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TCF Financial Corporation (NYSE:TCF)
Q3 2019 Earnings Call
Oct 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to TCF's 2019 Third 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]

At this time, I'd like to introduce Tim Sedabres, Head of Investor Relations, to begin the conference call.

Timothy R. Sedabres -- Senior Vice President, Director of Investor Relations

Good morning and thanks for joining us for TCF's third quarter 2019 earnings call. Joining me on today's call will be Craig Dahl, President and Chief Executive Officer; Tom Shafer, Chief Operating Officer and President of TCF Bank; Dennis Klaeser, Chief Financial Officer; Jim Costa, Chief Risk Officer; and Brian W. Maass, Deputy Chief Financial Officer and Treasurer.

In just a few moments, Craig, Dennis, and Jim will provide an overview of our third quarter results. They will be referencing a slide presentation that is available on the Investor Relations section of TCF's website at ir.tcfbank.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 that actual events or results may differ materially. Please see the forward-looking statement disclosure in our 2019 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of September 30th, 2019, and 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.

Craig R. Dahl -- President and Chief Executive Officer

Thank you, Tim. Good morning and thank you for joining us on our first earnings call as the new TCF team. As Tim mentioned, I'm pleased to be joined here this morning by Dennis, Tom, Jim, and Brian.

Let me start by recapping a few key highlights from our third quarter earnings and then share an update related to our merger and integration activities. After that, Dennis will share more details on our third quarter financials, and Jim will make a few remarks around credit quality.

To begin, we closed the quarter with $46 billion in total assets, including $34 billion of loans and leases funded with $35 billion of deposits. Both the loans and deposits are comprised of a complementary mix of consumer and commercial relationships as a result of bringing together both banks. The top 10 leading market share in the Midwest, along with dedicated team members across the footprint, we have the size, scale and product offerings to compete and win in our markets.

We have been hard at work and have completed numerous activities to date, including closing the merger on August 1st and completing all Legal Day One work streams; repositioning the balance sheet by selling securities; terminating interest rate swaps and transferring the legacy TCF auto portfolio to held-for-sale; continuing to drive organic growth both in loans and deposits; and authorizing a $150 million share repurchase. Dennis will provide more details on these actions.

I continue to believe we have a tremendous opportunity in front of us with the ability to grow and take market share in various ways, including building on the expertise in our commercial banking and commercial real estate groups to newly expanded markets; leveraging our expertise in inventory finance and capital solutions across our larger commercial customer base; bringing market-leading consumer digital banking offerings to a broader set of customers; and expanding our mortgage banking products to a larger base of over 1.5 million customers. We are in the very early innings of what I believe we can accomplish together as one TCF, and I look forward to sharing our progress and successes with you as we go forward.

Slide 4 opens with a few highlights from the third quarter results. Although our reported earnings were impacted by merger-related and non-core items for the quarter, adjusted for these items, we earned $0.98 per share. Even as we closed on the merger of equals during the quarter, we delivered an adjusted efficiency ratio of 58.7% and an adjusted return on tangible common equity of 15%. These results do not yet reflect the full contribution from our targeted cost synergies. Our results should only improve as we get closer to our run rate targets in the fourth quarter of next year.

Underlying these results was continued momentum across our businesses with deposit growth up 4% from a year ago and deposits excluding CDs increased by 7% year-over-year. On the lending side, we saw held-for-investment loan growth of 8% year-over-year, excluding the legacy TCF auto portfolio. And this included strong growth across our C&I and CRE portfolios. We also expect higher production going into the fourth quarter as we have a strong backlog in leasing and are seeing a large mortgage origination pipeline.

As I've said before, each bank had momentum going into this partnership on a stand-alone basis, and these core results demonstrate that continued trajectory. Finally, we posted a common equity Tier 1 ratio of 10.9% at quarter end, which was above the 10% target we shared at deal announcement. As a result of this increased capital, we announced a $150 million share repurchase authorization, which will continue our disciplined capital deployment strategy.

Turning to Slide 5, our integration program and activities remain on track. We closed on the merger on August 1st, which was at the early end of our expected timing and was supported by timely applications and approvals. Our integration teams are hard at work executing on our project plan and preparing for upcoming key milestones.

Recent actions include a combined Board of Directors comprised equally of representatives from each legacy bank. Our Board is comprised of exceptional leaders from their fields with diverse backgrounds and experience. We have consolidated governance and committee structures, both at the Board and management levels, to ensure we have one integrated governance and control framework for the organization.

We have aligned internal policies, including establishment of an integrated risk appetite framework and credit concentration limits. Additionally, credit underwriting policies and BSA policies have been aligned across the Company. Our cultural integration activities are well under way. We have spent a good deal of time traveling the footprint and meeting with team members across the bank. We have met with key leaders across the organization in their markets. And as we visit with more colleagues and see the passion they have for their customers, I have even more confidence in our ability to compete and win in these markets. We are already seeing positive momentum for leveraging our expanded product set and expertise across the footprint.

On the leadership side, We have named over 90% of functional leaders across the company to date.

Additionally, we recently hosted a meeting of our broader senior leadership team, representing the next layer of leadership across the organization, their engagement and passion was inspiring and demonstrated the substantial expertise we have across the company. The conversion of many key system is foundational in our integration plans and we are preparing for the first wave of system conversion work streams.

We have selected a provider for the core banking platform and have negotiated executed the related contract our teams continue to remain focused on putting our clients. First, during the integration work that includes both maintaining top service levels, as well as not losing momentum on new business development activities.

Not directly related to the merger, but indicative of our continued focus on managing the business effectively and efficiently, we implemented a set of branch rationalization initiatives. This includes closing four branches in Indiana and Ohio, which were outside of our core market footprint and also announced the closing of 17 branches within grocery store locations in Chicagowe have named over 90% of functional leaders across the Company to date. Additionally, we recently hosted a meeting of our broader senior leadership team representing the next layer of leadership across the organization. Their engagement and passion was inspiring and demonstrated the substantial expertise that we have across the Company.

The conversion of many key system is foundational in our integration plans, and we are preparing for the first wave of system conversion work streams. We have selected a provider for the core banking platform and have negotiated and executed the related contract. Our teams continue to remain focused on putting our clients first during the integration work. That includes both maintaining top service levels as well as not losing momentum on new business development activities.

Not directly related to the merger, but indicative of our continued focus on managing the business effectively and efficiently, we implemented a set of branch rationalization initiatives. This includes closing four branches in Indiana and Ohio, which were outside of our core market footprint and also announced the closing of 17 branches within grocery store locations in Chicago and the Twin Cities aligned with our ongoing review of branch profitability.

As we move into the fourth quarter, there are numerous items coming up on our action plans, including implementing a combined benefit plan for all employees effective on January 1. Our human capital management team did a great job to get us to a single, comprehensive benefit plan for all employees. On the systems' front, we will consolidate to one mortgage lending platform. We will continue to execute on system conversions in waves as we move forward. Where we can, we are derisking the conversion milestones. We are working through the continuation of staffing optimization to support our targeted cost synergies from compensation and overlapping resources and taking steps to do right by our employees in the process. Finally, we have roadmaps in place regarding the launch of business synergy initiatives.

