Q4 2019 Earnings Call
Good morning, everyone and welcome to TCS 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. I would like to ask a question simply, press the star followed by the number one on your telephone if you would like to enjoy your questions. You may press star into.
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Thank you and good morning. Thank you for joining us for TCS fourth quarter 2019 earnings call joining me on today's call will be Craig dial president and chief executive officer Tom Schaefer co-operating Officer Dennis klaser Chief Financial Officer. Jim Costa Chief risk officer and Brian Maas Deputy Chief Financial Officer and Treasurer in just a few minutes Craig Dennis and Jeff and overview of our fourth-quarter results. It will be referencing a slide presentation that is available on the investor relations section of TCS website and I are tcfbank.com following their remarks 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 an actual events are results May differ materially. Please suck forward-looking statement disclosure and our 2019 fourth quarter earnings release for more information about risk and uncertainties, which may affect us. The information will provide today is accurate as of December 31st, 2019, We undertake no duty to update the information. I would now like to turn the conference call over at TCF president and CEO Craig.
Thank you, Tim.
Good morning, and thank you for joining us on the call today 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 that momentum not 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 dead.
Augusta.
Efficiency ratio was just under 59% and adjusted r o a t c e was over 16% Neither of these ratios yet reflect the full contribution from a targeted cost synergies and they should only improve as we get to our run rate Targets in the fourth quarter of this year.
What are the key outcomes of the merger was the complementary products that we now have across both commercial and consumer as a result of bringing together the best of both Banks during the quarter our team 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 energies and we are confident and hitting our expense run rate for the fourth quarter of this year.
second in terms of operating The Core Business we
Change focused on organic growth with loans up 2.9% in the quarter or 11.8% annualized commercial loan portfolio balances grew by a billion dollars during a fourth quarter and we're up nearly 10% year-over-year. Each bank had momentum going into this partnership and our results reflect that trajectory we reinvest in Securities balance from sales during the third quarter as part of our balance sheet repositioning credit quality Trends also remain strong with net charge-offs of just seven basis points off non-accrual loans declining 249 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 freeze 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 cni business in that market. Finally. We announced the divestiture of our Arizona branches as we attend to exit the market and focus on the opportunity in our core Midwest and Colorado markets.
overall we maintain
Excess Capital with a CET one ratio of 11% following a sale of Auto and we were active and disciplined and our Capital deployment strategy as we repurchased 28 million dollars of stock during the quarter with a full quarter under our belt. I look at twenty twenty as a year to demonstrate our execution of the plan. We've 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 removing the 20/20 we are focused on for strategic priorities first is delivering on the merger cost savings Dennis. We'll talk more about this in a few minutes, 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 Thursday. 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.
sir
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 for 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. Well as approved efficiencies and turnaround times.
as of
January 1st. We launched our combined benefits plan and also implemented our company-wide learning management system to more efficiently Aid and achieving Learning and Development needs.
We are also on track with vendor synergies as over 35% of contracts have been renegotiated.
Last quarter, we laid out several business Synergy opportunities. We have across our commercial Leasing and mortgage products. Well 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 and getting out and interacting with our teams through Regional and business leadership Summits town halls and track across our footprint as we move into 2020. There are several integration Milestones on our roadmap that we will be focused on
as we talk about culture having a common purpose and belief 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 walk 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 on to the TCF digital banking platform. This will both enhance the customer experience and dearest the ultimate car banking system conversion, as it serves as proof of concept for our ultimate end-stage pairing of TCF digital technology with chemicals core banking platform. Testing is in process as we speak and we remain right on track.
As I mentioned before we expect various system rollouts and consolidations to continue over the coming quarters. We expect final system conversion to occur in late Thursday quarter Staffing optimization is also continuing as we move through 2020.
In addition we continue to keep putting our customers first. We'll a lot of effort is going into integration. We are maintaining the core of what is always made our teams grade.
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 than a quarter Financial results. 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 of year ago, excluding the Legacy TCF Auto Finance portfolio on a linked quarter basis growth was driven by an increase of 1 billion dollars on Commercial loans and leases including approximately five hundred million dollars of cni growth.
