TCF Financial Corporation
Q1 2019 Earnings Call Transcript

Published: 22 Apr 2019

[Operator:]

Good morning, and welcome to TCF's 2019 First Quarter Earnings Call. My name is Jamie, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Please also note today's conference is being recorded. At this time, I would like to introduce Tim Sedabres, Head of Investor Relations to begin the conference call.

[Tim Sedabres:]

Good morning, and thanks for joining us today for TCF's first quarter 2019 earnings call. Joining me on today's call will be Craig Dahl, Chairman and Chief Executive Officer; Brian Maass, Chief Financial Officer; Mike Jones, EVP of Consumer Banking; Bill Henak, EVP of Wholesale Banking; and Jim Costa, Chief Risk Officer and Chief Credit Officer. In just a few moments, Craig, Brian and Jim, will provide an overview of our first quarter results. They will be referencing a slide presentation that is available on the Investor Relations web of TCF's at ir.tcfbank.com. Following their remarks, we will open up for questions. During today's presentation, we may make projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements or predictions and that actual events or results may differ materially. Please see the forward-looking statement disclosure and our 2019 first quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is accurate as of March 31, 2019, and we undertake no duty to update the information. The subject matter discussed in the following message is addressed in a joint proxy statement perspectives filed with the SEC as part of the registration statement filed by Chemical Financial Corporation. TCF and Chemical urge you to read it, because it contains important information. Information regarding the persons who may, under the rules of the SEC be considered participants and the solicitation of TCF and Chemical shareholders in connection with the proposed transaction is set forth in the joint proxy statement perspectives filed with the SEC. I would now like to turn the conference call over to TCF's Chairman and CEO, Craig Dahl.

[Craig Dahl:]