Before I turn it over to Dennis, I want to thank all of our employees for all of their hard work to date on ensuring we continue serving our customers. We all come to work every day as part of one TCF, and I believe we have the scale, products, talent, and expertise to compete and win against any competition. I look forward to our top -- to our opportunity in 2020 and the future.

I will now turn it over to Dennis to provide more details around our third quarter financial results.

Dennis L. Klaeser -- Chief Financial Officer

Thank you, Craig. Before I begin, I want to remind everyone that the third quarter results as presented in the earnings release reflect the mid-quarter closing of the transaction on August 1st. As a result, our numbers include July financials for legacy TCF only and reflect the combined new TCF financials for August and September, inclusive of the addition of Chemical. The income statement as presented in the earnings release does not reflect the full quarter of earnings, nor does it reflect a full quarter of expenses. In the presentation today we have added selected items to assist in establishing a relevant full quarter view as we move into the fourth quarter.

Starting on Slide 6, we highlight the purchase accounting marks as a result of the closing of the merger. The credit mark came in at $183 million based on the addition of the Chemical loan portfolio and was slightly lower by $6 million compared to our estimate in January when we announced the transaction. The interest rate mark came in at $66 million, much lower than our initial estimate given the substantial decline in interest rates between January and August. Tangible book value per share was $26.18 at quarter end, 11% higher than we projected at January's announcement. The result of lower interest marks as well as not all merger-related costs being recognized on day one both support a higher tangible book value per share.

In addition, the core deposit intangible came in at $178 million, slightly above our estimate from January. CDI is expected to be amortized over 10 years and is expected to be approximately $5 million in the fourth quarter.

The result of purchase counting marks as well as the timing of merger-related expenses gives us much higher capital at the close of the transaction, while reducing the related accretion income we would have otherwise have accreted in overtime. The common equity Tier 1 ratio was estimated to be 10% at close but was at 10.9% at the end of September. Purchase accounting accretion in the third quarter was $28 million, CDI amortization was $4 million for the third quarter, and the net impact for the third quarter was $24 million.

Purchase accounting accretion of $28 million was elevated for the months of August and September and was benefited by loan repayments and payoffs. We expect purchase accounting accretion to be in the low $20 million range for the fourth quarter, excluding payoffs and prepayments.

Turning to Slide 7, we took several actions during the quarter to optimize the balance sheet of the combined company. Collectively these actions lower our risk profile, reduce asset sensitivity, and enhance capital efficiency and liquidity. We sold $1.6 billion worth of securities during the quarter, which included selected floating rate, corporate non-agency and municipal securities. These actions are intended to reduce credit risk of the securities book, help us manage interest rate risk as we look to reduce asset sensitivity, and improve overall liquidity and capital efficiency of the portfolio. We did not redeploy all the sales proceeds as of quarter end, and we had approximately $1.3 billion remaining to be reinvested, which we were layering over the coming quarters.

We also terminated a $1.1 billion interest rate swap during the quarter, which all else being equal, we expect to reduce our asset sensitivity by approximately 60 basis points. The termination of swaps resulted in a $17 million pre-tax expense. Lastly, we transferred the legacy TCF auto finance portfolio to held-for-sale and marked the portfolio to fair value, which resulted in a $19 million pre-tax loss included in the gain and sale line item. At quarter end the portfolio totaled $1.2 billion. We are being proactive and exploring options for the portfolio which has been in runoff mode since the fourth quarter of 2017.

As shown on Slide 8, you can see the strong mix of our combined loan and lease portfolio, which is comprised primarily of commercial based loans, which total 66% of total loans, and the remaining 34% from our consumer-based portfolios. We continue to generate strong loan and lease growth as balances increased $2.6 billion or 8.3% year-over-year, compared to the combined portfolios of TCF and Chemical a year ago, excluding the legacy TCF auto portfolio. This growth has come from across all portfolios with C&I up 11% year-over-year and commercial real estate up 9.5% year-over-year.

Note that as part of merging the two balance sheets, the legacy TCF inventory finance portfolio is now included in the C&I category. Similarly, the legacy TCF leasing and equipment finance portfolio is now split with the loans being in the C&I category and leases being in the lease financing category.

Moving to deposits on Slide 9. We have a well-diversified deposit mix with $8 billion of non-interest bearing balances and CDs representing less than 25% of deposits. In addition to product diversification, we have a strong depositor mix as a result of the MOE. We have brought together the strong consumer deposit base of legacy TCF and a strong commercial deposit base of Chemical, which has created a complementary deposit mix of 62% consumer deposits and 38% commercial deposits. Total deposits have increased by 4% year-over-year and growth of deposits, excluding CDs, increased by $1.7 billion or 7% from a year ago.

The third quarter benefited from strong seasonal inflows of municipal deposits as tax payments drive higher balances. Our cost of deposits in the third quarter was 94 basis points, one basis point below our combined cost of deposits in the second quarter. We expect to see our deposit cost continue to decline over the coming quarters.

Slide 10 highlights that $1.6 billion worth of investment securities sales I mentioned earlier. As a result, we have been able to improve the mix of our investment securities portfolio by reducing interest rate and credit risk enhancing capital efficiency and liquidity. The total securities portfolio of $5.7 billion represents only 13% of total assets. We expect that number to gradually increase as we reinvest over the coming quarters. In the near term, we expect the securities to total assets to be in the mid-teen range. The largest component of the portfolio today is agency MBS, representing two-thirds of the total portfolio and 95% of the portfolio is represented by securities rated AA or AAA.

Turning to Slide 11, we have presented net interest income and net interest margin for both the third quarter, reported period, as well as the September month actuals. Starting with the net interest income in the upper left. The red number one circle represents reported net interest income for the third quarter of 2019, reflective of a stub period of $371 million with $28 million of the total coming from purchase accounting accretion. As a result, the net interest income, excluding accretion, was $343 million. As a reminder, this $343 million does not reflect a full quarter of net interest income because the merger closed on August 1st. Our income statements results, including net interest income, reflect full legacy TCF results for July and new TCF results for August and September. Reported results exclude Chemical results for the month of July.

As noted by the red number two below the chart to help provide a starting point for net interest income going forward, we provided our actual net interest income for the month of September which totaled $143 million and included $15 million of accretion, resulting in net interest income for the month of September, excluding accretion, of $128 million. Taking the $128 million in September as a baseline, this puts us at a starting point entering into the fourth quarter for net interest income, excluding accretion, of $384 million.

