TCF - TCF Reports Fourth Quarter 2020 Results

TCF Financial Corporation (NASDAQ: TCF):

Fourth Quarter 2020 Highlights

• Quarterly net income of $91.4 million, or $0.58 per diluted share, up 63.9% from the third quarter of 2020
• Adjusted diluted earnings per common share of $0.75 ⁽¹⁾ , up 19.0% from the third quarter of 2020. Adjusted diluted earnings per common share excludes $24.7 million, or $0.17 per share, after-tax impact of merger-related expenses and notable items
• Loan and lease balances grew 0.4% from September 30, 2020. Loan and lease balances, excluding PPP loans, grew 1.2% from September 30, 2020
• Net charge-offs of $11.6 million, or 0.14% of average loans and leases (annualized)
• Provision for credit losses of $11.8 million, down 83.0% from the third quarter of 2020
• Allowance for credit losses, which includes the reserve for unfunded lending commitments, of 1.59% of total loans and leases, compared to 1.60% at September 30, 2020
• Nonaccrual loans and leases of $677.3 million, up $300.6 million, or 79.8%, from September 30, 2020
• Efficiency ratio of 74.53%, improved 76 basis points from the third quarter of 2020. Adjusted efficiency ratio of 64.80% ⁽¹⁾ , up 363 basis points from the third quarter of 2020
• Common equity Tier 1 capital ratio of 11.45%, compared to 11.45% at September 30, 2020
• On December 13, 2020, announced merger with Huntington Bancshares Incorporated ("Huntington"), which is expected to close in the second quarter of 2021

Merger-related Expenses and Notable items in the Fourth Quarter of 2020 and Third Quarter of 2020 ⁽¹⁾

• Pre-tax merger-related expenses of $31.5 million, $24.4 million net of tax, or $0.17 per diluted common share for the fourth quarter of 2020, compared to pre-tax merger-related expenses of $54.0 million, $42.8 million net of tax, or $0.28 per diluted common share for the third quarter of 2020
• Pre-tax expenses of $357 thousand, $276 thousand net of tax, related to notable items for the fourth quarter of 2020, compared to pre-tax expenses of $154 thousand, $122 thousand net of tax, related to notable items for the third quarter of 2020, see summary of notable items adjustments below

The following table includes merger-related expenses and notable items used to arrive at adjusted net income in the Adjusted Financial Results (non-GAAP) (see "Reconciliation of Non-GAAP Financial Measures" tables).

TCF Financial Corporation ("TCF" or the "Corporation") (NASDAQ: TCF) today reported net income of $91.4 million, or diluted earnings per common share of $0.58, for the fourth quarter of 2020, compared with $55.7 million, or diluted earnings per common share of $0.35, for the third quarter of 2020. Adjusted net income was $116.1 million, or $0.75 per diluted common share for the fourth quarter of 2020, compared with $98.7 million, or $0.63 per diluted common share, for the third quarter of 2020 (see "Reconciliation of GAAP to Non-GAAP Financial Measures" tables).

“The fourth quarter was highlighted by strong momentum across the bank which helped drive higher loan and lease balances, increased revenues, net interest margin expansion, and strong capital ratios, all of which position us well as we prepare to complete our announced merger with Huntington in the second quarter of 2021,” said David T. Provost, chief executive officer. "We believe this merger will benefit our key stakeholders through leading market share in top Midwest markets, increased scale, a broader product set, enhanced technology capabilities and investments, and significant earnings per share accretion. As we look forward to the closing of the merger, our focus over the next several months will be on taking care of our team members, serving both our consumer and commercial customers, and growing the business.”

Net Interest Income and Net Interest Margin

Net interest income was $381.4 million for the fourth quarter of 2020, an increase of $4.2 million, or 1.1%, from the third quarter of 2020. Purchase accounting accretion and amortization included in net interest income was $23.0 million for the fourth quarter of 2020, compared to $17.7 million for the third quarter of 2020. At December 31, 2020, the remaining fair value discount from purchase accounting on acquired loans totaled $108.1 million. Additionally, fourth quarter of 2020 net interest income recorded included $19.1 million of interest and fee income from PPP less funding costs, compared to $14.7 million for the third quarter of 2020. Adjusted net interest income, including FTE adjustments and excluding purchase accounting accretion and amortization and the impact from PPP loans, a non-GAAP financial measure, was $342.5 million for the fourth quarter of 2020, compared to $347.6 million for the third quarter of 2020.