The inventory Finance business is included within cni and increased by $189 from third quarter as we saw normal seasonal bills and balances. We also sort of strong growth across our c r e 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 wage, and they were impacted by a non-accrual and TDR loan sale of 83 million dollars in the fourth quarter.
on your
For basis we are seeing continued growth and 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 5.2 for the decline was driven by the full quarter impact of the September rate cut and the subsequent October rate cut off as well as the full impact of the chemical loan portfolio on the balance sheet as a reminder of third-quarter loan yields included only two months of chemical owns Which had a slightly off overall yield and the Legacy TCF portfolio.
Starting to slide six 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 cost of funding as we execute on our balance sheet management strategies, including the sale of the Legacy TCF Auto Finance portfolio, as a result see balances were down $930,000 including the run off of over four hundred million dollars of brokered CDs, and we are able to exit other higher cost deposits which led to a quarter report decline in interest bearing off balances CDs Now make us make up less than 22% of total deposits down from nearly 24% at September 30th, 2019.
well
Actually getting these actions we were still able to grow the combined balances of non CD balances one point by one point four billion dollars or over 5% year-over-year while mayonnaise or other deposit costs lower.
In fact deposit cost declined six basis points from the last quarter a trend that we would expect to see continued into twenty-twenty. We are continuing to be proactive and pricing down certain deposits off a maturing CDs as Market rates continue to move lower.
Slice seven highlights the reinvestments we're making it are investment Securities portfolio following the sale of one point six billion dollars of Securities in the third quarter. We have readjusted all but a hundred seventy million and expect to complete the reinvestment in the first quarter of this year during the fourth quarter. We we purchased Securities out of Average Joe's of 2.7% This compares favorably to the yields of security sold in the third quarter of 2.4%
overall
The portfolio over all the portfolio yield increased three 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 page continue to increase towards the 16% range over the course of twenty twenty.
Turning to slide eight our net interest income and that is just barging were again impacted by purchase accounting equation.
Recall that last quarter. We disclosed that 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 $400 which included $31 off purchase accounting accretion and resulted in adjusted net interest income of $378 million dollars. We shared our outlook for fourth-quarter accretion in a low $20 range excluding payoffs and prepayments. This was in line with a fourth-quarter results as the 31 million dollars of accretion included approximately ten million dollars related to three payments and payouts.
reported name 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 five basis points decline from the September and October rate cuts, and the additional issues related to balance sheet mix and other items.
Well, we could see margin moved slightly lower we expect stabilization in the near-term within the 350 range given in the 350s given less loan yields wage and benefit from lower deposit costs and the continued optimization of our asset mix mix that interest margin continue speed and outcome of the business Maddie driver. We are folks are growing that 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 juice journey to slide 9, we saw strong non-interest income during the quarter of $158, which included seven point six million dollars of notable items resulting in adjusted non-interest income a hundred sixty-six million dollars, no notable items included in eight point two million dollar loss on the sale of the Legacy TCF Auto portfolio.
that
Went through the gate on sale line item as well as a $600,000 recovery on the prior Loan Servicing rights and pyramid.
In addition to these notable items to gain on sale hello lines benefited from a 3.7 million dollar gain related to the non-accrual and TDR sale during the quarter and other non-interest income. So benefited from a 2.4 million dollar 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 peek in the fourth quarter and fees and service charges and car driven are are lighter in the first quarter of the year in total. We expect to reset not interested in the first quarter from this quarter's level similar to what the combined company saw from 4:18 to 1:19.
Turning to slide ten. We remain focused on executing on our costs energy initiatives during the fourth quarter as we have now achieved around 1 Thursday are expected $180 of annualized cost savings to date that said we had a relatively noisy quarter from an expense standpoint as reported non-interest expensive or fourth quarter included $47 million dollars of merger related expenses and 14.5 million dollars of notable items resulting in adjusted not interest expense of $355.
This is down.
Slightly from our combined non-interest income expense of $358 million in the fourth quarter of 2018. All right, just efficiency ratio improved to 58.5% in the fourth quarter, please total expense items included 6.3 million dollars of pension fair value adjustment a 4.7 million dollar impact from the sale of the auto forty thousand and three point five million dollars related to Branch exit cost.
In addition we had several other items that impacted on interest expense in the quarter totaling nine point four million dollars, including $4000000 impairment of historic tax-credit, which were offset by a related 3.6 billion dollar tax credit in the income tax line item a 1.3 million dollar Branch impairment expense took about four million dollars of higher commission expenses in the fourth quarter compared to the third quarter due to higher origination activities and production in the quarter caps, and these items expenses table in the mid-40s for the fourth quarter.