In addition, we expect purchase accounting accretion in the fourth quarter to be in the low $20 million range and be additive on top of the $384 million. This does not include any accelerated payoffs or prepayments which we did see a fairly decent amount of during the months of August and September. We are presenting net interest margin in the similar format in the upper right portion of the slide. We reported third quarter net interest margin of 4.14%, which included 31 basis points of purchase accounting accretion, resulting in a margin excluding accretion of 3.83%. Again this reflects the stub period accounting math as it excludes one month of Chemical impact from July.

Our margin, excluding accretion for the month of September was 3.7%, which provides a starting point as we enter the fourth quarter. This reflects the full impact of both portfolios. Going forward, we expect various factors to impact this 3.7% margin. Our continued reinvestment in our securities portfolio will likely result in a lower margin but will add additional net interest income dollars and be accretive to return on capital. In addition, we expect a rate cut this week or in December to be additional margin headwind as our combined balance sheet remains modestly asset sensitive.

All of these factors alongside earnings asset growth will impact net interest income and margin moving forward. We do maintain levers in our at our disposal to combat, again, some of these factors. We should see a benefit in the fourth quarter from deposit repricing we have enacted to date and expect to see deposit cost decline over the coming quarters. Additionally, we will continue to look to optimize our asset mix, however, the pace of Fed rates and LIBOR moves will continue to drive the trend for asset yields.

Looking at Slide 12. Reported non-interest income was $94 million in the third quarter. This included several non-core items: a loss of $19.3 million from the transfer of the legacy TCF auto to held-for-sale; a loss of $17.3 million related to the termination of interest rate swaps; a $4.5 million impairment on loan servicing rights; and a $5.9 million gain on the sale of investment securities. Excluding these items, adjusted non-interest income was $129 million. Again, the third quarter results exclude July non-interest income from Chemical. As we look ahead to the fourth quarter, we would expect non-interest income to come closer to the levels from the combined Chemical and TCF that you can see for the second quarter and third quarter of '18 -- second quarter of '19 and the third quarter of '18.

Slide 13 highlights non-interest expense and $180 million of merger-related cost savings we expect to achieve by the fourth quarter of 2020. As shown in the upper left chart, when we announced the transaction in January, we utilized Street's consensus for both banks for the combined 4Q '20 non-interest expense, which totaled $366,000 at that time and was inclusive of expected cost savings -- cost expense growth and inflation. Taking out $45 million of quarterly cost savings or $180 million annualized, we would have implied fourth quarter '20 expense of $321 million.

Looking at the chart in the upper right, our reported non-interest income expense in the third quarter was $425 million, including $111 million of merger-related expenses and $6 million of non-core items resulting in an adjusted non-interest income of $308 million. Keep in mind, again, this is a stub period basis, so [Indecipherable] reflective of the current full quarter run rate.

The combined expenses of both banks for the second quarter of 2019 provides a full quarter view of $341 million, excluding merger-related charges. Based on August and September actuals, we remain in a similar range in the lower $340s million as we enter the fourth quarter. We have realized $4 million of cost savings to date with $41 million further to realize as you can see in the bottom-left chart. We expect the pace of cost savings to ramp up as we move through 2020. We do expect some level of natural expense growth and inflation on top of the cost energy savings with merit increases in early 2020 as an example. Net of these factors, we believe we can drive expenses below the initial implied target of $321 million by the fourth quarter of 2020.

Overall, we are focused on driving toward an efficiency ratio that is below the pure median after completion of our cost savings. Our adjusted efficiency ratio in the third quarter was 58.7%, which is adjusted for merger-related expenses, non-core items, tax-equivalent adjustments, intangible amortization as well as an adjustment for lease financing equivalent depreciation. We will continue to keep you updated on our progress in future quarters.

With that, I will turn it over to Jim Costa to provide an update on credit.

James M. Costa -- Chief Risk Officer

Thank you, Dennis. Turning to Slide 14. As we brought together the organizations this quarter, we continue to see strong credit performance across the portfolios. Reported net charge-offs were 39 basis points and are calculated based on average loans for the quarter. Charge-offs for the quarter total $29 million, with approximately half of the $29 million coming from a single C&I credit. Expected losses for this credit were fully absorbed in the third quarter.

Absent this credit, we would have been in the low end of the combined charge-off range we had seen over the past year. Non-accrual loans and leases of $182 million represented 54 basis points of loans and leases, while the allowance for loans and lease losses was only 36 basis points. However, Chemical loans added in the merger were recorded at fair value as of August 1st without a carry-over of the related allowance. Therefore, the allowance including the discount on acquired loans was 89 basis points of loans and leases.

Lastly, over 90-day delinquencies, a leading indicator of credit quality for many of our portfolios, were just 9 basis points for the quarter. Overall, the additional diversification of the loan and lease portfolio as a result of the merger of equals, we believe positions us very well as we continue to stay focused on the overall credit profile of the balance sheet.

Lastly, let me share a brief update on our CECL work and expectations. Our teams are conducting parallel runs of CECL process against our current incurred loss for ALLL process. Based on our work completed to date, we expect CECL allowance could result in an increase to the reserves of 35% to 45% of the current ALLL in place for legacy TCF portfolio of $17.8 billion. We expect our commercial portfolios with relatively short durations to not see a meaningful net change in reserves. However, our consumer lending portfolios, including mortgage and home equity, are expected to see a greater impact. Related to the legacy Chemical portfolio, we do not expect the CECL mark to be materially different than the level day one credit mark.

With that, I'll turn it back over to Craig.

Craig R. Dahl -- President and Chief Executive Officer

Thank you, Jim. So turning to Slide 15. The highlight from a capital perspective this quarter is the higher level of capital at merger close than what we initially guided. With this excess capital today above our near-term target, we are pleased to have announced $150 million share repurchase authorization. This will give us increased capital flexibility as we move forward and is consistent with our desire to remain thoughtful around capital deployment in order to drive value for shareholders.

As we think about capital priorities going forward, our primary focus will be on organic growth and the ability to leverage the scale and products that we have as a leading Midwest bank across our markets; second is dividends, where we think a payout ratio in the 30% to 40% range makes sense and is competitive with peers; next, our share repurchases I mentioned; and finally, corporate development opportunities if and when they arise.

No matter which priority we take action on, we are committed to being thoughtful and disciplined and expect to continue to put the shareholder impact at the forefront of our thought process. Overall, we remain confident in our ability to drive toward a top quartile return on average tangible common equity, which we indicated at deal announcement.

And with that, I'll open it up for questions.

Questions and Answers:

Operator

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jon Arfstrom from RBC Capital Markets. Please go ahead with your question.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Thanks. Good morning, guys.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Dennis, maybe let's start with you on expenses. I think it's good that you talked about being able to get below that implied fourth quarter '20 consensus target. It looks like you might get there a quarter early if you take that $75 million of cost saves and layer that through. I know it's a year out, but what are you saying about the rest of it, the $105 million in annualized cost savings that would be left. Are you saying that that comes through because of the conversion in 3Q and how quickly can we see that come through?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. That large chunk of cost savings really is triggered by the completion of the core operating systems, which we were targeting in the third quarter. And our goal is to achieve that as quickly as possible after the conversion. However, there is a little bit of delay in full realization of that because if we do, we need to run our systems redundant for a short period of time just to be able to test the systems. Exactly how long we run redundant with some of their functions is yet to be determined. So some of that could spill into the fourth quarter, but our goal is to get that realized as much as we can by the end of the third quarter.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay. Say that again, Dennis. You're just saying some of that spills into the fourth quarter but maybe not material. Is that -- is that the message?

