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TCF Financial Corporation (NYSE:TCF)
Q4 2019 Earnings Call
Jan 28, 2020, 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 Fourth 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.

Tim Sedabres -- Head of Investor Relations

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

In just a few minutes, Craig, Dennis, and Jim will provide an overview of our fourth 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 fourth quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is accurate as of December 31, 2019, and we undertake no duty to update the information.

I would now like to turn the conference call over to TCF's 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 the call today. The fourth quarter marked our first full-quarter as a combined organization, and I'm pleased to update you on the progress we have made, and share the momentum we are seeing throughout the Company.

To begin, we posted strong financial results, and even as our results were impacted by merger-related and notable items. Adjusted for those items, we earned $1.04 per share. Our adjusted efficiency ratio was just under 59% and adjusted ROATCE was over 16%. Neither of these ratios yet reflect the full contribution from our targeted cost synergies, and they should only improve as we get to our run rate targets in the fourth quarter of this year.

One of the key outcomes of the merger was the complementary product set we now have across both commercial and consumer, as a result of bringing together the best of both banks. During the quarter, our teams continue to work diligently to bring together the two organizations, and we saw strong performance across our businesses in the fourth quarter. Highlights included progress on key integration activities, continuing to operate a high-performing Company, and completing other strategic actions to position the Company for the future.

First, on the integration front, we achieved several milestones during the quarter, including the consolidation onto a single mortgage lending platform, and an integrated commercial loan origination system. We also made progress on achieving expense synergies, and we are confident in hitting our expense run rate for the fourth quarter of this year.

Second, in terms of operating the core business, we remained focused on organic growth, with loans up 2.9% in the quarter or 11.8% annualized. Commercial loan portfolio balances grew by $1 billion during the fourth quarter, and were up nearly 10% year-over-year. Each bank had momentum going into this partnership, and our results reflect that trajectory. We reinvested securities balance from sales, during the third quarter as part of our balance sheet repositioning. Credit quality trends also remained strong, with net charge-offs of just 7 basis points and non-accrual loans declining to 49 basis points in the fourth quarter.

Lastly, we completed other strategic actions during the quarter to better position the organization, including completing the sale of the Legacy TCF auto portfolio, which closed in mid-December. This reduces our risk profile, frees up liquidity, and accelerates the move to improving return on capital. In addition, we added key commercial banking talent in Chicago to begin to build our traditional C&I business in that market. Finally, we announced the divestiture of our Arizona branches, as we intend to exit the market and focus on the opportunity in our core Midwest and Colorado markets.

Overall, we maintained excess capital with the CET1 ratio of 11% following the sale of auto, and we were active and disciplined in our capital deployment strategy, as we repurchased $28 million of stock during the quarter. With the full quarter under our belt, I look at 2020 as a year to demonstrate our execution of the plan we have laid out. We have a tremendous opportunity in front of us with the ability to grow, and increase market share, and I believe we have the teams and people in place to be successful.

As we move into 2020, we are focused on four strategic priorities. First is, delivering on the merger cost savings. Dennis will talk more about this in a few minutes, but I will say that I'm very pleased with our progress to-date, and I'm confident in our ability to achieve our targets. Second is, continuing to grow organically and leverage the best of both banks. We have a real opportunity to build on the positive momentum we had coming into the transaction, and utilizing the complementary products to drive incremental growth. Third is, maintaining our strong risk and credit culture that both banks each had worked hard to instill. We have a great opportunity across all markets and products that we do not need to stretch for a marginal credit. We believe strong credit discipline is a hallmark of our franchise, and one that we will ensure remain so. Finally, we will be focused on executing and completing the integration, including systems, branding and culture to provide a consistent customer experience. We are just beginning to scratch the surface of the opportunity we have, as One TCF, and I remain confident in our ability to deliver throughout 2020.

Turning to Slide 4, our integration program and activities remain on track. As I mentioned, we recently completed the consolidation onto a single mortgage platform. We also integrated our commercial loan origination system, which allows for a consistent experience for our customers as well as approved efficiencies and turnaround times. As of January 1, we launched our combined benefits plan and also implemented our Companywide learning management system to more efficiently aid in achieving learning and development needs.

We are also on track with vendor synergies as over 30% of contracts have been renegotiated. Last quarter, we laid out several business synergy opportunities we have across our commercial, leasing and mortgage products. While many of these take several quarters to get up -- fully up and running, we already began seeing early successes during the fourth quarter. Finally, culture continues to be a key priority for us, as we are being active in getting out and interacting with our teams through regional and business leadership summits, town halls, and traveling across our footprint.

As we move into 2020, there are several integration milestones on our road map that we'll be focused on. As we talk about culture, having a common purpose and beliefs for the organization is very important, and something that is more than just words on a page and demonstrates a shared purpose that our employees can rally around. This is just about finalized, and we plan to launch internally next month.

One of the first customer-facing upgrades is nearing, as we are preparing to transition Chemical retail customers onto the TCF digital banking platform. This will both enhance the customer experience, and de-risk the ultimate core banking system conversion, as it serves as proof-of-concept for our ultimate end-stage pairing of TCF's digital technology with Chemical's core banking platform. Testing is in process as we speak, and we remain right on track.

As I've mentioned before, we expect various system roll-outs and consolidations to continue over the coming quarters. We expect final system conversion to occur in late third quarter. Staffing optimization is also continuing as we move through 2020. In addition, we continue to keep putting our customers first. While a lot of effort is going into integration, we are maintaining the core of what is always made our teams great.

Finally, I continue to appreciate all the hard work of our team members around the organization, as we could not accomplish all of this without their efforts.

