Q1 2020 Earnings Call

Dead dead dead.

Good morning, and welcome to TCS 2020 first quarter earnings call. My name is Jamie and I will be your conference operator today.

All lines have been placed on mute to prevent any background noise after the speakers remarks. There will be a question answer. If you would like to ask a question simply, press the star key followed by the number one on your telephone off. He would like to withdraw your questions. You may press Start into

You're listening via speakerphone. We ask you. Please let your handset prior to asking your questions you require operator assistance, please press star and zero, please also note that he's event is being recorded at this time. I would like to introduce them to the head of investor relations to begin the conference call.

Good morning, and thanks for joining us for TCS. First quarter 2020 earnings call joining me on today's call will be Craig dial president and chief executive officer. Tom Schaefer Chief Operating Officer in disclosure a Financial Officer. Jim Acosta Chief risk officer. Brian Maas, Deputy Chief Financial Officer and treasurer

Just a few moments Craig Brian Dennis and Jim will provide an overview of our first quarter results will be referencing a slide presentation that is available on the investor relations section of TCS website Bank.

Calling their marks will open up for questions.

During today's presentation. We may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are projections and that actual events or results May differ materially. Please see the forward-looking statement disclosure and our 2020 first quarter earnings release for more information about risks and uncertainties, which may affect us. The information will provide today as accurate as it March 31st, 2020. We took take no duty to update the information would now like to turn the conference call over to TCF president and CEO Craig.

Good morning, and thank you for joining us today.

These certainly are unprecedented times and as you know, the environment made fluid with numerous headlines changing daily or sometimes hourly. I want you all to know that we are doing exactly what you would expect and have rallied as a leadership team and as an organization to guide TCF through these volatile times before I get more detail about the actions. We are taking off dress the challenge of the covet pandemic. I will mention that we reported earnings per share of $0.32 in the first quarter with adjusted EPS of $0.57, excluding thirty-seven million of merger related expenses eight million from the impairment on the MSR asset and three million of expenses related to the sale of the Legacy TCF Auto Finance portfolio, the ignition, we added $74 million of additional provision related to covet that impacted by 38 cents per share.

Anderson Brian will provide details on our financial performance in a few minutes.

I want to share what we are doing to combat the effects of the covid-19 demek which are outlined on slide for we are actively managing the business and not letting the business manage us off that is not an easy task and requires the collaboration and dedication of our entire leadership team and all of our managers and employees throughout the company.

Sure has been a key focus of ours as we brought together the two Banks and early in the first quarter. We published a new purpose and beliefs statement to align the organization around a common set of principles off. One of our beliefs TCF is to care like a neighbor and this statement has never been truer than today as we seek to demonstrate the care for our customers employees and communities in each decision and interaction.

This environment has enhanced our culture as an organization and accelerated our teams focused as coming together as one TCF a couple of our priorities. We've been working diligently on include protecting the health and safety of our employees supporting our customers maintaining business as usual operations and continuing to execute on the M integration roadmap.

First we are working to protect the health and safety of our team. We are a safety business service business and our team is at the center of our customer interactions, and they may serve as the face of TCF each and every day. I am proud of our teams Nimble and timely response.

We ensure that our employees well-being remain top-of-mind as we acted to reduce Branch service to drive thru only closed select in-store grocery locations where another drive-thru location was nearby and for those in-store branches, which remain open we have install a protective Shields and have provided mask gloves and necessary supplies for cleaning and sanitation.

After starting with a trial plan to support work from home, we quickly pivoted and transitioned over 4,000 employees to work from home in a matter of days with no disruption to our operations.

And with the Advent of technology today, we were able to move critical functions to a work-from-home model including areas such as the call center credit underwriting loan processors and other middle back office functions.

We have been encouraged at how productive our teams can remain will work remotely across the company.

For those employees that have had their branch office closed are working reduced hours or caring for family members who are sick as a result of covid-19. We have committed to pay them for their full hours.

For employees who have critical roles that require them to continue working in the office primarily in our Branch Network. We have committed to taking care of them and ensuring no one feels the financial impact of clothes location or reduced hours in addition starting April 1st. We enacted a premium paid program to recognize the exceptional work of these employees as they continue working on the front page to serve our customers.

Second we continue to stand by our customers who count on to help support their financial well-being where our retail customers who have been impacted by covid-19. We are offering payment goes up to 90 days and a suspended any new foreclosure actions for business customers from small business or commercial clients. We are offering loan modifications to help them manage through covered in packs to their business.

In addition, we utilize the paycheck Protection Program to help support their continued employment of Staff. We recognize these are not just numbers and Loans, but these loans represent wages foreign countries and families in our communities the date we have approved over 1.2 billion of PPP loans our project team did exceptional work to get the program up and running in a short time and has remained Nimble throughout the process.

Times Like These are when the greatest companies show their colors and here at TCF. We look forward to stepping up as a Premier Bank in our communities and to support our customers and neighbors are banks are ready to help assist consumers with payment deferrals businesses with customized Solutions, whether deferrals of existing loans or new lending needs in addition. We've made commitments to lead a matching donation program for two of our local hospital groups in Michigan and Minnesota and have made numerous other Financial commitments to groups in our communities Our IT team even utilized a 3D printer to help manufacture protective face Shields and donated them to help to local Health Systems.

We are also thankful and appreciative of the many hard-working Health Care Professionals in our communities.

Third maintaining operations during a fluid and changing situation. We started off twenty-twenty with momentum across the business and a solid outlook for organic growth in January and February. We saw strong business performance that reflected the opportunity. We see in our markets as a result of our merger of equals including robust loan and deposit growth that was even a bit ahead of our expectations along with stable credit quality and on-time execution of our integration initiatives with this strong start to the year through February the covid situation began to evolve as of today. We have Approximately 80% of our branch locations open and operating we see a reduction in Branch transactions of approximately 4 or 50% compared to a month or two ago and an increase in digital banking logins the benefits of having a strong mobile application and digital banking platform are evident in New Jersey.

Environment additionally as part of our integration activities. We are launching digital upgrades for chemical customers to enhance features and functionality. And that is in Flight as we speak with the digital platform is also supporting increased new online account openings with digital new account openings running at 50% above recent Trends in the last couple of weeks off.

We have an experienced leadership team including the executive group as well as the senior leaders across the organization one benefit of the m o e is the Deep bench strength. We have across the company with experience Bankers who are continuing to help our customers. Our team took immediate action to form a Covetous Force to coordinate our response efforts and we have been meeting daily as an executive order to ensure timely and open communication across the bank. We have consistent two-way communication with our employees with regular updates from the task force as well as weekly all met your calls in addition as you would expect we are closely monitoring our credit portfolios and maintaining open dialogue with borrowers to understand evolving Trends in their birth.

worth continuing to

Execute on the m o e integration slide 5 highlights the key integration updates for the first quarter despite some of the challenges resulting from covid-19.

We continue to make progress in contract negotiations with vendors in order to drive the plans cost synergies. Although there is a large set of work remaining to complete our integration roadmap. We can see the impact site between now and the end of the third quarter remaining items include commit completion of the digital banking upgrade the conversion of the human Capital management system. And finally the conversion of teenage Legacy court system into the f i b s platform that we operate today on the chemical side all along the way we will continue to finalize our costs energy initiatives.

To achieve the fourth quarter run rate, we laid out and we will continue to Leverage The Best of Both Banks to implement business Synergy opportunities.

The new TCF is in a stronger position than each Bank was on a stand-alone basis prior to the merger while it is hard to predict which of the many scenarios will play out over the coming months. We have six Capital liquidity a diversified loan portfolio both Geographic and by product and a deep-set of experienced leaders throughout the organization to guide us through

Turning to slide six. I wanted to remind you of some of the balance sheet actions be completed since closing the m o e all of which lowered our risk profile going into the environment. We are in today in the fourth quarter of 2019. We reduced our credit risk by completing the sale of 1.1 billion Legacy TCF Auto Finance portfolio as well as selling 80 million of consumer non-accrual and TDR loans in addition in the third quarter of 2019. We repositioned our our Securities portfolio by selling 1.6 billion of sixties and reinvesting over the last few quarters, which we completed in the first quarter this reduced our asset sensitivity and enhanced Capital efficiency and liquidity.

Today the Securities portfolio is high quality and liquid with 96% of security is rated double-a or Triple-A. We also further reduced our asset sensitivity by termination 1.1 billion of interest rate swaps.

lastly

R. M o e provides additional credit support as we completed comprehensive credit due diligence on both on both loan portfolios and late 2018. Keep in mind off acquire loan balances from the merger retain an additional total fair value discount of approximately $167 million in addition to the Cecil on-balance-sheet reserves. Overall. We are in a much better position today than we were even just six months ago as a result of these actions with that. I'll turn it over to Brian.

Thank you Craig highlights the strong loan growth Trends. We saw in the first quarter with total loan balances up nearly 9% compared to a year ago month excluding the Legacy TCF Auto Finance portfolio and was near the top end of our expectations.

Our commercial portfolios drove the growth and increased by 1.2 billion in the first quarter. This was led by nearly nine hundred million of CN I followed by four hundred million of growth in commercial real estate and two hundred million of growth in the consumer portfolios. Is he an eye growth which was led by higher inventory Finance balances of 578 million, which generally reaches its seasonal Peak late in the first quarter. We could see higher inventory Finance balance has remained elevated and above-normal others in the second and third quarters given slower sales Cycles in the current environment.

In the consumer portfolios growth continues to be driven by Residential Mortgage with declining balances in home equity and consumer installment draw Downs of Life commercial lines of credits did not have a material impact on our loan growth for the quarter as our mix of Commercial Business does not include the largest Upper Middle Market corporate office hours materially Drawn Lines during the first quarter.

Strong growth we saw in the first quarter provides a solid starting point for balances as we enter the second quarter. However, given the current environment we expect our loan growth to be driven by wage demand from commercial borrowers, which we do not expect to be as strong for the remainder of year given the uncertainty and economic outlooks our outlook for a loan growth. This year is unlikely come in at the level we shared previously and it is more likely we will see something closer to low single-digit loan growth on a year-over-year basis excluding the Legacy TCF Auto portfolio long as we move throughout 2020 with a good portion of our loan growth already being booked in the first quarter this Outlook could change if power sentiment improves but with expected week on demands in our markets, we will be prudent on where we deploy our capital and we will not be chasing growth for growth's sake.

Bring the slide date.

We generated strong deposit growth during the quarter which totaled 1.3 billion and nearly matched are corresponding loan growth in the quarter this deposit growth continued into April as we saw stimulus checks deposited and deposit balances are up month-to-date over 1 billion dollars.

Don CD balances were up 7.9% year-over-year and increased by one point three billion from the fourth quarter with the quarter-over-quarter change driven by money Mark and checking balances would see these remaining relatively flat going forward. We expect to see deposit growth opportunities across all of our channels, especially as customers continue to hold higher balances in the current environment due to less spending.

Hold deposit cost to climb ten basis points during the quarter with non CD cost of deposits down 7 basis points. We expect our cost of deposits to continue to decline over time as we have reduced deposit rates across our products and have 57% of our CD portfolio maturing in the next six months at an average rate of 1.54% compared to the current promotional rates, which are closer to 1%

turning to side none.

Last quarter we guided towards net interest margin excluding accretion between 3.5% and 3.6% off the Fed rate cuts and lower Bible rates in the last month of the quarter. We were pleased with the 3.53% Margin where the first quarter.

as we move into the second quarter, it is likely we will see incremental margin pressure given a full quarter impact of the FED funds rate cuts and lower Libor rates with that being said, we are hopeful the margin excluding accretion can't stabilize towards the end of second-quarter or into the third quarter as earning asset yields will likely be fully repriced a.m. To 2, but we expect to see some continued deposit and funding cost reductions in 3Q and for you

We saw twenty-five million of accretion during the Forum which had a 23 basis-point positive impact on the margin. We would expect a creation in the second quarter to be in the high teams or any substantial prepayments and the continue to come down by a couple of million dollars each quarter as we move throughout 2020.

Given the resilient margin in the quarter and strong loan growth net interest income excluding accretion remained relatively stable at 376.

Similar to the margin we expected decline in net interest income in the second quarter. Although the strong. And balances at March 31st, March 31st should be a benefit from it is possible that net interest income could stabilize by the third or fourth quarter. However will be dependent on the pace of loan growth and the rate environment with that. I'll turn it over to Dennis. Thank you Brian turning to slide ten not interesting come total $237 for the quarter and included an eight point $5 Loan Servicing rights and pyramid, excluding this adjusted net interest income was $145 billion. This reflects the typical seasonal decline fee Revenue that we mentioned last quarter as long as in service charges card and ATM revenue and leasing fees all generally contribute lower revenues in the first quarter.

the first quarter

Also included a favorable six million dollar interest rate swap mark-to-market adjustment adjusted not interest income would have been $139 excluding this adjustment.

Gain, on sale revenues totaled $21 for the quarter driven by Strong Mortgage Banking performance with mortgage paid on sale revenue of $14 in the in the first quarter compared to ten million dollars in the prior quarter while Mortgage Banking revenues generally seasonally strong in the second quarter is more difficult to predict. This year's Trend given the uncertainty in addition. It is difficult to predict trends for many feet Revenue line items given activity and volume levels Drive many of the non-interest income categories.

Fees and service charges as well as card and ATM revenues will likely be driven by activity levels, which will depend on how long stay-at-home orders remain in place. We have seen Jeff tire balance is at last activity in retail accounts since the stay-at-home orders have been put in place.

Additionally customer demand will impact the levels of both leasing activity and Commercial customers swap transactions, which will drive the outlook for related fee revenues for these items.

Wealth management fees are tied to assets under management. And we also have trust business. So um mix contains both equity and fixed-income as well as cash and products. In addition. The quarter was the final quarter that will reflect servicing fee income from Legacy TCF Auto Finance portfolio. We have completed the transfer of service operations from this business and we'll see total servicing Revenue decline in the second quarter around two or three million dollars partially offsetting. This Revenue reduction is lower expected expenses related to Loan Servicing as well as near-term final line down of the TCF auto business.

Turning to slide 11:00. We continue to execute on our integration cost synergies and remain on track to achieve the 321 million dollars or lower of expenses in the fourth quarter off. We made good progress in the first quarter as adjusted not interest expense decline to three hundred thirty-five million dollars. It's excluded thirty-seven million dollars or merger-related expenses and $3,000 of expenses related to the sale of the Legacy TCF Auto Finance portfolio. First quarter expenses included higher higher payroll taxes of $5 compared to the fourth call back and we saw a lower commission expenses of the first quarter driven by lower quarter of a quarter activity and origination volumes.

Probably related expenses for the first quarter were modest as our task force activities only covered a couple of weeks during the latter part of the quarter as we moved into the second quarter. We will see the impact of incremental expenses related to covid-19.

and it is

Should Merit increases took effect starting in April? However, we expect to benefit from lower travel expenses due to work from home environment and the continuation of our execution against merger of these from vendor contracts and other costs energy activities.

Federal historic tax credit impairment expense for the quarter was one point five million dollars compared to four million in the prior quarter. We expect this to be volatile depending on timing and completion of a variety of projects with higher impairment expenses in the second half of the year compared to the prior quarter or a couple of quarters, but as a reminder these projects generate a associate tax credits, which come in through the income tax line item and that more than offset that's related impairment expenses.

Excluding any discrete tax items we expect our effective tax rate to be between between 21 and 23% for 2020 are adjusted efficiency wage for the quarter was 58.2% We continue to expect to produce any efficiency racial low. Median upon completion of our integration activities and cost synergies month. And once we return to a more normalized operating environment while all banks are likely to be under some level of Revenue pressure are built in cost synergies from the Emily should serve as a unique Catalyst for TCF.

Turning to slide 12. We are entering this adverse economic environment with a strong Capital position. As our common Equity Tier 1 ratio was 10.4% at the end of the first quarter which we expect to put us in the top quartile of our peers.

Good strong Capital level remains even after our $1 plus of loan growth during the quarter our regulatory Capital levels reflect our election of the five years. So transition for regulatory Capital purposes tangible book value per share of $26.16 is largely unchanged from the third quarter the adoption Council and the move of equity into allowance negatively impacted tangible Book value order positive fair value adjustments that are securities portfolio offset a substantial portion of that in the first place order.

Given the economic uncertainty our primary focus from a capital perspective will be on maintaining robust Capital levels while continuing to serve our customers.

Yesterday we announced our quarterly 35% common stock dividends that will be payable in June as I sit here today. I believe we are in a strong position to continue our dividend off over this will depend on economic conditions as we move throughout the year. We also want to ensure that we are in a position to take advantage of any platform or portfolio opportunities that may become available and generate attractive risk-adjusted returns. We did repurchase 873000 shares during the earlier part of the quarter at a cost of $33 33.1 million dollars.

barber in response to

Like many other Banks we have temporarily suspended BuyBacks under our share repurchase program, but we're we will retain the ability to resume repurchases as the circumstances warrant officer. We currently have $89 remaining under the existing authorization and there's no preset program expiration. Overall. We have a strong Capital the off position remain focused on doing everything we can to support our employees customers and and communities with that. I will turn it over to Jim to provide an update on credit.

Thank you, Dennis turning to slide thirteen as Craig mentioned earlier our credit results to start the year with strong and we saw that reflected our first quarter results as net charge-offs came basis points down 1 basis point from last quarter over 90 day delinquencies also remained very low at 2 basis points non-accrual loans and leases. In fact eighty million dollars from the fourth quarter. However, that reported increase is primarily attributable to a reclassification due to the adoption of Cecil.

They were seventy-three million dollars of loans previously accounted for as purchased credit impaired or PCI.

At December 31st 2019 those loans are reclassified to not approval on January 12020 as a result of Cecil.

These seventy-three million dollar of PCI non-accrual balances have declined from $85 billion at the end of the third quarter of 2019 and they are carried at a discount wage. If you turn to slide 14, I'll walk you through our allowance for credit losses reporter where there were changes driven by both the adoption of Cecil as well as covid-19 impacts.

We ended 2019 with an allowance of $113 or thirty three basis points of lungs or Cecil day one. We had two hundred six million dollars to the allowance back to the adoption of Cecil on January one. And this was primarily related to the acquired loan portfolios. Which although They Carried an off-balance-sheet discount prior to Cecil. There was no allowance related to these loans recall the Cecil day one allowance of $206 was in line with the Outlook. We provided last quarter for $200 to $225,000 of higher reserves through the Cecil.

That increase of two hundred six million dollars. Our overall Cecil day will allow us to 390 million or 90% of total loans and leases.

Total provision expense for the quarter totaled $97 of which $74 million was related to code.

Excluding the impact of covid-19 den, twenty-three million and within the range we have seen over the prior quarters.

In some we ended the quarter with an allowance of $406 for for 113 basis points of lost coverage and that is before you account for the additional $167 of coverage attributable to the fair value discount applied to the acquired loans.

As far as our process, we like most of the banks dropped my multitude of sources decide potential impacts of the covid-19 demek those include macro forecasts core underlying asset quality Trends payment deferral activity loan concentrations and sectors of the portfolio identified to be more likely impacted by the pandemic.

Before I close I would also like to Echo Craig's earlier comments and expand on the level of payment deferral activity. We are provided to support our customers during these difficult times.

Across the consumer portfolios including mortgage home-equity and installment loans. We have received approximately seventy three hundred requests for our customers from our customers or payment deferrals representing 825 million dollars of balances.

Within the commercial portfolios. We have seen approximately 8,500 customer payments of our requests with the majority coming from Capital Solutions in the remainder of from c n i n c r e

Specifically related to inventory Finance. We have partnered with the various manufacturers to review any potential impact to the dealer Network and the associated financing of inventories within those programs.

TCF along with our manufacture Partners have extended manufacturer paid interest. From 90 days up to 180 days and continue to retain the support of the manufacturers bumper support. We believe it is important to support the dealers during this time as sales cycle times slow. However, we have been pleased by the level of dealer activity. We are seeing in a certain segments through April.

You continue to monitor the portfolios daily. And as you can see our closely engaged with our customers to offer support.

As the duration and intensity of the Covent and then it becomes more clear over time. We will adjust our views on Ford performance accordingly having said that our first quarter cut off all speak to the benefit of exercising a disciplined correct model with solid underwriting criteria and following a well-diversified portfolio strategy without alternate back to Craig.

Thank you. Jim are turning to slide fifteen? You can see the diversification of the loan portfolio. Jim mentioned. This was one of the most important aspects of the merger of equals to both me and my partners are chemical by bringing together both Banks. We have one of the most granular and diverse lending portfolios of our peers with no single business representing a substantial overweight position and not no single concentration over 5% of the total loan portfolio.

The Sierra portfolio is Diversified with no components greater than 5% of total loans. All of these asset classes are areas where Community Banks lend in their markets and bulb banks have followed strong sponsor and relationship focus on origination.

Currently there are many areas of lending. TCF does not participate in that have gathered attention recently. We have no material oil and gas lending exposure. We do not have any Aviation lending to a commercial airlines or cargo operators. We do not participate in Railcar lending or Leasing and we do not have a credit card portfolio.

Hotel lending TCF total $764 million and represents only 2% of total loans. This is a modest component of our total commercial real estate Max and we have reviewed our portfolio and are monitoring occupancy levels. We have had some request for payment deferrals and we are working with our borrowers accordingly are focused in this sector has been on sponsors with expertise and liquidity operating flagged limited-service properties generally in the Midwest.

Turning to slide 16. We have provide additional breakouts of our cni and leasing portfolios by industry C&I Leasing cni and leasing together total $15 billion Berg and these include business banking middle-market Capital Solutions in inventory Finance total. My lease is excluding inventory Finance shown in that first read column are $11,000 again here. You can see the benefits of diversification in the portfolio with no sector greater than 5% of total loans manufacturing represents. The largest wage and is split nearly sixty forty between traditional C&I businesses and the capital of solutions business which adds further further diversification of assets.

Secondly transportation and warehousing is number two also just under 5% of total loans and it's primarily contributed by Capital Solutions within the 1.6 billion dollars is further Diversified with focused business sectors within this category including tow trucks fire trucks shuttle buses and motor coaches importantly in Capital Solutions. These credits are very granular with an average ticket size just over 100,000 our asset secured and are largely business essential equipment required to operate the company.

Arts entertainment and Recreation of 780 million includes five hundred million of golf exposure split through Capital Solutions, excuse me, split between golf cart golf term. We have defects Port East here with manufacturer relationship courses are starting to open as of last week and the grass is continuing to grow on the right side of inventory Finance is centered on five Industries. And first quarter balance is totaled four billion up from 3.4 billion a year end due to normal seasonal spring shipments of Edmonton primarily lawn and garden and Powersports, each of these industries individually represent less than 5% of total TCF loans with Powersports at 4 and half percent align a garden at 3% and Marine at one point six Within These sectors. There are numerous manufacturers and programs programs represented. For example within Lawn and Garden Club.

Toro Aaron's in Mt.

Especially Vehicles includes programs with blue bird school buses Ron ability mobility and wheelchair vans and E-Z-GO golf carts Powersports includes a TV and off road vehicle and personal watercraft and some snowmobiles important to note that 84% of the portfolio is tied to exclusive manufacturer programs where we retain support loading repurchase agreements and we Finance the assets and dealer inventory at the lower wholesale cost versus the retail cost. Additionally. We are financing the secured inventory across the dealer base, and we do not provide consumer and use our financing for the purchase of these products.

To wrap up on slide Seventeen. Our priorities are as follows first. We will continue to prioritize the health and safety of our team next. We are committed to continuing to serve our commercial and consumer customers. We have a full Suite of products and services to meet the diverse needs across our customer base and we remain committed to being here to serve them in addition to these factions. We cannot lose sight of our integration program despite. The added challenges brought about by the covid-19 demek and our work from home environment. We remain on track to complete our integration in the third quarter.

Given, the current environment will be very focused on our risk profile and credit quality and Trends within our portfolio. We have already taken many actions to date that put us in a strong position as we stand today and lastly we remain focused on achieving our financial targets after we complete our merger cost savings and once we return to a more normalized operating environment We believe We will be well-positioned to generate top quartile adjusted r o a t c e along with a blow. Median adjusted efficiency ratio.

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

Ladies and gentlemen at this time will begin the question-and-answer session. If you would like to ask a question, please press star and then one on a touch-tone telephone. If you are using a speakerphone we do age you please pick up your handset before pressing the keys to answer all your questions. You may press star into again that is star and then one to ask a question at this time. We will pause momentarily to assemble roster.

And our first question today comes from John are from from RBC Capital markets, please go ahead with your question Banks morning. Everyone morning Jim Jim a question for you to start. I think we understand what's going on in credit. But the modifications in commercial you gave us the number deferrals and curious if you're willing to size it off then curious what you're seeing in terms of the peso modification requests are you know, increasing stable slowing and then you know, and what you're seeing in Capital Solutions. I'm guessing it's smaller balance and I need a truck roll type stuff, but just, you know, give us an idea of what's typical there. Thanks. Sure. We actually are tracking just your line of inquiry there. What we saw as the crisis unfolded life was a surge. If you will and payment deferral request in that has moderated. It really requires us to ship resources around it really has moderated across all channels now we yep.

And that case may change but right now it's really decline. We don't disclose the the balances of the commercial deferral payments, but the number that I had to slow down it was a t

Five or so. $8,500 is is the level of volume and then as Greg mentioned the the average ticket size. The Capital Solutions is quite small for the deferral payment. There really has been pretty modest home transactions ages.

Okay, and these are these are just you know business has stopped. They're asking for a deferral for 90 days and then it's kind of a yeah. Okay got it. One of the area's John that I'm paying attention to you'll find the capital solution is shuttle bus shuttle bus and motor coach in that largely supports, um tourism and travel which obviously has been halted through shelter at home. So the the liquidity position of some of those borrowers isn't as strong as we'd like and so it really is not just inbound but also proactive Outreach to the bar was to see how we can help them. So further the activity with a Capital Solutions to be driven from that shuttle bus and motor coach segment.

Good. Thanks for the gym. And then maybe Brian or tennis appreciate the thinking on the margin Outlook and the potential for stability two three Q for you know, you know this questions, and we understand the puts and takes but any thoughts on the magnitude of the expected pressure in Q2 on the margin before we start to see some potential stability.

Yeah, John, you know, you know that question obviously, this is Brian. You know what I'd say is, you know rates really only impacted to one margin, you know for that last month of the quarter. Going forward, you know, we do expect that. There's going to be you know some pressure on the margin as I said in the prepared remarks really what you have is you get a full quarter break cuts that are going to be factored in there. We are going to have lower levels as Libor comes down as well as it likely will continue to normalize but we will have some you know other mix shifts that takes place in there. So generally speaking we expect you to have you down to size that, you know, we might have TP loans in there for a short period of time which will influence it if I'd say is we expect you to be down but then we do, you know overall paint that we can see stabilization, you know, and maybe even some upside as we get the Q3 and two four. So overall, you know, we feel really good about the merchants the fact that we were still at 3:53 at the end of two one. We really feel you know, yep.

Tipped appears and just overall that we've got a strong net interest margin and even but he's down here, you know a little bit in Q2, which is going to be in a good position.

Okay. All right. Thank you. Our next question comes from David long from Raymond James, please. Go ahead with your question.

Good morning, everyone.

Morning.

Following up on the the net interest marks in the net interest income guidance fine and safe for me to assume that that excludes the payroll protection programming impact, correct?

That that's true days. Okay, and can you can you just the amount of fees you may be receiving from that and then you know, you're expected timing and how that wage and interest income.

Yes, no, no good question days. You know what? I would say based upon the first round of loans are fees are probably you know around they say Thirty million dollars. It's what I'd say are the gross fees now how we recognize that that were, you know, the amortized in the interest income overtime and the recognition of that will depend upon the Forgiveness. As well, so obviously to the extent that loans are forgiven off. It'll come in a little bit faster to the extent that home, you know, stay around for the two for the full Trader. They'll get recognized over that that 2-year. And then in addition, you know, obviously we're in our you know, second round wage PPP loans there is potential for you know, more activity there. So the comments I gave you a really around what we have approved through the first round of PPP loans.

Got a few do you have in your mind on it a level that you think will be forgiven, you know relatively soon say within the first maybe 90 to 120 days or maybe you know after 60 days if the government's click on that and then also, you know with the round to do you have any expectations of where that could be? Are you looking at a couple hundred million several hundred million. They're you know, how big is your pipeline?

Yeah, so so two questions there day and I'll take the first one and then I'll have maybe Tom Schaefer. Somebody else answered the second one. I guess. I'm a question question, which is around the Forgiveness, you know, a lot of that is going to be driven around the borrower activities. So it's really hard for us to predict at this point in time. I'm sure you know as the quarter progresses because it gets to that take week. We'll know a lot more but it's really too hard to predict at this point.

Best of David is Tom Schaefer on the I'm kind of version two of the PPP program yesterday was I would say a very kind of a couple of steps for the SBA we were able to to submit a hundred percent of our pipeline through a batch files yesterday where and so it will be a fall or approved something just under a billion dollars of expect to be approved in the next the next round.

Appreciate the call again. Thank you.

Our next question comes from Steven alexopoulos from JPMorgan, please go ahead with your question.

Mr. Alexopoulos your line is open. Is it possible your phone is on? Oh, yeah. Hi everybody start on the Cecil Reserve in the build. You guys took in the quarter. You just give us some color how much different is the economic Outlook now as compared to what you use for the day to adjustment.

This is Jim Steve. You know, I'd like to say that there's more clarity. I mean on one hand the economic Outlook has been buoyed by the degree to which certain jurisdictions have been able to begin to control the spread of the virus. And obviously we'll have a blowback on Capital markets in the banking industry. So on one hand i'm encouraged on the other hand, you know, it all seems to be driven by the health care issues. I don't think that there is solid progress yet demonstrated proven progress on medical treatment. So Thursday, we may have been able to contain the crisis. I don't know if we can say that it's clearly on its way to be behind us. So therefore that introduces a degree of uncertainty. Will there be more shelter at home on a second wave is so for that reason now, it's hope you understand. I don't want to create a longer-term forecasts with some degree of certainty. I'm encouraged by what we're seeing on the health-care. Yep.

know if it's um

Sustainable, but I would say today versus three weeks ago. I'm feeling slightly better. I think you see that reflected in the market as well. Yeah, and you have to follow is I think of a month coverage, you know, quite a few of us are looking at DFAS and was last was 2017 when you guys released D fast and losses in that stress that's around 3.6% But we think about the new company down here and you think about losses to recycle. Do you think that's still a reasonable range or is it much higher much lower given that you have a new company today?

I would say directional you would see the benefit of the Diversified business model by combining the two Banks. We have a very strong deposit base driven largely by what's happening in the community bank and model inside of Michigan. I think overall performance would be more favorable post-merger than three.

So adding the two together. I think there's a benefit to forecast performance on credit. We haven't actually disclosed a combined stress case a stress test view. We have of course done some analytical on that during the merger process, but you know, we are not at this point required to submit a defect in the amount, but I I feel better post-emergent and prior. Yep. Yep, and then final question because obviously at a nice quarter on expenses what portion of the cost savings are now in the run-rate,

It's Steve. It's about two-thirds or so. So clearly we're marching it down overall operating expenses. And again, you'll expect the, you know, core operating expenses to be 321 or lower by the fourth quarter. So we'll make some incremental progress here in the second quarter, then you know significant much more significant progress as we end the third quarter in going to the fourth quarter of the game and then it says no reason that the system conversion should be delayed because of what's happening with covid-19 off it clearly. It's more challenging with the work at home. But right now we feel confident that we're going to stick on schedule and so we're very intensely working on that to make sure that we stand schedule. Okay, terrific. Thanks for taking my questions.

Our next question comes from Abraham poonawala from Bank of America Securities. Did you go ahead with your question?

Good morning, guys. Good morning, in the environment feels a little bit better today even relative to last week or two weeks ago. And I guess that lens if I ask this question if three months from now like when you think about Reserve build what's going to have a bigger impact on that result will will it be the changes in the macro scenario than what banks look at from a movie standpoint off or will it be more driven by better portfolio insights as you finally start to read out around actual potential problem loans as opposed to just convenience package the photos at this point.

If I had to pick one.

Abraham this is Jim. I would pick unemployment's what we really need to understand is a degree to which return to work allows the economy to begin to restart in that will provide sustainability to employment if that is not successful. The payment deferrals are only going to carry liquidity challenges so far and then you'll see the losses flow through and that also impact things like, um, asset valuation particularly on the residential real estate side. So if I really had to focus on one thing I'm watching it's are we able to Stave off a high unemployment right by the return to work in different geographies if we're successful and it looks like we might be on that trajectory then I'm going to feel better going forward. I don't think the portfolio insights necessarily.

It's not as if we study the more we learn more we really have to see what's impacting the bar and to me that's more of an external issue on things like employment. I don't know if that's helpful. That's the way I'm looking at. That's actually helpful. And so if I miss this earlier, what's the Assumption within your scenarios around unemployment for the rest of the year into twenty Twenty-One, if you could share that, I'm not sure sure. So we have our process. I'll just provide a little bit more color here. We take a consensus forecast. So we're not wedded to a singular forecast off the support and derive our quantitative Cecil reserve and then we overlay that with qualitative. So the qualitative is really where the code in fact comes in. So that is not as if I picked a macro scenario ran our models through it and that is how we arrived at the cobit impact of $74. That's not the way it works. I will tell you age.

We did look at macro forecasts and those range from Peak unemployment's on the 9% with a quick reversion to sustained unemployment over many quarters 78% to a longer duration. That was another lens. We also Abraham look at a number of what we call queue factors, which is asset quality Trends Home Loan review, uh, sort of the core performance of the portfolio Loan review reports, um, other macro factors key performance indicators if they compilation of things that derived qualitative forecast, so I would discourage you from focusing on a macro factor and trying to translate that into a reserve level because that's not the way our process works. It's a piece but it's only a piece of the overall is that helpful? That's extremely helpful. Thank you, and I guess just moving to the slide fifteen Theory disclosure and sorry if I messed this one but dead.

Do you disclose the ltvs on the CTI report? And whether a lot of these loans are backed by borrow guarantees just in a sort of color around we seen a fair amount of growth in this book over the last ten years what I mean, so they're all small individually as exposures. But if you talk to just the borrower guarantees, what's kind of the sponsorship behind Islam's?

You're all offer a thought that maybe Tom or Greg would like to follow up. It really depends Abraham and whether you're looking at sort of a an owner-occupied transaction or a sort of a national corporate banking real estate almost an Institutional type of credit.

For the latter I can tell you that we have as the credit cycle has elongated. We have taken a moderately and consistently more conservative position over time. So 25% equity in a corporate c r e transaction would have been normal a few years ago. That's probably gravitating more towards 30% times better than that sometimes 35% so off the the cre asset classes are a little different when you put the two things together, but I think if you're looking for an equity level, you know, it's not uncommon to see 30% on average. I don't know Tom if you'd like to add anything else. Yeah, I think that's the right especially as you're talking about the institutional growth that we had the institutional real estate segment for the Regional Bank Community Bank. I would say that you know, fifty five twenty 25% Equity is then standard as the expansion has continued for last couple of years. Most of these are in Market sponsors that we know off.

Sponsors that we've had long relationships with yeah and in some cases some level of sponsors support, but we've been uh, I think a careful across all these classes to make sure that there is legitimate, you know owner contributions in in each of these classes, especially on what you're looking at page fifteen.

Thank you.

Our next question comes from Chris negrotti from KBW, please go ahead with your question.

Great morning, Brian or Dennis. Had a question on the on the reserve. Just want to make sure I understand the $167 discount. If I were to add that to the existing reserve it would look like something like a 1.6 Reserve coverage. I'm interested in kind of the breakdown in that between rate and credit and could you speak to me how that how we should be thinking about absorption between accretion and and just traditional credit. Thanks.

Is that a soul roughly two-thirds of that Mark is related to a credit mark from day one. That's still remaining. I should know something like that going forward. It really doesn't that distinction between credit Market interest rate. Mark is less relevant because both of those marks a Creed in over the life of the loan portfolio. Now if at any point in time, there's a loan that's charged off within the chemical portfolio you if you think of the accounting it's that page sixty-seven million dollars absorbs the first part of the loss and then if there's loss above that Mark then you begin to eat into the on balance sheet allowance for credit laws. So I like to think of it as the what's available to absorb loss. You have the off-balance-sheet remaining Mark as well as you have the on balance sheet loans for credit log.

So for that portfolio, we do have I think you should think of that entire.

She's have a million dollars currently available for absorbing part of the loss. But no to that overtime that you know that cushion. That's there does get it created in month in income to the through the to net interest income.

Okay, that's great, Thank you for that. In terms of the the understanding is a ton ton of moving parts. And I know this is a topic last quarter. But if we think about the PCM for Leasing and your some of your consumer banking fees from from the impact of the quarantine you can you maybe elaborate a little bit more about the potential near-term pressure. Although maybe just a couple of quarters off for some of those items. Thanks. I'm sure so well, you know reported $137 million a couple of moving Parts with was the MSR impairment and then we took a game from interest rate swaps net doubt. If you took those two out we would have had hundred thirty-nine million dollars of the income so clearly in the fees on both accounts the card in ATM Revenue are impacted by the coldest situation now, you know, is it really only impacting of a part of the core birth?

We will have some more impact they're going into the second quarter, you know, depending on where all activity levels and how quickly we come out of the stay-at-home orders off and I would think that within the leasing Revenue as well. We probably had a little bit a little bit of headwind there as a result of covid-19.

So I think as business synergies come hold there, there's some upside to to be Revenue. We also talked before about selling our leasing services in to the Legacy chemical franchise. And so that creates some upside. You know, I feel free optimistic about our mortgage banking business. You know, TCF was really at its infancy and developing the traditional in my life, you know, first mortgage lending within its franchise and you know get Legacy chemical had developed a really good platform, but I think is very lovable. So I think over time we have good outside in terms of Mortgage Banking fee revenue, of course it it's going to fluctuate depending on you know, interest rate environment and refinance activity as that business grows. We should see growth in servicing fee revenues. I did note it note that we'll see a bit of a into the second quarter as you know, we now give up dead.

The auto loan servicing revenue and then also in wealth management Revenue.

You know, first of all historically we would see a pick-up in second-quarter a seasonally stronger quarter for V Revenue with wealth management, but then longer-term, you know, we should see some businesses use their of rolling out, you know wealth management Trust Services across the TCF franchise. So you no longer term. I I see some, you know strong potential for Life overall in in B Revenue.

That's great. Thanks. Thanks so much. Just one more. You saw one of your Midwest peers racing subordinated. I think last week given the drop in rates, you know, you guys have plenty of capital in terms of seat. He won but any thoughts on utilizing a similar strategy just pull the markets are open.

Yeah, you know, this is Brian. You know, what I would say is we feel really good about the liquidity and and capital position of the bank. You know, it's one of those things where would we want them considered, you know bolstering on you know more Capital. It's something that we will we will consider, you know, depending upon you know market conditions costs. I wouldn't rule it out I guess but we don't necessarily, you know, we're in a position where we would we would necessarily need it to

Thanks, bro.

And our next question comes from Nathan race from Piper Sandler, please go ahead with your question. Hi guys, good morning. Appreciate the disclosures on slide fifteen and sixteen months. I guess just trying to put this in context with some with what some other Banks of disclose so far and earning season and outside of inventory Finance. Guess we kind of get through a number anywhere between ten and fourteen months to 50% of total loans that are more so exposed to the ongoing pain stomach. Just curious if you guys have any thoughts on that number just kind of how you guys do the portfolio outside. If it's refinance that could be more of a risk new return I suppose.

Sure Nathan, this is Jim at all offer a point of view the part of the reason that we wanted to give you some insight into the composition of the cre portfolio and see and I portfolio. It's as a you can see it's pretty granular. There aren't large concentrations. So I'm not sure if I would say I think you maybe said 15% of the portfolio or things that you would expect to be impacted, you know anticipating maybe being asked. What are you worried about all answer. Your question is way as we indicated before our hotel portfolio 764 million dollars is 2% of the portfolio maybe 2.5%

We have shuttle buses and motor coach has about four hundred and ten million of that that's 1.1% And then it starts to drop off pretty significantly. I am watching carefully a restaurant folio. That's 0.2% So you can see suddenly the list of things that you really have front and center gets to be very small. I'm not sure I'd say $14 15% off as Craig mentioned we look for the obvious. When The Crisis began to unfold oil and gas aviation in oil and gas inside of shared National Credit. The numbers are very very small. We're not really worried about cuz it wasn't part of our strategy. I would say it's the it's a crisis extends and it does impact collateral valuation. A lot of banks will be looking at residential real estate collateral values. I don't have a reason to believe that's where we're going. But that would be a different concern. I'm not worried about it yet, but I'm doing watchful of it. So, you know hotel shuttle bus motor coach wage.

the one that comes off of mine

Is that might be you know, 4% of the portfolio would be the most obvious?

Yeah, and if I could just ask Craig on the inventory Finance portfolio appreciate the disclosures there and it just curious, you know, in terms of your views in terms in that. You know how this portfolio May perform in a downturn. I appreciate the guidance or I'm sorry, the indication that you guys have had just 12 basis points of charge off the 29th annual basis. So just curious if you have any thoughts on how this portfolio's worth perform during previous downturns and just maybe how some of the laws all sets are in place relative to a traditional denied book and again appreciate the fact that you know, 84% of this month. It was tied to direct X.

Sure, you know or remember most of this portfolio was on what we would call pay as sold terms. So there aren't required principal money to be made typically until the until the asset is sold in addition as you've already indicated from our from our disclosures over eighty percent of these portfolios manufacturer exclusive program where we have manufacturer support as far as repurchase and remarketing and so typically, you know supporting this dealer we entered this business need an 08 at a time when people were wondering if you know financing the dealers and these Community Bank cities, you know made a lot of sense and we've had just tremendous job performance and again partnering with those strong manufacturers is always been key to this program.

Understood helpful color. I appreciate you guys taken questions.

Our next question comes from Terry McEvoy from Stevens, please go ahead with your flesh. All right, thanks gud morning guys. The question. What is the expensive in the third quarter coming out of the core conversion? And so what would that mean to the fourth quarter as those costs come down?

Yeah, it's it's really a couple of things one. It's compensation related to employees around systems and you know think of it as really we're running two systems right now and will will convert to a single system going forward and I don't have the exact, you know, break break down but you'll see some reduction, you know, any equipment expenses as well coming coming down but you know, the the guidance is that we're going from the 3:35 or so, of course expenses that we saw in the first quarter down to 321 lower than the 4th Court.

I mean eight 8 or I'm sorry not need anymore. This is Craig. The other thing to remember it's going to be a really messy quarter cuz all of those expenses are going to come down in the quarter the retirement of the Legacy system. So all that activity is going to go flow through the be a lot of merger-related numbers in that third quarter.

Understood and then Craig, it's Terry a question for you. I know it's low on the priority list in terms of excess Capital but you have talked about opportunities their environments like this month where you could see portfolio purchases and opportunities to buy some portfolios. Are they out there in the marketplace and what your interest today and and and seriously taking a look at them. I mean, I I would the only thing yes, they are out there today, but from our standpoint, they the long-term return on Capital these asset moves would be the primary driver. We're not looking truck roll just to add portfolio or add net income necessarily. We want to make sure that you know based on our strategic value analysis that we've got the right investing in their life. So everybody's got their antenna, but right now we're we're just handling our own portfolio.

Thank you.

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

Good morning, guys.

Good morning. First question just on the the balance sheet cash liquidity should be assumed that that you keep levels at this this level sort of going forward until we're through sort of this covid-19 environment or should we expect to see some of the one point three billion drift down over the next few quarters.

Yeah, this is Brian. I'd say in general. You know, most of our absolute quality is is held in the investment Securities portfolio. We did see us, you know, kind of finalize that reinvestment am actually finish that back in January, you know, when yields were were quite a bit higher so, you know, I I wouldn't see overall, you know, Security's levels as a percentage of assets coming down at all. It might have been a little bit of excess cash on hand at the end of the quarter depending upon you know, how the quarter ended but in general, you know, the investment Securities portfolio will stay its size. You know, it could it could potentially see some expansion of the Investment Portfolio. I know in previous quarters, we had said we might look to you know grow that has another percentage of investment could say as of today kind of where yields are at home more kind of involved in the wait mode to see if that to see if that makes sense. But overall, you know, as a company we have a lot of on balance sheet liquidity. We've got a lot of a lot of continued age

Borrowing capacity, you know, so we probably got liquidity on both on balance sheet as well as contingent, you know, more than ten billion dollars even up to Fifteen billion dollars. We have access to a wholesale markets as well as long as the Capital Market. So we feel really good about where we sit, you know from a liquidity position.

Okay. Thanks. And then on 513 looking at the 73 million that was added to on accrual that was previously PCI off if there's if there's a performance there in terms of actual credit performance will that be assumed that that sort of flows through the provision is, you know an offset to you know provision for divorce, I guess, how how would that work?

You said that you know that provision went off balance sheet on balance sheet and because it was classified as a PCI. It's has a substantial Reserve against that small, you know, portfolio and you're right if we outperformed essentially that provision is released and release pressure on you know, future provision expense.

Thank you.

Internet question comes from cancer be from Morgan Stanley, please go ahead with your question Thursday around the T program. It don't even know if they're going to stay or go. I assume your guys is not in. Like what is this is single digits excluding all PPP impact in the in the year.

Yeah ten. This is this is Brian Maas. You were kind of cutting out on the question or my phone was cutting out. But I think your question was with our loan growth guidance. Does that include? My name is a moment those come off balance sheet. You know, what I would say is the guidance I gave on bone growth I'd say is is coral bone growth, you know relative to the business obviously as we talked about, you know, we have that, you know approved one point over a billion dollars of of loans from the first round and you know, we don't know exactly how much we're going to wind up in the second round, but it could be, you know, another billion dollars potentially. So that would be excluding I'd say the PTP loan so that would that would be separate and it's hard to predict exactly how long those will stay on balance sheet again relates to the you know forgiveness. And really that's driven by the customer behavior and what they use the funds for will drive one that comes off of our balance sheet. So hopefully that helps

It does. All right. Thank you very much.

And ladies and gentlemen with that we'll end today's question-and-answer session like to turn it back over to mr. For any closing remarks.

Thank you, Jamie. First of all, I wanted to commend my the team that's on the phone here today that just did a fantastic job and getting prepared for this call off the amount of detail. The scripting of it is just a they did a great job working remotely. It's it's been fantastic next. I want to thank all of you for listening this morning.

The next I want to thank all the Health Care Professionals in our markets for their sacrifices during this time, as you know, several of our markets including Detroit and Chicago have been severely impacted and we owe a debt of gratitude to these health care workers. I want to thank all of our team members for their hard work is they've experienced new challenges of balancing work and family commitments, but not only our team is managing through work from home challenges. We are staying on track of our integration work streams, which is remarkable and I'm extremely proud of the team's efforts. We will all get through this together am confident. We'll have come out of this stronger than ever before. Thank you.

Ladies and gentlemen, that does conclude today's conference call with you. Thank you for joining. You may now disconnect your lines.