Thank you, Tim. Good morning, and thank you all again for joining us today. Let me start out today by briefly recapping our strong first quarter results, and then updating you on the current status of our proposed MoE with Chemical, which we jointly announced just under 90 days ago. When we announced the transaction, we highlighted how it accelerates the strategic plans of both companies by multiple years with minimal overlap of customer-facing employees, and it brings limited disruption to customers and our business outlook. Our first quarter results demonstrated that limited disruption as our teams kept their eye on the ball from a business development front and focused on serving our customers as we saw continued growth and success during the quarter. Our focus has not shifted from improving the efficiency of the organization and driving higher return on capital over time. Both of which we delivered in the first quarter and improved from the comparable quarter last year. We expect these themes to be constant throughout 2019 even as we work to finalize a proposed merger with Chemical. On the other side of the transaction, these metrics are not expected to change in their level of importance as we continue to believe they are strong indicators of enhancement to shareholder value. Let me begin with a summary of first quarter results on slide two. EPS for the first quarter came in at $0.42. Now this included a pre-tax merge-related expense of $9.5 million or $0.04 per share. Excluding these charges, adjusted diluted EPS was $0.46 per share, which represents an 18% increase from a year ago. In the first quarter, we continued to grow the balance sheet with checking and savings balances increasing nearly 9% compared to a year ago, and continued to grow non-auto finance loans, which increased by $1.1 billion or 6.9% from the prior year. Loan growth this quarter was supported by the seasonal increase in inventory finance balances, which were up $642 million from year-end, and increased by $291 million or 8.4% from a year ago. On a year-over-year basis, we also saw a growth from the consumer real estate portfolios, which increased by $632 million or 13.4%, as well as commercial, which increased by $206 million or 5.6% from a year ago. This growth resulted in a higher net interest income even as margin declined slightly due to our remix of the balance sheet. I would remind you that our emphasis on remixing the balance sheet including the shift form auto loans to securities and other loans is focused on driving a higher return on capital over time. We were disciplined on expense management as non-interest expense excluding merger-related items and operating lease depreciation declined by $4 million or 2% from this time last year. The result of this was an adjusted efficiency ratio for the quarter of 68.1%, lower than last year's first quarter level. On the risk and credit front, we continued to improve the risk profile of the organization by managing the run-off for the auto portfolio, which declined by $278 million in the first quarter, and we have now run-off 47% of balances since year-end 2017. Non-performing assets declined compared to a year ago and charge-offs excluding auto were 20 basis points for the quarter. From a return on capital standpoint, we generated an adjusted ROATCE of 13.72% in the first quarter; our seasonally lowest quarter, up nearly a 150 basis points from a year ago. We were able to do this while growing our CET1 ratio, which reduced our risk profile over the course of the past year. As we look forward to the remainder of 2019, our business outlook remains largely positive and unchanged. Even with the integration planning efforts well underway, the limited disruption from this transaction allows our teams to remain focused on organic growth opportunities throughout the year, and their goals have not changed for new business development and more importantly on delivering a great customer experience. In contrast to some of the daily headlines about slowing growth, tariffs, trade outlook, or pending recession, we continue to see a positive environment to grow and expand our business and serve our client base. We are aware of the length of the economic recovery we have enjoyed over this cycle, and we are constantly examining our credit exposures and concentrations to review how and where we deploy our capital. Diversification in the portfolio, both in terms of product and geography is a key [tenet] [ph] of our approach. This allows us to not have to stretch for growth in any one loan portfolio. As I think about where the market is today, there does not appear to be a positive catalyst from interest rates or credit on the horizon. As a result, we recognize that bank outperformance going forward will likely need to come from effectively managing expenses. Not only did we demonstrate our ability to do this in the first quarter, our merger of Equals puts us in a great position to optimize the combined expense base of both companies as they become one and drive higher returns moving forward. This gives us the unique position over the coming years as we integrate the two banks and allows us to control what we can control and drives value for shareholders without the explicit benefit from the macro environment. Let me share an update with you related to our MoE on slide three, which highlights what we have been working on for the past 90 days since the announcement. To begin, not all MoEs are the same. From deal structure to rationale to execution, there are many differences to draw from. Our transaction is unique for a few reasons primarily for attributes that have been in place since the early beginning. One, we have a go-to market brand selected and in place from day one, which was jointly agreed to and allows us to avoid market ambiguity. Two, our leadership team which announced the next layer of management a few weeks ago like many attribute so this transaction comes from the best of both banks. I have said this in nearly every communication that we will leverage the best of both banks to create a new company and the management team is no exception. Three, Detroit will serve as the combined company's headquarters. We jointly agree to this early on in the process. And I strongly believe we are well-positioned to capitalize to being the largest bank headquartered in Michigan, and we will also maintain substantial operations and presence in Minneapolis, Chicago, and Midland. Four, our regulators will be the Federal Reserve at the Holding company and the OCC at the bank. And we look forward to continuing our strong working relationship with both regulators. Five, minimal branch and client overlap; this one is key. Most of our cost savings are not coming from closing branches and exiting duplicative commercial teams or loan portfolios. One of the really unique benefits of this deal is that we operate in largely adjacent markets with slightly different business models and product sets. That allows us to be true -- to truly be complementary to each other. Chemical brings traditional commercial banking with C&I and CRE across our many markets including Detroit, Grand Rapids, Cleveland, Midland, and Greater Michigan. TCF brings expertise in lending verticals such as equipment finance, leasing, and inventory finance. When we look at the shared loan relationship between the two banks, it is negligible. We are not in the same commercial relationships, inventory finance programs, or leasing transactions. We each bring unique products, relationship managers, clients, and programs to each other, which we believe we can leverage and build on to accelerate the growth profile of the combine firm. In the first 90 days, we accomplished a great deal related to integration work. However, we also spent a good deal of time on the road meeting with combined investors in both firms. In these meetings, the top question that came across was why now. Why do this deal now? As I mentioned previously, this transaction accelerates the strategic plans of both banks by two years. Individually, we each had momentum in our standalone business prospects and very rarely do transactions benefit from two banks with momentum as often one is clearly on stronger footing compared to the other. I truly believe the opportunity to combine these two institutions creates substantial opportunity whether it's optimizing the expense-based accretive efficiencies, increasing the already higher revenue generation of the combined firm, even more so as we deploy new products to new markets across the Midwest or by leveraging technology spend across a broader customer and asset base. When you think of our investments into digital banking over the past few years, we would not have spent any more dollars on development, if we had launched the product and services over a customer base that was 30% to 40% larger. Now on to highlights from the first 90 days of integration planning post announcement, one of our most important accomplishments during the quarter was establishing the Joint Integration Management Officer, IMO. The IMO was made up of approximately 40 work stream leaders from both organizations to oversee the integration process. These leaders have transitioned to the integration project are engaged each and every week and planning efforts both in Detroit and Minneapolis. This team is supported by an experienced external advisor we brought on board to assist with the framework and to support our teams through the process. As we move through this process, we will leverage the experience that chemical brings from a full bank M&A standpoint along with our own experience format numerous platforms and portfolios over the years. Combined, I believe we have the right people in place with the right experience necessary to support our integration. With all of these pieces in place, we have begun to identify the work streams and we are making key decisions that will shape the combined organization moving forward. As we sit here today, we are right on track where we expect it to be from an integration perspective. In addition, the registration statement and all regulatory applications were filed on a timely basis. The special meetings of stockholders are expected to be held in June 2019 for both TCF and Chemical. We continue to expect the merger to close late in the third quarter or early in the fourth quarter of 2019. Slide four provides an illustration of our balanced and experienced leadership team including a board that will be made up of eight directors from each organization and a joint executive management team. I'm very excited about this team given the depth of expertise and industry experience. As I have been telling everyone for the past three months, our objective in this MOE has been to utilize the best of both companies and that is what this joint team brings. Overall, I become more optimistic every day about what this MOE can mean for our investors as well as our customers, communities and employees. We have a unique opportunity to build something special and to differentiate ourselves as the leading Midwest Bank by creating scale and making the investments necessary to compete and thrive in the banking industry now and in the future. I will now turn it over to Brian to provide more detail around our first quarter financial results.