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

Dennis L. Klaeser -- Chief Financial Officer

Thank you, Craig. Slide 5 highlights the strong loan growth trends we saw continued into the fourth quarter. The total loan balances were up 6.6% compared to the combined balance sheet a year ago, excluding the Legacy TCF auto finance portfolio. On a linked quarter basis, growth was driven by an increase of $1 billion on commercial loans and leases, including approximately $500 million of C&I growth. The inventory finance business is included within C&I and increased by $189 million from the third quarter, as we saw a normal seasonal build in balances. We also saw continued strong growth across our CRE and leasing portfolios, keeping in mind that the fourth quarter is usually a seasonally strong quarter for growth.

Consumer balances were flat quarter-over-quarter, and they were impacted by a non-accrual and TDR loan sale of $83 million in the fourth quarter. On a year-over-year basis, we are seeing continued growth in residential mortgage loans, while declining balances in home equity loans. We remain very optimistic about our loan growth opportunities in 2020, and continue to expect full-year growth in the mid-to-high single-digit range.

Loan yields declined 38 basis points in the fourth quarter to 5.24%. The decline was driven by the full-quarter impact of the September rate cut, and subsequent October rate cut, as well as the full-quarter impact of the Chemical loan portfolio on the balance sheet. As a reminder, the third quarter loan yields include only two months of Chemical loans, which had a slightly lower overall yield and the Legacy TCF portfolio.

Turning to Slide 6. Deposit balances during the quarter were impacted by the seasonal decline in our municipal -- in our municipal deposits, as well as by proactive run-off of higher costing funding, as we execute on our balance sheet management strategies, including the sale of the Legacy TCF auto finance portfolio. As a result, CD balances were down $930 million, including the run-off of over $400 million of brokered CDs, and we are able to exit other higher cost deposits, which led to a quarter-over-quarter decline in interest-bearing checking balances. CDs now make us -- make up less than 22% of total deposits, down from nearly 24% at September 30, 2019. While executing these actions, we were still able to grow the combined balances of non-CD balances by $1.4 billion, over 5% year-over-year, while managing our other deposit costs lower. In fact, deposit cost declined 6 basis points from the last quarter, a trend that we would expect to see continue into 2020. We are continuing to be proactive in pricing down certain deposits, and maturing CDs as market rates continue to move lower.

Slide 7 highlights the reinvestments we are making in our investment securities portfolio. Following the sale of $1.6 billion of securities in the third quarter, we have reinvested all but $170 million to date [Phonetic], and expect to complete the reinvestment in the first quarter of this year. During the fourth quarter, we repurchased securities at an average yield of 2.7%. This compares favorably to the yield of security sold in the third quarter of 2.4%. Overall the portfolio -- overall the portfolio yield increased 3 basis points from the third quarter to 2.84% given the full-quarter impact of the Chemical portfolio on the balance sheet. Our mix of investments to total assets was 14.7% at year end, which is getting closer to where the combined balance sheets were prior to the deal close. We expect to see this mix continue to increase toward the 16% range over the course of 2020.

Turning to Slide 8. Our net interest income and net interest margin were, again, impacted by purchase accounting accretion. Recall, that last quarter we disclosed net interest income and margin for the month of September to provide a starting run rate for the fourth quarter with additional pressure expected due to the recent rate cuts. This is what we saw, as reported net interest income of $409 million, which included $31 million of purchase accounting accretion, and resulted in an adjusted net interest income of $378 million.

We shared our outlook for fourth quarter accretion in the low-$20 million range, excluding payouts and prepayments. This was in line with the fourth quarter results, as the $31 million of accretion included approximately $10 million related to prepayments and payouts. Reported NIM of 3.89% included 29 basis points of accretion, resulting in an adjusted margin of 3.6%, which was impacted by the full-quarter impact of the Chemical balance sheet. Compared to the month of September margin of 3.7%, the fourth quarter margin saw 5 basis points decline from the September and October rate cuts, and the additional impact related to balance sheet mix and other items. While we could see margin move slightly lower, we expect stabilization in the near-term within the 3.50 range, -- in the 3.50s, given less loan yield pressure and benefits from lower deposit cost and the continued optimization of our asset mix. Net interest margin continues to be an outcome of the business, not a driver. We are focused on growing net interest income. And although the first quarter can seasonally be lower, we expect net interest income to grow, as we get into the second quarter and beyond.

Turning to Slide 9, we saw strong non-interest income, during the quarter, of $158 million, which included $7.6 million of notable items, resulting in adjusted non-interest income of $166 million. Notable items included an $8.2 million loss on the sale of the legacy TCF auto portfolio, that went through this gain on sale line item, as well as a $600,000 recovery on the prior loan servicing rights impairment. In addition to these notable items, the gain on sale of loan lines benefited from a $3.7 million gain related to a non-accrual and TDR sale during the quarter. And other non-interest income also benefited from a $2.4 million interest rate swap mark-to-market adjustment.

Looking ahead to the first quarter, we would expect to see the typical seasonal decline in non-interest income as leasing fee revenues peak in the fourth quarter, and fees and service charges and card revenue are lighter in the first quarter of the year. In total, we expect to reset non-interest income in the first quarter from this quarter's level, similar to what the combined company saw from Q4 '18 to Q1 '19.

Turning to Slide 10, we remained focused on executing on our cost synergy initiatives during the fourth quarter as we have now achieved around one-third of our expected $180 million of annualized cost savings to date. That said, we had a relatively noisy quarter from an expense standpoint, as reported non-interest expense in the fourth quarter included $47 million of merger-related expenses and $14.5 million of notable items resulting in adjusted non-interest expense of $355 million. This was down slightly from our combined non-interest income expense of $358 million in the fourth quarter of 2018. Our adjusted efficiency ratio improved to 58.5% in the fourth quarter. These notable expense items included $6.3 million of pension fair value adjustment, a $4.7 million impact from the sale of the auto portfolio and $3.5 million related to branch exit costs.

