Q2 2020 TCF Financial Corp Earnings Call
Good morning, and welcome to Tcfs, 2021st quarter earnings call.
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At this time to introduce Mr., Tim Sedabres head of Investor Relations to begin the conference call.
The floor is yours.
Thank you might get good morning, everyone.
Thank you for joining us for Tcf second quarter 2020 earnings call.
Joining me on today's call will be Craig Dahl, President and Chief Executive Officer.
Shaper Chief operating officer.
Dennis Klaeser Chief Financial Officer.
In constant Chief risk Officer, and Brian Maass, Deputy Chief Financial Officer and Treasurer.
Just a few moments Craig Brian Denison Jan will provide an overview our second quarter results.
I'll be referencing a slide presentation that is available on the Investor Relations section Tcfs website.
Yeah, our got Tcf Bank Dot com.
Following their remarks, well open up for questions.
During today's presentation, we may make projections or other forward looking statements regarding future events are the future financial performance of the company.
We caution that such statements are productions actual events or results may differ materially <unk>.
Please see the forward looking statement disclosure in our 2022nd quarter earnings release for more information about risks and uncertainties, which may affect us.
The information will provide today is accurate as of June Thirtyth 2020, we undertake no duty to update the information.
I like to turn the call every piece, yeah, President and CEO Craig Dahl.
Well good morning, and thank you all for joining us today.
Our results for the second quarter demonstrates the resilience and strength of Tcf. During this period up economic uncertainty low interest rates in global pandemic.
As we continue to navigate an ever changing economic outlook, we're working hard to ensure we continue to run the business serve our customers and support both to safety and wellbeing of our team members.
Our integration activities continued during the quarter and now just about a year after closing of the transaction. We can see the end in sight for our integration program as our final system conversion is scheduled for completion and the next two weeks.
Hi, I'm very proud of our team's efforts to support her integration activities that we have continued to remain on track with key timelines, even while overcoming challenges due to work from home and the pace [noise].
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These efforts were no easy cash however, our team's ability to execute reflects the power of our purpose unbelievable and our ability to rally the organization around a set of shared objectives.
In addition to integration activities, our teams have not skipped a beat continuing to serve our customers through our active involvement in the P.P.P. program supporting 16000 borrowers with TPP loans as well is working with our customers to provide loan deferrals for other support to help them through their current end buyer.
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Regarding our financial results for the second quarter, which Denison, Brian I'll cover shortly in greater detail.
We reported earnings per share or 14 cents, an adjusted for merger related a notable items totaled 54 cents per share.
We saw strong deposit flows given the levels of stimulus in P.P.P. proceeds.
Loan balances declined modestly from the first quarter, driven primarily by lower inventory finance balances, which were down 1.5 billion from the first quarter as dealer saw strong sell through rates and lower resupply levels in all product categories.
Excluding the lower inventory finance balances loans, otherwise were up 3%, which included $1.8 billion a growth due to a P.P.P. loans.
I know first quarter call, we shared DUC inventory finance balances have the potential to remain elevated and sales cycles could slow depending on demand. However, as we indicated earlier in June we saw second quarter dealer sales volumes much stronger than expected as the level of demand for line.
Pardon Powersports RV and marine we're all areas, where consumers continued purchasing products to support changing traveling recreational plans.
This is a substantial credit positive as strong sell through rates are exactly what we like to see what quick asset churn times.
Now the counter trend the strong sell through is the decline in balances and associated lower revenue from Outstandings as many of the manufacturers had their plans idle due to state regulations, and we're not producing equipment to ship and backfill the inventory being sold.
As we sit here today those plans are beginning to or have reopened which should help improve our growth outlook from the low level and the second quarter, but it will take some time to reach totally inventory gaps.
From a credit perspective, our second quarter results were strong with just four basis points of net charge offs and we again added reserves in the quarter, given the economic outlook, which Jim will cover with additional details later in the call.
We continue to be well positioned with strong capital levels and substantial liquidity and our lending portfolios benefit from diversification across both geography and asset classes with no unnatural concentrations, resulting from our merger of equals.
Slide four highlights our completed integration milestones to date as well as a couple of the remaining integration activities slated for completion this quarter.
The highlight of our work in the second quarter was the upgrade of the digital banking platform for legacy chemical customers now have added functionality and an upgraded experience for mobile and online capabilities matching what tcf had built in assembled.
The overall digital enrollment from our legacy chemical customers has exceeded our expectation and their response has been very encouraging as over 80% of eligible customers have already enrolled and we have seen strong utilization trends for bill pay and mobile deposit.
This combination of the actual yes, I B S core paired with our de Threed digital banking platform represents the system architecture and ultimate end state solution, we will operate going forward.
No. It isn't a court system conversion and this requires a good deal of hard work, but the customer interface in applications used today will not change and we expected to be much less disruptive to customers as the biggest changes are in the back office systems.
Earlier in July we completed our mock conversions prepare for the upcoming event and where there are always selected items to enhance and refine we were very pleased with the execution feedback from our integration teams.
Additionally, we will be consolidating 13 banking centers that overlap as a result of the conversion primarily in southeast Michigan.
These banking centers on average have another location within two miles.
We are working our way through the integration program and the remainder of the expense synergies will come from both vendor contracts driven by system consolidation and from lower staffing from the groups to support the systems, which will be sunsetted.
The end result of our integration program will be one tcf operating on a streamlined efficient core system with the agility and nimbleness to continue to deploy new features and functionality to customers.
Technology platform, we will have at the end of the day. We believe is scale level to support Tcf for many years to come and eliminates the legacy technology anchors that many other banks struggle to upgrade an optimized.
Thanks upon completion of the integration we are confident we will deliver on the cost synergies, we committed to as part of the merger.
Additionally, we could see adjusted expenses for the fourth quarter below our 321 million dollar target.
There are lot of moving pieces, depending on the love it level of Colvin related expenses as well as the timing of when travel and business development expenses pick back up.
