TCF Financial Corporation (NYSE:TCB) Q3 2018 Earnings Conference Call - Preliminary Transcript
Oct 22, 2018 • 10:00 am ET
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,