[Brian Maass:]

Thank you, Craig. Starting on slide five, we had a really strong quarter from an expense control standpoint that led to 115 basis point decline in our adjusted efficiency ratio year-over-year. As we mentioned earlier, this excludes $9.5 million of merger related expenses during the quarter. Our core operating expenses excluding lease financing equipment depreciation and merger related expenses were $225 million in the first quarter down $4 million from the first quarter of 2018. On the revenue side, we generated $358 million of total revenue during the quarter up slightly year-over-year while we saw strong net interest income growth. Non-interest income declined $5 million from the first quarter of 2018. Turning to slide six, we have continued to consistently see net interest income growth on a year-over-year basis each quarter. This increase has continued despite an ongoing balance sheet remix and the resulting modest pressure on our net interest margin. As we look forward, we expect to continue to grow net interest income on a full year-over-year basis. Margin for the first quarter came in at 4.56% down four basis points from the fourth quarter and down three basis points from a year ago. As we have commented over the course of the last year, we are remixing the balance sheet to drive higher returns on capital and margin is an output of these decisions. Even though margin is down slightly from a year ago, adjusted EPS is higher and adjusted return on capital improved by over 140 basis points even as our common equity Tier 1 capital ratio moved higher from a year ago. These returns demonstrate our ability to grow earnings and improve return on capital even as we give up modest spread by remixing the balance sheet towards more capital efficient and lower risk assets. We expect modest margin pressure to continue throughout the year as we run-off the auto loan portfolio and redeploy the cash flow into securities and other loans including select longer duration assets. Turning to slide seven, average earning assets increased 3.6% year-over-year. What continues to be important here is the improving mix shift towards more capital efficient assets. Auto has declined to just 8% of the portfolio down from 14% a year ago. All other loans have increased from 75% to 77% of average earning assets and the securities portfolio now makes up 12%. Meanwhile we have continued to see revenue growth even as we remix the balance sheet. In addition as a result of the mix shift, our risk weighted assets as a percentage of total assets have continued to decline and support our capital allocation and return on capital focus. Turning to slide eight, we generated $1.1 billion of loan and lease growth or 6.9% year-over-year excluding the auto run-off with over $600 million of growth from consumer real estate and over $500 million from commercial and our other wholesale businesses. You will also notice that inventory finance balances increased $642 million from last quarter, the first quarter is always our seasonal peak for inventory finance due to the overlap of snow and lawn and garden products. In addition, the run-off of our auto finance portfolio continued to progress as planned with balances down $278 million during the first quarter. Given the reduced size of the portfolio, we still expect run-off of $800 million to $1 billion in 2019. Turning to slide nine, first quarter earning asset yields of 5.5% were up 31 basis points year-over-year as loan and lease yields continue to expand due to the recent rate hikes. Our strategy of competing as experts along with our pricing discipline and increases in short term rates continue to drive our strong yield portfolio performance. Our security yields are also increasing as new purchases in the first quarter at an average tax equipment yield of 3.39% above the blended portfolio yield of 2.88%. In addition, we took advantage of an opportunity to reposition part of our securities book and sell select lower yielding municipal securities allowing us to pick up incremental yield without materially changing the duration profile. This remix also improves the liquidity and risk profile of the portfolio. Given the Fed's expectation of holding rates flat in 2019, we will likely see earning asset yields level off moving forward. Turning to slide 10, we continue to grow our deposit base driven by average checking and savings balances which increased 8.9% year-over-year. In addition despite the current environment, we were able to increase non-interest bearing deposits $174 million or 4.6%. We continue to believe in the strength of our deposit composition with 83% of our deposits being consumer base. Our cost of total deposits increased nine basis points from the fourth quarter, and have increased by 31 basis points from a year ago, while the average interest cost on CDs has increased faster than our non CD book over the past year, we have been able to intentionally reduce our CD portfolio by $376 million. As I mentioned earlier, we expect to see deposit costs continue to trend higher in the coming quarters primarily due to CD renewals at current market rates. But changes in future rate expectations should have some positive impact on promotional pricing. Looking at slide 11, the majority of our year-over-year decline was due to a $3.2 million decline in servicing fee income as the auto finance portfolio continues to run-off. This is resulting in a more favorable mix of non-interest income over time. In addition, leasing fees returned to a more normalized level following the seasonal high in the fourth quarter. We typically see seasonally high customer-driven activity in the fourth quarter. We would expect second and third quarter leasing non-interest income to be more in line with what we saw in the second and third quarters of 2018. With that, I'll turn it over to Jim Costa to cover credit and risk.