Dennis L. Klaeser -- Chief Financial Officer

That's the goal, yeah. That's the goal

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay. Okay. $341 million from the Q2 combined number less $4 million, does that feel like a good run rate for Q4 expenses?

Dennis L. Klaeser -- Chief Financial Officer

I think you misspoke. You said $341 million less $4 million.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Right. You laid out the Q2 '19 combined at $341 million, and I think you said in your comments that that's a decent run rate or that was representative of what you saw in 3Q combined.

Dennis L. Klaeser -- Chief Financial Officer

Yes, yes. That's roughly the same level. We had some seasonal increase in commissions to particularly the residential mortgage lenders. So some of that offset the additional realization of cost savings. But let's say we're at that $341 million level and we have another $41 million worth of quarterly cost saves to realize, that puts us down to roughly $300 million or so of a run rate. But that run rate is going to be impacted by the -- I mentioned in my prepared remarks, by the annual inflation, salary increases, and so forth, and the potential ***Part 13***

so forth, and the potential increase in some additional hires. But net-net, we expect to come below the $321 million.

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay, great. Thanks, guys. Appreciate it.

Dennis L. Klaeser -- Chief Financial Officer

Thank you.

Operator

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

David Long -- Raymond James & Associates, Inc. -- Analyst

Good morning, everyone.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Dennis L. Klaeser -- Chief Financial Officer

Hey, David.

David Long -- Raymond James & Associates, Inc. -- Analyst

Can you talk about any progress that you've made to date on the revenue synergy side and maybe any hires or moves to find a leader in the C&I side in the TCF footprint? And anything on the revenue side that you can point to at this side -- at this time.

Craig R. Dahl -- President and Chief Executive Officer

Yeah, I would say -- this is Craig. I would say that at this point, it's all been in the planning phase. The execution is really going to be the next step, but it will be starting in the fourth quarter. We have not announced the hire, but we're very -- we're very confident of our ability to act on the C&I expansion in the TCF -- in the TCF territories, and we'll be having some updates on that rather soon. And I'll have Tom Shafer add any of his comments to that question.

Thomas C. Shafer -- Chief Operating Officer

Yeah. So Dan Terpsma is running the middle-market side of that. Some of the C&I does migrate to the national businesses that we have. I think the plans are well under way and we're very confident with the conversations that we're having that we'll be executing, as Craig said, beginning in the fourth quarter.

David Long -- Raymond James & Associates, Inc. -- Analyst

Got it, OK. Thanks for the color there. And then, Jim, as it relates to that single C&I credit that made up I think you said half of the charge-offs in the quarter, any detail that you can give on that, what industry, is it part of a larger trend, and maybe any other trends that you've seen in credit?

James M. Costa -- Chief Risk Officer

Yeah. I appreciate the question, David. Yeah, it was say a credit at the healthcare sector, a diagnostics lab and the circumstances there are there was a regulatory change which really disrupted the business model. It was not indicative of a drop-off in demand or a weak balance sheet or anything that would be sort of emblematic of a change in the credit cycle. This is really a unique circumstance where a state legislative change impacted the business model.

And so it really is an extraordinary situation. It did, as you mentioned, represent half of the credit charge-offs for the quarter. And further to that point, you will note that we moved the Gateway portfolio to held-for-sale. So sort of the core charge-off content really is quite de minimis. We're happy with that. And as we look across the broader portfolios, we're watching I'm sure all the same things you are in the residential real estate side, collateral values, the loan demand, delinquency trends. There is really nothing that has surface that would cause us concern, but we do recognize where we are in the cycle and our attention is well placed.

David Long -- Raymond James & Associates, Inc. -- Analyst

Got it. Thanks for the color there. And then lastly, Dennis, thinking about the City of Detroit and that win that you guys had for the large deposits last year at Chemical, has that relationship fully been brought on board at this point? And then any other opportunities on the municipal side for you guys?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. We made substantial progress there and deposits have ramped up. There are some incremental deposits we expect to bring in from the city, but they are fairly incremental to where we sit today. And yes, we have opened doors to a variety of other municipalities where we've made some progress and brought in some additional deposits. It's a great marketing tool for us. It demonstrates our level of sophistication to be able to handle their deposits. We can handle just about any municipality's deposits across the Midwest.

David Long -- Raymond James & Associates, Inc. -- Analyst

Excellent. Thanks a lot for the color, guys. Appreciate it.

Operator

Our next question comes from Scott Siefers from Sandler O'Neill. Please go ahead with your question.

Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Morning, guys. Thank you.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Hey, Dennis, just want to make sure I'm crystal clear on this expense guidance. So it sounds like for expenses, you're saying that you get to $321 million by the third quarter of next year and then that should be a low watermark, right. I think you said maybe a little more spills over into fourth quarter, but basically 3Q '20 is a low watermark of about $321 million. Is that all correct.

Dennis L. Klaeser -- Chief Financial Officer

I'm saying 4Q is below $320 million. It will be a bit higher than that in the third quarter, because in the third quarter a lot of our -- a large chunk of our expenses are still running well into the quarter. So there is a significant drop from 3Q to 4Q down to that $320 million or less level in 4Q.

Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Okay, all right. I think that clears it up. I was wondering sort of where that 90-day gap came from. Okay so fourth quarter $321 million or below.

Dennis L. Klaeser -- Chief Financial Officer

Yeah.

Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

That's a low watermark then. Okay, good. Thank you for clarifying that. And then could you maybe walk through what specifically TCF's rate positioning is now versus what it was before all the actions, I guess you had that securities portfolio, the swaps, and the auto moved to held-for-sale. So maybe, a simple way would be, what would have been the impact to the margin of a rate cut previously and then what would it be now?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. So I'll start out and Brian can chime in, too, if he'll be helpful here. So first of all, the legacy Chemical was naturally liability sensitive, and we moved ourselves to relative neutral position with the help of an interest rate swap. So we unwound that swap to move the legacy Chemical side of the balance sheet back to a liability sensitivity. And that moderated the level of asset sensitivity of TCF.

Now, we are still net-net on a combined basis asset sensitive with a 100 basis point [Indecipherable] down, we would expect our net interest income to be reduced by a little less than 5%. And by further deployment of the securities portfolio and then some strategies within the loan portfolio, our goal is to further moderate that level of asset sensitivity, and hopefully we're going to see that impact already here in the fourth quarter. The exact impact to the margin depends on a number of factors in terms of the timing of changes and so forth, but I think that will give you a sense as to how sensitive margin could be to the further actions of the Fed.

Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Okay, perfect. Thank you. And then if I could jump back to that CECL commentary. I think you said 35% to 45% increase in the reserve. Did that include the impact from sort of that double-count notion of sort of remarking the legacy chemical portfolio again or is there another higher number that is the total all-in increase to the reserve? And if so, what is that total increase to the reserve from CECL?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. Jim's comment was purely focused on the legacy TCF portfolio, what is the existing on-balance sheet allowance for loan loss and the 35% to 45% increase in that level -- that loan loss. You're correct, the Chemical portfolio, essentially the allowance for loan losses, off-balance sheets at that day one credit mark, which was $180 million or so. At this point we're not fully prepared to give guidance exactly what we think the CECL mark is going to be, but my expectation is, it's in that ballpark range. But there may be some noise to that depending on the final analytics around that.

Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Okay. All right, perfect. Thank you very much.

Operator

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

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

Great. Good morning. Dennis or Craig, maybe for you. I think you said your prepared remarks excluding the auto run-off, loan growth was about 8% year-on-year and fourth quarter I believe is seasonally pretty good for you guys. How should we be thinking about outlook for growth next year? Is kind of mid- to upper-single digits kind of a reasonable excluding the auto or maybe the puts and takes on that?

Craig R. Dahl -- President and Chief Executive Officer

Yeah, this is Craig. I think that's what we've talked about before. Chemical has always been at the high-end of single digit or double digit and TCF we were moving toward that short of the auto run off and so -- but you're right, the fourth quarter is particularly good for us, and so we would expect really a strong quarter of originations in this first full quarter.

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. And then if we kind of fast forward through and get the cost saves that you've outlined for us, I think you said in your remarks that the goal is efficiency ratio better than peers. In the deck you show 57%, and obviously that's a bit of a moving target because of rates, but is that 57% is kind of -- is that what you're kind of trying to steer us to over the next four, five quarters?

Dennis L. Klaeser -- Chief Financial Officer

No, it will be stepping down from there and it will -- depending on a variety of factors, our expectation will be stepping -- will be moving down from that level as we move to the end of next year.

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. So below 57%, Dennis, by the end of next year, is that what you're saying?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, yeah. Our original guidance when we announced the deal was 53%. Obviously, the industry is facing some revenue headwind with margin. So it may be difficult to get to that level, but we're going to do our damnedest to to get us closer to that as we can.

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

Great. And then maybe one for Jim. I think you said half the charge-offs were on that one credit. So that would put kind of blended charge-offs in that roughly 20 basis point range. Is that kind of a fair way of thinking about credits -- credit costs plus provisioning as you see the world today?

James M. Costa -- Chief Risk Officer

I would think that that would be a generous estimates. So we would hope to be inside of 20 basis points. But not a bad starting point.

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, great. And then, Dennis, maybe the last one. Tax rate, you had a lot of moving parts in the quarter. Could you help us with Q4 and kind of 2020?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, so the normalized tax rate on the combined entity is going to be 22% to 24%, let's say 23% is a normalized rate. In the fourth quarter there will be some discrete items that effectively bring the rate down below that. That is probably not important for you to model that out. The particular discrete item that we're going to see is we're going to see another one of the historic tax credits that come through the legacy Chemical that you are accustomed to seeing in the historically legacy Chemical side. But going forward, I would say the 22% to 24% is the range that you should be modeling.

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

And that's an effective ...

Dennis L. Klaeser -- Chief Financial Officer

Yes.

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

[Indecipherable] Thank you for your help.

Operator

Our next question comes from Steven Alexopoulos from JPMorgan. Please go ahead with your question.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Hey, everybody.

Craig R. Dahl -- President and Chief Executive Officer

Hey, Steve. Morning.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

To start on the fee income side. So core fee income was fairly well off from the historical and a combined basis [Indecipherable] really service charges. What drove that?

Dennis L. Klaeser -- Chief Financial Officer

Steve, I don't know that I have a particular item for you. Obviously there was lots of noise in the quarter, and we're suggesting that when you look at the trend, it's really better to look at the prior quarters as being the indicative level of the starting point. Fee income should be seasonally a bit stronger in the fourth quarter, but over time and looking at the prior quarters is really the range that you should be expecting for us to build off of.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Okay. Okay. And then Dennis, not to beat the dead horse on the expenses. So we're going to get to the fourth quarter run rate and then is the assumption that you basically will stay there may be plus or minus some inflation until that system conversion gets done and then the remaining cost saves will hit? Is that the right way to think about it? Or will any material cost saves come through beforehand?

Dennis L. Klaeser -- Chief Financial Officer

The $321 million is fully realizing the cost saves -- less than $320 million is fully realizing the the cost saves. Now there is a possibility that we're going to look for incremental cost saves there, but I don't -- that isn't particularly the target for us to drive that much lower than that. We're always sort of interested in the geography of the expenses and when there is opportunities to reduce cost within non-revenue producing areas to allow us to further invest in revenue producing areas, we're going to do that. But pushing down below that $321 million level in the fourth quarter and then going forward I think the reasonable baseline is just assuming the natural inflation adjustments to that going forward.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Okay. I probably should have made clear. I meant when we get to the 4Q '19 run rate, so through the beginning of 2020, will any material cost saves hit before that system conversion, or is it really after that date when the remaining cost saves will hit?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, sorry, I misunderstood. So over that four-quarter period, fourth quarter this year and going forward, we do have -- we are layering in roughly $75 million worth of cost saves or roughly $70 million worth of incremental costs saves. That's going to be realized over that period of time and then the balance of it realized late in the third quarter, early fourth quarter.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Got it. Okay. And then finally, just on the NIM. What do you -- and I heard the guidance on 4Q, low $20 million? What's the accounting schedule for 2020 and 2021 full year?

Dennis L. Klaeser -- Chief Financial Officer

What's the -- what did you say, accounting schedule?

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

So the purchase accounting you talk about low $20 million for 4Q '19? I don't know if that's the straight line run rate moving forward effectively ...

Dennis L. Klaeser -- Chief Financial Officer

Yeah.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

but I just wanted to see what it was for 2020, 2021.

Dennis L. Klaeser -- Chief Financial Officer

Yeah, so each quarter expect that to moderate by $2 million, $3 million, $4 million, but there's going to be noise in that impacted by prepayments. So if the Fed moves this quarter, while that puts some core pressure on the margin, you may see a pickup in prepayment speeds and therefore a pickup in the level of accretion. And to the extent that we have pick up in accretion, it's just a matter of timing. It's moving accretion that we thought would come in later periods coming in earlier. But I think modeling at in the low $20 million range and expecting that to bleed down $2 million, $3 million a quarter is a reasonable starting point.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

And then, sorry, just one final one. The $1.3 billion that you plan to redeploy, I'm assuming it's going to securities. What's the yield that you'll likely get with that $1.3 billion?

