TCF Financial Corp's (TCB) CEO Craig Dahl on Q2 2016 Results - Earnings Call Transcript

| About: TCF Financial (TCB)

TCF Financial Corp Earnings (NYSE:TCB)

Q2 2016 Earnings Conference Call

July 22, 2016, 10:00 ET

Executives

Jason Korstange - Director, IR

Craig Dahl - CEO

Brian Maass - CFO

Mike Jones - EVP, Consumer Banking

Analysts

Jon Arfstrom - RBC Capital Markets

Jared Shaw - Wells Fargo Securities

Dave Rochester - Deutsche Bank

Bob Ramsey - FBR

Scott Siefers - Sandler O'Neill

Ken Zerbe - Morgan Stanley

Steven Alexopoulos - JPMorgan

Chris McGratty - KBW

Emlen Harmon - Jefferies

Presentation

Operator

Welcome to TCF's 2016 Second Quarter Earnings Conference Call. My name is Jamie and I will be your conference operator today. [Operator Instructions]. Please also note that today's event is being recorded. At this time I'd like to introduce Mr. Jason Korstange, TCF Director of Investor Relations, to begin the conference call.

Jason Korstange

Good morning. Mr. Craig Dahl, Chief Executive Officer, will host this conference. Joining Mr. Dahl will be Mr. Tom Jasper, Chief Operating Officer, Mr. Brian Maass, Chief Financial Officer, Mr. Mike Jones, Executive Vice President Consumer Banking and Mr. Bill Henak, Executive Vice President Wholesale Banking. During this presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the Company. We caution that such statements are predictions and that actual events or results may differ materially.

Please see the forward-looking statement disclosure in our 2016 second quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of June 30, 2016 and we undertake no duty to update the information. During our remarks today, we will be referencing a slide presentation that is available on the investor relations section of TCF's website ir.tcfbank.com. On today's call Mr. Dahl will begin with a discussion of second quarter observations and 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 then open it up for questions.

I now turn the conference call over to TCF Chief Executive Officer Craig Dahl.

Craig Dahl

Thank you, Jason. TCF had another strong quarter as we continue to execute on our four strategic pillars which are shown on slide 3, diversification, profitable growth, operating leverage and core funding remain our emphasis going forward. As I look at the second quarter, I am pleased by the progress we're making on improving operating leverage as year-over-year revenue growth, again, outpaced expense growth.

We remain focused on this issue. Loan and lease growth remains strong as period-end loan and lease balances increase 3.5% year-over-year driven by an 8.4% increase in originations. We were also able to maintain our steady loan yields while effectively managing deposit costs during the quarter. Despite continued loan and lease origination growth, we did see our typical seasonal decline in period-end balances driven by inventory finance. We also maintained stable credit quality metrics across all business lines.

Slide 4 provides an overview of why we feel we're well-positioned versus our peers. Our model provides for higher and more diverse revenue sources compared to our peers and from a growth perspective, we're focused on profitable growth. We have also been able to maintain steady loan and lease yields well in excess of our peers without expanding our credit box due to our strong execution on pricing and unique blend of niche lending businesses. This mix of asset classes provides ample and flexible origination capabilities which have resulted in loans and leases making up a larger portion of our average assets.

We have been able to consistently generate organic originations while maintaining discipline on price, structure and credit quality. 94% of our deposits are insured compared to our peers at 63%. This is a competitive advantage for us from a price and balance perspective. In addition, we have a preferred deposit composition primarily made up of low balance retail deposits which have the highest liquidity value. Our net charge-offs are in line with our peers. As our first mortgage portfolio runs off, our wholesale portfolio, with just 10 basis points of net charge-offs in the second quarter of 2016, is having more of a positive influence on our consolidated credit quality.

Slide 5 shows key year-over-year financial highlights for the second quarter with trends remaining very positive in these areas. Loan and lease originations increased 8% year-over-year while average deposits were up 9%. We also saw nice increases on revenue, return on average common equity and book value for common share. We reported a return on assets of 1.14%. In addition, nonaccruals were down over 5%. You will notice that we did see a slight uptick in provision year-over-year; however, net charge-offs also declined from $17 million to $10 million.

Slide 6 highlights similar encouraging trends when compared to the first quarter of 2016. We saw growth in loans and leases and deposits along with favorable credit trends which include reductions in non-accrual loans and leases. Meanwhile, we experienced some seasonality benefits in the second quarter, including higher fees and service charges and lower compensation expenses which positively impacted revenue and ROA.