In addition, we had several other items that impacted non-interest expense in the quarter, totaling $9.4 million, including $4 million impairment of historic tax credits, which were offset by a related $3.6 million tax credit in the income tax line item, a $1.3 million branch impairment expense and about $4 million of higher commission expenses in the fourth quarter compared to the third quarter, due to higher origination activities and production in the quarter. Absent these items, expenses totaled in the mid-$340s for the fourth quarter. With the cost savings we have yet to realize and expected inflation on merit-related increases in early 2020, we remain right on track to achieve our expense levels of $321 million or better in the fourth quarter of '20 and a resulting efficiency ratio that is better than the peer median. I would also mention that we expect an effective tax rate between 21% and 23% in 2020, excluding any discrete tax items.

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

James M. Costa -- Chief Risk Officer

Thank you, Dennis. Turning to Slide 11, our strong credit trends continued in the fourth quarter. Net charge-offs for the quarter were just 7 basis points, but included a recovery from the consumer non-accrual and TDR loan sale. Excluding this recovery, net charge-offs would have been 13 basis points and within our range of expectations for the portfolio. This sale also impacted provision, which would have been $19 million, excluding the recovery. The $83 million loan sale, which included nearly $63 million of accruing TDRs and $17 million of non-accrual loans, helps us further reduce our risk profile, as the sale generated a gain, while reducing non-performing assets.

Allowance for loan and lease losses declined $8 million to 33 basis points of total loans and leases. However, inclusive of credit discount on acquired loans, the reserve ratio would have been 74 basis points. On the CECL front, we are finalizing our work for both Legacy TCF and Chemical portfolios. We currently expect allowance for credit losses to increase between $200 million and $225 million as a result of CECL, with the majority of the increase related to acquired loans, which includes the Chemical portfolio. This increase would equate to an allowance for credit losses of between 90 basis points and 100 basis points.

From a capital perspective, we would expect CECL to result in a 10 basis points to 15 basis points decline in common equity Tier 1 for the year one phase-in and 40 basis points to 50 basis points decline, when fully phased in. Other credit metrics remained strong as well. We saw a $12 million decline in non-accrual loans and leases to 49 basis points, due in part to the non-accrual and a TDR loan sale during the quarter, while over 90 day delinquencies, a leading indicator of credit quality in many of our portfolios, remained flat at just 9 basis points.

Overall, we remain very pleased with credit quality across our combined portfolios. With the improved diversification, and robust and scalable risk management framework we have in place, we have an optimistic view of credit quality at TCF going into 2020.

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

Craig R. Dahl -- President and Chief Executive Officer

Thanks, Jim. Turning to Slide 12, we continued to have a strong capital position with CET1 ratio of 11% at year-end, which we expect to be 45 basis points to 50 basis points lower fully phased in for CECL. This provides us with continued capital flexibility as we remain thoughtful and disciplined, when evaluating capital allocation. These priorities have not changed as we first look at organic growth opportunities. As evidenced by the strong organic loan growth during the quarter, we are seeing the continued momentum across the organization and numerous growth opportunities.

In addition, we are starting to get some early wins from our business synergy initiatives. Our second priority is the dividend, as we expect to maintain a payout ratio of between 30% and 40%. Next, our share repurchases, as we began executing on the buyback we announced last quarter. During the fourth quarter, we repurchased 658,000 shares at a cost of $27.5 million. We still have $122.5 million remaining under the current authorization, which we expect to execute on over the coming quarters.

Finally, we will continue to look at various corporate development opportunities, including portfolio and platform acquisitions, if and when they arise. As we have said, since we announced the merger a year ago, our focus is on accelerating shareholder value. We remain committed to doing this by driving toward a below peer median efficiency ratio and a top-quartile ROATCE by fourth quarter of '20.

With the continued passion and collaboration shown by our team members, we remain on track to achieve these targets. In fact, our fourth quarter adjusted ROATCE of 16.3% is already above the peer median. We have the benefit of operating with a strong revenue base of nearly $2.3 billion annualized, a level much higher than similarly sized peers. Our opportunity is to execute on our cost synergies and drop the savings to the bottom line, which results in an increased earnings power, while lowering the efficiency ratio and increasing our return on capital.

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. Please go ahead with your question.

Jon Arfstrom -- RBC Capital -- Analyst

Thanks, good morning guys.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Dennis L. Klaeser -- Chief Financial Officer

Good morning.

Jon Arfstrom -- RBC Capital -- Analyst

Maybe, I'll start on net interest income. Just thinking through the margin, Dennis, I understand your comment about how you're focused on the dollars. But the 3.50% range feels like Chemical impact is in, you've got a little bit from rates, you talked about 5 basis points, maybe some mix changes, what do you mean by the 3.50% range? Do you mean that over the course of the year, the core margin falls down to 3.50% or is it another similar type step-down? Is that what you're trying to flag for us in Q1?

Dennis L. Klaeser -- Chief Financial Officer

No, we expect it to be in the 3.50s, so there is some incremental pressure here in the first quarter, incrementally impacted by the sale of higher yielding auto loans. But then we see the margin stabilizing for the rest of the year. We do have greater downside in terms of pricing, some of our deposits. And we have a large amount of -- our CDs are going to be maturing in the next six months. So, those will be priced down as they mature.