Brian Maass -- Chief Financial Officer

Right. Yeah, so this is Brian. What I would say on that, you saw in third quarter, our reinvestments were around 2.6%. Yields weren't all that different as we started off here in the fourth quarter, probably around that 2.55% to 2.6%. Yields are slightly higher right now. So it's hard to predict where they'll kind of remain as we continue to reinvest those proceeds I'd say probably over the next three to four months, but it's somewhere in that 2.6% to 2.7% range as of right now.

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Okay. Perfect. Thanks for taking my questions.

Operator

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

Nathan Race -- Piper Jaffray & Co. -- Analyst

Hi, guys. Good morning.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Nathan Race -- Piper Jaffray & Co. -- Analyst

Just to clarify on the margin outlook on the core basis for the fourth quarter. So you're at 3.70% September and so I think, Dennis, you're speaking to additional pressure in the fourth quarter, just given the Fed cuts. So are we talking mid-to-low 3.60%s. And then maybe, I guess I'm just curious how much more additional pressure we should expect with each additional Fed cut from that run rate?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, we're hesitant to sort of give the specific basis point guidance there. I think you saw the core sort of trend on the combined company second quarter into the third quarter and you saw rate cut late July and September. So I think that does give you some indication, but there's a lot of factors that are going to go into the ultimate outcome there. So I think there's going to be a range of different conclusions there by our analysts, appropriately so, because at this point, it's difficult to predict that. And obviously, we are going to be as proactive as we can in trying to combat that pressure thinking through in terms of loan mix that we're putting out to the balance sheet. I think we've made very rapid progress in terms of our deposit basis that the teams got together very quickly. In fact, they got together August 1st when we closed the deal, and I think that had a positive impact on the fact that our deposit costs actually stepped down a basis point in the third quarter, and we expect further stepping down of that as we go into the fourth quarter and into the first quarter of next year.

And then, of course, also we expect the volume of earning assets to increase meaningfully, not just from the securities portfolio, but we will have a seasonally strong quarter in terms of loan growth. So the goal is for us to combat that pressure on margin by strategically focused on loan growth, deposit pricing, and we'll see where that shakes out.

Nathan Race -- Piper Jaffray & Co. -- Analyst

Okay, understood. And I guess within that context, can you update us in terms of what the variable or floating rate exposure is within the portfolio, and within that how much is LIBOR over prime?

Dennis L. Klaeser -- Chief Financial Officer

So the portion that is purely floating that's indexed off [Phonetic] prime or LIBOR is roughly 37% or so, plus or minus. And less than half of that is more is LIBOR based, the other half -- more than half is prime based.

Nathan Race -- Piper Jaffray & Co. -- Analyst

Okay, that's helpful. And if I could just ask one more on the buyback. Can you help us just going to understand the pace at which you want to kind of tap that going forward? Obviously capital levels came in ahead of what you guys guided to when the deal was announced in January. So just trying to understand how aggressive you guys could be with the buyback at this point.

Dennis L. Klaeser -- Chief Financial Officer

Again, there's a number of factors that's going to impact the pace. It's going to -- our view in terms of loan growth, short-term and long term, is going to impact that. How quickly we get to the point of selling the auto portfolio is going to impact that; and the stock price is going to impact that. But I think in general, you can assume we're going to be fairly aggressive about it because right now at the stock price we think that it makes sense for us to be buying back stock.

Nathan Race -- Piper Jaffray & Co. -- Analyst

Understood. I appreciate all the color, Dennis, Thank you.

Operator

Our next question comes from Ebrahim Poonawala from Bank of America. Please go ahead with your question.

Ebrahim Poonawala -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

Good morning, guys. And just one more follow-up on NII, Dennis, if I could. When we think about the cash getting redeployed into securities, just if you could give us a sense of is it fair to assume that the average earning assets land around the $42 billion to $42.5 billion in the fourth quarter as we think about a base from where it begins to grow in 2020?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, I think we talked about high-single digit -- mid-to-high single-digit loan growth target over the course of the year with fourth quarter being very strong. So you should expect the growth in the fourth quarter to be at higher end of the range. And then in my prepared remarks, we talked about over the shorter term and that sort of year-end, early 2020, we expect the securities portfolio to get up to the mid-teens of the total assets. And so that would imply in the neighborhood of $1 billion of growth over the next few months or so.

Ebrahim Poonawala -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

Got it. So $1 billion of growth relative to wherever we are in the fourth quarter.

Dennis L. Klaeser -- Chief Financial Officer

Relative to where we're at as of the end of the third quarter.

Ebrahim Poonawala -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

End of the third quarter. Got it, got it, got it. All right. And just moving in terms of the -- move to the held-for-sale for the auto book. As we think about -- assuming that you're able to go through that relatively quickly, how should we think about redeployment of those cash flows? Does it all go into immediately buying the securities, or would you rather keep cash and then deploy it toward funding loan growth?

Dennis L. Klaeser -- Chief Financial Officer

Well, clearly the preference is freeing up that part of the balance sheet, that capital to support the loan growth, bigger margins, higher value from franchise standpoint. So in the short-term, really, it's paying off the incremental higher cost borrowings and being more aggressive in running off higher costing CDs. But it's a combination of redeployment into the loan portfolio and a redeployment into a securities portfolio.

Ebrahim Poonawala -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

And do you expect any additional marks on that or hit on that book as you look to exit or do you think it's fairly marked to market for the current environment?

Dennis L. Klaeser -- Chief Financial Officer

There's always a chance that there is going to be some change upon final realization of the sale. But right now, that's our best estimate. And so that's where we stand today.

Ebrahim Poonawala -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

Got it. Thanks for taking my questions.

Operator

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

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Hi, good morning.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Just on the auto that moved to held-for-sale. Was there anything that happened this quarter that caused you to want to accelerate the exit from that portfolio in terms of the credit dynamics? And I guess what's driving that mark in the portfolio this quarter? Is it really just the market environment?

Dennis L. Klaeser -- Chief Financial Officer

It's a strategic decision. It's a market environment, the fact that the merger got completed, and we're more focused on a variety of other business priorities.

James M. Costa -- Chief Risk Officer

I might just add a comment. This is Jim. We monitor that portfolio very closely the behavior of the delinquency and charge-off has been consistent with what you'd expect with seasonal performance. There's been really no change in our expectations. It's running out just as we would have expected.

Dennis L. Klaeser -- Chief Financial Officer

Yeah. It's a great portfolio for an acquirer to buy and for us it's something that we made a decision not to be focused on that niche anymore. And over time right now that portfolio is incrementally profitable to us, but I say incrementally. But as that portfolio runs down, it becomes incrementally unprofitable. So it's the right time for us to take a more proactive approach to divesting in that portfolio.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Okay. And then when we look at the planned sale of that portfolio and then the securities restructuring and sitting on the cash for a little longer, does that change or do those impacts to NII change the expected time for EPS accretion from the deal?

