TCF faces uncertain future after exiting auto lending

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If there’s one thing that TCF Financial executives know well, it’s how to change the company’s business model on a dime.

TCF, in Wayzata, Minn., has reinvented itself several times since the crisis. After the mortgage market collapsed, it shifted into specialty commercial lending and expanded its business on a national scale. And when regulators put a cap on interchange revenue — a key source of fees for TCF — the company bought an auto lender and began selling car loans to the secondary market.

But after TCF’s announcement this week that it will no longer originate auto loans — which make up nearly 20% of its loan book — it is unclear where Chairman and CEO Craig Dahl plans to take the company next.

“They’ve always had to reinvent themselves,” said Chris McGratty, an analyst with Keefe, Bruyette & Woods. “What’s the next act?”

This much is certain: Investors welcomed the move, sending shares of the company up about 10% since the surprise announcement.

Shareholders had been spooked by TCF’s aggressive expansion into auto lending in recent years, as well as its partial focus on subprime lending, amid the signs of credit problems in that market, analysts said. As of Sept. 30, chargeoffs in TCF’s auto book, calculated as a share of total loans, ticked up 27 basis points from a year earlier to 1.13%.

Still, the decision has put TCF’s business model in flux — and rekindled speculation that it is up for sale, according to industry analysts.

In announcing the move, Dahl said TCF will devote capital to more profitable uses than auto originations. No additional details were provided, though analysts expect the company to increase its bond portfolio and buy back stock in the short term. In conjunction with the auto exit, TCF also authorized a $150 million share repurchase program.

TCF did not respond to a request for an executive interview for this story.

Filling the hole in its balance sheet left by auto originations will be a big challenge.

Over the past year, the $23 billion-asset TCF has grown its commercial lending, inventory finance and equipment leasing by double-digit rates. Overall loan growth in the months ahead, however, will likely be tough as the $3.2 billion auto portfolio winds down.

One of the more clear-cut paths forward could be for TCF to find a buyer, analysts said.

“What it does is it makes the company more sellable,” McGratty said.

TCF has made itself “more attractive to a potential suitor” by ditching the auto business and quashing worries about future credit problems, said Scott Siefers, an analyst with Sandler O’Neill.

The exit from the auto lending business marks the end of an era for TCF.

TCF entered the business just six years ago, in late 2011, by acquiring Gateway One Lending & Finance in Anaheim, Calif. The acquisition was designed to bolster the company’s loan book and also generate a new source of fees though secondary loan sales.

Months before the deal was announced, the Federal Reserve had imposed a cap on the interchange fees that banks can charge merchants for card payments. Those fees were a primary revenue source for TCF at the time. The company famously had sued the Fed to block the rule, but dropped its suit in June 2011 shortly after the rule was finalized.

TCF’s decision to halt auto originations also caps off what has been a tumultuous year in its auto-lending business.

Earlier this year, TCF said that it would no longer sell auto loans to the secondary market. Gains on the sales plunged 90% in the fourth quarter compared to the third, as investors across the market grew worried about looming credit problems.

The move was designed to bring stability to earnings, but it also stirred fears about the quality of TCF’s loan book. Most of the auto loans that TCF previously sold off were for borrowers with blemished, subprime credit. Keeping those credits on the balance sheet, instead, raised the prospect of higher losses down the road.

“I think a lot of people just didn’t buy into the auto strategy in the first place,” Siefers said.

The average FICO score in TCF’s auto book at Sept. 30 was 716, down from 729 a year earlier, according to the company. Delinquencies as a share of total loans had increased over the same period, rising 5 basis points to 0.25%.

"People really got nervous because they were seeing the seasoning of the portfolio,” McGratty said.

It will likely take several years for TCF to completely wind down its auto portfolio, analysts said. The company will halt originations on Dec. 1 but will continue to service the credits that remain on its books.

Analysts praised the company for decisively dealing with an issue that over the past year had become a dark cloud over its operations. In the months ahead, however, the company has big questions to answer about its future business model.

“We remain committed to making decisions that will drive shareholder value moving forward,” Dahl said in a press release Monday that announced the exit.

As the industry awaits more details on TCF’s strategy, speculation about a potential sale will continue to percolate. Aside from auto lending, another factor that had deterred acquirers was the potential outcome of TCF’s legal challenge with the Consumer Financial Protection Bureau, analysts said.

The CFPB sued TCF earlier this year, charging the company with tricking its customers into signing up for overdraft protection. But with the resignation of Richard Cordray, and appointment of Mick Mulvaney as interim head of the agency, analysts expect a more business-friendly approach to consumer protection in the months ahead. While the outcome of the legal case is unclear, the leadership change is widely viewed as good news for the company.

“It makes the potential for a deal more likely,” McGratty said, noting that a buyer would not want a company that is “laced with regulatory risk or overly exposed to auto.”

McGratty did not comment on names of potential acquirers but said a buyer would likely be attracted to TCF for its seven-state retail footprint or national lending businesses.

In the more immediate term, though, executives at the company will face pressure to articulate their vision for the future.

“They’re not out of the woods yet,” Siefers said. “It’s still unclear exactly what the company will look like a year from now.”

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