[Jim Costa:]

Thank you, Brian. We turn to slide 12, where see that we are continuing to reduce risk profile of our balance sheet from a credit, operational, and liquidity risk standpoint as the auto portfolio runs off. NPA declined $22 million year-over-year and were down slightly on a linked quarter basis as well. Sixty days delinquencies, a leading indicator for several of our portfolios, were just 12 basis points remaining at low levels. This gives us continuous confidence in the overall credit quality outlook of our portfolio. Provision for credit losses was $10 million in the first quarter, remaining relatively in line with the first quarter of 2018. Lastly, we are seeing improved liquidity as the balance sheet remix continues to progress as well as steady loan-to-deposit ratio of 102% as of March 31. Our cash and debt securities now make a 14% of total assets, up from 11% a year ago. Let's turn to Slide 13. First quarter net charge-offs excluding auto, were up 20 basis points. Up from a full-year net charge offs of 14 basis points in 2018. After an increase in commercial and inventory finance net charge-offs in the fourth quarter, both portfolios saw improvements in the first quarter. Overall, half of our net charge-offs in the first quarter came from the runoff of the auto portfolio which was $9 million coming from non-auto. We have been talking all year about our reduced risk profile which positions us well from a credit risk standpoint. Not only do we have an improved mix with a runoff of auto, but we continue to have strong diversification across our portfolio. Our credit risk profile is much better today than it has been in recent years. With that, I'll turn it back to Craig.

[Craig Dahl:]

Thank you, Jim. Slide 14 reiterates our focus on making decisions that enhance our return on capital. As I mentioned earlier, our adjusted ROATCE improved nearly 150 basis points year-over-year despite a higher common equity tier I ratio of 10.79%. We have shown an ability to generate higher return on capital with both higher capital levels and a lower risk profile. As a reminder, we still have $78 million remaining under our current share repurchase authorization. We did not repurchase any shares in the first quarter as the S-4 was not filed until the end of the quarter. We continue to expect to purchase these remaining shares prior to the closing of the merger. So with that, I will open it up for questions.

[Operator:]

[Operator Instructions] And our first question today comes from Jon Arfstrom from RBC. Please go ahead with your question.

[Jon Arfstrom:]

Thanks. Good morning.

[Brian Maass:]

Good morning.

[Craig Dahl:]

Good morning.

[Jon Arfstrom:]

Hi. Just rubbing in an expense question here, Craig, you talked about no change in the revenue generation approach really of either company, and you have been in this integration phase -- early integration phase. Anything you can point to where you may be more confident or more optimistic about revenue synergies from the combined companies?

[Craig Dahl:]

Yes. I mean I think I am more confident on every line. I mean we have now been -- lots of sharing, a lot of work stream work from partners from both companies, and there is really a strong origination vent in that company as you know, and we have got really the strong asset classes, a lot of program-driven business that gives us every quarter a lot of confidence. So, I would say, yes, I am really confident -- more confident on all the revenue items.

[Jon Arfstrom:]

Okay, good. And then maybe one for you, Brian, you guys talked about disciplined expense management and not a lot left on rates and credit. So, I think that obviously you had a good expense quarter, and I am just curious in terms of your expense performance for this quarter, is this a standalone performance would you say and you can improve from here, or is this maybe a bit of a head start in terms of the merger expenses starting to come out?

[Brian Maass:]

Yes. No, good question, Jon. What I would say is this is really still standalone expenses. Obviously as we get closer to the merger, we will be making decisions based upon what's best for the new co on the other side of the merger. You'll see us breaking out merger-related expenses as they are. There is a potential that there is some, I would say in both companies where there are certain initiatives that we had going on as a standalone that we could start to pause some of those initiatives into the close of the transaction. So, we are confident that both in the short run as well as in the long run that we are going to be able to improve the efficiency ratio both on a standalone basis as well as like we announced with the transaction really getting to a low 50s the efficiency ratio on a combined or consolidated basis.

[Jon Arfstrom:]

Okay. All right. And then just one -- quick one for Jim, that charge-off number on auto, is that a surprising number to you, or is that something that we can expect to potentially go higher as the portfolio runs out? Thanks.

[Jim Costa:]

I wouldn't say it's a surprising number, Jon. You look at the behavior of these consumer portfolios it looks like we have got a high spot in the winter time. If you look at the delinquency -- 60-day delinquency, you see that it's improved quarter-over-quarter. So, my expectation is that it will be on par if not better next quarter.

[Jon Arfstrom:]

Okay. All right. Thanks a lot guys.

[Operator:]

Our next question comes from Nathan Race of Piper Jaffray. Please go ahead with your question.

[Nathan Race:]

Hey, guys. Good morning.

[Jim Costa:]

Hi, Nate.

[Craig Dahl:]

Good morning.

[Nathan Race:]

Brian, just digging into your outlook on the margin going forward, it sounds like you expect some pressure going forward. I was hoping if you can kind of just bring up the magnitude of that pressure that we can expect on a quarterly basis over the next few quarters? It looks like you guys moved up deposit rates on some of your non-maturity deposits -- non-maturity products in the quarter. So, I guess I am just curious within that context and also kind of what the differential you have seen in terms of CDs rolling off versus what's you are putting the CDs on today?