Dennis L. Klaeser -- Chief Financial Officer

No.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Okay.

Dennis L. Klaeser -- Chief Financial Officer

The other thing to note on the security -- on the auto portfolio is that obviously there is some non-interest operating expenses associated with that portfolio. And so, again, while we are going to lose some net interest income, the bottom line impact is relatively neutral in 2020 and then accretive to earnings in 2021.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Okay. And then the branch closures that you announced, were those always sort of part of the planned cost saves or were those -- is that going to be incremental savings beyond the planned deal cost saves?

Dennis L. Klaeser -- Chief Financial Officer

They were not part of the original expected cost saves. So ultimately that becomes incremental overall in terms of the efficiency of the organization. But let me point out that again there is a variety of areas in which we are optimistic about revenue growth opportunities and there are some geographies where we're going to intend to open a couple of additional branches.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Okay. And then I guess -- actually, just following up on the auto side. When is the expectation for that to be sold?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, we don't have a specific timeframe, but our goal is sooner the better.

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

I mean like in a quarter or two, or is it -- it's just related ...

Dennis L. Klaeser -- Chief Financial Officer

Our goal is -- our goal is, yeah, within the quarter or two. Yeah. That's our objective. And we're working hard toward that

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Great, thank you.

Operator

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

Lana Chan -- BMO Capital Markets-United States -- Analyst

Hi, thanks. Good morning. I had a few follow-up questions. One on the fee side. On an earlier question about the run rate seeming a little bit below the prior quarters. I think so some of it, the fee income at legacy TCF was related to auto. I don't -- can you just refresh us in terms of the servicing fee income, how much is left on the auto side, and I don't know the gain on sale loans. Is that a good run rate?

Brian Maass -- Chief Financial Officer

Yes, Lana. This is Brian. We were seeing a rundown of the servicing fee income on the legacy TCF side, but that really was being offset by NIE declines over time. So there was a few million dollars less in that line that ultimately once the portfolio was sold that will -- we'll have that remaining amount will come out. But as Dennis alluded to, I think the guidance that we have overall for non-interest income, it's going to be similar back to the levels that you saw in 2Q or 3Q. So there would be some mix shift that's taking place in there. Gain on sale, I'd say, was probably a little light for the third quarter. We held a few extra loans, but you should see that number will likely be up a little bit even from what you saw in the third quarter as we get to 4Q. So I think the guidance that Dennis had around look at the previous quarters is probably the best indicator of what we'll probably see in the fourth quarter.

Lana Chan -- BMO Capital Markets-United States -- Analyst

Okay, thank you. And then following up on the margin question. It would be helpful if you have some available end-of-period spot rates across deposits and some of your loan and securities, so we could model off of end-of-period spot rates going into 4Q.

Dennis L. Klaeser -- Chief Financial Officer

Yeah. Sorry, Lana, we didn't bring those spot rates. But, Brian, can you ...

Brian Maass -- Chief Financial Officer

Yeah, we don't have specific numbers to give you, Lana, but what we did show you was the September stand-alone. So the 3.70% is kind of the starting point for the quarter. Then there are these puts and takes which honestly it's kind of hard for us to estimate exactly what those puts and takes are going to be, but it is going to be lower than the 3.70% as we get into fourth quarter than what we realized in third quarter because you are going to have the third month of Chemical comes in. So that's going to make the NIM be lower. The portfolio expansion is going to have an impact of having a reduction to the net interest margin as we mentioned.

And so really the net impact will be what happens from a rates perspective is what will drive it lower. So if we do see a rate cut this week, we will see some pressure going down, and that's versus our modeled results, which Dennis mentioned, we might be in a 4.8%, 4.7% or 4.9% kind of in a down 100 shock. So that would be a number that you can use. What we're going to try and do is hopefully outperform our deposit estimate that we have for that. And as Dennis said, we've been quite aggressive at leading the market and reducing promotional rates and running off some higher cost wholesale funding and stuff.

So we think we can have some offset to that. But really, our big offset is going to be growing earning assets. And as we grow earning assets in fourth quarter, that's really going to help us from a run rate perspective into growing NII, or net interest income, is really our goal as we get into 2020. It's not about necessarily the margin rate. We want to make sure that we're growing net interest income and we think we can, especially if we have strong originations this quarter.

Lana Chan -- BMO Capital Markets-United States -- Analyst

Okay, thank you.

Operator

Our next question comes from Terry McEvoy from Stephens. Please go ahead with your question.

Terry McEvoy -- Stephens, Inc. -- Analyst

Good morning. Question, your near term CET1 capital ratio target of 10%, and I guess my question is, is near-term 2020 or something beyond 2020?

Dennis L. Klaeser -- Chief Financial Officer

Brian, would you take that?

Brian Maass -- Chief Financial Officer

Yeah, I think it's more of a reference to that's where we thought we were going to be when we announced the transaction. So we're not necessarily in a rush to get to that 10%. As Dennis said, we're focused on organic growth, we're focused on a lot of other things. But I think it's notable that we also do want to manage the capital of the organization appropriately. And to the extent that we have excess capital, you saw us announce a stock repurchase, and we're going to manage toward that. So we don't necessarily have a date in mind where we have to be at 10%. It's more that's where we thought we were going to be and that is a good target for you to think about, but ...

Terry McEvoy -- Stephens, Inc. -- Analyst

And then just as a quick follow-up. The sale of the legacy auto portfolio, the $19.3 million loss, was that net against the $25 million reserve that was held against that portfolio?

Dennis L. Klaeser -- Chief Financial Officer

Yes.

Terry McEvoy -- Stephens, Inc. -- Analyst

Great. Just trying to connect all the dots. That's it. Thank you.

Dennis L. Klaeser -- Chief Financial Officer

Yeah. Thanks, Terry.

Operator

Our next question comes from Ken Zerbe from Morgan Stanley. Please go ahead with your question. Mr. Zerbe, is it possible your phone is on mute? And we'll move on to Kevin Reevey from DA Davidson. Please go ahead with your question.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Good morning.

Dennis L. Klaeser -- Chief Financial Officer

Hey, Kevin.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

So I was just curious, with 60% of your CD portfolio that's maturing over the six -- next six months, is the plan to roll that over or to have it exit the bank.

Dennis L. Klaeser -- Chief Financial Officer

Go ahead, Brian.

Brian Maass -- Chief Financial Officer

Yeah, this is Brian. What I would say is what we were trying to do was two things: we were trying to manage kind of from the interest rate environment uncertainty, allow us the optionality to reprice that lower; as well as knowing that we might be selling $1.2 billion of auto balances and having a further reduction of liabilities on the balance sheet, it's just allowing us optionality to either not renew some of those, or significantly lower the rates on them and run some of them off.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

And if you were to renew some of them, what kind of rate do you think you'd have to pay up to retain those deposits?