As you turn to slide 7, you will, again, notice in the upper right-hand corner that we have indicated which of our strategic pillars the slide highlights. Our total revenue increased 3.6% year-over-year. During the quarter, we saw just a 2 basis point decrease in the margin as loan yields moved lower by only 1 basis point and deposit costs increased only 1 basis point. Given the shape of the yield curve and interest rate outlook, we would expect to see margin pressure moving forward as the mix of our portfolio continues to change.

We did experience an increase in fees and service charges typical of the second quarter. We had another strong quarter of non-interest income in the leasing businesses totaling $31 million for the quarter and nearly $60 million year-to-date. I will remind you that leasing revenue can be customer-driven and has some level of volatility from quarter-to quarter. Finally on the right side of the slide, you can see the level of diversification we have from both an interest income and noninterest income perspective. Diversification is an important part of our strategy.

Turning to slide 8, you can see the diversification we also have within our loan and lease portfolio as no asset class makes up more than 25% of the total. Our portfolio had year-over-year loan and lease growth of 3.5%. Had we not sold any loans in the second quarter, we would have experienced an annualized growth rate of 15% which demonstrates the strength of our model. We have additional diversification in the portfolio by geography, rate, average loan size, estimated weighted average life and collateral type.

Slide 9 highlights our unique loan and lease origination capabilities which are an important part of our business model. We have multiple origination channels that gives us growth flexibility while allowing us to maintain our discipline on price, structure and credit quality. Second quarter 2016 originations increased 8% from the second quarter of 2015. Note that inventory finance origination levels are higher than the other asset classes due to the high velocity of fundings and repayments with dealers, but are included in all of the comparison periods.

Slide 10 provides an overview of our loan sales which have been a core competency for over four years. We continue to optimize our whole versus cell strategy on a quarterly basis based on various factors including concentration management, capital liquidity and revenue generation.

On Slide 11, you can see that our Service for Others portfolio continues to grow now with an average balance for the second quarter of $4.7 billion. This portfolio contributes revenue through both gains on sales and loans and servicing fee income. Our servicing revenue continues to increase as we sell and service these loans, totaling $9.5 million in the second quarter of 2016, up 32% from a year ago.

Slide 12 demonstrates the stability of our loan and lease yields which have remained relatively flat over the past year despite a very competitive marketplace and challenging interest rate environment. Our diversification strategy has allowed us to maintain a significant yield advantage over our peers.

Turning to slide 13, you can see that the credit quality remains consistent at TCF. Our 60 day delinquencies, a leading indicator for equipment finance, auto finance and consumer real estate, remained very low at 12 basis points. We saw $6 million linked quarter decrease in provision due to lower net charge-offs and reduced reserve requirements in the consumer real estate portfolio. Non-performing assets decreased by $9 million for the second consecutive quarter and now are at their lowest level since the third quarter of 2008.

Turning to slide 14, net charge-offs continue to perform in the low end of our expected range, driven largely by the strong performance of our wholesale businesses with just 10 basis points of net charge-offs in the quarter. Consistent with our expectations, net charge-offs in the auto portfolio declined in the quarter and were down 12 basis points quarter-over quarter to 0.69%. We also saw a significant improvement in our consumer real estate portfolio, down 16 basis points from the first quarter of 2016. Overall, we see no significant themes in our credit story.

With that, I'll turn the call over to our Chief Financial Officer, Brian Maass.

Brian Maass

Thank you, Craig. Turning to slide 15, non-interest expense increased 1.9% year-over-year, while revenue increased 3.6%. This demonstrates our focus on creating operating leverage by managing our expense base while growing revenue. In addition, our efficiency ratio moved lower to 68.7%, a 115 basis point decrease over the prior year.

This remains a key focus for the organization. Compensation returned to a more normalized level after two consecutive quarters of volatility. We expect compensation to remain in this range moving forward. We did have an increase in other non-interest expense which is largely attributable to a branch optimization expense of $2.9 million related to the pending closure of two traditional branches.

Turning to slide 16, slide 16 shows our deposit mix which is the primary funding source for our loan and lease growth. While we have continued to execute on our targeted CD campaigns which have resulted in good deposit growth, we have seen continued increases in checking and money market balances, as well.

