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Edited Transcript of CHFC earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Chemical Financial Corp Earnings Call

Midland Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of TCF Financial Corp earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Provost;CEO and President

* Dennis Klaeser;Chief Financial Officer

* Thomas Shafer;Vice Chairman of the Board

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Conference Call Participants

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* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David Joseph Long

Raymond James & Associates, Inc., Research Division - Senior Analyst

* Nathan James Race

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* Robert Scott Siefers

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Chemical Financial Corporation's second quarter earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded. A copy of today's earnings release can be accessed by logging onto chemicalbank.com and selecting the Investor Information tab at the top of the website. Also included is a slide presentation on our Investor Information page with supplemental information that will be referenced in today's call.

With us today are David Provost, CEO and President of Chemical Financial Corporation; Thomas Shafer, Vice Chairman of Chemical Financial Corporation and CEO and President of Chemical Bank; and Dennis Klaeser, our Chief Financial Officer.

(Operator Instructions)

Before we begin, we would like to caution listeners that this conference call will contain forward-looking statements about Chemical, its business, strategies and prospects. Please refer to the forward-looking statements disclaimer and the other information on pages 2 through 5 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in forward-looking statements.

In addition to the financial results prepared in accordance with generally accepted accounting principles, or GAAP, we will also present certain non-GAAP financial measures today. You are encouraged to review the reconciliation of non-GAAP financial measures with their most directly comparable GAAP financial measure, which can be found in our earnings release and the accompanying slide presentations.

And now, I'd like to turn the call over to David Provost.

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David Provost;CEO and President, [2]

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Thanks, Tara, and good morning, everyone. We're pleased with our results for the quarter that reflect growth in our net interest income and improvement in our profitability ratios. This coupled with an active management of our expenses continue to provide for a low efficiency ratio. Driving our increase in net interest income was our solid loan growth for the quarter, which totaled $538 million, which was primarily comprised of commercial and industrial growth. Over the past 12 months, our loans have grown by $1.3 billion, an annualized rate of 8.8%.

Looking at the financial highlights for the second quarter on Slide 6. Our earnings were $69.6 million, representing earnings per diluted share of $0.96. Excluding significant items, earnings represented $1.06 per diluted share for the second quarter. In addition, we recognized $4.2 million in net gain on sale of investment securities in the second quarter, as we repositioned our portfolio as a part of our planning efforts related to our pending merger with TCF. If we exclude both the significant items and the security gains, then our earnings per share would have been $1.02 for the quarter.

Moving on to Slide 7. Since our last earnings call, we have made significant progress with our previously announced merger of equals with TCF Financial, a transaction that we continue to expect will create significant strategic and financial value for our shareholders. We received positive feedback from our shareholders of both Chemical and TCF through their approvals of the pending merger. Following these approvals, we have obtained the necessary bank regulatory approvals to complete the merger and we have announced our plan to close the merger on August 1. In addition, we have worked diligently to build out our joint Board of Directors for the new TCF to include a valuable and diverse set of skills and expertise as we move forward with the integration efforts and the growth initiatives we've set out for the combined company.

The specific composition of the Board members for the new TCF was announced in an 8-K that was filed yesterday. Our integration efforts involve key leaders from both organizations, supported by a strong third-party consulting firm. We're very pleased with our progress to date, and we believe it bodes well for the future of this merger of equals. I can't speak highly enough of our core banking teams' focus on continuing customer service. Our customers are at the forefront of the decisions that are being made in the planning for our combined organization. This level of customer focus, recent upgrades to our core operating system, investments in our team over the past year joined with the strength that we've previously built, now coupled with the expansion of business that our pending merger with TCF will provide, allows for our continued optimistic outlook for our future.

We believe that we are well positioned for growth not only in our high-growth potential markets of Detroit, Cleveland and Grand Rapids, but also as we expand our market footprint as a result of our proposed merger with TCF, we focus on service and products that provides the greatest opportunity to create value. While we continue to make strategic market investments and make plans in regards to our pending merger, we will continue to balance our disciplined expense management philosophy with a strong focus on driving revenue growth as we continue to make progress towards our goal of being the Midwest premier bank, providing best-in-class service to all of our customers.

With that, let me turn it over to Tom to go through some of the specifics of our overall strategic plan. Tom?