So when business returns to more normalized state, we will also likely see higher commissions based on originations and production levels.
With that being said, we are ready to manage the company in a fluid environment, where if we see growth opportunities as we head into 2021.
We may look to invest some of those incremental savings in supporting revenue synergies that we've already identified.
However, if the economic outlook worsens or we do not see the growth in revenue opportunities, we will be disciplined expense management and couldn't look to further improve operating efficiencies.
Slide five taking actions to support our team members customers in communities.
At Tcf, we took quick action to respond to actions affecting the communities, where we live in work, including the colder global pandemic civil unrest in the call Great racial equity.
And the dam break and flooding in Midland Michigan.
First on the Colgate's pandemic.
We're continuing to respond to the cobot impacts, which are affecting our local economies and communities.
We had reopened our banking center lobbies, ensuring customers have access to vital banking services, while maintaining the safety of our team members.
We are continuing to work with our borrowers to help them manage through this difficult time.
We have been offering loan deferrals to support our customer base.
And as a quarter end, we had $1.8 billion of loan balances in deferral across the bank.
Our trends and timing were similar to many others as we saw strong demand early on for loan deferrals and over the past couple of weeks, we're seeing very limited new deferral requests or request for a second 90 day deferral.
I will ultimately Chow and we are still cautious given the uncertainty heading into the back half of this year. However, the recent trends have been encouraging.
Secondly, and civil unrest in call for ish racially quality.
This topic, it's close to home as the murder Upcharge slide happened in Minneapolis, which is one of our primary markets Tcf strongly condemns all form a bias racism and filings we continue to be very active and supporting our team members and communities to this dialogue and call to action.
Just last week, we were proud to announce a 1 billion dollar loan commitment for minority and women on small businesses.
Small businesses are the backbone of our neighborhood, but we know that many minority owned and women on small businesses historically have not had strong access to credit. So many banks, we recognized a crucial need for change and we are positioned to help these business owners.
Another way, we can support these communities by making it easier for people to purchase or on home.
We announced the expansion of our heart and home program to assist low to moderate income buyers by providing brands up to $3000 to help cover closing costs.
[noise] internally, we have work to make sure our employees have a voice in a forum for discussion.
We have implemented listening sessions with our executive team to facilitate candid conversations.
And we have rolled out mandatory training across the bank on topics such as unconscious bias.
We have also shared the stories of our team members across the bank with do their own words shared personal experiences a racism and then equity in their daily lives.
Tcf also celebrated June 18th as a company, taking the opportunity for a deeper dialogue and education on racial equity.
We hosted a panel discussion for all team members, including me.
And selected board members are cheap debt and diversity officers and renowned community leaders from Hcl, you, NAACP, and Michigan round table or diversity and inclusion.
This tone starts with our board of directors Im proud to say that we have a very diverse group of in terms of race gender experience and expertise. This includes five women and for directors representing racial diversity.
We believe it is time to create meaningful change.
One way, we can do that is to invest in programs and policies to address disparities and we are terminal to be an authentic part just movement.
Answered on the flooding in Midland.
So one of our local communities was impacted by a significant flooding event and Midland Michigan.
Tcf has deep roots in Midland as a market was significant operations and employees.
I'm proud of Tcs response to this event and the response of our team members as our belief of carrying like a neighbor continued to be at the forefront of our actions we provided financial support to local community organizations established a hardship lending program to support impacted residents and businesses and launching in play.
He assistance funds were impacted team members.
So with that update ill turn it over to Brian to cover additional second quarter financial results.
Okay.
Thank you Craig.
Slide six shows total loan balance activity during the quarter.
Although loans declined modestly from the first quarter the driver of which was the strong seasonal decline inventory finance balances mentioned earlier, which were down 1.5 billion quarter over quarter, excluding the lower inventory finance balances loan otherwise increased by 3%.
Although this is a near term headwind from a balance and revenue perspective. Overall, we are pleased with the resulting credit impact at the inventories are selling through and the channels and dealer networks remain open for business with robust activity levels.
As a result, the inventory finance balances continued to come down into the end of June at 2.5 billion.
And our expectations for the second half of the year for this business will be largely dependent on the timing of shipments of inventory from the manufacturers it could take a quarter or two for inventory levels to refill.
We hope to see the trough balances in the third quarter consistent with prior year trends and a potential rebuilding of balances heading into the fourth quarter.
In general we are seeing lower levels of customer demand and the other commercial portfolios, while the mortgage origination pipeline has remained very strong.
Our overall loan growth outlook for the rest of the year will be largely dependent on the level and pace of commercial loan demand, which we do not expect to return to normalized levels in 2020.
While there are many factors that can impact demand, we expect to see low to moderate loan growth, excluding PPP loans by the fourth quarter.
This outlook could change in power sentiment improves, but we will continue to be prudent on where we deploy our capital and disciplined on which asset classes. We originally.
As we think longer term when we get back to a more normal operating environment, we remain bullish on our ability to generate stronger than pure loan growth given the product and geographic breadth. We have as a result of the merger and the numerous business synergy opportunities in front of us.
Turning to slide seven.
We generated 3.4 billion of deposit growth during the quarter, which was supported by stimulus checks TPP funds and reduced spending levels for many customers.
This strong deposit growth is coming while we continue to run off CD balances, which were down over 300 million in the second quarter.
We would expect to see total deposit balances decline during the second half of the year as a portion of this recent growth is transitory.
However, we continue to expect deposit growth remained strong on a year over year basis.
With our excess liquidity runoff of CD balances and improved market pricing our cost of deposits declined 29 basis points from the first quarter.
This includes the cost of our non CD deposits nearly being cut in half.
We believe there remained opportunity to continue to bring down our cost of deposits into the second half of the year.
Based on actions, we have already taken during the prior two months, our third quarter results should reflect a full quarter impact of those actions and we are continuing to bring down deposit pricing across the board.