With the cost savings we have yet to realize.
And expect and expected inflation and related increases in early 2023 remain right on track to achieve our expense levels of 321 million dollars or better in the fourth quarter of 20 and it 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 Acosta to provide an update on credit.
Thank you, Dennis during the slide eleven are strong credit Trends continued in the fourth quarter net charge-offs for the quarter. We're just 7 basis points, but included a recovery from the consumer non-accrual Thursday. We are closed cell 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 nineteen million excluding the recovery the $83 loan sale which included nearly $63 of accruing tdrs and Seventeen million accrual loan us further reduce reduce our risk profile as the sale generated a gain while reducing non-performing assets.
I was for a loan and Lease losses declined eight million dollars to 33 basis points of total loans and leases. However inclusive of credit discount on acquire load, the reserve ratio would have been 74 basis points off on the Cecil front. We are finalizing our work for both Legacy TCF and chemical portfolios. We currently expect allowance for credit losses to increase between $200 and $225 million as a result of Cecil with the majority of the increase related to acquire loans, which includes the chemical portfolio.
This increase would equate to an allowance for credit losses of between 90 and 100 basis points from a capital perspective. We would expect Cecil to result in a 10 to 15 basis-point decline a common Equity. Teria common Equity Tier 1 or a year one phase in and forty to fifty basis point decline when fully phased in
Other credit metrics remain strong as well. We saw twelve million dollar decline in non-accrual loans and leases 249 basis points due in part to the non-accrual a TDR loan sale during the quarter off. Well over ninety day delinquencies a leading indicator of credit quality and many of our portfolios remain flat at just nine basis points off.
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 12 a.m. With that. I'll turn it back over to Craig. Thanks Jim turning to slide 12. We continue to have a strong Capital position with cet1 ratio of 11% off your rent, which we expect to be forty-five to fifty basis points lower fully phased-in for Cecil.
This provides us with continued Capital flexibility as remained thoughtful and disciplined when evaluating Capital allocation.
These priorities have not changed as we first look at organic growth opportunities as evidenced by the stronger 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 energy initiatives.
Our second priority is the dividend as we expect to maintain a payout ratio of between Thirty and forty percent next our share repurchases as we begin executing on the buyback. We announced wage order during the fourth quarter. We repurchased 658000 shares at a cost of $27 and $5 million. We still have a hundred and twenty two and half million remaining under the current month reservation, which we expect to execute on or the coming quarters.
finally
We'll 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 focuses on accelerating shareholder value. We remain committed to doing this by driving towards a below. Media and efficiency ratio and a top-quartile r o a t c e by fourth quarter of twenty with a continued passion and collaboration. Show me our team members. We remain on track to achieve these Targets. In fact or fourth quarter adjusted r o a t c e of 16.3% is already above the peer median.
We have the benefit of operating with a strong Revenue base of nearly two point three billion annualized a level much higher than similarly-sized peers are opportunity to execute on our cost synergies and drop the savings to the bottom line, which results in increased earnings power will lowering the efficiency ratio and increasing our return on Capital with that. I'll open it up for questions.
Ladies and gentlemen at this time will begin the question-and-answer session to ask a question. You may press star and then one on your telephone keypads. If you are using a speakerphone, we do ask you please pick up your handset before pressing keys to a charger questions. You may press star to again that is star in and one to ask a question.
Our first question today comes from John Armstrong from RBC Capital, please go ahead with your question. Thanks morning guys. Good morning. Maybe I'm just thinking through the margin Dennis. I understand your comment about how you're focused on the dollars, but the 350 range feels like chemical impact is in you've got a life from range. You talked about five basis points, maybe some mix changes. What do you mean by the 350 range? Do you mean that over the course of the year the core margin floats down to 350 or is that another Sim life stuff down? Is that what you're trying to flag for us in q1?
No, I we expect it to be in the 350s.
So there is some incremental pressure here in the first quarter, you know, incrementally impacted by the sale of higher-yielding auto loans. But but then we see the margin the stabilizing for the rest of the you know, for the rest of the year. We do have, you know, greater downside in terms of pricing some of our deposits and we have a large amount of our CDs that are going to be maturing in the you know in the next six months. So those will be priced down as a mature. Okay, and then the purchase accounting accretion. I know last quarter you kind of flag that it might be you know, in in the low 20s. Is that consistent with what you tell us for q1?