A further break down of our CDs shows that 87% are under $250,000. Note that our CD growth does provide longer term value as over 80% of our promotional CDs also utilize additional TCF products. Meanwhile, deposit costs increased just 1 basis point compared to the first quarter. Account attrition continues to improve, while deposit growth is outpacing our loan and lease growth. Finally our deposits are granular in nature with 94% being FDIC insured.

Slide 17 demonstrates how we're well prepared for changing interest rates given our mix of short term and variable rate loans. The shorter duration of our assets also allows for optionality in a changing interest rate environment. Given the current interest rate outlook, we may see some pressure on our margin moving forward related to portfolio mix changes, growth and competition.

Turning to slide 18, our capital ratios remain strong with earnings accumulation. We declared a common stock dividend of $0.075 per common share earlier this week. We also saw improvement in our tangible book value per share and return on average tangible common equity.

With that, I will turn the call back over to Craig Dahl.

Craig Dahl

Thank you, Brian. Slide 19 provides a summary of our strategic pillars. We continue to generate loan and lease originations that provide portfolio diversification and revenue growth, all while maintaining credit quality discipline. We're able to produce core operating revenue growth in net interest income, leasing revenue and our consistency of loan sales.

We continue to make strides from an operating leverage perspective as items such as branch closures will provide additional operating leverage as we move forward. And finally, we continue to generate sufficient deposits to support our loan and lease growth.

With that, I'll open it up for questions.

Question-and-Answer Session

Operator

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

Jon Arfstrom

Maybe just the last topic you brought up was just on the branch closures and some of the opportunities there. I don't know if Mike's in the room, but maybe give us an idea of what's left to do on branch closures and maybe how things are going in Chicago. I thought it was a particularly good quarter with a $2.9 million expense in there as well. But just give us an idea of what's to come and where we're at on that.

Mike Jones

Yes, Jon, this is Mike Jones. How I would frame it is, we're going to continue to look at the traditional branch networks. There are two traditionals that we closed within the quarter. I don't think that we need to make major changes to our footprint. I really like our footprint, but then with that said, I think there will be opportunities from time to time to trim it a little bit. I think what we're trying to do is kind of respond to the change in customers' needs and their desires.

They're moving more towards self-service. If you look at year over year, we've increased our ATM footprint almost 30%. So we've significantly put a lot of investment into self-service because that's the feedback that we've received from our customers. On the Chicago, it's tracking exactly like we expected it to, with really no material runoff of deposits based on those closures.

Jon Arfstrom

Okay. Good. And then it seems like you're highlighting the efficiency ratio a bit more. And I don't remember the Company highlighting efficiencies for a long, long time. But maybe give us an idea of what the message is internally on expenses and are there any targets that you're managing to on efficiency?

Brian Maass

Yes, Jon, this is Brian Maass. What I would say there is we don't have any specific efficiency ratio targets to share. But I think, as we've been alluding to over the last couple of quarters, we're just real focused on making sure that we're growing revenue faster than we're growing in expense. When you look year to date, revenue is up 5.1%, expenses are up 1.3%. If you actually look without the branch closure in this quarter, expenses were up less than 1%. It was like 0.6%. And I think we had expenses up 0.7% in Q1. So, again, our focus isn't necessarily on a targeted ratio at this time, but we want to ensure that we're creating operating leverage by making sure that revenue is growing faster than expense.

Jon Arfstrom

Okay. Good. And then just on the last slide, Craig, you touched on was on capital. And just wondering if you guys have any changing capital plans? It seems like your capital is certainly building. And I'm just wondering how you guys think about uses for your capital as it continues to build.

Craig Dahl

No. We don't have a change in our view on capital. And we just had a Board meeting this week. Again, we discussed our capital position and our options. We've talked about it before, Jon, about the role of the dividend. What role can a stock buyback play? What capital would we need for any corporate development activity? And what capital we need to retain really for organic growth? And so, as long as we continue to see profitable growth opportunities, we're comfortable with the capital that we're at. And when we stop seeing those, that would be a time when we would look at that stack.

Operator

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

Jared Shaw

As we look at the loan sales this quarter, continue to see progression in increasing the size of the loan sales. When you look at this quarter specifically, I know that there's a lot that go into your calculation on when you're going to sell and how much you're going to sell, but what was really driving that this quarter? Was it more of the desire to influence the mix of the loan portfolio or was it you trying to target more of a loan-to-deposit ratio? We've seen that that's coming down the last few quarters. I guess what was your thinking behind the level of loan sales this quarter and what we could expect for the year?