Turning to slide eight.
We saw incremental pressure on net interest income and margin as expected given the full quarter impact of the fed rate cuts and lower LIBOR rates.
Net interest income and margin were impacted by both purchase accounting accretion and TPP loans during the quarter.
We saw 18 million of accretion in the quarter, which had a 16 basis points benefit to the margin. We would expect this the continued to come down by a few million dollars each quarter as we move throughout the back half of the year.
TPP loans added 9 million to net interest income.
Including both pp he fees and interest recognized during the quarter offset by the cost of funds.
In total the PPP loans reduced net interest margin by one basis point during the quarter due to the 1% coupon rate on the loans, partially offset by the amortization of PPP loan origination fees.
As a result, net interest income excluding accretion and TTP declined from 376 million in the first quarter to 351 million in the second quarter, while core net interest margin declined from 3.53 to 3.2 all person.
We are optimistic that net interest margin, excluding accretion and TPP control and rebound from this 320 level given several tailwinds, including further deposit repricing, which could offset some incremental pressure we see on loan yields as we move into the second half of the year.
Ultimately, we expect net interest margin expansion, excluding accretion and PPP and the second half of 2020 to support net interest income growth the magnitude of which will be dependent on the pace of loan and earning asset growth.
With that I'll turn it over to us.
Thank you Brian.
Turning to slide nine noninterest income totaled 133 million for the quarter.
And included a $14.7 million gain on the sale of our Arizona branches.
And $8.9 million loan servicing rights impairment.
Excluding these notable items adjusted non interest income was 127 million.
The decline from the first quarter was driven by lower banking related fees due to coated 19 impacts, including fees and service charges and card and ATM revenue.
During the quarter, we saw higher account balances from stimulus payments, which drove lower levels of deposit fees and service charges and lower transaction volumes impacted debit card and ATM revenues.
In addition, other noninterest income declined due to lower swap fee income, which declined by $9 million from the first quarter, given the lower commercial origination activity.
Although although we saw pressure on fee revenue in the second quarter. We saw stronger results in May and June off the loads from April.
These trends give us optimism that we would see fees growth from this level into the second half of the year dependent on activity levels and economies in our markets remaining open.
Gain on sale revenues of $29 million in the second quarter were driven by strong mortgage banking performance.
And mortgage gain on sale of $25 million compared to $14 million in the prior quarter.
Given strong origination levels and mortgage it is possible, we will see continued strength into quarter quarter three in quarter four.
This is a key revenue synergy for us and we are operating with one mortgage team and platform across our entire footprint.
And we have substantial opportunities to gain our fair share of origination volumes matching our consumer market share.
Leasing fees increased by $3 million from the prior quarter.
We're likely to be dependent on the level of customer demand and transaction volumes heading into the second half.
We saw a significant decline in applications in the capital solutions business in April and May down from prior levels. However June application started to rebound.
Wealth management fees are tied to assets under management.
And reflect the underlying assets under management levels, we call. Our trust business includes a mix of equity fixed income as well as cash and liquid products.
In addition, servicing fees income of $3 million for the second quarter provides a good run rate going forward as it reflected the first full quarter. After completing the sale of the legacy Tcf Auto finance portfolio.
Partially offsetting this revenue reduction is lower related loan servicing expense.
Turning to slide 10, we continue to execute on our integration and cost synergies everything remain on track to achieve the 321 million or lower expense level in the fourth quarter.
We had better than expected cost control in the second quarter with adjusted non interest expense of 317 million dollar.
Excluding.
$82 million of merger related expenses and 1.5 million of notable items.
As a result, our adjusted noninterest expenses are already below our targeted level of 321 million for the fourth quarter.
We saw lower levels of expenses during the quarter in areas such as employee benefits.
Medical expenses occupancy equipment, and other noninterest expenses, including advertising and marketing and travel expenses.
These are partially offset by higher covered related expenses, including premium pay for certain team members and costs related to cleaning sanitation supplies.
Given that we still have cost synergies yet to be realized the board Jordi of which are will come from vendor and systems.
We expect to see adjusted noninterest expense below our $321 million target in the fourth quarter.
How far below $321 million level, we can get on a core recurring basis will depend on a variety of factors.
Including the level of additional cool with 19 expenses.
The timing of when travel in business development expenses pick back up and the timing and Lumpiness of Federal historic income tax impairment expenses.
We may see higher federal income tax.
Credit amortization expense in the second half driven by the completion of various projects, but as a reminder, tax expenses from these projects generate associated tax credits, which come into the income tax lane in line item and more than offset the related expense in the PNM.
Based on these factors it's fairly fairly.
Likely that our fourth quarter.
Expenses will be lower than the $321 million that we've targeted.
As Craig mentioned, we have levers to pull depending on the growth outlook, we see as we head into next year.
We believe we have the optionality to either redeploy additional expense synergies into revenue producing areas to support topline revenue growth.
Well, if we see more anemic economic outlook, we had the ability to pursue further expense efficiency opportunities to calendar potential additional revenue headwinds into 2021.
As we move into the fourth quarter, we expect to have a better sense.
2021 opportunities as we finalize our budget for next year.
Our adjusted efficiency ratio for the quarter totaled.
Our was 59.8% we continue to expect to produce and adjusted efficiency ratio below peer median upon completion of our integration activities and cost synergies. Once we returned to a more normalized operating environment.
On a pre provision net revenue basis.
We recognize pressure we have seen from the revenue side due to rates and recent fee income trends. We are optimistic PPNR country Kentrox would begin to grow with modest net interest margin improvement and recovery and fee revenues.
The tax perspective, excluding any discrete tax items, we expect our effective tax rate to be between 20 and 23% for 2020.
Turning to slide 11.
We remain well positioned in this environment from a capital standpoint, with common equity tier one ratio of 11.1% at the end of the second quarter, which we expect to which we expect to put us in the top quartile of our peers.