Yeah, pretty much in the ballpark the the the level of accretion that came from prepayments and pay Downs was little higher than we expected in the fourth quarter. I think as a quarter went on we saw a little bit of moderation in the pace of prepayments and pay Downs which is which is positive. And so yeah, I think our wage normalized accretion without any prepayments would be, you know, just under twenty million and then with prepayments we expect it to be in the low $20 range. Okay, good. Thank you for that. And then Craig just one for you you flag 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 wage. Can you talk a little bit about the magnitude what you've seen so far and what you're thinking for a potential on that? Thanks. Yeah, the magnitude is still pretty small but the the frequency of discussions, especially we're dead.
We've got a current.
Chemical customer and we're bringing in equipment Finance solution to that customer that would be I think our our earliest ones were without even a formal referral system. We've won several deals with that were there because we're not, you know, we're not pushing that transaction the customers pulling us into that and we we see that as enhancing our relationship the other part of the business is it looks you know looks awful glad is in the mortgage business but our our backlogs up significantly in in both of our platforms and that that origination was pretty flat on a year-over-year when the 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 same sort of patching that had to go on there now, we got one system and we're pretty excited about that as well. And then there's still going to be that that roll out over time. It's going to be thoughtful it's going to be structured wage.
at the inventory Finance dealers, you know in Michigan and
Ohio we have more equipment Finance or excuse me, inventory Finance dealers that we have branches in those States and all of those customers have are going to be tailor-made to be, you know to be called on by our own new HomeTown banking team. So we're looking forward to really all of those. All right. Thanks a lot.
Our next question comes from David long from Raymond James, please go ahead with your question.
Good morning, everyone.
Good morning. Just following up on the net interest. Margin Outlook. Does your purchase accounting? I think you should just under $20 million before I pay down. Does that include the impact from Cecil the day to impact that that may have there if you're double counting for your purchase loan reserves. Yeah in effect in reality the that accretion level doesn't change because it's Cecil. There's no impact on that independent. So that 20 million dollars does suck. We expect to step down a couple of million dollars each quarter going forward and then and then the pace at which a step sounds moderate overtime and it's it's more of a factor of just the overall size of that portfolio over time.
Okay, got it. And then sticking with the Cecil on the provision line, you know, you're pretty clear on day one with the impact is how how do you think the provision moves on a quarter-to-quarter basis is a pair of Cecil relative to where we are today.
David this is Jim Casa. 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 to 100 basis points as our Reserve rate. So the day to Mark's wage they to reserve will follow that loan growth what it's a little hard to give you a specific provision estimate as we don't know what mix the channel will come from in terms of loan originations a little hard to forecast what macro scenario will be running through the Cecil 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. Ninety one hundred basis points Reserve rate all in on the on the newly originated access.
gotta know I
We can appreciate that that commentary lastly just in your slides you you did this last quarter with the September providing us with some color on the name and the nii for the month of September , and that for December so we can kind of see where you're at going into the first quarter.
No, I think we just felt that was a one-time item for the third quarter because unusual circumstance were the third quarter included only two months of 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 is really the boss really is indicative of the trend quarter-to-quarter.
Got it. Thanks a lot guys. Appreciate it.
Our next question comes from Nathan race from Piper Sandler, please. Go ahead with your question. Good morning. Everyone is just a clarifying your comments around think I'm growing in the second. Is that a core basic screwed up purchase accounting accretion?
Yeah, yeah.
Because it's called increased and 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 that's core wage growth driven by, you know growth of earning assets. And we enter the year. We exited the feeling very good about the loan growth wage. But we also have a strong pipeline going into into this year. So we feel pretty good about the guidance that we have in in in historically for both companies as well. You know, the first quarter tends to be a little bit of week or quarter, but then seasonally we we we both both the Legacy companies picked up in the second quarter.
Understood that cellphone changing gears and think about capital and perhaps optimizing the capital stack going forward just giving the profitability profile that's going to improve as you guys generate cost-saving so forth and give them that the Cecil impact seems to be pretty reasonable. I suppose in the first quarter just any thoughts on perhaps we need to prefer this outstanding in conjunction with the birth of BuyBacks.
We have a small amount of preferred that came through chemical, but that has a very low rate and it's not due until $23. And so I I think it's likely we would just leave those those the rates on those instruments are probably less than what we would 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 you know, that's something we obviously she bought Monitor and take a look at I appreciate the color. Thank you.