Mike Jones

Yes, this is Mike Jones. I would say a little bit of it is kind of based on opportunity in the marketplace and kind of what the marketplace will allow us to bear from an investor standpoint. I think as you look over the period and last year it was $820 million. So up a little bit year over year. And then up a little bit on a linked quarter basis.

So I would say that it's kind of based on what we originated within the quarter, being the auto and the consumer real estate. Additionally, I would add that about a little bit over a year ago we've gone back into the branches with the correspondent lending first mortgage book. And that continues to grow as well. And that's shown on that sales line as well.

Jared Shaw

And then, Brian, looking at the tax rate this quarter, it had come down sequentially. What should we be -- was there anything one time or a true-up in the quarter and what should we be looking at for the rest of the year?

Brian Maass

Yes, so this is Brian. I'd say our tax rate was slightly lower this quarter. But I still would expect our normal or core effective tax rate to be in that 34.5% to 36.5% range.

Operator

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

Dave Rochester

On expenses real quick, what was the big driver for the growth of that other expense line this quarter? I know you had the branch realignment expense in there, but outside of that, it looked like that was up a little bit.

Brian Maass

Yes, on that line, I would say it really is the branch realignment that was $2.9 million or $3 million of that change. There's nothing else that really stands out on that line.

Dave Rochester

Okay. And are you still thinking you can keep expense levels from here relatively flat or maybe just growing modestly, through the end of the year?

Brian Maass

Yes. I would say, year-over-year, like we said, year to date we're up 1.3% on expenses. I think, again, we're in that 1% to 2% range, assuming that we can continue to grow revenue at the pace that we have been.

Dave Rochester

Okay. And just switching to capital for a minute, can you guys just update us on your thoughts on buybacks? It just seems like it would be a good time to start those, given the valuation. Or maybe said another way, what are you guys waiting for before you start those up?

Craig Dahl

Yes, this is Craig. We just talked about that. And what I started with was we just had our Board meeting this week. We talk about it, really, among four options. One of them is, where are we on the dividend? Second is, where are we on stock buybacks? Third is the role we would need capital for corporate development. And fourth is our capital needs for organic growth. Now, you have followed the stock for a while. And you know, in our history, TCF did utilize stock buybacks.

However, in the more recent term, as we've turned more to an asset model, we have a bigger capital requirement to support that. And the other thing I would mention is that our intra quarter leverage is slightly higher than it would show at period end because as we build up for the loan sales within the quarter and don't have the gain on sale running through equity either.

So those are the discussions that we've had and then lastly, we still think that there are profitable opportunities, profitable asset growth opportunities out there, either through organic or through corporate development. And until we stop seeing those, we really don't want to trade capital for something else.

Dave Rochester

Are you still thinking that you're growing loans at 6% a year roughly?

Brian Maass

I think it's less focused on a single number. What we're looking for there, as Craig alluded to, is profitable growth, right? And what can we grow revenue on a year-over-year basis at.

Dave Rochester

Okay. I guess previously you'd spoken to something in that mid-single digit, around 6% kind of range. So I was just thinking, given returns and whatnot, it seems like you're going to be growing capital ratios over time. And if that's the case, where do capital ratios need to be in order for you to feel more comfortable with sort of deploying that, not only in organic growth but buybacks? Do you need to have excess capital versus peers -- any kind of extra color to give there?

Craig Dahl

This is Craig. The first thing I want to remind everyone, too, is the seasonality that we have in our inventory finance business and which swells our balance sheet in that first quarter. And it always makes our first to second quarter asset comparisons difficult to sort of manage at the total level. Now, we also have in the fourth quarter -- it's our biggest quarter of originations in our leasing businesses, so we have it there too.

So it's really kind of hard to throw out a percentage here right at the end of the second quarter, based on where our loan mix is. And the other thing, Dave, if you look, our average assets in the quarter were quite a bit higher than our ending asset levels as well. And that's the other piece of that puzzle. So we're really not giving guidance on at what point we would institute a stock buyback. We continue to look for profitable growth opportunities and some will be organic and some will be non-organic.

Dave Rochester

And just one last one if I could on the NIM? You mentioned seeing some pressures in the exchanges, you talked about competition, lower rates. Can you just talk about the slope of that decline that you're expecting? Are you thinking something more moderate or just maybe more modest gradual NIM pressure over time? Any color there would be great.

Brian Maass

Yes, I don't think the trajectory of the NIM decline changes much, right? As you know, we're starting off with one of the highest NIMs. So we do expect to see some downward pressure. Absent the last couple of quarters, if you look back in time and the kind of declines we were having quarter to quarter, that's probably what we would expect going forward. So, no real shift or change there.

Dave Rochester

Okay.

Craig Dahl

And this is Craig. We've got woven in our messaging that we have lots of discipline around pricing and credit. And that's the other part of it. So we've been -- and then with our mix gives us a lot more options than a lot of people we compete with.

Operator

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

Bob Ramsey

I guess first question I have for you is sort of the leasing income. I know you said in the introductory comments that it can be very volatile quarter to quarter. I've sort of had it in my notes that you guys were targeting about $100 million a year, though and you're well above that trajectory. I'm just curious if that's still a reasonable way to think about the Business or if it's bigger than I was thinking.

Craig Dahl

Well, I think when you look at our quarterly average, it's right around the $28 million mark. And we've probably pulled some forward here in the quarter based on, like I said, customer-driven activities. And so we would probably stand by our quarterly. Going forward, our quarterly average is a good estimate. But we have outperformed that in the first half of the year.

Bob Ramsey

Okay. So quarterly average of $28 million is maybe the right way to think about it on average?

Craig Dahl

But when you look backwards -- the last eight -- that's what it looks like. And obviously we've had a couple of lower quarters and we've had a couple of highers, but that's kind of where we're modeling it, but again, if it's a mid-term transaction activity, it's going to be customer-originated, not us. If it's end of term, then it's going to be both of us.

Bob Ramsey

The $3 million in branch consolidation charges this quarter, was that just the two traditional branches or was some of the Chicago in-store stuff in that number as well?

Mike Jones

That was just the two traditional branches.

Bob Ramsey

Okay. And on those traditional branches, what is the cost benefit of closing those branches and how do you think about the earn-back of that cost?

Mike Jones

Yes, this is Mike Jones. I think the earn-back associated with those is a little bit longer than the Chicago closure and the renegotiation of that agreement. So, that's going to probably be in around the 2- to 3-year time frame.

Bob Ramsey

And then I know you would certainly talked about a little bit more margin pressure given the rate environment we're in. Can you quantify what the pace of that looks like in the next couple of quarters, if rates stay where they are today?

Brian Maass

Yes, I mean, I tried to answer that, I think, in one of the previous questions. The last couple of quarters, we did have the rate hike in December. What I would expect -- just again, you have to take into account that we're starting off at a 4.35% NIM. So there is going to be some downward pressure on that. I'd say if you -- absent the last couple of quarters where it went up 2 and now down 2 and you look back to some of the previous periods where it was going down 4 or 5 basis points, that's probably the range.

Bob Ramsey

Okay. So, 4 to 5 makes sense roughly, if rates are where they are today?

Brian Maass

Yes.

Operator

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

Scott Siefers

Just maybe a little follow-up on the margin. I guess I've gotten the sense over the last few quarters that potential pressure or I guess actual pressure, on funding costs has been the -- kind of the biggest pressure point, particularly CDs. And CD costs are going up, but it looks like the pressure is a little eased relative to what it's been. I guess I'm just curious to hear your updated thoughts on deposit cost pressures as you see them, particularly if rates just sort of hold steady for a while.

Brian Maass

Yes, so this is Brian. A couple of things there that would drive that line is going to be the amount of deposits that we're going after. It's going to be competition. And it's going to be the rate curve. So the one benefit, I'd say, of having rate expectations come down has been our ability to try and manage deposit costs tighter. So what you saw in the quarter is that our deposit costs only went up 1 basis point. And that's much better than the last two or three or four quarters before that, where it was going up 2 or 3 basis points. So we're reasonably optimistic, I guess, in this low rate environment that we can continue to manage that line closer.

Scott Siefers

And then, I try to take a look at the overall loan growth trends. I mean, the summertime tends to be kind of particularly challenging for you guys to or I guess from the outside -- to figure out where there's strength and weakness in the portfolio, given the combination of sales and then the leasing business in the summertime. So I guess as you look at things, I mean the origination trends look pretty steady overall, but as you look across the portfolio, where would you say you're feeling kind of best and worst about underlying strength across your product categories?

Craig Dahl

Okay. Just to clarify, Scott, from an origination standpoint or from an asset growth standpoint?

Scott Siefers

More the asset growth side. Yes, the origination side on -- overall still looks pretty good, but just trying to get a sense for where you're feeling best and worse on the underlying trend.

Craig Dahl

Yes, I think the one that continues to be a challenge for us is that commercial portfolio. I mean, there are lots of our competitors that have only that, C&I and CRE as their primary wholesale platforms. And so there still is a lot of competition there. Although, with a little bit of the energy noise bouncing through some of our competitors, we've had some opportunities there. But that one is the biggest challenge. And then we do have that runoff of our legacy First portfolio that has an impact on our NIM. And obviously, we're fighting against that in each quarter. So those would be the two.

And I understand that we have a fairly complex asset model on our balance sheet. We have a held-for-sale. You have to kind of look at where was that in the quarter and then we have -- so that's one factor. And then when you look at our inventory finance business, if you really look at it year over year, that's the best way to do it. And I think it's up 11% on a year-over-year basis. So while it liquidates in the quarter -- again, it liquidated in the quarter a year ago, too and look at it that way. We still see strength in our auto business. We still see strength in inventory finance and we still see strength in our leasing and equipment finance.

Operator

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

Ken Zerbe

Can you just talk about the thought process of growing the CD portfolio? Obviously this quarter's total -- or average loan growth -- was fairly flat. But would you still grow CDs if, let's say, your total loan balances grew less than that 6%? Thanks.

Brian Maass

Yes, so this is Brian. And obviously, we're going to be cognizant of where asset growth is when we think about funding promotions. So we would try and move the dial accordingly from a promotion perspective to try and keep those things somewhat in mind.

Mike Jones

The other thing that I would add is, our team is very successful of taking a retail CD customer and cross selling them into a checking account or a savings account. So while it comes in as promotional money, we look at it as an opportunity to cross sell into checking and savings and getting a real strong household for the future as well.

Ken Zerbe

And is that meeting expectations? Because I think if I look at that one slide that you talked about, deposit mix, CDs as a percentage has been going up. Savings, I think, has been fairly flattish. Actually, savings are down 5 percentage points over the last year. Are you I guess happy or satisfied with that cross sell so far?

Brian Maass

We're definitely satisfied with the deposit growth that we've had on a year-over-year basis. And it's not just been CDs that's growing. Obviously that percentage -- it's showing on a percentage basis, but if you actually look at the checking line on there -- and even though it's roughly the same percentage on a year-over-year basis, over 20% of our deposit growth came from checking. And that's roughly $300 million worth of growth in the last year. So we're not just growing, you know, promotional accounts and CDs. We actually are seeing, whether it's new accounts or augmentation of existing accounts, growth in average balances in deposit in checking accounts as well.

Ken Zerbe

And was there any reason for the more rapid runoff in the second-lien home equity portfolio this quarter?

Mike Jones

No. I mean, there's two aspects to that, right? So there's sales out into the marketplace that we do on a quarterly basis. And those were up a little bit on a quarter-over quarter basis. And then it's just a factor of prepayments and customers paying down balances.

Brian Maass

This is Brian. Just one other thing to add to that, too, is we did have movement of some of those loans into held-for-sale, too, for some anticipated sales in the third quarter. So some of the balance is sitting on that line as well.

Ken Zerbe

Should we expect that line to be flat or down from here?

Brian Maass

It just depends as to what we have at the end of a quarter.

Operator

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

Steven Alexopoulos

I wanted to first follow up on an earlier question for expected loan growth. If we look year over year which you highlight on slide 8, you're up 3.5% which is inclusive of loan sales. All things considered, why would that not be a good run rate going forward?

Brian Maass

Well, obviously that's what we've experienced. We also -- as we said, if we didn't sell any loans, we'd be at 15%. So we obviously have the origination capability to have that be a number, but we're trying to manage a lot of different facets.

Craig Dahl

And, again, that's where the movement to a held-for-sale can impact the ending balance comparison. And that's part of the complexity that I tried to acknowledge in my prior answer. Does that make sense? When we mark a portfolio for sale, it moves into that category and you're going to not see it in loans held for sale -- or held for investment, excuse me.

Steven Alexopoulos

Yes. As you think about the year forward, is there any reason you would be materially reducing the amount of originations getting sold?

Mike Jones

This is Mike Jones. I think, as you looked at our prior history around the levels of loan sales and as that moves forward, we'll look at, from quarter to quarter based on the investors we have, the marketplace and what we want to maintain on balance sheet. So all of those factors kind of go into play. But I would say that if you look at the prior five quarters and see those ranges in there, we would see those continuing as we move forward into the future.

Craig Dahl

And this is Craig. The only other thing I wanted to add is, the timing of when we marked it for sale can affect the period-end balance. That's what I was trying to indicate. So I can sell the same amount in the quarter. If I sell some earlier and they're marked at the prior quarter end, it's not going to be in the ending loan balance.

Steven Alexopoulos

Yes. Okay. Shifting gears for a second, we've seen some smaller banks around your market sell. Are there any thoughts around bank M&A to help out on the deposit funding side?

Craig Dahl

Well, as we talked about in the corporate development aspect and that's something that we have not ruled out. And we would be interested and just haven't really run into the right opportunity at this point.

Steven Alexopoulos

And just one final, $3 million to close two branches seems on the high side. What exactly did that money go towards?

Mike Jones

Yes, so this is Mike Jones. If you looked at those two branches, they were old, larger, traditional branches that were owned. And if you look at when those were purchased, from a timing standpoint it's just where the market will bear to exit those. We believe that we've got great coverage around those branches. So we felt like it was a great opportunity to get us out of a couple underperforming branches.

Steven Alexopoulos

Okay. So is that to say you sold them for less than where you were carrying them? Is that what you're saying?

Mike Jones

That would be correct.

Operator

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

Chris McGratty

Craig, I'm interested in an update on the NORA letter. You haven't talked about it. Where do we stand in terms of potentially getting this resolved?

Craig Dahl

I would -- from an answers to that, Chris, we're in the same spot we were at last quarter's call, where we're still in, we believe, discussions with them regarding the nature of our accounts. And there really isn't any other comments I can make at this time.

Chris McGratty

Okay. Maybe I can come back to your prior comments, Craig, about capital use. Given where your stock's selling in terms of tangible book around 1, 2, were your comments around acquisitions more portfolio purchases, something like a GE situation? Or were you suggesting that you could go out and buy a depository? I'm just curious, given where pricing is for M&A.

Craig Dahl

Yes, I think my comments were more on the former that we've been looking for asset opportunities there in the short run. But I believe, going forward, I would not rule that out.

Operator

[Operator Instructions]. Our next question comes from Emlen Harmon from Jefferies. Please go ahead with your question.

Emlen Harmon

Just wanted to hit on auto originations. Do you guys still anticipate building your origination capability there? Obviously, it slowed a little bit this quarter, but that was on the back of, I think, a really strong first quarter.

Mike Jones

Yes, this is Mike Jones. I would say that we're pretty satisfied with the number of sales teams that we have within the Organization. And now we're looking for more efficiency and operating leverage by leveraging those sales teams in the different territories that they're in. So what we're trying to drive for is them getting up to speed, establishing the relationships with the indirect dealers or with the dealers to originate the indirect paper and looking to increase kind of our look-to-book percentage so that we can originate those loans more efficiently.

Emlen Harmon

And then just on the provision, it was an interesting quarter given that the loan book was fairly flat. And you guys just -- really just matched the charge-offs. I guess, excepting a meaningful change in the macro environment, is that how we should think about the provision going forward? Effectively you guys will build the allowance when the loan book is going up and effectively try to match charge-offs underlying that?

Craig Dahl

Right now that's, I think, a good way to look at it. The other -- again, the other thing about it is you have to look at the underlying mix. And there's continuing to be mix changes within that that have an impact. And, again, the quarterly impact in the second quarter -- you've got a reduction in your inventory finance that frees up reserves again. So there's a lot of moving pieces within each quarter, too.

Operator

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

Craig Dahl

Yes. I would just like to give a quick summary of TCF's first six months of 2016. First of all, I'd remind you of our strategic pillars -- diversification, profitable growth, operating leverage and core funding -- and our year-to-date results compared to year to date of 2015. Our net interest income is up 3.7%. Our non-interest income is up 7.7%. Our loan and lease originations are up 10.7% and our non-interest expense is up only 1.3% which includes branch closures in each of the first two quarters. These branch closures are helping to optimize our expense base and allowing for reinvestment into channels and products. With the continued efforts of our employees, we're working as one TCF to deliver these sustained results. Thank you.

Operator

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