TCF Financial Corporation
Q4 2019 Earnings Call Transcript

Published: 28 Jan 2020

[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] Please also note today’s conference call is being recorded.At this time, I’d like to introduce Tim Sedabres, Head of Investor Relations, to begin the conference call.

[Tim Sedabres:]

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 President and CEO, Craig Dahl.

[Craig Dahl:]

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 continued 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 yearSecond, 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 nonaccrual 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 a 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 a 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 company-wide learning management system to more efficiently aid in 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. 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 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 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 derisk 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 chemicals’ core banking platform. Testing is in process as we speak, and we remain right on track.As I have mentioned before, we expect various system rollouts 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 has 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 Klaeser:]

Thank you, Craig. Slide 5 highlights the strong loan growth trends we saw continue 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 normal seasonal bills and 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 nonaccrual 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, third quarter loan yields included only two months of Chemical loans, which had a slightly lower overall yield than the Legacy TCF portfolio.Turning to Slide 6. Deposit balances during the quarter were impacted by the seasonal decline in our municipal deposits as well as by proactive runoff 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 runoff 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 or over 5% year-over-year, while managing our other deposit costs lower.In fact, deposit costs 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 and expect to complete the reinvestment in the first quarter of this year.During the fourth quarter, we purchased securities at an average yield of 2.7%. This compares favorably to the yield of securities sold in the third quarter of 2.4%. 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 towards 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 payoffs 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 $350 million range, given – in the 350s, given less loan yield pressure and benefit from lower deposit costs 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 $8.2 million loss on the sale of the Legacy TCF auto portfolio that went through the 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 the 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 quarter’s level, similar to what the combined company saw from Q4 2018 to Q1 2019.Turning to Slide 10. We remain 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 have 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 expect – and expected inflation in 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 2020, 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.

[Jim Costa:]

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 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 and 100 basis points.From a capital perspective, we would expect CECL to result in a 10 to 15 basis point decline in common equity Tier 1 for a year 1 phase in and 40 to 50 basis point decline when fully phased in. Other credit event metrics remain 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 of 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 Dahl:]

Thanks, Jim. Turning to Slide 12. We continue to have a strong capital position with CET1 ratio of 11% at year-end, which we expect to be 45 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 begin 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 towards a below peer median efficiency ratio and a top quartile ROATCE by fourth quarter of 2020.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.With that, I’ll open it up for questions.

[Operator:]

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

[Jon Arfstrom:]

Thanks. Good morning, guys.

[Craig Dahl:]

Good morning.

[Jon Arfstrom:]

Maybe 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 $350 million range feels like chemical impact is in, you’ve got a little bit from range. You talked about 5 basis points, maybe some mix changes. What do you mean by the $350 million range? Do you mean that over the course of the year, the core margin floats down to $350 million or is it another similar type step down? Is that what you’re trying to flag for us in Q1?

[Dennis Klaeser:]

No. We expect it to be in the 350s. 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:]

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’d tell us for Q1?

[Dennis Klaeser:]

Yes. Pretty much in that ballpark. The level of accretion that came from prepayments and paydowns 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 paydowns, which is positive. And so yes, I think our – 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:]

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 of what you’ve seen so far? And what you’re thinking for potential in that? Thanks.

[Craig Dahl:]

Yes. 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’ve won several deals that were there because we’re not pushing that transaction, the customer is pulling us into that. And we see that as enhancing our relationship.The other part of the business looks flat is 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 for the fourth quarter over fourth quarter, and 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’s still going to be that rollout 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 – or excuse me, inventory finance dealers and we have branches in those states, and all of those customers have – are going to be tailor-made to be called on by our new hometown banking team. So we’re looking forward to really all of those.

[Jon Arfstrom:]

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:]

Good morning, everyone.

[Craig Dahl:]

Good morning.

[David Long:]

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

[Dennis Klaeser:]

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

[David Long:]

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?

[Jim Costa:]

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 to 100 basis points as our reserve rate. So the day two marks – day two reserve will follow that loan growth. But 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. It’s a little hard to forecast what macro scenario we’ll 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, as projected loan growth, 90 to 100 basis points reserve rate all in on the newly originated assets.

[David Long:]

Got it. No, 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 the NII for the month of September. Will you provide that for December, so we can kind of see where you’re at going into the first quarter?

[Dennis Klaeser:]

No. I think we just felt that was a onetime 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 we feel that the month of December alone is really the – necessarily is indicative of the trend quarter-to-quarter.

[David Long:]

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:]

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 Klaeser:]

Yes. 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 yes, so that’s a 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 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 weaker quarter, but then seasonally, we – both the legacy companies picked up in the second quarter.