[Craig Dahl:]

Yes. Couple of questions there, Nate, I will try and address some. But as you know, we did have some additional asset growth between -- in the fourth quarter that led into the kind of the first quarter's decline in the margin. So, we did add some mortgage loans as well as the addition of the securities portfolio. So, we still -- we are giving up revenue on that transition. And that's part of the headwind. And I think I had talked about that from an auto perspective, it's almost two basis points each quarter kind of cumulatively. That keep adding up. We had another three basis points headwind in the first quarter because we added more consumer loans or more consumer mortgages in the fourth quarter. From a deposit cost perspective, everything is really progressing as we plan. We did see an uptick in the deposit cost. Again, we think deposit pricing is -- has been relatively rational. But we also -- and that was 9 basis points on deposits. But our total funding cost went up 16 basis points in Q1. And really part of that is driven by we did actually -- we do have some short-term borrowings that were outstanding in Q1 that I would say are really at market rates. That was 2.76 in the first quarter. And that's really is just being used to fund some of the seasonal increase; the $650 million that we talked about in inventory finance. So that has some increase in, what I would say, the total funding cost. I do expect on a go-forward basis, I would say I have got more of a positive outlook on deposit pricing. We see indications in some of the markets that we are in that competitors are pulling in on kind of promotional pricing. And we expect to be doing the same here. So, I do think that deposit cost could actually slow as we go from kind of Q1 to Q2 relative to what you saw from 4Q in the first quarter. So, overall, you are going to see basis points reductions. You are still going to see an increase in deposit cost. But when you look at that the individual components, we feel good about kind of where we are at.

[Nathan Race:]

Got you. So if I'm hearing you correctly, some of the transitory items within inventory finance and the wholesale funding increase this quarter should kind of abate somewhat over the next couple quarters. And so the margin pressure that we should see should maybe be just one or two basis points over the next couple of quarters. Is that a fair way to think about it?

[Craig Dahl:]

Yes. I mean without putting a certain number -- it depends on what type of assets and the mix shift that we still have going on the balance sheet. And I would say overall, as you have seen us, we have been saying now for the last four or five quarters, we are not trying to manage or maintain even though with the NIM at the rate that it's had, you know, adding whether it's mortgages or other assets that are more capital efficient and that are going to be of a lower risk quantity. We're going to have lower credit costs. We're going to have lower expenses. So even though we're giving up on revenue, we might be giving up on the margin, we still expect to be able to drive better return on capital overall. That's really our focus.

[Nathan Race:]

Understood, I appreciate all the detail and color. Thank you.

[Operator:]

Our next question comes from David Long from Raymond James. Please go ahead with your question.

[David Long:]

Good morning, everyone.

[Craig Dahl:]

Good morning.

[David Long:]

Even before the Chemical announcement of the merger of Equals, you guys were focused on improving your efficiency, and now that you've spent 90 days plus with them talking about -- thinking about the integration, is there anything when you're looking at your own individual expense base today that you think maybe there is greater opportunities for us on a standalone basis to rationalize some expenses than maybe what you thought six months ago?

[Brian Maass:]

Yes, what I would say on that, this is Brian, right, we are looking at how we bring together the companies. I'd say our confidence around the announced $180 million of cost saves, when we bring the companies together we still -- I'd say we've got increasing confidence towards that from a standalone perspective, again -- I mean as I think I mentioned one of the previous answers you could see some slight change in initiatives are kind of run rate, but really a lot of the expense save is going to be when we bring together the two companies, and again our confidence level around being able to achieve that has actually probably improved since we announced the transaction. As Craig said, we've had a lot of conversations on joint teams and reconfirmed a lot of the high-level assumptions that we had, and we can see a slight line towards being able to execute against that.

[Craig Dahl:]

Yes, this is Craig. I want to add -- when we talk about relying on the experience that our partner brings to this, there was really a solid base of realism in the estimates that we put together. They were that embedded. Again, there was a bottoms-up kind of top-down approach. Now that we've gotten into it, as Brian said, we have even more confidence that we have the right numbers.

[David Long:]

Got it, thanks, and then just a quick follow-up, the $78 million you have authorized to do repurchases with, can you may be give us a little bit of color on what timeframe that can happen, I know there are some restrictions with the MOE out there?

[Brian Maass:]

Yes, this is Brian. There are kind of windows where we'll be allowed to purchase and there're windows where we're not. So you know there is a shareholder vote as we said in the kind of prepared remarks that's coming up in June, there will be windows after that we're going to be able to purchase our stock. So, our intention is still to be able to purchase that $78 million between now and the close of the transaction.

[David Long:]

Okay, got it. Thank you.

[Operator:]

Our next question comes from Chris McGratty from KBW. Please go ahead with your question.

[Chris McGratty:]

Hi, good morning. Brian. maybe a question for you on the securities built. How should we be thinking about just the pace, I think you said 800 or billion of auto, I think that was for the full year of run-off, how should be thinking about kind of cumulative growth in the bond book from here?