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Thomas Shafer;Vice Chairman of the Board, [3]

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Thanks, David. During the quarter, we continued to place the priority on the extension of the foundation of our business and maintaining our strong market share and brand recognition in our historical markets and continuing to drive growth in our high potential markets of Detroit, Cleveland and Grand Rapids, and strengthen our core banking operating model, which will continue to be relied on as we migrate into our new markets, all while additionally working collaboratively with our TCF counterparts towards the completion of the merger.

We continue to see the benefits of our upgraded core operating system through the ability to expand and offer new products and through continued growth in commercial and business banking customer relationships as we have focused on building strength and depth in our team. As always, while we grow our loan portfolio, our focus is on continuing to improve the risk characteristics of our credit portfolios as well as continuing to offer exceptional customer service.

As David touched on, with all the required approvals received, and the quality of the planning from our combined integration teams, we're positioned to close on our merger on August 1, 2 months ahead of the schedule communicated when we announced the transaction. We have key leaders from both organizations leading work streams to bring the best of both organizations forward, enhancing our capacity to grow our combined core bank and the national lending platform of TCF. With the merger literally just days away, we're organized to operate the company and achieve the goals, which were at the center of bringing Chemical and TCF together.

Our priorities are bringing our companies together by focusing on the cultural integration and creating one TCF. This is the most important aspect of any merger, and we know through our personal experience of the criticality of this for all constituents. Our focus has also heightened on culture with the nature of our transaction being an MOE. The new executive team of the combined company has been meeting routinely with an emphasis on initiating a deep dive into both organizations and supporting information gathering and exchanging at all levels of the companies.

Our next priority is planning and executing the system conversions in 2020, and as equally important, achieving the cost synergies previously announced. We continue to be impressed by our team as they place a strong focus on servicing our customers while we are working to complete the merger with TCF. As we look forward to the third quarter and beyond, we are excited to close the merger and begin leveraging the best of both banks. We are particularly excited about the TCF transaction because of the complementary nature of our companies and the opportunities this brings for our customers with enhanced digital experiences leveraging the national business lines across our footprint and client base as well as exporting our relationship banking strategy to new markets. All of this will support the momentum we each bring to this merger.

Our teams have heard me say a number of times, why I like Chemical Bank and TCF? We will be a much stronger company together and this positions us well as we begin working as 1 company for the remainder of 2019 and head into '20 and '21.

With that, let me turn it over to Dennis to go through the financial results in further detail. Dennis?

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Dennis Klaeser;Chief Financial Officer, [4]

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Thank you, Tom, and good morning, everyone. Moving to Slide 9. Net income was $69.6 million in the second quarter of 2019 or $0.96 per diluted share. Our second quarter results were impacted by a couple of significant items. First, we had $5.5 million detriment from the change in fair value of loan servicing rights or the equivalent of $0.06 strike to earnings. We also incurred $3 million of merger-related expenses incurred during the second quarter of 2019 or the equivalent of $0.04 to earnings. After adjusting for these items, our net income was $76.3 million or $1.06 per diluted share compared to $73.3 million or $1.02 in the first quarter and $69 million or $0.96 per share in the second quarter of 2018.

In addition to the items we identified as significant, we recognized $4.2 million net gain on sale of investment securities as a result of repositioning our portfolio in conjunction with our pending merger of equals with TCF, which provided $0.04 benefit to earnings per share.

As shown on slides 10 and 11, our key profitability metrics improved as we increased net interest income compared to the prior quarter through continued increases in average balances and yields on loans, partially offset by an increase in average short-term borrowings and overall cost of funds, and kept our efficiency ratio at a low level. Excluding significant items, return on average assets was 1.39% and return on tangible shareholders’ equity was 17.3% for the second quarter 2019.

As shown on Slide 12, year-over-year, our total loan portfolio has grown $1.3 billion or 8.8% to $15.9 billion as of June 30, 2019. This growth was driven by C&I loans, which grew by over 22% year-over-year, demonstrating our strategic focus on growing our C&I lending business.

Turning to Slide 13. We had loan growth in the second quarter of $538 million. The growth in the second quarter was primarily a result of growth in the C&I portfolio, which grew by $294 million in addition to growth in our residential mortgage loan portfolio, which grew by $117 million.

From Slide 14, you can see that our $538 million of net loan growth for the quarter is a result of $729 million of growth in the originated loan portfolio, offset by $191 million runoff in our acquired loan portfolios.

Moving on to deposits. As you can see on Slide 15, we had strong overall deposit growth year-over-year of $1.3 billion or 9%, with $1.3 billion of growth in customer deposits, partially offset by $19.7 million decrease in broker deposits. Total deposits declined during the second quarter primarily due to seasonal decrease in municipal deposits. Our average cost of deposits increased to 105 basis points in the second quarter compared to 99 basis points in the first quarter and 56 basis points in the second quarter of 2018.