Jon Arfstrom -- RBC Capital -- Analyst

Okay. And then, the purchase accounting accretion, I know last quarter you kind of flagged that it might be in the low-20s. Is that consistent with what you tell us for Q1?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, pretty much in that ballpark. The level of accretion that came from prepayments and pay downs was little higher than we expected in the fourth quarter. I think as the quarter went on, we saw a little bit of moderation in the pace of prepayments and pay downs, which is positive. And so, yeah, I think the normalized accretion without any prepayments would be just under $20 million. And then with prepayments, we expect it to be in the low $20 million range.

Jon Arfstrom -- RBC Capital -- Analyst

Okay, good. Thank you for that. And then, Craig, just one for you, you flagged this a couple of times in the call, but you talked about some of the early synergy success and how you're more optimistic on that. Can you talk a little bit about the magnitude what you've seen so far and what's your thinking for potential on that? Thanks.

Craig R. Dahl -- President and Chief Executive Officer

Yeah. The magnitude is still pretty small, but the frequency of discussions especially where we've got a current chemical customer and we're bringing in equipment finance solution to that customer. That would be, I think, our earliest ones, where without even a formal referral system, we won several deals that were there, because we're not pushing that transaction, the customers are pulling us into that. And we see that as enhancing our relationship. The other part of the business, it looks flattish in the mortgage business, but our backlog is up significantly in both of our platforms. And that originations was pretty flat on a year-over-year, on a fourth quarter over fourth quarter, we see that pretty strong entering the first half of this year. So, that's another one, where again having a common system, we've eliminated all of the sort of patching that had to go on there. And now, we got one system and we're pretty excited about that as well.

And then, there is still going to be that roll-out over time; it's going to be thoughtful; it's going to be structured. But the inventory finance dealers in Michigan and Ohio, we have more equipment finance, excuse me, inventory finance dealers and we have branches in those states. And all of those customers are going to be tailor-made to be to be called on by our new hometown banking team. So, we're looking forward to really all of those.

Jon Arfstrom -- RBC Capital -- Analyst

Okay, all right, thanks a lot.

Operator

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

David Long -- Raymond James -- Analyst

Good morning, everyone.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

David Long -- Raymond James -- Analyst

Just following up on the net interest margin outlook, does your purchase accounting, I think you said just under $20 million before any paydowns, does that include the impact from CECL to day two impact that may have there, if you're double accounting for your purchase loan reserves?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, in effect -- in reality, that accretion level doesn't change because of CECL. There is no impact on that and that's an independent. So, that $20 million does -- we expect to step-down a couple million dollars each quarter going forward. And then, the pace of which is step-downs, moderates over time. And it's more of a factor, it's just the overall size of that portfolio over time.

David Long -- Raymond James -- Analyst

Okay. Got it. And then sticking with the CECL on the provision line, you're pretty clear on day one what the impact is. How do you think the provision moves on a quarter-to-quarter basis as a result of CECL, relative to where we are today?

James M. Costa -- Chief Risk Officer

David, this is Jim Costa. I would say, I'd be looking at the loan growth that we're anticipating in the first quarter. And we gave a range of 90 basis points to 100 basis points is our reserve rate. So the day two marks will -- day two reserve will follow that loan growth. But, it's a little hard to give you the specific provision estimate, as we don't know what mix the channel will come from in terms of loan originations. And it's a little hard to forecast what macro scenario will be running through the CECL process at the end of Q1. So that may seem like a punt, but there are enough moving parts. It's a little hard to provide guidance on provision today. Those would be my anchors, though, however, is projected loan growth 90 basis points to 100 basis points reserve rate all-in on the -- on the newly originated assets.

David Long -- Raymond James -- Analyst

Got it. No, I don't -- I think we can appreciate that commentary. Lastly, just in your slides, you did this last quarter with the September, providing us with some color on the NIM and NII for the month of September. Do -- will you provide that for December, so we can kind of see where you're at going into the first quarter?

Dennis L. Klaeser -- Chief Financial Officer

No. I think we just felt that was a one-time item for the third quarter, because that unusual circumstance where the third quarter included only two months of chemical, and the full-quarter was not particularly indicative of the trend. So I don't think -- I don't think we feel that the month of December alone is really the necessarily is indicative of the trend quarter-to-quarter.

David Long -- Raymond James -- Analyst

Got it. Thanks a lot guys. Appreciate it.

Operator

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

Nathan Race -- Piper Sandler -- Analyst

Good morning, everyone. Dennis, just to clarify on your comments around net interest income growing in the second quarter. Is that on a core basis, excluding up purchase account accretion?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, yeah, because purchase account accretion actually is a little bit of a headwind, because that's going to come down a bit, unless there's some spike in prepayment speeds. But, yeah, so that's core growth driven by growth of earning assets. And we enter the year -- we exited the year feeling very good about the loan growth. But we also have a strong pipeline going into -- into this year. So we feel pretty good about the guidance that we have, and then historically for both companies as well. First quarter tends to be a little bit of weaker quarter, but then seasonally we -- both the legacy companies picked up in the second quarter.

Nathan Race -- Piper Sandler -- Analyst

Understood. That's helpful. And changing gears and thinking about capital, and perhaps optimizing the capital stack going forward, just given the profitability profile that's going to improve as you guys generate cost savings and so forth. And given that the CECL impact seems to be pretty reasonable, I suppose, in the first quarter, just any thoughts on perhaps redeeming the preferreds that's outstanding in conjunction with the buybacks?

Dennis L. Klaeser -- Chief Financial Officer

We have a small amount of preferred that came through Chemical, but that has a very low rate, and it's not due until 2033. And so I think, it's likely we would just leave those. Those -- the rates on those instruments are probably less than what we get in subordinated debt issuance today. So I don't think we're going to -- I don't think that's on the table right now, but it was something we obviously monitor and take a look at.

Nathan Race -- Piper Sandler -- Analyst

I appreciate the color. Thank you.