Net interest margin was 3.53% for the fourth quarter of 2020, compared to 3.31% in the third quarter of 2020, while net interest margin on a fully tax-equivalent basis (FTE), a non-GAAP financial measure, was 3.55%, up 21 basis points from the third quarter of 2020. The increase in net interest margin from the third quarter of 2020 was primarily driven by lower cash balances, lower cost of funds and overall higher yields on loans benefited by PPP forgiveness and higher accretion, partially offset by new loan and lease originations at lower yields than loan and lease runoff. Deposit costs continued to reprice lower as they declined from 0.32% in the third quarter of 2020 to 0.22% in the fourth quarter of 2020. Adjusted net interest margin FTE, excluding a 21 basis point impact related to purchase accounting accretion and amortization and a four basis point impact related to PPP loans, a non-GAAP financial measure, was 3.30% for the fourth quarter of 2020, up 11 basis point from the third quarter of 2020. See the "Reconciliation of GAAP to Non-GAAP Financial Measures" tables for reconciliations of our noted non-GAAP measures.

Noninterest Income

Noninterest income was $127.2 million for the fourth quarter of 2020, an increase of $8.4 million, or 7.1%, from the third quarter of 2020. Noninterest income for the fourth quarter of 2020 included a notable item of a $357 thousand loan servicing rights impairment, included in other noninterest income. Noninterest income for the third quarter of 2020 included a notable item of an $154 thousand loan servicing rights impairment, included in other noninterest income. Adjusted noninterest income, a non-GAAP financial measure, for the fourth quarter of 2020 was $127.6 million, compared to $119.0 million in the third quarter of 2020. The fourth quarter of 2020 noninterest income, compared to the third quarter of 2020, also included increases of $8.2 million in leasing revenue due to an increase in sales-type lease revenue through our equipment financing activity and $4.3 million in fees and service charges on deposit accounts, partially offset by decreases of $9.8 million in net gains on sales of loans and leases and $2.3 million in net gains on investment securities. The decrease in net gains on sales of loans and leases was primarily due to lower volume and gain on sale rate. The fourth quarter of 2020 also included a $2.4 million favorable interest rate swap mark-to-market adjustment resulting from changes in the interest rate environment, included in other noninterest income, compared to an unfavorable interest rate swap mark-to-market adjustment of $2.6 million in the third quarter of 2020.

Noninterest Expense

Noninterest expense was $379.1 million for the fourth quarter of 2020, an increase of $5.7 million, or 1.5%, from the third quarter of 2020. The fourth quarter of 2020 included $31.5 million of merger-related expenses, $15.5 million of executive severance expense recorded in compensation and benefits expense, and $3.6 million of historic tax credit amortization recorded in other noninterest expense. The increase in the fourth quarter of 2020 primarily reflected increases of $22.7 million in compensation and benefits expense, $3.7 million in other noninterest expense and $1.8 million in occupancy and equipment expense, partially offset by a decrease of $22.5 million in merger-related expenses. Compensation and benefits expense also included $4.5 million of higher commission expense, compared to the third quarter of 2020 driven by stronger leasing activity and loan originations.

Income Tax Expense

Income tax expense for the fourth quarter of 2020 was $25.0 million, an effective tax rate of 21.3%, compared to income tax benefit of $4.4 million for the third quarter of 2020. Income tax expense for the third quarter included a $16.0 million benefit attributable to tax net operating loss carryback benefits associated with the CARES Act. Excluding the benefit provided by the CARES Act, our effective tax rate was 21.9% for the third quarter of 2020.

Credit Quality

Provision for credit losses Provision for credit losses was $11.8 million for the fourth quarter of 2020, a decrease of $57.8 million, from the third quarter of 2020. The provision for credit losses in the fourth quarter of 2020 reflects stabilization in the overall level of allowance for credit losses ("ACL") primarily resulting from improvement in both current and forecasted macro-economic conditions, offset by continued uncertainty around the performance of sectors more heavily impacted by COVID-19. Fourth quarter 2020 net charge-offs were $11.6 million, compared to $24.6 million in the third quarter of 2020.