Looking at overall funding on Slide 16. Our average cost of funds increased to 120 basis points during the second quarter compared to 113 basis points in the prior quarter and 76 basis points 1 year earlier, primarily driven by the rising interest rate environment.

Turning to Slide 17. Our credit metrics remained strong. The increase in provision to $7.5 million in the second quarter compared to $2.5 million in the first quarter reflects an increase in originated loan growth. Net loan charge-offs were just 5 basis points of average loans in both the first and second quarters compared to 12 basis points in the second quarter of 2018. Our ratio of nonperforming loans was 62 basis points as of the end of the second quarter compared to 56 basis points at year-end.

As shown on Slide 18, net interest income increased $2.3 million to $165.2 million in the second quarter compared to the prior quarter, with the increase primarily driven by the benefit from the increase in average balances and yields earned on loans, partially offset by the increase in funding cost. The net interest margin on a tax-equivalent basis was 3.36% in the second quarter compared to 3.42% in the first quarter, with the decrease primarily due to increase in average interest-bearing liabilities and cost of funds, partially offset by increase in average balances on the yields earned on loans. It is important to note that we continue to see improvements in our loan yields benefiting from market interest rate shifts in addition to our focus on growth in our commercial loan portfolio.

Moving on to Slide 19. Our noninterest income for the second quarter increased to $38.2 million compared to $24.9 million in the first quarter, largely due to the gain on sale of investment securities that I discussed earlier and increase in net gain on sale of loans and other mortgage banking revenue and increased swap fee income from our commercial lending business.

Net gain on sale of loans and other mortgage banking revenue includes the charge of -- from the -- to the fair value on loan servicing rights, which was a detriment of $5.5 million in the second quarter compared to $7.6 million in the prior quarter.

As seen on Slide 20, core operating expenses which excludes merger expenses and impairment associated with federal historic tax, credits was $107.7 million in the second quarter of 2019 compared to $103.6 million in the first quarter. Quarter-over-quarter, the increase was primarily due to increase in salaries and benefits impacted by an increase in mortgage loan commission expense and the annual merit increases that went to effect April 1.

We have a keen focus on expense management as evidenced by our continued low adjusted efficiency ratio of 51.3% in the second quarter compared to 51.7% in the first quarter and 51.2% a year ago.

Turning to Slide 21. We ended the quarter with tangible book value of $25.18, which represents 13% in our tangible book value compared to 1 year ago. Our TCE-to-total assets ratio remained strong at 8.4% at June 30, 2019, and regulatory capital ratios are strong at an estimated 10.7% for our Tier 1 capital ratio and 11.5% for our total risk-based capital ratio.

I will now turn it back to Dave for his closing remarks.

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David Provost;CEO and President, [5]

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Thank you, Dennis. As always, we believe the key factors that will drive our future earnings are our ability to drive revenue growth and the continuation of our disciplined expense management. We remain focused on these factors as we strive to appropriately balance risk and return, and in conjunction with our efforts to close on our pending merger with TCF and beyond.

As always, we appreciate your time and interest in Chemical Financial. On that note, moderator, let's open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Chris McGratty with KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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Dennis, maybe we could start with you. We just got off the, obviously, the TCF call, and their quarter was, I think, characterized by very good expenses and they talked a bit about getting some of the savings onto their income statement before close. Could you help us with kind of the -- obviously, you're reiterating the $180 million of cost. Could you help us with kind of the trajectory of expenses? Now that you -- seemingly you're going to close this deal 2 months sooner, can you get the savings quicker? Does the same outlook still hold in terms of run rate by the end of '20? Any thoughts on expenses will be great.

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Dennis Klaeser;Chief Financial Officer, [3]

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Yes. You're correct. TCF has made meaningful progress on their expense base. A portion of that is in anticipation of the merger, a portion of that is because they have been strategically focused on improving their efficiency ratio and we're -- we've been impressed with the success so far that they've already made. But there is a little bit of frontal loading of the expenses. I would not say there is a -- it's is a very material amount, and we're sticking with our guidance of recognizing $75 million of the $180 million over the first 4 quarters. And then, as we would move into the fifth quarter, we would be realizing the full $180 million. So we haven't -- we are not in a position yet to change that guidance. Obviously, if there's opportunities to accelerate that, we'll harvest those opportunities, but we really aren't in a position yet to change that guidance.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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Okay. Understood. Maybe we could turn to margins just for a moment. Most banks this quarter have felt the pinch from declining rates and the expectation for the Fed to cut next week. Can you speak to kind of how you're thinking about the pro forma NIM? I think around the deal, you said it was going to be 3.90% or 4%. So comments on pro forma margins given the shifting environment? And also given the drop in rates, obviously, I think, there will be less of a mark on day 1, so maybe rounding out the discussion with capital -- pro forma capital levels and maybe the accretable -- the change in the accretable assumptions?