[Brian Maass:]

Yes, so if you look at 2018, I think we actually grew the securities portfolio not at the same pace that we had auto run-off. So it could be -- I'd say at most would be equal to the auto run-off for the year, but as we said, a lot of that cash can get redeployed into the securities portfolio at least initially, if there is a better use of that cash. As it relates to having higher returns on capital for the organization or funding other incremental loan growth, we can also use the run-off of the auto portfolio to fund that. So we really have a lot of optionality around it, but we would feel comfortable still continuing to build the securities portfolio throughout 2019 as well.

[Chris McGratty:]

Okay, great. And on the optionality with the auto, I think at the time of the announcement you said we're going to wait to evaluate whether we accelerate -- any updated thoughts on whether you could more quickly exit the auto book and redeploy capital elsewhere?

[Brian Maass:]

No. I'd say no new updates as it relates to that topic. It's obviously something that we'll continue to monitor markets and kind of availability for that with the upcoming transaction we're going to have more, as Craig alluded to, we are going to have more avenues for revenue growth in place, potentially more places to redeploy that cash. So it's something that we'll continue to monitor markets on overtime and see if it makes sense to accelerate that, but no, current plans or initiatives in place for them.

[Chris McGratty:]

Okay, maybe just one modeling question before I step out. Tax rate going forward, is this a good rate, and also the merger charges any color on what was in the merger charges this quarter like what line items and what sort of the company? Thanks.

[Jim Costa:]

So tax rate, we still think is in the 23% to 25% was slightly lower in Q1 always related to some equity-based comp. As it relates to the merger expenses in Q1, there's -- some of it's related to a banker fees that you pay at the beginning, as well as I'd say just legal, as well as some advisor integration-related expenses, and we'll see some of that continue in the next quarters even leading up to the close.

[Chris McGratty:]

Great, thanks.

[Operator:]

Our next question comes from Jared Shaw from Wells Fargo Securities. Please go with your question.

[Jared Shaw:]

Hi, good morning.

[Brian Maass:]

Good morning.

[Jared Shaw:]

Just following up on the deposit costs, how much do you expect to see transition out of time or rollover in time and where is that new rate coming on.

[Brian Maass:]

Yes, I'd say, this is Brian, in our CD costs, probably our highest promotional rate right now might be 2.6%, so that's where some of the stuff will be rolling over to from a rate perspective. I'd say the balances overall have been declining in our CDs so it's had less of a contribution to the overall deposit costs. You could see those say flat or maybe even increase a little bit from here.

[Jared Shaw:]

Okay. And then on the inventory finance looking year-over-year, the growth rate was slower than we've seen for a while there any anything unique in this quarter or do you expect to see that sort of year-over-year growth rate return back to in more double-digit as we go through the rest of the year?

[Craig Dahl:]

Yes, I think was -- this is Craig, 8.4%, I don't see this as I is fairly consistent, the thing that's hard to predict is the sell-through of any existing or sort of carryover product. I think with the abundance of snow in the quarter, there was a more of a sell-through on the sale -- excuse me, on the snow product that makes major ending balances slightly lower. So I would say nothing that systemically different.

[Jared Shaw:]

And then, just finally for me, as you continue this transition into reducing the risk on the balance sheet and being more efficient on the capital side, where do you ultimately thing the capital ratios should be for the company as we deal with this new balance sheet with TCE ratio continues to grow. Our capital ratios really continue to grow, once we're done the buy back where should we see you wanting to run from a, from a capital point of view.

[Brian Maass:]

Yes, this is Brian. I mean, what I would say is we do acknowledge that we have excess capital, as an organization is growing and part of that is where we're limited in being able to, with the transaction as far as the windows of being able to purchase stock. So that's why we don't have the $78 million done to date, a better indication of kind of where our capital ratios will be is what you saw us announce with the proposed merger transaction back in January, and I think there we had set our common equity Tier 1 might be closer to 10% give or take some amount and the total capital maybe closer to 12% is what we had said related to the transaction, when we come together. So those are probably at least some gives you some ideas where as to where the new company might be from a capital perspective, which is probably going to become more relevant, there's only a limited amount of how we can adjust our capital between now and the close.

[Jared Shaw:]

But after the close you think that's ultimately where it is at close or that's where you'd like to see whether you think that's the optimal mix of capital for the balance sheet.

[Brian Maass:]

Yes. So that's where we expect to be roughly speaking at the close, obviously on the other side of the close, when we get to the point that we have kind of fully implemented our cost saves. We expect to be generating a lot of capital in the high teens perspective, which is going to leave us a lot of optionality around changing dividend rates or depending upon where our share price is doing more share repurchases with that amount of capital generation obviously our first need of capital will go towards serving the organic growth needs of the company, as well as evaluating other opportunities.

[Jared Shaw:]

Thanks very much.

[Operator:]

Our next question comes from line of Lana Chan from BMO Capital Markets. Please go ahead with your question.