Our next question comes from Steven alexopoulos from JPMorgan, please go ahead with your question. Hey, good morning everybody.
Morning, Dennis. I want to just follow up on the gym quick. So your guiding down to 350 and one Q twenty. I don't miss interpret life guys. I said the 350s and that's a the I mean in the 350s range and I suggested after Dave long as 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 support to step down as much as it did between the, you know, 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 stabilizing in the 350s. I hate to give you a narrower range of say 3:54 to 3:59, but 3:50 is gives me enough dead.
wiggle room give it all the
Wild cards that it could occur. Okay, it does that include purchase. Accounting. Are you talking reported? Margin of 350 or Cordon? Mm. Oh sorry 350 or are you talking for him or reported him? That's the that's the core. Yeah. Yeah x p a a in the 350s. Maybe the middle of a guy will say okay that's helpful and based on the guidance we gave about a creation in the first quarter. We would expect the reported them to be let's say twenty thousand to twenty five basis points higher based on the accretion right guy and the paa that should go down. I think you said a couple of million per quarter. Will that be the run-rate Beyond 2020 like through 2021? Yeah, it it it it moderate overtime that so in the first in the next two or three quarters, it's probably two million a quarter, but then it off.
Just a moderate the decline moderate.
It's overtime Gaya. Okay, and then the fee income guidance is actually really helpful in terms of the anticipation of the one Q decline. Now, we look at prior years, you know, it would decline it one Cube and then if we look at life the past year one Q2 four Q is up almost 30% the expect that magnitude of rebound through this year 2020 once we get to the one Q2 1 rate.
Yeah, that's pretty remarkable rebound. So I hate the guy to that level but you know, we do expect to be harvesting synergies across the company and one of the key reasons are coming together is together. I think we are better in producing via income. Okay? All right, and then finally on expenses 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 got to the efficiency ratio below 57% by the end of 2020. Are we still on track for that? Thanks.
Yes.
On track for that and yeah, the 180 is the number we've really zeroed in on we we we have a great deal of granular planning around that number and we're very calm 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 it's often more going to be a a question of where where we find a better place to spend that because clearly we are bullish about our prospects in in various markets. And so if we could if we do find additional cost savings and we're going to be very diligent about that odds are going to be spending those additional costs saves on Revenue growth initiatives. Okay. Terrific. Thanks for all the color.
Our next question comes from Chris mcgrotty from KBW, please go ahead with your question.
Hey, good morning, buddy. Come back to the capital discussion. So I think Craig's comments. You said 11:00 is where you are on t one. You've got a ten Target just to make sure I understand the phase in to see so I think the initial day one was was ten to Fifteen basis points is that and then full Cycles kind of fifty basis point. Is that right? Yep. You're correct. Okay, and so I suggest you know, 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 your 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 from Auto? Thanks. Yeah. I read your note last night or this morning and and your your view on that. So yeah as we got into the latter part of the quarter we had the frankly it was really the uncertainty of completing the sale bottle. So the Dead
you know when when our window was closing early in December additionally, we had the strong loan Pipeline and
It was it was building that declining So based on the bullish view towards 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 the Silver Lining there is we got more dry powder to work with to buy back stock and that's so going forward. It's going to be the same story Dynamic questions. What is our targeted Capital levels were above them. But also what is our Viewpoint in terms of lack of growth of the balance sheet and particular growth of the loan portfolio because ideally, you know, we have a much higher return to our shareholders if we deploy that through faith grows rather than just buying it back that said, you know, depending on where the stock price is, you know, we're going to be more or less aggressive in and executing dead.
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 wage loss reservation, but, you know, obviously those are things that will be will be thinking about as we move forward here over the next few months. Okay, great. Thanks, and then maybe I'm kind of the the quarterly in the twenty20 in terms of the growth. I mean, both companies had some seasonal patterns and Loan and deposit growth. My guess is that Smooths out a little bit when you put the two companies, but could you maybe ranked kind of quarters of of expected growth on both sides of the balance be strong strongest to weakest. Thanks.
yeah, the seasonality actually is is a bit consistent between the
Two organizations strong second and uh fourth quarters and the first and the third quarters being weaker. It's probably going to toss up between weather 2nd June 4th is the strongest a toss-up between whether first or third is the weakest.
Obviously in the first quarter, we have seasonal expense headwinds, like other banks have related to you know, you know the dead resetting a FICA taxes. So that adds another element in the in the first quarter for us and this is Craig. I just thrown one other item to the first quarter is currently in several of our segments coming off a strong fourth-quarter. So your same customer is going to turn around and do something, you know link order and then the third quarter I've never been able to solve it but there's always one month of the summer which seems to lag and that and it's not the same month every year either but that kind of sets it back and then the strong fourth-quarter as we build the inventory page Sport folios and as the tax nature of the equipment Finance product drives additional volume in the fourth quarter, so that's really how will look at it and we'll how are dead.
I am see our ebooks mature and and an origination will really tell which quarters are going to be stronger. So we'll have
You know, we'll have a better line of sight to the middle of the year.
Maybe I could speak one more in on the pay down. 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 rejected from growth.
No, not not really. We're not complaining about it. We we've got good place to put that liquidity either a new loan growth and or in some of the positioning within our funding base, but but we think the pay down levels are manageable at this point.
Thanks. Thanks a lot. Our next question comes from Ibrahim poonawala from Bank of America Securities. Please go ahead with your question the money guys off first question. I guess Dennis in terms of so you're given a lot of clarity and margin thank you in terms of when we look at the actual side of the balance sheet and and Page Arizona assets at 41.8 billion in the fourth quarter. Just give us some color in terms of way things ended what we should expect as a good starting point for the first quarter of two thousand and from there on the we expect any additional grows up in the Securities book beyond the 170, or are we done with adding to the Securities book?
But first on a Securities book, yeah, my guidance was expect the 170 in the first quarter, but there's some additional upside there because of the scale the Securities portfolio to total assets is a little bit below our our Target. So if our loan portfolio is growing in the you know, the 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 wage, you know, we had a a fairly big Spurt of lung growth near the near the end of the corridor, so I haven't exactly looked at it. But Brian may be brought home. This is Brian add in if you look at our average loans in the in the fourth quarter, they were probably closer to thirty three point eight billion, but we ended the year at 34.5 billion so we will dead.
benefit, you know we
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.
Go to training sense of where average owning assets would be in the first quarter.
I mean, we will have some additional seasonal growth in inventory finance that takes place in in first quarter. And you know, we will I can't say, you know, the completion of the reinvestment of the Securities portfolio will take place in the first quarter as well. So you should see you know, at least a couple hundred million increase in on the Securities portfolio and then you'll see the seasonal lift home refinance will probably be the largest, you know changes that you're going to see in q1.
Got it. Can I guess just moving to expenses and I guess Beyond sort of getting the expense savings from the deal. I know both Banks were were focused on efficiency Improvement prior to Thursday deal as we think about I know and you're not going to give guidance for twenty Twenty-One, but should we begin to think that whatever the fourth quarter expense places? We begin to start seeing some expect from there on as just from invest franchise Investments technology Etc, or do you expect additional room on the expense front or two kind of actually take dollar amount of expenses lower.
So in general I would.
Expect first of all as we get into twenty Twenty-One the the normal pace of expense growth inflation salary increases opportunistic hiring of talented 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 by the time we get through the conversion and integration. There is a little bit of expense from merger-related expect said isn't fully taken out in the fourth quarter where you get some incremental benefit in the first quarter, but that is going to be uh, you know, not that material and it's just modestly offset the name of expense bill that you would expect going from your end to the to the following year.
Go ahead 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 to 25 million dollars sequential drop off and fax from the hundred and sixty this quarter. Is that correct?
Yeah, it's in that.
Neighborhood. Yeah, perfect. All right. Thanks for taking my questions.
I just in terms of their question on Pace of expense growth going into the following your we do expect that to achieve additional operating leverage in that year because um again driven by the operating synergies the business synergies of the combined Enterprise helping Drive operating leverage further options in into 2021 Honda. Thank you. Our next question comes from from Wells Fargo Securities, please go ahead with your question. Good morning everybody else.
Just sticking with the I guess the expenses on the on the $47 million was most of that. I guess could you let us know what portion of that was in the compensation and then what would be a good?
Way to start the year off on the on the expense side with with the psyche and other adjustments.
Yeah, so it's for the 47 million again, one-time merger-related expenses. There was Nineteen million or so related to offer Severance and retention changing Construction Control payments and things like that, but the next biggest chunk which was just under that is it related expenses. Thursday is accelerating right off of it Investments and or ending contracts that were consolidating systems. And then the remainder is a lot of miscellaneous things in marketing expenses. For example, what was the second question just the the total impact from cycling into the first quarter expectation for the combined companies.
It's in the neighborhood of $5 billion dollars or so if I can left in the first quarter relative to where we were in the fourth quarter and then looking at the looking at the map now any other geographies or business lines that we should you know that are still under evaluation for potential consolidation or exit or or we at a good good place here now with the the business model.
Yeah, I think that we're in a good place with the business model. I mean the
we really we really haven't targeted much of of any stopped 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, you know continue to be reinforced throughout the year based on our our success within those business lines. We love having all of these levers and basically I think years of the power of the franchise come through in the fourth quarter with with, you know, very strong origination across virtually all of our platforms.
Great. Thanks.
Our next question comes in Terry McEvoy from Stevens, please go ahead with your question, right? Thanks. Good morning, given the move to the single mortgage lending platform. I was just hoping you could help me calculate mortgage impact to the fourth quarter. There was the net gains on loans, um had some some noise to it. So how much of that was mortgage-related was there any MSR revaluations at all in the quarter? I know the Legacy had that and then the servicing fees that 6 million is that all Legacy TCF Auto servicing fees.
Yes.
Yeah, this is Brian . I can try and give you a little bit more color on the fourth quarter cuz 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 the $17 range for the quarter and we probably expect you know, a similar level as wage into twenty-twenty of you know, 15 to 17 million a quarter. The servicing fees of six million is too part. There is you know some on the on the mortgage there is some related to Auto so that number will go down a normalized level for that is probably going to be closer to three or four million dollar level as we get into twenty-twenty.
And then just a follow-up on fee income expectations for the first quarter if I take the 166 and Dennis, I think kind of down and twenty to twenty-five million would give me a call 441-2146 with consensus at 1:43. I guess my question is do you feel good with the 143? Does that seem reasonable for Q1 2020?
In that neighborhood, maybe that's incremental a little high, but but you're you're in the ballpark. Okay. Thank you.
Our next question comes from Linda Chan from BMO Capital markets, please go with your question. Hi. My first question was related to funding you had some of the roll off of the CDs replaced with borrowings dog with a low to deposit ratio of 100% And the target of mid-to-high single-digit longer. Could you talk about expectations in terms of funding for the loan growth in 2026 and how much have you see these are maturing in the first six months.
Hi Lana, this is Brian . You know related to you know, deposit growth, you know, we're real optimistic. We can continue to grow deposit growth as we grow loans, you know, in fact when you look at 9 a.m. See D's on a year-over-year basis, you know, we did grow that one point four billion dollars. So there really is a lot of core growth in the book we did manage off or we did have some seasonality in in Municipal to place a deposit as well as we you know, managed off some higher costs, you know brokered but all we have lots of funding, you know that's available to us both, you know brokered but we do expect to continue growing the core book in 2020 and that'll predominately be how we fund the loan growth that takes place but we do have access to you know, broker deposits and and and flood capacity as well in twenty-twenty. So we feel really good about our liquidity position, you know, where we sit and in even the outlook for 2020 as well as the pricing of it, you know, we do have over 70% off.
CD book does mature in the next six months.
You know, the average cost of that right now is you know, 2.11% our highest cost promotions that we've got in the marketplace today are somewhere in the $175 to $185 range. So we think we're going to see you know, the pricing of the CD books come down as well as we would expect part of the you know, savings book and just the other non CD portion of the book. We think some of that can reprice long as we get into a 2020 as well with the current kind of rate expectations, and we're market prices are
Let me just add to see let me add that the in the fourth quarter of the deposit run over 400 million is the seasonal run off of Municipal deposits. Now as you sit here today, A lot of those dollars are rolling back on to the balance sheet and it'll be on our balance sheet as we get to the end of the first quarter. So with those coming back on obviously that we we then make progress on bringing that lower-wage deposit ratio down. So when you look over the course of the year the average low-deposit low deposit ratio should be under 100% off and 100% at your end is sort of a peak level that we'd expect to be under going forward.
So have you think about bringing these franchises together, you know putting our our retail teams on a common operating model of for a focus on customer customer growth and a month.
Hello.