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Dennis Klaeser;Chief Financial Officer, [5]

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Yes. So first on the accretable assumption. You're correct. The interest mark is going to come down quite meaningfully because the rate environment has come down, and it may be incrementally impacted by whether or not the Fed moves next week. So we're expecting a fairly low interest mark on the overall loan portfolio. However, as I think I've explained to analysts and investors is that, in that margin guidance we gave when we announced the deal, we weren't accreting in the credit mark and as we now know with CECL, that credit mark will be accreting in. So in the rough ballpark, the level of accretion from purchase accounting will be roughly the same as it was when we initially gave guidance. But you're right. When you look at the entire industry, I believe that there is pressure on margin with the drop in interest rates. And so directionally, I would say there is some modest pressure on that margin over time. I liked Brian's comment on their earnings call, the margin is the outcome of the strategy, not the input to the strategy. So overall, we look at the goals of the merger, the synergies that we create, the targeted return on tangible common equity, we still feel confident in those core fundamentals.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Great. So if I can kind of summarize, despite the moving pieces, the level of accretion that you've told us through the end of January, you're not materially different from that?

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Dennis Klaeser;Chief Financial Officer, [7]

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The EPS accretion, we talked about in January, was 17% EPS accretive to the Chemical shareholders. That's GAAP accounting accretion. We specifically carved out exactly what the cash accounting accretion is of 13%. And yes, we feel confident around those estimates.

One of the numbers that really jumps out at me when we look back to that point in time when we announced the transaction, is that the analyst consensus estimate for earnings for TCF for 2020 was around $315 million of net income. And as you just saw from TCF's earnings announcement, they produced over $90 million worth of core earnings here in the second quarter alone. So we feel very good about going here into the merger given the momentum that we see here.

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Operator [8]

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We'll take our next question from David Long with Raymond James.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [9]

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So looking at C&I growth in the quarter, obviously quite good. Curious as to what the spreads in terms were on some of the new originations in the quarter versus what you may have been looking at a year ago?

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Thomas Shafer;Vice Chairman of the Board, [10]

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Yes. So the C&I came from most of our marketplaces. And as you would expect, it's a very competitive environment out there. When we're looking at -- down at the core spreads of the transaction, we're really engaging in full relationships, so it deposits, fee-based services as well as the credit spread. But you're seeing at pricing in the, I'd say, the end of a long expansion depending on the credit quality of 175 to 225 over LIBOR is a typical spread, but it's -- I got to be very careful with a comment like that because you need to understand the quality of the borrowers and scale of the borrowers, et cetera, across our marketplaces.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [11]

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Got it. And as it relates to expanding that part of the business and leveraging it into TCF's franchise, any progress made in the TCF footprint? And whether it's looking for a leader team or teams at this point?

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Thomas Shafer;Vice Chairman of the Board, [12]

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Well, I'd say that we've spent the last couple of months, kind of, organizing what the new company's organizational structure will look like, giving assignments to both teams from TCF and Chemical. We've identified the structure of how do we go to market with middle market or the style that Chemical has had. And those individuals are now looking at -- really think about Chicago, Minneapolis, St. Paul as primary marketplaces. We're obviously in Denver and Milwaukee and Phoenix, beyond that, but first we'll pick a couple of marketplaces and then make sure that we have a very strong business case for the markets that we enter into.

We have a little bit of a start in Chicago. TCF has a couple of groups in the Chicago marketplace that I think will help get us started.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [13]

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Got it. Okay. And then, one on the deposit side. The City of Detroit deposits, is that relationship fully baked in at this point? And then, as a follow-up to that, some movement in municipality deposits, obviously, in the quarter. How should we expect the flow in overall municipal deposits over the next couple of quarters?