[Nathan Race:]

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 preferred that’s outstanding in conjunction with the buybacks?

[Dennis Klaeser:]

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 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 it was something we obviously see, monitor and take a look at.

[Nathan Race:]

I appreciate the color. Thank you.

[Operator:]

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

[Steven Alexopoulos:]

Hey, good morning, everybody.

[Craig Dahl:]

Good morning.

[Steven Alexopoulos:]

Dennis, I wanted to just follow-up on the NIM quick. So you’re guiding down to $350 million in 1Q 2020…

[Dennis Klaeser:]

I doubt. No, don’t misinterpret my guidance. I’ve said the 350s. And that’s a – I mean, in the 350s range. And I’d suggest that after Dave Long asked, we’ve got modest pressure in the first quarter. So we’re not expecting some wholesale step down. There’s no reason to support 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 a modest step down here in the first quarter, but then stabilizing in the 350s. I hate to give you a narrower range of, say, $354 million to $359 million, but $350 million gives me enough wiggle room given all the wildcards that could occur.

[Steven Alexopoulos:]

Okay. And does that include purchase accounting? Are you talking reported margin of $350 million or core NIM – sorry, 350s. Or – is that about core NIM or reported NIM?

[Dennis Klaeser:]

That’s the core. That’s the core NIM, yes.

[Steven Alexopoulos:]

So you’re saying core NIM, ex-PAA in the 350s, maybe the middle of the range, we’ll see. Okay, that’s helpful.

[Dennis Klaeser:]

Yes. 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 to 25 basis points higher based on the accretion.

[Steven Alexopoulos:]

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

[Dennis Klaeser:]

Yes. It moderates over time. So in the first – in the next two, three quarters, it’s probably $2 million a quarter, but then it begins to moderate – the decline moderates over time.

[Steven Alexopoulos:]

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

[Dennis Klaeser:]

Yes. That’s a 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 our boss coming together is together, I think we are better in producing fee income.

[Steven Alexopoulos:]

Okay. All right. And then finally on expenses. Now that the combines 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 Klaeser:]

Yes. Still on track for that. And the $180 million 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 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 various markets. And so 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:]

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:]

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

[Dennis Klaeser:]

Yes. You’re correct.

[Chris McGratty:]

Okay. And so that would suggest you had to obviously stop yourself out in kind of mid-December with the off 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 auto? Thanks.

[Dennis Klaeser:]

Yes. And I’ve read your note last night or this morning and your view on that. So yes, as we got into the latter part of the quarter, we have the – frankly, it was really the uncertainty of completing the sale of auto, so – when our window is closing early in December. Additionally, we had the strong loan pipeline, and it was building that declining.So based on the bullish view towards loan growth and 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 buy back stock. And so going forward, it’s going to be the same sort of dynamic questions. What is our targeted capital levels? We’re 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 in a – 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 the things that we’ll be thinking about as we move forward here over the next few months.

[Chris McGratty:]

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 smooths 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, strongest to weakest? Thanks.

[Dennis Klaeser:]

Yes. The seasonality actually is a bit consistent between the two organizations. Strong second and fourth quarters. And the first and the third quarter is being weaker. It’s probably going to tossup between whether the second or fourth is the strongest, and a tossup between whether first or 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 Dahl:]

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’ve never been able to solve it, but there’s 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 it back.And then the strong fourth quarter as we build the inventory finance portfolios, and as the tax nature of the equipment finance product drives additional volume in the fourth quarter. So that’s really how we’ll look at it. And what – how our C&I and CRE books mature and originations will really tell which quarters are going to be stronger. So we’ll have a better line of sight through the middle of the year.

[Chris McGratty:]

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

[Dennis Klaeser:]

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

[Chris McGratty:]

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:]

Good morning, guys.

[Dennis Klaeser:]

Good morning.

[Ebrahim Poonawala:]

First question, I guess, Dennis, in terms of – so you’ve given a lot of clarity on margin, thank you. In terms of when we look at the actual size 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 2020? 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 Klaeser:]

Well, first on the securities book. Yes, my guidance was, expect the $170 million in the first quarter, but there is some additional upside there because the 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 end of the quarter. So I haven’t exactly looked at it. But Brian?

[Brian Maass:]

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 – 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:]

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

[Brian Maass:]

I mean, we will have some additional seasonal growth in inventory finance that takes place in the first quarter. And we will – I can’t 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 in inventory finance will probably be the largest changes that you’re going to see in Q1.

[Ebrahim Poonawala:]

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 pace is, we begin to start seeing some expense growth from there on as just from – in the franchise investments, technology, et cetera? Or do you expect additional room on the expense front to kind of actually take dollar amount of expenses lower?