Net charge-off rate The annualized net charge-offs as a percentage of average loans and leases were 0.14% for the fourth quarter of 2020, down 14 basis points from the third quarter of 2020.

Allowance for Credit Losses The ACL includes both the allowance for loan and lease losses, which is presented separately on the Consolidated Statements of Financial Condition, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Statements of Financial Condition. The ACL was $549.2 million, or 1.59% of total loans and leases, at December 31, 2020, compared to $549.4 million, or 1.60%, at September 30, 2020. The ACL as a percentage of total loans and leases, excluding PPP loans, a non-GAAP financial measure, was relatively stable at 1.67% at December 31, 2020, compared to 1.69% at September 30, 2020 (see "Reconciliation of GAAP to Non-GAAP Financial Measures" tables). The PPP loans are individually guaranteed by the Small Business Administration and therefore the accounting under CECL does not require reserves to be recorded on such loans.

Nonaccrual loans and leases Nonaccrual loans and leases were $677.3 million at December 31, 2020 and represented 1.97% of total loans and leases, compared to $376.7 million, or 1.10% of total loans and leases, at September 30, 2020. The $300.6 million increase in nonaccrual loans and leases from September 30, 2020 included a $251.9 million increase from the commercial portfolio and a $48.6 million increase from the consumer portfolio. The increase within the commercial portfolio was primarily driven by certain sectors more heavily impacted by COVID-19, including the motor coach, shuttle bus, and hotel sectors.

Nonaccrual loans and leases in the motor coach sector were $104.0 million, an increase of $65.7 million from September 30, 2020, while nonaccrual loans and leases in the shuttle bus sector were $36.4 million, an increase of $24.0 million from September 30, 2020, and nonaccrual loans in the hotel sector were $78.5 million, an increase of $57.1 million from September 30, 2020. Due to the prolonged recovery of revenues for borrowers in these sectors given the dependency on travel and related activity levels, we have taken a proactive approach by working with borrowers to extend deferrals into 2021 where necessary, many of which have been moved to nonaccrual status.

Loan and Lease Deferrals Loans and leases on deferral status were $329.8 million at December 31, 2020, a decrease of $73.8 million, or 18.3%, from September 30, 2020. Loans and leases on deferral status included $218.0 million of balances that are included in nonaccrual balances at December 31, 2020, the majority of which have been on deferral for over 180 days.

Loans and leases were $34.5 billion at December 31, 2020, an increase of $122.7 million, or 0.4%, compared to $34.3 billion at September 30, 2020. At December 31, 2020 we had $1.6 billion of PPP loans outstanding, compared to $1.8 billion at September 30, 2020, all included in our commercial and industrial loan portfolio. Loans and leases excluding PPP loans, a non-GAAP financial measure, increased $405.7 million, or 1.2%, from September 30, 2020, primarily due to increases in the residential mortgage, lease financing and commercial and industrial portfolios.

Investment securities The investment securities portfolio was $8.5 billion at December 31, 2020, an increase of $852.6 million, or 11.2%, compared to $7.6 billion at September 30, 2020. The increase from September 30, 2020 was primarily due to purchases of residential mortgage-backed securities.

Deposits Deposits were $38.9 billion at December 31, 2020, a decrease of $315.8 million, or 0.8%, compared to September 30, 2020. Increases in noninterest-bearing deposits of $345.0 million, savings account balances of $214.5 million and money market accounts of $166.3 million were offset by decreases in certificates of deposits of $810.4 million and checking deposit account balances of $231.2 million as of December 31, 2020 compared to September 30, 2020. On a year-over-year basis, noninterest-bearing deposits increased $3.1 billion, or 38.5%.

Capital The common equity Tier 1 capital ratio was 11.45% at December 31, 2020, compared to 11.45% at September 30, 2020. Our capital ratios reflect our election of the five-year CECL transition for regulatory capital purposes.