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Thomas Shafer;Vice Chairman of the Board, [14]

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Yes. Good question. As you know, there's seasonality to that business, but the outcomes that we hoped for with the City of Detroit, they are coming to fruition, we've -- that comes in somewhat of waves as we're going through their different deposit categories. Our lockbox is now opened and so for tax revenues coming through, during the next billing cycle, we'll be seeing those. The -- it's also given us access to talk to other, I would say, highly sophisticated large municipal entities in Michigan, and we're having meaningful conversations and developing new relationships. So that's moving as we anticipated with the announcement that we made during the first quarter.

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Dennis Klaeser;Chief Financial Officer, [15]

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I wanted to point out one other thing when we talk about deposits. First, TCF commented on their call about the strong core deposit growth that they've had year-over-year. We too have had strong core deposit growth. When you look at our net interest margin table, you'll see that average balances for really core deposits, including checking accounts and savings accounts, the average balance has increased nearly 11% year-over-year, and that's a result of our strategic focus on that part of our business, and there's multiple drivers. One, our retail brand system has performed exceptionally well and delivered initiatives. Our commercial bankers are doing a great job of bringing in deposits with our C&I customers in particular. And then also our municipal deposit effort has been working very well over the past few quarters. And so we've got a lot of momentum in terms of driving core deposits, and then we're looking at the enhanced capabilities that we will have when we come together with TCF.

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Operator [16]

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And we'll take our next question from Scott Siefers with Sandler O'Neill.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [17]

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Dennis, I wanted to go to the expense side just for Chemical on a stand-alone basis. You guys' costs have kind of bounced around between like $103 million, $108 million in any given quarter, so a little bit of variability in there. And I know in the 2Q they were elevated due to some variable costs associated with revenues like mortgage. Just curious on a stand-alone basis, what you think the trajectory is? In other words, can we get some relief from this quarter's roughly $108 million level? Or is this the steady-state to base off of?

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Dennis Klaeser;Chief Financial Officer, [18]

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On a theoretical stand-alone basis, it's a good steady-state knowing that the mortgage compensation is seasonally a bit stronger than the other quarters. But overall, that's a pretty strong -- a good baseline. We -- I did mention that compensation increases went into effect April 1, and the annualized increases, particularly, for the broad base of lower compensated employees, the earnings -- the salary increases there were pretty strong this year. And so that trend line may have been a little stronger than what you'd normally be seeing as we go forward.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [19]

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Okay. Perfect. And then, I know over the past -- it feels like past 1.5 years to 2 years, for Chemical specifically, you've had this sort of slow but steady securities portfolio build, continued a little in the second quarter. Can you just spend a moment discussing how the merger will affect that? In other words, does -- the combined company, is that just naturally where you want it to be? Or will there be further need to do anything within the securities portfolio? Or is that just -- on a bigger company just isn't going to matter as much?

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Dennis Klaeser;Chief Financial Officer, [20]

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Well, it's a dynamic strategic item, but for Chemical stand-alone, we went from roughly securities being 10% of our balance sheet to now being a little bit more than 17%. And I previously talked about our long-term target of closer to 20%. So we moved up closer to that longer-term target. TCF has moved up to about 13% of their balance sheet being the securities portfolio primarily because of investing the cash coming off of the runoff of the auto loan portfolio. And so the TCF trend line probably was to continue to build that somewhat, again, dependent on the runoff of the auto portfolio and pace of growth in various other categories. So combined, I would see some modest build in that securities portfolio. Again, primarily driven not so much because of, like, an overall desire to leverage up the securities portfolio, but deploying cash off the auto loan portfolio. Our preference though is to make room for the organic growth across our various key lending categories, whether it's our middle market C&I business, the TCF's middle market C&I business, the inventory finance, the leasing business. And combined, we're going to have a really strong residential mortgage banking business as well. And as you saw in the second quarter, that can also be a lever that we pull to manage our overall growth of our loan portfolio. So it will be a dynamic item and depending on the opportunities and levels of returns that we can generate with the various categories, it will -- the growth of the securities portfolio will ebb and flow.

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Operator [21]

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We'll take our next question from Terry McEvoy with Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [22]

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With the deal expected to close earlier than expected, any chance you can move the systems conversion to an earlier date to achieve the cost savings a bit earlier than was discussed in February?

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Thomas Shafer;Vice Chairman of the Board, [23]

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Yes. Terry. No, I don't think that we're going to move that up. When I think about the planning process, while we've been able to move a number of things up to accommodate the closing, the planning work stream for the system conversion really is in a time line that makes sense to us right now. So I don't see that moving at this point.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [24]

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And then just, I guess, the last question for Dennis. Any thought into reducing the volatility in the loan servicing rights just to remove that mortgage volatility we see each quarter? And, again, we saw it here in the second quarter.

