Q3 2020 TCF Financial Corp Earnings Call
Good morning, and welcome to Tcfs, 2023rd quarter earnings call. My name is Chad and I'll be your conference operator today.
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This time I would like to introduce Tim Sedabres head of Investor Relations to begin the conference call.
Good morning, and thanks for joining us for Tcfs third quarter 2020 earnings call. Joining me on today's call will be Craig Dahl, President and CEO, David Provost CEO elect.
Shaper Bank CEO elect.
Brian Maass, Chief Financial Officer, and Richard bring below Chief Credit Officer and.
And just a few moments Craig Dave Tom and Brian will make opening remarks, and provide an overview of our third quarter results.
I will be referencing a slide presentation that is available on our Investor Relations section of the website.
IR Dot Tcf Bank Dot com.
Following their remarks, we'll open up for questions.
During today's presentation, we may make projections or other forward looking statements regarding future events or the future financial performance of the company.
We caution that such statements are predictions and actual events or results may differ materially. Please see the forward looking statement disclosure in our 2023rd quarter earnings release for more information about risks and uncertainties, which may affect us.
The information we'll provide today is accurate as of September Thirtyth 2020, we undertake no duty to update the information.
I would now like to turn the conference call over to Tcf, President and CEO Craig Dahl.
Well. Thank you Jim good morning, and thank you to everyone joining us today.
Yesterday, we released our third quarter financial results are in line with those results. We also announced that I will be retiring from Tcf and stepping down as CEO.
I've had the benefit of a long career in banking spanning over 40 years and what the most recent and most rewarding 21 years here at Tcf.
As we have successfully completed the integration from the merger of equals.
Believed knowledge the right time to pass the Baton and refocus my time with my family.
Even in the midst of a pandemic I could not be prouder of what Tcf is accomplished and the strong outlook in opportunities that lay ahead.
I am confident and proud of the strong bench strength, we have post the merger and I'm pleased to have Tom and Mike will step up into their elevated roles.
I know that both of them are the right people for the job and I've been impressed with their ability to lead their teams since the closing of the transaction.
Coupled with games focused role as CEO of the holding company I believe Tcf is in great hands to continue to execute on the strategies. We believed the merger of equals brought to the combined banks.
I will make a few comments on the integration and where we stand today, and then hand, it over to Dave Tom and Brian.
A highlight of the quarter was by far the successful on time completion of our merger integration Act activities that our team has worked hard to get across the finish line.
As we laid out from the beginning this merger has now positioned us with a common brand expanded product set significantly enhanced technology platform and improved efficiencies importantly, the cost synergies are on track for on time achievement in the fourth quarter.
Culture, one Tcf has come together better over the past year and a half done I couldn't even imagined.
I have seen firsthand or experienced leaders across the bank have rallied together just support integration efforts responder challenges from the coal that tend to support.
Support our customers and team members affected by the flooded Midland and rally around a shared vision to respond to the civil unrest and calls for social justice in our communities.
Since closing the merger I have seen the power that collaboration brings and we truly leverage the best of both banks to.
The collection of talented at Tcf continues to amaze me, what their level of expertise and dedication to doing the right thing for our customers team members and investors.
In closing it is a proud day for me to look at where we are today and recognize the hard work of our teams to get us to this point.
I look forward to seeing the continued success that Tcf Tcf has in its future for many years to come.
And with that update thank you to all of our investors analyst and team members listening today I believe this is my Twentyth earnings call as CEO and it has been a true pleasure to serve as your CEO for the past five years.
When I joined Tcf 20 years ago.
21 years ago, we had just under 10 billion in assets with a bright future ahead from starting Tcf leasing from the ground up to now having successfully created a leading Midwest bank with nearly 50 billion in assets. The opportunity ahead of us greater today than it has ever been for Tcf.
It's been an honor to serve as CEO of this great company and I look forward to the future successes to come out.
I will now turn it over to Dave.
Thank you Greg and good morning, everyone. We appreciate your passion and leadership that led Tcf forward to where we are today.
Let me make a few comments before passing it over to Tom to cover the third quarter highlights to start off I am pleased to work with time and Brian as we move past the immigration program and focus our efforts on continued organic growth.
And further improve profitability into next year as Craig mentioned, we are pleased to have completed our integration program and are on track to deliver the expense levels, we targeted for the fourth quarter.
While we are on track to deliver our spends commitment coated in the environment around us has less stuff shy of our target revenues, we expected when we announced the transaction loss.
More inventory finance balances in certain non interest income categories has seen revenue pressures. However, we view these as near term headwinds. These are great businesses and do not reflect permanent revenue losses.
As a result, we are committed to managing through these headwinds and we are prepared to take action. The company has a history of ensuring we produce an efficiency ratio and profitability profile that is attractive for investors as Tom Brian and I finalize our plan over these next 60 days, we will be.
Able to update you with more details around what we believe is possible for both accelerated revenue opportunities as well as incremental efficiency improvements for 2021.
Now, let me turn it over to Tom to cover our third quarter highlights.
Thank you Dave.
Third quarter results continue to reflect the impact of the economic uncertainty. However, we are working hard to manage through this environment.
As mentioned the critical priority. This quarter was the completion of our integration program and ensuring we deliver on the cost synergies for the fourth quarter, we committed to.
We saw modest loan balance to clients in the quarter.
Coupled with a relatively stable margin and continued strength in capital and liquidity ratios we.
We recognized a lower level of customer and borrower demand in the current environment. However, our commercial loan pipelines are rebuilding from low levels earlier independently and September pipelines for middle market commercial real estate capital solutions are gradually rebuilding and getting closer to comparable levels from a year ago.
We continue to believe the teams that we have in place along with the comprehensive products that we have as a result of the moving positions us well to deliver strong loan growth as we exit pandemic.
Tcf has a great opportunity to capture market share and grow organically as our revenue synergies remain in front of us growth in Minneapolis, and Chicago are critical markets for us in 2021.
On this topic.
We are nearly ready to announce the hiring of regional president for Minneapolis lead our commercial banking expansion in this key market. Additionally, we are nearing expiration of non compete agreements for our Chicago commercial banking leaders brought on last year.
These two factors demonstrate our commitment to continuing our focus on revenue synergy opportunities. We continue to believe we have a large opportunity to expand our commercial banking keep the capabilities in these two markets.
Mortgage is also great opportunity for us to get our fair share. We currently have deposit market share of around 3% in our primary markets across the footprint compared to mortgage market share closer to 1%, we have a long runway to grow our mortgage year to close this gap.
One of the easier revenue synergies to implement as our leasing products, which are ready to go to support deeper relationships with commercial customers before Colgate hit we had a strong pipeline of referrals from middle market leasing and we expect that as activity levels rebound, we'll see that pipeline continue to grow.
We will be disciplined where we invest in 2021 to drive sustained revenue growth.
And fund this it will likely require us to take a hard look at other expenses efficiency opportunities.
From a credit standpoint in the quarter, we saw much lower deferral balances at quarter end of 404 million, which represents just over 1% of total non PBP loans and were down nearly 80% from last quarter net.
Net charge offs were 20 basis points, along with $70 million of provision expense, which resulted in a moderate net reserve build.
We're taking a proactive approach and many of the more cobot impacted portfolio such as motor coach Shuttle bus and hotels.
And lastly capital ratios are strong and increased with a common equity tier one ratio of 11.5%.
That I will turn it over to Brian to further detail our third quarter financial results.
Thank you Tom.
Slide five shows total loan balance activity during the quarter.
Overall loan balances came in lower due to strong inventory finance sell through and higher mortgage prepayments in.
In the commercial real estate and leasing portfolios balances were relatively flat quarter over quarter consumer.
Consumer balances were down from the second quarter, but the majority of the decline coming from residential mortgage.
Overall, our mortgage pipeline remains strong however, originations for the balance sheet have not been able to keep pace with the higher levels of prepayments we have seen in the mortgage portfolio.
Inventory finance balances, which totaled 2.1 billion at quarter end declined $447 million during the third quarter.
This decline is the third this decline in the third quarter was less than the level of decline we saw in the second quarter dealer activity remains strong, but we continue to wait for inventory levels to refill to pre cobot levels. Following the closure of many manufacturing plants in.
In addition, the third quarter is the typical seasonal trough for inventory balances and while lower balances our near term revenue headwind. It has had a positive credit impact with no inventory finance net charge offs in a third quarter and no balances currently and deferrals to us.
Looking ahead, we believe we reached the crossover point in late September as shipment levels began exceeding liquidation levels. However, it may take a few quarters for inventories to return to more normalized levels. We are optimistic that balances could begin to grow in the fourth quarter of 2020 and in the first quarter of 2021.
Given the typical seasonal bill.
Our overall loan growth outlook for the fourth quarter and into 2021 will be largely dependent on the level and pace of commercial loan demand while demand continues to be modest overall, we are seeing positive signs as commercial loan pipelines have been building, including theory and certain see an i. sectors such as manufacturing.
We continue to believe we have the ability to generate stronger than peer loan growth as we get back to a more normalized environment and as customer demand returns given the revenue synergies we have yet to realize following the merger.
Turning to slide six.
Deposit balances remained flat from the second quarter. Despite the continued runoff of CD balances, which declined $808 million during the quarter.
Well checking balances, including non interest bearing increased $971 million.
Non CD deposit balances have now grown 4.6 billion over the last two quarters. A portion of this growth continues to be transitory given the impact of stimulus payments PPP and reduce spending.
While we have not seen these balances decline yet we would expect run off of a portion of these transitory deposits in the coming quarters.
Given the recent growth of deposit balances, we haven't seen the loan to deposit ratio declined from 100% in March to 88% in September.
With our excess liquidity runoff of CD balances and improved market pricing our cost of deposits declined 17 basis points from the second quarter we.
We believe there remains opportunity to further bring down our cost of deposits in the fourth quarter. For example, we still have over $6 billion of Cds at a cost of 1.1% with renewal rates of 20 to 30 basis points. This should help to drive overall deposit costs even lower.
Turning to slide seven.
As we indicated last quarter, we were able to hold net interest margin relatively flat with the second quarter with adjusted net interest margin declining just one basis point to 3.19%, excluding accretion and PPP.
As a result net interest income remained relatively flat at 377 million.
Excluding accretion and PPP income adjusted net interest income was $344 million in the third quarter.
As we look ahead to the fourth quarter, we expect a Dick a decline in excess liquidity deposits to continue to reprice lower and the potential for seasonal growth in our higher yielding inventory finance business to provide tailwinds for the margin.
We believe these tailwinds could more than offset the headwind of lower loan yields and drive a stable to increased margin rate for the fourth quarter.
PPP forgiveness in the fourth and first quarters of next year could drive accelerated recognition of fees.
As the PPP fees run off we are hopeful that incremental loan growth will help stabilize and potentially grow core net interest income going forward loan growth will be the key to supporting this as continued deposit repricing is helping to counter asset yields given the low rate environment.
Turning to slide eight.
Noninterest income totaled $119 million for the quarter. We believe we have seen the low point for non interest income as several drivers are now showing positive trends heading into the fourth quarter.
We also saw a $2.6 million unfavorable interest rate swap mark to market adjustment for the quarter, which lowered the other noninterest income line.
Fees and service charges on deposits came in at $25 million up slightly from the second quarter. This reflects the start of a rebound from the second quarter trough.
Which was due to higher balances from stimulus payments. Despite the rebound we remain at relatively low fee levels due to the continued excess liquidity on customer deposit accounts.
Card and ATM fees of $23 million. So a similar rebound in the third quarter as transaction volume transaction volumes increased in the third quarter. This level of fee income is approaching pre cobot levels.
Gain on sale of loans decreased from $29 million in the second quarter to $23 million in the third quarter, but remained strong overall with a continued strong pipeline in mortgage it is possible. We may see continued gain on sale strength into the fourth quarter. This remains a key revenue synergy for us as we are operating with one mortgage team and plan.
Form across our footprint.
Leasing fees declined 5 million to $32 million in the third quarter. These fees continued to be impacted by the levels of customer driven activity given the current environment. We are seeing lower customer activity levels, given the uncertainty that said the fourth quarter is typically the strongest for leasing fees.
So we would expect to see an increase late in the year.
Overall, while we have seen pressure on fee income from the current economic environment. We believe we have hit our trough as we are seeing several positive trends.
Turning to slide nine we.
We continue to execute on our integration cost synergies and adjusted noninterest expense of $319 million again came in below our fourth quarter target of $321 million.
This excluded $54 million of merger related expenses.
Occupancy and equipment compensation and employee benefits and leasing financing equipment depreciation all declined from the second quarter.
Other non interest expense increased $9.9 million, which included higher advertising and marketing expense and outside processing up from the low level in the second quarter.
This also included a 1.8 million federal historic tax credit amortization expense and we could see higher tax credit expense in the fourth quarter tied to completion of various projects. As a reminder, these tax expenses generate associated tax credits, which come in through the income tax line and more than offer.
Let the related expense.
As we enter the fourth quarter, we still have cost synergies yet to realize the majority of which will come from vendor and systems. We expect to see adjusted noninterest expenses below our 321 million target in the fourth quarter.
Our adjusted efficiency ratio for the quarter was 61.2% we continue to target an adjusted efficiency ratio below peer median.
We have demonstrated a commitment and ability to manage our expense base through that through the completion of merger synergies, we will have $180 million of recurring annual expense benefits and we now have a leading technology stack that will pay dividends for years to come.
We are working through our annual budgeting process and we believe there are opportunities to further align our expense base with the current revenue environment.
Many of these items required that we first complete our integration and system consolidation.
We are looking at the items that you would expect including rationalizing real estate, including branch and other office space and incremental process improvement and optimization opportunities.
The goal of this review will be to lower our expense levels to improve overall efficiency, while freeing up investment dollars for revenue growth opportunities in 2021.
At this point our review is in flight and we expect to have more detail to share with you in the next 60 days.
Turning to slide 10, we remain well positioned in this environment from a capital standpoint, with a CPT one ratio of 11.5% at the end of the third quarter Yeah.
Given the economic uncertainty our primary focus from a capital perspective will be maintaining robust capital levels, while continuing to serve our customers we.
We declared our quarterly stock common stock dividend alongside our earnings announcement that will be payable in December I believe we are positioned 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. However, this will depend on economic conditions as we move throughout the coming quarters.
We also want to ensure we are in a position to take advantage of any platform or portfolio opportunities that may become available as the macro outlook stabilizes and improves.
Buybacks under our share repurchase program continued to remain suspended.
Turning to credit on slide 11 net.
Net charge offs were $25 million or 0.28% of average loans over.
Over 90 day delinquencies remain very low at just two basis points, while nonaccrual loans and leases increased $85 million from the second quarter. So.
$78 million of this increase came from the commercial portfolios, including 47 million related to the motor coach and shuttle bus portfolio, which we have previously identified as a covert impacted portfolio.
Turning to slide 12.
We had $70 million of provision during the quarter down from $79 million in the second quarter as a result allowance for credit losses increased to 549 million as of September Thirtyth.
Allowance for credit losses, as a percentage of loans increased from 1.42% to 1.6% in the second quarter.
Excluding our $1.8 billion of PPP loans, our allowance for credit losses was 1.69% of loans. In addition to our allowance for credit losses. We also have a 131 million fair value discount on acquired loans.
The higher allowance levels are primarily driven by the commercial portfolios, we solve reserves in the lease financing and see an i. portfolios increased by 64 basis points and 26 basis points, respectively from the second quarter. Both of these increases were due to higher reserves in the capital solutions business primarily.
Really from motor coach and shuttle bus two of our most heavily impacted cobrand portfolios.
Reserves on the CRT portfolio increased 37 basis points to 2.06% driven by various risk rating migration in the third quarter as well as changes to the seery price index outlook.
Looking ahead, we are seeing stabilization in the economic forecasts, which should indicate that future allowance activity will be more closely tied to changes in loan mix and credit quality.
We are seeing the benefits of the diversification in the merger of equals brought together with no large lending concentrations.
Turning to slide 13 as expected we have seen a steady decline in the level of loan and lease balances on deferrals status as of September Thirtyth, we had just $400 million and deferral or 1.2%.
Of non PPP loans down nearly 80% from June Thirtyth.
The trend of declining deferral balances is continuing as we are seeing very few new deferral requests moving forward, we're likely to see a return to paying for many of these credits coming off deferral and where we believe there are additional accommodations needed for a medium term period, we are working with our borrowers such as motor coach Shuttle bus and hotel.
Turning to slide 14.
Overall, we are feeling better now compared to on June Thirtyth. However, we continue to see the largest cobot impacts in these portfolios. We previously identified with our top focus on motor coach Shuttle bus and hotel.
Motor coach and shuttle bus are the areas. We are seeing the most stress we have separated these two portfolios as they have distinct underlying use cases and may perform differently.
We have $166 million of motor coach balances, which are more heavily dependent on travel as they are typically the over 50 passenger coaches.
Just over one third were on deferrals status as of September Thirtyth and.
In many cases, another 90 day deferral does not match the extended recovery time. These borrowers are seeing as a result, we are taking a proactive approach to portfolio management and working with our borrowers on these structures.
Where we have moved into a longer term deferral, which will extend into 2021, we have generally moved those balances into non accrual.
The shuttle bus book is $245 million and generally has a wider variety of uses over half of these are not tied to travel and include areas such as day care retirement, and assisted living and education related services, where there is a higher level of utilization today.
Around 13% of the portfolio was on deferral at September Thirtyth.
Similar to motor coach we are taking a proactive approach to portfolio management and working on selected medium term deferrals into 2021.
In hotels, we have $787 million balances with the majority, having strong guarantors with liquidity and the ability to weather a medium term recovery of occupancy levels as.
As a reminder, the book is primarily made up of fled limited service properties in Midwest markets that are generally drive to not fly two locations. We saw deferral balances decline throughout the third quarter with $39 million or 5% still on deferral at quarter end down from 53%.
At June Thirtyth.
We continue to work with these borrowers to provide various deferral structures into 2021.
We downgraded $193 million in the third quarter, which we believe represents the subset of borrowers our sponsors who may either be seeing a longer term return to breakeven occupancy levels are or may represent those with lower levels of overall liquidity.
Other portfolios, we are keeping a close eye on our retail seery franchise in fitness and retail trade. However, we feel incrementally better about these portfolios today than we did 90 days ago.
With that I will turn it back to Tom.
Thank you Brian to wrap up we are excited to have the merger integration behind us our team members did a wonderful job in tough circumstances to ensure we completed the integration successfully and on time.
As we work toward executing on the final cost synergies, we can now turn our singular focus to managing the business driving toward the various revenue synergy opportunities we have in front of us.
We're also continuing to do our part to have a positive impact on our team members customers and communities.
As the many challenges of the cold pandemic continued to impact the markets. We serve as I mentioned earlier, we are starting to see a rebound customer activity across our markets.
There is still a long way to go to get back to normal but this is an encouraging first step in addition.
Just like other banks, we have a few loan portfolios there going to be more affected than others by by Cobot. We believe we have isolated these portfolios and are closely monitoring them. Overall, we are well reserved and have a robust capital position.
Finally, we remain focused on achieving our financial targets for top quartile adjusted Harley GCG, along with a below peer median adjusted efficiency ratio lastly, after closely working with Craig for nearly two years, including the time, we began mapping the integration strategy I'm excited and appreciation for the.
The GCF and work with a great team to achieve the potential of our moly with that we.
We will open it up for questions, Jeff can you help us with that.
Certainly we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time will just pause momentarily to assemble the roster.
And the first question today will be from Jon Arfstrom with RBC capital. Please go ahead.
Hi, good morning, everyone.
Good morning, Mark.
I think congratulations to everyone in the room for the most part.
Everybody has a different role but.
The question that keeps coming up the obvious one it seems like the fundamentals are fine but.
Craig your decision to retire seems a little bit abrupt.
Maybe you don't view it in your mind that way, but that's the feedback trucking.
Tim to give from investors so.
Maybe Craig just talk about the timing of the decision and David If you have anything to add to that would be helpful.
Sure sure John I mean.
Basically I've been I've been involved in this nearly seven days a week for two years and.
Kind of going through there.
Succession planning and just trying to understand what what would be the right time, there really isn't any any time that wouldnt necessarily be better than the others I.
I don't think.
Work from home, although I thought we were in very effective in managing the business and the work from lumen environment. It doesn't necessarily play to my strengths, which is more.
In the in the markets in the businesses and running town halls, and things like that and then I have had some significant family considerations. During this time as well so.
As we got through what I would call that phase one.
Of the ammo here and those items are we've been very clear on what they were legal day one.
We're in we effectively closed the merger ahead of schedule our system day, one, we which we never wavered from on what day that was the integration of the management teams in the installation and rollout of our purpose in belief statements and the opportunity to really live those in almost all of our mom.
Markets almost every single day it was incredible.
Delivering on the cost saves that we had identified as part of one of the financials and then.
Really rolling out a new brand what's in it for we and I think all of those things being completed on time.
Just it just seemed.
It just seemed like the right time to to to step down and so that's kind of what what drove it and.
And you know really from from a transition timeframe as Tom has already indicated in his comments you know we've been working together every day for two years, Mike Jones has been running a significant portion of the business for two years and.
There really isn't it really isn't necessary, we didn't think as an organization to put a long runway out there for us so thats that.
Thats really the that's really the story there John.
Okay.
John the Provost I want to kind of reiterate that.
No one works harder than Craig and when you say seven days a week if he could say eight days a week.
There will be more accurate so.
It's been a it's been a great run and we give them a lot of lot of credit to get us to this point.
Yes, absolutely.
A lot of other places we could go but maybe just.
For.
Palmer, Richard or Brian how are you feeling big picture about credit.
Is that better do you have new concerns is it the same.
How do you want us to think about that.
Fourth quarter provision given that you.
You look at your reserves and marks and you're well over 2% and it feels like things are better, but just curious if big picture and ill you want us to think about fourth quarter provision, but does thanks, Dan. This is Tom we let me.
Intro, then then rich will probably follow up but you know as it relates to the reserves I think as we've gone into seasonal in the models that we use we're closely monitoring the indices. So I think that being well reserved is is very thoughtful for projecting future earnings as we kind of wonder.
Through this and then the good signals anything except our understanding and deep understanding of.
The economy and are in the portfolios, we've highlighted the higher risk portfolios and the monitoring we have there and those portfolios is specifically we have begun to see the 20 years of experience our our capital solutions teams have we know those markets. We know the collateral we know the alternatives for it and they were being very proactive.
And thoughtful on that generally speaking and everyone.
Sees the sees the.
The consensus on the economic forecast and we are seeing we are seeing economic activity come back and Thats. Good for all of our portfolios some stabilization and unemployment right now and so I think that we're we're really well positioned as we as we March.
March through the next couple of quarters rich.
Rich.
Yes sure Tom.
Yes, just to follow up on Toms comments.
Looking at our capital our liquidity and our reserve levels.
I feel good about where we are.
Physician for for the portfolio, we've got a very diverse and granular portfolio theres not.
If you look at our motor coach and shuttle bus and some of our high impact coded ports.
Portfolios the average loan sizes are very manageable and.
When you look at the 549 or $50 million up reserves versus the credit stats.
We're feeling we're feeling good about where we are.
Is this provision drivers is it is it is growth really live and charge offs or is there anything else to think about.
For the relatively near term.
Yes, I'll take that so for provision drivers for Q3, we had a $70 million Rsixty 9 million provision expense about 25 for charge offs and a modest reserve build of 45.
As we as we look forward, we're going to continue to look at all the impacts that we normally monitor monitor, including our Cecil model and our deep dive reviews and.
Its course are where we are today with the reserve.
Factors in those.
Those portfolios and the forward look on those so I would expect that if conditions remain stable as they seem to be stabilizing that we would see a.
More favorable provision expense into Q4.
Okay.
Thank you and Craig best wishes to you.
Thank you.
The next question will be from Steven Alexopoulos with JP Morgan. Please go ahead Dave.
Hey, good morning, everybody.
The board and Craig to John's comments best of luck in retirement said believe you. So you go David welcome back.
We have to start on for you David So in your comments you said on revenue the message to US was it's a near term headwind not a permanent loss, which really begs the question how deep of a cost cutting plan are you guys considering here.
Well I don't put a specific numbers on it but.
We.
It depends on how fast fees. These revenues come back so there.
We have to right size the organization to match the revenues, we need to get our efficiency targets. There. So we'll have more details in the next 60 days.
Okay, and you guys using an outside consultant for that or is it internal.
No its internal on Turner Okay.
And then on credit so if we look at the most challenged segments of motor coaches Shuttle buses can you walk us through how you guys are approaching these credits are you working with borrowers to get them to the point, where the economy and their business is a bit more normal or are you looking to take ownership of some of these assets here, which could require more severe write downs.
Yes sure. This is rich I'll take that so we're working very closely with with with the on the motor coach and shuttle bus clients. Many of these clients have been customers of the bank for for years, and we know them very very well.
And the idea is to for those clients that need to to work with us in terms of deferrals.
To bridge to revenue recovery, we've got active dialogues going on with them in terms of the normal.
The normal channels and avenues, we reduce for so those situations so deferrals.
Deferrals and.
And extensions until we see.
Recovery if revenue for them.
Okay. That's.
Thats good color and then finally on the leasing income maybe for Brian.
Said, you expect a rebound of for Q.
We look at third quarter view are below where you were in the first quarter. So I'm not sure. What rebound means are we are we north of $40 million, which is where you would normally be in the fourth quarter.
Yes, Steve its Brian hard to put hard to put a number on it but as you know fourth quarter tends to be the strongest quarter for leasing. So we're confident we're going to see growth there.
Don't wouldn't be expecting kind of the fourth quarter of 19 type level.
But we're optimistic that we should see input.
Improving levels, there that we've kind of troughed out here on a lot of that's kind of my overall message on a lot of these no fee line that feels like we are troughing out and we're optimistic about.
The next quarter, especially for leasing.
I know David when you we announced its really when you announce deal you talked about potentially selling tcs leasing products across the legacy chemical footprint has that started yet and when when should that kick in where we start to see a bigger lift and leasing thanks, well, yes, it's it started but with the we did the.
The integration then.
Or through the integration, we got kind of caught in the recorded which.
Doesn't allow for it will a lot of outbound opportunities. So those were started in January with a great kick off program.
But it's been a little slow, but we expect a lot of gain on ads coming up in the next couple of quarters.
Okay.
Hi, Thanks for taking all my questions. Thanks.
And the next question will be from David long with Raymond James. Please go ahead.
Good morning, everyone and again, congratulations to to Craig and welcome welcome back to David.
Looking going back to the reserve level the economic stimulus.
Any expected economic stimulus built into year reserve model at this point in time.
Yes, Dave I'll take that question, you know I think with everybody Theres a lot of inputs.
And assumptions that go into the sale process, including multiple scenarios I think when you just look at the overall underlying economic scenario, whether its unemployment GDP.
There's probably some presumption of economic stimulus thats built into those underlying forecast theres not something separate per se.
But there are components I think of that just in the outright projection of of of different indices and such.
Got it okay.
And then shifting gears here, you mentioned, the Minnesota market and potentially a higher coming there is it safe for us to assume that the build out of the CN eyesight.
This is Tom yes that is the primary focus of original president would be not only its the cnine buildout, but.
Operating in the marketplace as a bank to make sure that all products are represented.
To the customer base.
Okay, Great and then just finally, just a more of a housekeeping, but you mentioned in the release a charge off of $9 million that had been repaid odd.
This quarter charged off last quarter. It sounds like does that is that right should we expect this to be a $9 million recovery in the fourth quarter.
Yes, correct.
Okay got it. Thank you appreciate taking my questions.
Mr.
Thanks, David.
Our next question will be from Ebrahim Poonawala with Bank of America Securities. Please go ahead.
Hey, good morning, everyone. Thanks.
Hey, good morning, congratulations good estimation aggressive nations on on really position. The bank. After you took over as CEO I think it's been amazing what you've done in the last five years, including getting deeper integration done so job well done and congratulations on the retirement.
Thank you.
But I guess just following up Bob Brian on I think you talked about core NIM stability.
Given some of the funding cost leverage liquidity deployment.
Talk to us at all on the outlook for an irony that led to the $244 million should should needed to the fact that loan growth just picking up some of the margin stability all of that implied that core and I should have also saw in the third quarter or is there more to go as the balance sheet, just kind of I guess late shades.
Yeah, no good question Ebrahim what I.
What I would say hinders theres kind of two components that right. There is the net interest margin rate.
I think where we've got a lot of confidence around that we will see excess liquidity on the balance sheet come down which will be supportive to that deposits will re price.
Well as even mix changes into the balance sheet can kind of be supported into the net interest margin rate.
To really get and I hate to start growing it really is going to be centered around loan growth and I think we are seeing some of that kind of green shoots activity as well as seasonal activity that could be starting to turn we do expect to start seeing some inventory finance growth in fourth quarter and into Q1, it's hard to predict the level thats going to come back.
Okay.
But where we expect to see that coming back we expect leasing to be strong as we get into the end of the year as well as I think you know Tom made reference and I made reference to improved activity.
Ditched seeing our bankers, having improved activity as it relates to kind of CRT or kind of see an eye pipelines as well as we know we've got revenue synergies in front of us. So all of those things. We think can help kind of get this thing turned and make sure that we're growing Eni Eni on its face will go up in fourth quarter and in first quarter.
Because we're going to have PPP forgiveness, and our real plan is as that's happening real real focus now we can be laser focused at the two companies are together on how can we ensure we're growing loans because that's really how we're going to get eni to start growing from here.
Got it and just tied to that is when we look at the inventory finance business on slide 19.
Down whatever about 20% to 25% year over year as you think about the fourth quarter give us what's the right way to think about what level of the bond that we see in Fourq, you and going into one kill it should we look at that 30% decline as a.
A decent colm thinking about despite the seasonal uptake or is that a better me, how we should think about it.
Yeah Ebrahim there has been nothing kind of ordinary has it comes to kind of the balances that inventory finance this year with manufacturers closing and inability to kind of produced product was the first headwind and then the second headwind was just the strong sell through of inventory from the dealerships. So it's it's again, it's hard to predict where are they.
These balances are going to go I think the comments we made at the beginning we don't see in permanent impairment in this business a lot of this business. We have exclusive programs, we have relationships the manufacturers and dealers as the activity comes back it's going to be our business. So.
So we think balances will be higher here in fourq and into Q1, but it's really hard with kind of the new dynamics that are in place to predict what that level is going to be but we know that it should be higher from here.
But then if I may just one question for David and Tom.
I mean, I guess, it's not missing any money of his team domes of the making the timeline to chemicals and Dcs just talk to us in terms of box you talked about being mcgeady. Since the deal was announced now that the integration no. We're just talk to us and discuss your thoughts at all on consolidation and walks through the DCF might mean that as you think about.
The next year or two.
Well, so I think that.
That said as Saumen, we think but we're in a consolidating industry that's going to continue that as well as us we've got a tremendous footprint right now and the capacity to add to the franchise.
Is is from from all directions, but and Dave can speak more specifically to that but I think that that when we talk about being acquisition ready part of it is making sure that we're on a stable system and can can handle the the growth of a of an acquisition yen day and having the.
The combination of our.
At last system in Ddrthree, we are we are really in a.
And Andrew will position in the industry to have that technology stack and add the operation support it will give our company in the years to many years to come.
Yes, and then preparing our team to four continued change that industry is going to bring us it's not only the industry brands. The the rate of change for our customer behaviors is going to create opportunity for us and and positioning our team to be ready for that and having the right skills for which I think we've got a long history of.
Having.
Now Tom mentioned acquisition ready, So we were acquisition ready.
But.
In our history, we we want to do deals, but we want to do deals that are.
Accretive to our shareholders. So if.
If those opportunities come up you never know when they're going to come up if they come up we'll take advantage of rubber in position to do that.
Got it thanks for taking my questions.
The next question will be from Terry Mcevoy with Stephens. Please go ahead.
Hi, Thanks, Craig I, just want to have enjoyed working with you over the years and David Nice to hear your voice on the call and congrats to others.
My first question.
You talked about the review of the bank over the next 60 days could that result in the exit of any lending businesses or any markets or is the focus over the next 60 days really on the expense line.
Yes.
Yes Terry.
Uh huh.
I'll answer it and Tom can Tom can add to it too you know what I'd say is we're we're focused on the EPS.
Fish unsi ratio of the bank.
I think the company has always shown great expense control and we have to be cognizant of the environment that we're in so we're not looking at holistic changes.
In the business or or in the businesses that we're in.
As part of this is more just trying to as I mentioned, you know rationalizing real estate as well as looking at now we've put all the systems together, but we just need to look at and then processes as a way to lean those processes and drive out some incremental efficiency.
And then just a follow up question.
On equipment, the equipment financing activity, where was that running in the third quarter, maybe versus pre cobot last year I.
I know I know youve talked a little bit about your fourth quarter expectations, but just trying to get a sense of where activity was last year versus last quarter versus a more quote unquote normal environment.
Yes, Terry you know what I'd say there is like the other businesses that we've mentioned, we're seeing increased activity levels, even when we talked about kind of internally some of the revenue synergies and bring in leasing the banking customers. We had pipelines at the beginning of the year.
As it related to those and we saw things kind of just slow down into April and may but with the increases in activity that we're seeing just kind of I'd say all around the economy were seeing activity pick up there as well now there are specific events that are related to kind of customer activity levels and that can drive.
Revenue opportunities, but generally no we feel optimistic standing here as we get into fourth quarter as fourth quarter is typically stronger for that for that business than some of the other quarters. So so we think we've we've kind of troughed out there and we should see things start to lift from here.
Great. Thank you.
Thanks.
The next question is from Nathan race with Piper Sandler. Please go ahead.
Hi, guys good morning, and congrats again.
Everyone in the room.
Okay, and just start on credit.
Curious if you guys can describe the migration that we saw in the kind of segments that are.
Outlined in the deck I mean, what was that kind of starting point in the quarter and what it overall the size migration looked like outside of the.
These segments that are.
And in the deck on.
And on the slide Andy here.
Slide 14.
Yet they may be able to kind of first question on that I think.
The majority of the migration that you're seeing is really in these cobot impacted portfolios I'd say, there probably is some stuff away from us, but I think by far and away. The things that we're trying to highlight here are really the areas that we're focused on and I think those are the main main contributors to it.
Okay, and then just to to gears on the.
Balance sheet dynamics in the quarter, obviously kind of.
De leveraging some extent helps support the margin here in Threeq, you just curious kind of what the opportunity. So it looks like to continue to go down that path that inventories mill inventories.
Inventory balances and loan growth kind of remains challenging these over the next quarter or two.
Okay.
So I think that.
As we take a look into the fourth quarter first quarter, you know all the all the businesses that we're in we're seeing additional activity to the mortgage business has been a good business for us for the brands, we're seeing more activity we've actually seen.
And I want to be careful not to do over the predict but.
Passing the point, where the liquidations are greater than than sales in the inventory business, where that business is now growing again, we've got to be careful because I don't know that I'd say, it's a complete trend, but we're seeing we're seeing very positive.
Positive trends for us in holding in there in the dealers holding more inventory as we come out of the summer.
So.
We're going to I think that the pipelines that were seeing that had been rebuilding typically those are those are obviously early signs of activity and we're working with our borrowers and and prospects closely we've actually received some.
Some additional relationships from PPP, we were a strong ppb.
Company in all of our marketplaces, and we're getting business from from that activity in that initiative. So I think we're I'd say.
Optimistic about the green shoots that we're seeing in the different segments that we're serving today.
Okay. That's helpful.
Thank you guys.
Thanks, Nick.
The next question is from Chris Mcgratty with KBW. Please go ahead.
Hi, good morning, everybody. Thanks.
Hi, Chris.
Running on prior on prior conference calls it was last quarter you talked about.
The ability to go back to expenses, if the revenue management Didnt materialize like you thought and that's obviously, what you're talking about today.
Is the right way to think about without going into specific dollars a slower rate of growth off that grew 21 goal or outright declines.
And it's a good it's a good question, Chris and again, we're doing the review.
Part of this is trying to find additional dollars will also be partially how much of that can we reinvest so that we can ensure that we're now accelerating revenue, we see opportunities to invest as well.
But in no way should it should.
Should you take a view that we don't think that we've got investment opportunities and waited and ways to grow revenue. So that we only it can go to expenses were still very excited about our opportunities to grow revenue as well in the 21.
Tom I don't know if you want to.
You are on mute.
You having the.
Having the dollars to invest in growth is critical we've got a number of initiatives that are very important to us and we need to be able to make sure that we have cash flow to support them I would say that the.
That we're cognizant of some of the shifts in revenue and we need to make sure that we're achieving objectives that we've laid out for efficiency and and and supporting all the constituents, we have including investors.
Great.
In terms of of capital.
The obviously the slower the smaller balance sheet with the growth headwinds is building your capital levels.
What are the thoughts on on capital return in terms of buybacks is it as simple as well that you're going to wait until the.
The bigger banks can recover or would you consider like a few banks have done repurchasing stock over the next couple quarters.
Yes, Chris. This is this is Brian you know obviously you know the big banks are prohibited.
From that obviously, we feel we've got excess capital levels were not at the point, where we would.
Buyback shares today, but as we get into 2021 and we see what this environment is if if we feel we're on the other side of the corner here.
Definitely one of the things that will be for us to review and consider.
Okay, one last one Brian on the tax rate can.
Can you help us on the fourth quarter and also.
Any any material change in sensitivity, if we get abide and tax increase now that the companies are combined.
Yes, no no change as we currently kind of sit on kind of the forward look for our tax rate in this high high teens low Twentys area is is where we're at and.
Overall with some of the repositioning we done even if tax rates were to go higher we think we're less exposed to that than we would have been even as a standalone legacy Tcf.
All right. Thanks, yes.
Yes.
The next question is from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, Good morning, just want to echo everyone else congratulations as well.
Most of my questions have been asked but on the PPP loan balances this quarter was there any.
Did you actually have any forgiveness or accelerated payments or is that just the.
Impact on the full quarter.
Yet at Jared This is Brian no no forgiveness at all in third quarter, we had a very small amount of payoffs that occurred but it's really just the amortization of the fees over the life, but.
But we do we have now and the window is open and we have gotten our first borrowers here in October and October through the through the process with the FDA for forgiveness. So we do expect to see acceleration of.
Some of those fees here in fourth quarter again, it's still hard to tell exactly how much of it lands in fourth quarter versus early next year, but it's a it's a positive progress that the process has been kind of established and we've actually gotten some through the pipeline already here in in fourth quarter.
Okay. Thanks, and then just on credit.
Is the expectation that really all the negative credit migration has now been dealt with or.
Is there still some further migration is as you continue to evaluate portfolios assuming.
Let's assume that you know a broader economic background backdrop stay stable.
Well, we've been through deep dives in all of our portfolios and that affect a number of times now and rich can talk to the due to the to the depth of those literally portfolio by portfolio in segments that we're serving so we think we think we've been very proactive in identifying.
Stress in our borrowers.
And in those segments that have more stress.
Fully reserved for him and and.
But.
Where is the where's the economy in Q1, Q2, and unemployment that'll that'll also dictate where the where from some of the portfolio scale, but I think we've done a great job of getting through and understanding what we have rich.
Yes, Thanks, Tom I would just echo that the number of portfolio reviews, we've done across different vectors for instance, some liquidity analysis.
Liquidity reserves versus cash burn.
Loss estimates and ratings analysis.
Our happening.
Constantly.
And so we feel pretty comfortable with where we are on on the rating of the entire book and I.
I think Tom is right. It all comes down to the economy and the impact of coated but it's.
If the assumption is that things are stabilizing than I think we're in pretty good shape.
Okay, Great and then just finally for me on the inventory finance I hear what you're saying that you're starting to see some some of the balances rebuilds at the dealers. When you look at the factories over they are they still running at a pretty significant reductions.
Reductions from full capacity are you starting to see manufacturers actually.
Approach.
More normal production levels.
So.
The.
The feedback that we're getting from the campus.
Capitalism group is that denims refinance is that the.
Factories are really not up to a pre pre go live production. There is some supply chain issues in certain areas, but substantially back there is no like most manufacturing or retail facilities, you know they've got to be careful with take your team members and then again, the the intermittent supply chain issues, but for.
Production is suing substantially back to pre corporate levels.
What was remarkable as just the consumer demand in all product lines.
Great. Thank you.
The next question is from Ken Zerbe with Morgan Stanley. Please go ahead.
Great. Thanks.
How much or what are you assuming that accelerated TPP amortization as tiers NIM anti during fourth quarter.
Yes, Ken this is Bryan again, it's it's hard to know we've started the process with the FDA of getting things through the forgiveness window so to date.
Of the gross fees that are out there about $60 million, we've recognized about $20 million of that life to date here. So that remaining 40 million will come through it's really hard to predict how much is going to happen in fourq versus how much is going to happen in one Q.
We started the process, we've got some going through there I don't know if it will be half or.
Be something less or more than that it's just really hard to predict at this point.
You made a comment that NIM is going to be stable to slightly higher in fourth quarter would it still be higher if you excluded the PPP amortization.
Yes, and just to be clear you know Ken. This is Brian those comments are related to the core NIM.
Okay East if the fees come through yes, the GAAP NIM will go higher just because that all gets recognized through interest income. So when I was speaking to being able to maintain NIM again at this threenineteen level or maybe even see that go up that's speaking to the corn and not the not with PPP, so excluding PPP or accretion.
Okay that helps and then how much of your loan portfolio still needs to reset lower and I guess on the fixed piece, where are those yields versus new money yields today.
Yes, no. Good question again, what I'd say is we are seeing loan yield loan yields still come on lower than where the existing book is I think that was you know six or seven basis points from last quarter to this quarter.
Again in the short run here in the fourth quarter, we think that deposit repricing being able to run excess liquidity off the balance sheet as well as if we have change in mix on the balance sheet, meaning as we have more inventory finance balances those tend to be at higher yields. We think we can offset that.
Kind of loan yield headwind in the short run here.
And fourth quarter.
All right. Thank you very much.
Ladies and gentlemen, we have reached our allotted time for question and answer session and also thus concludes today's call. We thank you very much for joining todays presentation. You may now disconnect take care.
Okay.
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Okay.