Brian Maass -- Chief Financial Officer

Yeah, promotional rates for retail have come down, what I'd say, dramatically. We probably saw retail promotional rates peak, I'd say, back in first quarter, it was probably March or April. So we've been reducing rates on promotional deposits. We could be down 100 basis points from probably where we were at peak. I'd say at peak we might have been at 2.65%, 2.75%, and we're probably down in 1.65%, 1.75% range today. And obviously, a lot of that will depend upon market competition as well as where interest rates change from here going forward.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

And then, Craig, earlier in your prepared remarks you talked about residential mortgage production. Is the plan to hold that production in portfolio or to sell it?

Craig R. Dahl -- President and Chief Executive Officer

That always becomes both a segment discussion and an overall discussion. So at this point, I don't have any pre-determination of where that's going to go. But I think the key is that it's all in our footprint and that's -- these are not -- this is not a national business. It's all in our footprint. These are all our customers or we're acquiring new customers. And we're pretty pumped on that pipeline as we sit here today.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Thank you.

Dennis L. Klaeser -- Chief Financial Officer

Hey, Kevin, going back to your question about lowering overall CDs. I think an important number to look at is the growth of our non-CD deposits year-over-year. We highlighted that it was 7% year-over-year or so. That level of growth I think really puts us in the top tier in the industry, and it shows a lot of success in both companies in growing really true core deposits. And that's a level of growth that we achieved sort of prior to us benefiting some of the business synergies. As we talked about when we announced the transaction, TCF has made significant investments in the front-end digital banking platform to be an industry-leading platform, and we're going to be leveraging that into the Chemical franchise. And we think that's going to help, particularly in the legacy Chemical side, in growing those core deposits with our retail customers. And then vice versa, Chemical brings an expertise in generating commercial deposits, which we're going to roll out into the TCF franchise. So ultimately the goal is rather than rolling over those CDs into new CDs is to pick up the growth of core deposit growth -- really core deposits and that will clearly have a benefit to margin and overall franchise value.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Thank you very much.

Operator

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

Brock Vandervliet -- UBS Warburg LLC (US) -- Analyst

Hi, good morning. I think we've covered the NII and NIM dynamics. Dennis, I know we've talked about this offline, in terms of the system conversion and that being a linchpin for some of the substantial cost saves, any sense of whether that could be moved up or is that really kind of locked in in concrete here given that outside providers are required for that?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, it's pretty well locked-in in the third quarter. And yes, particularly because we're working with an outside provider, it's hard to move that data around. That said, there are other aspects of the conversions. It's really multiple conversions that are going on and we're staging a number of the conversions earlier. So, for example, that front-end deposit app -- banking app that we use for our retail customers, that conversion occurs much earlier. And so on the chemical side, we'll get the benefit of that enhanced technology much earlier than the final systems conversion.

Brock Vandervliet -- UBS Warburg LLC (US) -- Analyst

Okay, great. This may have been covered initially on the call. But any changes or call-outs you'd make in terms of the general market environment and kind of the operational tempo that you see across the franchise?

Craig R. Dahl -- President and Chief Executive Officer

This is Craig. I would say, we're particularly attuned to that, especially we just came off of our first combined Board meeting and so setting the risk appetites and concentration levels. And we've had a lot of customer interactions and feedback. And we're continuing to monitor that. I would say that there is probably less expansion oriented, but there is still quite a bit of companies investing in their products or replacing equipment. And that we continue to again to monitor that, but there's frequently a manufacturer and a dealer in a lot of the stuff that we do. So we get a lot of different perspectives on business activity.

Brock Vandervliet -- UBS Warburg LLC (US) -- Analyst

Great. Thanks, Craig. Appreciate the color.

Operator

And our next question comes from David Chiaverini from Wedbush. Please go ahead with your question.

David Chiaverini -- Wedbush Securities, Inc. -- Analyst

Hi, thanks. So you spoke about loan growth in the mid- to high-single digits for next year. Could you talk about the opportunity for deposit growth and the pipeline for deposits to fund that growth?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. Ultimately, our goal is for core deposit growth to keep up with loan growth. That's a big challenge when you're talking about the level of loan growth that we're targeting. But because we've got sort of the multiple drivers of deposit growth, both the retail side and the commercial side, we think we can achieve that objective. And that's a key strategic priority of ours, and it was a key strategic synergy of the transaction rationale for the merger in the first place, because we thought that we really complement each other in terms of our deposit generation core competencies.

David Chiaverini -- Wedbush Securities, Inc. -- Analyst

Great, thanks for that. And then shifting to fee income, and this is more of an accounting type of question, but were there any loan fees that were previously included in fee income that are now being included in net interest income?

Dennis L. Klaeser -- Chief Financial Officer

No. Brian?

Brian Maass -- Chief Financial Officer

I think obviously when you come together as two companies, there is slight geography changes that you have to make to reclass few things to make sure that you've got alignment on both sides. But there shouldn't be anything that was materially different.

David Chiaverini -- Wedbush Securities, Inc. -- Analyst

Thanks very much.

Operator

And ladies and gentlemen, at this time, we 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.

At this time, I'd like to turn the conference call back over to Mr. Craig Dahl for any closing remarks.

Craig R. Dahl -- President and Chief Executive Officer

Thank you for listening us this morning. I would tell you that I'm so glad we have the statement that said, we undertake no duty to update this information, because if that was ever appropriate for an earnings call, it was appropriate for today.

So I'm pleased about the progress we've made, the collaboration our teams have shown. We're right on track with our expectations for the merger, and we're excited to operate as one TCF and deliver on the value creation we expect for our shareholders, customers, team members, and communities. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 73 minutes

Call participants:

Timothy R. Sedabres -- Senior Vice President, Director of Investor Relations

Craig R. Dahl -- President and Chief Executive Officer

Dennis L. Klaeser -- Chief Financial Officer

James M. Costa -- Chief Risk Officer

Thomas C. Shafer -- Chief Operating Officer

Brian Maass -- Chief Financial Officer

Jon Arfstrom -- RBC Capital Markets LLC -- Analyst

David Long -- Raymond James & Associates, Inc. -- Analyst

Scott Siefers -- Sandler O'Neill & Partners LP -- Analyst

Christopher McGratty -- Chris McGratty, Keefe, Bruyette & Woods, Inc. -- Analyst

Steven Alexopoulos -- JP Morgan Securities LLC -- Analyst

Nathan Race -- Piper Jaffray & Co. -- Analyst

Ebrahim Poonawala -- Merrill Lynch, Pierce, Fenner & Smith, Inc. -- Analyst

Jared Shaw -- Wells Fargo Securities LLC -- Analyst

Lana Chan -- BMO Capital Markets-United States -- Analyst

Terry McEvoy -- Stephens, Inc. -- Analyst

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Brock Vandervliet -- UBS Warburg LLC (US) -- Analyst

David Chiaverini -- Wedbush Securities, Inc. -- Analyst

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