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Dennis Klaeser;Chief Financial Officer, [25]

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Yes. So first of all, the accounting policy with TCF is to do a lower cost of market. So at least in the short term, we're likely to move to that accounting policy for the servicing rights. If you understand that accounting basically, there's still the downside risk of mark-to-markets on mortgage servicing rights, but you moderate the overall volatility because if and when the securities portfolio appreciates in value, you're not marketing -- marking up the mortgage servicing rights. So I think in the combined organization, one, just given the combined scale, the relative volatility MSR is moderated, but we're also focused on either from an accounting standpoint and/or implementing a hedging strategy to moderate that overall impact of volatility.

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Operator [26]

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We'll take our next question from Nathan Race with Piper Jaffray.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [27]

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Dennis, maybe a question on just the trajectory of deposit cost going forward. Brian made some comments earlier today that deposit costs may peak in 3Q or 4Q at the latest of this year, assuming that Fed does cut rates here in July. So just curious on how you see that potentially unfolding on the Chemical side of things based on what you're seeing in your...

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Dennis Klaeser;Chief Financial Officer, [28]

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Yes, my guidance would be in complete harmony with what Brian was suggesting there. We continue to see some pressure here on deposit cost, and we expect that to continue for the short-term here. But as we look a bit longer-term, we think that deposit costs will peak and then start coming down with the success of potential Fed moves.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [29]

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Okay. Great. And then perhaps a question for Tom. And just going back to the earlier question in terms of commercial hires and so forth in some of the legacy TCF cities and so forth. Just curious, as you spent more time with some of those folks on the TCF side of things over last several months, if you've got any more confidence in terms of your ability to maybe replicate some of the successes you've had in adding commercial banker talent in Grand Rapids, Detroit and Cleveland and so forth in some of those legacy TCF cities and so forth?

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Thomas Shafer;Vice Chairman of the Board, [30]

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Yes. So I think about the kind of the operating model that we've had for the last couple of years at Chemical Bank. Getting to know the TCF management team very well, having a better understanding of their marketplace, I have as much confidence today as ever in our ability to replicate that activity going forward. And I think that partially it's our ability to execute, but as an organization to join, I think that we have extraordinarily strong story in recruiting. And our ability to recruit, I believe, is even stronger as we move past August 1.

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Operator [31]

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And we have a follow-up from Chris McGratty with KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [32]

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Dennis, just a quick one on the model, the tax rate. How should we think about pro forma tax rate from here?

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Dennis Klaeser;Chief Financial Officer, [33]

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Yes, so our tax rate is just under 18% this quarter. Pro forma for the fourth quarter, I think, you would sort of look at the just weighted average between our tax rate and TCF's. We will have a modest benefit to our tax rate in the fourth quarter as a result of a legacy federal historic tax credit, as you've seen before in our results in past quarters. And so the tax rate will be moderately below that weighted average in the fourth quarter. Going into 2020 as well, again your, sort of, base model should use the weighted average tax rates of the 2 companies. But then we have more than we expected of federal historic tax credits that are being accounted for with the -- that were grandfathered with this -- the legacy accounting treatment where we're able to harvest the benefit immediately -- 100% of the benefit immediately when our historic tax credit project goes into use. And so in the last 3 quarters of the year, we will be harvesting some benefits from federal historic tax credits. Again, that will be moderately averaging down the tax rate below that, sort of, weighted average of our 18% and TCF's tax rate.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [34]

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Great. And then maybe just last, kind of, maybe for David. The balance sheet repositioning -- both of you guys are repositioning the balance sheet a bit into the close. Given the mark is coming down and capital levels are going to be higher, maybe I missed it before, but any thoughts on kind of announcing a capital, like a, distribution with a buyback or something into the back half of the year?

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David Provost;CEO and President, [35]

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I think we'll wait till the -- till we get the 2 companies together and make sure we're on board with our regulators before we start getting too aggressive with those comments. So stay tuned for that.

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Operator [36]

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And there are no further questions at this time.

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David Provost;CEO and President, [37]

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All right. Well, let me conclude by saying we appreciate your interest in Chemical Financial as we change our ticker symbol to TCF on August 1. We continue to remain very confident in the future, and we believe we're well positioned to achieve additional market share gains as we move forward.

So with that, thank you very much and have a great day. Thank you, everybody.

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Operator [38]

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Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect.