CHEMICAL FINANCIAL CO. Forward-looking Information
Any statements contained in this Quarterly Report on Form 10-Q regarding the
outlook for the Corporation's businesses and their respective markets, such as
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.
These statements include, among others, statements related to: our strategic
plan to develop customer relationships that will drive core deposit growth and
stability, management's belief that our commercial and commercial real estate
loan portfolios are generally well-secured, the impact of projected changes in
net interest income assuming changes to short-term market interest rates,
statements regarding our risk exposure, statements related to integration
following our Merger, including statements related to the anticipated effects on
results of operations and financial condition from expected developments. All
statements referencing future time periods are forward-looking.
Management's determination of the allowance for credit losses and related
provision; the carrying value of acquired loans and leases, goodwill and loan
servicing rights; the fair value of investment securities (including whether
there is any credit impairment); and management's assumptions concerning
postretirement benefit plans involve judgments that are inherently
forward-looking. There can be no assurance that future loan losses will be
limited to the amounts estimated. All of the information concerning interest
rate sensitivity is forward-looking. The future effect of changes in the
financial and credit markets and the national and regional economies on the
banking industry, generally, and on us, specifically, are also inherently
uncertain.
These forward-looking statements are subject to certain risks, uncertainties and
assumptions ("risk factors") that could cause actual results to differ
materially from those expressed or implied in such statements, and no assurance
can be given that the results in any forward-looking statement will be achieved.
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, except as required by law. These factors
include the factors discussed in Item 1A. in our Annual Report on Form 10-K for
the year ended December 31, 2019 under the heading "Risk Factors" or otherwise
disclosed in documents filed or furnished by us with or to the SEC after the
filing of the Annual Reporting on Form 10-K, the factors discussed below and any
other cautionary statements, written or oral, which may be made or referred to
in connection with any such forward-looking statements. Since it is not possible
to foresee all such factors, these factors should not be considered as complete
or exhaustive: macroeconomic and other challenges and uncertainties resulting
from the COVID-19 pandemic, such as the extent and duration of the impact on
public health, the U.S. and global economies, financial markets and consumer and
corporate customers and clients, including economic activity, employment levels
and market liquidity, as well as the various actions taken in response to the
challenges and uncertainties by governments, central banks and others, including
TCF; a failure to manage credit risk; cyber-security breaches involving us or
third parties, hacking, denial of service, loss or theft of information, or
other cyber-attacks that disrupt TCF's business operations or damage its
reputation; adverse developments affecting TCF's branches, including supermarket
branches; inability to successfully execute on TCF's growth strategy through
acquisitions or expanding existing business relationships; adverse effects
related to competition from traditional competitors, non-bank providers of
financial services and new technologies; failure to keep pace with technological
change, including with respect to customer demands or system upgrades; risks
related to developing new products, markets or lines of business; risks related
to TCF's loan origination and sales activity; lack of access to liquidity or
ability to raise capital that isn't dilutive; adverse changes in monetary,
fiscal or tax policies; litigation or government enforcement actions; heightened
consumer protection, supervisory or regulatory practices or requirements;
deficiencies in TCF's compliance programs or risk mitigation frameworks;
dependence on accurate and complete information from customers and
counterparties; the failure to attract and retain key employees; ineffective
internal controls; soundness of other financial institutions and
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other counterparty risk, including the risk of default, operational disruptions, or diminished availability of counterparties who satisfy our credit quality requirements; inability to grow deposits, increase earnings and revenue, manage operating expenses, or pay and receive dividends; interruptions, systems failures information technology and telecommunications systems failures of third-party services; deficiencies in TCF's quantitative models; the effect of any negative publicity or reputational damage; technological or operational difficulties; changes in accounting standards or interpretations of existing standards; adverse federal, state or foreign tax assessments; and the effects of man-made and natural disasters, any of which may negatively affect our operations and/or our customers. This Quarterly Report on Form 10-Q also contains forward-looking statements regarding our outlook or expectations with respect to the Merger with Legacy TCF. Examples of forward-looking statements include, but are not limited to, statements regarding outlook and expectations with respect to the strategic and financial benefits of the Merger, including the expected impact of the transaction on TCF's future financial performance (including anticipated accretion to earnings per share, the tangible book value earn-back period and other operating and return metrics), the expected costs to be incurred in connection with the Merger, and operational aspects of post-Merger integration. Such risks, uncertainties and assumptions, include, among others, the following: • the impact of the COVID-19 pandemic;
• 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, the integration of the two companies or as a result of the
strength of the economy, competitive factors in the areas where TCF does
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;
• the operational integration of the merged businesses and operations, which
may take longer than anticipated or be more costly than anticipated or
have unanticipated adverse results;
• failure to attract new customers and retain existing customers in the
manner anticipated;
• the challenges of integrating, retaining and hiring key personnel;
• the potential impact of the Merger on relationships with third parties,
including customers, vendors, employees and competitors; and
• other factors that may affect future results of TCF including changes in
asset quality and credit risk; the inability to sustain revenue and
earnings growth; 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.
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. Overview
Through our wholly-owned bank subsidiary,
References herein to "TCF Financial" or the "Holding Company" refer to
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Supporting Team Members, Customers and Communities through the COVID-19 Pandemic and Civil Unrest
To support our team members we have:
• Implemented health and safety policies, protocols and guidelines while
ensuring adequate PPE and cleaning supplies are available at all locations
in response to the COVID-19 pandemic;
• developed a thoughtful return to work approach where team members are
returning in phases based on safety guidelines and local restrictions
while evaluating lessons learned and opportunities for a more flexible
workspace strategy in the future; and
• established various internal initiatives to increase awareness of
diversity and inclusion issues including launching the Executive Diversity
and Inclusion Council , providing executive office hours for team members
to have candid discussions with leaders regarding diversity issues,
required unconscious bias training for all team members and provided the
opportunity for team members to connect with community thought leaders
through TCF Talks: The Color Line to discuss racial equity issues held on
Juneteenth.
To support our customers we have:
• Assisted customers in response to the COVID-19 pandemic via loan and lease
deferrals with $1.8 billion of unpaid principal balance on deferral status
as of June 30, 2020 ($1.5 billion of commercial unpaid principal balance
and $327.1 million of consumer unpaid principal balance); and
• assisted business and commercial customers via $1.9 billion of total loans
funded through the Paycheck Protection Program ("PPP").
To support our communities we have:
• Expanded closing costs assistance program through the Heart and Home
Lending Program providing up to $2 million of annualized grants to help
cover closing costs for qualified low-to-moderate income home buyers;
• partnered with Wayne County, Michigan to provide fast relief through
low-interest loans to help small businesses in the Detroit area;
• provided $700 thousand in donations to organizations that offered programs
and resources to underserved communities impacted by COVID-19; and
• committed $250 thousand for relief efforts supporting Great Lakes Bay
Region community organizations and a $10 million Hardship Lending Program
to support residents and business impacted by dam failures and historic
flooding in the Midland, Michigan area.
The COVID-19 pandemic has resulted in historic job losses and decreases in economic activity. While the duration and full extent of job losses and magnitude of economic dislocation are not yet known, it is clear that they have impacted, and may impact in the future, the ability of individuals and small businesses to make payments, the value of underlying collateral and the ability of guarantors to make payments in the case of default, which may decrease consumer demand for our products and services and reduce our ability to access capital. As a result, we have faced and may continue to face a decrease in demand for certain products, reduced access to our branches by our customers, and disruptions in the operations of our vendors. The pandemic could also result in the recognition of additional credit losses in our loan and lease portfolios and increase our allowance for credit losses as both businesses and consumers are negatively impacted by the economic downturn. The extent of such impact will depend on the outcome of certain developments, including but not limited to, the duration and spread of the outbreak as well as its continuing impact on our customers, vendors, employees and the financial markets all of which are uncertain. See Part II, Item 1A, "Risk Factors - Risks related to the impact of COVID-19" for further discussion.
Merger of Equals
On
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The Merger was accounted for as a reverse merger using the acquisition method of
accounting, therefore, Legacy TCF was deemed the acquirer for financial
reporting purposes, even though Chemical was the legal acquirer. Accordingly,
Legacy TCF's historical financial statements are the historical financial
statements of the combined company for all periods before the Merger Date. Our
results of operations for the first and second quarters of 2020 include the
results of operations of the post-Merger combined TCF. Results for the first
half of 2019 reflect only those of Legacy TCF and do not include the results of
operations of Chemical. Accordingly, comparisons of our results for the second
quarter of 2020 to the second quarter of 2019 and the six months ended
Business Overview
Net interest income, the difference between interest income earned on loans and
leases, investments securities and other earning assets (interest income) and
interest paid on deposits and borrowings (interest expense), represented 74.0%
of our total revenue for the three months ended
Noninterest income is a significant source of our revenue and an important component of our results of operations. The significant components of noninterest income are leasing revenue, fees and service charges on deposit accounts, net gains on sales of loans and leases, card and ATM revenue, wealth management revenue and servicing fee revenue. Leasing revenue generates noninterest income primarily from operating and sales-type leases. Primary drivers of fees and service charges include the number of customers we attract, the customers' level of engagement and the frequency with which the customer uses our solutions. Providing a wide range of consumer banking services is an integral component of our business philosophy. We sell loans, primarily secured by consumer real estate, which results in gains on sales, as well as servicing fee income. Primary drivers of gains on sales include our ability to originate loans, identify loan buyers and execute loan sales.
The following portions of this Management's Discussion and Analysis of Financial
Condition and Results of Operations ("Management's Discussion and Analysis")
focus in more detail on the results of operations for the three and six months
ended
Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in accordance with
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Certain accounting measurements inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We use third-party sources to assist us with developing certain estimates, assumptions and judgments regarding certain amounts reported in our Consolidated Financial Statements and accompanying notes. When using third-party sources, management remains responsible for complying with GAAP. To meet management's responsibilities, we have processes in place to develop an understanding of the third-party methodologies used and to design and implement internal controls.
We have identified the determination of the allowance for credit losses (loans and leases), accounting for business combinations (including fair value of purchased loans and leases and core deposit intangibles), and the evaluation of goodwill impairment to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider them to be critical accounting estimates and discuss them directly with the Audit Committee of our Board of Directors.
Our significant accounting estimate related to accounting for business
combinations is more fully described in the Critical Accounting Estimates
section of this Management's Discussion and Analysis of Financial Condition
within our audited Consolidated Financial Statements and notes thereto and
additionally described in our Annual Report on Form 10-K for the year ended
Updates to Critical Accounting Estimates
Allowance for Credit Losses
The allowance for credit losses ("ACL") represents management's estimate of current credit losses expected to be incurred in the loan and lease portfolios over the remaining expected life of each financial asset at the balance sheet date, including known or anticipated problem loans and leases, as well as for loans and leases which are not currently known to require specific allowances. The ACL includes the allowance for loan and lease losses ("ALLL") and a reserve for unfunded lending commitments ("RULC"). Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amounts and timing of expected future cash flows, adjustments for forward-looking information, estimates of losses based on measurement date credit risk characteristics and consideration of other qualitative factors, all of which may be susceptible to significant change.
Events that are not within our control, such as changes in economic conditions, could change subsequent to the end of the period covered by this Quarterly Report on Form 10-Q, and could cause the ACL to be overstated or understated. The amount of ACL is affected by net charge-offs, which decrease the ACL, and the provision for credit losses charged to earnings, which increases or decreases the ACL.
The amount of the ACL significantly depends on management's estimates of key factors and assumptions affecting valuation, appraisals of collateral, evaluations of performance and status, the amounts and timing of future cash flows expected to be received, forecasts of future economic conditions and reversion periods. Such estimates, appraisals, evaluations, cash flows and forecasts may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees, properties or economic conditions. These estimates are reviewed quarterly and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known.
See "Note 3. Summary of Significant Accounting Policies" and "Note 8. Allowance for Credit Losses and Credit Quality" of the Consolidated Financial Statements for additional disclosure regarding our ACL.
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Given the economic deterioration due to the COVID-19 pandemic, during both the first and second quarters of 2020, we evaluated whether it was more-likely-than-not that the fair value of any reporting unit was less than its carrying amount. We assessed economic conditions, including projections of the duration of current conditions and timing of a potential recovery; industry and market considerations; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting units including Merger synergies; the market price of our common stock and other relevant events. At the conclusion of each assessment, we determined that it was not more-likely-than-not that the fair value of each reporting unit was less than its carrying amount.
We could incur impairment charges related to goodwill in the future due to changes in financial results or other matters that could affect the fair value of our reporting units.
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Table of Contents Selected Financial Data
The following table provides our selected financial information for the periods and at the dates indicated. This information should be read together with our Consolidated Financial Statements and the related notes thereto, which are included elsewhere in this report. Our financial results were significantly impacted by the Merger, and periods before the Merger reflect financial data of Legacy TCF, while periods after the Merger reflect financial data for the combined company. Earnings per share and share quantities of TCF have been retrospectively adjusted to reflect the equivalent number of shares issued in the Merger. As noted in the following table, we have included certain non-GAAP financial measures, which should be read in conjunction with the section entitled "Non-GAAP Financial Measures" and the accompanying table entitled "Reconciliation of Non-GAAP Operating Results," for an explanation of the use of non-GAAP financial measures in this Quarterly Report on Form 10-Q and a reconciliation of non-GAAP measures to the most directly comparable GAAP financial measure. Historical data is not necessarily indicative of TCF's future results of operations or financial condition.
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