation and credit costs and the expenses, you were at maybe like 3% to 4% year-over-year. Is there any reason you guys should change materially from that ex that FDIC surcharge roll-off over the next year?

Brian Maass -- Chief Financial Officer

This is Brian. Wasn't really planning to give much guidance toward 2019 and what expense levels will be. I think we're going to be very mindful of where the revenue is and where the revenue trajectory is, and we're going to ensure that from an operating leverage perspective or from an efficiency ratio perspective, that we're keeping those two things in line with each other, and we're looking to improve our efficiency ratio over time as we go forward.

David Rochester -- Deutsche Bank -- Analyst

How much improvement are you expecting over the next year and then what are you factoring in for rate hikes since that is supportive of the NIM and NII?

Brian Maass -- Chief Financial Officer

Yes, probably will be able to give you a better guidance on 2019 on the next call.

David Rochester -- Deutsche Bank -- Analyst

Okay. Sure. And then just back on the NIM, maybe I just wanted to make sure I understood your thoughts. Nearer-term, it sounded like you think the NIM could possibly decline modestly in 4Q even though we just had a September hike. Is that right? And is that just because of the incremental production NIM is a little bit lower?

Brian Maass -- Chief Financial Officer

Yes. Again, it's the composition of everything and the changes that we have quarter-to-quarter in that portfolio. We do expect our deposit costs to be increasing as we get into the fourth quarter compared to where they were in the third quarter. So we do think that there will be a modest amount of pressure. Again, on a year-over-year basis, I think we're at 4.64%, 4.65% on a year-to-date basis, which is up 10 or 11 basis points versus last year. So I think we're doing really good. But it could see a little bit of pressure in the fourth quarter just due to the mix and the deposit cost increase.

David Rochester -- Deutsche Bank -- Analyst

Got you. And then just one last one maybe, on the securities purchases you mentioned those had a yield of 3.4%. I was just curious where those yields are now following the backup in the middle of the curve?

Brian Maass -- Chief Financial Officer

Yes, so as you know, we have been purchasing a little bit longer-dated securities into the portfolio. I'd say, month-to-date those yields are probably closer to 3.8%, 3.85%.

David Rochester -- Deutsche Bank -- Analyst

Great. All right. Thanks, guys.

Operator

The next question will be from Lana Chan of BMO Capital Markets. Please go ahead.

Lana Chan -- BMO Capital Markets -- Analyst

Thank you. Good morning. Just a couple of questions. One is, looks like the loan growth ex auto this quarter was 2.5%, a little bit lower than the sort of mid single-digit growth rate I think you had previously been targeting. Are you still expecting mid single digits or is sort of elevated paydown activity changing that outlook?

Brian Maass -- Chief Financial Officer

Yes, Lana. This is Brian. I'll make a comment. So you're right. On a point in time basis, we're up 2.5% excluding auto. On our average balances, though, on a year-over-year basis, we're probably 5.7% on a year-over-year basis, so called out at 3% to 6%. So I think that is mid single digits. I feel comfortable with that range on a full year basis. And as Craig pointed out, I mean, we have strong originations happening in our commercial book. Our leasing is typically stronger later in the year. Our IF (ph) seasonality always hit its low point kind of as you get into late in the third quarter, so we expect those balances to start increasing in the fourth quarter. So overall, we see good growth opportunities across most of our -- across most of the portfolios.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. Thank you. And second question is around the securities buildup this quarter was a little bit less than I expected. It looked like you used some of the cash flow and deposit growth to pay down long-term borrowings, which came down pretty nicely. And I assume that helps your margin as well this quarter. Can you talk about further opportunities there?

Brian Maass -- Chief Financial Officer

Yes. From a securities portfolio perspective, we do expect to get more run-off from auto in the fourth quarter and, especially with yields being higher now, we do expect to see growth in the securities portfolio in the fourth quarter, maybe even at a little faster pace than what you saw in the third quarter.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. And borrowings staying around the same level, then?