[Dennis Klaeser:]

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 of expense – merger-related expense that 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 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:]

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 a $20 million to $25 million sequential drop off in fees from the $160 million this quarter. Is that correct?

[Dennis Klaeser:]

Yes. It’s in that neighborhood, yes.

[Ebrahim Poonawala:]

Perfect. Thanks for taking my questions.

[Operator:]

Our next question –

[Dennis Klaeser:]

Just in terms of your question on the 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 operating leverage – further operating leverage into 2021.

[Ebrahim Poonawala:]

Understood. Thank you.

[Operator:]

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

[Jared Shaw:]

Hi. Good morning, everybody.

[Dennis Klaeser:]

Good morning.

[Jared Shaw:]

Just sticking with, I guess, the expenses. On the $47 million, was most of that – I guess, could you – less on what portion of that was in the compensation? And then what would be a good way to start the year off on the expense side with FICA and other adjustments?

[Dennis Klaeser:]

Yes. So for the $47 million, again, onetime 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, which was 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:]

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

[Dennis Klaeser:]

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

[Jared Shaw:]

Okay. 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 place here now with the business model?

[Dennis Klaeser:]

Yes. I think that we’re in a good place with the business model. I mean, we really haven’t targeted much of any stock 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:]

Great. Thanks.

[Operator:]

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

[Terry McEvoy:]

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 Maass:]

Yes. This is Brian. I can try and give you a little bit more color on the fourth quarter because 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 nonaccrual 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. There is some 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:]

Great. 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 Klaeser:]

Yes. In that neighborhood. Maybe that’s incrementally a little high, but you’re in the ballpark.

[Terry McEvoy:]

Okay. Thank you.

[Operator:]

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

[Lana Chan:]

Hi. My first question is related to funding. You had some of the roll-off in the CDs replaced with borrowings this quarter with the 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 Maass:]

Hi, Lana, this is Brian. Related to deposit growth, we’re really optimistic. We can continue to grow 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 flub 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% 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 and 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 Klaeser:]

Let me just add that the – let me add that the – in the fourth quarter of the deposit runoff, over $400 million is the seasonal runoff of municipal deposits. Now as you 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, that – 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.

[Tom Shafer:]

This is Tom Shafer. We also have – if you think about bringing these franchises together, putting our retail teams on a common operating model for focused on customer, customer growth and –

[Operator:]

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

[Lana Chan:]

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 on the portfolio and platform acquisitions, what areas would be of interest?

[Craig Dahl:]

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

[Lana Chan:]

Great. Thanks, Craig.

[Operator:]

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

[Brock Vandervliet:]

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 will have a higher CECL reserve. Therefore, as those acquired loans runoff, could we assume the reserve drops or no?

[Jim Costa:]

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 Chemicals and Legacy TCF and consequently, that’s why these 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 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.

[Brock Vandervliet:]

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

[Jim Costa:]

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 adjustment – or excluding the adjustment for the recovery on the nonaccrual TDR sale at 13. So 7 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 to 20. But we’re very, very happy with the portfolio’s performance, really have been and 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 from a 10 to 20 basis point range prospectively.

[Brock Vandervliet:]

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:]

Hi. Thanks. A couple of questions. First, a follow-up on deposits. So the noninterest-bearing and the checking deposits were down sequentially. You mentioned about the muni deposit runoff, the seasonal impact there. Was there anything – just wanted to confirm, was there anything else kind of driving that decline? Or was it entirely municipal deposit driven?

[Dennis Klaeser:]

It’s primarily municipal deposit driven. Also in the increase in liquidity that we had, we did have a couple of larger more institutional-type deposits that were 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 per our liking.

[David Chiaverini:]

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 a pretty drastic step up. I was curious what kind of change between then and now?

[Jim Costa:]

The $30 million to $35 million – this is Jim Costa. The $30 million to $35 million 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 carry forward into 2020 as well. So that 90 to 100 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 on a normal run rate. That’s why we gave you the guidance of the 74 basis points today, which is the 33 on the incurred loss book, plus the credit mark is 74, and then prospectively, we’re looking at 90 to 100 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 to 110 – 90 to 100, 90 to 100.

[David Chiaverini:]

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 interest rate swap mark-to-market adjustment?

[Brian Maass:]

Yes. 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:]

Great. Thanks very much.

[Operator:]

And ladies and gentlemen, at this point, we 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 Dahl:]

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:]

And ladies and gentlemen, that does conclude today’s conference call. We do thank you for joining. You may now disconnect your lines.