[Lana Chan:]

Hi, good morning. Two questions, one on the core expenses, I think excluding the upper end appreciation. It was up about 2% year-over-year. It's that sort of a good run rate going forward, trying to keeping in the low single-digit growth rate?

[Brian Maass:]

I guess, Lana, what I would say is our, this is Brian, on our expenses on a year-over-year basis excluding the merger related expenses was actually down 2% on a year-over-year basis, not up 2%.

[Lana Chan:]

I was just referring operating lease depreciation to…

[Brian Maass:]

Oh, the operating lease depreciation, I mean the operating lease depreciation is really related to transaction activity and leasing revenue and that's related to the amount of operating leases that we have on the balance sheet, we continue to see that part of the business continue to grow. So you could see that part grow but if that part grows, we will see leasing revenue as somewhat of an offset for that.

[Lana Chan:]

Yes, maybe I ask another way, do you expect overall core expenses excluding merger charges to be relatively flat to slightly down.

[Jim Costa:]

Yes, I mean what we're looking at is we are being able, we want to look at still being able to improve the efficiency ratio of the company over the course of 2019, and I think you can see some of the expenses come down as we - in the coming quarters.

[Lana Chan:]

Okay, thank you. And second question is about loss provision, how should we think about that should we think about that going forward just roughly covering ex auto charge-off.

[Jim Costa:]

I think it's been performing in line with our expectations. Lana, this is Jim and as you could see the portfolio is running off on auto roughly $300 million, thereabouts about 275 quarter in the provision coming down accordingly on auto. So what I would say is, or the allowance. So I would say consistent with recent experience is what you should expect going forward there is nothing that's evolved in the portfolio that has surprised us and therefore our forward expectations would be consistent with recent history. There is some seasonality, I ask you to keep a light on that year-over-year comps are certainly important, but really no change in the projected outlook.

[Lana Chan:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Ken Zerbe from Morgan Stanley. Please go ahead with your question.

[Ken Zerbe:]

Thanks, good morning. First question, just on Slide 11 the servicing fee income down I guess $3 million year-over-year. Should we expect -- is that the entire servicing fee line, so if -- I'm not sure how much is left over, but I assume probably some $10 million but is that whole line go away as the auto loans go away or is there some of a mismatch there?

[Brian Maass:]

So now, this is Brian. So that line will continue to go down as it relates to auto servicing fee income, but we also do have servicing fee income on our consumer real estate portfolio. So long it won't go down to zero.

[Ken Zerbe:]

Okay. Even though, all right -- the $3.2 million is including both the auto and the resi portfolio.

[Brian Maass:]

That's correct.

[Ken Zerbe:]

They were combined down to that much.

[Brian Maass:]

They are combined into that line for us, the $3 million decline probably relates to auto from a year-over-year perspective, but we want you see remaining on that line would be both auto as well as consumer real estate.

[Ken Zerbe:]

Sure. Okay, that's fair. And sorry, just going back to the expense piece, I just want to be really clear, I think you mentioned this to Lana's question that some of the expenses could actually come down, but it didn't sound like you meant all the expenses would come down. So I mean is if it was there anything unusual in terms of our any unusual items that aired on the low side this quarter that it might tick up next quarter?

[Brian Maass:]

Yes, I mean there are certain things like even you saw there are as it relates to some of the, I think it's occupancy and equipment now that has some of our hardware and software costs and some of the investments that we've made into the technology. So some of those lines can continue to go up, but again I look at, in general, you're going to see a lot of expense control management between now and into the close of the transaction.

[Ken Zerbe:]

Got it. So it probably focuses more on the efficiency ratio rather than the dollar numbers?

[Brian Maass:]

Correct, and it may not, as you know we've got just seasonality in our business overall. Right, so we've got $650 million more of assets in Q1, those assets, some of that will come down as we get in the quarters, two and three. So you can't necessarily look at everything on a quarter-to-quarter basis, but when you look at it on a year-over-year basis, we think we're going to be able to continue to improve efficiency ratio for the full year 2019. And then when we get into the other side of the transaction, we are going to significantly, be able to improve our efficiency ratio as well.

[Ken Zerbe:]

Got it. And just real quick question is, since you brought up seasonality - it would, how much is compensation seasonally higher in first quarter versus a second?

[Brian Maass:]

I don't know the exact dollar amount that contributes into there, there's obviously certain compensation things that appear in Q1 that you don't have in later quarters including extra FICA taxes and things like that I don't have a specific dollar amount to give you on that, but I can follow up.

[Ken Zerbe:]

Okay. I think it's FICA taxes, I was thinking about specifically. All right, thank you very much.

[Operator:]

Our next question comes from Brock Vandervliet from UBS. Please go ahead with your question.

[Brock Vandervliet:]

Thanks, good morning. Just following up on that servicing question, so what's the current breakdown between auto and consumer real estate?

[Brian Maass:]

I don't know the split between that for the, for the end of Q1. We can follow up on that.

[Brock Vandervliet:]

Okay. Yes, I was just trying to get a sense of if it's mostly auto, it's mostly going to go away, that's the, that's the concern.

[Brian Maass:]

Just on that point though, there will be a revenue decline associated with that servicing fee income going away, but there will be expense decline that goes away as well as we're servicing those loans and just as a reminder, even though we given up revenue with the run-off of auto and if you look at our interest income from auto is actually down $15 million in Q1 of this year versus Q1 of last year. But overall, our consolidated interest income was up $27 million to $28 million. So, even though we will have some of these revenue headwinds, even as it relates to servicing from the auto book. We've done a really good job of adjusting the expense base, improving the risk profile of the organization and even with those revenue headwinds on a year-over-year basis from last year. We've increased our EPS 18% on a core basis from first quarter of last year to first quarter this year. So we still feel confident we can manage, even with that little bit of servicing revenue that's going to run away from us.

[Jim Costa:]

Yes, this is Jim. The only thing I would add to that is really the servicing revenue approximates our costs around it. So I think Brian spot on, from the standpoint as servicing revenue declines, the expense will go away with it.

[Brock Vandervliet:]

Okay, little bottom line impact. Just stepping back on total loan growth as you look at auto expected to fade out $800 million to $1 billion this year, would it any sense of what you're just total average loan growth could run for the year.

[Brian Maass:]

Yes, this is Brian. I'd say, similar to the guidance we gave at the beginning of their experienced last year, excluding auto we really see mid-single digits. Right now, even just Q1 versus Q1 of last year were up 7%. So mid-single digits, somewhere in that neighborhood as what we think we can achieve in the rest of our businesses, we're seeing good growth, as Craig said, inventory finance up 8.4% year-over-year, commercial up 5.6%. So from that regard, we feel good about the loan growth.

[Brock Vandervliet:]

Okay, thank you.

[Operator:]

[Operator Instructions] Our next question comes from David Chiaverini from Wedbush Securities. Please go ahead with your question.

[David Chiaverini:]

Hi, thanks. Couple of questions, starting with inventory finance, so a year ago you put in place a few new programs in inventory finance are the new partners performing as expected in the reason I ask is because I noticed a modest uptick in net charge-offs and delinquencies there.

[Craig Dahl:]

Yes, this is Craig. Yes, everything is basically performing as we would have expected it to the new programs have been performing is as we would expect and so some, some of that charge-off and delinquencies changes are simply the normal year end kind of activity that we, that we wouldn't encounter so.

[David Chiaverini:]

Okay, great. And then shifting gears, you've mentioned about how Chemical and TCF have complementary at lending products, I was curious when do you expect the training to occur for the lenders on both sides to learn about the new products? And to ask another way, when can we expect a possible uptick in loan growth from the merger, would it be a year after closing or as soon as a couple of quarters after closing?

[Craig Dahl:]

As far as the training goes, one of the items is it's not really loan growth immediately after the merger is not going to be depending on how well trained the bankers are because we don't want the bankers and the sales teams to performing the things that they're already doing, and that sort of training, product training will be phased in over time, but it won't be necessary for them to do their day one job. As far as trying to predict exactly when loan growth, one of the things that we've talked about is how little customer and sales team disruption there is. So, our objective is going to be to hit the ground running from the merger point, and to have a loan growth yield literally immediately upon the consolidation of the company, because we're not going to be kicking sales teams away from their customers, we're not going to be changing bankers territories, those kinds of things are not going to be happening in our deal.

[David Chiaverini:]

Great. Thanks very much.

[Operator:]

Thank you for your questions today. Should any investors have further questions, Tim Sedabres, Director of Investor Relations will be available for the remainder of the day at the phone number listed on the earnings release. I'd now like to turn the conference call back over to Mr. Craig Dahl for any closing remarks.

[Craig Dahl:]

I just wanted to say thank you to everyone for listening this morning. As I think about the merger of Equals, I want to reiterate why we believe this partnership makes such good sense. First, it provides enhanced scale and capabilities, a combined organization will be strategically positioned to capitalize on market opportunities and better serve our customers. Together, we'll have the scale to invest, compete and outperform. Second, it accelerates the strategic evolution of both banks. Complementary operations from each bank will broaden the opportunities to capture greater market share. Third, it provides a more balanced loan and deposit mix, which brings upside growth potential with lower relative concentrations, while maintaining the strong and aligned credit cultures of both banks. Finally, it provides complementary values and community focus. We both share a legacy of developing deep community ties along with core values centered around customer service, accountability, and adaptability to market changes. This partnership will only strengthen this commitment going forward. I'm pleased with the progress we have made to date and have the utmost confidence in our integration leadership team to ensure we deliver on our commitments. We appreciate your interest and investment in TCF. Thank you.

[Operator:]

Ladies and gentlemen, with that, we will conclude today's conference call with you. Thank you for attending today's presentation. You may now disconnect your lines.