Q3 2019 Earnings Call
Tcfs 2019 third quarter earnings call.
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At this time I'd like to introduce Tim Sedabres head of Investor Relations to begin the conference call.
Good morning, and thanks for joining us for Tcfs third quarter 2019 earnings call.
Joining me on today's call will be Craig Dahl, President and Chief Executive Officer, Tom cheaper, Chief operating officer, and President of DCF Bank.
Dennis Klaeser, Chief Financial Officer, Jim Costa, Chief Risk Officer, and Brian Maass, Deputy Chief Financial Officer and Treasurer.
And just a few moments Craig denizen, Jim will provide an overview of our third quarter results.
I'll be referencing a slide presentation that is available on the Investor Relations section a piece, yes website at <unk> Dot Tcf Bank dotcom.
Following their remarks, we'll open up for questions.
During today's presentation, we may make projections or other barber looking statements regarding future events or the future financial performance of the company. We caution that such statements are production and the actual events or results may differ materially. Please see the forward looking statement disclosure and our 2019 third quarter earnings release for more information about risks and uncertainties, which may affect us.
The information we will provide today is accurate as of September Thirtyth 29 team and we undertake no duty to update the information.
I'd now like to turn the conference call over to Tcf, President and CEO Craig Dahl.
Thank you Jim.
Good morning, and thank you for.
For joining us on our first earnings call as the new Tcf team.
As Tim mentioned I'm pleased to be joined here this morning by Dennis.
Jim and Brian .
Let me start by Recapping a few key highlights from our third quarter earnings and then share an update related to our merger and integration activities.
After that Dennis will share more details on our third quarter financials, and Jim will make a few remarks around credit quality.
To begin we closed the quarter with 46 billion and total assets, including 34 billion up loans and leases, but did with 35 billion I'm deposits. Both the loans and deposits are comprised of a complementary mixed up consumer and commercial relationships as a result of bringing together both banks.
The top 10, leading market share in the Midwest along with dedicated team members across the footprint, we have the size scale and product offerings to compete and win in our markets.
We have been hard at work and have completed numerous activities to date, including closing the merger on August 1st and completing all legal day, one work streams.
Repositioning the balance sheet by selling securities terminating interest rate swaps and transferring the legacy Tcl auto portfolio to held for sale.
Continuing to drive organic growth, both in loans and deposits and authorizing a $150 million share repurchase.
Dennis will provide more details on these actions.
I continue to believe we have a tremendous opportunity in front of us with the ability to grow and take market share in various ways, including building on the expertise and our commercial banking and commercial real estate groups to newly expanded markets.
Leveraging our expertise and inventory finance and capital solutions across our larger commercial customer base.
Bringing market, leading consumer digital banking offerings to a broader set of customers.
And expanding our mortgage banking products to a larger base of over one and a half million customers.
We are in the very early innings or what I believe we can accomplish together as one tcf and I look forward to sharing our progress and successes with you as we go forward.
Slide four opens with a few highlights from the third quarter results.
Although our reported earnings were impacted by merger related to non core items for the quarter. Adjusted for these items, we earned 98 cents per share.
Even as we closed on the merger of equals during the quarter, we delivered an adjusted efficiency ratio of 58.7% and an adjusted return on tangible common equity a 15%.
These results do not yet reflect the full contribution from our targeted cost synergies.
Our results should only improve as you get closer to our run rate targets in the fourth quarter of next year.
Underlying these results was continuing momentum across our businesses with deposit growth up 4% from a year ago and deposits, excluding Cds increased by 7% year over year.
On the lending side, we saw held for investment loan growth of 8% year over year, excluding the legacy Tcl bottle portfolio and this included strong growth across our Sienna and CRB portfolios.
We also expect higher production going into the fourth quarter as we have a strong backlog and leasing and are seeing a large mortgage mortgage origination pipeline.
As I've said before each bank had momentum going into this partnership on a standalone basis and these core results demonstrate that continue trajectory.
Finally, we posted a common equity tier one ratio of 10.9% at quarter end, which was above the 10% target we shared at deal announcement.
As a result of this increased capital, we announced a $150 million share repurchase authorization, which will continue our disciplined capital deployment strategy.
Turning to slide five our integration program and activities remain on track we closed on the merger on August Onest, which was at the early end of our expected timing and was supported by timely applications and approvals.
Our integration teams are hard at work executing on our project plan and preparing for upcoming key milestones.
Recent actions include a combined board of directors comprise equally representatives from each legacy Bank. Our board is comprised of exceptional leaders from their fields with diverse backgrounds and experience. We have consolidated governance committee structures, both at the board and management levels to ensure we have one.
Good governance and control framework for the organization.
We have aligned internal policies, including establishment of an integrated risk appetite framework and credit concentration limits.
Additionally, credit underwriting policies and BSC policies have been aligned across the company.
Our cultural integration activities are well underway. We've spent a good deal of time traveling the footprint and meeting with team members across the bank.
We have met with key leaders across the organization in their markets and as we visit with more Carla colleagues and see the passion they have for their customers I have even more confidence in our ability to compete and win in these markets.
We're already seeing positive momentum for leveraging our expanded product set and expertise across the footprint.
On the leadership side, we have named over 90% of functional leaders.
Across the company to date.
Additionally, we recently hosted a meeting of our broader senior leadership team representing the next layer of leadership across the organization their engagement and passion was inspiring and demonstrated the substantial expertise we have across the company.
The conversion of many key system is foundational and our integration plans and we are preparing for the first wave of system conversion work streams.
We have selected a provider for the core banking platform and have negotiated an executed the related contract.
Our teams continue to remain focused on putting our clients first during the integration work.
That includes both maintaining top service levels as well as not losing momentum on new business development activities.
Not directly related to the merger, but indicative of our continued focus on managing the business effectively and efficiently. We implemented a set of branch rationalization initiatives. This includes closing four branches in Indiana, and Ohio, which were outside of our core market footprint and also announced a closing up 17 branches.
Within grocery store locations in Chicago, and the twin cities aligned with our ongoing review of branch profitability.
As we move into the fourth quarter. There are numerous items coming up on our action plans, including implementing a combined benefit plan for all employees effective on January one our human capital management team did a great job to get us to a single comprehensive benefit plan for all employees.
On the systems front, we will consolidate to one mortgage lending platform. We will continue to execute on system conversions in waves as we move forward, where we can we are de risking the conversion milestones.
We are working through the continuation of staffing optimization to support our targeted cost synergies from compensation and overlapping resources.
And taking steps to do rate by our employees in the process.
Finally, we have roadmaps in place regarding the launch of business synergy initiatives.
Before I turn it over to Dennis I want to thank all of our employees for all of their hard work to date on ensuring we continue serving our customers. We all come to work every day as part of one Tcf and I believe we have the scale products talent and expertise to compete and win against any competition.
When I look forward to our top two our opportunity and 2020 and the future.
Ill now turn it over to Dennis to provide more detail around our third quarter financial results.
Thank you Craig before I begin I want to remind everyone that third quarter results as presented in the earnings release reflect the mid we're closing of the transaction on August Onest.
As a result, our numbers include July financials for legacy Tcf, only and reflect the combined new Ts Tcf financials for August and September inclusive of the addition of chemical.
The income statement as presented in the earnings release does that reflect a full quarter earnings nor does it reflect a full quarter of expenses in the presentation. Today, we have added selected items to assist in establishing a relevant full quarter view as we move into the fourth quarter.
Starting on slide six we highlight the purchase accounting marks as a result of the closing of the merger.
The credit Mark came in at $183 million.
Based on the addition of the chemical loan portfolio and was slightly lower by $6 million compared to our estimate.
In January when we announced the transaction.
The interest rate Mark came in at $66 million much lower than our initial estimate.
Given the substantial declining interest rates.
Between January in August .
Tangible book value per share was $26, an 18 cents.
At quarter end, 11% higher than we projected in Gen January's announcement.
The result of lower interest marks as well as not all merger related costs being recognized on day, one both support a higher tangible book value per share.
In addition, the core deposit intangible came in at a 178 million slightly above our estimate from January .
Cdti is expected to be amortized over 10 years and is expected to be approximately $5 million in the fourth quarter.
The result of purchased coating marks as well as a timing of merger related expenses gives us much higher capital at the close of the transaction, while reducing the related accretion income we would've otherwise accreted in over time.
The common equity tier one ratio was estimated to be 10% at close but was at 10.9% at the end of September .
Purchase accounting accretion in the third quarter was $28 million.
CDIY amortization was $4 million for the third quarter and the net impact for the third quarter was $24 million.
Purchase accounting accretion of $28 million was elevated for the month of August and September and was benefited by loan prepayments and pay offs.
We expect purchase accounting accretion to be in the low 20 million dollar range for the fourth quarter, excluding payoffs and prepayments.
Turning to slide seven we look we took several actions during the quarter.
Optimize the balance sheet of the combined company collectively these actions lower our risk profile reduce asset sensitivity and enhanced capital efficiency and liquidity.
We sold 1.6 billion dollars' worth of securities during the quarter, which included included selected floating rate.
Corporate non agency and municipal Securities. These actions are intended to reduce credit risk of the securities book help us manage interest rate risk as we look to reduce asset sensitivity and improve overall liquidity and capital efficiency of the portfolio.
We did not repeat redeploy all the sales proceeds as of quarter end and we had approximately $1.3 billion remaining to be reinvested, which we were layer in over the coming quarters.
We also terminated a $1.1 billion interest rate swap during the quarter, which all else being equal we expect to reduce our asset sensitivity by approximately 60 basis points.
The termination of swaps resulted in a $17 million pre tax expense.
Lastly, we transferred the legacy Tcf Auto finance portfolio to held for sale and Mark the portfolio fair value, which resulted in a set in a $19 million pre tax loss included in the gain on sale line item.
At quarter end the portfolio totaled $1.2 billion, we're being proactive in exploring options for the portfolio, which has been in runoff mode. Since the fourth quarter of 2017.
As shown on slide eight you can see the strong mix of our combined loan and lease portfolio, which is comprised primarily of commercial based loans, which totaled 66% in total loans and the remaining 34% from our consumer based portfolios.
We continue to generate strong loan and lease growth as balances increased $2.6 billion or 8.3% year over year compared to the combined portfolios at Tcf and chemical a year ago, excluding the legacy Tcf auto portfolio.
This growth has come from across all portfolios with Cnine up 11% year rate year over year, and commercial real estate up 9.5% year over year.
Note that as part of merging the two balance sheets, the legacy Tcf inventory finance portfolio.
Is now included in the Cnine category. Similarly, the legacy Tcf leasing and equipment finance portfolio is now split with the loans being in the see an AD category and leases being in the lease financing category.
Moving to deposits on slide nine.
We have a well diversified deposit mix with $8 billion of noninterest bearing balances and Cds, representing less than 25% of deposits.
In addition to product diversification, we have a strong deposit or mix as a result of them what we.
We have brought together the strong consumer deposit base of legacy Tcf and the strong commercial deposit base of chemicals, which has created a complimentary deposit mix of 62% consumer deposits and 38% commercial deposits.
Total deposits have increased by 4% year over year and growth of deposits, excluding Cds increased by 1.7 billion or 7% from a year ago.
The third quarter benefited from strong seasonal inflows of Miss municipal deposits as tax payments drive higher balances.
Our cost of deposits in the third quarter was 94 basis points, one basis point below.
Combined cost of deposits in the second quarter.
We expect to see our deposit cost continued to decline over the coming quarters.
Slide 10 highlights by $1.6 billion worth investing securities sales I mentioned earlier.
As a result, we have been able to improve the mix of our investment securities portfolio by reducing interest rate and credit risk enhancing capital efficiency and liquidity.
The total securities portfolio of 5.7 billion represents only 13% of total assets.
We expect that number to gradually increase as we reinvest over the coming quarters in the near term, we expect the securities to total assets to be in the mid teen range.
The largest component of the portfolio today is agency MBS, representing two thirds of the total portfolio and 95% of the portfolio as represented by Securities rated double A. or AAA.
Turning to slide 11, we have presented net interest income and net interest margin for both the third quarter.
Reported period as well as the September month actuals.
Starting with the net interest income in the upper left.
The Red number one circle represents reported net interest income for the third quarter of 2019 reflective of the stub period of $371 million with 28 million a bit of the total coming from purchase accounting accretion.