Operator

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

Steven Alexopoulos -- JPMorgan -- Analyst

Hey, good morning, everybody.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Dennis L. Klaeser -- Chief Financial Officer

Good morning.

Steven Alexopoulos -- JPMorgan -- Analyst

Dennis, I want to just follow-up on the NIM quick. So you're guiding down to 3.50% in 1Q '20. Does that --

Dennis L. Klaeser -- Chief Financial Officer

I -- that -- you know, don't misinterpret my guidance. I said the 3.50s, and that's a -- that -- I mean, in the 3.50s range. And I suggested after Dave Long asked, we've got modest pressure in the -- in the first quarter. So we're not expecting some wholesale step down. There's no reason it to -- for to step down as much as it did between the third and fourth quarter, because we don't have the rate changes. And now we have the benefit of continued repricing of deposits. So modest step down, here in the first quarter, but then stabilizing in the 3 -- 3.50s. I hate to give you of narrower range of say 3.54% to 3.59%. But 3.50s gives me enough wiggle room given all the wildcards that could occur.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. And does that include purchase accounting? Are you talking reported margin of 3.50% or core NIM -- I'm sorry, 3.50s or -- is that a core NIM or reported NIM?

Dennis L. Klaeser -- Chief Financial Officer

That's the core -- that's the core NIM, yeah. So the --

Steven Alexopoulos -- JPMorgan -- Analyst

If you're saying core NIM, ex-PAA in the 3.50s, maybe the middle of the range. We'll see. Okay, that's helpful.

Dennis L. Klaeser -- Chief Financial Officer

Yeah. And based on the guidance we gave about accretion in the first quarter, we would expect the reported NIM to be, let's say 21 basis points to 25 basis points higher based on the accretion.

Steven Alexopoulos -- JPMorgan -- Analyst

All right. Got you. And the PAA that should go down. I think you said a couple of million per quarter. Will that be the run rate even beyond 2020, like through 2021?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, it -- it moderates over time. So in the first -- in the next two quarters, three quarters, it's probably $2 million a quarter, but then it begins to moderate. The decline moderates over time.

Steven Alexopoulos -- JPMorgan -- Analyst

Got you. Okay. And then the fee income guidance was actually really helpful in terms of the anticipating the 1Q decline. Now, we look at prior years decline in 1Q, but then if we look at over the past year, 1Q to 4Q is up almost 30%. Do you expect that magnitude of rebound through this year 2020, once we get to the 1Q '20 run rate?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. That's pretty remarkable rebound. So, I hate to guide to that level. But we do expect to be harvesting synergies across the Company, and one of the key reasons are us coming together is -- together, I think we are better in producing fee income.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. All right. And then finally on expenses. Now that the combined companies are together, I know it's early, but how are you thinking about the initial cost-save target, any room to do better? And I think you guided the efficiency ratio below 57% by the end of 2020. Are we still on track for that? Thanks.

Dennis L. Klaeser -- Chief Financial Officer

Yeah, still on track for that. And, yeah, the $180 million is a number, we've really zeroed in on. We have a great deal of granular planning around that number, and we're very confident in it, and the timing of it. And we think that's the -- that's the right number. I've commented before that, if there is additional cost saves, it's often more going to be a question of where we find a better place to spend that, because clearly we are bullish about our prospects in our-in various markets. And so if we -- if we do find additional cost saves, and we're going to be very diligent about that. Odds are, we're going to be spending those additional cost saves on revenue growth initiatives.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay, terrific. Thanks for all the color.

Operator

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

Chris McGratty -- KBW -- Analyst

Hey, good morning, everybody. Dennis, I want to come back to the -- come back to the capital discussion. So I think in Craig's comments, you said 11% is where you're on CET1. You've got a 10% target. I just want to make sure I understand the phase-in of CECL. I think the initial day one was 10 basis points to 15 basis points of that, and then full cycles kind of 50 basis points. Is that right?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, you're correct.

Chris McGratty -- KBW -- Analyst

Okay. And so that would suggest you had to obviously stop yourself out in kind of mid-December with the auto sale. But I think last quarter you said in the low-40s you were pretty optimistic about buying stock. How do we think about the timing of the rest of the buyback, number one and number two? How do we think about the capital free-up from auto? Thanks.

Dennis L. Klaeser -- Chief Financial Officer

Yeah, I read your note last night or this morning and your -- your view on that. So yes, as we got into the latter part of the quarter, we had the -- frankly it was really the uncertainty of completing the sale of auto, so -- when our window was closing early in December. Additionally, we had the strong loan pipeline and it was building, not declining. So, based on the bullish view toward loan growth and the uncertain timing as to exactly when auto would come off the balance sheet, we held back a bit on the pace of share repurchases. So the silver lining there is we got more dry powder to work with to buyback stock. And so going forward, it's going to be the same sort of dynamic questions. What is our targeted capital levels were above them, but also what is our viewpoint in terms of growth of the balance sheet, and particularly growth of the loan portfolio. Because, ideally, we have a much higher return to our shareholders, if we deploy that through loan growth rather than just buying it back.

That said, depending on where the stock price is, we're going to be more or less aggressive in executing on the additional authorization. I think we're going to -- we would want to get further into the existing authorization before we consider going back and asking -- see our Board for additional authorization. But obviously, those are things that will be -- we'll be thinking about as we move forward here over the next few months.

Chris McGratty -- KBW -- Analyst

Okay, great. Thanks. And then maybe one on kind of the quarterlies in 2020 in terms of the growth. I mean, both companies had some seasonal patterns in loan and deposit growth. My guess is that smoothed out a little bit when you put the two companies together. But could you maybe rank kind of quarters of expected growth on both sides of the balance sheet strong -- strongest to weakest? Thanks.