Ladies and gentlemen, thank you for your patience. It appears. We may be having a connection issue with the speaker line will attempt to rectify that we do ask you please remain patient and on the line and we should have them back on momentarily. One moment.
And everyone the speaker line has rejoined Lana you are still in the question queue.
Thanks. So 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 on the service platform Acquisitions. What what areas would be of interest?
I mean, I think that the common ones are we've talked about in the sort of Legacy TCF continue to be here today. And that's primarily in the equipment Finance Thursday inventory Finance businesses. So that's where that's where the the focus has been.
Great. Thanks Craig. And our next question comes from Brock vandervliet from UBS, please go ahead with your question. Oh, thank you. Just coming back to Cecil the the adjustment 200 to 225 million driven by the acquired loans. I would think those acquired loans would have a a higher Cecil Reserve. Therefore as those acquired loans runoff. Could we assume the the reserve drops or or no? This is Gemma. I'm not sure that it's fair to say that the acquire loans have a higher Cecil reserve the portfolio composition is not identical between Legacy chemical and Legacy TCF and consequently, that's why they Cecil rates have faith tailored to match the quality and composition.
So I would I would just expect natural attrition some of those Legacy assets.
I wouldn't make an assumption that you'll see a faster run off on the reserve rate because of one portfolio running out faster than the other it really is. It's nuanced you really have to look at vintage and geography and all the things that build into a proper forecasting model.
Got it. Okay. And which what range should we be thinking about in terms of net charge-offs for the combined company looking at?
Sure. So last quarter. We thought that we would be inside of twenty basis points on an annualized basis and we came in at after the adjustment excluding the adjustment for the recovery on the nod our sale at 13. So 7 on absolute 13 without the adjustment that felt like it was right in line with our our forecast and we're going to stick with that. I might give you a tighter range of maybe ten to twenty years, but we're very very happy with the portfolios performance really have been announced surprises to the extent that we've had a one-off commercial credit. We brought that to your attention. There's nothing systemic that would change our view of an underlying for the 10 to 20 basis-point range prospectively.
Okay, great. Thanks for the guidance.
In our next question comes from David chiaverini from wedbush Securities, please go ahead with your question. Hi, thanks couple of questions first follow up on deposit. So the non-interest-bearing and the checking deposits. We're down sequentially you mentioned about the muni, you know deposit run off the seasonal impact there. Was there anything just wanted to confirm was there anything else kind of driving that decline or was it entirely on a municipal deposit or isn't driven? It's it's primarily Municipal deposit driven also in the increase in liquidity that we had. We did have a couple larger wage institutional Tech depositors that were the rates. We were paying were quite high and we managed, uh, one or two deposit relationships out because the rate was a little too hyper our our liking
Okay. Thanks for that and then a follow-up on Cecil I have in my notes that
You guys were expecting in October the reserve was going to increase, you know, thirty-five to forty 5% but now you're saying $225 million, which is pretty drastic step up. I was curious what kind of change between then and now
The 32 34 this is Jim Casa the 30 to 35 was reflective of the portfolio that was attracting and incurred losses Reserve which was the Legacy TCF portfolio recall in Q3. The the only Legacy chemical portfolio. That would have had an incurred lost 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 alone. At least a month. You're going to see a meaningful pick up. It's really the nature of the accounting keep in mind that we have a a credit Mark that we carry forward into twenty-twenty as well. So that 90 to 100 is is the name.
Is the reserve rate for for Cecil and then there's a 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 a relatively low spot in Q3 versus what you'd expect on a normal run rate. That's why we gave you the guidance of the 74 basis points today, which is the the 33 on the entire book plus the credit Mark is the 74 and then prospectively we're looking at 90 to 100 on Cecil 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 to 110.
or not either 100
How you doing?
That's helpful. Thank you. And then the last one for me is more housekeeping, but was there anything unusual in the other income of 22 million besides the 2.4 million, you know interest rates job market to market adjustment.
Yep, David, this is Brian . What I'd say is, you know, we had some other fees that were strong in the fourth quarter in our commercial business. So I wouldn't expect at that line item to be as high going forward. It's more like a call at that number is going to be in the mid-teens on a go-forward basis.
Right. Thanks very much.
And ladies and gentlemen at this point when the question answer session. Thank you for your questions today should any investors have further questions to him Saddam had an 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 go for any closing remarks. 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 twenty twenty. Thank you.
And ladies and gentlemen that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.