As a result, the net interest income excluding accretion was $343 million.
As a reminder, this 343 does not reflect a full quarter of net interest income because the merger closed on August Onest, our income statements results, including net interest income reflect full.
Legacy Tcf results for July at New Tcf results for August and September .
Reported results exclude chemical results for the month of July .
As noted by the Red number two below the chart to help provide a starting point for net interest income going forward. We provided our actual net interest income for the month of September which totaled $143 million and included $15 million of accretion.
Resulting in net interest income for this for the month of September excluding accretion.
Of $128 million.
Taking $128 million in September as a baseline this puts us at a starting point entering into the fourth quarter for net interest income excluding accretion of $384 million.
In addition, we expect purchase accounting accretion in the fourth quarter to be in the low $20 million range and be additive on top of the treaty for.
This does not include any accelerated payoffs or prepayments, which we did see a fairly decent amount of during the months of August and September .
We are presenting net interest margin in the similar format in the upper right portion of the slide.
We reported third quarter net interest margin of 4.14%, which included 31 basis points of purchase accounting accretion, resulting in margin excluding accretion of three to three again. This reflects the stub period accounting math as it excludes one month of chemical impact from July .
Our margin excluding accretion for the month of September was 3.7%, which provides a starting point as we entered the fourth quarter. This re split this reflects the full impact of both portfolios.
Going forward, we expect various factors to impact is 3.7% margin. Our continued reinvestment in our securities portfolio will likely result in a lower margin, but we'll add additional net interest income dollars can be accretive to return on capital.
In addition, we expect a rate cut this week.
Or in December to be additional margin headwind.
As a combined balance sheet remains modestly asset sensitive.
All of these factors alongside earnings asset growth will impact net interest income and margin moving forward.
We do maintain levers in our does at our disposal took a bath against some of these factors, we should see a benefit in the fourth quarter from deposit deposit repricing.
We have enacted to date and expect to see deposit cost decline over the coming quarters. Additionally, we will continue to look to optimize our asset mix. However, the pace of fed rates and LIBOR moves will continue to drive the trend for asset yields.
Looking at Slide 12 reported noninterest income was $94 million in the third quarter. This included several non core items.
A loss of 19.3 million from the transfer of the legacy Tcf auto to held for sale a loss of 17.3 million related to the termination interest rate swaps.
Hey, $4.5 million impairment on loan servicing rights.
And a $5.9 million gain on the sale of investment securities. Excluding these items adjusted noninterest income was $129 million again, the third quarter results exclude July noninterest income from chemical.
As we look ahead to the fourth quarter, we would expect noninterest income to come closer to the levels from the combined chemical and Tcf that you can see for the second quarter and third quarter.
Second COVID-19 in the third quarter of 18.
Slide 13 highlights noninterest expense and the $180 million a merger related cost savings, we expect to achieve.
The fourth quarter of 2020.
As shown in the Upper left chart when you when we announced the transaction January we utilized streets consensus for both banks for the combined.
For Q2 0, non interest expense, which totaled $366 million at that time.
And was inclusive of expected cost savings costs expense growth in inflation.
Taking out $45 million, a quarterly cost savings or $180 million annualize.
We would have implied fourth quarter 20 expense of $321 million.
Looking at the charge in the upper right. Our reported noninterest income expense in the third quarter was 425 million, including a $111 million of merger related expenses and $6 million a non core items, resulting in an adjusted non interest income of $308 million.
Keep in mind again, this is a stub period base.
A basis as a knotty reflective of the of the current full quarter run rate.
The combined expenses of both banks for the second quarter of 2019 provides a full quarter view of $341 million excluding merger related charges.
Based on August and September actuals remain in a similar range in the low three fortys as we entered the fourth quarter.
We have realized $4 million the cost savings to date.
With $41 million.
Further to realize as you can see in the bottom left chart.
We expect the pace of cost savings to ramp up as we move through 2020.
We do expect some level of natural expense growth and inflation on top of the cost synergy savings with Baird increases in early 2020 as an example.
None of these factors, we believe we can drive expenses below the initial imply target of $321 million by the fourth quarter of 2020.
Overall, we are focused on driving towards an efficiency ratio that is below the peer median after completion of our cost savings our adjusted efficiency ratio in the third quarter was 58.7%.
Which is adjusted for merger related expenses non core items tax equivalent adjustments intangible amortization as well as an adjustment for lease financing equipment depreciation.
We will can Pete will continue to keep you updated on our progress in future quarters.
With that I'll turn it over to Jim cost to provide an update on credit. Thank you Dennis turning to slide 14, as we brought together the organizations. This quarter, we continue to see strong credit performance across the portfolios.
Reported net charge offs were 39 basis points in our calculated based on average loans for the quarter.
Charge offs for the quarter totaled $29 million was approximately half of the 29 million coming from a single Cnine credit.
Expected losses for this credit were fully absorbed.
Third quarter absent. This credit we would have been in the low end of the combined charge off range, we've seen over the past year.
Non accrual loans and leases of a $182 million represented 54 basis points of loans and leases, while the allowance for loan and lease losses was only 36 basis points.
However, chemical loans added in the merger were recorded at fair value as of August Onest without the carryover other related allowance.
Therefore, the allowance, including the discount on acquired loans was 89 basis points of loans and leases.
Lastly, over 90 day delinquencies, a leading indicator of credit quality for many of our portfolios. We're just nine basis points for the quarter.
Overall, the additional diversification of the loan lease portfolio as a result of the merger of equals we believe this positions us very well as we continue to stay focused on the overall credit profile of the balance sheet.
Lastly, let me share a brief update on our Cecil work and expectations. Our teams are conducting parallel runs of Cecil process against our current incurred loss or a triple L process.
Based on our work completed to date, we expect Cecil allowance could result in an increase to the reserves of 35% to 45% of the current a triple l. in place for legacy Tcf portfolio of $17.8 billion.
We expect our commercial portfolios with relatively short durations to Nazi emit a meaningful net change in reserves, however, our consumer lending portfolios, including mortgage and home equity are expected to see a greater impact.
Related to the legacy chemical portfolio, we do not expect to see some mark to be materially different than the level day, one credit Mark.
With that I'll turn it back over to Craig.
Thank you Jim So turning to slide 15, the highlight from a capital perspective. This quarter is the higher level of capital merger closed than what we initially guided with this excess capital today above our near term target. We are pleased to have announced 150 million dollar share repurchase authorization.
This will give us increased capital flexibility as we move forward and is consistent with our desire to remain thoughtful around capital deployment in order to drive value for shareholders.
As we think about capital priorities going forward, our primary focus will be on organic growth and the ability to leverage the scale and product set we have as a leading Midwest bank across our markets second as dividends, where we think a payout ratio in the 30% to 40% range makes sense and is competitive with peers nexstar share.
Purchases I mentioned, and finally corporate development opportunities, if and when they arise.
No matter, which priority we take action on we are committed to being thoughtful and disciplined and expect to continue to put the shareholder impact at the forefront of our thought process.
Overall, we remain confident in our ability to drive toward a top quartile return on average tangible common equity, which we indicated at deal announcement and with that I'll open it up for questions.
Ladies and gentlemen at this time will begin the question and answer session.
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Our first question today comes from Jon Arfstrom from RBC capital markets. Please go ahead with your question.
Thanks, Good morning, guys.
Morning.
Dennis maybe let's start with you on expenses.
I think it's good that you talked about being able to get below that implied.
Fourth quarter 20 consensus target it looks like you might get there.
A quarter early.
If you take that 75 million to cost saves.
And layer that through.
I know, it's a euro but what are you, saying about the rest of it to 105 million in annualized cost savings that would be left are you, saying that that comes through because of the conversion in threeq you and how quickly can we see that come through.
Yes that large chunk of cost savings really has triggered by the completion of the core operating systems.
Which were targeting.
In the in the third quarter and our goal is to achieve that.
As quickly as possible after the conversion. However, there is little bit of delay in full realization of that.
Because we do we need to run their systems redundant for a short period of time.
Just to.
To be able to test the.
The systems.
Exactly how long we run rate redundant with some other functions.
Has yet to be determined but.
So some of that.
Could spill into the into the fourth quarter, but our goal is to get that.
Realize as much as we can by the end of the third quarter.
Okay.
Say that again, Dennis you just since some of that spills into the fourth quarter, but maybe maybe not material that is that Michael yes, thats still okay.
341 from the Q2 combined number.
Less 4 million does that feel like a good run rate for Q4 expenses.
I think you misspoke, you said 341 less 4 million.
Right you laid out the Q2 19 combined 341, then I think you said in your comments, but that's a decent run rate or does that was representative of what you saw in Threeq combined.
Yes, yes, that's roughly the same level, we had some seasonal increase in commission fees and commissions to a particularly the residential mortgage lenders. So some of that offset the the additional realization of cost savings, but let's say, we're at that 341 level and we have another.
$41 million worth of quarterly cost saves realize that puts us down to roughly $300 million soul of a run rate, but that run rate.
It's going to be impacted by the.
I mentioned in my prepared remarks by the annual inflation salary increases and so forth and the potential increase in some additional hires so but net net we expect to come below the 321.
Okay, great. Thanks, guys appreciate it.
In Q.
Our next question comes from David Long from Raymond James. Please go ahead with your question.
Good morning, everyone.
Morning, David.
Can you talk about any progress that you've been made to date on the revenue synergy side and maybe.
Maybe any any hires or move to find a leader in the cnine side in the Tcf footprint and.
Anything on the revenue side that you can point to at this site at this time.
Yes, I would say this is Craig I would say that at this point, it's all been in the planning phase the execution is really going to be the next step, but it will be starting in the fourth quarter.
We have not announced the higher but we're very we're very confident of our ppas our ability to act on the Sienna expansion in the Tcf.
In the Tcf territories and will be having some updates on that rather soon and.
I'll have time Shaffer add any of his comments to that question.
Yes, so interruption was right in the middle market side of that some of the Cnine does.
As migrate to the national businesses that we have.
Plans are well underway and we're very confident with conversations that we're having that.
That will be executing as Craig said, beginning in the fourth quarter.
Got it okay. Thanks for the color there and then.
Jim as it relates to that single.
See an eye credit that made up I think you said half of the charge offs in the quarter any detail that you can give on that what industry is it part of a larger trend.
And maybe in any other trends that you've seen in credit.
No I appreciate the question David Yes, it was a credit the healthcare sector diagnostics lab in the circumstances. There are there was a regulatory change, which really disrupted the business model. It was not indicative of a.
A drop off in demand or a week balance sheet or anything that would be sort of emblematic of a change in the credit cycle. This is really a unique uncertainty unique circumstance.
Where a state legislative change impact of the business model and so it really is an extraordinary situation did as you mentioned represent half of the.
Credit charge offs for the quarter and further to that point you. You'll note that we moved the gateway portfolio to held for sale, so sort of the core.
The core charge off content really is is quite de Minimis, we're happy with that as we look approach across the broader portfolios were watching I'm sure. All the same things you are on the residential real estate side collateral values.
The loan demand delinquency trends, there's really nothing that has surface that would cause us concern, but we do recognize where we are in the cycle in our attention as well placed.
Got it thanks for the color there and then lastly, Dennis.
ER.
Thinking about the city of Detroit net win that you guys had for the large deposits last year at chemical.
As that.
Relationship fully been brought onboard at this point and then any other opportunities on the municipal side for you guys.
Yes, we made substantial progress there and deposits have ramped up there are some incremental deposits, we expect to bring in from the city.
But they are fairly incremental to where we sit today.
Yes, we have opened doors to a variety of other.
Municipalities, where we've made some progress and brought in some additional deposits its up.
Okay great.
Marketing tool for us.
It demonstrates our level sophistication to be will handle their deposits. We can handle just about any municipalities deposits across the Midwest.
Excellent. Thanks, a lot for the color guys appreciate it.
Our next question comes from Scott Siefers from Sandler O'neil. Please go ahead with your question.
Good morning, guys. Thank you.
Dennis just want to make sure I am crystal clear on this expense guidance. So it sounds like for expenses, you are saying that you get to $321 million by the third quarter of next year, and then that should be a low watermark right. I think you said, maybe a little more spills over into fourth quarter, but basically threeq you 20 is a low watermark.
321 million is that correct.
Well I'm, saying for Q is below threetwenty, it'll be a bit higher than that in.
In the third quarter, because in the third quarter a lot of our.
A large chunk of our expenses are still running well into the quarter. So there's a significant drop.
From Q3, Q to Fourq, you down to that 320 or more or less level in fourq you.
Okay, all right that I think that clears it up I was wondering sort of where that 90 day GAAP came from.
Fourth quarter 321 million or below.
Okay. Good. Thank you for clarifying that and then could you maybe walk through what specifically Tcfs repositioning is now versus what it was before all the actions here I guess you had the securities portfolio the swaps and.
The auto moved to held for sale so maybe.
Okay, maybe a simple way would be what would've been the impact to the margin.
Right.
Previously and then what would it be now.
Yes so.
I'll start out and Brian can chime in two of if we if you will be helpful. Here.
So first of all.
The legacy chemical was naturally liability sensitive and we moved ourselves to relative neutral position.
With the help of an interest rate swaps, so we unwound that swap.
To move that legacy chemical side of the balance sheet back to a liability sensitivity.
And that moderated the level of asset sensitivity of Tcf now we are still net net on a combined basis asset sensitive.
With a 100 basis point shock down we would expect our.
Net interest income to be reduced by little less than 5%.
And by further deployment of the.
Securities portfolio, and some strategies within the loan portfolio. Our goal is to further moderate that level of asset sensitivity and hopefully we're going to see that impact already here.
In the fourth in the fourth quarter.
The exact impact in the margin depends on a number of factors in terms of the timing of changes and so forth, but I think that will give you a sense as to how sensitive margin could be to the further actions of the fed.
Okay perfect. Thank you and then if I could jump back to that.
We still commentary I think you said.
35% to 45% increase in the reserve.
Did that did that include the impact from.
Sorted that double count notion.
So remarketing the legacy chemical portfolio again or is there.
Other higher number that is the total all in increase to the reserving and if so what is that total increase the reserve from seasonal yes, Jim's comment was.
Purely focused on the legacy Tcf portfolio, what is the existing on balance sheet allowance for loan loss in the 35% to 45% increase in that level that loan loss.
Correct the chemical portfolio the.
Essentially the allowance for loan losses off balance sheets that day, one credit Mark.
Which was 100.
$80 million or so.
At this point, we're not fully prepared to give guidance exactly what we think the Cecil Mark is going to be but my expectation is it's in that ballpark.
You know range.
But there may be some noise to that depending on the final analytics around that.
Okay, Alright, perfect. Thank you very much.
Our next question comes from Chris Mcgratty from KBW. Please go ahead with your question.
Great Good morning.
Thanks, Dennis or Craig maybe for you.
I think you said your prepared remarks, excluding the auto run off loan growth is about 8% year on year.
In fourth quarter I believe the seasonally pretty good for you guys, how should we be thinking about.
Outlook for growth next year, it's kind of mid to upper single digits.
Kind of a reasonable excluding the auto or maybe the puts and takes on that.
Yes. This is Craig I think Thats, that's what we've talked about before chemical has always been at the high end single digit or double digit and and Tcf, we were moving towards that short of the auto runoff in so.
But you're right the fourth quarter is particularly good for us and so we would expect really a strong quarter of originations.
In this first full quarter.
Okay, and then if we if we kind of fast forward through and get the cost saves.
That you've outlined for US I think you said your remarks, the goal is efficiency ratio better than peers in the deck you show, 57%, obviously, that's a bit of a moving target because of because of rates but.
57 is kind of that would you are kind of trying to steer us to over the next former headquarters.
Although it will be stepping down from there and idle.
Depending on a variety of factors our expectations will be stepping it will move in be moving down from that level as we moved to the end of next year.
Okay. So below 57, Dennis by the end of next year is that when you are saying, yes, yes original guidance when we announced the deal was 53%.
Obviously, the industry is facing a little some revenue headwind with margin. So it may be difficult to get to that level, but we're going to adapt as to to get as close to that as we can.
Great.
And maybe one for Jim I think you said half that charge offs were on that one credit.
So that would put kind of blended charge offs in that roughly 20 basis point range.
Is that kind of a fair way of thinking about credits credit costs plus provisioning.
As you see the world today.
I would think that would be a generous estimate so we would hope to be inside of 20 basis points, but but not a bed starting point.
Okay, Great and then Dennis maybe last one tax rate you had a lot of moving parts in the quarter.
Could you help us with Q4 and kind of 2020.
Yes, so the normalized tax rate and the combined entity is going to be 20 to 20.
4%.
Let's say, 23% as a normalized rate.
In the.
In the fourth quarter.
There will be some discrete items that effectively bring the rate down below that.
There is probably not important feed a model that out of the particularly discrete item that we're going to see as we're going to see another one of the historic tax credits that come through their legacy chemical that you are accustomed to seeing in a historically legacy chemical side, but going forward I would say the 20% to 24% is the range that you should be modeling.
And that's an effective yes effective right.
Thank you for help.
Our next question comes from Steven Alexopoulos from JP Morgan. Please go ahead with your question.
Hey, everybody.
Good morning, let's start on the fee income side. So core fee income was fairly well off from the historical on a combined basis. It was really service charges what drove that.
Steve I don't know that I have a.
Particular.
Item for you, obviously theres lots of noise in the quarter and we're we're suggesting that.
When you look at the trend, it's really better to look at the the prior quarters as being the indicative level the starting point.
Income should be.
Seasonally a bit stronger in the fourth quarter, but.
Overtime, but looking at the prior quarters is really the range that you should be expecting for us to build off of.
Okay.
Okay, and then Dennis not to beat a dead horse on the expenses. So we're going to get to the fourth quarter run rate and then as the assumption that you'll basically will stay there may be plus or minus some inflation in told that system conversion gets done and then the remaining cost saves will hit.
That's the right way to think about it.
Overall any material cost saves come come through beforehand.
The 321 is.
Fully realizing that cost to say that less than 320 is is fully realizing the the cost saves now there is a possibility that we're going to look for incremental cost saves there, but I don't.
That is a particularly the target for us to drive that much lower than that.
We're always sort of interest in that geography, a good expenses and when there is opportunities to reduce.
Cost within non revenue producing areas to allow us to further invest in revenue produce in revenue producing areas.
We're going to do that but.
But.
Pushing down below that 321 level in the fourth quarter, and then going forward I think the reasonable baseline is just assuming the natural.
Inflation adjustments that going forward.
Okay, I, probably should make clear I meant when we get to the Fourq you 19 run rate. So through the beginning of 2020 will any material cost saves hit before that system conversion where is it really after that date.
The remaining cost saves lives.
Sorry, I misunderstood so over the over that four quarter period.
Fourth quarter, this year and going forward.
We do have we are layering in roughly $75 million worth of of cost saves are roughly $70 million worth of incremental cost saves.
Thats going to be realize over that over that period of time and then the balance of the realize late in the third quarter early for fourth quarter.
Okay, and then finally.
Just on the NIM.
What do you I heard the guidance on Fourq, you load 20 million, what's the you accounting schedule for 2020 and 2021.
Full year.
What's the would you say accounting schedule. So the purchase accounting you're talking about low 20 million for Fourq. You 19, I don't know if that's the straight line run rate moving forward, yes, potentially but I just wanted to see what it was for 2020 2021.
Yes, so each quarter expect that to moderate by $234 million, but theres going to be noise in that impacted by prepayments. So.
If the fed moves this quarter, while that put some core pressure on the margin you may see a pickup in prepayment speeds and therefore, a pickup in the level of accretion so.
To the extent that we have pickup in accretion. It's just a matter of timing, it's moving accretion that we thought would come in later periods coming in earlier.
But but I think modeling at.
In the low $20 million range, and expecting that to bleed down to $3 million of quarters is a reasonable starting point and.
And then sorry, just one final one the 1.3 billion that you plan to redeploy I'm, assuming it's going to securities what's the yield you'll likely get 1.3 billion.
Right.
Yes. So this is Brian what I would say on that you saw in in third quarter, our reinvestments or around 2.6% yields were an all that different as we started off.
Here in the fourth quarter, probably around that 255, the two 2.6 yields are slightly higher right now.
So it's hard to predict where it all kind of remain as we continue to reinvest those proceeds I'd say probably over the next three to four months, but it's somewhere in that two six to two seven range as of right now.
Okay.
Thanks for taking my questions.
Our next question comes from Nathan race from Piper Jaffray. Please go ahead with your question.
Hi, guys good morning.
Good morning to clarify on the margin outlook on a core basis for the fourth quarter. So you're at 370 for September and so I think Dennis you're speaking to.
Additional pressure in the fourth quarter, just given the fed cuts. So are we talking mid to low three sixtys and then maybe.
I guess I'm just curious how much more additional pressure, we should we should expect with each additional but from that run rate.
Yeah, we're hesitant to sort of give the specific basis point guidance. There I think you saw the core sort of trend.
On the combined company second quarter into the third quarter.
And you saw.
Rate cut late July in September So I think that that does give you some indication, but theres a lot of factors that are going to go into the ultimate outcome there.
So.
I think there's going to be a range of different.
Conclusions there by our analysts appropriately sold because at this point, it's difficult to predict App and obviously, we're going to be as proactive as we can and trying to combat that pressure.
Thinking through in terms of loan mix that we're putting out to the balance sheet.
I think.
We made very rapid progress in terms of our deposit bases that the teams got together very quickly in fact, they got together August 1st when we close the deal and I think that had a positive impact in the fact that our deposit costs.
Actually stepped down a basis point in the third quarter and we expect.
Further stepping down to that as we go into the into the fourth quarter and into the first quarter next year.
And then of course.
We're also we expect the volume of earning assets to increase meaningfully not just from the securities portfolio, but we will have a seasonally strong quarter in terms of of loan growth. So the goal is for us to combat that pressure on margin.
By strategically focused on loan growth.
Deposit pricing.
And and.
We will see without shakes out.
Okay understood and I guess within that context can you update us in terms of what the variable or floating rate exposure is within the portfolio and within that how much is LIBOR.
Over Brian .
So that the portion that is purely floating thats index up a prime or LIBOR is roughly.
37% or so plus or minus.
And less than half of that is more is LIBOR base. The other half more than half is prime base.
Okay, that's helpful and but I could just asked when one of the buyback.
Let's just going to understand.
The pace at which you want to tenet that going forward.
Obviously capital levels given ahead of what you guys guided to when the deal was announced in January So just trying to understand how aggressive you guys.
Could be with the buyback at this point.
And again, there where theres a number of factors that is going to impact the pace, it's going to our view in terms of loan growth short term and long term is going to impact that.
How quickly we get to the point of.
Selling the auto portfolio is going to impact that.
And the the stock price is going to impact that but I think in general you.
You can assume.
You know, we're going to be fairly aggressive about it because right now the stock price we think that.
It makes sense for us to be buying back.
Buying back stock.
Understood I appreciate the color Dennis Thank you.
Our next question comes from Ebrahim Poonawala from Bank of America. Please go ahead with your question.
Good morning.
And just so one will follow up on and I, Dennis if I could Tom when you think about.
The cash getting redeployed into securities.
If you could give us a sense of is it fair to assume that the average earning assets.
And then on to 42 billion to 42 and have been in the fourth quarter as you think about.
Being embedded begins to but all in 2020.
Yes.
I think.
We talked about high single digits of.
Mid to high single digit loan growth target over the course of the year with fourth quarter being very strong. So you should expect.
The growth in the fourth quarter to be higher end of the range and then.
In my prepared remarks, we talked about over the.
Shorter term and that sort of year end early 20.
2020, we expect the securities portfolio to get up to the mid teens of total assets and so that would.
That would imply.
In the neighborhood of $1 billion a growth over the next.
For the next few months or so.
Well actually getting those of growth relative to maybe movie at in the fourth quarter.
Relative to where we add as of the end of the third quarter.
Yes.
All right.
Alright, and then just moving in terms of the.
Moved to held for sale for the auto book as we think about.
Yes.
Assuming that you're able to go through debt is pretty quickly how should we think about hey deployment of those cash flows does it all going to.
Immediacy buying to security, though would you rather keep cash and then deployed towards funding loan growth.
Well clearly the preference is to his freeing up that.
Part of the balance sheet that capital.
To support the loan growth bigger margins higher value from franchise standpoint.
So in the short term really it's paying off.
The incremental higher cost borrowings and.