Dennis L. Klaeser -- Chief Financial Officer

Yeah. The seasonality actually is a bit consistent between the two organizations. Strong second and fourth quarters, and the first and the third quarters being weaker. It's probably going to toss up between whether the second or fourth is the strongest, and a toss up between whether the first or the third is the weakest. Obviously, in the first quarter we have seasonal expense headwinds like other banks have related to the resetting of FICA taxes. So that adds another element in the first quarter for us.

Craig R. Dahl -- President and Chief Executive Officer

Yeah, this is Craig. I'd just throw in one other item. The first quarter is really in several of our segments coming off a strong fourth quarter. So your same customer is going to turn around and do something linked quarter. And then the third quarter, I have never been able to solve it, but there is always one month of the summer, which seems to lag, and it's not the same month every year either, but that kind of sets us back. And then the strong fourth quarter, as we build inventory finance portfolios, and as the tax nature of the equipment finance products drives additional volume in the fourth quarter. So that's really how we'll look at it. And how our C&I and CRE books mature and originations will really tell which quarters are going to be stronger. So we'll have -- we'll have a better line of sight through the middle of the year.

Chris McGratty -- KBW -- Analyst

Maybe I could sneak one more on the pay downs. A lot of banks have complained about pay downs. Did you see a notable change in pay downs quarter-on-quarter, that may have supported or detracted from growth?

Dennis L. Klaeser -- Chief Financial Officer

No, not really. We're not complaining about it. We've got good place to put that liquidity, either a new loan growth and/or in some repositioning within our funding base. But we think the pay down levels are manageable at this point.

Chris McGratty -- KBW -- Analyst

Okay. Thanks. Thanks a lot.

Operator

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

Ebrahim Poonawala -- Bank of America Securities -- Analyst

Good morning, guys.

Craig R. Dahl -- President and Chief Executive Officer

Good morning.

Dennis L. Klaeser -- Chief Financial Officer

Good morning.

Ebrahim Poonawala -- Bank of America Securities -- Analyst

First question, I guess, Dennis, in terms of -- so you've given lot of clarity on margin. Thank you. In terms of when we look at the actual side of the balance sheet and essentially average earning assets at $41.8 billion in the fourth quarter, just give us some color in terms of where things ended? What we should expect as a good starting point for the first quarter of '20. And from there on, do we expect any additional gross-up in the securities book beyond the $170 million or are we done with adding to the securities book?

Dennis L. Klaeser -- Chief Financial Officer

Well, first on the securities book. Yeah, my guidance was, expect the $170 million in the first quarter, but there is some additional upside there, because these scale of securities portfolio to total assets is a little bit below our target. So if our loan portfolio is growing in the mid-to-high single-digit range, expect the securities portfolio to grow in the high-single-digit to low-double-digit range over the course of the quarter. We had a fairly big spurt of loan growth near the -- near the end of the quarter. So I haven't exactly looked at it. But, Brian --

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

Yes, Ebrahim, this is Brian. I'd add in, if you look at our average loans in the -- in the fourth quarter, they were probably closer to $33.8 billion, but we ended the year at $34.5 billion. So we will benefit. Yeah, we ended at a much higher balance than what the average was for the quarter. So we'll get that benefit as we start in Q1 as well.

Ebrahim Poonawala -- Bank of America Securities -- Analyst

Got it. So, any sense of where average earning assets would be in the first quarter?

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

We will have some additional seasonal growth in inventory finance that takes place in first quarter. And we will, I can say, the completion of the reinvestment of the securities portfolio will take place in the first quarter as well. So, you should see at least a couple of hundred million increase in the securities portfolio. And then, you'll see the seasonal lift to inventory finance will probably be the largest, changes that you're going to see in Q1.

Ebrahim Poonawala -- Bank of America Securities -- Analyst

Got it. And I guess just moving to expenses, and I guess beyond sort of getting the expense savings from the deal, I know both banks were focused on efficiency improvement prior to the deal. As we think about, I know and you're not going to give guidance for 2021, but should we begin to think that whatever the fourth quarter expense base is, we begin to start seeing some expense growth from there on as just from franchise investments technology etc.? Or do you expect additional room on the expense front to kind of actually take dollar amount of expenses lower?

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

So, in general, I would expect first of all, as we get into 2021, the normal pace of expense growth, inflation, salary increases, opportunistic hiring of talent as we expand into new markets, but we don't expect any unusual sort of capital investments in new technology and things like that, because we're pretty well-positioned by the time we get through the conversion and integration. There is a little bit expense, merger-related expense that isn't fully taken out in the fourth quarter or you get some incremental benefit in the first quarter, but that is going to be not that material. And it's just going to modestly offset the normal expense build that you would expect going from year-end to the following year.

Ebrahim Poonawala -- Bank of America Securities -- Analyst

Got it. And just one last, if I can clarify something on fees. So, looking at the last year for both banks, we should expect about $20 million to $25 million sequential drop-off in fees from the $160 this quarter. Is that correct?

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

Yeah, it's in that neighborhood. Yeah.

Ebrahim Poonawala -- Bank of America Securities -- Analyst

Perfect. All right, thanks for taking my questions.

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

In terms of your question on pace of expense growth going into the following year, we do expect that to achieve additional operating leverage in that year, because again driven by the operating synergies, the business synergies of the combined enterprise helping drive further operating leverage into 2021.

Ebrahim Poonawala -- Bank of America Securities -- Analyst

Understood. Thank you.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning, everybody. Just sticking with the, I guess, the expenses, on the $47 million, was most of that, I guess, -- less than what portion of that was in the compensation? And then, what would be the way to start the year off on the expense side with FICA and other adjustments?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. So, it's or the $47 million, again one-time merger-related expenses. There was $19 million or so related to severance and retention, change in control payments and things like that. The next biggest chunk, of course just under that, is IT-related expenses. It is accelerating write-off of IT investments and/or ending contracts that were consolidating systems. And then, the remainder is a lot of miscellaneous things. Increased marketing expenses, for example.