Given the economic uncertainty our primary focus from a capital perspective will be on maintaining robust capital levels, while continuing to serve our customers.
As part of our earnings announcement, we declared our quarterly 35 cents common stock dividend that will be payable in September.
I believe we remain in a strong position to continue our dividend at this level given the earnings power, we see on the horizon. Once we get past the end of our merger related expenses over this will depend on economic conditions as we move throughout.
As we move through the coming quarters.
We also want to ensure that we're in a position to take advantage of any platform of portfolio opportunities that may become available as the macro environment stabilizes it improves.
Buybacks under our share repurchase program continued to remain suspended.
We currently have $89 million remaining under existing authorization and there is no preset program exploration.
Overall, we have a strong capital and liquidity position remained focused on doing everything we can to support our employees customers and communities.
With that I'll turn it over to Jim to provide an update on credit.
Thank you Dennis turning to slide 12.
Craig mentioned earlier, our credit results in the second quarter remains strong at net charge offs came in at four basis points.
Down two basis points from last quarter.
The level of net charge offs. We are seeing continues to be below expectations. We said prior to the Coke and then to the Twentyth money.
Our 90 day delinquencies also remained very low at just two basis points.
We did we did see a slight uptick in nonaccrual loans, and leases, which increased $41 million or 16% from the first quarter.
Yeah, Hi, non accrual increased by 14 million.
It is primarily driven by four credits all of which either collateral value in line with the outstanding balance or are on track for payoff or refinance out of the bank.
The increase in CRM non accrual of 10 million was driven by a handful of smaller credits.
The largest of the at a couple of million dollars.
Let's turn to slide 13 in Q2, we added $76 million to reserves for a total allowance for credit losses of 504 million.
This includes $43 million of reserves or unfunded commitments.
Allowance as a percentage of loans increased 119 basis points 142 basis points in second quarter.
Excluding our $1.8 billion of TPP loans, our allowance was 149 basis points or 1.49% of loans.
Keep in mind, we also have $149 million of fair value discount on acquired loans, which provide additional credit protection.
In total our allowance for credit losses, and discount on acquired loans would represent 194 basis points of loans excluding PDP.
Total provision expense declined from $97 million in the first quarter $279 million in the second quarter.
The elevated provision expenses driven by the economic impacts of global Nike.
While cobot 19 related provisions in the first quarter. It was driven by a qualitative review and modeling of various economic scenarios to assess the potential impacts from dependent.
Revision in the second quarter was driven by our quantitative models based on.
Economic scenario deterioration compared to the first quarter.
As well as supplemented by in depth portfolio reviews.
It is difficult to predict the future.
Future given the various told uncertainty as long as fiscal and monetary stimulus.
However, the situation will continue to become more clear over time as the economic environment changes, we will continue to assess likely scenarios related to coven and adjust our reserves accordingly.
Our recent credit performance has been very strong so far this year, we are seeing deferral balances start to come down.
As an early positive indicator.
However, we continue to operate in a very fluid environment, yet believe tcf is well positioned given the at the diversification of lending we have as result of our merger of equals.
At this point, let's turn to slide 14.
It's important to note that we have one of the most granular and diverse lending portfolios of our peers with no single business, representing an overweight position.
It is also worth noting there are many areas of concern in the industry's for other banks were Tcf has little or no exposure for example, no material oil and gas lending exposures.
You're not any aviation lending to commercial airlines are cargo operators.
We did not participate in railcar lending or leases no credit card portfolio et cetera.
However, we have learned more over the past few months as we have completed deep portfolio reviews, which incorporate our estimation of the potential impacts of Covance.
As a result, we had called out the portfolios lifting here on slide 14, where we believe there may be higher relative risk due to the impacts from cobot.
As you can see these portfolios include hotels motor coach Shuttle bus, which is within capital solutions.
One of our CRM retail portfolio.
Franchise in fitness.
In retail trade in Cnine.
Our overall balance of loans on deferral at quarter end totaled 1.8 billion in that number has come down so you actually over the quarter.
Many of the initial deferral requests came in when the level of uncertainty was much higher.
And we saw borrowers taking a very defensive position given that uncertainty.
What we have seen since then is the initial deferral period that started to fall off.
It's substantially lower requests for second 90, the deferral periods as well.
That activity has resulted in our deferral total at quarter end being less than 40% of the original deferral requests.
Subsequent to quarter again during the month of July we continue to see lower.
A total outstanding balances under book.
However, we are monitoring deferral trends across these portfolios and have reviewed the component of those which we believe that an elevated level of risk due to coke, which is what we're sharing with you here.
Hotel lending as an example, one of the common impacting portfolio, which totaled $775 million. It represents 2% of total lungs.
This is a modest component of our total CRT mix here, we have reviewed our portfolio.
Our monitoring occupancy levels among other metrics not surprisingly, 53% of that portfolio was on deferral at quarter end.
We believe that approximately 600 million of those balances represent elevated risk to go.
Our focus on the sector has been on sponsors with expertise and liquidity operating flag limited service properties generally in the Midwest.
We benefit from London, New properties, primarily in drive two locations versus fly to destinations in do not have material exposure to large downtown or convention center types of hotels in this portfolio.
Motor coach in the shuttle bus is another sector, we'd like to call out which totaled just over $400 million represents 1.2% of total loans.
Consistent with our comment last quarter. This portfolio was heavily impacted by reduced travel activity, which continues to see low.
Deferrals had been higher portfolio.
And we will likely see along the road to recovery for the areas to get back to closer.
I will state.
Retail CRB totaled <unk> point 3 billion and represents just under 4% of total loans, which is another area we're calling.
Here, we have seen fairly low levels of deferral requests today.
This portfolio is supported by its diverse and granular nature.
As an example of the average size alone the deferral is just $1 million.
Franchise, and fitness totals $300 million or just under 1% total loans.
To date, we have seen modest deferral activity here. However, we do believe there is approximately.
Folio that could carry an elevated cobot risk.
Then the impact of potential second phase.
Downs or restrictions.
On the franchise side. These credits are largely to borrowers affiliated with large national brand brand name change.
Which provide more stability can support to the business program.
And our generally quick serve restaurants, which has seen less revenue decline than other dining room only businesses.
On the fitness side. The primary concern here is the status of restrictions and various state as it relates to reopening guidelines.
Borrowers in this space are primarily associated with large national chain and mass market membership basins, which we believe are more recession resistant.
The premium segments of the Mark.
Finally on the retail trade sector of our Cnine book, which totaled just over 350 million. We have also seen very modest level of deferral activity today.
We are watching the status of reopening across our footprint as that will drive the outlook outlook, where this portfolio.
Importantly, here again the.
The book has strong diversification.
While we do not specifically call out consumer portfolios on the plus we continue to monitor trends the new books, given the potential changes to unemployment rates.
As well as the support from stimulus programs.
However, we do not use this portfolio is having the same level of risk.
And the other as the other portfolios that we have highlighted.
With that I'll turn it back to Craig.
Thank you Jim so to wrap up on slide 15.
Our priorities remain as follows.
First we will continue to prioritize the health and safety of our team members 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 open for business.
Third the finish line of our integration journey. His insight we will remain focused on a smooth final transition.
Despite the continued challenges brought about by the covert attend we remain on track for completion in the third quarter. Thanks to the hard work and dedication of our team members.
Given the current environment, we will be very focused on our risk profile and the credit quality and trends within our portfolio.
We took many actions to date that put us in a strong position coming into this crisis and I think the nature of our portfolio positions us well to understand the current economic environment and tried when we emerge on the other side.
Lastly, we remain focused.
On achieving our financial targets.
After we complete our merger cost savings and once we returned to a more normalized operating environment.
We believe we will be well positioned to generate top quartile adjusted Aro HTC E along with the below peer median adjusted efficiency ratio.
So with that I'll open it up for questions.
Thank you Sir.
We'll now begin the question answer session.
To ask a question that press Star then one on their Touchtone phone.
Speakerphone, please pick up Brad said before pressing the keys.
If any time request has been addressed.
Your question. Please press Star then.
Again. It is star then one to ask your question at this time, we'll we'll just pause momentarily to assemble roster.
And the first question will come from Jon Arfstrom of RBC capital markets. Please go ahead.
Thanks, Good morning.
Good morning, good morning.
Maybe just sort of the.
No.
Certainly expenses were high points for the quarter.
And I understand.
Got to give us a little.
Really precise guidance, but maybe Dennis can you talk about.
The magnitude of some of the expenses.
Expense savings, you're expecting from vendor and systems.
Conversions, and then and then maybe the flip side of it.
We can do our own mouth, but.
Any idea of.
How depressed some of the activity based spending was for the quarter like some of the trouble and business development expenses.
Yes, a number of puts and takes there so.
So in terms of our overall expense savings.
Last quarter, we indicated that were but.
Two thirds through we're now about three quarters through our expense savings.
And most of the incremental savings are related to vendors system expenses.
So we do have some of those expenses in Q, but there's a variety of areas where expenses were down more than we expected in the second quarter.
Inter related to cope with 19. So for example.
Marketing travel and medical expenses alone those three items were $10 million.
Trinet down in the second quarter.
As we returned to normalized activities those expenses medical and travel.
Marketing trend back up to the more normalized levels offsetting a good portion of those incremental operating expense savings that we still have from the merger.
But there's a variety of other areas, where we found an incremental expense saves and so as we trend into the fourth quarter, we do expect to be below the prior guidance.
But again some of that is due to just.
The slower economic activities.
As we look to the latter per year and into next year, we are bullish about.
The recovery.
Of the various fee revenue items.
Loan volumes loan origination volumes and with that we would see the expenses sort of migrating back to that more normalized level.
And as we commented that if there is no continues be significant headwinds to our levers, we can or can't pull to manage down the operating expense levels appropriately.
But I think we remain bullish that.
Theres going to be those revenue growth opportunities and we do see opportunities to have incremental hires.
Really across the franchise that will help drive.
Drive the revenue synergies that we expect from the merger.
Thank you for that.
And then.
Brian you talked about.
Than interest income.
Growth.
In one of the comments you made it's dependent on the pace of loan and earning asset growth when it gets.
Can you dig a little deeper and just let us know what's your thinking on some of the third quarter starting points for loans is it period end is the guidance that you've given us versus the average are you expecting some for the pressure in the period end balances just.
Yes. Thanks, Thanks for the question John what I, what I would say is when we said kind of slow to moderate growth at speaking kind of to by the end of the here. So it's kind of speaking from a point in time perspective, and obviously is going to depend upon economic outlook peso patient demand. We're more confident that we can have that growth be in fourth quarter.
That's typically when we see capital solutions have more growth.
It's one we're more confident we're gonna see inventory finance balance and start to grow because in fact, just like previous periods, we will see inventory finance balances likely still trend down a little bit here in third quarter from the end of second quarter. So it's really.
Okay, and I kind of growth.
You know more content that that's fourth quarter than than in the third quarter, but we do we do see it and it's driven both by the Troughing of net interest margin rate as well as.
Are you seeing seeing growth come back in the portfolio.
In the second half.
Okay, Alright, thanks, guys.
Next we have Steven Alexopoulos update anymore.
Hey, good morning, everybody.
Good morning, good morning.
Maybe to follow up on John's expense question. When we look at this quarter to 370 million of excess of operating expenses is that a good base run rate as we head into the third quarter I know Dennis you mentioned, maybe 10 million or so depressed tied to work from home things like that but that will stay the same for third quarter. So is that a good run.
Great for us to build from moving into Threeq you.
Yes.
Probably a good base level.
Some of these expenses.
You know, we'll come back a little bit.
Medical expenses for example people are going back to the doctors again.
But some of that expense growth would be offset by the incremental expense saves that will start coming in particularly left in the latter part of the.
Of the third quarter, so again theres, some puts and takes there, but but it's probably a good.
Good number to work from okay.
And then Dennis you mentioned on the fee income that you saw improvement in May and June could you give us a sense. If you look I know, we're basing on a one month, but if you looked at the June.
A fee income like what would that moment the run rate of that be.
The common should we get back.
Yes.
I don't know if I want to give a specific.
Revenue per the of specific month, but clearly there was a distinct rebound occurring.
As economic activity started to pick up in our economies.
So, but we're still down significantly year over year were well below our normalized levels.
And the trajectory of which that continues weather continues on this steep trajectory that we saw sort of made to june or whether it levels off a little bit depending on the pace of economic recovery I think suffice to say, we do expect.
Sort of a full recovery normalcy as the economy.
Recovers.
Exactly the pace at.
Which we get there whether it's.
Later in the third quarter or later in the early next year it depends on the pace of economic activity. Okay. That's helpful. Maybe just one final one for Jim If we look at slide 14, where you're calling out the hotel exposure in the $609 million at risk can you give us idea whats occupancy like for the for those.
As loans on deferral, and where do they need to be for breakeven and maybe then ltvs in that portfolio. Thanks.
Sure I appreciate the question Steve This is Jim so it varies the reason that there's a fairly high proportion of the 775 as high risk because the occupancy avid rebounded to what we would like.
We saw the OCC he's in the single digits at the onset of co that we're now seeing some of our more distressed properties showing up at 20% to 40% occupancy levels, which is good.
Still not what we're looking for in terms of a breakeven and it really does vary by asset.
So I would say it really depends on the property, but we do stress them upon underwriting.
And we have put you know severe revenue pressures on the stressors in that portfolio to determine the allowance as well look to called them out as high risk.
And then raise the debt yield thresholds to.
Levels that we would not normally underwrite to to ensure that even under the most stressed times they can perform.
So.
Circling back to the original underwriting the the equity would range anywhere from 20% to 30% in these portfolios typically more like 30% in last 18 months or so.
As a strong equity position, what we're really finding is that.
The stress on occupancy is expected to be sustained for a long period of time that we just wanted to call the sudden bring it to your attention.
Okay. Thanks for the call everybody.
Sure.
The next wave David low with Raymond James.
Good morning, everyone.
Good morning, 40 odd as it relates to the Paycheck protection program what are the remaining fees to be realized there and then on that notes on a quarter to quarter basis absent forgiveness are you.
Accruing to fees on a straight line method.
Yeah. So Dave this is Brian you know what I'd say as are our gross fees will likely be around $60 million as we called out you know we recognized by 8 million of that.
This quarter. So there's 52 million left to be recognized we're currently amortizing that 50 that remaining 52 million.
Primarily over the two year term on the term of the loans.
That will get accelerated to the extent that there is forgiveness, we are expecting.
You know a high percentage of these to likely be forgiven can be 80, 90% of them on and we think a lot of that will happen here in the third and third and fourth quarter. So we would expect a lot of not that remaining fee.
To get amortized in the third and fourth quarter, but obviously it's dependent upon.
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Borrower use of proceeds as well as the timing is kind of hard to predict at this point.
Right right got it. Thank you and then you talked about the line utilization being down overall can you give us some color on the magnitude of of where the line utilization nation is relative to where it was maybe December 31st on March 31st.
Yeah, Yeah, Dave This is Brian what I'd say is it was very immaterial for us the movement that we saw in Q1. It was it was relatively flat we did not experience big line draws on in Q1. So when we say it's moved it it's marginal up and and really you know marginally less today. So it's not.
Material at all to our balances, but I thought.
Okay got it and just the last thing one ask you about was the mortgage pipeline.
Sounds like it's going to be a pretty good quarter any color on the pipeline today and how it compares to three months ago.
Yeah, it's Matt, but I would say Davis Brian.
Very strong levels I mean, I think we have.
It's probably a billion dollars plus pipeline ended the quarter. So origination refinance levels continue to be very strong in hard to predict how much of that how much of that close isn't how long. This we stay at this high level, but you know it's one of the definitely the bright spot bright spots from a loan origination perspective.
Okay, great. Thanks, Brian appreciate it.
Next with Ebrahim Poonawala Bank of America Securities.
Good morning.
Good morning.
Yes, just first wanted to follow up the Jim on the CRT book, So I think Jim you mentioned.
If I heard you could actually be ltvs, and the hotel portfolio or approximately 70%.
Could you give us.
TV is what the CRT D did book and the rest of the CRT portfolio and again the question essentially trying to handicap.
Equity buffer that data in the van trailer industry production come up you properties and what you should expect in terms of what the loss severity could be on these loans.
Yes, I appreciate the question Ebrahim across all the different channels, we probably wouldn't get into LTV is by segment and it really is tailored to the asset class.
I would just remind you as we said in recall good quarters that we have a very conservative underwriting and we underwrite to stress conditions interest rate shock that equity question. There is meant to absorb those shops as well as thing like longer stabilization period, and lower occupancy the stresses that way.
We're seeing now are quite extraordinary obviously, so that's why we're calling it out.
As relatively higher risk in the reserves associated to them are commensurate with the relatively higher risk position.
But asset by asset Theres, many factors that go into that including liquidity or the borrowers I probably wouldn't call out specific LTV by channel.
That said on so to thanks for that and I guess just on that I guess, maybe question for Craig I think as you look to though I think the struggling right now if we saw things evolve in May and June and that's kind of stores in terms of economic activity.
If you can talk to just when you look across your businesses, what's your expectation and all the outlook do you think things getting worse than the should.
Nick.
What's the kind of pressure that you're seeing on your customers that if we don't see a little bit up pretty bond with the next 30 to 60 days there.
Thanks, Good luck input.
Well I think you trying to have to break them down into this into the segments on the consumer side, it's really where the employment status is we're pretty comfortable where we stand we.
As a as Jim commented, we had and Brian We had we had a rush.
Good to deferral requests early on because people were doing it on a defensive way and weve been able to maintain good good performance, there and I'd say modest levels of deferral. So it's really just.
Hard to say, where the economy is going to calm based on but our markets are not just are not having.
Our primary markets are not having some of the coal that issues that.
They are in the south and southwest and so we just got to continue to to.
Monitored.
On the commercial side, it's again it's.
You asked for a lot of a lot of detailed questions in there I think the keys is we have low typically low exposures. We have strong sponsors both banks in their historical origination process really relied heavily on the sponsor.
And I think thats sitting in a good.
Position with the sponsors is key for that but you know I don't have a crystal ball as to where the economy is going and we're going to occur we know a lot more about our portfolio today than we did sitting here even on March 31st just based on completing all these quoted reliance reviews, we've done both top down in bottoms up reviews we.
Understand where we have collateral shortfalls, we understand where we're relying on sponsor to meet operating shortfalls and all of those are have been going we think really really well.
Got it and just wanted to ask question if I may.
I know coming into this you talked a lot Craig about investments you made on digital banking online platforms.
It does sort of the mobile that access I just talk to us in terms of what these knockdowns that remote working means to you in terms of.
Customer acquisition on that is different and should we expect additional expense savings as we look out into 21 of the they get the guidance.
That was mentioned earlier, but does that more expense savings looking out into Q1 are as good as I could just faster.
Adoption. Thank you.
Sure I mean.
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We think it's quite remarkable and all of this that we've stayed on track in our announcements. In addition, how we brought our Tcf front end to chemical customers in the.
In this quarter and we havent over 80% adoption rate of the total customer base at this point. So we're very excited by that we learned a lot of lessons you know we do have a lot of branches and so we used a lot of our drive option to service our customers, but that didn't necessarily always end up leaving a great customer experience and.
So the adoption of digital couldn't be huge there and you know we think but we've got the freshest technology stack, that's going to be out there. When we go live in two weeks and so we're excited about where that can go and how and you saw we announced 13 banking centers.
Primarily in southeast, Michigan closing, we're going to continue to make those optimization decisions.
But the only thing is you know, we havent really had a lot of.
Marketing expenses that have gone n., because we weren't trying to get people too.
Opened up an account right and that Mitch step back conversion and so we're looking forward to.
Kind of resuming a more normal marketing and.
Spend as well so there's there's lots of different factors like a one there but the key is you know we love our technology stack, we love the adoption, we're getting now we don't believe that.
Conversion to that core is going to create a lot of disruption for the tcf customers and we're excited to run as one tcf.
Got it thanks for taking my question.
The next we will take Chris Mcgratty of KBW.
Hey, good morning.
Brian I want to come back to make sure I'm clear on that and I guide so.
You talked about the 351 number for the second quarter ex TPP and ex accretion.
I think you talked about stability and then growth with that kind of a fourth quarter comment and should we expect a modest dip in Q3 or are you, suggesting Q3 should be modestly higher than Q2 metrics 51.
Yes, I don't.
Thanks for the question, Chris You know I don't think I was getting being too specific about the quarters. What we're saying is if we can hold none at this 320.
That's a trough and it starts to increase as we start to build back balances.
And more confident again and more growth in fourth quarter potential unlikely third quarter, just because of the headwind Stella inventory finance.
We're hoping that we can maintain and and build an IR.
And I think I said in the second half so it kind of it's a generic comment that covers.
Both of them more confidence towards Fourq you than Threeq you.
But we don't have yeah that help.
Yeah, and if I think maybe broadly right, there's going be some noise in the next six months with PPP and balance sheet liquidity being high.
But if we see this sustained.
Challenging rate environment is that 320 is that kind of how you're thinking about talk margin in this environment or do you think perhaps if you can see a little bit of pressure.
The curve stays where it is.
Yes, well and obviously will depend upon you know level of rates I'm trying to kind of give you know views kind of looking out for the rest of the next the rest of this year.
You know and when we look at the margin there are several headwinds and there are several tailwind and I think we talked about them, all but you know inventory finance balances being less than as one of our higher yielding assets, that's a little bit of the headwind.
LIBOR will still continue to be fully normalized for all of Threeq. You were for Twoq you LIBOR was in the process of normalizing. So that's a little bit of the headwind new loan yields are a little bit lower than probably the average portfolio yield. So those are all the headwind, but on the what we're saying is the tailwinds are we think can outweigh that that.
Tailwinds our deposit repricing, we're confident by some of the actions that we took right at the end of second quarter that we're going to see deposit costs continuing to come down in third quarter and into fourth quarter as well as will have lower cash balances on hand, so what we're signaling is that even though some of those headwinds exist and we could have new loan yield speed.
Down we think at least for the next couple of quarters that we can hopefully offset that by deposit pricing and having less excess cash balances the excess cash balances.
Well still persist for part of three Q.
But by the end of Threeq, you really all of our FHLB borrowings everything rolls off and resets on so that's again, where theres more confidence in Fourq you on that in and Threeq you.
That's great and maybe if I could just to put in for a question for Craig.
You called out in your slide deck, the potential for portfolio acquisitions. Once the economy gets more visibility you talked about that last quarter as well.
Are you seeing a two part question are you seem more potential today than perhaps 90 90 days ago and does the transitory nature of that inventory finance make you all more or less likely to do something over the next six to 12 month. Thanks.
Okay.
On the first part you know the portfolio Act.
No portfolio activity is.
I'm sorry.
Message here.
Screen, but.
The portfolio opportunities again, Chris what we've talked about in the past is is the reason for the sale what what's the reason for it and if its credit related work, yeah. So segments and it's an untouchable segment don't know those kind of items are the first ones to come for sales during this timeframe.
What we're looking for is more where there's a capital or liquidity challenge for the or or it's not a strategic business for them. So we can we continue to monitor that and I'm, sorry, I didnt quite catch the second question on the linked to inventory finance.
Just given the near term pressure on on loan balances does.
The deploying some of that excess liquidity.
Perhaps the growing importance.
We were we I think we've talked about we've never changed that Weve never chase loan growth for loan growth safe. So we're using very rigid and I are tables and chairs FNB tables on the things that we're acquiring and so there is some of that activity going on but you know.
It's there's worst things that happened then you have a loan payoff in full so we're not at all down on the inventory finance business, we still like to business I think it's it's been great for the dealer network across all of our asset classes to get liquidity to be they're selling a great margins and.
And they're very excited about it and again, we talked about that at the first quarter call as a potential.
Headwind for us and what it's turned out it's a pretty it's a pretty positive credit story that comes out of that at the same time. So we're not going to do we're not going to chase anything simply for loan growth, we're going to use the same metrics that we continue to years and were still as diligent to find those opportunities as we've ever been.
Thanks, a lot.
Next we have Ken's urban Morgan Stanley.
Hey, thanks.
I guess just first question I had in terms of inventory finance I understand that this is sort of a seasonally weak quarter and sounds like it's going to be Taliban threeq, you as well, but can you just help us understand.
I understand the magnitude of this like how different was this seasonality in terms of the declining loan balances versus say normal seasonality in previous years.
Oh. Thanks, Thanks for that question, because we put a slide in the appendix, which has that would show as inventory finance due to which seasonality and so it's typically gone down anywhere between four to 500 million. So for it to go down a 1 billion five you can figure that out that's a batch of a very significant.
Ken.
Sell through and again the rationale is strong attractiveness for these products and the dealers did remain open and the fact that the manufacturers did not remain open in most of the manufacturers were close your anywhere from six to eight weeks. So some are still reopening some have already reopened.
There's there's also again the seasonality of the attractiveness of the product. So all of those things have to work worked together for us to get a clear outlook, but you can see from that from a on page 19, It's typically Ben Florida 500 million and this quarter, obviously a billion five so.
Got it okay that helps a lot and then Craig maybe little more of a broader question I. Appreciate all your opening remarks sounds like you guys are doing a lot for the community, including the $1 billion a loan commitments for minority and women owned businesses.
Can you just help us size that flaky, how know if you have any date or if you can provide data how much of you went to minority and women owned businesses like over the last year to just so we can size the billion dollars. Thanks, yeah.
It's going to be viewed as doubling the initiative for us over the five year period. So that's that's really where we would say where that comes from so [noise].
Got it okay perfect. Thank you.
Your next question will have will come from Jared Shaw Wells Fargo.
Hi, good morning.
On.
This does so so the $1.3 billion cobot sensitive balances on slide 14 as was the growth in non performers this quarter with those classified as PCD loans are those.
Are they not PCD.
No no those those are not PCD loans.
Okay. So so no okay all right.
And then could you also give us an update on what the current balance of deferral that as you said it would come down since June 30.
Where are we at at yet today.
You know we ended June 30, I think we said at 1.8 all in its continued to come down, but you know what we're wanting to be careful about tier is.
Those deferrals have come through we've seen a lot of payment activity during deferral period.
Give you. An example, you roughly half of those home equity borrowers have continued to pay it's not even a large deferral portfolio, but there's varying degrees of and we wouldn't see that on the hotel side. So we want to let the quarter play out more before we give an update on where we are for the month in July we wouldn't want to give you a false read I would say.
Directionally, we're very encouraged the surge did happen in Q1 at the onset of cobot lot of defenses deferral, we were very discerning as to whether or not they were justified so.
The deferral asks were pretty robots, what was satisfied with less than that we ended the quarter at 1.8.
But we're encouraged by the level of decline in deferral activity in the continued pay through across many of the channels I would say, let's stay tuned and see how Q3 plays out.
Thanks, and just finally from me when you look at the excess liquidity on the balance sheet.
Yeah, I hear you, saying you expect to see some deposit outflows.
Sure, we still assume that you maintain a higher level of excess cash liquidity or could we see that had back down toward side 1.31 and half billion.
Level by the end of the year.
Yet. So this is Jerry this is Brian so so two questions there what I'd say.
On the excess cash position I think we had we ended the quarter with a $2 billion at the fed. So thats you know that was a drag six basis points on margin you know.
That will even if deposits didnt change that excess cash.
Well start to roll off we can run off all of our federal home loan bank balances if need be they all mature by the end of third quarter.
So that would really most of that excess cash by the end of September.
So that's that's kind of one question as it relates to deposits. We do expect some of those inflow of balances.
From the you know the stimulus money to TPP money that's come in some of that is transitory.
So we do think some of those balances will roll off.
By the end of year, However, as I think I said in the prepared remarks, we still expect to have significant deposit growth on a year over year basis, even by the time, we get to the end of the year, so not all of that fleet.
And so and the and the pricing is going to become.
Much less as we get to Threeq and Fourq you as well.
Great. Thank you.
Well. Thank you for questions today, everyone I'll now turn the conference call back over to Mr., Craig Dahl for any closing remarks, Sir.
Thank you. Thank you all for listening. This morning again, we look forward to completing our integration in the third quarter, which will result in one Tcf brand.
I wanted to commend our team members for their hard work, which has allowed us to remain on track as well as our frontline workers and our banking centers. It is not easy to manage your day job an additional integration work in all working from home during a pandemic along with the civil unrest and superior flooding I think it is truly remarkable what this team has.
Accomplish so far.
What I want you to take away, we have a bank here, where the strong management team. We've got a refresh technology stack. We have referred funding mix, we have strong core markets and we have strong capital liquidity and I continue to believe that fast is still in front of us. Thank you.
And we thank you Sir and also to the rest of the management team for your time also today again. The conference calls now concluded at this time you may disconnect. Your lines. Thank you get everyone take care another wonderful day.
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