Being more aggressive in running off higher costing Cds.
But it's a combination of redeployment into loan portfolio and redeployment into into a securities portfolio.
And do you expect any additional maxim that hit on that book.
Looking to exit or do you think it's.
Thank you mark to market for the current environment.
If theres always a chance that theres going to be some.
Change upon final realization of a sale.
But right now that's our best estimate and so that's where we stand today.
Okay. Thanks for taking my question.
Our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.
Hi, good morning.
Good morning.
Just on the auto the moved to held for sale was there.
Anything that happened this quarter that caused you to want to accelerate the exit from from that portfolio.
In terms of the credit dynamics and I guess.
I guess, what's driving that.
Mark this.
This quarter as it really just the market environment.
It's a strategic decision, it's a market environment. The fact that the merger got completed and we're more focused on a variety of other.
Business priorities I might just had a comment this is Jim.
We monitor that portfolio very closely the behavior of the.
Delinquency and charge offs has been consistent with what you'd expect with seasonal performance. There has been really no change in our expectations. It's it's running out just as we would have expected.
Yes no.
It's it's a great portfolio forward on acquired to buy and for US it's something that we.
We made a decision not to be focused on that niche anymore and.
Overtime.
Right now that portfolio does is incrementally profitable to us by so I say incrementally, but as that portfolio runs down it becomes incrementally unprofitable. So it's it's the right time for us to take a more proactive.
Approach to divesting in that portfolio.
Okay, then when we look at the.
The.
Land sale that portfolio and then the.
Securities restructuring and sitting on the cash for for a little longer.
That change or do those.
Packs and I changed the expected time for EPS accretion from the deal.
No.
No.
The other thing to note on the security on the auto portfolio is that.
There are obviously, there's some non interest operating expenses associated with that portfolio and so again.
While we are going to lose some net interest income the bottom line impact is relatively neutral.
In 2020, and then accretive to earnings in 2021.
Okay, and then the branch closures that that you announced where those are always sort of part of it planned cost saves are those is that going to be incremental savings beyond the.
The plant deal cost saves.
They were not part of the original expected cost saves so ultimately.
That becomes incremental overall in terms of the efficiency the organization, but let me let me point out that.
Again.
There's a variety of areas in which we are optimistic about revenue growth opportunities and there are some geographies, where we're gonna intend to.
To open a couple of additional branches.
Okay.
I actually just following up on the on the auto said when is the.
Expectation for that to to be sold.
Yes, we don't have a specific.
Timeframe, but.
Our goal is sooner the better.
I mean like in a quarter or two or is it.
Our goal is our goal is yeah within a within the quarter or too yes.
That's our objective and we're working hard towards that.
Great. Thank you.
Our next question comes from wanted Chen from BMO Capital markets. Please go ahead with your question.
Hi, Thanks, Good morning had a few follow up question swine on the C side.
Question about.
Seeming a little bit below the.
Apply clinically setting so some of it the fee income.
Satellites related to auto and I don't can you just refresh us in terms of the servicing fee income.
Is left on the auto side and I don't know.
And on sale loans is that a good run rate.
Yes, Atlanta. This is this is Brian we.
We were seeing a rundown of the servicing fee income on the legacy Tcf side, but that really was being offset by an E.
Declines over time, so there was a few million dollars left in that line on that ultimately once the portfolio is sold that we'll we'll have that remaining amount.
We'll come out, but as as Dennis alluded to I think the the guidance that we have overall for.
Noninterest income, it's going to be similar back to levels that you saw in twoq or Threeq you. So there'll be some mix shift on that's taking place in their gain on sale I'd say was probably a little light.
For the third quarter, we held a few extra loans, but you should see that number.
We will likely be up a little bit even from what you saw in the third quarter as we get to Fourq. So I think the guidance that Dennis had around look at the previous quarters is probably the best indicator of what we'll probably see in fourth quarter.
Okay. Thank you and then.
Following up on the margin question would be helpful. If you have seen the Dallas.
And just purely spot rates across Tina positive change from the dealer.
Okay.
Okay models.
It's not going to flow what do you.
Yes, sorry, flatter, we didn't bring those spot rates with Brian you've yet.
Yes, we don't have specific numbers to give you Atlanta, but.
Well, we Didnt show you was the September Standalone. So the 370 is kind of the starting point for the quarter. Then you. There are these puts and takes which honestly it's kind of hard for US. Decimate example, those put takes are going to be but it is going to be lower than the 370.
You know as you get into fourth quarter or would then what we realized in third quarter. Because you are going to have the third month of of chemical comes in so thats going to make the NIMBY lower the portfolio expansion is going to have an impact of having a reduction to the net interest margin as we mentioned.
And so really the net impact will be what happens from a rates perspective is what will drive at lower so if we do see a rate cut. This week, we will see some pressure going down and thats versus our modeled results, which Denis mentioned, we might be enough for eight.
For seven to four nine kind of in a down 100, Chuck so that would be a number that.
You can use what we're going to try and do is hopefully outperform our deposit estimate that we have for that and as Dennis said, we've been quite aggressive at leading the market and reducing promotional rates is running off some higher cost wholesale funding and stuff. So we think we can have some offset to that but really our big offset is going to be growing earning assets and as we grow reading out.
It's in fourth quarter, that's really going to help us from a run rate perspective into growing Eni are not net interest income is really our goal as we get in 2020, it's not about necessarily the margin rate, we want to make sure that we're growing net interest income and we think we can.
Especially if we have strong originations this quarter.
Okay. Thank you.
Our next question comes from Terry Mcevoy from Stephens. Please go ahead with your question.
Good morning.
Question your near term see tier one capital ratio targets, 10% and I guess my question is is near term 2020 or something beyond 2020.
Right and it's interesting that yet.
I think it's more of a reference to that's where we thought we were going to be when we announced the transaction. So we're not necessarily.
Rush to get to that 10% as Dennis said you know we're focused on organic growth. We're focused on a lot of other things, but I.
I think it's notable that.
We also do want to manage the capital the organization appropriately and to the extent that we have excess capital you saw us unknowns.
Stock repurchase and we're going to manage towards that so we don't necessarily have a date in mind, where we have to be at 10%. It's more that's where we thought we were going to be and that is a good target for you to think about but.
And then just as a quick follow up the sale of the legacy auto portfolio. The 19.3 million dollar loss was that netted against the $25 million reserve that was held against that portfolio.
Yes.
Great just trying to connect all the dots.
That's it thank you.
Yes. Thanks.
Our next question comes from Ken Zerbe from Morgan Stanley . Please go ahead with your question.
Mr is every is it possible you focus on mute.
Yes.
And we'll move on to Kevin Reevey from D.A. Davidson. Please go ahead with your question.
Good morning to.
Good morning.
So I was just curious the 60% of your CD portfolio, that's maturing over the six next six months is the plan to Oh rolled out over award to 'em habit exit the bank.
Go ahead right. Yes. This is Brian you know what I would say is what we what we were trying to do was two things we're trying to manage kind of from the interest rate environment uncertainty allow us the optionality to reprice that lower as well as knowing that we might be selling.
Going into an auto balances and having a further reduction of liability on the balance sheet is just allowing us optionality to either.
Not renew some of those core significantly lower the rates on them and run some of them off.
And if you were to win new some of them would kill rate do you think you'd have to pay you got to retain those deposits.
Yes, I mean promotional rates for retail have come down what I'd say you don't dramatically, we probably saw retail promotional rates peak I'd say back in first quarter. It was probably March or April so we've been reducing rates on promotional deposits. We can be down 100 basis points from probably where we were at peak I'd say at peak, we might have been at two.
65 to 75, and we're probably down in 165 175 range today, and obviously a lot of that will depend upon market competition as well as where interest rates change from here going forward.
And then click earlier in your prepared remarks, you talked about residential mortgage production is the plan to.
Pulled that production.
Oh and portfolio or to sell it.
Okay.
And that always becomes a tornado both a segment discussion on an overall discussion. So at this point I don't have any.
Predetermination or where that is going to go but I mean I think the key is that it's all in our footprint and that's it's needs or not or this is not a national business has fallen or footprint. These are all our customers, where we're acquiring new customers were were pretty pumped on that pipeline as we sit here today.
Thank you.
Hey, Kevin going back to your question about rolling over of Cds I think.
An important.
Number to look at is the growth of our non CD deposits year over year.
We highlighted that it was 7% year over year, so that level of growth I think really puts us in the top tier of the in the industry.
And it shows a lot of success in both companies and growing really true core deposits and that's a level of growth that we achieve sort of prior to their.
Benefiting some some of the business synergies as we talked about when we announced the transaction.
You know Tcf has made significant investments in the front end digital banking.
Platform to be an industry, leading platform and we're going to be leveraging that into the chemical franchise, and we think thats going to help ship, particularly on the legacy chemical side in growing there was core deposits with a retail customers.
And then vice versa.
Chemical brings an expertise in generating commercial deposits, which we're going to roll out into the Tcf franchise. So ultimately the goal is rather than rolling over those Cds into new Cds is to pick up the growth of of core deposit growth.
Really core deposits and that will.
Clearly have a benefit to margin and overall franchise value.
Thank you very much.
Our next question comes from Brock Vandervliet from Yes. Please go with your question.
Hi, good morning.
I think we've we've covered the a eni and NIM dynamics.
Dennis I know he's talking about this offline.
In terms of the.
The system conversion.
And that being linchpin for some of the substantial cost saves any sense.
Of whether that could be.
Moved up or is that really kind of locked in and concrete here given that outside providers are required for that.
Yes, it's pretty well locked in.
In the third quarter and yes in particular, because we're working with an outside.
Provider, it's hard to move that did round that said there are other aspects of the conversions. It's really multiple conversions that are going on and we're staging a number of the conversions earlier. So for example that front end.
Deposit app.
Banking app that we use for our retail customers that conversion occur as much earlier and so the on the chemical side, we'll get the benefit of that.
Enhanced technology.
Much earlier than the final systems conversion.
Okay, Great and this may have been covered it initially on the call.
But any changes or call outs you'd make in terms of the general market environments and kind of the operational tempo that you see across the franchise.
Hi, This is Craig I would say you know, where we're particularly attune to that especially we just came off of our first a combined.
Board meeting and so setting the risk appetites and concentrations.
Levels than we've had a lot of customer interactions and feedback and where we're continuing to monitor that I would say that theres, probably less expansion oriented, but there's there's still quite a bit of companies investing in their products or replacing equipment and.
That we continue to again to monitor that but you know there's frequently a manufacturer and a dealer in a lot of the stuff that we do so we get a lot of different perspectives on business activity.
Great. Thanks, Greg I appreciate the color.
And our next question comes from David Severini from Wedbush. Please go ahead with your question.
Hi, Thanks, So you spoke about loan growth in the mid to high single digits for next year could you talk about the opportunity for deposit growth and the pipeline for deposits to fund that growth.
Yes, our ultimately our goal is for a core deposit growth to keep up with loan growth.
That is a net that's a big challenge when you're talking about the.
The level loan growth that we're targeting but because we've got sort of the multiple multiple drivers of deposit growth both the retail side and the commercial side. We think we can achieve that that objective and that's a key strategic priority of ours and it was a key strategic synergy of the transaction a rash.
Now for the for the merger in the first place because we thought that we really complement each other in terms of our deposit generation.
Core competencies.
Great. Thanks for that and then shifting to fee income and this more of a in it and accounting type question, but were there any loan fees that were previously included in fee income that are now being included in net interest income.
No it Brian .
I think obviously when you come together as two companies. There is slight geography changes that you have to make to Reclassed few things to make sure that you've got alignment on both sides, but there shouldn't be anything that was materially different.
Thanks very much.
And ladies and gentlemen at this time, we 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.
At this time I'd like to turn the conference call back over to Mr., Craig Dahl for any closing remarks.
Thank you for listening. This morning, I would tell you that I'm. So glad we have the statement that said, we undertake no duty to update this information because if that was ever appropriate for an earnings call. It was appropriate for today. So I'm pleased about the progress we made the collaboration our teams have shown we're right on track with our expectations for the merger.
And we're excited to operate as one tcf and deliver on the value creation, we expect for our shareholders customers team members and communities. Thank you very much.
And ladies and gentlemen, the conference has now concluded we do thank you for attending today's presentation. You may now disconnect your lines.