And what was the second question?

Jared Shaw -- Wells Fargo Securities -- Analyst

Just the total impact from FICA going into the first quarter, the expectation for the combined companies?

Dennis L. Klaeser -- Chief Financial Officer

It's in the neighborhood of $5 million or so of FICA left in the first quarter, relative to where we were in the fourth quarter.

Jared Shaw -- Wells Fargo Securities -- Analyst

And then, looking at the map now, any other geographies or business lines that we should -- that are still under evaluation for potential consolidation or exit? Or are we at a good good place here now with the business model?

Dennis L. Klaeser -- Chief Financial Officer

Yeah. I think that we're in a good place with the business model. I mean, we really haven't targeted much of any stop-doing. And so, but we're not going to invest in all of them at the same rate either. So, I think you should see the business mix continue to be reinforced throughout the year, based on our success within those business lines. We love having all of these levers and basically I think you saw the power of the franchise come through in the fourth quarter with very strong originations across virtually all of our platforms.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thanks.

Operator

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

Terry McEvoy -- Stephens -- Analyst

Hi, thanks. Good morning. Given the move to the single-mortgage lending platform, I was just hoping you could help me calculate the mortgage impact to the fourth quarter. There was the net gains on loans, had some noise to it. So, how much of that was mortgage-related? Was there any MSR revaluations at all in the quarter? I know chemical legacy had that. And then, the servicing fees, that $6 million, is that all legacy TCF auto servicing fees?

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

Yeah, this is Brian. I can try and give you a little bit more color on the fourth quarter. So, it was a little noisy on the gain on sale line. So the gain on sale line, the reported number was $13 million. But if you take out the loss on auto as well as the gain that we had on the non-accrual TDR sale, that number adjusted would probably be in the $16 million to $17 million range for the quarter. And we probably expect a similar level as we get into 2020 of $15 million to $17 million a quarter. The servicing fees of $6 million is two part. On the mortgage side, there is some related to auto. So, that number will go down. A normalized level for that is probably going to be closer to $3 million or $4 million level as we get into 2020.

Terry McEvoy -- Stephens -- Analyst

And then, just a follow-up on fee income expectations for the first quarter, if I take the $166 million, and Dennis, I think, kind of down $20 million to $25 million would give me $141 million to $146 million with consensus at $143 million. I guess my question is, do you feel good with the $143 million? Does that seem reasonable for Q1 2020?

Dennis L. Klaeser -- Chief Financial Officer

Yeah, in that neighborhood, maybe that's incrementally a little high, but you're in the ballpark.

Terry McEvoy -- Stephens -- Analyst

Okay, 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 -- Analyst

Hi, my first question is related to funding, you had some of the roll-off of the CDs replaced with borrowings this quarter, with a loan to deposit ratio of 100% and the target of mid- to high-single-digit loan growth. Could you talk about expectations in terms of funding for the loan growth in 2020 and how much of your CDs are maturing in the first six months?

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

Hi, Lana. This is Brian. Related to deposit growth, we're real optimistic, we can continue to grow our deposit growth as we grow loans. In fact, when you look at non-CDs on a year-over-year basis, we did grow that $1.4 billion. So, there really is a lot of core growth in the book. We did manage off or we did have some seasonality in municipal deposits as well as we managed off some higher cost brokered. But we have lots of funding that's available to us, both brokered. But we do expect to continue growing the core book in 2020 and that will predominantly be how we fund the loan growth that takes place, but we do have access to broker deposits and flood capacity as well in 2020.

So, we feel really good about our liquidity position, where we sit and even the outlook for 2020 as well as the pricing of it. We do have -- over 70% of our CD book does mature in the next six months. The average cost of that right now is 2.11%. Our highest cost promotions that we've got in the marketplace today are somewhere in the 1.75% to 1.85% [Phonetic] range. So, we think we're going to see repricing of the CD book come down, as well as we would expect part of the savings book in just the other non-CD portion of the book. We think some of that can reprice as we get into 2020 as well with the current kind of rate expectations and where market prices are.

Dennis L. Klaeser -- Chief Financial Officer

Let me just add --- let me add that in the fourth quarter, of the deposit runoff over $400 million is the seasonal runoff of municipal deposits. Now, as we sit here today, a lot of those dollars are rolling back on to the balance sheet and will be on our balance sheet as we get to the end of the first quarter. So, with those coming back on, obviously we then make progress on bringing that loan-to-deposit ratio down. So, when you look over the course of the year, the average loan-to-deposit ratio should be under 100% and 100% at year-end is sort of a peak level that we'd expect to be under, going forward.

Craig R. Dahl -- President and Chief Executive Officer

As Jim said [Phonetic], if you think about bringing these franchises together, putting our retail teams on a common operating model or focused on customer growth. [Technical Issues]

Lana Chan -- BMO Capital Markets -- Analyst

Hello.

Operator

Ladies and gentlemen, thank you for your patience. It appears we may be having a connection issue with the speaker line. We will attempt to rectify that. We do ask you please remain patient and on the line. And we should have them back on here momentarily. One moment.

And everyone, the speaker line has rejoined. Lana, you're still in the question queue.

Lana Chan -- BMO Capital Markets -- Analyst

Thanks. Just one more question for Craig. In terms of, just wanted to get more color in terms of the comment on any interest in acquisitions, and the portfolio and platform acquisitions. What areas would be of interest?