TCF Financial Corporation (NASDAQ: TCF) is a Detroit, Michigan-based financial holding company with $48 billion in total assets at December 31, 2020 and a top 10 deposit market share in the Midwest. TCF’s primary banking subsidiary, TCF National Bank, is a premier Midwest bank offering consumer and commercial banking, trust and wealth management, and specialty leasing and lending products and services to consumers, small businesses and commercial clients. TCF has approximately 475 banking centers primarily located in Michigan, Illinois and Minnesota with additional locations in Colorado, Ohio, South Dakota and Wisconsin. TCF also conducts business across all 50 states and Canada through its specialty lending and leasing businesses. To learn more about TCF, visit ir.tcfbank.com.

Cautionary Statements for Purposes of the Safe Harbor Provisions of the Securities Litigation Reform Act

Any statements contained in this earnings release regarding the outlook for the Corporation's businesses and their respective markets, such as statements regarding projections of future performance, targets, guidance, statements of the Corporation's plans and objectives, forecasts of market trends and other matters are forward-looking statements based on the Corporation's assumptions and beliefs. Such statements may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "will benefit," "is anticipated," "estimate," "project," "management believes" or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, TCF claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.

This release also contains forward-looking statements regarding TCF's outlook or expectations with respect to the planned merger with Huntington. Examples of forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of TCF and Huntington with respect to the planned merger, the strategic benefits and financial benefits of the merger, including the expected impact of the merger on the combined corporation's future financial performance (including anticipated accretion to earnings per share, the tangible book value earn-back period and other operating and return metrics), and the timing of the closing of the merger. Such risks, uncertainties and assumptions, include, among others:

• the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect TCF or Huntington or the expected benefits of the merger);
• the failure of either TCF or Huntington to obtain shareholder approval, or to satisfy any of the other closing conditions to the merger on a timely basis or at all;
• the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement;
• the possibility that the anticipated benefits of the merger, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, economic weakness, competitive factors in the areas where TCF and Huntington do business, or as a result of other unexpected factors or events;
• the impact of purchase accounting with respect to the merger, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
• diversion of management's attention from ongoing business operations and opportunities;
• potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the merger;
• the ability of either TCF or Huntington to repurchase their stock and the prices at which such repurchases may be made;
• the outcome of any legal proceedings that may be instituted against TCF or Huntington;
• the integration of the businesses and operations of TCF and Huntington, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to our businesses;
• business disruptions following the merger; and
• other factors that may affect future results of TCF and Huntington including changes in asset quality and credit risk; the inability to grow revenue and earnings; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of technological changes; capital management activities; and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms.

Additional factors that could cause results to differ materially from those described above can be found in the risk factors described in Part I, Item 1A of TCF’s Annual Report on Form 10-K under the heading "Risk Factors" filed with the SEC for the year ended December 31, 2019 or otherwise disclosed in documents filed or furnished by us with or to the SEC after the filing of the Annual Report on Form 10-K. TCF disclaims any obligation to update or revise any forward-looking statements contained in this communication, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by law. Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive.

Use of Non-GAAP Financial Measures

Management uses the adjusted net income, adjusted diluted earnings per common share, adjusted ROAA, adjusted ROACE, ROATCE, adjusted ROATCE, adjusted efficiency ratio, adjusted net interest income, net interest margin (FTE), adjusted net interest margin (FTE), adjusted noninterest income, adjusted noninterest expense, tangible book value per common share, tangible common equity to tangible assets and the allowance for credit losses as percentage of total loans and leases, excluding PPP loans, internally to measure performance and believes that these financial measures not recognized under generally accepted accounting principles in the United States ("GAAP") (i.e. non-GAAP) provide meaningful information to investors that will permit them to assess the Corporation's capital and ability to withstand unexpected market or economic conditions and to assess the performance of the Corporation in relation to other banking institutions on the same basis as that applied by management, analysts and banking regulators. TCF adjusts certain results to exclude merger-related expenses and notable items in addition to presenting net interest income and net interest margin (FTE) excluding purchase accounting accretion and amortization and the impact of PPP loans. Management believes these measures are useful to investors in understanding TCF's business and operating results.

These non-GAAP financial measures are not defined by GAAP and other entities may calculate them differently than TCF does. Non-GAAP financial measures have inherent limitations and are not required to be uniformly applied. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a corporation, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes selected items does not represent the amount that effectively accrues directly to shareholders. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measure may be found in the reconciliation tables included in this press release.