Brian Maass -- Chief Financial Officer

Correct. It depends on just overall growth of the balance sheet and, so yes.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. And just the last question on fees and service charges. It seems like there is still some modest pressure on that line item year-over-year. Can you talk about what's going on there, and if you know what's driving that pressure still?

Brian Maass -- Chief Financial Officer

Yes, I'd say -- this is Brian. Our fees and service charges, I think overall, that line on the income statement, which has multiple things is probably down to 2% to 3%. That continues to be -- we are -- we've had -- we have added functionality, we have added convenience to our customers. We think there is a lot of kind of transparency about what's happening on that. But in addition, we think with the investments that we've made in our digital banking platform, one of the ways that we can outrun kind of some of the declines that you see on a year-over-year basis in some of those fee lines is by growing accounts. And we are being able to do that with -- in our retail banking area.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. Thanks, Brian.

Operator

The next question will be from Ken Zerbe of Morgan Stanley. Please go ahead.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. I guess, question on credits. You mentioned that the provision expense or the reserve in general was affected by the -- so the maturation (ph) of the auto portfolio. Is there a way to quantify what or how much of benefit came from the auto portfolio's declining in the provision line this quarter?

James Costa -- Chief Risk Officer, Chief Credit Officer

I think -- this is Jim Costa. I think it's really primarily coming from the non-accrual loan sales what impacted the provision. If you go back and look, we're running anywhere 10, 10 plus on the provision. I think this quarter would have fallen in line with that absent the non-accrual loans sales. So really -- your driver this quarter was the impact to non-accrual loans, so rather than a change in the complexion of the auto portfolio.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got it, understood. So I presume that also holds true on a go-forward basis that the run-off of the auto portfolio will not -- or is it fair to say that the run-off of auto portfolio doesn't meaningfully affect your provision expense as that declines?

James Costa -- Chief Risk Officer, Chief Credit Officer

Again, this is Jim. Ken, I would say we really revalue it every quarter as we need to, of course, and the run-off in the auto portfolio is following a trajectory that we expected. It will meaningfully impact the provision proportionately but nothing inconsistent with what you have seen the prior quarters. So there's really no change in the trajectory. There is no change in the reserve levels that we're seeing. Things are sort of running out as planned. So I wouldn't factor in any specific change on a go-forward basis.

Kenneth Zerbe -- Morgan Stanley -- Analyst

All right. Great. Thank you.

Operator

The next question will be from Steven Alexopoulos of J.P. Morgan. Please go ahead.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Good morning, everybody. I wanted to start on the deposit repricing side. Did you guys see any notable migration from customers out of savings and money market and into time deposits in the quarter, whether they're your time deposits or what competitors are offering?

Brian Maass -- Chief Financial Officer

This is Brian. I wouldn't say that there was any noticeable shift.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. Brian, can you talk about your expectations, what you will expect to see from a migration view?

Brian Maass -- Chief Financial Officer

We continue to see -- as growth in our core accounts, we continue to see some growth technically in average balances still, in our checking account and savings account balances. So we're continuing to kind of win a greater percentage of our customers' balances. I think from a -- so we're happy with kind of the growth that we have. As I mentioned earlier, on a year-over-year basis, our non -- our average balances of non-interest bearing deposits are up 10%. So we think that's solid growth we have availability and capacity -- if -- we haven't been growing our CD book from a promotional perspective, but that is available capacity to us. But we will only do that if we really had a true incremental asset opportunity on the other side.

Michael Jones -- Executive Vice President

Steve, this is Mike Jones. I think what you're really seeing is our focus on growing core deposits. I think you're also seeing the payoff of some of the technology investments that we've made and providing the features and functionalities that customer, core customers want and a movement away from money markets and more of the savings, which we believe is more core.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. Then maybe just a few questions on the loan side. Looking at the inventory finance loans, they were up just under 12% year-over-year this quarter. Are we back to a more normalized growth trajectory for that business here?

James Costa -- Chief Risk Officer, Chief Credit Officer

Yes, I think the -- what's reflected there is -- is that's -- the liquidation of that lawn and garden portfolio that was sort of delayed and then some of the other (inaudible) in the other books. And so we would expect that that would build back up again into the fourth quarter, with the shipment of the snow product and then into the first quarter, with, again, starting all over with the same cycles.

Steven Alexopoulos -- J.P. Morgan -- Analyst

And then -- thank you. And then regarding the growth in the consumer real estate loans we saw in the quarter, could you help frame for us your appetite to grow that moving forward?

Brian Maass -- Chief Financial Officer

Yes, this is Brian. I think from an asset sensitivity perspective, where we look at where we're at, where we look at where we are in the credit cycle, where we are in the rate cycle and kind of what might be on the horizon, as we have noted, our -- the average duration of our loan portfolio has gotten a lot shorter over the last, call it five to eight years. So adding some duration back on to the balance sheet we think we'll be prudent over the next 12 to 24 months. We've started in the investment securities portfolio, but we would feel comfortable at least maintaining the balances on the mortgage side, if not growing them a little bit into 2019 or 2020.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. And what types of loans are you adding there (inaudible) first, second lien, LTV, et cetera?

Brian Maass -- Chief Financial Officer

I'd say, it's a combination. So we do have our home equity originations, both of which we keep some, as well as we do sell some of those for credit concentration purposes. So that's growth on the second side, and the first side, it could be jumbo as well as conforming loans over time as well.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. Great. Thanks for all the color.

Operator

(Operator Instructions) The next question will be from David Chiaverini of Wedbush Securities. Please go ahead.

David Chiaverini -- Wedbush Securities -- Analyst

Thanks. Question on credit quality. So consumer real estate NPAs increased about $5 million in the quarter. Could you provide some color as to what could be driving that?

James Costa -- Chief Risk Officer, Chief Credit Officer

This is sort of the dynamic -- this is Jim Costa, appreciate the question, David. This is a dynamic of having a non-accrual loan so your portfolio balances are reduced. So really from an inflow standpoint, the NPAs in the consumer real estate are consistent as they've been for the last many quarters. It's really the outflow because you have a smaller portfolio. It is not a change in quality. Does that make sense?

David Chiaverini -- Wedbush Securities -- Analyst

Yes, it does. And going back to the prior question on TCF Home Loans. So are most that new loans that are coming on board, are they fixed rate or variable rate?

Brian Maass -- Chief Financial Officer

Most of what's coming on balance sheet in the first will be fixed rate, likely. At the growth end, HELOCs would be variable rate.

David Chiaverini -- Wedbush Securities -- Analyst

And what sort of yields are you getting on these, that new or TCF home loans? I know that your overall is about 6.1%. Are you getting a similar rate on the new loans?

Brian Maass -- Chief Financial Officer

This is Brian. What I'd say is, we are not that different than what market rates would be on the first mortgage side. So we'd be at or right around where market is.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Thanks very much.

Operator

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

Craig Dahl -- Chairman and Chief Executive Officer

Thank you for joining the call this morning, and we appreciate your interest, the level of questions and your continued investment in TCF. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 59 minutes

Call participants:

Timothy Sedabres -- Investor Relations

Craig Dahl -- Chairman and Chief Executive Officer

Brian Maass -- Chief Financial Officer

James Costa -- Chief Risk Officer, Chief Credit Officer

Jon Arfstrom -- RBC Capital Markets -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

R. Scott Siefers -- Sandler O'Neill & Partners -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Jared Shaw -- Wells Fargo -- Analyst

Christopher McGratty -- KBW -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

David Rochester -- Deutsche Bank -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Kenneth Zerbe -- Morgan Stanley -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Michael Jones -- Executive Vice President

David Chiaverini -- Wedbush Securities -- Analyst

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