Craig R. Dahl -- President and Chief Executive Officer

I think the common ones that we've talked about in the sort of legacy TCF continue to be here today, and that's primarily in the equipment finance and the inventory finance businesses. So, that's where the focus has been.

Lana Chan -- BMO Capital Markets -- Analyst

Great. Thanks, Craig.

Operator

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

Brock Vandervliet -- UBS -- Analyst

Thank you. Just going back to CECL, the adjustment $200 million to $225 million driven by the acquired loans, I would think those acquired loans that have a higher CECL reserve. Therefore, as those acquired loans run off, could we assume the reserve drops or no?

James M. Costa -- Chief Risk Officer

This is Jim. I'm not sure that it's fair to say that the acquired loans have a higher CECL reserve. The portfolio composition is not identical between legacy chemical and legacy TCF. And consequently, that's why the CECL rates have been tailored to match the quality and composition. So, I would just expect natural attrition of some of those legacy assets. But I wouldn't make an assumption that you'll see a faster runoff on the reserve rate because of one portfolio running off faster than the other. It really is -- it's nuance. You really have to look at vintage and geography and all the things that built into a proper forecasting model.

Brock Vandervliet -- UBS -- Analyst

Got it, OK. And which range should we be thinking about in terms of net charge-offs for the combined company looking ahead?

Dennis L. Klaeser -- Chief Financial Officer

Sure. So, last quarter, we thought that we would be inside of 20 basis points on an annualized basis. And we came in at, after the adjustments. Excluding the adjustment for the recovery on the non-accrual and TDR sale at 13 basis points. So, 7 basis points on absolute, 13 without the adjustment. That felt like it was right in line with our forecast and we're going to stick with that. I might give you a tighter range of maybe 10 basis points to 20 basis points. But we're very, very happy with the portfolio's performance, really have been no surprises to the extent that we've had a one-off commercial credit. We brought that to your attention. There is nothing systemic that would change our view underlying the 10 basis points to 20 basis points range prospectively.

Brock Vandervliet -- UBS -- Analyst

Okay, great. Thanks for the guidance.

Operator

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

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks, a couple of questions. First, follow-up on deposits. So, the non-interest bearing and the checking deposits were down sequentially. You mentioned about the muni deposit runoff to seasonal impact there. Just wanted to confirm, was there anything else kind of driving that decline or was it entirely municipal deposit-driven?

Dennis L. Klaeser -- Chief Financial Officer

It's primarily municipal deposit-driven. Also in the increase in liquidity that we have, we did have a couple of larger more institutional type deposits, where the rates we are paying were quite high, and we managed one or two deposit relationships out because the rate was a little bit too high for our liking.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. Thanks for that. And then a follow-up on CECL. I have in my notes that you guys were expecting in October, the reserve was going to increase 35% to 45%, but now you're saying $200 million to $225 million, which is pretty drastic step up. I was curious what kind of change between then and now?

James M. Costa -- Chief Risk Officer

The 30% to 35% is -- this is Jim Costa. The 30% to 35% was reflective of the portfolio that was attracting an incurred loss reserve, which was the Legacy TCF portfolio. Recall, in Q3, the only Legacy Chemical portfolio that would have had an incurred loss reserve as what was a newly originated. So therefore, you should expect -- you take the newly originated assets relative to a full legacy balance sheet for Chemical and loan and leases, you're going to see a meaningful pickup. It's really the nature of the accounting. Keep in mind, that we have a credit mark that we carried forward into 2020 as well. So that 90 basis points to 100 basis points is the -- is the reserve rate for CECL and then there is a credit mark that's carried forward. So it really is just the nature of the acquisition, the accounting acquisition of the Legacy Chemical portfolio, that gives you a relatively low spot in Q3 versus what you'd expect in a normal run rate. That's why we gave you the guidance of the 74 basis points today, which is the 33 basis points on the incurred loss book, plus the credit mark is 74 basis points, and then prospectively, we're looking at 90 basis points to 100 basis points. On CECL, that is a more intuitive comparison and not such a significant increase.

I do want to point out that, again that credit mark does get carried forward in addition to the 90 basis points to 110 basis points -- 90 basis points to 100 basis points.

David Chiaverini -- Wedbush Securities -- Analyst

That's helpful. Thank you. And then the last one from me is more housekeeping. But was there anything unusual in the other income of $22 million besides the $2.4 million interest rate swap mark-to-market adjustment?

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

Yeah. David, this is Brian. What I'd say is, we had some other fees that were strong in the fourth quarter in our commercial business. So I wouldn't expect that that line item to be as high going forward. It's more likely that that number is going to be in the mid-teens on a go-forward basis.

David Chiaverini -- Wedbush Securities -- Analyst

Great. Thanks very much.

Operator

And ladies and gentlemen, at this point we'll end the question-and-answer session. Thank you for your questions today. Should any investors have further questions, Tim Sedabres, Head 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

Well, thank you all for listening this morning. We appreciate your continued interest in TCF, and we look forward to building on the momentum we have established as we execute on both the integration and our core business initiatives over the course of 2020. Thank you.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Tim Sedabres -- Head of Investor Relations

Craig R. Dahl -- President and Chief Executive Officer

Dennis L. Klaeser -- Chief Financial Officer

James M. Costa -- Chief Risk Officer

Brian W. Maass -- Deputy Chief Financial Officer and Treasurer

Jon Arfstrom -- RBC Capital -- Analyst

David Long -- Raymond James -- Analyst

Nathan Race -- Piper Sandler -- Analyst

Steven Alexopoulos -- JPMorgan -- Analyst

Chris McGratty -- KBW -- Analyst

Ebrahim Poonawala -- Bank of America Securities -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Terry McEvoy -- Stephens -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Brock Vandervliet -- UBS -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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